July 31, 2014
July 30, 2014
Sixth Circuit’s Summary Judgment Reversal Sours Milk Processors’ Win
In a decision articulating standards on a number of important components of antitrust law, the Court of Appeals for the Sixth Circuit reversed summary judgment dismissal of a claim that a pair of milk processors conspired to divide and otherwise unreasonably restrain trade in the milk market. The Sixth Circuit’s decision in In re: Southeastern Milk Antitrust Litigation1 suggests that plaintiffs who allege antitrust violations that do not clearly fit into the per se illegal category may still be able to allege a restraint that is unreasonable without alleging a detailed market analysis under a “quick-look” analysis, provided there are components to the alleged unlawful agreement that indicate obvious adverse competitive effects. In addition, the court engaged in extensive discussion, likely to be drawn upon by future litigants, of the use of expert testimony at the summary judgment stage to determine both the relevant market and antitrust injury.
The complaint, originally filed in the Eastern District of Tennessee on behalf of a putative class of milk retailers, alleged that a milk processor conspired with a company acting both as a raw milk producer and milk processor to divide markets and unreasonably restrict the output of milk in the Southeastern United States. 2 According to the complaint, the genesis of the alleged conspiracy involved a 2001 merger between the country’s two largest milk processors, Dean Foods Company and Suiza Foods Corporation, under the name Dean Foods.3 The Department of Justice had required the divestment of certain milk processing plants to Suiza’s primary supplier of raw milk, Dairy Farmers of America (“DFA”).4 Those processing plants were subsequently transferred by DFA to a newly formed partnership, National Dairy Holdings (“NDA”), in which DFA retained a 50% interest. The processing partnership, NDA, thereupon became Dean Foods’ largest competitor in the processing of milk.5 At the same time, however, DFA, the raw milk producer, obtained a contractual commitment to act as a supplier of raw milk to Dean Foods.6 Although DFA’s ownership stake in NDA, the new milk processor, created an incentive to support NDA, DFA’s raw milk supply agreement with Dean Foods created what the Sixth Circuit called “fertile soil for the development of a conflict of interest.”7 The plaintiffs alleged that NDA, the milk processor under the control of DFA, “accepted ‘second best’ plants, operated those plants at losses and eventually shuttered some of those plants” in return for raw milk supply agreements between DFA and NDA’s primary milk processing competitor, Dean Foods.8
After the close of discovery, the district court, applying a rule-of-reason analysis, granted the defendants’ motion for summary judgment.9 In doing so, the district court ruled that the plaintiffs had failed to establish the relevant geographic market as required in a rule of reason analysis, and could not provide sufficient proof of antitrust injury.10 The plaintiffs appealed, arguing that the district court should have applied a per se antitrust analysis to the facts alleged rather than a rule of reason analysis, and further arguing that the district court was incorrect in excluding or disregarding plaintiffs’ experts’ testimony, which plaintiffs claimed met the requirements for establishing a geographic market and antitrust injury.11
The Sixth Circuit’s Decision
In its January 3, 2014 opinion, the Sixth Circuit reversed the district court’s dismissal, holding that the lower court erred in failing to consider whether it should have applied an abbreviated “quick look” antitrust analysis of the alleged restraint, and in excluding or disregarding plaintiffs’ expert testimony regarding the relevant market and antitrust injury.
Application of “Quick Look “Antitrust Analysis
The first dispute the Sixth Circuit addressed centered on whether the district court erred in applying the rule of reason instead of the per se rule to analyze the defendants’ alleged anticompetitive agreement. In order to successfully allege a Section 1 claim, a plaintiff must present evidence showing defendants’ agreement “unreasonably restrains trade.”12 A restraint may be “per se” unreasonable if it fits into a narrow class of restraints that have been found by the courts to be so plainly anticompetitive that they are conclusively presumed illegal without an examination of market factors or business justifications. 13 However, “[u]nless the restraint falls squarely into a per se category, the rule of reason should be used instead.”14 In contrast to presumptively anticompetitive per se restraints, the rule of reason requires plaintiff to establish a prima facie case by showing a number of elements, including that the scheme adversely affected the relevant product and geographic markets.15 If the plaintiff establishes these required elements, the burden shifts to the defendant to produce evidence that the restraint in question can be justified by procompetitive effects that outweigh the anticompetitive effects.16
One of the factors used to determine the appropriate standard of analysis is whether the restraint at issue is a horizontal agreement between competitors (“considered to be more threatening, and thus result in per se treatment more regularly”), or a vertical agreement between parties at different levels of the market structure, such as a manufacturer and distributor (subject to the more-forgiving rule of reason because of the potential “redeeming qualities” of such an agreement, such as distribution efficiencies).17 The district court concluded that because the “essence of the agreement alleged by the Plaintiffs” centered on vertical supply agreements for raw milk, the agreement should be scrutinized under the rule of reason.18 Because it found the plaintiffs had failed to carry their burden under the rule of reason by, among other things, failing to establish the effect of the challenged restraints on the relevant geographic and product markets, the district court dismissed plaintiffs’ claim.19
The Sixth Circuit agreed with the lower court that the restraint causing the alleged anticompetitive effect—the vertical milk supply agreement between Dean Foods and DFA—did not fit into the “limited” category of restraints warranting per se treatment.20 However, the Sixth Circuit faulted the district court for not considering a third approach of analysis at the summary judgment stage—a “quick look” rule of reason analysis.21 The court noted that such an analysis, the result of “the blurring of the line between per se and rule of reason cases,” should be utilized when “‘an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.’”22 Because of the obviousness of anticompetitive effects resulting from conduct under challenge, a detailed marketplace review is unnecessary under a quick-look analysis.23
Here, construing all facts and record evidence in the plaintiffs’ favor, the Sixth Circuit concluded that the alleged conduct—which included, in addition to the vertical elements of the supply agreement, an agreement between horizontal competitors for the express purpose of limiting competition between them—“had obviously adverse, anticompetitive effects.”24 Thus, even though it agreed that the defendants’ alleged conduct was not illegal per se, the Sixth Circuit declared that the lower court needed to at least consider whether the allegations and evidence were sufficient to shift the burden to the defendants to present some procompetitive benefits of the alleged conduct, even in the absence of a detailed market analysis.25
Use of Expert Testimony to Establish Relevant Antitrust Market
The Sixth Circuit next turned to the exclusion by the district court of the plaintiffs’ expert’s testimony regarding the relevant market. Despite the fact the plaintiffs would not necessarily need to establish a relevant product or geographic market under a quick-look analysis, the court noted that the issue of exclusion of the expert’s testimony would become relevant if the district court determined a full rule of reason analysis was required.26
Applying the standard required by the Supreme Court in Daubert v. Merrell Dow Pharmacy, Inc.,27 the district court had excluded the testimony of the plaintiffs’ expert—Professor Luke Froeb—because it determined he had “formed his opinion concerning geographic market by using an unreliable method,” including a lack of reliance on facts in the record.28 Reviewing for abuse of discretion, the Sixth Circuit reversed, finding that the district court’s decision to exclude the expert testimony was based on an incomplete review of the facts and the application of incorrect legal standards. Of most interest was the Sixth Circuit’s holding that, although an expert must base his findings on “proper facts,” each such fact “does not have to occupy an independent part of the record for an expert to be able to use them when crafting an opinion.”29 Thus, Professor Froeb’s use of facts “from government studies” and “academic publications” provided a sufficient basis for his discussion of economic concepts of competition between milk processing plants, and his use of a nationwide estimate of demand elasticity to predict the reaction of retailers in the southeast to a price increase was a “reliable method of calculation,” even in the absence of specific data regarding the particular plaintiffs’ purchasing habits.30
Use of Expert Testimony to Establish Antitrust Injury
Finally, the Sixth Circuit examined the district court’s exclusion of the testimony of a second plaintiff expert regarding antitrust injury. A plaintiff is required to establish antitrust injury in order to survive a motion to dismiss, regardless of whether the court analyzes the restraint using the rule of reason, the per se rule, or a quick-look analysis.31 A second expert put forth by the plaintiffs—Professor Ronald Cotterill—had conducted an economic regression analysis related to the price of milk.32 The district court found that Professor Cotterill’s analysis was “too simplistic,” and that it had merely discerned that prices had risen, a fact that could have been due to the merger between Dean Foods Company and Suiza Foods Corporation rather than anticompetitive behavior. The district court thus concluded that his testimony did not create a material issue of fact.33
The Sixth Circuit disagreed that summary judgment was warranted on the issue of injury.34 The Sixth Circuit noted that Professor Cotterill’s model actually revealed three conclusions which, taken together, could be viewed as evidence of antitrust injury sufficient to survive a motion for summary judgment: 1) the plaintiffs purchased processed milk from the defendants; 2) after the merger, the plaintiffs were charged 7.9% more for milk that an econometric analysis could justify; and 3) the district court found evidence that indicated that Dean Foods and National Dairy Holdings had avoided competing vigorously.35 This, the Sixth Circuit noted, was “precisely the kind of injury that the Sherman Act was designed to prevent.”36
The Sixth Circuit’s holdings in In re Southeastern Milk Antitrust Litigation may impact antitrust litigation, at least in that Circuit, in a number of ways. First, because plaintiffs who can successfully argue the restraint they are challenging fits into the “quick-look” analysis model can avoid the difficult hurdle of properly pleading a relevant geographic or product market, more plaintiffs may argue that their cases fit into the amorphous quick-look category. In addition, the Sixth Circuit’s holding on the use of expert testimony to establish a relevant market could lead to more plaintiffs utilizing facts from government studies and academic publications as supplements to facts from the record. Finally, the Sixth Circuit’s discussion of the use of expert testimony to establish antitrust injury suggests that a plaintiff’s expert’s regression analysis does not necessarily need to exclude the possibility that prices increased due to causes other than anticompetitive activity at the summary judgment stage, provided the regression analysis also could suggest antitrust injury.
1 12-5457, 2014 WL 25811 (6th Cir. Jan. 3, 2014).
2 Id at *1–2.
3 Id. at *1.
7 Id. at *2.
8 Id. (quoting Appellants’ Reply Brief at 15).
9 In re: Se Milk Antitrust Litig., No. 2:08-MD-1000, 2012 WL 1032797, at *12 (E.D. Tenn. March 27, 2012).
10 Id. at *5–7.
11 Appellants’ Reply Brief at *1–2, In re: Se. Milk Antitrust Litig., No. 12-5457 (6th Cir. April 5, 2013).
12 In re: Se. Milk Antitrust Litig., 2014 WL 25811, at *4 (citing Re/Max Intern., Inc. v. Realty One, Inc., 173 F.3d 995, 1012 (6th Cir. 1999)).
17 Id. at *5.
19 In re: Se Milk Antitrust Litig., 2012 WL 1032797, at *12.
20 In re: Se. Milk Antitrust Litig., 2014 WL 25811, at *5–6.
21 Id. at *7.
22 Id. (quoting Cal. Dental Ass’n v. FTC, 526 U.S. 756, 770 (1999)).
24 Id. at *8.
27 509 U.S. 579 (1993).
28 In re: Se. Milk Antitrust Litig., 2014 WL 25811, at *9 (quoting In re Se. Milk Antitrust Litig., 2012 WL 1032797, at *12). The district court had initially excluded Professor Froeb’s testimony on the ground that it did not adhere to requirements defined by the Supreme Court for discerning a geographic market. A magistrate judge then issued an order excluding the expert’s testimony under Daubert and Federal Rule of Evidence 702. After reviewing the magistrate’s order, the district court again excluded the testimony, this time based on Rule 702, although it noted it was doing so as an alternative holding to its prior exclusion. See id. at *11.
29 Id. at *12–13.
30 Id. at *13.
31 Id. at *14.
33 Id. at *15. At the district court level, the defendants had filed a Daubert motion objecting to Professor Cotterill’s testimony. The matter was referred to the magistrate judge, who denied defendants’ motion. Although the district court never formally ruled on the defendants’ objection, the wording of the section of its order granting summary judgment that addressed antitrust injury led the plaintiffs to believe the district court agreed with the defendants’ objection, and so the plaintiffs argued in their appeal that the district court had failed to give proper deference to the magistrate judge’s findings. The Sixth Circuit found that the district court’s summary judgment order “strongly suggest[ed]” that the district court concurred with the magistrate judge, and had not actually excluded Professor Cotterill’s testimony, but rather concluded that his testimony did not create a material issue of fact. See id. at 14–15.
34 Id. at *16.
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