3rd Circuit Holds That Long-Term Supply Agreements Based on Market Share Rebates or Discounts Are Subject to Rule of Reason, Not Above-Cost Pricing Test

The 3rd U.S. Circuit Court of Appeals recently held, in ZF Meritor, LLC v. Eaton Corp., No. 11-3301 (3d Cir. Sept. 28, 2012), that long-term supply agreements predicated upon market share rebates or discounts should be evaluated under the Rule of Reason, rather than under the Brooke Group above-cost pricing test. As such, they can be exclusionary even if all of a defendant’s prices are above cost.

The defendant, Eaton, a monopolist in the heavy-duty truck transmissions market, had entered into long-term supply agreements with all of the customers (OEMs) in the market. The agreements conditioned rebates on the purchase of a specified percentage of the OEMs’ requirements from Eaton. The rebates did not reduce Eaton’s prices below cost, and Eaton argued that, under a price-cost screen, it therefore did not violate the antitrust laws.

The 3rd Circuit conceded that predatory pricing principles, including the price-cost test, would control in cases solely presenting a challenge to pricing practices. But the court rejected Eaton’s “unduly narrow” characterization of the case as a “pricing practices” case, i.e., a case in which price is the “clearly predominant mechanism of exclusion.” The court noted other forms of exclusionary behavior, including (i) Eaton’s efforts to make itself the standard offering in the OEMs’ “data books” (which provided product information to end users); (ii) the removal of competitors’ products from two data books; (iii) preferential prices for Eaton products required by the long-term agreements; and (iv) evidence that Eaton’s continued compliance with the long-term agreements was also conditioned on the market penetration targets. “Accordingly,” the 3rd Circuit concluded, “plaintiffs introduced evidence that compliance with the market penetration targets was mandatory because failing to meet such targets would jeopardize the OEMs’ relationships with the dominant manufacturer of transmissions in the market.”  The court went on to find that Eaton’s long-term contracts were, in fact, exclusionary and supported a finding of antitrust injury.

In reaching its conclusion, the 3rd Circuit rejected the argument advanced by an amicus brief that its decision in LePage’s always precludes application of a price-cost screen. The court noted that LePage’s invovled bundled product tying claims, and held: “LePage’s is inapplicable where, as here, only one product is at issue and the plaintiffs have not made any allegations of bundling or tying. The reasoning of LePage’s is limited to cases in which a single-product producer is excluded through a bundled rebate program offered by a producer of multiple products, which conditions the rebates on purchases across multiple different product lines.” The opinion is available here.