Shearman & Sterling LLP | Antitrust Blog | United States District Court For The Southern District Of Iowa Grants Motion To Dismiss Antitrust Claims Against PepsiCo Based On Alleged “Price Squeeze”<br >  
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  • United States District Court For The Southern District Of Iowa Grants Motion To Dismiss Antitrust Claims Against PepsiCo Based On Alleged “Price Squeeze”

    On September 15, 2017, Judge James E. Gritzner of the United States District Court for the Southern District of Iowa granted a motion to dismiss antitrust claims filed against PepsiCo Inc. and its bottler-distributor subsidiary by an independent bottling company.  Mahaska Bottling Co. v. PepsiCo Inc., No. 4:16-cv-00114-JEG (S.D. Iowa Sept. 15, 2017).  In so doing, Judge Gritzner rejected the bottler’s proffered “price squeeze” theory and its other allegations of exclusionary conduct under Section 2 of the Sherman Act, as well as its proffered market definition, and found that Mahaska had failed to allege harm to competition or, relatedly, antitrust injury.  The Court also dismissed claims brought under the Robinson-Patman Act and Iowa state antitrust statutes.  While this case does not break new ground, it is useful in demonstrating again the difficulties that a distributor faces in asserting antitrust claims against a supplier that the distributor believes is seeking to end the relationship, even with unusual “in perpetuity” exclusive arrangement at issue here.   
    This case arose out of an almost 90-year relationship between PepsiCo, Inc. (“PepsiCo”) and Mahaska Bottling Company, Inc. (“Mahaska”), an independent bottling company.  Since 1948, Mahaska has had a perpetual exclusive agreement with PepsiCo to bottle and distribute certain  PepsiCo’s products in southeast Iowa.  Mahaska is also the exclusive distributor of beverage products from the Dr Pepper Snapple Group (“DPSG”) within the same geographic area.  Under the PepsiCo-Mahaska agreement, PepsiCo provides Mahaska with the necessary ingredients, including concentrate syrup, for bottling carbonated soft drinks; in turn, Mahaska bottles and distributes Pepsi-brand products, the prices of which it sets independently.  Notably, PepsiCo also operates an in-house distributor subsidiary, Pepsi Beverage Company (“PBC”), which bottles and distributes Pepsi-brand and DPSG-brand products, but is currently barred by PepsiCo’s perpetual exclusive agreement with Mahaska from distributing Pepsi-branded products in Mahaska’s territory.

    In 2016, Mahaska brought an attempted monopolization claim under Section 2 of the Sherman Act, alleging that PepsiCo was attempting to drive it out of business in order to allow PBC to take over Mahaska’s exclusive distribution territory and raise prices in that market.  The central allegation of the complaint was that PepsiCo executed a “price squeeze” by increasing the price of concentrate for Pepsi-brand products (an essential input), while also lowering wholesale prices below its costs for its soft drinks in agreements with national retail customers. 

    At the outset, Judge Gritzner noted that although the allegations fit the definition of a classic price squeeze, the antitrust laws do not prohibit a price squeeze without an independent violation of the law; rather, the antitrust laws requires courts to consider separately the legality of the high upstream prices under the principles governing refusals to deal, and the legality of low downstream prices under the principles governing predatory pricing. 

    In evaluating PepsiCo’s increases in concentrate prices, the court began with the well-established principles that the antitrust laws do not prohibit charging high prices nor do they impose a duty to deal on terms that a competitor finds acceptable.  For a refusal to deal to be considered anticompetitive or exclusionary, the defendant must forgo or threaten to forgo “a profitable supply relationship to stymie competition.”  On this point the complaint foundered because Mahaska’s theory was not that PepsiCo was forgoing short-term profits by charging high concentrate prices, but “that PepsiCo is aggrandizing its near-term profits in the concentrate market at the expense of Mahaska’s profits in the bottling market.”  At worst, the Court found, this constitutes charging a monopoly price, which is not illegal, and thus PepsiCo’s upstream pricing was not illegal.

    With regard to the claim that PepsiCo’s low wholesale prices for Pepsi-brand soft drinks in agreements with national retailers constituted predatory pricing, the Court found that Mahaska had adequately alleged pricing below cost.  Judge Gritzner found, however, that Mahaska did not plausibly allege a sufficient probability that PBC could recoup its losses by charging supracompetitive prices following the eventual exit of Mahaska.  Because Mahaska had an exclusive right to distribute Pepsi-brand products within the agreed-upon territory, replacing Mahaska with PBC “would simply result in the same number of Pepsi bottlers (one) serving the same customers in that area.”  Thus, the Court found that the replacement of one Pepsi bottler with another would not change the competitive constraints in the marketplace, and that Mahaska did not otherwise assert allegations sufficient to conclude that PBC would be able to recoup its losses by charging supracompetitive prices.  The Court used similar reasoning in finding that Mahaska failed to allege antitrust injury because the alleged harm was harm to a competitor, not to competition, explaining that replacing Mahaska with another bottler/distributor may well constitute harm to Mahaska, but would not constitute harm to competition, because interbrand competition with other beverage brands (the only competition currently existing in the market) would not be reduced.       

    The Court also rejected allegations of exclusionary conduct in the form of a “joint monopoly” involving PepsiCo and DPSG because “§ 2 does not support ‘shared’ or ‘joint’ monopoly claims” in the absence of a conspiracy to monopolize, which the plaintiff did not plausibly plead. Finally, the Court concluded that, regardless of the theory of exclusionary conduct, Mahaska failed to allege the dangerous probability of achieving monopoly power required for an attempted monopolization claim because its alleged relevant market included both concentrate and soft drinks, complementary products that do not compete with each other.  Without alleging a coherent relevant market, it is impossible to adequately plead a dangerous probability of achieving monopoly power.   

    As noted, this case demonstrates again the difficulties that a distributor or franchisee facing potential termination confronts in asserting antitrust claims against its supplier. Notably, PepsiCo did not seek to dismiss Mahaska’s contractual claims.  In the absence of viable contractual claims, a distributor facing termination faces a steep uphill battle litigating antitrust claims against its supplier, especially if its claims are limited to the unilateral conduct of the supplier.