Liggett Group Inc. v. R.J. Reynolds Tobacco Co.

Decision Date30 May 2000
Docket NumberNo. Civ.A. 00-994(AJL).,Civ.A. 00-994(AJL).
Citation102 F.Supp.2d 518
PartiesLIGGETT GROUP INC., Plaintiff, v. R.J. REYNOLDS TOBACCO CO., Defendant.
CourtU.S. District Court — District of New Jersey

Michael R. Griffinger, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, PC, Newark, New Jersey, Kenneth A. Gallo, Joseph J. Simons, Brian K. O'Bleness, Aimèe D. Latimer, Cliffor Chance, Rogers & Wells LLP, Washington, DC, for plaintiff.

Alan E. Kraus, Riker, Danzig, Scherer, Hyland & Perretti LLP, Morristown, New Jersey, Randolph S. Sherman, Liza Karsai, Jesse Sands, Kaye, Scholer, Fierman, Hays & Handler, LLP, New York City, Daniel R. Taylor, Jr., Mark A. Stafford, Kilpatrick Stockton LLP, Winston Salem, North Carolina, for defendant.

OPINION

LECHNER, District Judge.

This is an action brought by the plaintiff, Liggett Group, Inc. ("Liggett"), against defendant, R.J. Reynolds Tobacco Company ("RJR"). On 3 March 2000, Liggett filed a complaint (the "Complaint") that alleges, inter alia, violations of the Federal antitrust laws in connection with the distribution and sale of discount cigarettes. See Complaint. Liggett specifically alleges RJR violated Section 1 ("Section 1") of the Sherman Act, 15 U.S.C. § 1, Section 4 ("Section 4") and Section 16 ("Section 16") of the Clayton Act, 15 U.S.C. §§ 15 and 26. See id. at ¶¶ 11, 31-39 and pp. 13-14. On 12 April 2000, RJR filed an answer to the Complaint.

Currently pending is a motion, filed by RJR, to transfer the action (the "Motion to Transfer") to the United States District Court for the Middle District of North Carolina (the "Middle District of North Carolina"), pursuant to 28 U.S.C. § 1404(a) ("Section 1404(a)").1 For the reasons set out below, the Motion to Transfer is granted; the action is transferred for all purposes to the United States District Court for the Middle District of North Carolina.

Background
A. Parties

Liggett is a corporation organized and existing under the laws of the State of Delaware. See id. at ¶ 9. Liggett, is also an indirect, wholly-owned subsidiary of Brooke Group Holding, Inc. See id. Liggett maintains substantially all of its manufacturing facilities in or near Durham, North Carolina. See id. The premium cigarette brand manufactured by Liggett is Eve®. See id. The "mass-market" discount cigarette brand manufactured by Liggett is Pyramid®. See id. In addition, Liggett manufactures various "private label," "control label" and generic cigarettes.2 See id.

RJR is a corporation organized and existing under the laws of the State of New Jersey, with its principal place of business located in Winston-Salem, North Carolina. See id. at ¶ 10. It appears RJR transacts business in New Jersey through its sales office located in Middlesex County. See id. RJR manufactures cigarettes for sale through retail outlets throughout the United States under various brand names, including Camel®, Winston®, Doral® and the Forsyth family brands. See id.

B. Facts

As mentioned, Liggett primarily alleges violations of the Federal antitrust laws as the basis of the instant action. See id. at ¶ 1. For example, Liggett alleges RJR illegally contracted and conspired with cigarette retailers to "restrain trade by engaging in a pervasive scheme of anticompetitive conduct." See id. At issue is the "Every Day Low Price" (the "EDLP") plan promulgated by RJR and the EDLP contracts (the "EDLP Contracts") utilized by RJR to implement the program. See id. at ¶ 2. Liggett alleges the purpose and effect of the EDLP plan "has been to impede the functions of the marketplace by reducing consumer choice, raising prices paid by consumers, and foreclosing competition in the manufacture and sale of discount cigarettes throughout the United States."3 Id.

As stated in the Complaint, it appears cigarettes are sold by manufacturers to wholesalers who, in turn, sell cigarettes to retailers throughout the United States. See id. at ¶ 13. In addition, it appears cigarettes are directly sold by manufacturers to large retailers located in the United States. See id. Liggett alleges retailers "typically" do not buy cigarettes through any other means. See id. at ¶ 15. As a result, the Complaint alleges Liggett, like other cigarette manufactures, maintains direct relationships with its retailers. See id. In an effort to foster its relationship with retailers, Liggett alleges it provides direct discount payments to retailers designed to reduce the retail price of its products and make those products competitively priced to the consumer. See id.

Liggett alleges the relevant market effected by the EDLP plan is the manufacture and sale of discount cigarettes throughout the United States. See id. at ¶ 14. Liggett alleges that because of the "substantial" price disparity between discount and premium tobacco products (cigarettes, pipe tobacco and cigars), consumers of discount cigarettes do not consider premium tobacco products to be viable substitutes for discount cigarettes. See id. Liggett further alleges manufacturers of cigarettes view discount and premium cigarettes as distinctly different products. See id. Liggett alleges, moreover, that industry analysts view discount cigarettes as an entirely separate market. See id.

Liggett alleges RJR is one of four major cigarette manufacturers in the United States and accounts for an estimated 30% of the discount cigarette sales in the country. See id. at ¶ 16. The Complaint further alleges the importance of RJR in the discount cigarette market is magnified by the "high barriers" unique to the entry into the market for the manufacture and sale of discount cigarettes in the United States. See id. at ¶ 17. For example, Liggett alleges the "entry barriers" include the "requirements for extensive distribution organizations, large capital outlays for sophisticated production equipment, substantial inventory investment and costly promotional spending." Id.

In addition, the entry into the discount cigarette market has recently become more difficult in light of a master settlement agreement (the "Master Settlement Agreement") formulated between cigarette manufacturers and various State attorneys general. See id. Liggett specifically alleges because of the Master Settlement Agreement, cigarette advertising has been "substantially" curtailed, making it difficult for companies to enter the discount cigarette market. See id. Liggett, moreover, alleges cigarette manufacturers now face significant uncertainty due, in part, to "unresolved liability issues and the fact that the overall demand for cigarettes has been slowly declining in recent years and appears likely to continue to decline." See id. The Complaint also alleges "the primary basis of competition in the discount cigarette market is based on price, and without the ability to undercut the price of incumbents, a new entrant [into the discount cigarette market] is almost certain to fail." Id. at ¶ 19.

As mentioned, the instant action challenges the EDLP plan developed by RJR and implemented through the EDLP Contracts entered into between RJR and various cigarette retailers. See id. at ¶ 2. Liggett alleges the EDLP Contracts require retailers to insure that no competitive cigarettes are priced below RJR brand cigarettes. See id. In this regard, the Complaint alleges RJR accomplishes its price-fixing "scheme" by requiring that cigarette retailers, inter alia, raise the prices of competing discount cigarettes in return for "substantial payments" (the "EDLP Payments"). See id. at ¶¶ 2, 21.

Liggett further alleges that despite RJR competitors offering retailers "substantial discounts" (for the purpose of reducing the price of their product) the EDLP plan prohibits retailers from lowering the price of competing discount cigarettes, regardless of manufacturer discounts. See id. at ¶ 2. Liggett alleges the EDLP Payments are made to retailers to compensate them for the increased price and resultant decrease in sales of competing discount cigarettes. See id. at ¶ 21. "The EDLP Contracts thus have the effect of preventing retailers from accepting any discounts from other manufacturers (Liggett) that would lower the price of competing product below that of the RJR product." Id. at ¶ 2.

The Complaint further alleges the anticompetitive effects of the EDLP plan are "intensified" by the enforcement mechanism implemented by RJR. See id. at ¶ 22. Liggett alleges that retailers are required to rely upon their individual RJR sales representative to explain and construe the obligations of the retailers under the EDLP Contracts. See id.

EDLP Contracts specifically provide that the opinion of the RJR representative is final regarding contract interpretation. Cigarette retailers, fearing a loss of EDLP Contract payments or other punitive measures by RJR, succumb to obligations as set forth by their RJR representatives. The requirements enforced by RJR representatives often go beyond the express terms of the EDLP Contracts.

Id.

In particular, Liggett alleges that the EDLP Contracts provide in relevant part:

Retailer, if given certain pricing protection against other competitive products, agrees to offer and promote [RJR Discount Cigarette Brand] as its primary cigarette in the lowest price category at the everyday low price at all times and to provide [Retailer's Store] with a minimum of one prominent price communication sign, as well as preferred merchandising space and locations as compared to other products in the low price category.

Id. at ¶ 23. (alterations in the Complaint).

As a result of the implementation of the EDLP plan, the Complaint alleges RJR and participating retailers have increased prices to consumers and excluded competition from other discount cigarette manufacturers. See id. at ¶ 26. "Competing discount cigarette makers have been deprived of effective retail sales outlets for their products. By suppressing price competition, and consequently, sales of competitive discount products, RJR has...

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