Breaux Bros. Farms, Inc. v. Teche Sugar Co., Inc.

• Decision Date: 04 May 1994
• Docket Number: No. 92-4968,92-4968
• Parties: , 1994-1 Trade Cases P 70,581 BREAUX BROTHERS FARMS, INC., Plaintiff-Appellee, Teche Planting Co., Inc. and Francis Pat Accardo, Plaintiffs-Appellees, Cross-Appellants, v. TECHE SUGAR CO., INC., South Coast Sugars, Inc., Defendants-Appellants, Cross-Appellees. TECHE PLANTING CO., INC., Francis Pat Accardo, Plaintiffs-Appellees, Cross-Appellants, v. TECHE SUGAR CO., INC., South Coast Sugars, Inc., Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 83

21 F.3d 83

62 USLW 2718, 1994-1 Trade Cases P 70,581

BREAUX BROTHERS FARMS, INC., Plaintiff-Appellee, Teche Planting Co., Inc. and Francis Pat Accardo, Plaintiffs-Appellees, Cross-Appellants, v. TECHE SUGAR CO., INC., South Coast Sugars, Inc.,

Defendants-Appellants, Cross-Appellees.

TECHE PLANTING CO., INC., Francis Pat Accardo, Plaintiffs-Appellees, Cross-Appellants, v. TECHE SUGAR CO., INC., South Coast Sugars, Inc.,

Defendants-Appellants, Cross-Appellees.

No. 92-4968.

United States Court of Appeals Fifth Circuit.

May 4, 1994.

Sidney A. Marchand, III, LA, Talbot, Carmouche, Marchand, Marcello & Parenton, Donaldsonville, LA, John L. Carter, Karen Jewell, Vinson & Elkins, Houston, TX, for appellants.

Raymond E. Allain, Sr., Allain & Allain, Jeanerette, LA, Claude F. Reynaud, Jr., Jude C. Bursavich, Breazeale, Sachse & Wilson, Baton Rouge, LA, for Breaux Bros Farms, Inc.

Appeals from the United States District Court for the Western District of Louisiana.

Before WISDOM, HIGGINBOTHAM, and JONES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Teche Sugar Company, Inc., offered to lease to Breaux Brothers Farms, Inc., Teche Planting, Inc., and Francis Accardo land for farming sugar cane. Teche Sugar conditioned its offer on its choice of a processing mill. All three sugar farmers sued in federal district court alleging that the lease tied land to milling in violation of the Sherman Act, 15 U.S.C. Sec. 1. The district court ruled in favor of the farmers and awarded damages. We are not persuaded that any tie of land to milling was supported by market power in the land or, relatedly, that any tie had the requisite effect on competition. We reverse.

I.

For several years Breaux Brothers, Teche Planting, and Accardo leased land in St. Mary Parish from the Prudential Insurance Company. They grew sugar cane on the leased land each year, which they processed at a mill they selected. The right to choose the mill is valuable. A mill that can ensure a supply of sugar cane in times of low sugar prices enjoys an economic advantage. The present dispute arose when Teche Sugar, then an owner of a mill, leased the land from Prudential. In an effort to assure cane for its mill, Teche Sugar offered to sublease land to Breaux Brothers, Teche Planting, and Accardo at a lesser rental rate than it paid Prudential. Teche Sugar conditioned its offer on a lessee's processing its cane at a mill selected by Teche Sugar. Breaux Brothers agreed, but Teche Planting and Accardo declined the offer.

Teche Sugar at first directed the sugar cane that Breaux Brothers produced to the Oak Lawn Mill, which Teche Sugar owned. Teche Sugar was still unable to generate enough cane for its mill and closed it before its lease with Prudential expired. Teche Sugar then designated the Raceland Sugar Mill--owned by South Coast Sugars, Inc., the co-defendant and Teche Sugar's sister company ¹--as the site for processing Breaux Brothers' sugar. Teche Sugar allowed Breaux Brothers to send excess sugar that Raceland could not process in a timely fashion to a nearby mill, Sterling Sugar Mill. Subsequently, South Coast sold the Raceland Sugar Mill. Teche Sugar then struck a deal with Sterling by which Teche Sugar would pay Sterling a flat rate of $9 per ton to grind cane and Teche Sugar would then sell the product at whatever profit it could make. Teche Sugar had no financial interest in Sterling Sugar Mill.

II.

The farmers argue that the lease Teche Sugar offered constituted an illegal tying arrangement. A tying arrangement is the sale or lease of one product on the condition that the buyer or lessee purchase a second product. See Northern Pacific R.R. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514, 518-19, 2 L.Ed.2d 545 (1958). The land that Breaux rented and the grinding services of the mills are said to be separate products.

There is a strong support for the two product argument offered by the functional approach in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 21-25, 104 S.Ct. 1551, 1562-65, 80 L.Ed.2d 2 (1984). Whether two products exist "depends on whether the arrangement may have the type of competitive consequences addressed by the rule." Id. at 21, 104 S.Ct. at 1562 (footnote omitted). The argument continues that an owner of a dominant portion of a market in sugar cane land could route the cane its land produced to a mill under its control. This guaranteed source of sugar might allow it to drive other mills from the market. The land owner thus could transfer power in one market into power in another. This presents fairly straightforward antitrust doctrine, in theory. See, e.g., Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611, 73 S.Ct. 872, 881, 97 L.Ed. 1277 (1953) ("[T]he essence of illegality in tying agreements is the wielding of monopolistic leverage; a seller exploits his dominant position in one market to expand his empire into the next."). Professor Kaplow has analyzed this danger and suggested that tying arrangements may cause harm even when they do not create power in a second market. Louis Kaplow, Extension of Monopoly Power through Leverage, 85 Col.L.Rev. 515 (1985). But we need not decide on these facts whether renting sugar cane land and grinding sugar cane constitute two separate goods. Assuming that they do and that the lease Teche Sugar offered therefore amounted to a tying arrangement, the farmers have nevertheless failed to establish that the lease violated the Sherman Act.

We begin with first principles. Not all tying arrangements are illegal. Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 24-25, 104 S.Ct. 1551, 1564-65, 80 L.Ed.2d 2 (1984) ("[T]he fact that [a] case involves a required purchase of two [goods] that would otherwise be purchased separately does not make the ... contract illegal.") As Jefferson Parish explained it:

[T]he law draws a distinction between exploitation of market power by merely enhancing the price of the tying product, on the one hand, and by attempting to impose restraints on competition in the market for a tied product, on the other. When the seller's power is just used to maximize its return in the tying product market, where presumably its product enjoys some justifiable advantage over its competitors, the competitive ideal of the Sherman Act is not necessarily compromised. But if that power is used to impair competition on the merits in another market, a potentially inferior product may be insulated from competitive pressures.

Id. at 14, 104 S.Ct. at 1559.

The legality of a tying arrangement depends in part on its effect in the tied market. The farmers acknowledge that Teche Sugar could have raised the rent it charged for its land, allowing the farmers to process their sugar cane at the mill of their choice. It is doubtful that Teche Sugar's decision to seek similar gains by controlling the choice of mills violates the Sherman Act. ² Our focus today is, however, whether the lease impaired competition in the sugar cane processing market such as creating barriers to the entry of new competitors into that market. Jefferson Parish, 466 U.S. at 14, 104 S.Ct. at 1559. Our analysis focuses on Teche Sugar's economic strength in the sugar cane land and milling markets. Id. at 18, 104 S.Ct. at 1561 ("In sum, any inquiry into the validity of a tying arrangement must focus on the market or markets in which the two products are sold, for that is where the anticompetitive forcing has its impact.").

The farmers may prevail under either of two approaches. First, to establish that the tying arrangement was illegal per se, the farmers must show that Teche Sugar exerted sufficient control over the tying market, sugar cane land, to have a likely anticompetitive effect on the tied market, sugar cane grinding. Id. at 15-18, 26-29, 104 S.Ct. at 1559-61, 1565-67. Second, the farmers may prevail by establishing that the arrangement is an unreasonable restraint of trade. Id. at 17-18, 29-31, 104 S.Ct. at 1560-61, 1567-68. See also Fortner Enters. v. United States Steel Corp., 394 U.S. 495, 499-500, 89 S.Ct. 1252, 1256-57, 22 L.Ed.2d 495 (1969) ("Fortner I "). We evaluate the reasonableness of the arrangement by exploring the "actual effect of the exclusive contract on competition" in both the tying and tied markets. Jefferson Parish, 466 U.S. at 29, 104 S.Ct. at 1567. We may find an antitrust violation to be an unreasonable restraint of trade only if the tying arrangement has had an "actual adverse effect on competition." Id. at 31, 104 S.Ct. at 1568.

A.

A per se condemnation requires proof that the tying arrangement involved "the use of market power to force [consumers] to buy [goods] they would not otherwise purchase." Id. at 26, 104 S.Ct. at 1565. The per se rule, of course, obviates the need for full consideration of actual market conditions; it does require a finding of "significant market power" in the tying market. See id.

The farmers allege that Teche Sugar controlled as much as 17.5% of the land in the relevant market. They base this percentage on a narrow definition of the market of sugar cane land. Sugar cane farmers can feasibly transport their crop for processing no farther than twenty five to thirty five miles from their farms. Five mills operated within approximately thirty five miles of the land that Teche Sugar offered to farmers, an area encompassing the St. Mary and Iberia Parishes. Teche Sugar, South Coast and related companies controlled no more than 17.5% of the sugar cane farmland in St. Mary Parish and no more than 9.4% of the farmland in the two parishes combined.

The district court defined both products as the relevant market in sugar cane land. We find that even under the narrowest of reasonable definitions Teche Sugar lacked the requisite market power to trigger a per se violation.

Land that offers a distinct economic advantage based on its location may enhance market power. See Northern Pacific R. Co. v. United...