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Probably the most difficult task in writing an article about the 3rd U.S. Circuit Court of Appeals’ recent antitrust decision in United States v. Dentsply International Inc., filed Feb. 24, is to avoid using the obligatory tag line, “Court takes bite out of false teeth monopoly.” There is just something about a case involving a manufacturer of artificial teeth which invites bad jokes and puns. Even the normally staid 3rd Circuit could not resist the temptation to describe Dentsply’s exclusive dealing policy as “not edentulous,” i.e. not toothless. Fortunately, the universe of dental humor is relatively small, so we will leave it at that in addressing the significance of the Dentsply decision to monopolists operating in this circuit. The Department of Justice instituted suit in the U.S. District Court for the District Court of Delaware alleging that Dentsply had acted unlawfully to maintain a monopoly in violation of �2 of the Sherman Act, entered into illegal restrictive dealing agreements prohibited by �3 of the Clayton Act, and used unlawful agreements in restraint of trade in violation of �1 of the Sherman Act. After a bench trial, Chief District Judge Robinson denied the DOJ’s request for injunctive relief and entered judgment for Dentsply on all claims. The government appealed the district court’s dismissal of the Sherman �2 monopoly claim but did not appeal the adverse rulings on the Sherman Act �1 claim or the Clayton Act �3 claim. Dentsply, a Delaware corporation headquartered in York, Pa., manufactures artificial teeth for use in dentures and sells them to dental-products dealers, who in turn sell the teeth and other materials to dental laboratories, which then fabricate dentures for sale to dentists. Dentsply holds a market share of 75 percent to 80 percent based upon revenue, 67 percent based upon units sold, and is about 15 times larger than its next closest competitor. Indeed, Dentsply’s six largest competitors had market shares ranging from 1 percent to 5 percent. The manufacturers generally distribute their products to dealers who maintain large inventories of artificial teeth and carry many products, other than teeth, made by hundreds of manufacturers. Some of Dentsply’s competitors deal directly with dental laboratories and bypass the dealers. The dealers, who number in the hundreds, compete with each other on the basis of price and service. Over time, there has been significant consolidation of dealers with several large national and regional firms emerging. Dentsply distributes its teeth exclusively through a network of 23 independent national and regional dealers, which collectively service dental labs covering essentially every major metropolitan area. These dealers sell under their own name and offer thousands of different products made by hundreds of manufacturers. In 1993, Dentsply adopted Dealer Criterion 6, which provided that the 23 authorized dealers of Dentsply products — which dealers described as the “biggest and the best in the industry” — were prohibited from adding further tooth lines to their product offering. Dentsply also required that its prospective dealers drop most or all competing brands. Only those existing dealers which carried competing brands prior to 1993 were grandfathered for sales of those products. The district court found in its opinion that Dentsply’s business justification for Dealer Criterion 6 was pretextual and designed expressly to “block” its rivals from access to dealers. Notwithstanding that Dealer Criterion 6 was found to be anti-competitive, the district court dismissed the government’s monopolization claim, concluding, inter alia, that Dentsply was not a monopoly in spite of its large market share, because the DOJ had failed to prove that Dentsply had the power to control prices or exclude competitors. According to the district court, because the ultimate consumer was the dental laboratory and not the dealer, competing manufacturers were free to sell directly to laboratories, and Dentsply did not have the power to exclude competitors from the ultimate consumer. The court also noted that Dentsply was unable to prevent the entry of new competitors into the marketplace. The district court also found that the DOJ had failed to prove the willful acquisition or maintenance of monopoly power. The district court noted that anticompetitive intent alone did not establish anticompetitive conduct “where the conduct appears objectively incapable of harming competition.” The court stressed that competitors were free to convert Dentsply dealers to sales of competitors’ products at any time, and the DOJ had failed to prove that Dentsply’s actions had been successful in preventing new or potential competitors from gaining a foothold in the market. Ultimately, the failure of Dentsply’s competitors to gain market share was the result of their own business decisions, not Dentsply’s exclusionary practices, the district court found. Circuit Judge Joseph F. Weis Jr., along with Circuit Judges Max Rosenn and Theodore A. McKee, found on appeal that it was not market share which counts in evaluating monopoly power, but the ability to maintain market share. Therefore, the 3rd Circuit found that Dentsply’s market share, which it had held for more than 10 years and had fought aggressively to maintain, was more than adequate to establish a prima facie case of monopoly power. The 3rd Circuit in reversing concluded that the apparent lack of aggressiveness of competitors in their business practices was “not a matter of apathy, but a reflection of Dentsply’s exclusionary policy.” Citing testimony of former Dentsply managerial employees, Weis observed that the purpose of Dealer Criterion 6 was to “block competitive distribution points,” to “not allow competition to achieve toeholds in dealers; tie up dealers;” to “not ‘free up’ key players,” and to preclude giving the end user — the laboratory — a choice. Thus, the labs were forced to buy Dentsply teeth because it was the only brand available from the dealer. The 3rd Circuit emphasized findings by the district court detailing at least 10 separate incidents whereby Dentsply required agreements by new and existing dealers not to handle competitors’ products. Virtually all dealers yielded to that pressure. The court concluded that the evidence was conclusive that Dentsply “had supremacy over the dealer network” and “at that crucial point in the distribution chain” had monopoly power over the market for artificial teeth. “[T]he firm that ties up the key dealers rules the market.” Although some sales were made directly by manufacturers to laboratories, “overwhelming numbers” of sales were made to dealers. Thus, the court took issue with the district court’s “mis-focus” on the “ultimate consumers” who used the teeth (the labs), rather than the customers who purchased the teeth, a category which included dealers as well as labs. Citing its own recent decision in LePage’s Inc. v. 3M and the D.C. Circuit’s decision in U.S. v. Microsoft, the 3rd Circuit held that the evidence demonstrated that Dealer Criterion 6 had excluded competitors from the dealers’ network, ” a narrow, but heavily traveled channel to the dental laboratories.” The district court had stated its own findings were consistent with LePage’s. The 3rd Circuit disagreed. The 3rd Circuit also concluded that there was sufficient evidence of an increase in pricing to support a finding of market power. Testimony from both sides’ experts indicated that if Dealer Criterion 6 were abolished, prices would fall. A former sales manager of Dentsply agreed that the company’s market share would diminish if Dealer Criterion 6 were rescinded. Dealers observed that Dentsply’s policy created a “high price umbrella.” Significantly, when competitors did not follow Dentsply’s price increases, Dentsply did not reduce its prices, indicating a manufacturer “that sets prices with little concern for its competitors, something a firm without monopoly power would have been unable to do.” On the question of anti-competitive effects, an essential element of a �2 claim, the court explained that it was not essential to prove that all competition be foreclosed. Slowing a rival’s expansion by requiring it to develop alternative outlets for its products or relying upon inferior or more expensive outlets is sufficient to demonstrate harm to competition which results from the delay that the monopolist imposes on the rival’s growth. The 3rd Circuit observed that selling through dealers was the preferred distribution method and offered many advantages over selling directly to dental laboratories. Dealers offered numerous services including “one stop-shopping,” credit services, discounts, return of product for exchange or credit and savings on shipping costs from consolidated returns, economies of scale and convenience otherwise unavailable to labs who would buy direct from manufacturers. Concluding that selling direct to dental labs was possible but not viable, the 3rd Circuit concluded that the district court’s finding that direct selling was a viable method of distribution was clearly erroneous. That some manufacturers had managed to stay in business using direct sales was insufficient to establish that direct selling was an effective means of competition. Mere survival was not the test; the proper inquiry was whether direct selling posed a real threat to the defendant’s monopoly. The small market shares of Dentsply’s competitors demonstrated that direct selling posed little threat to Dentsply. Further evidence of harm to competition, the 3rd Circuit found, was the effectiveness of Dealer Criterion 6 in keeping dealers in the Dentsply network, notwithstanding the “at-will” nature of Dentsply’s arrangements with those dealers; notwithstanding the limitation of choice on dental laboratories, which would be denied the benefits of purchasing from a dealer if the lab chose to purchase a non-Dentsply product; and notwithstanding barriers to entry into the marketplace. The court took issue with the district court’s theory that competitors could “steal” a dealer from Dentsply by offering a superior product at a lower price, noting that such efforts by competitors had been effectively thwarted by Dentsply’s aggressive enforcement actions. The “paltry penetration” in the market by competitors was sufficient to refute the district court’s theory, and testimony of competitors as to failed attempts to distribute their artificial teeth through Dentsply dealers because of their fear of losing the Dentsply account proved the point. Dentsply’s practices effectively foreclosed rivals from the market, leaving only a small portion for competitors. Having reached the conclusion that Dentsply’s exclusionary practices violated �2 of the Sherman Act, the 3rd Circuit then agreed with the district court in rejecting Dentsply’s business justification as pretextual. In many ways, there are no real surprises in the 3rd Circuit’s decision, which is consistent with and a logical extension of its reasoning in LePage’s. In that case, the court en banc clearly held that a monopolist’s actions in offering bundled rebates to retailers and in offering exclusive dealing contracts to major retailers for the purpose of inducing them to award business to LePage’s to the exclusion of a smaller rival violated �2. Thus, it is not surprising that the 3rd Circuit in Dentsply found that Dealer Criterion 6, another form of exclusive dealing arrangement which blocked smaller rivals from access to 23 major independent dealers, also violated �2, consistent with LePage’s. Perhaps more puzzling was the failure of the district court to come to the same conclusion, in light of LePage’s, particularly when the court described the defendant’s business as a “cash cow” with a reputation for “aggressive price increases in the market” and after the district court held unequivocally that the purpose of Dealer Criterion 6 was exclusionary and without business justification. Indeed, it is counterintuitive to suggest, as the district court found, that a policy which Dentsply so aggressively and successfully enforced for 15 years was completely ineffective in maintaining Dentsply’s market share. It is hard to believe that Dentsply, whose business acumen in promoting its products as the district court describes in great detail, could have been so utterly clueless about the efficacy of Dealer Criterion 6. The 3rd Circuit obviously viewed these facts in a more realistic light. In the future, those companies with large market shares that approach monopoly status would be well advised to take heed to the warnings of LePage’s and Dentsply that attempts to foreclose distribution channels to rivals invite close inspection, if not litigation, by the Government and/or competitors and will be viewed with suspicion by the 3rd Circuit. District courts are also well advised to view such conduct by monopolists as violative of �2, or risk reversal, even after a bench trial. In that event, the array of remedies and penalties available to punish monopolists in this circuit who run afoul of �2 are anything but edentulous. Carl W. Hittinger is chairman of the antitrust and unfair competition group and a member of the litigation department at Stevens & Lee, where he concentrates his practice in complex commercial litigation with particular emphasis on antitrust matters. He has successfully tried numerous antitrust and unfair competition cases before federal and state courts nationwide. Hittinger is also a frequent lecturer and writer on antitrust issues and has extensive experience counseling clients on all aspects of civil and criminal antitrust law. Donald E. Wieand Jr. is a shareholder in the Lehigh Valley, Pa., office of Stevens & Lee. He concentrates his practice on complex commercial litigation with particular emphasis on antitrust and unfair competition matters.

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