Eaton Looks To U.S. Supreme Court For Help After Third Circuit Upholds

by Pepper Hamilton LLP
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On February 25, 2013, Eaton Corporation (Eaton) filed a petition for certiorari to the United States Supreme Court seeking to reverse a jury verdict finding Eaton liable for illegal monopolization. In late 1999/early 2000, Eaton, which manufacturers heavy-duty truck transmissions, began entering into long-term supply agreements with each of the four heavy-duty truck manufactures in North America. In late 2006, Eaton’s former competitors ZF Meritor LLC and Meritor Transmission Corp. (collectively, "Meritor") filed suit against Eaton alleging that these long-term supply agreements violated federal antitrust laws. More specifically, Meritor alleged that the supply agreements provided loyalty rebates in exchange for the manufacturers’ agreement to purchase a certain percentage of their total transmission needs from Eaton. Depending upon the individual supply agreement, these purchase requirements ranged from 65 to 97.5 percent of a manufacturer’s total transmission needs. Meritor further alleged that the supply agreements provided for preferential pricing and product placement, requiring that Eaton’s transmissions be the truck manufacturer’s lowest priced transmission and/or its standard or default transmission.1

After a four-week trial, a jury found that Eaton’s conduct violated Section 1 and Section 2 of the Sherman Act, and Section 3 of the Clayton Act. Following the verdict, Eaton moved for judgment as a matter of law, arguing that the supply agreements were legal under the ‘price-cost’ test of Brook Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). Under Brooke Group, low prices are not unlawful unless they are below an appropriate measure of the defendant’s costs. During trial, Meritor offered no evidence that supply agreements’ rebates resulted in below-cost pricing. The district court rejected Eaton’s motion and held that there was sufficient evidence from which the jury could conclude that Eaton unlawfully foreclosed competition.

The Third Circuit similarly upheld the jury verdict, finding that the price-cost test did not apply to Eaton’s supply agreements given their non-price restrictions. The Third Circuit instead applied a rule of reason analysis weighing the supply agreements’ procompetitive and anticompetitive effects. In reaching its decision, the Third Circuit focused primarily upon three things: (1) the supply agreements foreclosed a significant part of the market, locking up essentially 90 percent of the total transmission sales;2 (2) the supply agreements’ preferential pricing and product placement requirements placed Meritor at a significant disadvantage in the market; and (3) the supply agreements, which were all at least five years in duration, were of an unprecedented length compared to the industry standard. According to the Third Circuit, the above elements took the supply agreements out of the predatory pricing context and made them more like exclusive dealing.

Eaton’s petition for certiorari argues that Meritor essentially challenged Eaton’s lower prices and that the Third Circuit, therefore, erred by not applying the price-cost test to the supply agreements. Since the Supreme Court’s decision in Brooke Group, courts have disagreed about whether the price-cost test applies to conditional price reductions, such as loyalty rebates and bundled discounts. Further, courts applying the price-cost test to such discounts have applied differing versions of the test, particularly with respect to calculating the ‘appropriate measure’ of a defendant’s costs. It will be interesting to see whether the Supreme Court takes this opportunity to clarify when the price-cost test applies and what the exact contours of that test are.

Endnotes

1 Heavy-duty truck purchasers typically order trucks using data books that list available options. Certain supply agreements required that Eaton be the only transmission offered in the data books.

2 The Third Circuit further cited evidence that the truck manufacturers believed that if they did not comply with the supply agreements’ purchase requirements, they risked losing Eaton as a supplier and being placed at a competitive disadvantage vis-à-vis other truck manufacturers for heavy-duty truck sales.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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