In ZF Meritor v. Eaton Corp., a divided panel of the Third Circuit upheld a jury verdict in favor of the plaintiff truck transmission manufacturer against its competitor Eaton Corp. The complaint alleged that Eaton violated the antitrust laws by entering agreements with each large truck manufacturer that contained the following provisions:
(1) Conditional rebate provisions under which the truck manufacturer would receive a discount only if it used Eaton transmission in a specific percentage of its trucks. The percentages varied from a low of 70% to a high of 97.5%. Although the contracts did not require purchases at these percentages – they merely conditioned discounts on them – some of the contracts permitted Eaton to terminate the agreements if the percentages were not met;
(2) Restrictions on informing truck customers of the availability of competing transmissions;
(3) Requirements that truck manufacturers price Eaton transmissions lower than competitors; and
(4) Competitiveness provisions permitting truck manufacturers to purchase competitive transmissions only if Eaton could not match the price or quality.
After the adoption of these agreements, the plaintiff’s market share fell and it left the market.
Eaton characterized the complaint as stating a predatory pricing case and it argued that such a claim must fail as a matter of law because Eaton’s prices were always above cost. The plaintiff, however, characterized its complaint as attacking exclusive dealing agreements that would violate the antitrust laws if their probable effect were to substantially lessen competition.
A 2-1 majority of the Third Circuit panel agreed with the plaintiffs. As Judge Fisher explained, the below-cost-pricing requirement is limited to cases in which “the clearly predominant mechanism of exclusion” is the defendant’s low prices. Here, the industry-wide agreements between the defendant and all truck manufacturers went well beyond mere pricing. For example, they forced truck manufacturers to list Eaton transmissions as preferred choices and to remove competitor transmissions from the books offered to truck buyers when selecting options. The case was thus effectively an exclusive dealing case, the panel majority held because “the defendant’s low price was [not] the clear driving force behind the customer’s compliance with purchase targets, and the customers [truck manufacturers] were [not] free to walk away if a competitor offered a better price.”
The panel majority held that total exclusivity was not required to prove an antitrust violation. But exclusivity provisions often have pro-competitive effects. To succeed, a plaintiff must establish that the defendant is using the agreement “to deprive other suppliers of a market for their goods.” The majority found that the evidence was sufficient to meet this standard. The market was highly concentrated and Eaton’s position was dominant; the percentage of foreclosure approached 90%; and the agreements were not of short duration. “Evidence presented at trial,” Judge Fischer thus explained, “indicated that not only were lower prices (rebates) conditioned on the OEMs meeting the market-share targets, but so too was Eaton’s continued compliance with the [agreements]. . . . Critically, due to Eaton’s position as the dominant supplier, no OEM could satisfy customer demand without at least some Eaton products, and therefore no OEM could afford to lose Eaton as a supplier. Accordingly, [the panel majority] agree with the District Court that a jury could have concluded that, under the circumstances, the market penetration targets were as effective as express purchase requirements ‘because no risk averse business would jeopardize its relationship with the largest manufacturer of transmissions in the market.’” The other provisions in the agreements requiring truck manufacturers to favor Eaton further justified the jury’s finding of anticompetitive conduct. These anticompetitive effects could reasonably be found to outweigh any pro-competitive price reductions that may have resulted from the agreements.
A class of truck purchasers has now filed a putative class action based on similar claims. Although the district court dismissed consumer protection claims, it has allowed the antitrust claims to move forward.