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Lawyers from both coasts squared off Wednesday before a 10-judge en banc federal appeals court in Philadelphia in one of the country’s most closely watched antitrust cases — LePage’s Inc. v. 3M. The case forces the court to tackle one of the most vexing and hotly debated questions in antitrust law — whether conduct by an admitted monopolist can violate § 2 of the Sherman Act even if it never lowers its price to below cost to squelch its smaller competitor. In the suit, LePage’s claims that office supply giant 3M — the maker of Scotch-brand tape and Post-It notes — set out to drive LePage’s out of the market for transparent tape by offering “bundled” rebates to large retailers that, in reality, could be earned only by removing LePage’s products from their shelves. Such rebate deals, LePage’s says, amounted to “de facto” exclusive dealing arrangements. As a result, LePage’s said it lost some of its biggest customers, such as the office supply chain Staples, which canceled its contract with LePage’s to manufacture a store-brand tape to benefit from 3M’s lucrative rebate program. In April 1999, a jury found that 3M had abused its monopoly power, but cleared 3M on claims that it had engaged in exclusive dealing or unreasonably restrained trade. Technically, the jury awarded LePage’s $22.8 million in damages, but that figure was automatically trebled for a total verdict of $68.4 million. Earlier this year, a three-judge panel of the 3rd U.S. Circuit Court of Appeals overturned the verdict after finding that 3M could not have violated antitrust laws because it never priced its products below cost. But in a spirited dissent, 3rd Circuit Judge Dolores K. Sloviter complained that the majority’s ruling would “weaken Section 2 of the Sherman Act to the point of impotence” and that her colleagues were imposing new hurdles for antitrust plaintiffs that would harm competition. Soon after, the 3rd Circuit announced that it had voted to rehear the case en banc. Ordinarily, an appellate court’s vote to hear a case en banc is a strong indication that it is poised to reject the views of the original three-judge panel since it requires a majority vote to go en banc. But the calculus of prognosticating in LePage’s v. 3M is complicated by the fact that Judge Carol Los Mansmann died and was replaced by Judge D. Brooks Smith, the former chief judge of the Western District of Pennsylvania, who is widely considered to be conservative and a likely ally of the two judges in the original majority — Morton I. Greenberg and Samuel A. Alito. In Wednesday’s argument, 3M’s lawyer, M. Laurence Popofsky of Heller Ehrman White & McAuliffe in San Francisco, urged the judges to overturn the verdict, arguing that LePage’s was trying to perform an end-run around the strict requirements for bringing a predatory pricing case. “This is a case predominantly about price,” Popofsky said. Popofsky said 3M used “various forms of price discounts, rebates and cash payments” to induce customers to buy from 3M — and that the customers sometimes opted to buy on an exclusive basis. But LePage’s case was fatally flawed, Popofsky said, because it complained of predatory pricing but never proved that 3M had ever sold any of its products at a below-cost price. Popofsky said courts have insisted on a “bright-line” rule that predatory pricing must be below cost in order “to avoid intolerable risk of chilling legitimate price competition.” “The rule cannot be bypassed by plaintiffs claiming, as they do here, that they have not alleged, formally, a predatory pricing claim. This is not a matter of pleading form or semantics,” he said. Although LePage’s couched its complaint as a § 2 claim that focused on 3M’s practices, Popofsky said, the case “is a predatory pricing claim by any other name.” But LePage’s lawyer, Roy T. Englert Jr. of Robbins, Russell, Englert, Orseck & Untereiner in Washington, D.C., argued that Popofsky’s entire argument was premised on a misreading of LePage’s case. “This is NOT a case primarily about price,” Englert said. Instead of analogizing the claim to predatory pricing, Englert said LePage’s complaint about 3M’s bundled rebates was “best compared” to a tying claim “whose foreclosure effects are similar.” The issue, Englert said, was the unique anti-competitive effects that flow from a monopolist’s decision to offer “multi-product discounts,” effectively tying the availability of discounts on non-monopoly products to the retailer’s agreement to purchase the monopoly product. “Our theory of this case is not that 3M priced its products so low that LePage’s could not compete,” Englert said. “Our theory is 3M used exclusionary tactics that allowed it to foreclose sufficient channels of distribution to LePage’s without having to sacrifice its own profits.” By bundling rebates and engaging in exclusive dealing, Englert said, 3M “weakened the greatest competitive threat to 3M’s Scotch Tape monopoly, allowing 3M to protect the price of Scotch against erosion to the detriment of consumers.” Englert said LePage’s suit focused on “two forms of allegedly predatory behavior — bundled rebates and exclusive dealing.” But those two concepts “merge,” he said, because “bundled rebates become exclusive deals.” Englert said the jury was “entitled to conclude” that 3M had set up an exclusive dealing arrangement with Kmart because there was evidence of a $1 million payment for exclusivity that was not even a rebate. After the payment, he said, a Kmart executive told LePage’s, “I can’t talk to you about tape products for the next three years.” The evidence, Englert said, showed that Staple’s was also paid to enter into an exclusive deal, not with a bundled rebate but in the form of an “outright payment dressed up as a settlement of other matters.” But Popofsky argued that LePage’s was trying to challenge a widely accepted sales practice — the use of annual volume rebates — and that it lacked the evidence necessary to show that 3M’s programs crossed the line into antitrust violations. There was no evidence, Popofsky said, of any agreement to engage in exclusive dealing, and buyers were always free, at any time of the year, to switch suppliers. Popofsky said LePage’s also “utterly failed to prove that it could not compete effectively with 3M” because of the rebate programs. But early on in his argument, Popofsky hit a snag when 3rd Circuit Chief Judge Edward R. Becker said, “I don’t think this is a pricing case.” Becker said he was speaking only for himself, but that he wanted to hear more from 3M about “what seems to be de facto exclusive agreements.” If the evidence supported LePage’s theory of such de facto exclusive dealing, Becker said, “why wouldn’t that constitute sufficient exclusionary conduct for liability under Section 2?” Popofsky said the question was a semantic one that begged the question of “what is a de facto exclusionary agreement?” An annual volume rebate, he said, is not necessarily a de facto exclusionary deal even if a buyer ends up buying exclusively. “That is simply a function of how the market works,” Popofsky said, adding that to win on the claim, LePage’s needed “evidence that implied an actual agreement.” Judge Thomas L. Ambro said LePage’s had proof that it lost sales of $21 million in a total market of $225 million — a fact that Ambro said showed a 9.3 percent foreclosure from the market. But Popofsky said “9 percent has not been held to be sufficient in the past to make a case.” And the entire theory of the alleged de facto exclusive deals was flawed, Popofsky said, since “the buyer was always free to jump ship.” But Judge Theodore A. McKee said LePage’s theory, which the jury accepted, was that the buyers were “tethered to the deck.” Popofsky disagreed, saying that since the jury specifically rejected LePage’s exclusive dealing claim, it should not be allowed to argue that the same evidence supports a verdict under a § 2 claim that more generally challenged 3M’s practices. Englert argued that 3M was able to fend off the threat that LePage’s and private labels generally posed to the Scotch Tape monopoly and was able to shift market share back to Scotch from a private label, including its own private label, and raise overall prices to consumers. When a monopolist offers a bundled rebate, he said, it “bears a superficial resemblance to a price cut, but is different in every way that matters for purposes of antitrust law.” A bundled rebate “is not inherently pro-competitive,” he said, because it has a “multiplier effect” that forces smaller competitors to reduce their prices by far higher percentages in order to compete. “If you allow that, you have given every monopolist a very powerful tool to raise its rival’s costs — because the rival has to factor that rebate into his costs — and nip in the bud any nascent competition against its monopoly product.” But Greenberg pointed out that LePage’s had 67 percent of the private label market just before trial. Englert said the private label tape business was not a true market, but just a “segment” of a market. Greenberg was undeterred, saying the 67 percent share “certainly demonstrates that the effort to drive you out of the private label market was pathetic.” Englert disagreed, saying “two thirds of a segment” was insignificant when looking at the true relevant market for transparent tape. LePage’s, Englert said, “was the upstart trying to make incursions on the Scotch Tape monopoly. It was the fringe — the competitive fringe — keeping the monopolist honest.”

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