TRADE REGULATION CASES: PROVING
(OR CONTESTING) MARKET POWER CLAIMS
Rodrick J. Enns
Petree Stockton, L.L.P.
At least to those who do not litigate antitrust issues on a regular basis, and often to those who do, the complexity and unmanageability of antitrust and trade regulation litigation can reach almost mythic proportions. The sheer volume of evidence to be marshalled, and the esoteric nature of the intricate economic analyses which are undertaken, can be daunting indeed. As with every other realm of human enterprise, however, it is possible to reduce the process to fundamental principles which are manageable and understandable.
The single concept and issue which is more often dispositive of antitrust and trade regulation cases than any other is that of market power. While there are many elements to be proved and many possible defenses to be raised in any trade regulation case, the practitioner who understands and can apply the basic concepts of market power will have a sure guide to assessing the risk of antitrust liability in a substantial majority of cases.
This paper is intended to present a practical guidebook for dealing with the issue of market power in the litigation context. This subject is, of course, of significant interest for its own sake to those who litigate trade regulation cases, but an understanding of the practicalities involved in attempting to prove or disprove market power is also essential to effective counseling of client conduct in this area.
II. WHAT IS MARKET POWER?
A. In the context of both federal and state antitrust and trade regulation laws, the established definition of "market power" is deceptively simple: market power is "the ability to raise prices above those that would be charged in a competitive market." NCAA v. Board of Regents, 468 U.S. 85, 109 n. 38 (1984); Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 27 n. 46 (1984).
B. One issue which has historically been less than crystal clear in the case law is the distinction, if any, between "market power" and "monopoly power." Monopoly power is traditionally defined as "the power to control market prices or exclude competition." See, e.g., United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956).
1. The added element of the ability to "exclude competition" should be of little moment. Except for regulated industries, the primary mechanism upon which our economy relies to check the power of any individual seller to control prices is competition. As a result, the two elements ought to be seen as two sides of the same coin. Proof of the power to control prices necessarily implies the power to exclude competition, and vice versa. See du Pont, supra, 351 U.S. at 392 ("Price and competition are so intimately entwined that any discussion of theory must treat them as one. It is inconceivable that price could be controlled without power over competition or vice versa.").
2. Despite the foregoing logic, a fair amount of ink has been spilled by the federal circuit courts in discussing whether the test of monopoly power ought to be in the disjunctive, as stated in du Pont, or whether it ought to be conjunctive, i.e., requiring the plaintiff to prove the power to control prices and the power to exclude competition. See, e.g., Borough of Lansdale v. Philadelphia Electric Co., 692 F.2d 307, 311 (3d Cir. 1982) (requiring proof of both); Neumann v. Reinforced Earth Co., 786 F.2d 424, 430 (D.C. Cir.), cert. denied, 479 U.S. 851 (1986) (requiring jury to find both power to control prices and power to exclude competition).
3. Most economists, the FTC, and some courts have recognized that there is no inherent difference between "market power" and "monopoly power," and therefore have tended to use the terms as synonyms. See, e.g., General Foods Corp., 103 FTC 204, 357 (1984); Town of Concord v. Boston Edison Co., 721 F.Supp. 1456, 1459 (D.C.Mass. 1989), revd on other grounds, 915 F.2d 17 (1st Cir. 1990), cert. denied, 111 S.Ct. 1337 (1991) (the two terms "are generally used interchangeably"). Other courts, however, have seemed to regard monopoly power as representing a particularly large amount of market power. See, e.g., Colorado Interstate Gas Co. v. Natural Gas Pipeline Co., 885 F.2d 683, 694 n. 18 (10th Cir. 1989), cert. denied, 111 S.Ct. 441 (1990) ("Monopoly power can be distinguished from a lesser amount of market power only in degree.").
4. The Supreme Court seems to have endorsed this concept, stating recently that "Monopoly power under § 2 requires . . . something greater than market power under § 1." Eastman Kodak Co. v. Image Technical Services, 112 S.Ct. 2072, 2090 (1992).
C. Despite these apparent distinctions, the conceptual underpinnings of market power and monopoly power are the same. The idea is that in the theoretical perfectly competitive market, goods will be sold at that point at which the demand and supply curves intersect, which represents the price at which the quantity of goods that all sellers in the marketplace are willing to produce is exactly equal to the quantity of goods that all buyers in the marketplace are willing to purchase. In such a market, no single buyer or seller acting alone can change that market price, for if any seller were to attempt to raise its price above the market level, buyers would simply turn to other suppliers to obtain the same goods at the lower market price. Similarly, buyers who attempted to buy goods at a lower price would be unsuccessful, since sellers would be able to sell all the goods they were willing to produce at the market price to other buyers who are willing to pay that price for them. These are the fundamental processes of competition upon which our free market economy depends, at least in theory.
D. Market power arises whenever there is a substantial departure from this perfectly competitive theoretical market. It results when the forces of competition are blunted, so that, without any change in market conditions, a seller can raise prices above the market price without losing a substantial number of customers, or conversely where a buyer can lower its offering price and still be able to obtain the supplies of goods it wants. Logically, such a situation can only arise from two kinds of conditions: either there are an insufficient number of competitors with the ability to respond to such changes and take advantage of them in the marketplace, or there are imperfections in the market itself which prevent the competitors who are there from responding effectively. The specific mechanisms which can be at play are considered in detail below, but the concept is that a seller or buyer possesses market power when its pricing discretion is unconstrained to some degree by the forces of competition.
III. THE ROLE OF MARKET POWER IN ANTITRUST AND TRADE REGULATION CASES
A. Because our society and economy rely on competition to regulate economic behavior, the presence of substantial market power on the part of participants in a market necessarily signals a weakness in or failure of the competitive process, and is almost always a cause for concern.
1. Our society has been much more willing to give lip service to the concept of free market economics than it has been to accept the realities which are necessary consequences of such a system. As Adam Smith recognized, the invisible hand of competition can be harsh indeed. It is relatively easy to be sanguine about the "dislocations" and "reallocations of resources" which are an inherent part of a true competitive economy when one balances them against the social benefits of increased efficiency in the production and consumption of goods, with all that that implies. "Dislocations" are much more difficult to accept when one is an employee who has lost a job in such a "resource reallocation," or is an employer which has gone bankrupt because it is somewhat less efficient than its fierce competitors.
2. As a result, legislation and regulation designed to temper, ameliorate, and sometimes eradicate competition is pervasive. These measures often constrain dramatically the ability of competitive forces to operate. Within the confines defined by such laws, however, competition remains the primary means of allocating resources in our society.
B. For the foregoing reasons, most antitrust laws and many trade regulation laws recognize that the presence of market power, sometimes in the extreme form of monopoly power, is a red flag signalling that the processes of competition have been impaired or short circuited.
1. Sherman Act § 1 -- Under § 1 of the Sherman Act, per se liability requires little more than proof that the conduct occurred and caused antitrust injury to the plaintiff. Outside of the relatively narrow class of per se conduct, however, the possession of some degree of market power by the defendant is a relevant and probably an essential element in establishing that any particular contract, combination or conspiracy unreasonably restrains competition. See, e.g., Murrow Furniture Galleries v. Thomasville Furniture Industries, 889 F.2d 524, 528-29 (4th Cir. 1989); Assam Drug Co. v. Miller Brewing Co., 798 F.2d 311, 315-16 (8th Cir. 1986) (plaintiff in a rule of reason case must demonstrate that defendant possesses market power); General Leaseway, Inc. v. National Truck Leasing Association, 744 F.2d 588, 596 (7th Cir. 1984) (plaintiff must "prove that the defendant has sufficient market power to restrain competition substantially. . . . If not, the inquiry is at an end; the practice is lawful").
2. Sherman Act § 2 -- By definition, proving the offense of monopoly requires, among other things, proof that the defendant possesses monopoly power. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). The offense of attempted monopoly does not necessarily require that the attempt have been successful, and therefore does not require proof that the defendant succeeded in obtaining monopoly power. It is essential, however, that there be a dangerous probability of success in achieving a monopoly, which requires a showing of a certain level of market power by the defendant, though less than monopoly power. See, e.g., McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1505 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989) (plaintiff in an attempt case must prove that "defendant possesses sufficient market power to be dangerously close to achieving a monopoly;" this is "proof of the same character, but not the same quantum" as a monopolization claim); Tasty Baking Co. v. Ralston Purina, Inc., 653 F.Supp. 1250, 1268 (E.D.Penn. 1987) (attempted monopolization requires showing of market power, but generally at a lesser level than that required to prove actual monopolization).
3. Clayton Act § 7 -- The underlying goal of merger enforcement is to prevent or undo those acquisitions or combinations which pose un undue risk of creating a firm or group of firms which can exercise market power. See Antitrust Div., U.S. Dept of Justice, Merger Guidelines, 4 Trade Reg. Rep. (CCH) ¶ 13,103, §§ 1, 3.12 (1984).
4. State Unfair Competition Law -- N.C.G.S. § 75-1.1, which prohibits "unfair methods of competition" and "unfair or deceptive acts or practices," has been applied for decades by the North Carolina courts without requiring proof of market power, though at least one panel of the North Carolina Court of Appeals has suggested that market power evidence might be required in an appropriate case. Dull v. Mutual of Omaha, Inc., 85 N.C.App. 310, 316-17, 354 S.E.2d 752 (1987) (finding no § 75-1.1 liability because plaintiffs had failed to forecast any evidence that "defendants competitors were in any way foreclosed from marketing insurance products to the public"). Federal courts sitting in North Carolina, however, have required explicitly that a plaintiff pursuing an "unfair methods of competition" claim (as opposed to an "unfair or deceptive practices"claim) offer proof that defendants conduct had an adverse effect on competition in the relevant market. See, e.g., Stearns v. GenRad, Inc., 564 F.Supp. 1309, 1318 (M.D.N.C. 1983), affd on other grounds, 752 F.2d 942 (4th Cir. 1984); Sewell Plastics, Inc. v. Coca-Cola Sales, 720 F.Supp. 1196, 1220-21 (W.D.N.C. 1989), affd, 912 F.2d 463 (4th Cir. 1990), cert. denied, 111 S.Ct. 1019 (1991). See also Chucks Feed & Seed Co., Inc. v. Ralston Purina Co., 810 F.2d 1289, 1292-96 (4th Cir. 1987) (reaching same result under virtually identical South Carolina statute). To the extent that proof of adverse effect on competition is required under § 75-1.1, then the first element of that proof must necessarily be proof that the defendant possesses market power, for the same reasons as discussed in relation to Sherman Act § 1.
IV. PROVING MARKET POWER
As one might expect from the rather theoretical and esoteric nature of the concept of market power, the process of attempting to prove as a factual matter that such a creature actually exists in a particular case is inherently uncertain. There are many possible approaches to the problem, which vary at least as widely as the economic circumstances of each individual market. A summary follows of those elements which are most frequently considered in a market power analysis, but it must be emphasized that the list is far from exhaustive, and by its very nature cannot be. The challenge in each case is to examine any and all evidentiary signs which might be indicative of a market participant whose behavior is unconstrained to some extent by the forces of competition.
A. Direct Evidence of the Exercise of Market Power
Market power can exist without being exercised, and certainly without being exercised in such a way that it is obvious and provable that that is what is happening. As a result, in most cases, proof of market power takes the form of an analysis of the conditions of the relevant market, with a view to identifying structural characteristics of that market which necessarily or probably have the effect of creating market power.
It is well not to lose sight of the ultimate goal, however. In theory, and every once in a while in actual practice, it is possible to observe and provide direct evidence of the defendants exercise of market power. As the Supreme Court has explained, "Since the purpose of the inquiries into market definition and market power is to determine . . . the potential for genuine adverse effects on competition, proof of actual detrimental effects, such as a reduction of output, can obviate the need for an inquiry into market power." FTC v. Indiana Federation of Dentists, 476 U.S. 447, 460-61 (1986), quoting 7 P. Areeda, Antitrust Law ¶ 1511 at 429 (1986).
Since market power is the ability to control prices or exclude competitors, direct proof of market power would take the form of evidence that the defendant has actually been able to raise prices for a sustained period of time without losing market share, or has been able to limit output while still excluding competitors from entering the market. See, e.g., American Tobacco Co. v. United States, 328 U.S. 781, 789 (1946); NCAA v. Board of Regents, 468 U.S. 85, 110 (1984) (where there is a naked restriction on price or output, market power need not be proved separately); Wilk v. American Medical Association, 895 F.2d 352, 360 (7th Cir.), cert. denied, 110 S.Ct. 2621 (1990) (showing of actual adverse competitive effects "negated the need to prove market definition and market power").
It is important to understand that this sort of "direct" proof requires much more than simply evidence that a defendant has been able to raise prices. There are many benign competitive conditions which could give rise to the ability of a firm to raise prices, including increased costs, unexpected shifts in demand, and a contraction in available supply. Therefore, what is generally necessary in order to be able to say with confidence that one is observing the actual exercise of monopoly power is the accumulation of enough market data to be able to construct reliable demand and supply curves. See, e.g., Telerate Systems v. Caro, 689 F.Supp. 221, 238 (S.D.N.Y. 1988) ("direct proof" of market power "is direct economic proof, namely, demand and supply curves," not merely "testimony or physical evidence of opinions regarding the sellers market power."). The nature of the evidence required in order to support such a proof is extensive and often extremely difficult to obtain, as the detailed discussion below reveals. See id. (demand and supply curves "are very difficult to establish accurately, and market analysis provides the most convenient and accurate secondary measure of monopoly power"); General Foods Corp., 103 F.T.C. 204, 348-56 (1984) ("reliable measures of supply and demand elasticities" are the "[m]ost direct, but rarely available" evidence of market power).
B. Market Analysis
Because of the difficulty of obtaining reliable evidence of supply and demand curves which would permit direct observation and proof of the exercise of market power, the vast majority of cases involve the more indirect but more accessible approach of conducting a "market analysis." This requires a plaintiff to define and prove the limits of the relevant market, and to then offer evidence of characteristics of and events in that market which are suggestive of the presence of market power.
1. Defining the Market
a. Proper market definition is a prerequisite to any meaningful market analysis. Conceptually, the market is simply the "area of effective competition" within which the defendant operates. Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961). The goal is to identify all of the competitive forces which meaningfully constrain the pricing and other competitive behavior of the defendant. As a result, market definition turns on the concept of substitutability, that is, the extent to which there are alternatives which a substantial number of consumers would regard as a reasonable substitute for the defendants product or service.
b. It is important to remember that this form of economic analysis is attempting to measure the behavior of large groups of people. One cannot draw meaningful conclusions about the limits of the relevant market based only on the purchasing habits of individual consumers. Some people would never consider buying anything except a Mercedes, but that does not mean that a Mercedes and a BMW are in different markets. Rather, the issue is whether there are a sufficiently large number of consumers who will consider a possible alternative to the defendants product or service that their willingness to turn to this alternative will meaningfully constrain the defendants behavior. This is a matter of degree, and economists attempt to measure the extent to which this substitutability exists by reference to "cross-elasticity."
c. "Cross-elasticity" is a means of attempting to measure and quantify the extent to which buying or selling decisions are responsive to and affected by changes in the price of the product or service being offered for sale. Cross-elasticity of demand, for example, measures the extent to which buyers may be inclined to turn to other substitutes if the price for a given group of products or services is raised by a not-insignificant amount. Similarly, cross-elasticity of supply measures the extent to which sellers will be inclined to shift their production capacity to produce more of a particular kind of good or service in response to a not-insubstantial increase in the price of that good or service by existing suppliers.
d. Markets are generally defined in terms of both a geographic dimension and a product (or service) dimension. In either case, the method of analysis is the same. With respect to the product dimension, for example, one begins by hypothesizing that a given group of products constitute a relevant market. One then asks what would happen if the price on all of those products were raised by a not-insignificant amount, say five percent. If very few of the potential buyers of such products would be inclined to turn to some other product outside the group as an acceptable substitute in the face of such a price increase, then there is relatively little cross-elasticity of demand between the hypothesized group of products and other products, and as a result the hypothesized group of products is likely to be a separate market. If, on the other hand, such a price increase is likely to induce a substantial number of consumers to turn to some other product outside the group as a substitute, then there is greater cross-elasticity, and the other product or products to which the consumers are likely to turn will likely be included in the relevant market.
e. The geographic market analysis is similar. One hypothesizes a particular geographic area as being the area within which buyers are likely to be willing to turn to find sources of supply for the product or service at issue. One then hypothesizes that all the suppliers in that geographic area raise their price a not-insignificant amount, and asks to what extent buyers are likely to be willing to turn to sources of supply outside that geographic area, and to regard such sources as acceptable substitutes. If so, the presence of such cross-elasticity suggests that the geographic market should be drawn more broadly to include those regions to which buyers are willing to turn.
f. The Merger Guidelines promulgated by the Antitrust Division of the U.S. Department of Justice employ this same concept, defining the relevant market as "a product or group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future producer or seller of those products in that area likely would impose at least a small but significant and nontransitory increase in price, assuming the terms of sale of all other products are held constant." U.S. Dept of Justice, Merger Guidelines § 1.0 (1992). The Merger Guidelines contain an extended and helpful discussion of the process of market definition and assessment of market power, which is generally regarded as persuasive, though not necessarily controlling, by the courts.
2. Indicators of Market Power In the Relevant Market
Once the limits of the market are properly defined, it is possible to observe conditions and events within that market which may be indicative of the presence of market power. No exhaustive catalogue of relevant factors is possible, but the following are factors which are often considered to be probative.
a. Market Share
Market share is the easiest to measure, and therefore the most often relied on indicator of market power. While the Supreme Court has on occasion suggested that "size is itself an earmark of monopoly power," United States v. Paramount Pictures, 334 U.S.131, 174 (1978), it has also been careful to emphasize that the "relative effect of percentage command of a market varies with the setting in which that factor is placed." United States v. Columbia Steel Co., 334 U.S. 495, 527-28 (1948).
In terms of monopoly power, the threshold market share appears to be approximately 70 percent. See, e.g., United States v. Aluminum Co. of America, 148 F.2d 416, 424 (2d Cir. 1945) (on certification from Supreme Court due to absence of quorum) (A ninety percent market share "is enough to constitute a monopoly; it is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three percent is not."); United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956) (unanimously opining that 75 percent market share would have demonstrated monopoly power); White Bag Co. v. International Paper Co., 579 F.2d 1384, 1387 (4th Cir. 1974) (noting that generally monopoly power has only been found when shares of relevant market are 70 percent or more).
For the purpose of proving some degree of market power short of monopoly power, the significance of market share becomes much more uncertain. The Fourth Circuit, in the context of proving market power to support a finding of dangerous probability of success in the context of an attempted monopoly claim, has indicated that where the defendant has less than a 30 percent market share, the claim "should presumptively be rejected," while a share greater than 50 percent should presumptively be treated as establishing sufficient market power to support a finding of dangerous probability of success. M & M Medical Supplies and Service, Inc. v. Pleasant Valley Hospital, 981 F.2d 160, 168 (4th Cir.), cert. denied, 113 S.Ct. 962 (1993). Claims resting on market shares between 30 percent and 50 percent "should usually be rejected, except when conduct is very likely to achieve monopoly or when conduct is invidious." Id.
While market share may be the single most important indicator of market power, it should be emphasized that market share alone is not determinative. It must always be evaluated in the context of the other factors described below. Depending on the circumstances of the particular market, it is quite possible for a firm with a relatively low market share to nonetheless possess market power, see, e.g., Valley Liquors, Inc. v. Renfield Importers, 822 F.2d 656, 667 (7th Cir.), cert. denied, 484 U.S. 977 (1987) (the "lowest possible market share legally sufficient to sustain a finding of monopolization is between 17% and 25%").
b. Barriers to Entry
Next to market share, this factor has been the one considered most often by the courts. In economic terms, a "barrier to entry" is any cost that would have to be borne by a new entrant into the market that was not and is not borne by an incumbent in the market. See Echlin Manufacturing Co., 105 F.T.C. 410, 486-87 (1985). Most often, however, courts tend to refer to the concept more generally as including any circumstance which will discourage potential competitors from entering the market in response to a price increase by those already there. See, e.g., Matsushita Electric Industries Co. v. Zenith Radio Corp., 475 U.S. 574, 591 n. 15 (1986). Examples of such barriers include:
i. patents or other intellectual property rights, McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1495 n. 11 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989).
ii. need for large capital outlay, Southern Pacific Communications Co. v. AT&T, 740 F.2d 980, 1001-02 (D.C. Cir. 1984), cert. denied, 470 U.S. 1005 (1985).
iii. control of limited supplies or other facilities necessary to compete, United States v. United States Shoe Machine Corp., 110 F.Supp. 295 (D.C.Mass. 1953), affd per curiam, 347 U.S. 521 (1954).
iv. limited demand which can support only one or a small number of sellers, United States v. Griffith, 334 U.S. 100 (1948).
v. regulatory barriers, Southern Pacific Communications Co., supra.
vi. exclusionary marketing practices, Philadelphia World Hockey Club v. Philadelphia Hockey Club, 351 F.Supp. 462 (E.D.Pa. 1972); United States v. Paramount Pictures, supra.
c. "Supra-Competitive" Profits
Some courts have suggested that consistent "above-normal" profits (however that might be defined) support a finding of monopoly power. See, e.g., Borden, Inc. v. FTC, 674 F.2d 498, 512 (6th Cir. 1981), vacated and remanded for entry of consent judgment, 461 U.S. 940 (1983). Other courts have remained skeptical, however, noting that "the inference that a defendant that enjoys healthy profits only does so because of an unhealthy market structure is not a strong one. Good management, superior efficiency and differences in accounting provide explanations that are just as plausible, and none of those explanations is inconsistent with an effectively competitive market." In Re: IBM Peripheral EDP Devices Antitrust Litigation, 481 F.Supp. 965, 981 (N.D.Cal. 1979), affd sub nom, TransAmerica Computer Co. v. IBM, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955 (1983).
d. Relative Size and Profitability of Competitors
Where there are few competitors having a large enough market share to challenge the defendant, the likelihood of the defendant possessing market power is increased. See, e.g., Reazin v. Blue Cross & Blue Shield, 899 F.2d 951, 967 (10th Cir.), cert. denied, 110 S.Ct. 3241 (1990); Pacific Coast Agricultural Export Association v. Sunkist Growers, 526 F.2d 1196, 1204 (9th Cir. 1975), cert. denied, 425 U.S. 959 (1976) (market shares from 45 percent to 70 percent were sufficient to support finding of monopoly power when other competitors in market were "relatively small, with no single competitor controlling over 18 percent of the market before, or 12 percent of the market after, Sunkists entry.").
e. Pricing and Profitability Trends Over Time
Evidence that prices, market share, and profitability are all increasing for the defendant over time may be even more probative than the absolute size of market share at any given point. Borden, Inc. v. FTC, supra, 674 F.2d at 511-12; Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273 n. 11 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980) (despite relatively high market share, evidence that it has been declining over time is a factor suggesting absence of market power).
f. Other Factors
Many other factors could conceivably be relevant in the context of a particular industry, including such considerations as technological superiority, entrenched customer preferences, scale economies, homogeneity of products, and so on. See, e.g., United States v. AT&T, 524 F.Supp. 1336, 1347-48 (D.C.D.C. 1981).
V. EFFECTIVE USE OF DISCOVERY TOOLS TO GATHER EVIDENCE OF MARKET POWER
Having laid a huge amount of theoretical groundwork, we finally come to the point of this manuscript: in practical terms, how can discovery best be used to develop probative evidence relating to the issues discussed above? Of course, there can be no comprehensive road map. What follows are suggestions for productive tactics and avenues of inquiry, which should be leavened with a large dose of creativity and then tailored to fit the particular circumstances of the individual case.
A. Engage an Economist First
The importance of engaging a competent economic expert at the very outset of a case cannot be overemphasized. Assuming the case is substantial enough to warrant it, such an expert should be consulted in advance of filing the complaint, since the expert will have much to offer pertaining to the allegations of market definition, market power, and related economic issues. With respect to discovery, the expert should be able to give you invaluable guidance in terms of the types of documents and data which should be targeted in written discovery, the approach to market definition and market power issues in depositions, and effective responses to discovery on these issues initiated by the opposition. Competent lawyers will no more get into an antitrust case without an economic expert than a competent pilot will get into a 747 without a navigator.
B. Obtain and Analyze Your Own Clients Data
While this does not technically fall in the category of formal discovery, the first step which should not be overlooked is to investigate thoroughly the information available from your own client. This would certainly include data concerning the plaintiffs own activity in the marketplace, such as historical sales volume, pricing, margins, costs, and so on. In the course of its ordinary business activities, your client may also collect a fairly significant amount of information about its competitors, including the defendant. All of this should be gathered and analyzed in conjunction with the economist, preferably prior to launching discovery initiatives directed at the defendant.
C. Obtain Defendants Data
The first target of written discovery directed to the defendant should be the defendants internal and historical pricing, sales volume, costs, profitability, and other related data. Any and all information of this kind should provide a rich resource for your economist to mine in coming to conclusions both about market definition and market power. The attached sample document requests give some idea of the kinds of documents to ask for.
D. Ask Interrogatories Directed to the Market Definition Issues
In complex litigation, interrogatories are often a waste of time, especially broadly phrased questions which do little more than give the opponent an opportunity to regurgitate his or her own theory of the case. Precisely drawn interrogatories can be very helpful in nailing down the partys position on technical issues, however, and market definition is one of those. Again, the attached sample interrogatories illustrate one approach to obtaining such information.
E. Depose Defendants Key Employees
Depositions can be an invaluable means of obtaining key information about the defendants marketing practices, and about the way the defendants employees perceive its business and the market in which it operates.
1. Budget considerations permitting, do not limit yourself to one employee or representative of the defendant. Rule 30(b)(6) is an excellent tool which should always be utilized, and a sample 30(b)(6) deposition notice is attached which illustrates the subject areas which can be inquired into. In addition, however, one should always identify key individuals to be deposed as well, usually including the chief financial officer, a marketing executive, and one or more employees involved in sales. It may also be productive, depending upon the circumstances of the particular case, to depose one or more technical employees who are involved in product design and development, since very often physical characteristics of the product are highly relevant to market definition questions.
2. The information to be obtained from these witnesses is of two kinds.
a. It is always possible that one might obtain raw data concerning pricing, sales, etc., particularly from the financial people, or possibly from the CEO. More likely, you will be able to obtain explanation of data which has been produced in written form which will aid in understanding and analyzing it.
b. Such depositions also offer the opportunity to obtain invaluable admissions from employees of the defendant, usually in more or less anecdotal form, about how they perceive the relevant market and their companys position in it. Of course, one rarely receives a helpful or candid answer if the question is asked in that way, but it is surprising how anxious most business people are to talk about their jobs and their company. Very often if one simply asks open-ended questions about how the business works, witnesses will be all too anxious to give full explanations.
F. Obtain Defendants Internal Planning Documents
1. Internal operating plans, strategic planning documents, marketing forecasts, business reviews, and similar sorts of intra-firm documents can provide a rich source of statements and admissions by the defendants own employees concerning the market definition and market power issues.
2. Most often, statements made in an internal company document, or statements by a marketing director in deposition, concerning "the market" the company is trying to reach are not referring to an economic or antitrust market, and are not controlling, or even particularly relevant, to the question of the definition of the antitrust market in which the company competes. At the same time, the persuasive force of such "admissions" by the defendant referring to particular "markets" can often be much more significant to a jury, and sometimes to a judge as well, than its technical relevance might warrant.
G. Consult Public Sources of Information
It is often surprising how much market information may be available with respect to particular industries from public sources. Regulated industries in particular, such as the insurance industry, the dairy industry, and many others, are often required to make periodic public filings of much of their financial information. Publicly traded companies are also required to file a fair amount of financial information, though not in great detail, with the SEC and/or state securities authorities. These can be valuable sources of information to attempt to fill in a complete picture as to the activities of "third party" participants in the market, other than the plaintiff and the defendant.
H. Consider Trade Associations and Other Industry Sources for Market-wide Data
Most industries today have one or more active trade associations, and often such organizations regularly compile data concerning economic activity in the industry. In some cases, it may require a court order to obtain access to such information, since antitrust considerations usually require safeguards against sharing this data among competitors, but it can nonetheless be a much less expensive means of obtaining data which provides a complete market-wide picture of activity.
I. Look for Commercial Information-Gathering Services
Depending on the industry, there may well be commercial services who gather and sell market data for particular industries. An example is in the field of retail consumer goods, as to which much data is collected by organizations such as Nielsen, IRI, and others. Your client may well already subscribe to these services and therefore have the data available. Be aware, however, that the subscription agreement usually strictly limits the uses to which the information can be put, so that even if your client is a subscriber you may well have to obtain the separate consent of the data source, or an order of court, before the data may be used in litigation.
J. When Other Sources are Inadequate, Consider Gathering Data Directly
Though it can be expensive and time-consuming, it is certainly possible, and may be necessary in some cases, to generate or compile raw data for use in litigation. For example, it may be worthwhile to commission consumer research to attempt to measure buyer attitudes, as a way of evaluating cross-elasticities of demand. While this evidence is much less direct and probative than direct evidence of purchasing behavior in the marketplace, it still may be sufficient when other evidence is lacking.
Similarly, it is possible to interview, depose, or obtain document production from third-party competitors in the marketplace. If information is gathered from all competitors in the industry in that fashion, it can be compiled in order to provide a meaningful basis for market-wide analysis. Of course, there are very few things most businesses are more reluctant to do than sitting down to answer questions under oath propounded by a lawyer representing their direct competitor, especially when the pending lawsuit is one in which they have no direct interest. Prepare to respond to many motions for protective orders if you pursue this course.
K. Be Creative
You and your economist can often come up with other sources of data and information which, while they may not be complete or exhaustive, might be broad enough to provide some reasonable basis to support an expert opinion. As a plaintiff, the goal is to develop enough of a factual record that the experts opinion will survive summary judgment and will get to the jury. Every avenue that can be explored to attempt to develop more of that factual record will add to the likelihood that your experts opinion will survive and be found credible.
VI. ATTACKING A MARKET POWER ANALYSIS
Most of the strategies, tactics, and information sources described above are ones which the defendant will want to consult as well, though obviously from the opposite point of view of attempting to disprove, as opposed to prove, the presence of market power. Certainly the importance of early retention of an expert economist is as paramount for a defendant as for any plaintiff. In addition, there are a few strategies which are frequently productive areas of emphasis for the defense.
A. Concentrate on Market Definition
Market definition is often an area with a high potential for success by the defendant, for a number of reasons. First, the process of market definition tends to be rather esoteric. Even if the plaintiffs lawyer understands the issues (which is not always the case), the plaintiffs lay witnesses rarely do. It is therefore possible to obtain more or less candid responses on specific evidentiary questions, such as the geographic scope of sales by plaintiff and its competitors, the extent to which consumers regard other products as substitutable with those of the plaintiff and the defendant, and so on, because it is not always obvious what the implications of those answers are for the outcome of the litigation.
Second, it is plaintiffs burden not only to define the market in a rational or coherent way, but to prove that the proposed market definition corresponds to commercial reality. Plaintiffs sometimes fail to take this obligation of proof seriously, but the courts usually do. See, e.g., Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 (1965) ("Without a definition of [the relevant] market, there is no way to measure [a defendants] ability to lessen or destroy competition."); Murrow Furniture Galleries, Inc. v. Thomasville Furniture Industries, Inc., 889 F.2d 524, 527-28 (4th Cir. 1989) ("To prove market power, the plaintiff must first establish the relevant product and geographic markets."); Yoder Brothers, Inc. v. California-Florida Plant Corp., 537 F.2d 1347-1366 (5th Cir. 1976), cert. denied, 429 U.S. 1094 (1977) (to avoid summary judgment, plaintiffs must adduce "sufficient evidence to raise a jury question on the market [definition] issue").
Often plaintiffs internal documents and depositions of its employees will be very productive in generating admissions that the geographic and/or product markets are much broader than the narrow definitions for which the plaintiff contends in litigation. In theory, at least, the defendant need not propound its own market definition; it need only show that the definition proposed by plaintiff is not supported by substantial evidence, and the claim should fail.
B. Scrutinize the Foundation of the Opinions of the Plaintiffs Expert
It can be assumed that the plaintiff will have an economic expert who will mouth the conclusory opinions necessary to support the particular cause of action being pursued. Those conclusory opinions, however, are only the beginning of the game, not the end of it, so far as the defendants quest for summary judgment is concerned. It has long been recognized that an expert witness testimony is no stronger than the facts upon which it rests; if the expert gives an opinion, the facts upon which it is founded "must be established by independent evidence properly introduced." Newman v. Hy-Way Heat Systems, Inc., 789 F.2d 269, 270 (4th Cir. 1986); Genmoora Corp. v. Moore Business Forms, Inc., 939 F.2d 1149, 1163 (5th Cir. 1991) ("[A]n experts testimony is not substantial if it is based merely on speculation and conjecture without basis in fact and . . . such testimony is insufficient to support the jurys verdict as a matter of law.").
In recent years, the federal courts have become more and more willing to scrutinize the foundation for an experts opinion, and to reject the opinion if it has an inadequate factual basis. See, e.g., Tyger Construction Corp., Inc. v. Pensacola Construction Co., 29 F.3d 137, 145 (4th Cir. 1994) ("Without accurate factual support," experts opinions "were speculative and the district court abused its discretion" in permitting them to be introduced at trial). But see M&M Medical Supplies and Service, Inc. v. Pleasant Valley Hospital, Inc., 981 F.3d 160 (4th Cir.) (en banc), cert. denied, 113 S.Ct. 962 (1993). There, the thirteen judge en banc panel split seven to six on the issue of whether the affidavit of plaintiffs expert economist was sufficient to withstand summary judgment. The majority concluded that the district court had erred in excluding the affidavit because it was not supported by specific facts of record. The majority "reiterate[d] that an experts conclusory affidavit lacking facts does not satisfy the requirements of Fed.R.Civ.P. 56(e)," but held that an affidavit, such as the one before it, which refers, at least in general terms, to the facts on which the opinion is based does satisfy Rule 56(e) "even though the expert does not attach the data supporting the facts." Needless to say, the Fourth Circuit has left ample room for litigation on this issue.
When counsel is faced with the need to address a market power issue, either in the context of counseling a client concerning contemplated conduct or in the context of prosecuting or defending a legal challenge to that conduct, the sheer volume and complexity of information potentially relevant to the issue can be overwhelming. The surest path to successfully finding ones way through the morass of information, in addition to retaining and listening to a competent expert, lies in understanding and keeping in focus the basic conceptual underpinnings of the market power issue. The ultimate goal is to prove (or disprove) that the defendant has the ability to make at least some market decisions unconstrained by the effects of competition. The use of all the possible modes of analysis and the pursuit of all the possible avenues for obtaining relevant evidence will be most effective when each step is taken with an eye to its efficacy in generating evidence which will make more or less likely this single ultimate fact.
PLAINTIFFS REQUEST FOR PRODUCTION OF DOCUMENTS
NOW COMES plaintiff, through counsel, and pursuant to Rule 34 of the Federal Rules of Civil Procedure, requests that defendant produce for inspection and copying at the offices of Petree Stockton, 1001 West Fourth Street, Winston-Salem, North Carolina 27101, within thirty (30) days after service hereof, the documents identified below:
DOCUMENTS AND THINGS REQUESTED
2. All documents that describe, discuss, mention, refer to or in any way relate to defendants actual performance or anticipated performance as to budget for the years 1989, 1990, 1991, 1992 and 1993.
3. All documents that describe, discuss, mention, refer to or in any way relate to ways to increase revenue for defendant for the years 1989, 1990, 1991, 1992 and 1993.
4. All audited and unaudited financial statements, general ledgers, books of account, profit and loss or income statements, balance sheets, and all other documents reflecting the financial condition of defendant, including assets, sales and profits, for each fiscal year to date beginning with fiscal year 1989 through the present.
5. All state and federal income tax returns (including all amendments and attachments thereto) filed on behalf of defendant for the years 1989, 1990, 1991 and 1992.
6. Annual reports for defendant and any entity that owns or controls defendant for the years 1989, 1990, 1991 and 1992.
7. All documents created during the years 1989, 1990, 1991, 1992 and 1993 that describe, discuss, mention, refer to or in any way relate to plaintiff.
8. All daily, weekly and monthly records of shipments for defendants product(s) [describe product(s) at issue with specificity] from the time the product was first shipped to stores through the present.
9. All documents that describe, discuss, mention, refer to or in any way relate to the quantity of defendants product(s) which has been shipped to stores.
10. All documents that describe, discuss, mention, refer to or in any way relate to daily, weekly, monthly and annual sales of defendants product(s).
11. All documents that report, describe, discuss, mention, refer to or in any way relate to actual profits or anticipated profits attributable to defendants product(s) at any time.
12. All documents that describe, discuss, mention, refer to or in any way relate to the sales and profit potential of defendants product(s).
13. All documents that describe, discuss, mention, refer to or in any way relate to the amounts which defendant received from sales of defendants product(s).
14. All documents that describe, discuss, mention, refer to or in any way relate to defendants costs incurred in producing defendants product(s).
15. All telephone records of defendant from December 1, 1992 through the present.
16. All documents that describe, discuss, mention, refer to or in any way relate to any advertising, marketing or promotional efforts for defendants product(s).
17. Documents sufficient to identify each customer which has purchased defendants product(s), either directly or through any dealer, distributor, representative, sales agent or other intermediary.
18. All documents that describe, discuss, mention, refer to or in any way relate to sales efforts for defendants product(s).
19. All documents that constitute, describe, discuss, mention, refer to or in any way relate to orders placed for defendants product(s).
20. All documents that describe, discuss, mention, refer to or in any way relate to consumer studies, surveys, tests or focus groups regarding defendants product(s).
21. All market studies and analyses prepared by defendant or for the benefit of defendant which discuss or make reference to defendants product(s) and/or any competing products.
22. Minutes or other records of every meeting of defendants board of directors and the board of directors of any entity that owns or controls defendant at which plaintiff or its product(s) was discussed.
23. All documents stating or describing any policy or program concerning destruction or retention of documents or things during the period from 1989 to date.
24. All documents concerning any destruction, retention or other disposition of any document or thing which is within the scope of any of the foregoing requests.
25. All documents that discuss, refer or relate to the market or markets in which defendants product(s) are sold.
26. All documents that identify, discuss, refer or relate to any competitors of defendant, including plaintiff, with respect to defendants product(s).
27. All documents that report, refer or relate to actual or estimated prices, volumes, costs and market shares for any and all products manufactured by third parties which are competitive with defendants product(s).
28. Any and all market studies, competitive studies, or other analyses of the competitive conditions in any market in which defendant competes in the sale of defendants product(s).
29. Price lists or other documents sufficient to establish the price at which any of defendants product(s) have been sold or have been offered for sale at any time from January 1, 1989 to the present.
30. Any documents reflecting prices at which any products made by any third parties which are competitive with defendants product(s) have been sold or offered for sale from January 1, 1989 to the present.
PLAINTIFFS FIRST SET OF INTERROGATORIES
NOW COMES plaintiff, through counsel, and pursuant to Rule 33 of the Federal Rules of Civil Procedure, requests that defendant respond to the interrogatories set forth below, in writing and under oath, within thirty days of service hereof, as required by the provisions of Rule 33.
1. Identify the person or persons employed by plaintiff with the most knowledge or information with respect to each of the following categories:
(1) The research, design and development of defendants product(s) [define with specificity].
(2) Products of any third parties which are competitive with defendants product(s), including without limitation those of plaintiff, and tests, analyses and evaluations performed on or in connection with such products.
(3) Pricing of defendants product(s), current and historical.
(4) Sales volume for defendants product(s), current and historical.
(5) Costs incurred in connection with production, marketing and sale of defendants product(s), current and historical.
(6) Current and historical marketing and sales strategies and planning for defendants product(s).
(7) Defendants competitive market research.
(8) Defendants current and historical financial condition.
2. State what you contend to be the relevant product and geographic market for purposes of the antitrust claims in this action.
3. Identify by model number, or other appropriate means, each distinct model, line, SKU, brand, or other relevant unit of product(s) sold by defendant in the market defined in response to Interrogatory 2 since January 1, 1989, and for each, state by year:
a. the number of such units sold by defendant;
b. the price at which such units have been sold by defendant;
c. the total dollar volume of sales of each type of such unit sold by defendant;
d. the total costs incurred by defendant in connection with the manufacture, marketing and sale of such units; and
e. the profit or loss realized by defendant in connection with each such unit.
4. Identify each competitor of yours in the market as defined in response to Interrogatory 2.
5. For each competitor identified in response to Interrogatory 4, state that competitors total sales of products in the market, in both dollars and units for each year from January 1, 1989, to the present.
6. For each competitor identified in response to Interrogatory 4, identify by model number, or other appropriate means, each distinct model, line, SKU, brand, or other relevant unit of product(s) sold by such competitor in the market defined in response to Interrogatory 2 since January 1, 1989, and for each, state by year:
a. the number of such units sold by such competitor;
b. the price at which such units have been sold by such competitor;
c. the total dollar volume of sales of each type of such unit sold by such competitor;
d. the total costs incurred by such competitor in connection with the manufacture, marketing and sale of such units; and
e. the profit or loss realized by such competitor in connection with each such unit.
7. Identify all documents which are a source for any of the information reported in response to the above interrogatories.
NOTICE OF DEPOSITION(S)
Please take notice that plaintiff, through counsel and pursuant to the provisions of Rule 30(b)(6) of the Federal Rules of Civil Procedure, will take the deposition(s) of the person or persons designated by defendant to testify on its behalf as to all information known or reasonably available to the organization with respect to the matters set forth in Exhibit A, attached hereto. The deposition will take place commencing at 9:30 a.m. on ____________, 19__, at the offices of Petree Stockton, L.L.P., 1001 West Fourth Street, Winston-Salem, NC 27101, and will continue thereafter from day to day until completed.
Pursuant to Rule 30(b)(6), examinations requested of the representative(s) of defendant on the matters set forth below.
1. The identity of your officers, directors and shareholders.
2. The identity of your parent, subsidiaries, and other related corporate entities.
3. Your internal corporate structure, including identification and description of function of all departments, divisions, or other subunits, and identification and description of funtion and reporting responsibility of managerial personnel.
4. Your document filing system.
5. Written or unwritten policies, practices or procedures with respect to the retention or destruction of any documents.
6. A general description of your business and your policies, procedures and practices in conducting it.
7. Your net worth and financial condition.
8. Identification of all products sold by you, current and historical.
9. History of pricing, sales, sales revenue, costs, and profits with respect to the above products.
10. Your marketing and sales planning and strategies with respect to the above products.
11. Your current and historical business plans and strategies.
12. Characteristics of the market in which the above products are sold, including identification of and description of activities of all competitors.
13. The share of market held by you and by all other market entrants for all periods relevant to the matters alleged in this action.
14. All sources of market data and other information concerning the above market which is in your possession, or which is available to you or known to you.