Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Consumer alleges anticompetitive conduct by Keurig in single-serve coffee brewer market, (Apr 16, 2014)

By Linda O’Brien, J.D., LL.M.

A manufacturer of coffee brewers has engaged in anticompetitive conduct in the single-serve brewer, portion pack, and compatible portion pack markets by acquiring potential competitors, pursuing meritless patent claims against competitors, and entering into exclusive agreements with distributors and retailers, according to a complaint filed in the federal district court of New York City (Hashem v. Keurig Green Mountain, Inc., April 11, 2014).

Keurig Green Mountain manufactures coffee brewers for home and commercial use. Its main product is the K-Cup, a single-serving coffee brewing system. Keurig has certain patents on its proprietary K-Cup format used in its single-cup brewers and holds a dominant market position in the single-serve brewers, portion packs, and compatible portion packs markets. Hashem is a retail customer who purchased K-Cups directly from Keurig.

The complaint states that, in 2010, Keurig began an anticompetitive scheme by eliminating potential competitors through a series of acquisitions. Keurig also entered into anticompetitive license and manufacturing agreements with other competitors and currently owns or holds licenses to approximately 49 coffee brands, including many well-known brands. Through unduly restrictive exclusionary agreements, the competitor coffee brands agree not to sell brewing products to any third party for use in K-cup portion packs or portion packs compatible with Keurig brewers, or license any trademarks to third parties in connection with products for use with Keurig brewers.

According to the complaint, Keurig has coerced coffee brewer manufacturers and component suppliers to enter long-term exclusive dealing arrangements which deny competitors access to equipment and materials. The restriction placed on supplying machinery used to make compatible portion packs cannot be justified on the basis of ensuring a reasonable supply of equipment for Keurig. Keurig has also coerced distributors and retailers to enter into long-term exclusive contracts to deny competitors access to retail customers and distribution channels.

Compatible K-Cups are not reasonably interchangeable with other portion pack formats. Keurig locks consumers into the Compatible K-Cup format by selling its K-Cup brewers at or below cost and is able to recoup or exceed losses on sales of K-Cup brewers by obtaining a 50 percent profit margin on its K-Cups. Small increases in the prices of Compatible K-Cups do not increase demand for non-Compatible portion packs because most consumers of Compatible K-Cups own a K-Cup brewer and are sufficiently locked in to its use to substitute non-Compatible portion packs, the complaint alleges.

In 2012, Keurig’s two principal patents expired and the company engaged in anticompetitive conduct to maintain its monopoly and exclude competition by filing meritless intellectual property claims against competitors in an attempt to restrain competition. Keurig also has announced plans to change the technology utilized in its single-serve brewers to eliminate the use of competitors’ portion packs products. The objective of the proposed “lock-out” feature of the new technology is to protect Keurig’s monopoly by eliminating competition. As a result, the technology will protect Keurig’s products from competition by tying the purchase of K-Cups to the purchase of K-Cup brewers, according to the complaint.

Keurig’s business model depends on its ability to leverage its single-serve brewer monopoly to restrain competition and extract monopoly profits from the K-Cups sold in the portion pack and compatible portion pack markets. The model relies on Keurig’s ability to (1) drive sales of its highly profitable K-cups by excluding competition for sales of single-serve brewers; (2) restrain price competition for compatible portion packs; and (3) maintain supra-competitive prices for an extended period of time.

Hashem asserts claims for monopolization, attempted monopolization, monopoly leveraging, and violations of Section 2 of the Sherman Act. The action seeks declaratory and injunctive relief, treble damages, pre- and post-judgment interest, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 1:14-cv-02582.

Attorneys: Daniel E. Gustafson (Gustafson Gluek PLLC), Arthur N. Bailey (Arthur N. Bailey & Associates), and Kevin Landau (Taus Cebulash & Landau, LLP) for Matthew Hashem

Companies: Keurig Green Mountain, Inc.; Green Mountain Coffee Roasters, Inc.; Keurig, Incorporated

News: Antitrust CaliforniaNews