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Spahr v. Leegin Creative Leather Products

August 20, 2008

NANCY SPAHR AND BARBARA TREADWAY, ON BEHALF OF THEMSELVES AND ALL OTHER SIMILARLY SITUATED, PLAINTIFFS,
v.
LEEGIN CREATIVE LEATHER PRODUCTS, INC. DEFENDANT.



The opinion of the court was delivered by: J. Ronnie Greer United States District Judge

MEMORANDUM OPINION

This class action complaint is before the Court on the motion of the defendant to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6), [Doc. 3]. The plaintiffs have responded in opposition, [Doc. 17], and defendant has filed a reply brief in support of its motion to dismiss, [Doc. 20]. The matter is now ripe for disposition. For the reasons which follow, the motion to dismiss will be granted.

I. Procedural Background

Plaintiffs, purchasers of retail products manufactured and distributed by the defendant, filed their complaint against defendant on August 9, 2007, on behalf of themselves and all others similarly situated in the United States (the "Direct Purchaser Class") and all others similarly situated in Tennessee (the "Indirect Purchaser Class").

The plaintiffs allege violations of section 4 of the Clayton Act, 15 U.S.C. § 15(a), section 1 of the Sherman Act, 15 U.S.C. § 1, violation of the Tennessee Trade Practices Act, T.C.A. § 47-25-101 et seq., and a state common law action for unjust enrichment. The defendant responded to the complaint on October 22, 2007, with a motion to dismiss, [Doc. 3]. On December 4, 2007, plaintiffs filed their "First Amended Class Action Complaint," ["FAC"], [Doc. 16], and on December 7, 2007, responded to the motion to dismiss, [Doc. 17].

II. Standard of Review

In deciding a defendant's motion to dismiss under Rule 12(b)(6), the Court "must construe the complaint in the light most favorable to the plaintiffs [and] accept all well-pled factual allegations as true." League of United Latin American Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007). While this standard is "decidedly liberal," it nonetheless "require[s] more than bare assertions of legal conclusion." Id.

In the aftermath of the Supreme Court's recent decision in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), the Sixth Circuit has explained that a plaintiff's allegations, while "assumed to be true, must do more than create speculation or suspicion of a legally cognizable cause of action; they must show entitlement to relief." Bredesen, 500 F.3d at 527. Moreover, the plaintiffs' "obligation to provide the 'grounds' of their entitlement to relief requires more than labels and conclusions or a formulaic recitation of the elements of the cause of action." Id. "To state a valid claim, a complaint must contain either direct or inferential allegations respecting all the material elements to sustain recovery under some viable legal theory." Id. In the context of an antitrust case, the Supreme Court has held that the complaint must contain enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of illegal agreement . . . [A]nd allegation of parallel conduct and a bare assertion of conspiracy will not suffice.

Twombly, 127 S.Ct. at 1964-66. This standard was set by the Supreme Court in antitrust cases because such cases frequently cause substantial expenditures and give the plaintiff the opportunity to extort large settlements even where the plaintiff does not have much of a case. Id. at 1966-67. In other words, "[s]ome threshold of plausibility must be crossed at the outset before a patent antitrust case should be permitted to go into its inevitably costly and protracted discovery phase." Id. (quoting Asahi Glass Co. v. Pentech Pharmaceuticals, Inc., 289 F.Supp.2d 986, 995 (N.D. Ill. 2003) (Posner, J., sitting by designation)).

III. Facts

The following facts, taken as true for the purpose of this Rule 12(b)(6) motion, are from the plaintiffs' memorandum in opposition to the motion to dismiss:

Leegin Creative Leather Products ("Defendant") launched the Brighton brand in 1991 with a single collection of belts. That collection has since expanded into a variety of women's fashion accessories, including handbags, wallets, watches, footwear, fragrance, jewelry, home accessories and eye wear, see Amended Complaint, ¶14, sold across the United States in approximately 6,000 stores. There are also approximately 100 all-Brighton Collectible Stores located from coast-to-coast. Amended Complaint, ¶14. While the Defendant manufactures and sells Brighton-brand products to independent retailers, it also owns and operates the largest Brighton Collectible Stores, which account for a substantial share of Defendant's total sales. Amended Complaint, ¶22.

Defendant refers to its Brighton-brand as "one-of-a-kind ornamentation," stating that "Brighton is the only major accessories line featuring products that coordinate from head to toe." Amended Complaint, ¶23. Brighton-brand products are unique, distinct and characterized by an inelasticity of demand. Amended Complaint, ¶51. Many consumers do not consider other accessories as suitable substitutes for the Brighton-brand. Amended Complaint, ¶50. Thus, Plaintiffs lack a comparable product line from which to choose. Amended Complaint, ¶23. In or about 1997, Defendant instituted a minimum resale pricing policy (the "Brighton Retail Pricing and Promotional Policy") through which it induced retailers to sign and return a "Brighton Pledge" form agreeing to abide by Defendant's pricing policy and pledging to "Follow the Brighton Suggested Pricing Policy at all times." Amended Complaint, ¶15. To enforce the policy, Defendant refused to sell to retailers who discounted Brighton-brand products below its "suggested" price. Amended Complaint, ¶15. When a retailer offered a promotional discount, Defendant demanded that the retailer revoke the promotion and threatened sanctions. Amended Complaint, ¶16. If a retailer continued to offer discounts, Defendant ceased shipping products and informed the retailer that this cessation would be subject to "review" if the retailer agreed to adhere to the pricing policy. Amended Complaint, ¶17. This policy was extended by Defendant to all Brighton-brand retailers. Amended Complaint, ¶18.7

Defendant participated in meetings and conversations to discuss the prices of Brighton-brand products sold in the United States, agreed to charge prices at specified levels and otherwise to increase and maintain prices of Brighton-brand products sold in the United States, issued price announcements and quotations in accordance with the agreements reached, and sold Brighton-brand products to various customers in the United States at non-competitive prices. See Amended Complaint, ¶29. As a result, prices for Brighton-brand products have been maintained at supracompetitive levels from at least 1999 through the present. See Amended Complaint, ¶30.

IV. Analysis and Discussion

Section 1 of the Sherman Act states that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states . . . is declared to be illegal." 15 U.S.C. § 1. Though on its face § 1 creates only a criminal penalty, § 4 of the Clayton Act, 15 U.S.C. § 15(a), provides treble damages relief to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." While the language of § 1 could be broadly read, the Supreme Court has limited the reach of § 1 and "outlaw[s] only unreasonable restraints." State Oil Co. v. Kahn, 522, 10 U.S. 3 (1997).

Two standards have been articulated by the Supreme Court for testing whether a practice unreasonably retrains trade in violation of § 1. "[T]he first employs a presumption that an agreement is an antitrust violation, thus invoking a per se illegality rule to classify the agreement." Betkerur v. Aultman Hosp. Ass'n., 78 F.3d 1079, 1088 (6th Cir. 1996). Certain types of restraints "are deemed unlawful per se." Khan, 522 U.S. at 10.

The second standard for testing whether a practice restrains trade in violation of § 1 is the "rule of reason" which "requires the fact finder to decide whether under all the circumstances of the case the restrictive practice imposes an unreasonable restraint on competition." Betkerur, 78 F.3d at 1088 (quoting Arizona. v. Maricopa County Med.Soc'y., 457 U.S. 332, 343 (1982)).

Two types of antitrust conspiracies in restraint of trade have been identified in the relevant case law. Trade restraining agreements scrutinized under the Act can be categorized as horizontal --"agreements between competitors at the same level of market structure," or vertical --"combinations of persons at different levels of the market structure, such as manufacturers and distributors." Ezzo's Investments, Inc. v. Royal Beauty Supply, Inc., 243 F.3d 980, 986 (6th Cir. 2001) (quoting Bailey's, Inc. v. Windsor Am., Inc., 948 F.2d 1018, 1027 (6th Cir. 1991)). Vertical restraints primarily affect intrabrand competition, while horizontal restraints primarily affect interbrand competition. Ezzo's, 243 F.3d at 986-87.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007), the Supreme Court held that vertical resale price maintenance restraints are to be judged according to the rule of reason rather than the per se rule. In doing so, the Supreme Court overruled the holding in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which held that resale price maintenance agreements were a per se violation of the Sherman Act. Under the rule of reason, "the fact finder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Leegin, 127 S.Ct. at 2712 (quoting Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1997)). "Appropriate factors to take into account include 'specific information about the relevant business' and 'the restraint's history, nature and effect."' Id. (quoting State Oil Co. v. Khan, 522 U.S. 3, 10 (1997)). "Whether the businesses involved have market power is a further, significant consideration." Id. In contrast, "[r]esort to per se rules is confined to restraints, like those mentioned [horizontal agreements among competitors to fix prices or to divide markets], 'that would always or almost always tend to restrict competition and decrease output.'" Id. at 2713 (quoting Business Electronics Corp. v. Sharpe Electronics Corp., 485 U.S. 717, 723 (1998)). "[T]he per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue . . . and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason." Id.

As noted by the Supreme Court in Leegin, "the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result." 127 S.Ct. at 2718. Moreover, the Court in Leegin stated that, in contrast to a situation where "only a few manufacturers lacking market power adopt the practice, . . . [r]esale price maintenance should be subject to more careful scrutiny . . . if many competing manufacturers adopt the practice." Id. at 2719 (citing F.M. Scherer & D. Ross, Industrial Market Structure and Economic Performance 558 (3d ed. 1990) (finding that "except when [resale price maintenance] spreads to cover the bulk of an industry's output, depriving consumers of a meaningful choice between high-service and low-price outlets, most [resale price maintenance arrangements] are probably innocuous"); Frank H. Easterbrook, Vertical Arrangements and the Rule of Reason, 53 Antitrust L.J. 135, 162 (1984) ("stating that "every one of the potentially anticompetitive outcomes of vertical arrangements depends on the uniformity of the practice").

Moreover, although vertical price restraints are to be judged according to the rule of reason, the Supreme Court in Leegin made clear that "[a] horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful." 127 S.Ct. at 2717; see also Texaco, Inc. v. Dagher, 547 U.S. 1, 5 (2006) ("price-fixing agreements between two or more competitors, otherwise known as horizontal price-fixing agreements, fall into the category of arrangements that are per se unlawful."). "To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel, it, too, would need to be held unlawful under the rule of reason." Id.

"Resale price maintenance, furthermore, can be abused by a powerful manufacturer or retailer." Id. at 2717. "The vertical agreements establishing minimum resale prices can have either pro-competitive or anti-competitive effects, depending upon the circumstances in which they are formed." Id. The Supreme Court noted, however, in Leegin, that "the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result." Id. at 2718. Furthermore, "that a dominant manufacturer or retailer can abuse resale price maintenance for anti-competitive purposes may not be a serious concern unless the relevant entity has market power. If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers . . . and if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets." Id. at 2720.

The defendant Leegin seeks dismissal of the plaintiffs' complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rules of Civil Procedure 12(b)(6). More specifically, defendant alleges (1) that plaintiffs have failed to state either a federal or state claim that will survive scrutiny under the rule of reason analysis because (i) plaintiffs have not made allegations that fit within the Supreme Court's definition of the requisite "relevant market", and (ii) plaintiffs have not alleged any anti-competitive effect from the resale price maintenance agreements; (2) plaintiffs have failed to allege they purchased directly from a participant in a resale price maintenance agreement with Leegin and thus have no standing to assert an antitrust claim under either federal or state law; (3) plaintiffs cannot assert federal claims against Leegin under the United States Supreme Court's ruling in Illinois Brick v. Illinois, 4 ...


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