Antitrust Law Daily Wrap Up, ANTITRUST—NDCal: Antitrust, Unfair Competition Claims Fail Against Home Depot and Power Tool Manufacturers over Exclusive Supply Contracts, (Apr 15, 2013)

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

A California hardware chain failed to state claims against hardware retailer Home Depot USA, Inc. and power tool manufacturers Makita USA, Inc. and Milwaukee Electric Tool Corporation (METC) over alleged exclusive supply agreements between Home Depot and the manufacturers that caused Makita and METC to cease selling to the complaining hardware chain, the federal district court in San Francisco has ruled (Orchard Supply Hardware LLC v. Home Depot USA, Inc., April 11, 2013, Tigar, J.).

According to the complaint, on June 7, 2012, Home Depot announced its intent to enter into "exclusive-supplier contracts with key suppliers, so that it would become the principal or only supplier of the single most important kind of core hardware product—professional power tools and related accessories."

Shortly after the announcement, Makita and METC informed Orchard Supply Hardware LLC, which owns and operates a chain of California hardware stores, that they would no longer supply power tools to Orchard. A third manufacturer, Black & Decker Dewalt, informed Orchard that Home Deport 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.

Orchard filed suit against Home Depot, Makita, and METC, alleging that their actions violated federal and California antitrust law. The defendants moved to dismiss.

Per se group boycott. Orchard initially contended that the defendants’ arrangement constituted a per se illegal group boycott. Orchard alleged that they formed a "hub-and-spoke" relationship, with Home Depot as the hub and Makita and METC as the spokes. However, the court observed that this kind of arrangement still required an agreement between horizontal competitors to constitute a per se violation, and that Orchard had not alleged such an agreement, or even communications from which such an agreement could be inferred.

The court also rejected Orchard’s contention that an agreement not to sell to Orchard could be inferred because "neither [METC] nor Makita would have agreed to stop making sales to significant distribution channels, save upon obtaining reassurance from Home Depot that the other had likewise agreed to do so." The court noted that this argument "begs the question of why both were apparently willing to do so without an assurance that Black & Decker and other suppliers would participate. The court found that nothing suggested that "[METC]’s and Makita’s actions were not merely parallel conduct that could just as well be independent action." Although a plaintiff could rely on circumstantial evidence, and did not have to "allege specific communications amongst conspirators," the case more resembled cases where illegal agreement had not been inferred from parallel conduct than those where it had, in the court’s view."

Rule of reason. Although the court found Orchard’s allegations of a horizontal agreement were insufficient, it did find that Orchard had "adequately pled facts suggesting the existence of two vertical agreements" that could constitute unreasonable restraints of trade between Home Depot and the manufacturers.

However, Orchard based its allegations of harm to competition on Home Depot’s alleged ability "to charge higher prices and deprive consumers of choice as a result of its agreements." The court noted that the Ninth Circuit had held in 2012 in Brantley v. NBC Universal, Inc., 675 F.3d 1192, 2012-1 Trade Cases ¶77,844, that "[a]llegations that an agreement had the effect of reducing consumers’ choices or increasing prices to consumers does not sufficiently allege an injury to competition." Since Orchard only alleged increased prices and reduced consumer choice, the court dismissed its claim.

Cartwright Act. The court also dismissed Orchard’s claim under the Cartwright Act, noting that the analysis of a Cartwright Act violation "mirrors the analysis under federal law." Although Orchard cited state court cases it claimed supported permitting it "to allege a group boycott even in the absence of any arrangement between horizontal competitors," the court observed that those cases preceded the U.S. Supreme Court’s 1998 decision in NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 1998-2 Trade Cases ¶72,362, "that an unlawful group boycott claim must involve some horizontal arrangement."

Unfair Competition Law. The court also found that its previous decisions required dismissal of Orchard’s claims for violation of the UCL. Since Orchard did not sufficiently plead antitrust violations, the alleged violations could not serve as "unlawful business practices" under the UCL. Moreover, the violations could not constitute "unfair business practices," at least to the extent that Orchard alleged that the conduct was unfair for the same reason it argued that to violated the antitrust laws.

The court also dismissed Orchard’s claims for tortious interference with existing contracts and tortious interference with prospective economic relations.

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

Attorneys: Dorn Graham Bishop for Orchard Supply Hardware LLC. Andrew Dale Lanphere (Pillsbury Winthrop Shaw Pittman LLP) for Home Depot USA, Inc. Scott W. Hansen (Reinhart Boerner Van Deuren s.c.) for Milwaukee Electric Tool Corp. Richard James Mooney (Bryan Cave LLP) for Makita USA, Inc.

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

Cases: Antitrust StateUnfairTradePractices CaliforniaNews