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Office supply giant 3M — the maker of Scotch brand tape and Post-It notes — suffered a significant setback last week in its efforts to overturn a Philadelphia federal jury’s $68 million verdict in an antitrust suit when the U.S. Solicitor General’s Office filed a long-awaited brief that recommends that the U.S. Supreme Court refuse to hear the case. The case, LePage’s Inc. v. 3M Co., is one of the most closely watched antitrust cases in the country because it focuses on the practice of so-called “bundled rebates.” But a team of lawyers in the Solicitor General’s Office has now recommended that, while the business community could use some guidance on the application of antitrust law to the practice of bundled rebates, the LePage’s case “does not present an attractive vehicle for this court to attempt to provide such guidance.” Lawyers close to the case said the SG’s brief was filed just in time to allow the justices to issue a decision on whether to hear the case before the end of this year’s court term. In the suit, LePage’s claimed that 3M 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 said, amounted to “de facto” exclusive dealing arrangements. A jury agreed and in an October 1999 verdict awarded LePage’s $22,828,899 in damages — a figure that was automatically trebled by U.S. District Judge John R. Padova for a total judgment of $68,486,697. (A bond posted on appeal has now grown to more than $90 million during several years of appeals.) In its first appeal, 3M prevailed when the 3rd U.S. Circuit Court of Appeals overturned the verdict by a 2-1 vote. But the case was later reargued before a 10-judge en banc panel, which reinstated the verdict by a vote of 7-3. The en banc court flatly rejected 3M’s argument that the theory of LePage’s case was fatally flawed since there was no evidence that 3M ever sold any of its products at below-cost prices. Instead, the court said the evidence showed that 3M had set out to “kill” the niche market LePage’s had created for discount “private label” or store-brand tape with customers such as Kmart and Staples. Writing for the court, Circuit Judge Dolores K. Sloviter found that 3M “sought to meet the competition that LePage’s threatened by exclusionary conduct that consisted of rebate programs and exclusive dealing arrangements designed to drive LePage’s and any other viable competitor from the transparent tape market.” Sloviter found that LePage’s had built a valid case of illegal conduct by a monopolist by showing that 3M had lured away LePage’s biggest customers by offering bundled rebates that could be won only by meeting sales goals in six categories of 3M product lines. “The principal anti-competitive effect of bundled rebates as offered by 3M is that when offered by a monopolist they may foreclose portions of the market to a potential competitor who does not manufacture an equally diverse group of products and who therefore cannot make a comparable offer,” Sloviter wrote. In dissent, Senior Circuit Judge Morton I. Greenberg complained that the court was abandoning basic principles of antitrust law established by the Supreme Court in its 1993 decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. since there was no proof that 3M ever engaged in any “below-cost” pricing. By last summer, 3M had amassed an impressive group of “friends” in urging the U.S. Supreme Court to take the case up. Among those joining in filing amicus briefs in support of 3M’s petition for certiorari were Procter & Gamble Co.; Coca-Cola Co.; Honeywell International; Xerox Corp.; Verizon Communications; Johnson & Johnson; Morgan Stanley; Eastman Kodak Co.; the Business Roundtable; and the Washington Legal Foundation. Just as impressive were the cast of lawyers who signed on to those amicus briefs, including former federal appeals judge and one-time Supreme Court nominee Robert H. Bork; former Solicitor General Kenneth W. Starr, now of Kirkland & Ellis; and A. Douglas Melamed of Wilmer Cutler & Pickering, whose five-year stint in the Justice Department included a term as acting assistant attorney general in charge of the antitrust division. Many lawyers expected that the high court would include the case in its traditionally long list of cert orders announced on the first Monday in October. Instead, when that day came, the justices announced that they were inviting the Solicitor General’s Office to weigh in on the cert petition — an action that one lawyer said “signaled that they [the justices] were on the fence.” Another lawyer put it this way: “There were probably three votes for cert and those three [justices] were hoping that the SG’s brief would get them that fourth vote.” Now, more than eight months after the court’s invitation was extended, the Solicitor General’s Office has filed a brief that is somewhat critical of the 3rd Circuit’s decision but nonetheless urges the justices to allow the issue of bundled rebates to percolate in the lower courts a little longer before taking the issue up. “The practice of bundled rebates has received far less judicial and scholarly scrutiny than predatory pricing,” the 19-page brief says. “Although there are references to bundled rebates in the scholarly literature, the theoretical and empirical analysis of that practice as a potentially exclusionary mechanism is relatively recent and sparse.” The brief concludes by saying, “There is no pressing need for the court to address the matter at this time. While bundled rebates may be a common business practice, it is not clear that monopolists commonly bundle rebates for products over which they have monopolies with products over which they do not.” As a result, the SG’s brief says, “at this juncture, it would be preferable to allow the case law and the economic analysis to develop further and to await a case with a record better adapted to development of an appropriate standard.” At points in the brief, the SG appeared to side with 3M and its amici. In one footnote, the brief seems to support one of the central themes in 3M’s petition: that the 3rd Circuit erred by carving out an exception to the Brooke Group decision’s general rule — that there must be evidence of below-cost pricing — when the defendant is a monopolist. The footnote says the 3rd Circuit “declined to apply Brooke Group” on the grounds that nothing in the Brooke Group decision was “applicable to a monopolist with its unconstrained market power.” Disagreeing with that holding, the SG’s brief says that language in Brooke Group “plainly applies to a monopolist.” But despite that criticism, the SG’s brief does not endorse 3M’s argument that the Brooke Group rule must be extended to cover bundled rebates. Instead, the brief says, “whether to extend Brooke Group to bundled pricing depends on considerations other than whether the defendant is a monopolist.” In one section of the brief, the SG’s office agreed with the argument in one amicus brief that “bundled rebates are widespread and are likely, in many cases, to be procompetitive.” But the brief goes on to say that the practice may, in theory, also be anti-competitive. “Unlike a low but above-cost price on a single product, a bundled rebate or discount can — under certain theoretical assumptions — exclude an equally efficient competitor, if the competitor competes with respect to but one component of the bundle and cannot profitably match the discount aggregated over the other products, even if the post-discount prices for both the bundle as a whole and each of its components are above cost,” the brief says. In that single sentence, the SG’s brief effectively dismissed some of the strongest arguments made by 3M and its amici. In its cert petition, 3M’s team of lawyers, led by Richard G. Taranto of Farr & Taranto in Washington, argued that, if allowed to stand, the 3rd Circuit’s decision “will have pernicious, far-reaching effects, chilling firms nationwide from commonplace means of selling more for less, i.e. price competition.” The 3rd Circuit’s error, 3M argues, was to declare Brooke Group irrelevant and to ignore the “bright-line” test established in that case requiring proof of below-cost pricing. “The ruling takes a giant step back from bright-line protection,” 3M’s petition says. “It shelters small firms from their rivals’ above-cost price cuts, thus reviving an approach to Section 2 [of the Sherman Act] properly interred in Brooke Group and elsewhere.” Bork and Starr — in an amicus brief for Morgan Stanley, Procter & Gamble and Coca-Cola — argued that the 3rd Circuit’s decision “creates a dangerous new standard of � 2 liability that threatens competition in a wide range of industries by punishing precisely the type of conduct the antitrust laws protect.” The 3rd Circuit’s “sole basis” for condemning 3M’s bundled rebates, Bork and Starr argue, “was that the rebates might someday drive LePage’s out of the market and leave 3M free to raise prices.” But that rationale, they argue, “is not a sufficient ground for Section 2 liability.” In its response brief, LePage’s lawyers — solo practitioner Peter Hearn; Barbara W. Mather and Jeremy Heep of Pepper Hamilton; Roy T. Englert of Robbins Russell Englert Orseck & Untereiner; and Mark W. Ryan, Donald M. Falk and Robert Bronston of Mayer Brown Rowe & Maw — argue that 3M’s brief “is an untenable distortion of the 3rd Circuit’s analysis and the facts of record.” The central theme of 3M’s argument, the LePage’s team says, is that the Brooke Group decision effectively immunized any conduct that did not entail below-cost pricing. As 3M reads Brooke Group, they argue, “no conduct by a monopolist who sells its product above cost — no matter how exclusionary the conduct — can constitute monopolization in violation of Section 2.” On the contrary, they argue, Brooke Group established no such bright-line test, and “no court has read Brooke Group so expansively.” But attorneys Richard A. Samp and Daniel J. Popeo of the Washington Legal Foundation urged the justices to take the case up, arguing that the 3rd Circuit’s decision has created a chill that will ultimately harm consumers. “Prior to the decision in this case, companies could engage in aggressive price competition without fear of antitrust repercussions, provided only that they did not sell below costs. But if the 3rd Circuit’s decision is allowed to stand, that safe harbor will no longer be available to companies,” Samp and Popeo wrote. The Supreme Court should grant cert, they argued, “to prevent the antitrust laws from being used as a tool by inefficient producers to protect themselves from competition from their more efficient rivals.” Antitrust scholars, Samp and Popeo argued, “have long warned against permitting the antitrust laws to be hijacked in this manner.”

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