Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Cigar maker allegedly used monopoly power to restrict supply of competing private label product, (Oct 15, 2014)

By Linda O’Brien, J.D., LL.M.

A tobacco product manufacturer used its monopoly power to injure competition by refusing to fulfill purchase orders for the manufacture of a private label brand cigarillo in breach of contract and disparaging the quality of the competing private label brand, according to a complaint filed in the federal district court in the Central District of California (Trendsettah USA, Inc. v. Swisher International, Inc., October 14, 2014).

Trendsettah USA, Inc. and its subsidiary, Trend Settah, Inc., (collectively, “TSI”), market and distribute tobacco and other products. Swisher International is a global manufacturer of cigars and cigarillos.

The complaint states that, in 2010, TSI contemplated entry into the cigarillo market, an emerging sector of the cigar market. Through its investigation of the market, TSI came to understand that there are high barriers to entry in the cigarillo market, including enormous capital expenses to purchase specialized machinery for manufacturing cigarillos, the development of relationships with tobacco growers, and the regulation of the tobacco industry.

In face of the barriers of starting a cigarillo manufacturing operation, in January 2011, TSI entered into a private label agreement with Swisher for the manufacture of cigarillos under the brand name “Splitarillo.” As the contract progressed, TSI’s Splitarillo brand began to capture a larger and larger share of the cigarillo market. As Splitarillo’s market share grew, Swisher’s view of TSI soured. To protect its monopoly, rather than compete in the open market with the Splitarillo brand, Swisher began restricting the supply of Splitarillos by refusing to fulfill the orders for Splitarillos that TSI had placed, in violation of the private label agreement, the complaint stated.

According to the complaint, Swisher’s manufacturing right of the Splitarillo brand was exclusive and TSI was contractually prohibited from using another manufacturer to fulfill orders for Splitarillo cigar products. That aspect of the contract permitted Swisher to constrain the output of Splitarillo products as it saw fit. Swisher’s efforts caused TSI to lose sales and reduce the rate of market share growth that TSI had previously experienced.

In conjunction with the market growth of Splitarillo, Swisher began actively disparaging the Splitarillo product within the industry. In spring of 2012, Swisher employees told distributors that TSI was going out of business. Additionally, Swisher employees would visit wholesalers and distributors and physically remove Splitarillo products from their shelves as well as Splitarillo marketing and advertising materials. The efforts of Swisher and its employees intended to harm the Splitarillo brand in the industry, reverse the growth of the brand, and maintain Swisher’s monopoly in the cigarillo market, the complaint alleged.

The plaintiffs assert claims for breach of contract, breach of implied covenant of good faith and fair dealing, trade libel, tortious interference with contract, intentional interference with prospective economic relations, negligent interference with prospective economic relations, and violations of Section 2 of the Sherman Act and California’s Unfair Competition Law. The action seeks declaratory and injunctive relief, compensatory, treble, consequential, and punitive damages, restitution, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 2:14-cv-07956.

Attorneys: Mark Poe and Randolph Gaw (Gaw/Poe LLP) for Trendsettah USA, Inc. and Trend Settah, Inc.

Companies: Trendsettah USA, Inc.; Trend Settah, Inc.; Swisher International, Inc.

News: Antitrust CaliforniaNews