Iams Co. v. Falduti
| Decision Date | 20 May 1997 |
| Docket Number | No. 4:95CV1804 CDP.,4:95CV1804 CDP. |
| Citation | 974 F.Supp. 1263 |
| Parties | THE IAMS CO., Plaintiff, v. Anthony FALDUTI d/b/a Countryside Feed and Supply, Defendant. |
| Court | U.S. District Court — Eastern District of Missouri |
Michael J. Morris, David Wells, Thompson Coburn, St. Louis, MO, D. Jeffrey Ireland, Mary L. Wiseman, Faruki and Gilliam, Dayton, OH, for Plaintiff.
Jeffrey J. Lowe, Gray and Ritter, St. Louis, MO, for Defendant.
AMENDED MEMORANDUM AND ORDER
This matter is before the Court on plaintiff's motions for summary judgment on both its declaratory judgment action and defendant's counterclaim. Also before the Court is plaintiff's motion to strike an affidavit submitted by defendant in opposition to plaintiff's motion.
Plaintiff The Iams Company (Iams) manufactures dog and cat food. Defendant Anthony Falduti owns Countryside Feed and Supply and sells Iams pet foods as well as other brands. Falduti previously filed federal and state court actions against Iams and other pet-food manufacturers, alleging that their pricing and distribution systems violated the Robinson-Patman Act, 15 U.S.C. § 13, and Missouri's antitrust laws. Falduti voluntarily dismissed his first federal suit; the state suit is pending. Iams seeks a declaratory judgment that its distribution system does not violate federal antitrust laws. Falduti brings a counterclaim seeking injunctive relief under the Robinson-Patman Act, 15 U.S.C. § 13, and treble damages under the Clayton Act, 15 U.S.C. § 15.
This dispute centers upon the relationship among retail-level competitors, a manufacturer, and its St. Louis-area distributor. Defendant/counterclaim-plaintiff Falduti alleges that plaintiff, The Iams Company, engages in price discrimination against him in favor of his competitors, PetsMart and Pet Care, and alleges vertical price and non-price restraints in the operation of Iams' dual-distribution system. Iams' distributor in the St. Louis area is NutriPet.
Anthony Falduti owns Countryside Feed and Supply, a sole proprietorship in Florissant, Missouri, which sells large- and small-animal feeds. Countryside sells dog and cat food manufactured by Iams and many of Iams' competitors. His competitive strategy is to charge his customers low prices for premium pet foods and rely on volume to secure a profit. At one time, Falduti purchased sufficient quantities of Iams' products to qualify as one of its best customers in the St. Louis area. Between 1991 and 1995, however, his purchase of Iams' products decreased from 65,164 pounds to 5,536 pounds per year.
Countryside has always operated in Florissant, Missouri, with customers drawn from a forty-mile radius. In May 1993, after approximately ten years in its original storefront, Countryside moved to a new location about three blocks south on the same street. Countryside's new location was approximately one-and-one-half times the size of the first store and provided better parking for customers.
PetsMart and Pet Care are large multilocation "superstores" selling pet food and related products. PetsMart opened its first St. Louis-area store in October 1991, while Pet Care's first St. Louis-area store opened in June 1992. There are two PetsMart stores and two Pet Care stores within a 15-mile radius of Countryside. The development of these pet superstores has increased the competition among pet-food retailers. Some retailers have gone out of business while others, including Countryside, have seen their volume and profit margins decrease on sales of pet food.
Iams manufactures premium dog and cat food sold under the brand names Iams and Eukanuba. The Iams products are sold in specialty retail stores, including Countryside and the superstores. They are generally not available through grocery stores. Iams ranks as either the first or second largest seller of premium pet foods.
At the heart of the present dispute is Iams' distributorship system. Iams distributes its product through two routes. First, Iams sells at wholesale to approximately twenty-five independent distributors1 who sell to retailers such as Countryside. Second, Iams makes direct sales to large nationwide accounts such as PetsMart and Pet Care. Iams has never sold directly to Countryside.
Iams began direct sales to the large multistore accounts in 1991. Previously, the large stores bought Iams products through the distributors. Apparently the superstores were dissatisfied with inconsistent delivery schedules and regional differences in pricing, which interfered with their centralized purchasing systems. Under the present system, Iams receives orders directly from the superstore and fills them by repurchasing the necessary stock from the area's independent distributor, who then delivers the order to the superstore. The independent distributor functions as Iams' delivery agent to the superstore and Iams pays the distributor a delivery fee. The superstores purchase Iams products at a cost that is above the cost paid by Iams' distributors.
Since at least 1988, Countryside has purchased its Iams pet food almost exclusively from NutriPet. NutriPet was initially an Iams-owned distributor but was purchased by its present owner, Norman Worthy, in 1986. NutriPet sells only Iams' dog and cat foods, though it also carries bird food, cat litter, pet shampoos and pet toys. Another distributor, Bushmill, had previously supplied Iams to St. Louis-area retailers, although Countryside only used Bushmill as a "backup" supplier, purchasing Iams product from Bushmill on only three or four occasions, or "a handful" of times. In 1993, NutriPet acquired Bushmill's Iams' territory and accounts and thus became the sole St. Louis-area distributor.
The parties dispute the degree of control that Iams exercises over its independent distributors. NutriPet president, Norman Worthy, testified by affidavit and deposition that NutriPet and Iams have a non-exclusive agreement under which NutriPet may sell Iams' competitors' products, but that NutriPet chooses to sell exclusively Iams food products. Shortly after he purchased NutriPet from Iams, Mr. Worthy exercised his contractual option to sell a competitor's food. He testified in deposition that in 1987 he added Ralston Purina products because he thought he could expand his rural base by adding large-animal feed. As required by his contract, he gave Iams thirty days notice of his intention to carry Purina stock. He testified that he spoke with Iams President and owner, Clay Mathile, who was unhappy about his decision to carry a competitor. Worthy also testified that he was aware that, under the terms of his distributorship agreement with Iams, Iams reserved the right to terminate the agreement if NutriPet carried a competitor's products. Worthy stated that none of the Iams' representatives with whom he spoke mentioned the termination clause. Nonetheless, within two weeks of adding the Purina line, Worthy decided to drop it because it was not cost effective.
There are twenty-seven PetsMart and Pet Care superstores in NutriPet's territory. Despite its limited role as Iams' delivery agent to PetsMart and Pet Care, NutriPet salespeople call on the superstores at least once or twice per month to ensure that they have adequate supplies of Iams products. Steve Gaffney, a former NutriPet salesperson, testified that when he went to the superstores he would check the dates and rotation on Iams stock. He also checked Iams promotional displays. On one occasion he and an Iams employee reset the cat section at a superstore.
As additional evidence of the ties between NutriPet and the superstores, Falduti submitted a letter dated December 22, 1993, from Iams to NutriPet. The letter announced that exclusive distributors would receive two percent of the value of "direct sales" by Iams into the distributor's territory. The letter also stated that in determining whether to continue this "incentive program" to the distributors, Iams would examine various aspects of the distributor's relationship with the direct-buying customers, including the extent to which the distributor "developed and maintained relationships" with the direct buyers and supported their service needs by providing fill-in orders on Iams' behalf. Iams subsequently modified the incentive program to give the distributors credit rather than reimbursement for Iams' direct sales to the superstores in their territories. The purpose of this modification was to ensure that the distributors received credit toward their annual volume objectives.
Falduti testified that he has suffered certain declines in business since the superstores opened in St. Louis: His annual sales of Iams products have declined from 65,164 pounds in 1991 to 5,536 pounds in 1995. His profit margin on Iams food has dropped from $7.00 to $8.00 per bag to $3.00 to $4.00 per bag. Falduti further testified that there were times when the superstores were selling Iams products at retail prices lower than his purchase price for the same product from NutriPet. Norm Worthy also testified that he was aware of retailers purchasing from PetsMart because it cost them less than to go through NutriPet.
Falduti alleges that Iams provides PetsMart and Pet Care with discounts in the form of lower prices, reimbursement for advertising, or giveback programs that Iams does not provide to him. Iams contests this assertion. Martin Walker testified by deposition that Iams makes cooperative advertising plans available to both the superstores and to independent retailers. Robert Schafer testified by deposition that Iams offers its customers cooperative advertising agreements under which Iams reimburses a percentage of net dollar sales so long as the product is advertised at a minimum price Iams sets. Schafer also testified that Iams provides purchasers with two...
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