Failure to Adequately Allege Lack of Supply Cross-Elasticity Dooms Attempted Monopolization Action to "Quick Look" Dismissal
GULF STATES REORGANIZATION GROUP, INC. V. NUCOR CORP. (11th Cir. July 15, 2013) No. 11-14983.
In 1999, Gulf States Steel, Inc., a participant in a market described as “black hot rolled coil steel” filed a petition for bankruptcy. When reorganization efforts failed, and it filed a Chapter 7 petition, a group called Gulf States Reorganization Group (“GSRG”) negotiated with the Bankruptcy court to purchase and operate the “black hot rolled coil steel” assets. The Bankruptcy court issued an order requiring the sale of the assets to GSRG, unless another entity made a higher bid. In that eventuality, an auction would be held.
Nucor, a participant in the black hot rolled coil steel market, joined with Casey Equipment Corp. to form a shell entity to bid for the assets. Although GSRG submitted the highest bid, it was rejected as being non-conforming. Accordingly, the Nucor group purchased the assets, and later sold the steel producing assets to an Asian buyer. Nucor and Casey made a substantial profit on the transaction.
When GSRG learned that Nucor and Casey had been successful in obtaining the steel producing assets, it filed a complaint alleging that they had contracted and combined in violation of Section 1 of the Sherman Act to keep the steel producing assets from recompeting in the market. It alleged further that Nucor’s purchase and sale of the assets created a dangerous probability that it would obtain monopoly power in a relevant market described as “black hot rolled coil steel in the Southwest United States”. The District Court dismissed the complaint for failure to state a cognizable antitrust injury, and that plaintiff accordingly, lacked antitrust standing. The Court of Appeals reversed, and remanded. See Gulf States Reorganization Group, Inc. v. Nucor Corp., 466 F.3d 961 (11th Cir. (2006)).
On remand, to the District Court, James F. Rill, a former Assistant Attorney General in charge of the Antitrust Division, was appointed as a Special Master. Special Master Rill issued four reports. In the third and fourth reports, he recommended that Nucor be granted summary judgment as to all claims. The District Court adopted the reports and recommendations, and granted summary judgment. GSRG again appealed.
GSRG argued on appeal, inter alia, that the District Court improperly rejected its market definition of “black hot rolled coil steel”. The District Court had reasoned that steel producers currently making “pickled and oiled steel” could forgo the pickling and oiling process, and would thus have produced “black hot rolled coil steel”, which is a step in the process that is then “pickled and oiled” to reduce corrosion. As the pickling and oiling was simply a subsequent operation in the same process that produced the black hot rolled coil steel, producers of pickled and oiled steel could and would have foiled any efforts by Nucor to monopolize the relevant market, by the simple process of supply side entry and expansion. If Nucor had raised price and/or reduced output, the producers of pickled and oil steel would have entered the market, held off on the pickling and oiling, and restored competitive equilibrium, thus negating the notion of a “dangerous probability” of a successful attempt to monopolize.
The 11th Circuit, on receiving the second appeal, noted that it was “like a swallow returning to Capistrano”. In a succinct opinion, the court adopted the findings of the District Court and of Special Master Rilll, but only wrote on the supply-side cross-elasticity point.
In affirming the District Court’s order of dismissal, the court employed a “quick look” shifting of the burden of producing evidence, and held that the allegation of a relevant market of “black hot rolled coiled steel” was insufficient as a matter of law, as it failed to negate the likelihood of supply-side entry.
How could the circuit court have found that supply-side cross-elasticity factors would have thwarted a dangerous probability of the attainment and/or maintenance of monopoly power? For example, is it intuitively obvious that steel producers of the pickled and oiled product would forgo the pickling and oiling process and shift production and thus foil Nucor’s efforts to monopolize the market for coiled steel? The opinion is silent as to the capacity and marketing flexibility of the picklers and oilers. Not to worry. Citing Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1436 (9th Cir. 1955), the court points out that
defining a market on the basis of demand considerations alone is erroneous. A reasonable market definition must also be based on “supply elasticity.”
In other words, the court found that the supply elasticity characteristics suggested by the complaint were sufficient to shift the burden of producing evidence to GSRG to demonstrate that new entry and/or supply shifts were not feasible, and should not be anticipated, and thus satisfy the supply elasticity requirements cited by Rebel Oil. In a nutshell, the court is employing a structured rule of reason, or “quick look”, to impose a duty of coming forward on the plaintiff to negate supply elasticity likelihood.
But there is more. As the opinion states, the court adopted the findings of the District Court and the Special Master. The court noted that one of GSRG’s own experts conceded that, all things being equal, manufacturers of pickled and oiled steel would produce black hot rolled coil steel if the latter product were selling at a higher price. The court concluded that GSRG “simply did not present evidence to create an issue of material fact with respect to the cross-elasticity of supply.” The court therefore concluded that the failure of GSRG to account for cross-elasticity of supply was fatal to its attempt of monopolization claim under Section 2 of the Sherman Act, as a matter of law.
As the 11th Circuit’s opinion adopts the findings and conclusions of the District Court, a “quick look” at the District Court’s opinion may be helpful. In discussing the supply-side cross-elasticity issue, the District Court noted:
Indeed, some evidence supporting the inference that consumers within the proposed geographic market could not turn to sellers outside the geographic market is necessary to survive summary judgment. [citation omitted]. GSRG provided no such evidence. To the contrary, the record is replete with evidence that sellers outside GSRG’s proposed geographic market could, and did, ship significant quantities of hot rolled coil into GSRG’s proposed geographic market.
Gulf States Reorganization Group v. Nucor Corporation, 822 F.Supp 2d 1201, 1235-1237 (N.D. Ala. 2011) (emphasis in original).
Thus, it appears that the proverbial swallows will move on, and Nucor’s “pickle” of being a defendant in a multi-year antitrust case is over, at least for the time being.