Insight Equity A.P. X, LP v. Transitions Optical, Inc.

INSIGHT EQUITY A.P. X, LP, d/b/aVISION-EASE LENS WORLDWIDE, Plaintiff, v. TRANSITIONS OPTICAL, INC., Defendant.

Civil Action No. 10-635-RGA

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

June 30, 2016

MEMORANDUM OPINION

Robert W. Mallard, Esq., Alessandra Glorioso, Esq., Dorsey & Whitney LLP, Wilmington, DE; George G. Eck, Esq. (argued), F. Matthew Ralph, Esq., Dorsey & Whitney LLP, Minneapolis, MN; Alex Iliff, Esq., Dorsey & Whitney LLP, New York, NY, attorneys for Plaintiff.

Chad M. Shandler, Esq., Richards, Layton & Finger, Wilmington, DE; Jonathan M. Jacobson, Esq. (argued), Chul Pak, Esq., Jeffrey C. Bank, Esq., Daniel P. Weick, Esq., Wilson Sonsini Goodrich & Rosati, New York, NY; Lisa A. Davis, Esq., Wilson Sonsini Goodrich & Rosati, Palo Alto, CA, attorneys for Defendant.

ANDREWS, U.S. DISTRICT JUDGE:

Before the Court are Defendant's Motion for Summary Judgment (D.I. 38) and related letters and briefing (D.I. 38, 57, 93, 139); Defendant's Motion to Exclude (D.I. 98) and related briefing (D.I. 99, 108, 115); and Plaintiff's Conditional Cross-Motion to Exclude Transitions Optical, Inc.'s Summary Judgment Evidence (D.I. 111) and related briefing (D.I. 112, 115, 116). The Court heard oral argument on June 1, 2015. (D.I. 132). At the request of the Court, the parties submitted updated hyperlinked briefing with citations corrected to reflect the docket. (See D.I. 137, 138). For the reasons stated below, Defendant's Motion for Summary Judgment (D.I. 38) is GRANTED IN PART and DENIED IN PART. Defendant's Motion for Summary Judgment is granted with respect to Plaintiff's refusal to deal claim and denied with respect to Plaintiff's exclusive dealing and certain state law claims. Defendant's Motion to Exclude (D.I. 98) is DENIED IN PART and DISMISSED IN PART as moot and Plaintiff's Conditional Cross-Motion to Exclude (D.I. 111) is DISMISSED as moot.

I. BACKGROUND

This matter relates to antitrust claims pursuant to 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 various state competition laws (D.I. 63 at 130-32). (D.I. 63 at 110). Plaintiff Insight Equity A.P. X, LP, d/b/a Vision-Ease Lens Worldwide ("VE") alleges that Defendant Transitions Optical, Inc. ("TOI") maintained monopoly power of the photochromic ophthalmic lens market by engaging in anticompetitive conduct of two types: (1) exclusive dealing and (2) refusing to deal with VE. (Id.). For purposes of its summary judgment motion, TOI assumes that the relevant market is the photochromic lens market and that it had market power in that market. (D.I. 38 at 18).

A. Industry and Party Background

A photochromic lens changes from clear to dark tint when exposed to ultraviolet rays. (D.I. 61-4 at 4). Glass photochromic lenses were first distributed in North America in the 1960s. (D.I. 60-4 at 2). Lens manufacturers started researching processes to manufacture a plastic photochromic lens as early as the late 1970s. (D.I. 60-4 at 3). TOI launched "Transitions," its first plastic photochromic lens, in 1991. (D.I. 39-7 at 3-4). At the time, no commercially viable plastic photochromic lens product was available. (Id. at 3). As of March 2014, there had been seven generations of Transitions lenses. (Id. at 4). Over the years, TOI became able to apply its photochromic treatment to most lens materials, including polycarbonate.¹ (D.I. 39-8 at 24; D.I. 59 at 4).

TOI applies photochromic treatment to ophthalmic lenses but does not manufacture the lenses themselves. (D.I. 39-8 at 6, 24). Lens casters manufacture untreated lenses and sell them to TOI. (D.I. 63 at 115). TOI applies photochromic coating to the lenses and sells them back to the lens casters. (D.I. 39-7 at 2-3; D.I. 63 at 115). Lens casters distribute TOI's finished lenses to labs, retailers, or independent eye care professionals ("ECPs") such as ophthalmologists, opticians, and optometrists. (D.I. 39-7 at 3; D.I. 63 at 115). Labs grind lenses to prescriptions and fit lenses into eyeglass frames. (D.I. 63 at 115). Labs are sometimes integrated with retailers or lens casters and are sometimes independent. (D.I. 39-7 at 3). Some labs sell their finished lenses to ECPs that in turn sell finished eyeglasses directly to consumers. (D.I. 63 at 115). Retailers include national chains such as LensCrafters and Walmart, and generally sell directly to consumers. (Id.). TOI does not sell directly to labs, retail stores, ECPs, or consumers.(D.I. 39-8 at 6). In its briefing, TOI visually depicts the relationships between the different players in the market as follows:

Image materials not available for display.

(D.I. 38 at 13).²

VE is a lens caster that manufactures and sells corrective lenses. (D.I. 58 at 1-2). VE sells lenses to retailers and labs but does not sell lenses directly to other lens casters. (D.I. 39-6 at 145). In 1992, VE and TOI entered into a supply agreement pursuant to which VE purchased Transitions lenses from TOI. (D.I. 68-6 at 2-4). During the 1990s, VE also began to research implementing technology to apply photochromic treatment to the polycarbonate lenses it manufactured. (See D.I. 60-34 at 3-7). In 2005, VE launched a polycarbonate photochromic lens, LifeRx. (D.I. 59 at 8). TOI terminated the 1992 supply agreement with VE as of September 2005. (D.I. 58-27 at 2).

B. TOI's Business Arrangements

1. Lens Casters

Lens casters were TOI's only direct customers. (D.I. 39-8 at 6). Some of TOI's lens caster customers offered TOI's photochromic lenses in addition to other photochromic lenses. (Id. at 7). Some of TOI's lens caster customers offered Transitions as their only photochromic lens pursuant to exclusivity clauses in their TOI supply agreements.³ (Id. at 7, 9, 30). According to VE's expert, around 70% of photochromic sales by U.S. lens casters between 2004 and 2009 were by lens casters with exclusive contracts with TOI. (D.I. 55-1 at 143). According to TOI's CEO, TOI's exclusivity agreements with lens casters were mutually beneficial because they: (1) allowed TOI to share proprietary information with lens casters without TOI having to worry that the lens casters would use the information to develop competitive products and (2) encouraged TOI to invest in promoting the benefits of photochromic products to consumers, retailers, and wholesalers. (D.I. 39-8 at 7-8). VE contends, on the other hand, that "TOI enforced exclusivity despite lenscaster objections and forced them to submit" because Transitions lenses were a "must-carry product" for U.S. lens casters. (D.I. 57 at 13).

2. Labs

TOI did not enter exclusive agreements with labs; however, TOI offered financial incentives to labs that promoted TOI's lenses as "preferred."⁴ (D.I. 39-7 at 10-11; D.I. 39-10 at 13). TOI offered these incentives pursuant to its "STAR Laboratory Program." (D.I. 39-7 at 10). In exchange for financial incentives, a "STAR lab" would actively promote Transitions asits "preferred," or primary, photochromic lens. (Id. at 11). A lab would be in violation of the agreement if it promoted other photochromic lenses over the Transitions product, but not if it simply sold other photochromic lenses. (Id.). According to TOI's COO, the financial incentives offered to labs that agreed to promote Transitions as preferred were less than $1 per pair of Transitions lenses sold by the lab. (Id. at 10). According to VE's expert, TOI contracts foreclosed at least 60% of photochromic lens sales to wholesale laboratories each year between 2006 and 2009. (D.I. 55-1 at 189).

3. Retailers

TOI had both preferred marketing arrangements and exclusive arrangements with retailers. (D.I. 39-7 at 21). TOI's preferred marketing arrangements with retailers were similar to those it had with laboratories. (See id.). TOI offered enhanced benefits, including financial incentives, to retailers who committed to exclusively sell Transitions lenses. (D.I. 39-9 at 42; see, e.g., D.I. 43-3 at 2). For example, TOI's marketing agreement with Costco contained an exclusivity condition that required that Costco not sell any plastic photochromic lenses other than TOI's Transitions. (D.I. 43-3 at 2). If Costco complied, it would receive a $1 incentive payment per pair of Transitions it sold and an additional $1 per pair to be used to market Transitions in Costco stores. (Id. at 3).

The parties dispute the extent of the effect of TOI's exclusive agreements with retailers. TOI maintains that it had exclusive agreements with a small number of retailers that accounted for only 12% of sales of photochromic lenses between 2006 and 2008. (D.I. 38 at 25; see also D.I. 39-9 at 42). VE maintains that TOI's contracts with retailers covered about 34% of the retail channel in 2006 and 2007 and about 92% in 2008 and 2009 and that most of the market foreclosure was attributable to TOI's exclusivity contracts. (D.I. 57 at 31; see also D.I. 55-2 at70). Because VE's expert believed national retailers represented the most cost-effective means of distribution, he excluded smaller retailers from his foreclosure analysis, including only the top 50 national retailers. (D.I. 39-10 at 28-31).

C. FTC Agreement

In 2009, the Federal Trade Commission began an investigation of TOI's business practices. (D.I. 57 at 26). Following the investigation, the FTC and TOI entered a consent order. (D.I. 41-6 at 75). As part of the order, TOI agreed not to enter into exclusive arrangements with lens casters, subject to some limitations. (Id. at 77, 80). TOI also agreed not to enter into exclusive arrangements with entities such as labs and retailers, unless the labs and retailers could terminate the agreements with 30 days' notice. (Id. at 77, 80-81). The order was a settlement and did not constitute an admission of illegal conduct; TOI paid no fines or penalties. (See id. at 75-89).

II. LEGAL STANDARDS

A. Motion for Summary Judgment

"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the...