Corner Pocket of Sioux Falls, Inc. v. Video Lottery Technologies, Inc., 96-4208

• Citation: 123 F.3d 1107
• Decision Date: 29 September 1997
• Docket Number: No. 96-4208,96-4208
• Parties: 1997-2 Trade Cases P 71,913 The CORNER POCKET OF SIOUX FALLS, INC., et al., Plaintiffs-Appellants, v. VIDEO LOTTERY TECHNOLOGIES, INC., et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1107

123 F.3d 1107

1997-2 Trade Cases P 71,913

The CORNER POCKET OF SIOUX FALLS, INC., et al., Plaintiffs-Appellants, v. VIDEO LOTTERY TECHNOLOGIES, INC., et al., Defendants-Appellees.

No. 96-4208.

United States Court of Appeals Eighth Circuit.

Submitted June 9, 1997.

Decided Aug. 29, 1997.

Rehearing and Suggestion for Rehearing En Banc Denied Sept.

29, 1997.

Richard Lockridge, Minneapolis, MN, argued, for Appellant.

Thomas J. Welk, Sioux Falls, SD, Jerome B. Pederson, Minneapolis, MN, argued, for Defendants-Appellees.

Before LOKEN and ROSS, Circuit Judges, and FENNER, ^* District Judge.

LOKEN, Circuit Judge.

In 1989, the State of South Dakota initiated a video lottery regulated by the South Dakota Lottery Commission. See S.D. CODIFIED LAWS Ch. 42-7A. In this type of lottery, games of chance are played on coin-operated, computer-controlled video machines. The video lottery machines are privately owned, but the State owns the operating software and controls the games through a central computer system. The machines repay players 80-95% of the amounts wagered. The State takes a portion of the remaining gross revenues (initially 22%, now 50%) by electronically sweeping the machine owner's bank account. See generally Chance Mgmt., Inc. v. State of South Dakota, 97 F.3d 1107, 1108 (8th Cir.1996), cert. denied, --- U.S. ----, 117 S.Ct. 1083, 137 L.Ed.2d 217 (1997); Poppen v. Walker, 520 N.W.2d 238, 249 (S.D.1994).

In November 1993, the Lottery Commission investigated the video lottery machine market and concluded there was effective competition. Plaintiffs nonetheless commenced this antitrust class action in June 1994, alleging that Video Lottery Technologies, Inc. ("VLT"), manufacturer of the most popular video lottery machines, had refused to sell its machines to new customers for the purpose of enforcing a conspiracy among vending machine distributors to allocate territories and fix prices, all in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Following discovery, the district court ¹ granted summary judgment for defendants on the ground that plaintiffs had failed to present sufficient evidence of an unlawful conspiracy. Plaintiffs appeal, launching a three-pronged attack on the district court's decision. We affirm.

A. Plaintiffs first argue that the district court erred in applying the legal standard for granting summary judgment in antitrust cases. Plaintiffs criticize the court's "heavy reliance" on Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588, 106 S.Ct. 1348, 1356-57, 89 L.Ed.2d 538 (1986), where the Supreme Court stated that "conduct as consistent with permissible competition as with illegal conspiracy does not, standing alone, support an inference of antitrust conspiracy." Relying primarily on cases from the Third and Ninth Circuits, plaintiffs argue that this portion of Matsushita does not apply to this case because the conspiracy they allege served defendants' economic interests. However, we are among the majority of courts and commentators who read Matsushita more broadly. See Lovett v. General Motors Corp., 998 F.2d 575, 578-79 (8th Cir.1993), cert. denied, 510 U.S. 1113, 114 S.Ct. 1058, 127 L.Ed.2d 378 (1994); City of Mt. Pleasant, Iowa v. Associated Elec. Co-op., Inc., 838 F.2d 268, 273 (8th Cir.1988); II AREEDA AND HOVENKAMP, ANTITRUST LAW p 322, at 70-72, 75-81 (rev. ed.1995). In its Memorandum Opinion and Order, the district court discussed at length the appropriate summary judgment standard in complex antitrust cases, carefully reviewing these relevant cases. We conclude that the court properly articulated and applied the governing summary judgment standard of this Circuit.

B. Plaintiffs next argue that the district court engaged in improper summary judgment fact-finding when it accepted defendants' explanations for market conditions that, in plaintiffs' view, evidence an unlawful conspiracy. To put this issue in context, we must briefly describe the South Dakota video lottery machine market.

The private sector participants in the South Dakota video lottery are defined by statute. The State separately licenses video lottery machine manufacturers and distributors, who manufacture and sell the machines; "operators," who own the machines and account to the State for their revenues; and gambling "establishments," where the machines are played by consumers of this government-sponsored gambling. See S.D. CODIFIED LAWS §§ 42-7A-1(15-17), 41-45. Licensed manufacturers and distributors must sell their machines to licensed operators, who typically lease the machines to licensed establishments. Only bars, restaurants, and inns that sell alcoholic beverages may become licensed establishments. Operators and establishments negotiate their respective shares of the machine revenues remaining after the State takes its cut. Typically, those shares are stated as a percentage "split," such as 50-50.

The South Dakota video lottery commenced in October 1989. By the end of 1989, six manufacturers were licensed to sell video lottery machines approved by the State. Not surprisingly, those best prepared to distribute these machines were the established distributors of coin-operated vending machines, businesses that for years had placed juke boxes, pool tables, pinball machines, and dart boards in bars and restaurants around the State. These distributors and their trade association, the Music and Vending Association ("MVA"), had successfully lobbied the Legislature to authorize a video lottery. When the lottery began, MVA members had obtained operator licenses and were ready to supply video lottery machines to licensed establishments located on the operators' well-established vending machine routes.

As the lottery got underway, something unanticipated occurred--South Dakota gamblers overwhelmingly preferred to play video lottery machines manufactured by VLT. But these popular machines proved hard to get. Beginning as early as the fall of 1989, newly-established operators, including licensed establishments that obtained operator licenses so they could buy their own machines, had difficulty buying machines from VLT. To outsiders, it appeared that VLT was refusing to deal with anyone other than well-established vending machine distributors and those "squeaky wheels" who threatened litigation or complained to the Lottery Commission. Though VLT denied such an exclusionary policy and the Lottery Commission's investigation concluded that the marketplace was sufficiently competitive, the named plaintiffs--two licensed operators and three licensed establishments--smelled an unlawful conspiracy and began this action against VLT, certain licensed operators who are longstanding vending machine distributors, and the MVA.

Plaintiffs' Allegations. Although the lawsuit was initially prompted by VLT's refusal to sell video lottery machines to plaintiffs and others from the fall of 1989 to late 1993, plaintiffs' antitrust claims evolved through discovery and the summary judgment process to include the following allegations:

-- MVA and the operator defendants conspired to allocate operator territories in South Dakota. MVA members have their own distribution routes and went to great lengths to avoid competing in each other's territories. For example, MVA member protocol is to refer a competitor's complaining customer to that competitor, rather than try to obtain the account.

-- MVA and the operator defendants conspired to fix prices by agreeing to make video lottery machines available to establishments for a 50-50 split of the net revenues. In 1989, one MVA member circulated a sample lease agreement showing a 60-40 split. The operator defendants then agreed to adopt the 50-50 split, which was reflected in over 80% of their contracts with establishments between 1989 and 1993. When the conspiracy broke down, ² the operators' share of negotiated splits decreased.

-- VLT knowingly enforced the operator conspiracy by refusing to sell its video lottery machines directly to establishments, or to licensed operators other than the operator conspirators. VLT's policy of not selling machines to operators who leased to establishments at 90-10 or 80-20 splits helped enforce the cartel's conspiracy to impose 50-50 splits on establishments. VLT assumed the role of cartel enforcer out of gratitude for help MVA members gave VLT in quickly obtaining a South Dakota manufacturer license, and out of fear that MVA would otherwise use its influence to tarnish VLT's reputation in other States.

Defendants' Response. In moving for summary judgment, defendants painted a very different picture of the video lottery machine market than plaintiffs' conspiracy-dominated portrait:

-- When the video lottery began, long-time vending machine distributors had well-defined territories or routes, typically encompassing the area in which customer machines can be serviced in one day's drive. These operators concentrated on placing the new video lottery machines with existing bar, restaurant, and hotel customers in their traditional territories. When supplies of the popular VLT machines became limited, operators served their existing customers first. There was no agreement to allocate territories or customers. Many MVA members have overlapping routes, and plaintiffs have no evidence describing defendants' behavior along route overlaps, where one might reasonably expect to find competition absent a conspiracy.

-- The 50-50 revenue split was common in the coin-operated vending machine industry long before the video lottery. When the lottery was new and its prospects uncertain, licensed operators and establishments reasonably adopted this equitable-looking split; indeed, the named plaintiffs and other non-MVA operators did so. When the initial leases expired, operators and establishments renegotiated based upon actual experience with VLT machines. Establishments with profitable machines demanded and received more generous...