Price-Cost Test Does Not Apply in Exclusive Dealing Cases Where Pricing Is Not the Exclusionary Tool, Third Circuit Holds

by Ballard Spahr LLP

[authors: Leslie E. John, Jason A. Leckerman, Marcel S. Pratt]

The U.S. Court of Appeals for the Third Circuit in ZF Meritor, LLC v. Eaton Corporation affirmed a jury’s verdict in favor of ZF Meritor LLC and Meritor Transmission Corporation finding that Eaton Corporation, a leading supplier of heavy-duty truck transmissions in North America, entered into unlawful exclusive dealing agreements with the primary direct purchasers of transmissions. In its opinion, issued September 28, 2012, the court provided a narrow interpretation of its 2003 en banc decision in LePage’s Inc. v. 3M, which has been widely criticized. This interpretation should prove to be an important development in antitrust law.

According to the court, the “most significant issue in this case” was whether plaintiffs’ claims were subject to the “price-cost test” or the “rule of reason” applicable to exclusive dealing claims. The 2-1 decision declined to apply the price-cost test, drawing a vigorous dissent and adding a cautionary note that, despite the effort to circumscribe LePage's, above-cost pricing is not a panacea within the Third Circuit.

Under the rule of reason test, an exclusive dealing agreement is unlawful if “its probable effect is to substantially lessen competition in the relevant market.” In contrast, under the price-cost test, to succeed on a challenge to the defendant’s pricing practices, a plaintiff must prove that the prices are “below-cost.” The U.S Supreme Court fashioned the price-cost test in its 1993 opinion in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.

After an extensive discussion of price-cost jurisprudence, the court declined to adopt Eaton’s argument that the price-cost test was dispositive. The court reasoned that the price-cost test only applies “when price is the clearly predominant mechanism of exclusion.” Here, the court found that the exclusionary tool was not Eaton’s prices, but the entirety of Eaton’s long-term agreements. Eaton was able to drive out competition, not because plaintiffs could not compete with its prices, but because the agreements foreclosed the opportunity to compete. Accordingly, the court applied the rule of reason test and found sufficient evidence that Eaton’s agreements foreclosed a substantial share of the market.

The Third Circuit used this issue as a platform to circumscribe its decision in LePage’s, in which the court declined to apply the price-cost test to a bundled rebate scheme. In LePage’s, defendant 3M—an admitted monopolist in the transparent tape market—argued that its multi-product bundled rebate program was lawful under the test because the rebates never resulted in below-cost pricing. The court declined to apply the test to a challenge to a bundled rebate scheme, reasoning that such a scheme was better analogized to unlawful tying than to predatory pricing.

Highlighting multiple problems with LePage’s in light of subsequent Supreme Court developments, ZF Meritor distanced itself from LePage’s. First, the Third Circuit limited LePage’s to bundling and tying cases in which “a single-product producer is excluded through a bundled rebate program offered by a producer of multiple products, which conditions the rebates on purchases across multiple different product lines.” The court stated, “We join our sister circuits in holding that the price-cost test applies to market-share or volume rebates offered by suppliers within a single-product market.”

Most significantly, ZF Meritor departed from LePage’s suggestion that Brooke Group is not applicable in cases involving monopolists. Although not establishing a per se rule that above-cost pricing precludes antitrust liability for all conduct, ZF Meritor recognized that the Supreme Court has created a “safe harbor for above-cost discounting” in cases solely pertaining to predatory pricing involving a single-product market. The court expressly noted that these principles extend to above-cost discounting or rebate programs, which condition the discounts or rebates on the customer's purchasing of a specific volume or a specified percentage of its requirements from the seller.

ZF Meritor recognizes that when a company’s pricing is challenged in a single-product market, regardless of market share, that above-cost pricing is still a viable defense. Nonetheless, the court made clear that, in addition to the bundling at issue in LePage's, it still considered the price-cost test inapplicable to exclusionary behavior involving tying, enforcement of a legal monopoly provided by a patent procured through fraud (so-called "Walker Process" claims), some exclusive dealing claims, and other unfair tortious conduct targeting competitors.

Attorneys in Ballard Spahr’s Antitrust Group defend charges of price-fixing, vertical and horizontal restraints, tying arrangements, monopolization, and other alleged trade restraints. For more information, please contact Leslie E. John at 215.864.8212 or, or Jason A. Leckerman at 215.864.8266 or 215.864.8266.

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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