Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Consumers allege anticompetitive conduct by Keurig in single-serve coffee brewer market, (May 6, 2014)

By Linda O’Brien, J.D., LL.M.

Consumers have filed a putative class action complaint in the federal district court of San Diego against a manufacturer of coffee brewers for allegedly engaging in anticompetitive conduct in the single-serve brewer and compatible portion pack markets by conspiring to fix prices of its single-serving portion packs, entering into exclusive agreements with distributors and retailers, and acquiring its competitors (Rehma v. Keurig Green Mountain, Inc., May 5, 2014). The action follows a similar suit filed in the federal district court of San Diego by a group of retail customers who purchased the manufacturer’s single-serving portion packs (Schroeder v. Keurig Green Mountain, Inc., March 24, 2014).

Keurig Green Mountain designs, manufactures, and sells single-serve coffee brewers, each of which use a different type of portion pack that is incompatible with other types of brewers. The single-serve coffee brewers are marketed for home, office, or hospitality use. Keurig’s main product is the K-Cup, a single-serving coffee brewing system. Lorie Rehma and Jonna Dugan purchased K-Cups indirectly from Keurig.

The complaint states that Keurig has monopolized the market for the sale of single-serve brewers, as well as the market for single serving portion packs. Keurig held patents that allowed it to exclude competition for the sale of its K-Cup portion packs. The patents expired in 2012. To maintain its monopoly, Keurig abused its market dominance by coercing distributors to enter into exclusive agreements.

Barriers are high for potential entrants into the portion pack market. Potential manufacturers must either develop their own brewers to be compatible with their own portion packs, or make portion packs compatible with Keurig’s K-Cup brewers. Potential entrants cannot easily manufacture their own brewers because Keurig holds a number of patents covering brewing technology. Such a manufacturing effort would require success research and development efforts and significant capital expenditures, the complaint alleged.

Keurig’s market dominance is clear. Currently, Keurig 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. 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 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 objective of the redesign is to serve anticompetitive and unlawful end. As a result, the technology will force consumers to pay at least 15 to 25 percent more for K-Cups and block them from their preferred beverages and restrain competition on the merits, according to the complaint.

The complaint 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. 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 system, the plaintiffs charged. The terms of number of these anticompetitive agreements cannot be justified by a purported procompetitive purpose, such as to ensure a reliable supply of K-Cups. Moreover, Keurig’s exclusionary agreements with coffee brands allegedly contain restrictions on how licensed K-Cups can be sold, thereby allowing Keurig to maintain supracompetitive prices across licensed brands by controlling output.

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 has 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 sham 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, monopoly leveraging, technology tying , anticompetitive product redesign, attempted monopolization, conspiracy to monopolize, unjust enrichment, and violations of Sections 1 and 2 of the Sherman Act, Cartwright Act, California’s Unfair Competition Law, and New York General Business 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-01131-H-JLB.

Attorneys: Francis M. Gregorek (Wolf Haldenstein Adler Freeman & Herz LLP) and Thomas J. McKenna (Gainey McKenna & Egleston) for Lorie Rehma and Jonna Dugan.

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

News: Antitrust CaliforniaNews