LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003), is a 2003 en banc decision of the United States Court of Appeals for the Third Circuit upholding a jury verdict against bundling. Bundling is the setting of the total price of a purchase of several products or services over a period from one seller at a lower level than the sum of the prices of the products or services purchased separately from several sellers over the period. Typically, one of the bundled items (the "primary product" or "monopoly product" or "non-contestable product") is available only from the seller engaging in the bundling, while the other item or items (the "secondary product" or "contestable product") can be obtained from several sellers.See 2 , pp. 105-06 (ed. Roger D. Blair and D. Daniel Sokol 2014). The effect of the bundling is to divert purchasers who need the primary product to the bundling seller and away from other sellers of only the secondary product. For that reason, the practice may be held an antitrust violation as it was in the LePage's case, in which the Third Circuit held that 3M engaged in monopolization in violation of Sherman Act § 2 by (1) offering rebates to customers conditioned on purchases spanning six of 3M's different product lines, and (2) entering into contracts that expressly or effectively required dealing exclusively with 3M.
Background 3M manufactures Scotch Tape brand of tape, which accounted for 90% of the U.S. transparent tape market until the early 1990s, concededly a monopoly. Around 1980 LePage's decided to sell private label transparent tape, which is tape sold under the retailer's name rather than under the name of the manufacturer. By 1992, LePage's sold 88% of U.S. private label tape, which represented, however, only a small portion of the U.S. transparent tape market. LePage's sold its private label tape to retailers at a lower price to the retailer and the customer than branded tape such as Scotch Tape.
In response to the growth of this market segment, 3M entered this submarket with a second, "off brand" tape and private-label tape. In addition, 3M engaged in actions allegedly aimed at restricting the availability of cheap off-brand transparent tape to consumers, including establishing a bundling program that prevented LePage's from gaining or maintaining large volume sales. Allegedly, 3M maintained its monopoly by stifling growth of private label tape and by coordinating efforts aimed at large distributors to keep retail prices for Scotch Tape high.LePage's,, 324 F.3d at 144-45.
LePage's sued 3M, asserting that 3M used its monopoly over its Scotch Tape brand to gain a competitive advantage in the private-label tape portion of the transparent-tape market through the use of a "multi-tiered, bundled rebate" program. This program gave progressively higher rebates when customers purchased greater amounts of products in a number of 3M's different product lines.324 F.3d at 145.
The jury returned a verdict for LePage's on the monopolization claim under § 2 of the Sherman Act, and assessed damages of $23 million. The jury found in 3M's favor on LePage's claims under § 1 of the Sherman Act and § 3 of the Clayton Act.
Cross-appeals to the Third Circuit followed, and the court heard the case en banc.
Ruling of Third Circuit
The en banc court affirmed the jury verdict (7-3).
Majority opinion
The Third Circuit majority began by explaining the issue before it:
The sole remaining issue and our focus on this appeal is whether 3M took steps to maintain [its monopoly] power in a manner that violated § 2 of the Sherman Act. A monopolist willfully acquires or maintains monopoly power when it competes on some basis other than the merits.LePage's, 324 F.3d at 146-47.
LePage's argued that 3M willfully maintained its monopoly in the transparent tape market by bundling rebates and entering into contracts that expressly or effectively required dealing exclusively with 3M. 3M argued that its challenged conduct was legal because it never priced its transparent tape below its cost. The Third Circuit said this was "the most significant legal issue in this case because it underlies 3M's argument." 3M's position was that "above-cost pricing cannot give rise to an antitrust offense as a matter of law, since it is the very conduct that the antitrust laws wish to promote in the interest of making consumers better off." In its oral argument before the court, 3M counsel stated that "if the big guy is selling above cost, it has done nothing which offends the Sherman Act" and that is "the end of the story."324 F.3d at 147.
The court was unwilling to accept 3M's argument that "no conduct by a monopolist who sells its product above cost—no matter how exclusionary the conduct—can constitute monopolization in violation of § 2 of the Sherman Act." The court said, "The history of the interpretation of § 2 of the Sherman Act demonstrates the lack of foundation for 3M's premise." the Third Circuit insisted that the Supreme Court's "consistent holdings [were] that a monopolist will be found to violate § 2 of the Sherman Act if it engages in exclusionary or predatory conduct without a valid business justification."324 F.3d at 152. The court then turned to 3M's specific acts.
Bundling
3M offered many of LePage's major customers substantial rebates (often $1 million or more) to induce them to reduce or stop their purchases of tape from LePage's. 3M's rebate programs offered discounts to certain customers conditioned on purchases in six of 3M's diverse, unrelated product lines. The product lines covered by the rebate program were: Health Care Products, Home Care Products, Home Improvement Products, Stationery Products (including transparent tape), Retail Auto Products, and Leisure Time products. 3M's rebate programs 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 size of 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. The court observed, "This created a substantial incentive for each customer to meet the targets across all product lines to maximize its rebates." The penalties for not meeting targets would have been hundreds of thousands of dollars."324 F.3d at 154.
As in the SmithKline case, "where we held that conduct substantially identical to 3M's was anticompetitive and sustained the finding of a violation of § 2," 3M's competitors did not have as diverse a product line and thus could not offer comparable discounts in net dollar terms. The "effect of 3M's rebates were even more powerfully magnified than those in SmithKline because 3M's rebates" applied to so much more extensive product lines. "In some cases, these magnified rebates to a particular customer were as much as half of LePage's entire prior tape sales to that customer." Therefore, "3M's conduct was at least as anticompetitive as the conduct which this court held violated § 2 in SmithKline."324 F.3d at 157.
Exclusive dealing
The court reviewed the evidence and concluded that the jury could reasonably find that 3M gave payments to retailers to deal exclusively with 3M, thereby foreclosing LePage's from that portion of the market.324 F.3d at 159.
Business justifications
Finally, the court dismissed 3M's proffered justifications. There was evidence from which the jury could have determined that 3M intended to force LePage's from the market, and then cease or severely curtail its own private-label business in favor of its Scotch Tape sales, and that 3M wanted to "kill" the private-label market, because it was diverting Scotch Tape sales.324 F.3d at 164.
The majority therefore concluded: "There was ample evidence that 3M used its market power over transparent tape, backed by its considerable catalog of products, to entrench its monopoly to the detriment of LePage's, its only serious competitor, in violation of § 2 of the Sherman Act."324 F.3d at 169.
Dissenting opinion
Judge Greenberg dissented, joined by Judge Scirica and Judge Alito, as to the monopolization claim, but agreed as to LePage's's cross-appeal from the motion granting 3M a judgment as a matter of law on the attempted maintenance of monopoly claim. Greenberg insisted that LePage's "simply did not establish that 3M's conduct was illegal, as LePage's did not demonstrate that 3M's pricing was below cost (a point that is not in dispute) and, in the absence of such proof, the record does not supply any other basis on which we can uphold the judgment." He disagreed with the majority's use of the SmithKline case. His view of the evidence was that LePage's lost private sale tape business for reasons not related to 3M's rebates. He added, "Contrary to the majority's view, this is not a situation in which there is no business justification for 3M's actions," because 3M's bundling created "efficiency in having single invoices, single shipments and uniform pricing programs for various products." He accused the majority of "curtailing price competition and a method of pricing beneficial to customers because the bundled rebates effectively lowered their costs."
Denial of certiorari 3M petitioned the Supreme Court for certiorari, but the Court denied it.. Before deciding, the Court called for the views of the Solicitor General, who argued that it would be premature for the Supreme Court to rule on bundling until the issue of its legality had percolated more in the lower courts.Brief for the United States as Amicus Curiae Supporting Respondents at 12-14 and 18, 3M Co. v. LePage's Inc, 2004 WL 1205191.
Commentary
● Professor Kauper, in his critique of the LePage's case, noted that the Third Circuit opinion "provoked a strong outcry from the business community," including a "large number of amicus briefs . . . filed in support of 3M's [unsuccessful] petition for certiorari, all arguing that bundled rebates should be unlawful only" if the rebates made the sales below cost and, in addition, "suggesting all kinds of dire consequences should the Court of Appeals decision stand."Thomas E. Kauper, Section Two of the Sherman Act: The Search for Standards, 93 L.J. 1623, 1634 (2004). He points out that despite artifice, the petition (as does the case) "squarely raises the issue of whether Section Two liability can ever attach where the exclusion can be said to result from an above-cost price." Kauper recognizes that "businesses would be comforted by a bright line, below cost standard—a kind of safe harbor against most claims of exclusion based on the pricing of a dominant firm," but he "take[s] the parade of horribles put forth by petitioner and its amici with a degree of skepticism."Kauper, supra at 1635.
Kauper argues that bundling is a rebate subject to a condition. "Conditioned rebates essentially buy something the manufacturer wants and the buyer is prepared to give if the price is right." The effect, he says, is equivalent to an exclusive dealing agreement, and therefore the same analysis should be used (essentially, the rule of reason). "Exclusivity in limited circumstances could work to exclude rivals without legitimate justification. This should be the focus of the inquiry." That outcome (exclusivity) can be achieved without selling below cost. All that a below–cost requirement accomplishes is to show that "the rebates could not be matched by an equally efficient firm," but that should not be decisive. For example, "a new entrant or a small but expanding firm, for example, cannot be expected to have achieved the full economies of a dominant firm."