Eastern District Of North Carolina Finds Plaintiff Plausibly Pleads Tying Claims In Foam Insulation Antitrust Case
On October 24, 2017, Judge Terrence W. Boyle of the Eastern District of North Carolina declined to dismiss monopolization and other antitrust claims based on alleged tying and exclusive dealing of foam insulation products against Armacell, Inc. K-Flex, Inc. v. Armacell, Inc., No. 5:17-CV-279-BO (E.D.N.C. Oct. 24, 2017). The Court held that plaintiff K-Flex, Inc.’s complaint plausibly alleged that Armacell violated Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1 & 2), Section 3 of the Clayton Act (15 U.S.C. § 14), and North Carolina’s Unfair and Deceptive Trade Practices Act (N.C.G.S.A. § 75-1.1), by conditioning sales of one product – polyethylene or “PE” foam insulation, as to which Armacell had substantial market power – on the distributor’s agreement to purchase a second type of insulation product – elastomeric foam insulation - exclusively from Armacell and coercing a distributor to terminate the plaintiff. The opinion is notable in sustaining a monopolization claim against a manufacturer based largely on an alleged exclusive dealing/tying arrangement with a single regional distributor.
Defendant Armacell and plaintiff K-Flex are both manufacturers of foam pipe insulation. K-Flex manufactures only elastomeric foam, while Armacell manufactures both elastomeric foam and polyethylene foam (also known as PE foam). Although both products are used for insulation, elastomeric foam costs more, has a higher temperature resistance, and is primarily used in industrial settings. For several years, K-Flex worked with a distributor, Sunbelt, Inc., in the southeast United States. In early 2017, Sunbelt began distributing Armacell products and shortly thereafter dropped its distribution arrangement with K-Flex. K-Flex’s complaint alleges that the termination of its distribution arrangement with Sunbelt was a result of coercion by Armacell. Armacell moved to dismiss K-Flex’s complaint for failure to state a claim.
Because the alleged restraint was vertical – between two firms at different distribution levels – the Court analyzed the Sherman Act § 1 claim under the rule of reason. Beginning with market definition, the Court held that K-Flex pleaded facts sufficient to plausibly conclude that there is a separate product market for elastomeric foam insulation, as opposed to PE foam and other kinds of insulation, based on K-Flex’s claims that elastomeric foam is made from a different material, and has different characteristics, uses, and price points. The Court also found that K-Flex adequately pled a geographic market limited to the United States based on the costs of transporting the product. As to the alleged agreement itself, the Court held that K-Flex’s allegations that Armacell was “working directly with Sunbelt and other distributors to exert control over the marketplace,” that K-Flex’s distribution agreement with Sunbelt was terminated due to Armacell’s coercive conditioning of sales of its PE foam products on Sunbelt’s agreement to purchase elastomeric foam products exclusively from Armacell, and that this restraint will lead to increased prices, were adequate to plead that Armacell had entered an agreement in restraint of trade and that K-Flex had stated a claim upon which relief could be granted.
Turning to the plaintiff’s Sherman Act § 2 claims for monopolization and attempted monopolization, the Court held that K-Flex’s allegation that Armacell manufactures 70% of all elastomeric foam insulation in the United States was sufficient to support the conclusion of monopoly power. The Court then analyzed whether the plaintiff had plausibly alleged that the defendant engaged in anti-competitive conduct. The Court found that K-Flex sufficiently pleaded that Armacell entered into an anti-competitive tying and exclusive dealing agreement with Sunbelt. Specifically, the Court held that the plaintiff’s allegations that Armacell had a 90% share in the U.S. market for PE foam and had conditioned its sale of PE foam to Sunbelt on Sunbelt’s agreement to sell only Armacell’s elastomeric foam, and that the agreement foreclosed other manufacturers from selling to Sunbelt, were adequate to allege both anticompetitive tying and exclusive dealing. In light of “Sunbelt’s status as a high-volume distributor in the southeast” and the volume of K-Flex’s prior sales to Sunbelt, the Court concluded that the plaintiff had adequately alleged that the agreement had substantial effects in commerce and plausibly stated a claim upon which relief could be granted.
Finally, the Court rejected the challenges to K-Flex’s claims under the Clayton Act and North Carolina’s Unfair Deceptive Trade Practices Act, finding that the allegations of anti-competitive conduct that supported the Sherman Act claims were also sufficient to state a claim under both of these statutes.
In finding the allegations of foreclosure adequate, the Court relied largely on Armacell’s alleged 70% share in the U.S. elastomeric foam insulation market and K-Flex’s substantial volume of sales to Sunbelt before the alleged tying/exclusive dealing arrangement took effect. It did not address the issue of the degree to which the arrangement foreclosed competition in the overall alleged market (as opposed to foreclosure of the particular distributor) or the other channels available for the plaintiff to bring its products to market. These subjects are likely to be vigorously contested as the litigation proceeds.