Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Hardware chain states antitrust, false advertising claims against Home Depot, (Sep 23, 2013)

By Tobias J. Gillett, J.D., LL.M.

A California and Oregon hardware chain have stated antitrust claims under federal and state law against Home Depot, but not against two major manufacturers of professional power tools, the federal district court in San Francisco has ruled (Orchard Supply Hardware LLC v. Home Depot USA, Inc., September 19, 2013, Tigar, J.). The hardware chain also stated claims for false advertising under the Lanham Act and California’s False Advertising Law, and for unfair competition under California’s Unfair Competition Law, against Home Depot.

According to the complaint, Home Depot USA, Inc. is the largest seller of hardware products in the United States. Milwaukee Electric Tool Corp. (METCo) and Makita USA, Inc. are two of the three dominant manufacturers of professional power tools in the United States. A hardware retailer allegedly cannot remain a viable competitor in the power tools market without selling tools made by both METCo and Makita.

On June 7, 2012, Home Depot announced its intent to “lock down the supply of professional power tools.” Shortly after this announcement, Makita and METCo separately notified Orchard Supply Hardware LLC, operator of a chain of hardware stores in California and Oregon, that they would no longer sell power tools to Orchard. A third manufacturer, Black & Decker Dewalt, informed Orchard that Home Depot had requested that it cease dealing with Orchard, but that Black & Decker had refused. Home Depot allegedly reduced its purchases of Black & Decker products and placed those products in disadvantageous locations in its stores in response. Makita and METCo also ceased making sales to Amazon, and instructed national wholesale cooperative s to have their members cease fulfilling third-party orders for their products.

Makita and METCo allegedly acceded to Home Depot’s demand to cease supplying Orchard and other retailers because they could not “afford to cross” Home Depot, their largest trading partner. Home Depot allegedly made clear to Makita and METCo that it was conferring with the other company, and that the other company would cease selling to Orchard and Amazon it around the same time. Finally, Orchard alleged that Home Depot engaged in false advertising by claiming that Orchard charged more for the same products, when the products depicted differed in quality and manufacturer.

Orchard asserted claims for violation of the Sherman Act, California’s Cartwright Act, and California’s Unfair Competition Law, as well as certain common law claims, against Home Depot, METCo, and Makita. In April 2013, the court granted the defendants’ motion to dismiss. Orchard then filed a Second Amended Complaint (SAC) reasserting its initial claims, and asserting new claims for false advertising under the Lanham Act and California’s False Advertising Law. The defendants filed a motion to dismiss.

Sherman Act

Per se violation. Orchard failed to allege that Makita and METCo had engaged in a per se illegal group boycott, according to the court. The court explained that a plaintiff could plead an unlawful group boycott by alleging parallel conduct plus behavior giving rise to an inference of an agreement. Here, Orchard alleged seven specific plus factors: “1) confirmation from Black & Decker that Home Depot approached other suppliers; 2) Makita and METCo’s past history of shutting off supplies to Home Depot’s rivals in lockstep; 3) Home Depot’s public announcement of its plan to lock up suppliers; 4) the fact that Makita and METCo’s conduct was contrary to their own interests; 5) Orchard officers’ inside knowledge of Home Depot’s strategy; 6) the fact that METCo and Makita operate in a product market dominated by three suppliers; and 7) Makita and METCo’s simultaneous implementation of identical complex arrangements.”

Orchard did not show why Makita’s and METCo’s actions were against their self-interest, according to the court. Although they may have wanted to continue selling to Orchard, both companies were “extraordinarily dependent” on their relationship with Home Depot, and either company stood to benefit if Home Depot began excluding suppliers that did not conform to its requirements. Orchard did not demonstrate why Makita’s and METCo’s actions were not simply independent responses to Home Depot’s demand, or why Makita’s and METCo’s “past history of shutting off supplies to Home Depot’s rivals” did not also consist of responses to common demands from Home Depot.

Orchard’s allegation that two of its executives who previously worked for Home Depot had “surmised” that Home Depot would have communicated to METCo and Makita what other suppliers were doing “provide[d] little support” for its claims, in the court’s view. Moreover, the fact that the market for professional tools was dominated by three suppliers did not indicate that Makita’s and METCo’s actions would not have been independent responses to Home Depot’s demand. Finally, Makita’s and METCo’s instructions to their distributors and wholesalers not to make sales to Orchard did not fall within the per se rule, as they were vertical agreements, not horizontal agreements between direct competitors.

Rule of reason violation. The court concluded, however, that Orchard sufficiently alleged a claim under the rule of reason against Home Depot. In its previous decision, the court had found that Orchard’s “generic allegations” that Home Depot would be able to charge higher prices and deprive consumers of choice were insufficient to plead an injury to competition. In its SAC, Orchard alleged that the agreements foreclosed competitors from competing in the market for certain specific power tools as purchased by professional customers. The court found that Orchard’s allegations of “a distinct set of products”; of “a distinct submarket as indicated by a distinct set of purchasers, sensitive to a distinct price point; and of total foreclosure of competition within that submarket by the agreements were sufficient to plead harm to competition.

The court rejected the defendants’ contentions that Orchard did not demonstrate harm to competition because it did not allege a reduction in the output or quality of goods or an increase in price caused by Orchard’s exclusion from the market. Citing the Supreme Court’s decision in F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986), the court observed “that a plaintiff does not need to prove that prices have actually been raised to plead harm to competition.” The court also found that it could plausibly infer from Orchard’s allegations that Home Depot had significant market power in the defined submarkets. The court also concluded that Orchard did not have to plead the specific percentage of market power that it, or other Home Depot competitors, previously possessed in order for the court to infer harm to competition.

The court also declined to follow the defendants’ argument that Orchard had not alleged any facts showing the anticompetitive effect of each individual agreement, and that the court could not consider the aggregate effect of the agreements in evaluating the rule of reason claims. The court found “the weight of in-circuit precedent” favored allowing aggregation in pleading Section 1 claims. Moreover, the court observed that the defendants’ interpretation would mean that “a company could reach separate agreements with eleven different suppliers, each of whom has a nine percent market share, locking up 99 percent of the market, and yet still be outside the reach of Section 1’s prohibition of unreasonable restraints of trade.” Further, unreasonable restraint of trade under Section 1 and attempted monopolization under Section 2 were not mutually exclusive categories.

Therefore, the court found that the effects of the agreements could be aggregated for the purpose of showing that Home Depot’s conduct was anticompetitive. However, the court noted that the effects of the agreements could not be aggregated in evaluating the conduct of METCo and Makita. Since Orchard had not pled facts about the agreements individually, it could not demonstrate that they were anticompetitive, and the court dismissed its rule of reason claims against METCo and Makita.

Finally, Orchard had alleged that its stores were organized into seven different geographic markets in California, and one in Oregon, that the defendants had market power within each market, and that the defendants had market power in the United States generally. This was sufficient to adequately plead a relevant geographic market, according to the court.

Cartwright Act. Since California’s Cartwright Act was “modeled after the Sherman Act,” and Orchard had stated a rule of reason claim under the Sherman Act against Home Depot, but not METCo or Makita, Orchard sufficiently alleged a claim under the Cartwright Act against Home Depot but not the other defendants.

Unfair Competition Law. By stating a claim under the Sherman and Cartwright Acts, Orchard also stated a claim under the prong of California’s Unfair Competition Law that permitted a plaintiff to assert a claim based on a violation of other laws, according to the court.

Lanham Act. Orchard stated a claim for false advertising under the Lanham Act, in the court’s view. The court could infer that Home Depot’s advertising could affect interstate commerce because Orchard alleged that Home Depot and Orchard competed with each other in multiple states and with “ubiquitous” online retailers such as Amazon.

Moreover, Orchard pled its claims with the particularity required by Federal Rule of Civil Procedure 9(b), even though it did not provide information regarding the specific stores where the advertisements were displayed or the dates on which they were displayed. The SAC contained “a great deal of detail about the content of the advertisements,” and Orchard had alleged that the advertisements were located in stores in Southern California. Orchard’s allegations were sufficient “to put Home Depot on notice regarding the specific advertisements in question, and to describe the who, what, when, where and how of the alleged fraud.”

California False Advertising Law. Orchard had met its burden of showing that members of the public were likely to be deceived by Home Depot’s advertising, and therefore also stated a claim under California’s False Advertising Law.

The court declined to grant Orchard leave to amend its complaint to re-assert the dismissed claims because it did not seem likely to the court that Orchard would be able to state sufficient additional facts to plead those claims.

The case is No. 12-cv-06361-JST.

Attorneys: Dorn Graham Bishop and William A. Markham (Law Offices of William Markham) for Orchard Supply Hardware LLC. Andrew Dale Lanphere and Roxane Alicia Polidora (Pillsbury Winthrop Shaw Pittman LLP) for Home Depot USA, Inc.

Companies: Orchard Supply Hardware LLC; Home Depot USA, Inc.; Milwaukee Electric Tool Corp.; Makita USA, Inc.

Cases: Antitrust Advertising StateUnfairTradePractices CaliforniaNews