Inline Packaging, LLC v. Graphic Packaging Int'l, LLC, Civil No. 15-3183 ADM/LIB

• Decision Date: 05 September 2018
• Docket Number: Civil No. 15-3183 ADM/LIB
• Citation: 351 F.Supp.3d 1187
• Parties: INLINE PACKAGING, LLC, Plaintiff, v. GRAPHIC PACKAGING INTERNATIONAL, LLC, Defendant.
• Court: U.S. District Court — District of Minnesota

351 F.Supp.3d 1187

INLINE PACKAGING, LLC, Plaintiff,

v.GRAPHIC PACKAGING INTERNATIONAL, LLC, Defendant.

Civil No. 15-3183 ADM/LIB

United States District Court, D. Minnesota.

Signed September 5, 2018

Robert R. Weinstine, Esq., Justice Ericson Lindell, Esq., Brent A. Lorentz, Esq., and Kyle Kroll, Esq., Winthrop & Weinstine, PA, Minneapolis, MN, on behalf of Plaintiff.

Felicia Boyd, Esq., Barnes & Thornburg LLP, Minneapolis, MN; David B. Hamilton, Esq., and Barry J. Herman, Esq., Womble Bond Dickinson (US) LLP, Baltimore, MD; Jason Hicks, Esq., and Amanda Norris Ames, Esq., Womble Bond Dickinson (US) LLP, Charlottesville, VA; and Christine H. Dupriest, Esq., Womble Bond Dickinson (US) LLP, Washington, D.C., on behalf of Defendant.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, U.S. DISTRICT JUDGE

I. INTRODUCTION

On June 6, 2018, the undersigned United States District Judge heard oral argument on Plaintiff Inline Packaging, LLC's ("Inline") Motion for Partial Summary Judgment [Docket No. 540] and Motion to Exclude Expert Testimony [Docket No. 610]. Defendant Graphic Packaging International, LLC's ("Graphic") Motion for Summary Judgment [Docket No. 635], Motion to Exclude Expert Testimony [Docket No. 773], and Motion to Strike Pleading [Docket No. 788] were also heard on the same date.

Additionally before the Court is Inline's Objection [Docket No. 538] to Magistrate Judge Leo I. Brisbois' March 8, 2018 Order

[Docket No. 534] denying Inline's Motion to Amend to Plead Punitive Damages [Docket No. 504]. For the reasons set forth below, Graphic Packaging's motion for summary judgment is granted, Inline's motion for partial summary judgment is denied, all other motions are denied as moot, and Inline's Objection is denied as moot.

II. BACKGROUND

A. Parties

Inline and Graphic compete in the susceptor food packaging industry. Compl. [Docket No. 1] ¶ 2. Inline alleges Graphic is a monopolist in the United States susceptor food packaging market who has maintained its dominant position through a combination of anticompetitive tactics including unlawful discount bundling and sham intellectual property assertions. See generally, id. Inline contends that these tactics were employed in response to Inline's inroads at major food companies, and that Graphic's conduct has foreclosed Inline from selling to the market's largest purchasers of susceptor food packaging.

B. Susceptor Market

Susceptor food packaging is active food packaging that converts microwave energy to high surface temperatures which crisp and brown foods. Compl. ¶ 60. Of the handful of companies that supply susceptor products in the U.S., Graphic holds by far the largest market share at approximately 95% of the market, and Inline is second with approximately 4.6%. Hicks Decl. [Docket No. 638] Ex. 2 [Docket No. 640] ("Levinsohn Report") Ex. 4.

Inline and Graphic compete for supply contracts with consumer packaged goods food companies ("CPGs"). Compl. ¶¶ 20–21. The five largest purchasers of susceptor products in the U.S. are Nestlé, Conagra, Heinz, Schwan's, and Pinnacle. Levinsohn Report ¶ 187, Ex. 5. These five CPGs accounted for nearly 93% of U.S. susceptor sales in 2016. Id. Ex. 5.

C. Paperboard Market

Although Inline manufactures and sells only susceptor products, Graphic manufactures and sells paperboard/folding carton food packaging as well as susceptor products. Lindell Decl. [Docket No. 614] Ex. E [Docket No. 619] ("Saravia Report") ¶¶ 46–51. Graphic operates seven North American mills that produce paperboard to be used for manufacturing folding cartons. Id. ¶ 48. Graphic's paperboard customers include the five large CPGs listed above. Id. ¶ 52. Graphic's revenue and profits from sales of paperboard to these five customers far exceed its revenue and profits from sales of susceptor products to these same CPGs. Id. From 2010 to 2016, Graphic's revenue from paperboard sales to these CPGs was $1.9 billion, whereas its revenue from susceptor sales was $0.4 billion. Id. Graphic's gross profits from paperboard sales to these customers was $0.8 billion over this time period, while its gross profits from sales of susceptors was $0.2 billion. Id.

Graphic faces intense competition in the paperboard market from WestRock (formerly RockTenn), International Paper, Burd & Fletcher, and other regional and private label competitors. Id. ¶¶ 48, 53. In 2015, WestRock's reported revenue was $15.5 billion, which more than tripled Graphic's revenue of $4.3 billion for that year. Id. ¶ 53. Competition between Graphic, WestRock, and International Paper is intensified because these three firms are vertically integrated with paper mills. Id. ¶ 54. To cover the large fixed costs of running the mills while also offering competitive prices, the firms must operate the mills at full or close to full capacity. Id.

Thus, these firms are dependent on and must compete for large paperboard orders that will enable them to operate more efficiently and offer lower prices. Id.

Companies purchasing paperboard products employ strategies to encourage direct competition between paperboard suppliers to drive down prices. Id. ¶ 56. Business is sometimes awarded through reverse auctions and by seeking multiple bids for new lines of products or before re-signing contracts for an existing line of products. Id. For example, in early 2014, Heinz conducted an open market bid and reverse product auction on its folding carton volume, even though Graphic had an existing contract for that volume of products through April 2015. Id. Although Graphic was successful in retaining the business, Heinz extracted a 5.8% price reduction on some products, with the reductions starting before the end of the original contract term. Id. Customers also seek discounts and incentives that suppliers agree to in order to retain business. Id. ¶ 58. This competition suggests that customers wield significant power in dictating contract terms and is likely one reason why Graphic's profit margins on paperboard products are lower than susceptor products, 9% to 23% for paperboard versus 32% to 46% for susceptors. Levinsohn Report ¶ 101.

D. Graphic's Supply Agreements

Graphic holds multi-year supply agreements with four of the five major CPGs for the supply of susceptor and paperboard products. See id. ¶¶ 132–185; Hicks Decl. ¶ 30. These contracts govern their purchases of susceptor and paperboard products from Graphic. Levinsohn Report ¶¶ 133, 144, 151, 158, 164, 168, 175, 179. The contracts, which extend from one to four years, are common in the industry. See, e.g. Hicks Decl. Ex. 12 [Docket No. 650] ("Jones Dep.") 124:7–11; Hicks Decl. Ex. 14 [Docket No. 652] ("Ferrara Dep.") 95:12–12; Hicks Decl. Ex. 15 [Docket No. 653] ("Dorman Dep.") 142:17–144:1; 145:6–23.

These supply contracts also include an array of financial incentives. For example, Graphic's supply agreement negotiated in 2010 with Heinz included price caps, price reductions, and improved payment terms for both paperboard and susceptor products. Levinsohn Report ¶ 139. Graphic's 2012 contract with Schwan's included year-over-year price reductions and an annual rebate program that provided discounts for both paperboard and susceptor products if Schwan's purchased a target incremental amount of susceptor products. Id. ¶ 156. Graphic's 2014 contract with Conagra included fixed pricing, caps on paperboard price fluctuations, annual price reductions, and required Graphic to pay all tooling and die and equipment costs. Id. ¶ 168. Graphic's 2014 amendment to its supply agreement with Pinnacle included a cap on paperboard prices, a $1.25 million signing bonus that Pinnacle would have to repay if it stopped purchasing from Graphic, and a commitment to pursue productivity improvements to reduce Pinnacle's costs by at least 4% each year. Id. ¶ 180. Similar contractual terms are common in the paperboard and susceptor industries. See, e.g. Jones Dep. 124:7–11; Ferrara Dep. 95:3–12; Dorman Dep. 145:13–23.

Graphic's 2010 contract with Heinz was contingent upon Graphic receiving Heinz's Smart Ones Artisan Pizza business, which was under contract with Inline at the time. Levinsohn Report ¶ 136. During the negotiation period leading up to the 2010 Heinz contract, Graphic viewed Inline as a "competitive threat." Id. ¶ 141. Graphic's internal emails from May 2009 reflect concern that Inline is "pushing to get business at a major CPG[s] like Heinz, Nestlé, or Schwan [sic]. We want to keep them out of these locations to limit their credibility and growth." Id. ¶ 154.

E. Nestlé's Susceptor Sleeve Business

Since at least 2005, Nestlé has been one of Graphic's major customers. First Lorentz Decl. [Docket No. 543] Ex. 65 ("Best Dep.") 60:25–61:6. Unlike the other four large CPGs, however, Nestlé's purchases from Graphic are not covered by a supply agreement.

In 2009, Graphic viewed Inline's competitive efforts to secure business from Nestlé as having risen to a "troubling level." First Lorentz Decl. Ex. 67 [Docket No 557]. Graphic understood that Nestlé perceived Graphic's susceptor prices as "very high" because Graphic was " ‘unchecked’ in the market." Id. Ex. 68 [Docket No. 558]. In late 2011, Inline was successful in securing Nestlé's Kahiki susceptor sleeve¹ business for supply in 2012. Id. Ex. 69 ("Seefeldt Dep.") 179:10–20.

All of Nestlé's susceptor sleeve business—including the Kahiki line that Inline secured in 2012—was scheduled for renewal at the end of June 2014. Graphic was aware that Inline was a serious competitor for this business. First Lorentz Decl. Ex. 72 [Docket No. 561]; id. Ex. 73 [Docket No. 562] at GPI 00104156. In the summer of 2013, Nestlé sent requests for proposals ("RFP") to Graphic, Inline, and other suppliers that covered three Nestlé product lines: Kahiki, Croissant Pocket, and Hot Pocket sleeves. Id. Ex. 87 [Docket No. 575]; First Watkins Decl. [Docket No. 590] ¶ 3. Nestlé explained that the product specifications would be distributed through an online system called "Ariba." First Watkins ...