11th Circuit Affirms FTC Ruling that McWane Held Unlawful Pipe Fitting Monopoly

FTC vs McWaneThe 11th Circuit Court of Appeals has upheld a FTC ruling that McWane Inc. illegally had a policy aimed at keeping distributors from buying elsewhere so it could maintain a monopoly on the U.S.-made ductile iron pipe fittings market. The court’s opinion affirmed a 2014 FTC decision that found McWane had unlawfully maintained its monopoly through excluding competitors. The FTC’s complaint alleged that McWane, Star Pipe Products, Ltd., and Sigma Corp. illegally conspired to set and maintain prices for pipe fittings, and that McWane illegally maintained its monopoly power in the market by implementing an exclusive dealing policy. Sigma settled the FTC’s charges prior to litigation in 2012, and Star settled soon after.

Initially, Chief ALJ, Judge D. Michael Chappell, heard McWane’s case. Judge Chappell dismissed the first three counts of the FTC’s complaint, which charged that McWane and the other defendants conspired to illegally fix prices and exclude competition.  In his decision, Judge Chappell wrote, “Accepting Complaint Counsel’s conspiracy theory depends on accepting numerous assertions, assumptions, and inferences that are not sufficiently grounded in evidence,” and “[i]n addition, the preponderance of the economic evidence is not consistent with the alleged conspiracy.” However, Judge Chappell went on to sustain the other four counts of the FTC’s complaint, which charged McWane with having an illegal monopoly over the domestic pipe fittings market.

Following the ALJ judge’s decision, both McWane and the FTC appealed the case to the full Commission. The Commission’s decision dismissed Counts One, Two, Four, Five, and Seven of the Complaint, but found McWane liable under Count Six, which charged McWane with engaging in monopolistic behavior. According to the Commission’s opinion, McWane implemented a “Full Support Program,” which was, in reality, an exclusive dealing policy. Under the program, “McWane made sure distributors received the message that they would no longer be able to buy domestic fittings from McWane if they purchased domestic fittings from Star.” Following implementation of the Full Support Program, numerous distributors withdrew millions of dollars of requests for quotes, cancelled orders, or decided not to purchase domestic fittings from Star. On this evidence, the Commission found that McWane’s Full Support Program “foreclosed Star and other potential entrants from accessing a substantial share of distributors,” and “created a strong economic incentive for distributors to reject Star’s products, artificially diminishing Star’s competitive prospects in the domestic fittings market.” As a result, Star was unable to compete effectively.

McWane subsequently appealed the FTC’s decision. Specifically, McWane challenged that: (1) that the domestic fittings market was the relevant antitrust market; (2) that McWane monopolized the relevant market; and (3) that the Full Support Program harmed competition. The court’s decision on these three issues ultimately turned on whether McWane’s challenges were factual, economic, or legal. If they were aimed at factual and economic questions, then the court had to defer to the Commission’s findings on the issue. However, if they were legal questions, then the court could resolve the issues without any deference to the FTC’s findings. Ultimately, the court determined that McWane’s appeal turned on factual and economic questions. As a result, the court deferred to the FTC’s findings on these issues, and upheld the decision.

The Eleventh Circuit’s ruling provides several important takeaways. First, the court determined that antitrust liability could attach even where the alleged exclusive dealing only slows a competitor’s entry into the market. In this case, McWane did not entirely prevent its competitor from entering the domestic pipe fittings market. Rather, McWane only limited their competitor’s market growth to 10% of the total market share during the time McWane implemented its “Full Support Program.” Despite this significant entry into the market, the court found that slowing, as opposed to stopping or completely foreclosing, entry was sufficient to hold McWane liable.

Second, the court’s opinion makes clear that at this time there is no requirement for a plaintiff or the government to prove its market definition through the cross-elasticity demand test, which some have suggested is the correct test for determining the proper market definition. Even still, while the court’s opinion is no doubt more plaintiff-friendly, there are still opportunities for defendant’s to use the more rigorous cross-elasticity test to show that the proffered market definition is incorrect.

Third, this case once again shows that it is extremely difficult to appeal that FTC’s factual and economic determinations. This is particularly true where the standard of review on appeal is so deferential to the FTC’s findings. As a result, those appealing the FTC’s findings must be careful to stylize their challenges as legal challenges and not factual or economic challenges. Legal challenges do not require the court to defer to the FTC’s findings, but rather allow the court to conduct its own de novo review of the issues.

Finally, as is often the case in the merger context, bad documents “poisoned the well” for McWane. The court referred several times to documents wherein McWane “patted themselves on the back” for their efforts to exclude their competitor. These boasting-type documents did not sit well with the court, and if they did not outright prove the FTC’s case, they at least made it almost impossible for the court to endorse McWane’s justifications for its conduct.