McWane, Inc. v. Fed. Trade Comm'n

783 F.3d 814

McWANE, INC., Petitioner

v.FEDERAL TRADE COMMISSION, Respondent.

No. 14–11363.

United States Court of Appeals, Eleventh Circuit.

April 15, 2015.

Heather Souder Choi, Erik Koons, William Connor Lavery, Joseph Allen Ostoyich, Baker Botts, LLP, Washington, DC, W. Thagard, III, John Alan Truitt, Maynard Cooper & Gale, PC, Birmingham, AL, for Petitioner.

Theodore Paul Metzler, Jr., Donald S. Clark, Edward D. Hassi, Jonathan E. Nuechterlein, David Charles Shonka, Sr., Federal Trade Commission Office of General Counsel, Michael Bloom, Linda Holleran, U.S. Federal Trade Commission, Washington, DC, for Respondent.

Petition for Review of a Decision of the Federal Trade Commission. Agency No. 9351.

Before MARCUS, and JILL PRYOR, Circuit Judges, and HINKLE,^* District Judge.

Opinion

MARCUS, Circuit Judge:

This antitrust case involves allegedly anticompetitive conduct in the ductile iron pipe fittings (“DIPF”) market by McWane, Inc., a family-run company headquartered in Birmingham, Alabama. In 2009, following the passage of federal legislation that provided a large infusion of money for waterworks projects that required domestic pipe fittings, Star Pipe Products entered the domestic fittings market. In response, McWane, the dominant producer of domestic pipe fittings, announced to its distributors that (with limited exceptions) unless they bought all of their domestic fittings from McWane, they would lose their rebates and be cut off from purchases for 12 weeks. The Federal Trade Commission (“FTC”) investigated and brought an enforcement action under Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The Administrative Law Judge (“ALJ”), after a two-month trial, and then a divided Commission, found that McWane's actions constituted an illegal exclusive dealing policy used to maintain McWane's monopoly power in the domestic fittings market. The Commission issued an order directing McWane to stop requiring exclusivity from distributors. McWane appealed, challenging nearly every aspect of the Commission's ruling.

After thorough review, we affirm the Commission's order. The Commission's factual and economic conclusions—identifying the relevant product market for domestic fittings produced for domestic-only projects, finding that McWane had monopoly power in that market, and determining that McWane's exclusivity program harmed competition—are supported by substantial evidence in the record, as required by our deferential standard of review, and their legal conclusions are supported by the governing law.

I.

A.

The essential facts developed in this extensive record are these. Pipe fittings join together pipes and help direct the flow of pressurized water in pipeline systems. They are sold primarily to municipal water authorities and their contractors. Although there are several thousand unique configurations of fittings (different shapes, sizes, coatings, etc.), approximately 80% of the demand is for about 100 commonly used fittings.

Fittings are commodity products produced to American Water Works Association (“AWWA”) standards, and any fitting that meets AWWA specifications is interchangeable, regardless of the country of origin. Ductile iron pipe fittings manufacturers rarely sell fittings directly to end users; instead, they sell them to middleman distributors, who in turn sell them to end users. An end user (e.g., a municipal water authority) will issue a “specification” for its project, detailing the pipes, fittings, and other products required. Competing contractors solicit bids for the specified products from distributors, who in turn seek quotes from various manufacturers like McWane.

End users issue either “open specifications,” permitting the use of fittings manufactured anywhere in the world, or “domestic specifications,” requiring the use of fittings made in the United States. An end user might issue a domestic specification either because of its preference or due to legal procurement requirements: certain municipal, state, and federal laws require waterworks projects to use domestic-only fittings.¹ Domestic fittings sold for use in projects with domestic-only specifications command higher prices than imported fittings or domestic fittings sold for use in projects with open specifications. The majority of specifications are open, and the majority of fittings sold (approximately 80–85%) are imported.

Historically, fittings were made by a number of American companies, most of which offered a full line of domestic fittings. However, beginning in the 1980s, importing fitting suppliers—including Star Pipe Products and Sigma Corporation—began to make significant inroads into the market. By 2005, imported fittings made up the vast majority of ductile iron pipe fittings sales, and the competition from lower-priced and lower-cost imports drove most domestic manufacturers out of the market.

Today, the overall market for fittings sold in the United States—whether manufactured domestically or abroad, sold into both open-specification and domestic-only projects—is an oligopoly with three major suppliers: McWane, Star, and Sigma. Together they account for approximately 90% of the fittings sold in the United States. There are two national distributors, HD Supply and Ferguson, which together account for approximately 60% of the overall waterworks distribution market.

From April 2006 until Star entered the domestic fittings market in late 2009, McWane was the only supplier of domestic fittings. Until 2008, McWane produced fittings at two domestic foundries, one in Anniston, Alabama, (“Union Foundry”) and the other in Tyler, Texas. In 2005, McWane opened a foundry to produce fittings in China, and in 2008 it closed its Texas foundry.

In 2009, looking to take advantage of the increased demand for domestic fittings prompted by ARRA, Star decided to enter the market for domestic DIPFs. In June 2009, Star publicly announced at an industry conference and in a letter to customers that it would offer domestic fittings starting in September 2009. Star became a “virtual manufacturer” of domestic fittings, contracting with six third-party foundries in the U.S. to produce fittings to Star's specifications. Star also investigated acquiring its own U.S. foundry, which the Commission found would have been a decidedly less costly and more efficient way to produce domestic fittings.

In response to Star's forthcoming entry into the domestic DIPF market, McWane implemented its “Full Support Program” in order “[t]o protect [its] domestic brands and market position.” This program was announced in a September 22, 2009 letter to distributors. McWane informed customers that if they did not “fully support McWane branded products for their domestic fitting and accessory requirements,” they “may forgo participation in any unpaid rebates [they had accrued] for domestic fittings and accessories or shipment of their domestic fitting and accessory orders of [McWane] products for up to 12 weeks.” In other words, distributors who bought domestic fittings from other companies (such as Star) might lose their rebates or be cut off from purchasing McWane's domestic fittings for up to three months.² The Full Support Program did contain two exceptions permitting the purchase of another company's domestic fittings: where McWane products were not readily available, and where the customer bought domestic fittings and accessories along with another manufacturer's ductile iron pipe.

Internal documents reveal that McWane's express purpose was to raise Star's costs and impede it from becoming a viable competitor. McWane executive Richard Tatman wrote, “We need to make sure that they [Star] don't reach any critical market mass that will allow them to continue to invest and receive a profitable return.” In another document, he “observed that ‘any competitor’ seeking to enter the domestic fittings market could face ‘significant blocking issues' if they are not a ‘full line’ domestic supplier.” McWane I, 155 F.T.C. at 1134. In yet another, McWane employees described the nascent Full Support Program as a strategy to “[f]orce [d]istribution to [p]ick their [h]orse,” which would “[f]orce[ ] Star[ ] to absorb the costs associated with having a more full line before they can secure major distribution.” Mr. Tatman was concerned about the “[e]rosion of domestic pricing if Star emerges as a legitimate competitor,” and another McWane executive wrote that his “chief concern is that the domestic market [might] get[ ] creamed from a pricing standpoint” should Star become a “domestic supplier.”

Initially, the Full Support Program was enforced as threatened. Thus, for example, when the Tulsa, Oklahoma branch of distributor Hajoca Corporation purchased Star domestic fittings, McWane cut off sales of its domestic fittings to all Hajoca branches and withheld its rebates.³ Other distributors testified to abiding by the Full Support Program in order to avoid the devastating result of being cut off from all McWane domestic fittings. For example, following the announcement of the Full Support Program, the country's two largest waterworks distributors, HD Supply (with approximately a 28–35% share of the distribution market) and Ferguson (with approximately 25%), prohibited their branches from purchasing domestic fittings from Star unless the purchases fell into one of the Full Support Program exceptions, and even canceled pending orders for domestic fittings that they had placed with Star. Indeed, the Commission found that “Star was rebuffed by some distributors even after offering a more generous rebate than McWane.” However, some distributors also identified other factors that contributed to their decision not to purchase from Star, including “concerns about Star's inventory, the quality of fittings produced at several different foundries, ... the timeliness of delivery,” and negative past business dealings with Star.

Despite McWane's Full Support Program, Star entered the domestic fittings market...