Antitrust Law Daily Wrap Up, ANTITRUST—E.D. Pa.: Distributor’s monopolization claims against cigar maker go up in smoke, (Oct 15, 2015)

By Linda O’Brien, J.D., LL.M.

A cigar distributor failed to plausibly allege a relevant product market to pursue monopolization claims against a leading manufacturer of mass market cigars in relation to its agreement to offer favorable pricing to a competing distributor, which the cigar maker refused to offer to the complaining distributor, the federal district court in Philadelphia has ruled. However, the distributor’s price discrimination claims could proceed (Satnam Distributors LLC v. Commonwealth-Altadis, Inc., October 14, 2015, Restrepo, L.).

Commonwealth Brands, and its subsidiaries, Commonwealth-Altadis and Altadis, U.S.A. (collectively, “CA”), is one of the largest producers of mass market cigars, which are machine made cigars primarily sold in convenience stores and gas stations rather than in higher end specialty cigar shops. Harold Levinson Associates (HLA) is one of the largest full-line convenience store distributors.

In 2011, Satnam Distributors, an operator of a convenience store distribution business, opened a distribution business unit to focus on the sale of cigars to convenience store customers and began purchasing mass market cigars from CA. As Satnam’s market share in Pennsylvania rose to 30 percent, HLA’s market share fell from 80 to 50 percent after Satnam’s entry into the market.

In response to its dwindling market share, HLA entered into an agreement with CA under which HLA would receive lower pricing and increased promotional opportunities for CA’s mass market cigars. As a result, HLA was able to sell CA’s mass market cigars for less than the prices at which Satnam could purchase the identical products. After CA refused to offer the same pricing to Satnam, in November 2014, Satnam filed suit against CA and HLA, asserting claims for monopolization, attempted monopolization, conspiracy to monopolize, and unlawful agreement in restraint of trade in violation of Sections 1 and 2 of the Sherman Act, and price discrimination under the Robinson-Patman Act. The defendants moved for dismissal.

Monopolization. The court determined that the plaintiff failed to sufficiently allege a plausible product market. Satnam alleged that CA and HLA unreasonably restrained trade by entering into an agreement to foreclose the plaintiff from effectively competing in the Pennsylvania market. According to the court, a defined relevant product market was essential to evaluate whether there was monopoly power or dangerous probability of monopolization, or to determine the existence of market power. In this case, Satnam defined the relevant product market as “the market for distribution of CA mass market cigars” in Pennsylvania. However, the law is clear that the distribution of a single brand, like the manufacture of a single brand, does not constitute a legally cognizable market.

Moreover, the plaintiff alleged in its complaint that retailers must buy a full line of all manufacturers’ mass market cigar brands and therefore distributors must carry the same full line to sell to retailers. The court noted that, if the allegations were accepted as true, then the relevant market appeared to be very brand of mass market cigar produced by every major manufacturer, rather than a subset thereof. Since the plaintiff created a conflict within its own allegations and asserted a market that was simply “untenable,” the plaintiff failed to carry its burden of alleging a plausible product market.

Price discrimination. However, the plaintiff adequately pleaded the necessary elements for a Robinson-Patman claim. To support its price discrimination claims, Satnam alleged numerous instances of complaints made to CA that HLA was selling CA mass market cigars for less than Satnam’s purchase price from CA. CA’s argument that Satnam must identify the particular brands of CA cigars which were sold to HLA at more favorable prices and when those sales were made was rejected. The court noted that the plaintiff’s general allegation that CA sold its products at lower prices to a competitor was sufficient at the pleading stage of the case.

CA’s contention that Satnam failed to allege that its price discrimination actually harmed competition was also rejected. The court found that the plaintiff’s allegations that HLA regained its 80 percent market share as a result of favorable pricing, Satnam was in direct competition with HLA for the same customers, and Satnam was foreclosed from continued participation in the market sufficiently showed competitive injury. Satnam also adequately pleaded that HLA knowingly induced CA to engage in discriminatory pricing or had constructive knowledge that it received favorable prices from CA.

Finally, the plaintiff adequately pleaded antitrust injury for a Robinson-Patman Act claim. Satnam’s allegations that it was charged higher prices than HLA for CA cigars, it was the specific target of CA and HLA’s anticompetitive practice, it was foreclosed from the distribution market, and CA’ price discrimination resulted in lesser competition in the market was sufficient to connect Satnam’s losses to the defendants’ conduct in violating the Robinson-Patman Act, the court concluded.

The case is No. 2:14-cv-06660-LFR.

Attorneys: Brent W. Landau (Hausfeld LLP) for Satnam Distributors LLC d/b/a Lion & Bear Distributors. Robert J. Brookhiser, Jr. (Baker & Hostetler LLP) for Commonwealth-Altadis, Inc. and Commonwealth Brands, Inc. Elizabeth B. McCallum (Baker & Hostetler LLP) for Altadis, U.S.A., Inc. Andrew M. Lanker (Baker Botts LLP) for Harold Levinson Associates, Inc.

Companies: Satnam Distributors LLC d/b/a Lion & Bear Distributors; Commonwealth-Altadis, Inc.; Commonwealth Brands, Inc.; Altadis, U.S.A., Inc.; Harold Levinson Associates, Inc.

Cases: Antitrust PennsylvaniaNews