CHURCH v. MAYER LABORATORIES INC.
| Decision Date | 01 April 2011 |
| Docket Number | No. C-10-4429 EMC,C-10-4429 EMC |
| Court | U.S. District Court — Northern District of California |
| Parties | CHURCH & DWIGHT CO., INC., Plaintiff, v. MAYER LABORATORIES, INC., Defendant. |
OPINION TEXT STARTS HERE
Counterclaimant Mayer Laboratories, Inc. is a closely held corporation located in Berkeley, California which markets, distributes and sells latex male condoms. Second Amended Counterclaim ("SAC") (Docket No. 68) ¶¶ 15, 19. Mayer's business involves the marketing and sale of, inter alia, its Kimono brand of ultra-thin latex condoms. ¶ 15. Mayer was allegedly "instrumental in establishing the ultra-thin condom segment in the United States market," which now "comprises approximately 22% of the overall retail market." ¶¶ 22, 35. According to Mayer, Kimono condoms have a retail market share in the United States of less than 1%. ¶ 19. In California, however, they have a market share of about 5%; roughly 50% of all sales of Kimono condoms occurs in California. Id. Mayer touts that it pioneered the ultra-thin condoms in the United States by introducing "Kimono" and "Kimono MicroThin" made by Sagami Rubber Industries, a Japanese manufacturer. ¶¶ 21, 147. Mayer began using the term "MicroThin" for its Japanese-made, ultra-thin latex condom products in 1992. ¶ 144, 146. In June 2009, Mayer registered the mark "MICROTHIN" for condoms with the U.S. Patent and Trade Office, receiving registration number 3,641,977 (the "'977registration"). ¶ 162. Mayer also asserts that it contracted with Sagami for the right to be its exclusive North America agent and distributor. ¶¶ 23, 121.
Counterdefendant Church & Dwight ("Church" or "C&D") is a publicly traded company, headquartered in New Jersey. ¶ 16. It manufactures and distributes, inter alia, Trojan and other brand-name condoms. Id. Mayer claims that C&D branded condoms account for over 75% of all retail condom sales in the United States, such that it holds a monopoly position in the nationwide condom market as well as in California.1 ¶¶ 2, 16. The vast majority of condoms are sold in drug stores, grocery stores, and mass merchandisers. ¶¶ 31-34. Notably, Mayer claims there is an "extreme concentration of ownership of nationwide drug store chains: the three largest chains -Walgreens, Rite-Aid, and CVS - account for approximately 86% of all condom sales at drugstores. ¶ 32. Mayer also claims that there are considerable barriers to entry in the condom market, including costs of FDA and state regulatory approval and compliance, production minimums, and retailer program participation fees. ¶ 36.
Most formidable among the barriers to entry is the "difficulty in acquiring display in major retailers' condom retailing sections." Mayer claims this problem is exacerbated by the concentration of ownership of large chains, which decide what products to carry on a chain-wide basis. ¶¶ 36, 39. According to both parties, condoms are a unique product that rely heavily on point of sale advertising because they have minimal television and print advertising. ¶ 38. In that respect, condoms are generally displayed on, and sold from, pegboards and shelves in one area of a store where consumers can quickly glance at them at once. ¶ 37. Because of how condoms are displayed in retail stores, the competition for selling condoms depends heavily on acquiring space in retailers' display sections. ¶¶ 38, 148. Display is of critical importance in marketing because of the private nature of the transaction and the speed by which buying decisions are made. See ¶¶ 37-38, 148.
In this context, Mayer alleges that C&D engages in several distinct but related anticompetitive activities that have the combined effect of "greatly diminishing and in some cases eliminating competition in the relevant markets." ¶¶ 5-11; see also Mayer's Opp'n Br. (henceforth "Opp'n") at 19-20 ().
First, Mayer alleges that C&D offers "Condom Planogram Agreements"2 to large chain retailers, which together account for nearly 100% of condom sales nationwide.3 ¶¶ 5-6, 52-53. Such agreements give the chain the opportunity to receive a substantial kickback or rebate on its purchases of C&D condoms. Rebates are given if the retailer accepts and follows a planogram designed by C&D and guarantees that C&D's condoms occupy a specified minimum percentage of the available facings on its in-store display. Id. C&D "inherited" this "Planogram Program" in 2001 by acquiring the Trojan brand. ¶ 73. At the time, the Program had three "tiers" - a 55% tier (awarding a 4.0% rebate for 55% or more of a retail chain's display space), a 65% tier (awarding a 7% rebate for 65% or more of the display space), and a 70% tier (awarding a 7.5% rebate for 70% or more of the display space). ¶¶ 59-60. In 2006, and again in 2008, C&D "ratcheted up" its Planogram Program, introducing 75% and 80% tiers (providing 8.0% and 8.5% rebates, respectively) and eliminating the 55% and 65% tiers. ¶¶ 62-63. According to Mayer, "not a single major retail chain chose to forego the rebates." Id. Mayer avers that C&D's conduct has caused retail chains to devote increasing percentages of their condom displays to C&D products (id. ¶ 7), and as a result, C&D's dominant market share has grown substantially over the years, from approximately 64% in 2001 to over 75% in 2010. ¶ 65. While C&D's market share grew, there was a drop in the share of the Kimono brand from 0.5% in 2003 to 0.4% in 2008. ¶¶ 81,86. Mayer alleges its share in the ultra-thin condom market segment has been reduced substantially. ¶ 48. As a specific example of harm to competition, Mayer claims that in 2006 both Safeway Stores and Target Stores reduced the number of condom brands they carry from three to two. ¶ 83. Mayer alsocomplains that Longs Drug Stores ("Longs") removed Mayer's products from store displays "to make room for [C&D's] condoms. . . . despite specific [] data showing that the discontinued Mayer Labs condoms were better selling, and more profitable on a per unit basis, than many of the Trojan brand condoms that were continued in the Longs planogram." ¶ 84. Thus, the reallocation of display space to C&D was not based on the merits (e.g., relative sales volume) but rather was the consequence of C&D's program. Mayer also alleges that C&D has succeeded in raising prices for its products. ¶ 85 ().
Second, according to Mayer, C&D entrenched and strengthened its market dominance via its role as a "category captain" for most large retail chains. ¶¶ 8-10, 41, 67. Retailers allegedly have agreed to give C&D the "ability to decide and influence which brands of condoms are included in a chain's stores, where individual condom [products] are placed in the store displays, which condom [products] are discontinued, and which new condom [products] are added." ¶¶ 68-71. C&D purportedly uses this position "to obtain preferential display locations for its products, to recommend replacement of competing brands with [C&D] products, and to reduce visibility for (or exclude altogether) competing brands, including Mayer Labs' products." ¶ 70.
Third, Mayer alleges that C&D has exclusive dealing arrangements with some retail chains, including 7-Eleven, obligating them to sell only C&D condoms. ¶¶ 11, 57.
Fourth, Mayer asserts that in 2006, C&D began targeting the Japanese-made, ultra-thin condom market segment. ¶ 151. Initially C&D distributed "Trojan Ultrathin" condoms. Id. Mayer asserts C&D began using the term "ultra-thin" which had previously associated with Mayer's products. C&D allegedly began using the term "microthin" for its Trojan brand Ultrathin condoms in 2007, and for its Thintensity condoms in 2008. ¶¶ 123, 151-153. As a result, Mayer alleges that its sales of Kimono Microthin condoms declined 33% (from $1,167,000 in 2006 to $1,120,000 in 2007 due to C&D's anticompetitive conduct. ¶ 154; see also ¶ 150 (). Mayer alsoclaims that in 2007, C&D tortiously induced Sagami to begin supplying it with condoms in violation of an exclusive contract Mayer had with Sagami. ¶ 123.
On November 21, 2008, C&D filed a declaratory action in the District of New Jersey seeking a judicial determination that C&D's conduct was legal under applicable federal and state laws. In that complaint, C&D seeks a declaratory judgment as to the conduct that Mayer alleged in a draft complaint conveyed by Mayer's counsel to C&D in October 2008. See Original Compl. ¶¶ 81-86. On February 17, 2009, Mayer filed an Answer together with Counterclaims. Mayer amended its counterclaims on March 9, 2009. As it stands, the SAC includes claims for violations of the Sherman Act, 15 U.S.C. §§ 1 and 2 (Claims I & II); California's prohibition against trusts (Claim III), Cal Bus. & Prof. Code §§ 16700, et. seq.; California's prohibition against exclusive dealing (Claim IV), Cal. Bus. & Prof. Code §§16727, et. seq.; California's prohibition against secret rebates (Claim V), Cal. Bus. & Prof. Code § 17045, tortious interference with contractual relations (Claim VI), tortious interference with prospective economic advantage (Claim VII), and unfair competition under common law (Claims VIII & XII). The SAC also asserts claims for infringement under California common law (Claim XI) as well as the Lanham Act, 15 U.S.C. § 1114(a) (Claim X), and a claim for false designation of origin under the Lanham Act, 15 U.S.C. § 1125(a) (Claim IX).
In terms of relief, the counterclaim requests (1) a declaratory judgment that C&D's Condom Planogram Agreements are unenforceable, ...
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