Nicsand, Inc. v. 3M Co.

• Decision Date: 08 August 2006
• Docket Number: No. 05-3431.,05-3431.
• Citation: 457 F.3d 534
• Parties: NICSAND, INC., Plaintiff-Appellant, v. 3M COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

457 F.3d 534

NICSAND, INC., Plaintiff-Appellant, v. 3M COMPANY, Defendant-Appellee.

No. 05-3431.

United States Court of Appeals, Sixth Circuit.

Argued: January 25, 2006.

Decided and Filed: August 8, 2006.

ARGUED: Dennis E. Murray, Jr., Murray & Murray Co., L.P.A., Sandusky, Ohio, for Appellant. James P. Murphy, Squire, Sanders & Dempsey, Washington, D.C., for Appellee.

ON BRIEF:

Dennis E. Murray, Jr., Murray & Murray Co., L.P.A., Sandusky, Ohio, for Appellant. James P. Murphy, Squire, Sanders & Dempsey, Washington, D.C., J. Philip Calabrese, Squire, Sanders & Dempsey, Cleveland, Ohio, for Appellee.

Before: SILER, SUTTON, and COOK, Circuit Judges.

COOK, J., delivered the opinion of the court, in which SILER, J., joined.

SUTTON, J. (pp. 555-61), delivered a separate dissenting opinion.

OPINION

COOK, Circuit Judge.

NicSand, Inc. (NicSand), a marketer of automotive abrasives, brought this antitrust action against its competitor, 3M Company (3M), alleging that 3M's execution of exclusive dealing contracts with four of the six largest distributors of such abrasives constituted attempted and unlawful monopolization under § 2 of the Sherman Act. The district court granted 3M's motion to dismiss on the ground that NicSand failed to allege an "antitrust injury," and NicSand timely appealed. We find that NicSand has sufficiently pleaded an antitrust injury to maintain its claims and accordingly we reverse the judgment of the district court.

I.

Background. Prior to the allegedly anticompetitive conduct, NicSand converted and marketed DIY (do-it-yourself) retail automotive coated abrasives: sandpaper, cloth sanding rolls, sanding discs, compounding paper, polishing discs, grinding discs, and finishing paper — all to be used in the preparation of automotive surfaces for painting. NicSand did not manufacture the abrasives, but rather purchased the materials in bulk, cut them, and packaged them for the retail consumer. 3M is a manufacturing powerhouse; it was NicSand's only competing supplier of DIY retail automotive coated abrasives and now, in NicSand's absence, it is a monopolist of what NicSand alleges to be a distinct economic market.

The wholesale and retail markets for DIY retail automotive abrasives are small and highly concentrated. For the relevant period, six "big box" retailers — Advance Auto Parts (Advance Auto); Autozone; CSK Auto Corporation (CSK); Kmart; Pep Boys; and Wal-Mart — accounted for 80% of retail sales. In 1995, NicSand had a 67% share of the wholesale market, implying a total wholesale market size of $6 million, based upon NicSand's 1997 sales of approximately $4 million.¹

The First Amended Complaint (Amended Complaint) identifies various barriers to entry for new suppliers. First, five of the six "big box" retailers carried only one brand of DIY retail automotive coated abrasives at a time. (Pep Boys carried both NicSand and 3M abrasives.) Second, for a supplier to induce one of these retailers to stock its abrasives instead of its competitor's, the supplier had to: (1) purchase the retailer's current stock of abrasives; (2) provide and install appropriate display racks for the marketer's product; (3) supply a complete line of abrasives, with appropriate packaging for each subcategory of coated abrasive; and (4) provide a discount on the retailer's first order. Third, although the retailers were not contractually bound to stay with a particular supplier, retailers only considered changing suppliers once a year, during their "annual line review." Fourth, for apparently all of the relevant period, 3M maintained a "wrap-around program" with Wal-Mart, under which the retailer received discounts from 3M conditioned upon purchasing a complete line of coated abrasives, including coated abrasives for preparation of both automotive and wood surfaces.²

Alleged Anticompetitive Conduct. In 1997, 3M began a series of transactions that NicSand alleges ran afoul of § 2 of the Sherman Act, 15 U.S.C. § 2. NicSand alleges that 3M's anticompetitive conduct consisted of 3M according large discounts (exceeding the typical first-order discounts) to DIY-retail-automotive-coated-abrasives retailers in return for multi-year exclusive dealing agreements. Though NicSand devotes substantial attention to the magnitude of the discounts, the gravamen of the Amended Complaint is that 3M monopolized and attempted to monopolize the abrasives market through the exclusivity provisions of the contracts that the discounts accompanied.

Between 1997 and 2001, 3M secured exclusive contracts to provide DIY retail automotive coated abrasives to four of NicSand's customers: Kmart, Advance Auto, CSK, and Autozone. The discounts accompanying 3M's contracts constituted a sizeable portion of NicSand's annual sales and profits to each:

1. In 1997, 3M executed a contract with Kmart that included a $300,000 discount. Given NicSand's 1996 sales to Kmart of $475,000 and profits of $180,000, the discount represented 63% and 167% of NicSand's sales and profits, respectively.

2. In 1998, 3M executed a contract with Advance Auto that included a $285,000 discount. Given NicSand's 1997 sales to Advance Auto of $550,000 and profits of $272,000, the discount represented 52% and 105% of NicSand's sales and profits, respectively.

3. In 1998, 3M executed a contract with CSK that included a $200,000 discount. Given NicSand's 1997 sales to CSK of $369,000 and profits of $164,000, the discount represented 54% and 122% of NicSand's sales and profits, respectively.

4. In 2000, 3M executed a contract with Autozone that included a $1,000,000 discount (spread over 2001 and 2002). Given NicSand's 1999 sales to Autozone of $2,200,000 and profits of $865,000, the discount represented 23% and 58% of NicSand's sales and profits, respectively.

The Amended Complaint offers little more on the nature of the exclusive contracts. NicSand has made no allegations regarding the contracts' terms and only indirect allegations as to what portion of the relevant market the exclusive contracts foreclosed. Nonetheless, it is possible to draw certain conclusions from the allegations. The complaint notes that sales by the six largest retailers accounted for 80% of the retail market and that 3M executed exclusive contracts with four — leaving only Wal-Mart (which was subject to the wrap-around program) and Pep Boys as possible distributors for NicSand's products. NicSand thus alleges that through the exclusive contracts 3M locked up business with two-thirds of the retailers that together supplied 80% of the retail market. Assuming that each of the six retailers accounted for an equal share, this change would have increased 3M's (retail) market share from 20% to 73% (assuming that NicSand and 3M split the Pep Boys's business evenly), a change of 53%. And even with the more conservative assumption that Pep Boys accounted for twice the volume of sales of any of the others, 3M's market share would have increased from 23% to 69%, a change of 46%.

With NicSand left only to supply Pep Boys (and to share that business with 3M), NicSand alleges that it was no longer able to take advantage of economies of scale, either in its purchases of raw materials or in its own production processes. NicSand also alleges it lost sales on abrasives-related products, such as dust masks, and was forced to seek bankruptcy protection in 2001. NicSand's departure left 3M as the only supplier to the six largest retailers.

Litigation History. NicSand filed the original complaint in this matter on December 30, 2003, alleging that 3M had unlawfully monopolized and attempted to monopolize the market for "retail automotive sandpaper." (J.A. 7.) That market apparently included professional-grade as well as DIY automotive abrasives, as the original complaint listed additional retailers beyond the six large distributors of DIY retail automotive coated abrasives mentioned above. 3M moved to dismiss NicSand's claims on the grounds that: 1) NicSand failed to allege antitrust injury; 2) NicSand failed to allege a relevant product market; and 3) 3M's alleged conduct was pro-competitive and thus lawful.

In response, NicSand filed the Amended Complaint on April 15, 2004, which changed the alleged product market from "retail automotive sandpaper" to "DIY retail automotive coated abrasives" and reduced to four (Kmart, Advance Auto, CSK, and Autozone) the retailers with whom 3M had executed unlawful exclusive contracts. 3M then moved to dismiss this complaint on the same three grounds asserted before.

On March 1, 2005, the District Court granted 3M's motion to dismiss. The court concluded that NicSand failed to plead an injury that supported standing under the Sherman Act.

II.

"This court reviews de novo a district court's dismissal of a complaint under Federal Rule of Civil Procedure 12(b)(6)." Care Heating & Cooling, Inc. v. Am. Std., Inc., 427 F.3d 1008, 1012 (6th Cir.2005). "In reviewing a motion to dismiss for failure to state a claim, we construe the complaint in the light most favorable to the plaintiffs and determine whether the plaintiffs undoubtedly can prove no set of facts in support of the claims that would entitle them to relief." Mich. Paytel Joint Venture v. City of Detroit, 287 F.3d 527, 533 (6th Cir.2002). "The issue is whether the complaint states a claim under the Sherman Act, assuming the factual allegations to be true and indulging to a reasonable degree a plaintiff who has not yet had an opportunity to conduct discovery." DM Research, Inc. v. Coll. of Am. Pathologists, 170 F.3d 53, 55 (1st Cir.1999). Although we employ a "liberal system of `notice pleading,'" Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 168, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993), requiring the plaintiff only to make "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed.R.Civ.P. 8(a), the essential elements of the plaintiff's claim "must...