Automotive Paint Distributor’s Antitrust Claims Dismissed with Leave to Amend: Nicolosi Distributing, Inc. v. FinishMaster, Inc., Case No. 18-cv-03587-BLF, 2018 U.S. Dist. LEXIS 173788 (N.D. Cal. Oct. 9, 2018)

Aaron M. Sheanin
Robins Kaplan LLP

Small automotive paint distributor Nicolosi Distributing, Inc. (“Plaintiff” or “Nicolosi”) sued competitor FinishMaster, Inc., a large automotive paint supplier based in Indiana, and its Canadian parent, Uni-Select, Inc. (collectively, “Defendants”), for anticompetitive conduct arising from FinishMaster’s alleged used of exclusive dealing contracts and acquisition of smaller distributors. Nicolosi alleged that FinishMaster employed these practices unlawfully to eliminate competition in the market for “A-list” body shops that purchase automotive paint within the nine-county San Francisco Bay Area. On October 9, 2018, Judge Beth Labson Freeman denied Nicolosi’s motion for a preliminary injunction and granted Defendants’ motion to dismiss Nicolosi’s claims for violations of Sections 1 and 2 of the Sherman Act, the Cartwright Act, and the Unfair Competition Law (“UCL”), with leave to amend. Nicolosi Distributing, Inc. v. FinishMaster, Inc., Case No. 18-cv-03587-BLF, 2018 U.S. Dist. LEXIS 173788 (N.D. Cal. Oct. 9, 2018).

Nicolosi’s complaint defined the relevant market of A-list body shops as those in the business for ten years, certified by at least one car manufacturer, sponsored by at least one car dealer, having a high level of craftsmanship, and only able to purchase paint directly from manufacturers. Id. at *2-4. Nicolosi alleged that there are 800 A-list shops in the Bay Area, and that they are typically either connected to or certified by car dealerships, chain-stores, or super-large in size. Id. at *3. In contrast, B-list body shops are not certified or sponsored but have a high level of craftsmanship, and C-list body shops are local, family-run businesses. Id. Nicolosi’s complaint also limited the product market to one of the five major paint manufacturers, Axalta. Id. at *4, 12.

The alleged anticompetitive conduct included the following. First, in an effort to eliminate competition, FinishMaster purchased smaller competing distributors, forced the previous owners to retire, and then closed those businesses. Id. at *4-5. Second, FinishMaster entered into exclusive supply contracts with A-list body shops. Under these contracts, A-list body shops would purchase paint solely from FinishMaster in exchange for substantial upfront payments and price discounts. Id. at *5. Nicolosi alleged that Uni-Select encouraged and funded FinishMaster’s anticompetitive strategies. Id. at *5. Although Nicolosi claimed that the effect of this conduct was to give FinishMaster a near monopoly in the A-list and B-list body shop market in the Bay Area, the complaint did not specify the size of FinishMaster’s market share. Id. at *5-6. Nonetheless, the complaint did allege that smaller distributors accounted for approximately two-thirds of the sales in the Bay Area market. Id. at *6.

The Court granted Defendants’ motion to dismiss, concluding that Nicolosi failed to state a claim for any of its causes of action.(1) In addition, the Court denied Nicolosi’s motion for a preliminary injunction on the grounds that it had not shown a likelihood of success on the merits. Id. at *9-10.

Employing a rule of reason analysis to the Section 1 claim, the Court concluded that Nicolosi failed to demonstrate that FinishMaster’s use of exclusive dealing arrangements “sufficiently foreclosed competition in a substantial share of the line of commerce affected for several reasons.” Id. at *11 (citing Allied Orthopedic Appliances, Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 996 (9th Cir. 2010)).

First, the Court determined that Nicolosi’s market allegations were insufficient. The Court rejected Nicolosi’s geographic market definition of the nine-county Bay Area as potentially too narrow and too broad. Specifically, Nicolosi had neither alleged that body shops were precluded from purchasing paint from distributors or manufacturers outside of Bay Area, nor explained why those nine counties did not cover too much territory. Id. at *11. The Court determined that Nicolosi’s market definition improperly focused on the type of customer (A-list auto body shops) rather than the type of product sold. In this regard, Nicolosi had not explained why B-list or C-list auto body shops were excluded from the market, if they could purchase paint from Nicolosi, FinishMaster, or their competitors. Id. at *11-12. Nicolosi also attempted to limit the market to Axalta paint, but the Court held that Nicolosi failed to allege why it was appropriate to exclude other major paint brands that were functionally identical to Axalta. Id. at *12.

In addition to the market definition allegations, the Court rejected the complaint’s market share allegations. Nicolosi alleged that FinishMaster captured less than one-third of the relevant market, well below the forty to fifty percent necessary to be considered a “substantial share.” Id. at *12-13. Moreover, the Court concluded that Nicolosi had not sufficiently alleged that FinishMaster’s alleged conduct had anticompetitive effects, such as supply reductions or price increases. Id. at *13. The Court dismissed the Section 1 violation and found that the evidence Nicolosi submitted in support of its motion for a preliminary injunction failed to cure its pleading defects. Id. at *13-14.

The Court dismissed Nicolosi’s Section 2 claim on similar grounds. In particular, the Court rejected the complaint’s definition of the relevant market, market share allegations for both monopolization and attempted monopolization claims, and facts alleged to support an inference that the exclusive dealing arrangements had anticompetitive effects. Id. at *15-16. In addition, the Court dismissed Nicolosi’s Cartwright Act and UCL claims, holding that they were based on the same allegations as the federal claims and fell for the same reasons. Id. at *9-10, 16.

(1) – The Court also dismissed Uni-Select for lack of personal jurisdiction. Neither Uni-Select’s contacts with California, nor those of its subsidiary FinishMaster, were sufficient to confer general jurisdiction over Uni-Select. Similarly, Uni-Select’s relationship with FinishMaster was not sufficient to subject the parent company to specific jurisdiction in California on an “alter ego” theory, and Nicolosi had not alleged that Uni-Select purposefully availed itself of California law through the provision of funds directed to FinishMaster in California. Id. at *16-18.