Liggett Group, Inc. v. Brown & Williamson Tobacco Corp.

• Decision Date: 11 May 1992
• Docket Number: 91-1221,Nos. 90-1851,90-1854,s. 90-1851
• Citation: 964 F.2d 335
• Parties: , 1992-1 Trade Cases P 69,817 LIGGETT GROUP, INCORPORATED, now named Brooke Group, Limited, Plaintiff-Appellant, v. BROWN & WILLIAMSON TOBACCO CORPORATION, Defendant-Appellee, and Generic Products Corporation, Defendant. (Three Cases)
• Court: U.S. Court of Appeals — Fourth Circuit

Page 335

964 F.2d 335

60 USLW 2746, 1992-1 Trade Cases P 69,817

LIGGETT GROUP, INCORPORATED, now named Brooke Group, Limited, Plaintiff-Appellant, v. BROWN & WILLIAMSON TOBACCO CORPORATION, Defendant-Appellee, and Generic Products Corporation, Defendant. (Three Cases)

Nos. 90-1851, 90-1854, 91-1221.

United States Court of Appeals, Fourth Circuit.

Argued Feb. 3, 1992.

Decided May 11, 1992.

As Amended May 11, 1992.

Phillip Areeda, Cambridge, Mass., argued (William H. Hogeland, Bruce Topman, Mudge, Rose, Guthrie, Alexander & Ferdon, New York City, Abraham D. Sofaer, John M. Townsend, Hughes, Hubbard & Reed, Washington, D.C., Jean E. Sharpe, Brooke Group, Ltd., New York City, Garret G. Rasmussen, C. Allen Foster, Kenneth L. Glazer, Patton, Boggs & Blow, Greensboro, N.C., Josiah S. Murray, III, James W. Dobbins, Liggett Group, Inc., Durham, N.C., on brief), for plaintiff-appellant.

Griffin Boyette Bell, King & Spalding, Atlanta, Ga., argued (Abbott B. Lipsky, Jr., King & Spalding, Atlanta, Ga., Norwood Robinson, Michael L. Robinson, Petree, Stockton & Robinson, Winston-Salem, N.C., Martin London, Daniel J. Leffell, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, on brief), for defendant-appellee.

Before ERVIN, Chief Judge, and HALL and NIEMEYER, Circuit Judges.

OPINION

NIEMEYER, Circuit Judge:

Liggett Group, Inc., charges Brown & Williamson Tobacco Corporation with pursuing a primary-line predatory pricing scheme in the sale of generic cigarettes during the period 1984-85 in violation of § 2(a) of the Robinson-Patman Act, 15 U.S.C. § 13(a). Liggett contends that Brown & Williamson charged below-average-variable-cost prices ¹ to force Liggett either to raise the prices of its generic cigarettes or to cease selling them, with the expectation of preserving high profits theretofore earned on sales of branded cigarettes by the industry-wide oligopoly. ² Following a 115-day trial, a jury returned a verdict in favor of Liggett in the amount of $49.6 million which the district court trebled for a judgment of $148.8 million. The district court, however, granted Brown & Williamson's motion for judgment notwithstanding the verdict, 748 F.Supp. 344 (M.D.N.C.1990), and this appeal followed. We now affirm.

I

Cigarettes in the United States have been manufactured in recent years primarily by six companies, Philip Morris, Inc., R.J. Reynolds Tobacco Corporation, Brown & Williamson, Lorillard, Inc., American Tobacco Company, and Liggett. Philip Morris and R.J. Reynolds, with respectively over 40% and 28% of the market at the time of trial, held the two largest market shares throughout the 1980's. During the relevant period Brown & Williamson's sales never represented more than 12% of the market. Prior to 1980, cigarettes were sold by these companies to distributors at the same price, and when one company increased the price, the others followed. Liggett has characterized this market as "one of the most highly concentrated oligopolies in the United States," which has produced what Liggett's economist has characterized as "supracompetitive profits." ³

In 1980 when Liggett's share of the cigarette market in the United States had declined to 2.3%, a level that threatened its viability, it introduced a line of generic cigarettes in black and white packaging. Liggett discounted these generic cigarettes and offered volume rebates to yield an effective price to distributors about 30% lower than that charged for branded cigarettes. By 1984 Liggett's share of the total cigarette market in the United States increased to over 5% and its generics became the fastest growing segment of the market, in which overall sales of cigarettes were declining.

Other manufacturers began responding in 1983. In July of that year, R.J. Reynolds introduced "Century" cigarettes. It sold this brand in cartons of nine packs containing 25 cigarettes each, for the same price as other branded cigarettes sold in cartons of 10 packs containing 20 cigarettes each. These "25s" thus cost consumers 12.5% less than other brands. Brown & Williamson followed suit later that year with "Richland," its own brand of 25s.

Nonetheless, in the 1983-84 period, Brown & Williamson began to observe that it was losing more sales to generic cigarettes, proportionally, than were other manufacturers, and that it sustained a "variable margin loss" ⁴ of over $50 million in 1983 alone. It concluded that "unchallenged, [Liggett] could continue its total dominance of this segment ..., becoming the third largest company in the U.S. cigarette market." A Brown & Williamson memorandum introduced at trial stated about the Liggett activity:

Stipulating that the industry's interests--other than [Liggett's]--would be far better served had generics never been introduced, they are an immediate and growing threat to all other manufacturers. Competitive counter-actions are essential and inevitable.

After examining each company's capacity and expected response to Liggett's introduction of generic cigarettes, Brown & Williamson determined to enter the generic segment to recapture the sales lost to Liggett. It described the opportunity as follows:

Generics represent B & W's most immediate opportunity to increase volume. This volume can be achieved within current manufacturing capacity, without incremental manpower and without negatively impacting trading profit. No other option offers similar potential to recover lost volume/share with such minimal investment risk. This is true because our goal is to capture existing demand[,] not create new consumer demand.

The same marketing memorandum revealed a pricing strategy that was intended to produce "a full variable margin" in excess of $4 per thousand cigarettes. But it went on to state,

B & W is prepared to spend up to net variable margin as a first step response to competitive counter-offers; if required, we are also prepared to go up to, but not beyond, full variable margin to gain entry into the generics market.

* * * * * *

If [Liggett] goes below full variable margin, Brown & Williamson would not plan to match their offer.

In May 1984, before Brown & Williamson implemented its plan, R.J. Reynolds "repositioned" its brand "Doral," cutting the list price to that charged by Liggett for its generic cigarettes. Brown & Williamson reanalyzed its strategy in light of the Doral move, concluding in the final strategic memorandum,

B & W believes that branded generics will enhance the growth of the economy segment and will draw volume from popular priced brands.

* * * * * *

The earlier concern of expanding the economy segment is no longer tenable, given RJR's recent action. It is clear that the economy segment is significant, and growing. Accordingly, recognizing the importance of minimizing increased cannibalization and concomitant share erosion, as well as maintaining trading profit targets, it is imperative that B & W enter this segment.

Shortly thereafter, in July 1984, Brown & Williamson introduced its line of generic cigarettes in black and white packages to compete directly with Liggett's black and white packaged generics. Liggett responded immediately with this lawsuit alleging initially that Brown & Williamson violated the trademark laws. The complaint was amended to add the Robinson-Patman claims that are the subject of this appeal. Liggett also responded by increasing rebates and other incentives to its distributors. During the rest of the summer, the two manufacturers traded moves and counter-moves four more times in setting prices, offering rebates, and otherwise promoting black and white generic cigarettes. The incentive schemes established when the dust settled in August remained in force until June 1985, when Liggett raised its list price for generics. Brown & Williamson matched the rise in October of that year.

By 1988 all other market participants, except for Lorillard, were selling generics and discounted branded cigarettes, and both R.J. Reynolds and Philip Morris added a black and white generic line. By the time of trial, Lorillard too was in that segment of the market. With the exception of an aborted attempt by Brown & Williamson in December of 1985, no manufacturer raised the price of black and white cigarettes until the summer of 1986. Since then, generic cigarette prices have risen twice a year, in tandem with those of branded cigarettes, reducing the proportional price discount between branded and generic cigarettes from a high of 40% in 1985 to 27% in 1989.

While the United States market for cigarettes has been generally declining, the growth of discounted cigarettes has been dramatic. In 1981 Liggett, which held 97% of the generic sales, sold 2.8 billion cigarettes, representing .4% of the United States cigarette market. By 1988 it sold over 9 billion generic cigarettes. The total sales of generic and discounted cigarettes during the same period increased from 2.8 billion cigarettes to 61.6 billion, representing 11.1% of the entire United States cigarette market. By trial all manufacturers were selling generics and discounted cigarettes, and yearly sales had reached nearly 80 billion cigarettes, representing 15% of the United States cigarette market. The percentage of the market represented strictly by black and white generics peaked in 1985 with 4.7% and was continuing to decline at the time of trial.

No one denies that after Brown & Williamson introduced its black and white generic cigarettes in 1984, the companies fought "tooth and nail" and that the market "got very competitive." Liggett's president confirmed that "competition had substantially increased in the total cigarette market." When all was said and done, Liggett ended up with 3.25% of the market for cigarettes in the United States and Brown & Williamson with 11.36%.

Liggett contends that from June 1984 to the end of 1985, Brown & Williamson sold black and white cigarettes at prices below its "average variable cost," although it acknowledges...