Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Consumers allege anticompetitive conduct by Keurig in single-serve coffee brewer market, (Mar 26, 2014)

By Linda O’Brien, J.D., LL.M.

A manufacturer of coffee brewers has engaged in anticompetitive conduct in the single-serve brewer and compatible portion pack markets by engaging in a conspiracy to fix prices of its single-serving portion packs, entering into exclusive agreements with distributors and retailers, acquiring its competitors, and pursuing meritless patent claims against competitors, according to a complaint filed in the federal district court in San Diego (Schroeder v. Keurig Green Mountain, Inc., March 24, 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 and portion packs markets. Shirley Schroeder and Constance Werthe are retail customers who have purchased K-Cups.

The complaint states that, in 2012, Keurig’s patents expired and the company engaged in anticompetitive conduct to maintain its monopoly and exclude competition. Keurig allegedly abused its market dominance by coercing distributors to enter into exclusive agreements. To maintain its monopoly, Keurig has tied up vertical distribution channels for competitive portion packs by entering into unduly restrictive exclusive dealing agreements with companies at every level of distribution, the consumers claimed.

Keurig’s market dominance is clear. Currently, the company controls approximately 89 percent of the market for the sale of single-serve brewers, 73 percent of the market for all portion packs used in single-serve brewers, and 86 percent of the market for portion packs compatible with its single-serve brewers.

Keurig has announced plans to change the technology utilized in its single-serve brewers to eliminate the use of competitors’ portion packs products. The proposed “lock-out” feature of the new technology cannot be justified based on any purported consumer benefit and is not essential to the coffee brewer’s function, the complaint maintained. The objective of the redesign is to protect Keurig’s monopoly by eliminating competition. As a result, the technology will block consumers from their preferred beverages and restrain competition on the merits, according to the complaint.

The lawsuit alleges that, after the expiration of its patents, Keurig embarked on an aggressive plan to eliminate and restrain competition through successive acquisitions of potential competitors. Although competitors have entered the market, Keurig continues to sell K-Cups at supracompetitive prices for use with single-serve brewers manufactured or licensed by Keurig to be compatible with K-Cup brewers.

Keurig sells K-Cup brewers at cost or at a loss for use by consumers and provides K-Cups to businesses at no cost as long as the businesses agree to purchase the K-Cup portion packs exclusively from Keurig. While Keurig sacrifices brewer profits to increase sales of K-Cup portion packs, the company recoups profits by increasing the profit margin on the sale of K-Cup portion packs. Wthout the anticompetitive agreements foreclosing meaningful price competition, Keurig would not have been able to maintain such a substantial K-Cup profit margin, the complaint alleges.

Keurig allegedly engaged in anticompetitive conduct to maintain its monopoly by (1) using unduly restrictive, anticompetitive, and unjustifiable exclusionary agreements to make manufacturers and component suppliers unavailable to competing makers of compatible portion packs; (2) establishing agreements with coffee roasters to allocate markets, reduce output, and restrain competition from lower-priced competitive portion packs; (3) locking distributors and retailers into exclusionary agreements restraining or eliminating access to retail customers and distribution channels; (3) litigating meritless intellectual property claims against competitors; (4) threatening to eliminate competitive access to its single-serve coffee brewers by technologically tying the purchase of K-Cup portion packs to the purchase of K-Cup coffee brewers; and (5) using its plan to technologically tie its new coffee brewers to its licensed portion packs to encourage retail outlets to cease doing business with the makers of competitive portion packs.

The plaintiffs assert claims for monopolization, attempted monopolization, conspiracy to monopolize, exclusive dealing, monopoly leveraging, technology tying, anticompetitive product redesign, and violations of Sections 1 and 2 of the Sherman Act, Clayton Act, Cartwright Act, and California’s Unfair Competition Law. 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. 3:14-cv-00678-DMS-KSC.

Attorneys: Francis M. Gregorek and Fred Taylor Isquith (Wolf Haldenstein Adler Freeman & Herz LLC) for Shirley Schroeder and Constance Werthe

Companies: Keurig Green Mountain, Inc.; Keurig, Inc.

News: Antitrust CaliforniaNews