In re Processed Egg Prods. Antitrust Litig.

• Decision Date: 22 January 2018
• Docket Number: No. 16-3795,16-3795
• Citation: 881 F.3d 262
• Parties: IN RE: PROCESSED EGG PRODUCTS ANTITRUST LITIGATION Kraft Foods Global, Inc., Kellogg Company, General Mills, Inc., and Nestlé USA, Inc., Appellants
• Court: U.S. Court of Appeals — Third Circuit

881 F.3d 262

IN RE: PROCESSED EGG PRODUCTS ANTITRUST LITIGATION

Kraft Foods Global, Inc., Kellogg Company, General Mills, Inc., and Nestlé USA, Inc., Appellants

No. 16-3795

United States Court of Appeals, Third Circuit.

Argued July 11, 2017

Opinion Filed: January 22, 2018

Richard P. Campbell, James T. Malysiak, Michael T. Brody [Argued], Jenner & Block LLP, 353 N. Clark Street, Chicago, IL 60654, Counsel for Appellants

Carrie C. Mahan [Argued], Weil, Gotshal & Manges LLP, 1300 Eye Street, N.W., Washington, DC 20005, William L. Greene, Ruth S. Shnider, Stinson Leonard Street LLP, 150 S. Fifth Street, Minneapolis, MN 55402, Brian E. Robison, Gibson, Dunn & Crutcher LLP 2100, McKinney Avenue, Suite 1100 Dallas, TX 75201, Christine C. Levin, Jennings F. Durand, Dechert LLP, 2929 Arch Street, Philadelphia, PA 19104, Donald M. Barnes, Jay L. Levine, Porter Wright Morris & Arthur LLP, 1900 K Street, N.W., Suite 1110, Washington, DC 20006, Molly S. Crabtree, Porter Wright Morris & Arthur LLP, 41 South High Street, 29th Floor, Columbus, OH 43215, Michael L. Scheier, Joseph M. Callow, Jr., Keating Muething & Klekamp PLL, 1 East Fourth Street, Suite 1400, Cincinnati, OH 45202, Jan P. Levine, Robin P. Sumner, Whitney R. Redding, Pepper Hamilton LLP 3000 Two Logan Square, Philadelphia, PA 19103, Counsel for Appellees

Before: SMITH, Chief Judge, FUENTES, Circuit Judge, and STARK,^† Chief District Judge

OPINION

STARK, Chief District Judge.

In this antitrust case, suppliers of processed egg products are accused of conspiring to reduce the supply of eggs and, consequently, increasing the market price for egg products. The District Court, relying on our decision in Mid-West Paper Products Co. v. Continental Group, Inc. , 596 F.2d 573 (3d Cir. 1979), as well as the bar on indirect purchaser actions established in Illinois Brick Co. v. Illinois , 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), concluded that the purchaser-plaintiffs lack antitrust standing. We find that neither Mid-West Paper nor Illinois Brick bars the price-fixing claims asserted here and reverse the District Court's grant of summary judgment.

I

This is a case about eggs. After collection from laying hens, most commercially-produced eggs proceed through one of two principal distribution channels. The first path is for "shell eggs," which are supplied to grocery stores and other distributors as whole eggs, packaged, for example, in crates by the dozen. " 'Shell eggs' [are] defined as eggs produced from caged birds that are sold in the shell for consumption or for breaking and further processing." In re Processed Egg Products Antitrust Litig. , 312 F.R.D. 171, 177 n.4 (E.D. Pa. 2015).

The second path involves what are referred to as "egg products." " 'Egg products' [are] defined as the whole or any part of shell eggs that have been removed from their shells and then processed, with or without additives, into dried, frozen, or liquid forms." Id. at 177 n.5. Food manufacturers are the primary purchasers of egg products, using them as ingredients in goods ranging from frozen waffles to salad dressing

to mayonnaise.

In a series of individual and class actions brought by purchasers of shell eggs and egg products, certain egg suppliers are accused of price-fixing in violation of the Sherman Act, 15 U.S.C. § 1. It is alleged that, between at least 1999 and 2008, these producers conspired to reduce the population of egg-laying hens, resulting in a reduced supply of eggs and, in light of the inelasticity of demand in the relevant markets, supracompetitive prices.¹

Appellee United Egg Producers, Inc. ("UEP"), a trade association, allegedly played an important role by coordinating a certification program. Egg producers participating in the certification program were required to increase their hens' cage sizes and refrain from replacing hens that died with another laying hen (a practice known as "backfilling"). It is alleged that the animal welfare rationale offered for these practices is merely a pretext for the true goal of reducing egg supply to drive up egg prices.

Appellants—Kraft Foods Global, Inc., Kellogg Company, General Mills, Inc., and Nestlé USA, Inc. (hereinafter, "Plaintiffs" or "Purchasers")—are food manufacturers. They sued Appellees—UEP, as well as an exporting entity under UEP's control (United States Egg Marketers, Inc. ("USEM")), and five processed egg product suppliers² who made sales directly to the Plaintiffs—in the U.S. District Court for the Northern District of Illinois. The Judicial Panel on Multidistrict Litigation transferred the case to the U.S. District Court for the Eastern District of Pennsylvania, consolidating it for pretrial purposes with other cases involving similar antitrust claims (the "MDL").

Plaintiffs' claims are based solely on purchases of egg products; claims by purchasers of shell eggs are being litigated in other cases within the MDL. Plaintiffs seek to recover overcharges they paid in the market for egg products due to "substantially increased" prices resulting from Defendants' alleged participation in the supply-reduction conspiracy. (OB at 10)

More particularly, the Purchasers' theory is that the Suppliers conspired to reduce the supply of shell eggs, and to inflate the price of shell eggs, with the intent and effect of also artificially inflating the price of egg products. The Purchasers' view, which they contend is supported by their expert, is that the relevant market consists of shell eggs and egg products. Therefore, according to the Purchasers, the prices they paid for egg products—of which shell eggs are the main input—include overcharges, just as the conspiring Suppliers intended. (See generally JA416) (Plaintiffs' counsel arguing during summary judgment hearing, "[O]ur allegations and our proof are that the output-reduction conspiracy at the henhouse level impacted in the same way both shell eggs and egg products.")³

The Suppliers are vertically integrated to varying degrees. Thus, some proportion of the egg products purchased by Plaintiffs was made using eggs obtained from non-party, non-conspirator egg producers ("non-conspirator eggs"), with much or all of the remainder made from eggs sourced internally, from the Suppliers' own laying hens ("internal eggs").⁴ A slightly altered version of a diagram prepared by the Purchasers depicts this arrangement:

The dashed line in the left box indicates that internal eggs are used as an input for the egg products purchased by Plaintiffs-Purchasers from Defendants-Suppliers. In addition, as represented by the dotted line running from the right box into the left box, those same egg products also contain some amount of non-conspirator eggs that are first purchased by Defendants-Suppliers from non-conspirator egg producers. Therefore, the egg products Plaintiffs purchased from Defendants contain some combination of internal eggs, supplied directly by Defendants, and non-conspirator eggs, supplied indirectly by non-conspirator egg producers.

During discovery, Plaintiffs' damages expert opined that (i) the relevant market included both shell eggs and egg products; (ii) small reductions in flock size and egg supply caused significant increases in egg prices, due to the market's high inelasticity of demand; and (iii) this increase also enabled Defendants to overcharge Plaintiffs for their purchases of egg products. Plaintiffs collectively claim aggregate damages in excess of $111 million.

Plaintiffs' damages calculations make no distinction between overcharges for egg products made using internal eggs and those made from non-conspirator eggs. Plaintiffs' expert testified at his deposition that the proportion of price-fixed egg products derived from non-conspirator eggs is irrelevant. In the view of Plaintiffs' expert, Defendants' conspiracy effected an increase in the market price of all shell eggs, regardless of their source. (See JA596-97) ("As documented ... there are no close substitutes for eggs—regardless of whether one considers shell, liquid, dried, or frozen eggs. ... A reduction in egg production means that fewer eggs are available for making/processing shell eggs or egg products.") Consequently, and as Defendants allegedly intended, Plaintiffs paid an overcharge on all of the egg products they purchased from Defendants, even if those egg products were made, in whole or in part, from non-conspirator eggs. (See generally JA749-50) ("[A]nticompetitive actions to reduce the overall production of eggs will impact prices of all types of eggs analyzed in my report. ... The primary mechanism through which the alleged conspiracy impacted the prices of shell eggs and egg products was through coordinated efforts to reduce national flock size and the overall number of eggs generally....")

After discovery concluded, Defendants moved for summary judgment. They argued that Plaintiffs' inclusion in their damages calculations of egg products made with non-conspirator eggs violated Mid-West Paper 's prohibition on "umbrella damages." Defendants emphasized that none of Plaintiffs' allegations involves any wrongdoing undertaken at the egg product production stage, but only concern the production of shell eggs at the laying stage. They also demonstrated that one defendant, Michael Foods, made the "overwhelming majority" of relevant egg product sales, and that most of the egg products sold by Michael Foods were made with non-conspirator eggs. (Joint Response Brief of Defendants-Appellees ("AB") at 10) In other words, it is undisputed that "a Michael Foods egg product most likely was manufactured using egg supplied by a non-conspirator." (Id. at 11)

Defendants also pointed to Plaintiffs' expert's acknowledgment that, "as of 2004, producers not alleged to be defendants or conspirators accounted for more than 45% of [hen] flocks in the United States." (AB at 12) (citing JA590) Further, according to Defendants, Plaintiffs' damages calculations do not reveal "whether the allegedly higher prices resulted from...