Pac. Steel Grp. v. Commercial Metals Co.

600 F.Supp.3d 1056

PACIFIC STEEL GROUP, Plaintiff,

v.COMMERCIAL METALS COMPANY, et al., Defendants.

Case No. 20-cv-07683-HSG

United States District Court, N.D. California.

Signed April 26, 2022

Christopher C. Wheeler, Esq., Pro Hac Vice, Farella Braun & Martel LLP, San Francisco, CA, Benjamin Doyle Brown, Daniel McCuaig, Pro Hac Vice, Daniel A. Small, Cohen Milstein Sellers & Toll, PLLC, Washington, DC, David Owen Fisher, Matthew W. Ruan, Cohen Milstein Sellers and Toll PLLC, New York, NY, for Plaintiff.

Bonnie Lau, David Grothouse, Ian Kiely Bausback, Morrison & Foerster LLP, San Francisco, CA, Alexis Lazda, Brian Byrne, David I. Gelfand, Pro Hac Vice, Mark Leddy, Pro Hac Vice, Clearly Gottlieb Steen & Hamilton LLP, Washington, DC, for Defendants Commercial Metals Company, CMC Steel US, LLC.

Bonnie Lau, Morrison & Foerster LLP, San Francisco, CA, for Defendant Gerdau Reinforcing Steel.

Bonnie Lau, Ian Kiely Bausback, Morrison & Foerster LLP, San Francisco, CA, Alexis Lazda, David I. Gelfand, Mark Leddy, Clearly Gottlieb Steen & Hamilton LLP, Washington, DC, for Defendant CMC Rebar West.

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

Re: Dkt. No. 79

HAYWOOD S. GILLIAM, JR., United States District Judge

Plaintiff Pacific Steel Group ("Pacific Steel") brought this antitrust lawsuit on October 30, 2020. See Dkt. No. 1 ("Compl."). The Complaint alleges that Defendants Commercial Metals Company and its subsidiaries (collectively, "CMC") engaged in anti-competitive and monopolistic behavior in the steel rebar market. The Court granted CMC's motion to dismiss the Complaint but gave Pacific Steel leave to amend. Dkt. No. 74 ("Dismissal Order"). Pacific Steel then filed the Amended Complaint, which CMC now moves to dismiss. Dkt. Nos. 76 ("FAC"), 79 ("Mot."). CMC's motion is fully briefed. See Dkt. Nos. 81 ("Opp."), 85 ("Reply"). The Court held a hearing on the motion, see Dkt. Nos. 87, 91, and now rules that it is GRANTED IN PART and DENIED IN PART for the following reasons.

I. BACKGROUND

A. The Rebar Industry

Steel reinforcing bar or "rebar" is a steel bar used to reinforce concrete in construction projects. FAC ¶ 26. Before rebar can be installed, it must first be cut and shaped according to an engineer's drawings. Id. ¶ 36. Skilled steelworkers called "fabricators" buy stock rebar from rebar manufacturers and then cut and bend the rebar at a fabrication plant per the engineer's plans. Id. Once the rebar is "fabricated," another team of skilled professionals delivers and installs it in construction projects. Id. ¶ 38. This process creates at least two separate markets: (1) an upstream market for manufacturing rebar; and (2) downstream markets for furnishing and installing it ("Furnish-and-Install").

For most of the last two centuries, steel was produced in massive mills with fuel-intensive crucible furnaces fed by large amounts of iron ore, limestone, and metallurgical coal. Id. ¶ 44. These mills, called "traditional integrated mills," require large startup costs and, historically, were only economical to build when done at scale with millions of tons of annual capacity or more. Id. ¶ 45.

Beginning in 1964, steel manufacturers transitioned to "mini mills." Mini mills are steel mills powered by an "electric arc furnace," which melts scrap metal recycled from used cars or manufacturing byproducts. Id. ¶¶ 46-48. These mills are more efficient than traditional integrated mills because rebar manufacturers can build them with lower capital costs and therefore receive higher returns on equity. Id. ¶ 50. And the use of an electric arc furnace—which easily starts and stops on a regular basis—allows rebar manufacturers to quickly adjust production levels in response to market demand. Id. So, unlike traditional integrated mills—which operate profitably by leveraging their size to achieve economies of scale—mini mills use technological advantages to operate more efficiently. Id. ¶ 51.

In 2009, CMC commissioned the building of the world's first "micro mill" in Mesa, Arizona. Id. ¶ 52. Micro mills have since proven to be even more efficient than mini mills. Like mini mills, micro mills use an electric arc furnace, but instead of outputting pure steel billet (which must be stored and later re-heated and rolled into rebar), a micro mill outputs directly into rebar. Id. This advanced technology translates into significant cost advantages for rebar manufacturers: each ton of rebar produced by a micro mill costs approximately $53 less to manufacture than a ton produced by a mini mill. Id. ¶ 56. Today, the micro mill is not only the most cost-effective and profit-maximizing means of entering a rebar manufacturing market, but also the only means used to build any new rebar manufacturing facility in the United States in the last quarter-century. Id. ¶ 65.

B. Alleged Anticompetitive Conduct

Defendant CMC is the largest manufacturer and among the largest fabricators of rebar in the United States. Id. ¶ 20. Plaintiff Pacific Steel was formed in late 2014 and is a "Furnish-and-Install" reinforcing steel subcontractor. Id. ¶ 66. As explained above, that means that Pacific Steel buys stock rebar from mills owned by manufacturers (such as CMC), cuts and bends it, and then transports and installs it in construction projects. Id. Pacific Steel currently competes downstream with CMC and its various subsidiaries in the Furnish-and-Install markets. Id. ¶ 19. However, Pacific Steel would also like to enter the upstream rebar manufacturing market to compete with CMC there. Id. ¶¶ 4-5. And Pacific Steel alleges that the only "commercially feasible" way it can do so is by building a micro mill. Id.

The only company in the world to have built a micro mill is Danieli Corporation ("Danieli"). Id. ¶ 5. Using its proprietary "MI.DA" technology, Danieli has sold or is in the process of selling five micro mills in the United States and twenty worldwide. Id. CMC had previously arranged for Danieli to build two of those micro mills. Id. The first, built in 2009 in Mesa, Arizona, was protected by a now-expired geographic exclusivity provision that prohibited Danieli from building another micro mill within a 400-mile radius from Mesa. Id. ¶ 8.

When Pacific Steel decided in 2019 to explore building its own micro mill, it concluded that the best location was California, since that is where Pacific Steel was performing most of its Furnish-and-Install work. Id. ¶ 92. Pacific Steel accordingly approached Danieli and began negotiations to build a micro mill in the high desert area near the greater Los Angeles basin. Id. ¶¶ 97-102. Unbeknown to Pacific Steel, however, Danieli was simultaneously negotiating with CMC to build a new micro mill for CMC. Id. ¶ 103. And in August 2020, CMC announced that it had contracted with Danieli to build a second micro mill in Mesa, Arizona. Id.

As part of that agreement, Danieli agreed to another geographic exclusivity provision, under which it is prohibited from selling one of its proprietary micro mills to any company other than CMC within a 500-mile radius of Rancho Cucamonga, California for 69 months. Id. ¶ 106.¹ This territorial restriction blocks any competitor from building a Danieli micro mill in all but the northernmost reaches of California, in nearly all of Arizona, in all but the northernmost part of Nevada, and in the southwest half of Utah, as shown in the following map:

Id.

Pacific Steel alleges that CMC has engaged in anticompetitive conduct in both the upstream and downstream markets. As to the upstream market, Pacific Steel alleges that CMC's geographic exclusivity provision with Danieli unlawfully excludes it and all other potential entrants from the relevant geographic market for rebar manufacturing by blocking the uniquely efficient, effective, and profit-maximizing means of entry. Id. ¶ 1. And as to the downstream markets, Pacific Steel alleges that CMC Rebar and Gerdau Reinforcing Steel ("GRS") (which was later acquired by CMC) have unlawfully priced their Furnish-and-Install services below cost and as loss leaders to minimize Pacific Steel's growth and profitability. Id. ¶ 68.

Based on those facts, Pacific Steel brought a lawsuit in October 2020 alleging the following eight causes of action:

1. Conspiracy in restraint of trade against CMC and Danieli in violation of the Sherman Act ( 15 U.S.C. § 1 ) and the California Cartwright Act ( Cal. Bus. & Prof. Code § 16720 );

2. Monopolization against CMC in violation of the Sherman Act ( 15 U.S.C. § 2 );

3. Attempted monopolization (in the alternative) against CMC in violation of the Sherman Act ( 15 U.S.C. § 2 );

4. Conspiracy to monopolize against CMC and Danieli in violation of the Sherman Act ( 15 U.S.C. §§ 1, 2 ) and the California Cartwright Act ( Cal. Bus. & Prof. Code § 16720 );

5. Below cost sales against CMC Rebar, CMC Steel US, and GRS in violation of the California Unfair Practices Act ( Cal. Bus. & Prof. Code § 17043 );

6. Loss leader sales against CMC Rebar, CMC Steel US, and GRS in violation of the California Unfair Practices Act ( Cal. Bus. & Prof. Code § 17044 );

7. Unlawful and unfair business practices against all defendants in violation of the California Unfair Competition Law ( Cal. Bus. & Prof. Code § 17200 );

8. Interference with prospective economic advantage against CMC in violation of California common law.

Compl. ¶¶ 148-94.

In May 2021, the Court dismissed Pacific Steel's complaint, holding that it failed to allege facts that plausibly stated a violation of the federal antitrust laws. Dkt. No. 74. Having dismissed the federal claims, the Court also declined to exercise supplemental jurisdiction over Pacific Steel's state law claims. Id. Pacific Steel has now filed its Amended Complaint, which CMC again moves to dismiss. See Dkt. Nos. 76, 79.

II. LEGAL STANDARD

Federal Rule of Civil Procedure 8(a) requires that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). A defendant...