Antitrust and Unfair Competition Law
Cutting it Close? Eastern District of California Allows Antitrust Suit Involving Patented Styling Razors to Proceed
Harrison (Buzz) J. Frahn IV
Justin J. Calderon
Wyatt A. Honse
Simpson Thacher & Bartlett LLP
On March 29, 2019, Judge Morrison England of the Eastern District of California denied a Rule 12(b)(6) motion to dismiss filed by defendants Wal-Mart Stores, Inc. (“Walmart”) and American International Industries, Inc. (“AI”) (collectively, “Defendants”) in Stiles v. Wal-Mart Stores, Inc., et al., No. 2:14-cv-02234-MCE-DMC, 2019 WL 1429651 (E.D. Cal. Mar. 29, 2019). Defendants argued that Plaintiff Sharidan Stiles (“Plaintiff” or “Stiles”)—the inventor, patent-holder, and manufacturer of a disposable beauty styling razor alleged to have been sold at Walmart’s stores from 2006 to 2012 (the “Stiles Razor”)—failed to sufficiently allege claims under Section 1 of the Sherman Act and the Cartwright Act. Defendants argued primarily that Walmart did not compete in the market for the manufacture and supply of styling razors, and as a result Stiles’s claims cannot survive under the rule of reason analysis. Defendants also argued that under Plaintiff’s version of the facts, consumers would face lower prices overall, and therefore, Plaintiff failed to sufficiently allege antitrust injury.
Stiles alleged that Walmart and AI, a manufacturer of styling razors, exercised market control by entering into an illicit agreement to push her out of the disposable personal styling razor market. Stiles, 2019 WL 1429651, at *1–2. Defendants allegedly did so by refusing to restock the Stiles Razor where it sold well, demanding increased minimum sales requirements in stores where the razor sold the least, and refusing to provide discounts to its prices to increase sales. Id. At the same time, Stiles alleged that the Defendants agreed that AI would create a “knockoff” razor that infringed Stiles’s patent and sell such razors in Walmart’s stores. Id.
On a previous motion to dismiss, Judge England dismissed Plaintiff’s antitrust claims on the grounds that she failed to allege that Defendants precluded her from selling her razors to other retailers. Id. at *3. Plaintiff moved for reconsideration, and submitted evidence tending to show that she had “attempted to enter the market through other retailers and was rejected because her product ‘failed’ at Walmart.” Id. Based on this information, the court granted Stiles leave to file an amended complaint. She thereafter filed the now-operative Fourth Amended Complaint (the “Complaint,” ECF No. 142, filed July 10, 2018).
On August 10, 2018, Defendants again moved to dismiss, arguing that Walmart did not compete in Plaintiff’s alleged relevant market—the “nationwide markets for the manufacture and sale of Disposable Personal Styling Razors,” Compl. ¶ 79—and therefore did not have the market power required for a Sherman Act claim under a rule of reason analysis. Defendants also argued that Plaintiff failed to allege an actionable “agreement,” because the only allegation in the Complaint pertaining to concerted conduct is an agreement to infringe on Plaintiff’s patent for the Stiles Razor, which out-of-circuit case law has held insufficient to establish antitrust liability. Mot. to Dismiss at 10 (ECF No. 147, filed Aug. 10, 2018) (“MTD”). Finally, Defendants asserted that Plaintiff failed to allege antitrust injury, arguing that under Plaintiff’s version of the facts, retailers like Walmart would be incentivized to demand lower priced products from manufacturers which would, if anything, drive prices down for consumers instead of up. MTD at 18–19.
The Motion and Court’s Opinion
On March 29, 2019, the court denied Defendants’ motion to dismiss, ruling in Plaintiff’s favor on all three issues and finding that the Complaint adequately stated a claim for violations of the Sherman and Cartwright Acts.
1. Market Power in the Relevant Market
a. Issues Briefed
In the Complaint, Plaintiff alleged that the relevant market is the “nationwide markets for the manufacture and sale of Disposable Personal Styling Razors,” on account of the razor’s detailed shaving functions and grip to prevent risk of injury. Compl. ¶ ¶ 17, 79–82. Plaintiff also alleged that “Walmart’s market power is such that it can not only extract any concession from a supplier, but also, if a product fails at Walmart, no other retailer will sell the product.” Id. ¶ 91. The Complaint alleged that “Walmart’s market power over suppliers is so well-known throughout the retail industry, it has been called ‘one of the best illustrations of monopsony pricing power in economic history.’” Id. ¶ 86.
In their motion to dismiss, Defendants argued that as a retailer Walmart does not have the power to profitably raise prices for disposable personal styling razors above competitive levels—only suppliers can do so. MTD at 7. Acknowledging Plaintiff’s allegations that Walmart was a “dominant buyer” with “monopsony pricing power” to extract “pricing concessions” from suppliers, Defendants argued that “plaintiff’s own allegation that Walmart has buying power to suppress razor suppliers’ prices directly undermines any allegation that Walmart simultaneously is a supplier with the power to raise prices in that market . . . .” MTD at 9.
Plaintiff responded that Defendants mischaracterized the Complaint, and disputed the suggestion that Walmart must be a supplier to exercise market power. Opp. to MTD at 6 (ECF No. 159, filed Sep. 14, 2018) (“Opp.”) (“Under Defendants’ theory, a plaintiff alleging a vertical agreement could never show market power because the co-conspirators are not a ‘group of sellers or producers.’”). To that end, Plaintiff noted allegations that Walmart, in tandem with AI, excluded Stiles from rival retailers through its buying power, the lack of interbrand competition, and AI’s substantial share of the relevant market. Id. at 6–7.
Defendants also argued that Plaintiff failed to allege that Defendants used their market power to affect a “substantial foreclosure” of competition (i.e., that Plaintiff and her competitors were foreclosed from a substantial share of the market to sell disposable styling razors by an agreement between Defendants). According to Defendants, “[t]he only fact plaintiff alleges is that she was foreclosed from selling her razors at Walmart. She does not allege what percentage of the available selling opportunities Walmart represents,” and the complaint “contains no foreclosure allegations at all.” MTD at 16.
In opposition, Stiles argued that to the extent pleading “substantial foreclosure” is even necessary, she alleged that they were “frozen out of the market” by alleging that (1) Defendants control 98% of the market for disposable personal styling razors, (2) she has attempted to sell her razors to numerous other retailers and that she was rejected each time, and (3) that no other retailers or merchandisers would work with her, because she was “deleted and moved at Walmart.” Opp. at 15–16.
b. The Court’s Ruling
Ruling on this first issue, the district court found Plaintiff’s allegations sufficient to support a claim that Defendants had the power to exclude her from substantial portions of the relevant market. 2019 WL 1429651, at *3–4. In doing so, the district court explicitly credited Plaintiff’s allegation that the Stiles Razor falls into a small niche market, as well as the allegation that Walmart is the largest retailer in the world in this same market, and that Plaintiff was turned away by other retailers because her product “failed” at Walmart. Id. Taken together, the court held, these facts were sufficient to support a claim that Walmart exercises market power in the relevant market. Id. Notably, the district court’s opinion did not discuss Defendants’ distinction between the buy-side and the sell-side of the market, nor take up Defendants’ invitation to require Plaintiff to more specifically allege facts about foreclosure from the market, such as by showing what percentage of available selling opportunities Walmart represents. See MTD at 17.
2. Behavior Constituting Actionable Agreement
a. Issues Briefed
The motion to dismiss also argued that Plaintiff alleged conduct that is not actionable under the antitrust laws. Defendants advanced two related arguments: (1) that the alleged agreement to copy the Stiles Razor, alone, is insufficient to state a claim; and (2) Plaintiff’s allegations could easily be explained by independent, rational business behavior. Id. at 9–15.
On the first, Defendants asserted that the only agreement alleged in the Complaint is an agreement to infringe on the patent of the Stiles Razor, which under out-of-circuit case law, Defendants argued is insufficient to state an antitrust claim. MTD at 10 (citing Retractable Techs., Inc. v. Becton Dickinson & Co., 842 F.3d 883, 893 (5th Cir. 2016) (“[P]atent infringement invades the patentee’s monopoly rights, causes competing products to enter the market, and thereby increases competition.”)). Defendants argued that while the alleged infringement alone could lead to Plaintiff’s exclusion from the market, this would be due to an increase in competition as caused by the violation of a patent monopoly. Id. Antitrust law, Defendants argued, is designed to increase competition. As a result, they contended, an agreement to infringe on a patent standing alone is not actionable under the antitrust laws. MTD at 10 (“[A] plaintiff may not collect antitrust damages for exclusion caused by an increase in competition.”).
On the second part of Defendants’ argument, Defendants suggested that Plaintiff never alleged facts indicating an agreement to phase out the Stiles Razor from Walmart’s stores, and that any phasing out of the razors occurred before Walmart allegedly approached AI and asked it to infringe on Plaintiff’s patent. MTD at 14–15. Defendants suggested that Walmart was, unilaterally, merely trying to develop its own store brand, Salon Perfect. Id.
Plaintiff distinguished Retractable Techs.—the out-of-circuit authority—on the grounds that it was a monopolization case under Section 2 of the Sherman Act which dealt with unilateral conduct inapposite to Section 1’s rule-of-reason analysis. Opp. at 13. Plaintiff also pointed out that the allegation of Stiles’s exclusion from the market had the effect of “reducing consumer choice and lessening competition in the market.” Opp. at 13 n.9.
Plaintiff further argued the Complaint contained an allegation of “at least one meeting and probably more” between AI and Walmart relating to the supposed scheme. Opp. at 9. According to Plaintiff, “it is reasonable to infer that AI knew that by agreeing to copy Stiles’s Razor for Walmart that Stiles, a competitor, would be eliminated not just from Walmart but also from the market.” Id. at 10. Finally, Plaintiff pointed to allegations in the Complaint detailing the terms of the alleged scheme: AI would produce a “knockoff” razor under Walmart’s Salon Perfect brand and Defendants would then split the market with the “Salon Perfect” razor sold at Walmart, and AI’s own “Ardell” brand at other retailers. Id. at 10–12.
b. The Court’s Ruling
In a brief section of its ruling which largely side-stepped Retractable Techs., the court held that Plaintiff didsuggest an unlawful agreement among Defendants, crediting Plaintiff’s story that Defendants sought to eliminate Plaintiff and split the market between Salon Perfect and Ardell razors. 2019 WL 1429651, at *3. However, the court did not elaborate further beyond accepting Plaintiff’s allegations as sufficient.
3. Antitrust Injury
a. Issues Briefed
Defendants last argued that Plaintiff failed to allege an antitrust injury. Specifically, Defendants argued that “Plaintiff does not allege that overall market output of the relevant product decreased,” and that, far from harming consumer welfare, “Walmart exerted downward pressure on prices by ‘extracting concessions from suppliers in the Disposable Personal Styling Razor Market.’” MTD at 19. Defendants also pointed out that “one brand (Stiles) left the market, and an exact duplicate (Salon Perfect) replaced it,” and therefore, consumers could not have been injured. Id. Defendants dismissed as “bare legal conclusion[s]” Plaintiff’s allegations of “lessened” and “eliminated” competition as a result of Stiles’s exit from the market. Id.
In opposition, Plaintiff argued that increases in price and reduction in output need not be explicitly pleaded to allege harm to competition. See Opp. at 17–18 (citing Orchard Supply Hardware LLC v. Home Depot USA, Inc., 967 F. Supp. 2d 1347, 1359 (N.D. Cal. 2013)). This is because a court can “plausibly infer harm to competition” and that “plaintiff has lost profits and suffered damages” without requiring Plaintiff to plead “the specific percentage of market power.” Opp. at 18. Plaintiff pointed out that Walmart’s Salon Perfect razor was not a new product by a new competitor—it was produced by AI, and without the Stiles Razor, consumers are forced to choose between two products both produced by AI: the Salon Perfect and the Ardell. Id. at 18–19.
b. The Court’s Ruling
The court held that Plaintiff’s allegations, if true, support the theory that “Walmart could, and in fact did, leverage its ability to set the prices of products, [and] manipulate sales and product output . . . .” 2019 WL 1429651, at *4. As an example, the court pointed to Plaintiff’s allegation that other retailers have refused to stock the razor, effectively eliminating Plaintiff from the market. Id. In so holding, the court appeared to accept Plaintiff’s contention that specific factual allegations about increased prices, decreased product quality, or decreased output are not necessary to plead an antitrust complaint. However, the court did not explicitly state as much.
After Judge England’s order denying the motion to dismiss was issued, Defendants filed separate answers to the Complaint on April 12, 2019. Defendants also filed a motion on April 18, 2019, seeking reconsideration of the denial of the motion to dismiss, or, in the alternative, judgment on the pleadings in favor of Defendants. Defendants argue that the court did not adequately consider issues regarding substantial foreclosure and failure to allege antitrust injury. Plaintiffs have yet to respond as of this writing.