Shearman & Sterling LLP | Antitrust Blog | District Of Delaware Denies Building Supply Company’s Motion To Dismiss Claims That It Monopolized And Unlawfully Restrained Trade In The Ceiling Tile Market Through Exclusive Agreements<br >  
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  • District Of Delaware Denies Building Supply Company’s Motion To Dismiss Claims That It Monopolized And Unlawfully Restrained Trade In The Ceiling Tile Market Through Exclusive Agreements
     
    02/21/2018
    On February 9, 2018, Judge Mark A. Kearney of the United States District Court for the District of Delaware denied in part Armstrong World Industries Inc.’s (“Armstrong”) motion to dismiss a lawsuit filed by rival ceiling tile manufacturer Roxul USA Inc. (“Roxul”), finding that Roxul alleged facts plausibly demonstrating monopolization and attempted monopolization in violation of Sherman Act Section 2, and concerted action in restraint of trade in violation of Sherman Act Section 1 and Clayton Act Section 3.  However, Judge Kearney granted Armstrong’s motion to dismiss Roxul’s claims relating to the sale of ceiling tiles in Canada because Roxul failed to allege how reduced competition in Canada had a “direct, substantial and reasonably foreseeable effect” on U.S. commerce, as required by the Foreign Trade Antitrust Improvements Act (“FTAIA”). 

    Roxul defined the relevant market as “the sale of suspended acoustical ceiling tiles … sold in the United States of America and Canada.”  Armstrong challenged Roxul’s inclusion of Canadian ceiling tile sales in its market definition, arguing that the FTAIA prohibits courts from exercising jurisdiction over foreign conduct under the Sherman Act.  Roxul argued that it sufficiently pleaded the “domestic commerce exception” to FTAIA, which allows a court to exercise jurisdiction when a party’s foreign conduct creates a “direct, substantial and reasonably foreseeable effect” on domestic trade or commerce.  In determining whether the Sherman Act should be given effect for conduct that has an effect both within and outside the United States, courts look to whether the adverse foreign effect “is independent of any adverse domestic effect.”  If so, the domestic commerce exception does not apply.  Applying this test, Judge Kearney found that Roxul failed to show how foreclosure from the Canadian market because of Armstrong’s exclusivity contracts directly, substantially, and foreseeably affected United States commerce.  Because Roxul failed to make this showing, Judge Kearney confined the relevant market to sales only within the United States.
     
    To state a claim of monopolization under Sherman Act Section 2, a plaintiff must allege plausible facts that the defendant (1) possesses monopoly power in the relevant market and (2) that the defendant willfully acquired and maintained that power through anticompetitive, exclusionary conduct, as distinguished from “growth or development as a consequence of a superior product, business acumen, or historical accident.”  Crossroads Congregation Corp. v. Orange & Rockland Utils., Inc., 159 F.3d 129, 141 (3d Cir. 1998).  To state a claim of attempted monopolization, a plaintiff must allege “(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) specific intent to monopolize and (3) a dangerous possibility of achieving monopoly power.”  Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 317 (3d Cir. 2007).  Monopoly power is defined as “the ability to control prices and exclude competition from the given market.”  Id. at 307.  A plaintiff may demonstrate monopoly power by alleging a defendant holds a predominant share of the relevant market or that the defendant has the power to control prices or exclude competition.  Anticompetitive conduct includes “behavior that not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way.”  Int’l Constr. Prods. LLC v. Caterpillar Inc., No. 15-108, 2016 WL 264909, at *8 (D. Del. Jan. 21, 2016).  In addition to these pleading requirements, a plaintiff must also have antitrust standing in order to bring suit, which a plaintiff must demonstrate by showing that it suffered the type of harm antitrust laws are intended to prevent and that the injury flows “from that which makes the defendants’ acts unlawful.”  In re Processed Egg Prods. Antitrust Litig., 2018 WL 671128, at *5 (3d Cir. Jan. 22, 2018).
     
    Roxul alleged that Armstrong acquired and maintained monopoly power in the acoustical ceiling tile market through the use of anticompetitive exclusivity arrangements with building material distributors and that its 55% market share of the ceiling tile market constituted a “predominant share” of the relevant market.  Judge Kearney held that, absent other factors, a market share of 55% is typically insufficient to demonstrate prima facie monopoly power.  Fineman v. Armstrong World, Indus., 980 F.2d 171, 201-02 (3d Cir. 1992).  Judge Kearney held that Roxul plausibly pleaded monopoly power by alleging several additional factors, including:  a high barrier to entry, Armstrong’s history of charging supracompetitive prices, and its ability to exclude competitors through its distribution agreements.  Specifically, Judge Kearney pointed to factual allegations that that only three companies compete against Armstrong in the ceiling tile market, that Armstrong had raised its prices since 2011 despite an overall decrease in sales volume in the ceiling tile market, and that Armstrong continues to charge 5% over competitive market prices.  Finally, Judge Kearney held that Roxul plausibly alleged that Armstrong’s exclusivity agreements prevented new competitors from entering the market and remaining competitive; this argument was supported by allegations that Armstrong retaliated against distributors who violate exclusivity provisions by charging those distributors higher prices, enforcing liquidated damages clauses, and choosing to stop supplying ceiling tiles to those distributors.  With regard to Armstrong’s arguments that it had legitimate reasons for its exclusive arrangements and that other available means of distribution precluded any conclusion of substantial foreclosure, Judge Kearney found that these arguments presented factual issues that could not be resolved on a motion to dismiss.  Judge Kearney went on to hold that these allegations were sufficient to state a claim for attempted monopolization, adding that Roxul’s allegations that Armstrong pursued and enforced exclusivity arrangements to the detriment of its competitors in the market allowed for a reasonable inference that Armstrong acted with the specific intent to monopolize.  These allegations of harm to competition as a whole were sufficient to plead antitrust standing.
     
    Judge Kearney then addressed Roxul’s claim that Armstrong’s exclusive arrangements violated Sherman Act Section 1 and Clayton Act Section 3.  To state a claim under Sherman Act Section 1, a plaintiff must allege (1) the defendant was a party to a contract, combination or conspiracy and (2) the contract, combination or conspiracy imposed an unreasonable restraint on trade.  Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011).  To plead an unreasonable restraint on trade, a plaintiff must allege that the concerted action resulted in anticompetitive effects within the market.  Clayton Act Section 3 prohibits a firm from entering into exclusivity arrangements where the effect of such arrangement “may be to substantially lessen competition or tend to create a monopoly in any line of commerce.”  In determining the legality of an exclusive dealing arrangement under the Clayton Act, courts look to determine “whether the competition foreclosed constitutes a substantial share of the relevant market.”  LePage’s Inc. v. 3M, 324 F.3d 141, 157 (3d Cir. 2003).  Based on the same allegations supporting its monopolization claims, most importantly, those that detailed the essential role of distributors in the sale of ceiling tiles, Judge Kearney concluded that Roxul sufficiently pleaded that Armstrong’s exclusivity agreements were an unreasonable restraint on trade by foreclosing competitors from entering the market and foreclosing competitors from a substantial share of the ceiling tile market.
     
    Although a 55% market share is on the borderline for alleging monopoly power, the Court gave substantial weight to the allegations suggesting that the defendant had the power both to charge supracompetitive prices and to exclude competition based on the particular circumstances of the ceiling tile market.  Similarly, in evaluating the required element of foreclosure, the Court gave considerable weight to allegations that showed the unique and important role of distributors in this industry, as well as the shrinking number of distributors available as a channel for competitive products.  This opinion illustrates again the importance of evaluating the particular facts influencing competition in a given product market both in providing advice and litigating these sorts of disputes.    

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