On March 25, 2003, the United States Court of Appeals for the Third Circuit issued its opinion in
LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003). Rehearing the case en banc, the court in a 7-to-3 decision reversed the panel decision over
a sharp dissent and upheld a $68 million jury verdict that 3M had violated Section 2 of the Sherman Act by maintaining a volume-based
"bundled rebate" program and offering cash incentives to customers that effectively foreclosed LePage's from competing with
3M in the sale of transparent tape. We expect that 3M will petition for certiorari, and that the Supreme Court will rule on
the petition this fall.
Key Implications
The key implications of the LePage's decision are:
- Companies with large market shares should carefully evaluate the potential antitrust risks of bundled rebate or similar discount
programs that may have the effect of causing customers to deal exclusively with them.
- Companies with large market shares can reduce the antitrust risk associated with bundled rebate or similar discount programs
by having articulated and well-supported cost savings and other efficiency justifications for such programs.
Background*
3M manufacturers Scotch® brand tape for home and office use. Since the early 1980s, LePage's competed against 3M by selling
"second brand" and private label tape, i.e.., tape sold under the retailer's name rather than under the name of the manufacturer. By the early 1990s, 3M had a 90% share
of the market for transparent tape while LePage's accounted for 88% of private label tape sales in the United States. Due
to the growing popularity of private label tape at office superstores and mass merchandisers, 3M also decided to enter the
private label tape business in the early 1990s.
In its antitrust suit, LePage's claimed, inter alia, that 3M willfully maintained its monopoly in violation of Section 2 of the Sherman Act by engaging in exclusionary conduct
designed to prevent LePage's and another tape manufacturer, Tesa Tuck, Inc., from gaining or maintaining sales. (Tesa Tuck
was no longer in the market at the time of the trial.) More specifically, LePage's asserted that 3M created a multitiered
"bundled rebate" program and entered into contracts that expressly or effectively required customers to deal exclusively with
3M. 3M's rebate programs called the "Executive Growth Fund" and "Partnership Growth Fund" offered higher rebates to customers
who purchased targeted amounts of six different 3M product lines (comprising health, home, home improvement, stationery, retail
auto, and "leisure time" products). In addition, LePage's alleged that 3M offered certain large customers lump-sum cash payments,
promotional allowances, and other cash incentives to encourage them to purchase exclusively from 3M.
3M did not deny that it offered these rebate programs or promotional payments, but argued that its conduct was lawful because
it never priced its transparent tape or other products below its costs. Thus, 3M contended that its rebates "were no more
exclusive than procompetitive lawful discount programs" and that customers were discouraged from buying from competitors only
to the extent that less efficient rivals failed to match the discounts offered by 3M. In addition, 3M acknowledged that it
had entered into two contracts which expressly conditioned discounts on exclusivity, but argued that the two customers represented
a very small portion of the market. 3M also argued that its cash incentives were not equivalent to exclusive dealing agreements
and could not violate Section 2 of the Sherman Act since the jury found that the conduct did not separately violate Section
1 of the Sherman Act.
Third Circuit Opinion
The Third Circuit rejected 3M's defense that it did not violate Section 2 of the Sherman Act simply because all the products
subject to the bundled rebate were sold above cost. In the court's view, 3M's bundled rebate program could be unlawful exclusionary
conduct because "the principal anticompetitive effect of bundled rebates as offered by 3M is that when offered by a monopolist
they may foreclose portions of the market to a potential competitor who does not manufacture an equally diverse group of products
and who therefore cannot make a comparable offer."
According to the court, the rebate program
set customer-specific target growth rates in each product line. The size of the rebate was linked to the number of product
lines in which targets were met, and the number of targets met by the buyer determined the rebate it would receive on all
of its purchases. If a customer failed to meet the target for any one product, its failure would cause it to lose the rebate
across the line. This created a substantial incentive for each customer to meet the targets across all product lines to maximize
its rebates.
Since Scotch-brand tape is "indispensable to any retailer in the transparent tape market," the court held that a jury could
reasonably find that "3M used its monopoly in transparent tape, backed by its considerable catalog of products, to squeeze
out LePage's." Likewise, the court determined that there was sufficient evidence to support the jury's finding that 3M's cash
payments to many of the larger customers "were designed to achieve sole-source supplier status" and "cut LePage's off from
key retail pipelines necessary to permit it to compete profitably."
Finally, the court held that 3M failed to offer any evidence or testimony to support its business justifications for the bundled
rebate program, such as customers' desire to have single invoices and/or single shipments. Moreover, the court concluded,
"it is highly unlikely that 3M shipped transparent tape along with retail auto products or home improvement products to customers,"
and even if it did, "the savings stemming from the joint shipment [are not likely to] approach[] the millions of dollars returned
to customers in bundled rebates." On the contrary, "[t]here is considerable evidence in the record that 3M entered the private-label
industry market only to 'kill it.'" According to the court, acting in furtherance of one's economic interest to maintain a
monopoly is not the type of valid business reason that excuses exclusionary conduct.
Dissenting Opinion
The dissenting opinion criticized the majority for using Section 2 of the Sherman Act "to protect an inefficient producer
from a competitor not using predatory pricing but rather selling above costs." The dissent argued that Supreme Court precedent
under Section 2 favors vigorous price competition and expresses "skepticism about the ability of courts to separate anticompetitive
from procompetitive action when it comes to above-cost strategic pricing." Thus, the dissent would have followed stricter
tests devised by other courts (including the Eighth Circuit) with respect to bundled rebates and required LePage's evidence
to overcome a "strong presumption of legality" for above-cost pricing. According to the dissent, LePage's evidence failed
to satisfy this burden.
For example, the dissent argued that LePage's problems with a number of customers stemmed from several factors other than
3M's rebate program (e.g., quality and service issues, switching to foreign suppliers, etc.), and believed that LePage's failed
to quantify and demonstrate specifically how 3M's pricing would make it unprofitable for an equally efficient producer to
continue to compete. Indeed, since LePage's still maintained a 67% share of the private label business at the time of the
trial, its argument appeared to suggest that it could compete profitably only if it were the exclusive supplier of such tape.
Finally, the dissent concluded that 3M's pricing structure and bundled rebates were not contrary to 3M's economic interests
since it resulted in increased sales, and there were other procompetitive and valid business reasons for the program. LePage's
did not demonstrate that the programs only made economic sense if they excluded competition. Indeed, LePage's was able to
maintain several large customers despite the rebate program, and 3M continued to face competition from several foreign suppliers.
Thus, the dissent did not believe that 3M's rebate program was the type of exclusionary or predatory conduct prohibited by
Section 2 of the Sherman Act.
Implications
On its face, the Third Circuit's decision in LePage's presents potentially serious antitrust hurdles for firms with large
market shares (even in narrowly defined markets) that seek to increase sales and customer loyalty through rebate and discount
programs. While the antitrust laws are designed to encourage aggressive competition even from firms with monopoly power, the
LePage's decision creates the risk that disgruntled competitors could attempt to use these laws to attack firms with large
market shares for engaging in aggressive competition on the merits. Despite these risks, the LePage's decision does not mean
that all rebate programs with some of the characteristics of the 3M program are likely to be found violative of the antitrust
laws.
The decision in LePage's, in our view, resulted from a confluence of several facts (as found by the majority), including: (1) LePage's was the only
significant competitor of 3M; (2) 3M adopted its bundled rebate program after LePage's entered the market; (3) the intent
of the 3M program was to eliminate demand for private label tape and competition from private label tape manufacturers; (4)
3M not only bundled rebates across six "diverse" product lines, it set minimum targets for each product line, and the number
of targets met determined the size of the rebate the buyer would earn on all of its purchases, thus creating "a substantial
incentive for each customer to meet the targets across all product lines to maximize its rebates"; (5) the level of rebates
was so high that the single-product competitor could not, as a practical matter, offer similar price concessions to some customers
(i.e., they were "as much as half of LePage's entire prior tape sales to the customer"), and the rebate programs were "customized"
to exclude LePage's products; (6) 3M offered some customers incremental rebates for exclusivity; (7) 3M offered no evidence
to support its efficiency justifications for the bundled rebate program; and (8) 3M "conceded" that it could recoup any forgone
profits from this program once the private label manufacturers were out of business.
It is possible the court would have reached the same result had one or more of these facts not been present, but a close reading
of the opinion suggests that all of these facts (not to mention 3M's concession that it has monopoly power and the court's
finding that entry barriers were high) are necessary to the court's ultimate conclusion. Nonetheless, the court's broadly
articulated propositions (e.g.,, "the inherent anticompetitive effect of bundled rebates") and rejection of 3M's above-cost pricing defense create the risk
that courts may not read the decision as being dependent on the particular facts of that case. The LePage's, decision, therefore, may allow competitors more easily to characterize any successful rebate or discount program by a firm
with a significant market share as (1) having "strings" attached that effectively prevent customers from dealing with them,
and (2) lacking any cost savings or other efficiency benefits for customers.
Thus, in light of LePage's, it would be prudent for firms that have large market shares (even in narrowly defined markets) to carefully review their
rebate and discount programs. The risks associated with these programs must be evaluated on a case-by-case basis. In general,
however, each program should have an articulated, and well-supported, efficiency justification. The LePage's court acknowledges, for example, that "volume discounts . . . are concededly legal and often reflect cost savings." Firms
should make sure that they can demonstrate any such efficiency benefits from their programs. In addition, contracts with a
short duration (e.g., one year or less) that permit customers to terminate for any reason on short notice and without significant
financial penalties may also be used to reduce the antitrust risks.
*This summary is drawn from the majority and dissenting opinions in the Court of Appeals' decision.
