Ninth Circuit Reinstates $53 Million Jury Award Against Supplier In “Refusal to Deal” Monopolization Action
02/20/2019On February 8, 2019, a three-judge panel of the United States Court of Appeals for the Ninth Circuit reversed the district court and reinstated a jury verdict that found a cigar manufacturer liable for attempted monopolization under Section Two of the Sherman Act for various actions it took or refused to take in connection a contract manufacturing relationship with a competitor. Trendsettah USA, Inc. v. Swisher Int’l, Inc., No. 16-56823 (9th Cir. Feb. 8, 2019). The decision is notable in allowing the imposition of Sherman Act liability for conduct that amounted largely to alleged breaches of, and a refusal to renew, a supply contract, and illustrates that potential claims under Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), still pose litigation risks for firms with significant market shares that terminate profitable relationships with their competitors.
Plaintiff Trendsettah’s claims stem from a 2010 contract between it and defendant Swisher, in which Swisher agreed to produce Trendsettah’s flavored “Splitarillos” line of cigarillos. According to Trendsettah, it had no option but to use its competitor as its manufacturer due to the cigar industry’s high barriers to entry, specifically, the high cost of requisite machinery and the difficulty of establishing relationships with tobacco growers. Trendsettah alleged that defendant became increasingly uncooperative as Splitarillos became popular, threatening defendant’s alleged dominance in the cigarillo market. Among other alleged actions, Swisher purportedly refused to fill Trendsettah’s orders completely, refused to renew the original contract without a limit on the monthly production of Splitarillos, and later refused to renew the manufacturing contract when it came up for renewal in 2013. As a result, Trendsettah filed suit against Swisher in the Central District of California, asserting breach of contract and antitrust claims for monopolization and attempted monopolization.
After a two-week trial in March 2016, the jury returned a verdict for the plaintiff on the contract, monopolization, and attempted monopolization claims, awarding $9 million in damages on the breach of contract claims, and $14.8 million on the antitrust claims, which was trebled to approximately $44 million, plus attorney’s fees. After trial, however, the district court granted defendant judgment as a matter of law on the monopolization claim, and later, after the Ninth Circuit’s decision in Aerotec International, Inc. v. Honeywell International, Inc., 836 F.3d 1171 (9th Cir. 2016), reversed its earlier denial and granted defendant’s summary judgment motion on the attempted monopolization claim.
On appeal, the Ninth Circuit reversed and ordered the district court to reinstate the jury’s verdict in its entirety. The district court erred, the panel found, in relying on defendants’ evidence that it had legitimate business reasons for its conduct because “in rendering its verdict, the jury clearly had rejected this evidence.” The Court then addressed the argument that the jury had been improperly instructed on the issue of anticompetitive intent and legitimate business purpose. The pertinent jury instruction explained that if defendant’s “conduct harmed [plaintiff’s] independent interests and made sense only to maintain monopoly power, it was not based on legitimate business purposes.” Defendant argued that this was not consistent with the relevant Ninth Circuit standard that “there is only a duty not to refrain from dealing where the only conceivable rationale or purpose is ‘to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition.’” Aerotec International, Inc. v. Honeywell International, Inc., 836 F.3d 1171 (9th Cir. 2016). The panel disagreed, finding the principle in the instruction was consistent with the applicable law: that “in order for the [defendant] to have violated the antitrust laws, its only purpose must have been to harm [its competitor].”
On the issue of antitrust standing, the panel found that the district court properly rejected the argument that plaintiff had failed to show antitrust injury, finding that the evidence that defendant failed to timely deliver to approximately 200 million cigarillos due under private label agreements was sufficient for a reasonable jury to conclude that defendant restricted market output and harmed competition.
Although the panel’s opinion is unpublished and therefore not citable as precedent under Ninth Circuit rules, this case is nevertheless an important cautionary note that the general principle that a supplier, even a monopolist, may choose with whom it will deal and on what terms is not absolute, especially when there has been a profitable course of dealing with a competitor. As this case illustrates, although antitrust claims by terminated competitors based on a refusal to deal or alleged contractual breaches are disfavored and difficult, they can nevertheless sometimes reach a jury. When they do, a defendant must be prepared to present a compelling case as to the legitimate business reasons for its actions.
In light of the result, the not insignificant amount of damages at stake, and the controversial nature of refusal to deal cases, a petition for rehearing en banc and petition for certiorari are likely. In this regard, it is worth noting that while Justice Scalia, who was notably skeptical of Aspen Skiing-based “refusal to deal” cases, is no longer on the Court, Justice Gorsuch has expressed similar skepticism of Aspen Skiing’s reasoning, for example, explaining as a Tenth Circuit judge, that “requiring a preexisting course of dealing as a precondition to antitrust liability risks possibility that monopolists might be dissuaded from cooperating with rivals even in procompetitive joint venture arrangements – for fear that, once in them, they never get out.” Novell, Inc. v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013). Should this case reach the Supreme Court, the Tenth Circuit’s opinion in Novell v. Microsoft may well provide a guidepost.