Mahaska Bottling Co. v. PepsiCo Inc.

• Decision Date: 15 September 2017
• Docket Number: No. 4:16–cv–00114–JEG,4:16–cv–00114–JEG
• Citation: 271 F.Supp.3d 1054
• Parties: MAHASKA BOTTLING CO., Plaintiff, v. PEPSICO INC. and Bottling Group LLC, Defendant.
• Court: U.S. District Court — Southern District of Iowa

271 F.Supp.3d 1054

MAHASKA BOTTLING CO., Plaintiff,

v.PEPSICO INC. and Bottling Group LLC, Defendant.

No. 4:16–cv–00114–JEG

United States District Court, S.D. Iowa, Central Division.

Signed September 15, 2017

James Robert Krause, Pro Hac Vice, Lawrence J. Friedman, Pro Hac Vice, Shauna A. Izadi, Pro Hac Vice, Jason H. Friedman, Pro Hac Vice, Mazin A. Sbaiti, Pro Hac Vice, Friedman & Feiger, LLP, Dallas, TX, Johannes (John) H. Moorlach, Whitfield & Eddy PLC, Des Moines, IA, for Plaintiff.

Debra Hulett, Ryan Gene Koopmans, Spencer S. Cady, Nyemaster Goode PC, Des Moines, IA, Linda H. Martin, Freshfields Bruckhaus Deringer US LLP, New York, NY, Thomas Ensign, Pro Hac Vice, Freshfields Bruckhaus Deringer US LLP, Washington, DC, for Defendant.

ORDER

JAMES E. GRITZNER, Senior Judge

This matter comes before the court on a Motion to Dismiss (the Motion) pursuant to Federal Rule of Civil Procedure 12(b)(6) (the Motion), ECF No. 28, filed by Defendants PepsiCo, Inc. (PepsiCo) and Bottling Group, LLC d/b/a Pepsi Beverage Company (PBC) (collectively, Defendants or Pepsi). Defendants request an order dismissing Counts III, IV, and VI through X of the First Amended Complaint (the Amended Complaint), ECF No. 25, filed by Plaintiff Mahaska Bottling Company, Inc. (Mahaska). Mahaska resists. The Court held a hearing on the Motion on July 18, 2017. Attorneys Shauna A. Izadi, Jason H. Friedman, and John H. Moorlach were present for Mahaska, and attorneys Thomas Ensign, Linda H. Martin, and Debra Hulett were present for Defendants. The matter is fully submitted and ready for disposition.

I. BACKGROUND¹

The Amended Complaint presents ten counts against Defendants. Defendants move to dismiss Counts III, IV, and VI through X, all of which are asserted against both Defendants.² Count III alleges violations of the Robinson–Patman Act, 15 U.S.C. §§ 13 – 14, against both Defendants. Count IV alleges violation of § 2 of the Sherman Antitrust Act, 15 U.S.C. § 2. Count VI alleges breach of fiduciary duty. Counts VII and VIII allege predatory pricing and attempt to monopolize in violation of the Iowa Competition Law, Iowa Code §§ 553.4 –5, based on the same conduct at issue in the federal antitrust claims. Count IX alleges business defamation or disparagement based on PepsiCo communications with certain customers. Count X alleges a violation of the Lanham Act, 15 U.S.C. § 1123(a), based on PBC's use of Pepsi trademarks.

A. Carbonated Soft Drink Bottling

Mahaska is an independent bottler of carbonated beverages and has been in business since 1889. Branded carbonated soft drinks (CSD) are produced using concentrate flavor ingredients (concentrate). Bottlers such as Mahaska purchase concentrate inputs from concentrate suppliers such as PepsiCo and manufacture CSD products pursuant to licenses with the concentrate suppliers. The finished CSD products are marketed under the brands of the concentrate suppliers, i.e. , Pepsi–Cola. Bottlers are often responsible not only for producing from concentrate the finished CSD products under the concentrate supplier's brand, which is the process known as "bottling," but also for distributing, marketing, pricing, and selling finished CSD products to customers. In this context, the bottlers' customers are generally retailers who sell finished CSD products to end-consumers. By definition, independent bottlers do not formulate or sell their own brands of concentrate but instead purchase this product input from branded concentrate suppliers such as PepsiCo. Sometimes independent bottlers engage in bottling or distributing the brands of multiple concentrate suppliers. For example, Mahaska bottles and distributes Pepsi-brand CSD products, such as Pepsi and Mountain Dew, and also distributes brands offered by Dr Pepper Snapple Group (DPSG), another concentrate supplier. Bottlers, including Mahaska, also sell other products and services, such as snacks, sports beverages, and vending services.

PepsiCo is a concentrate supplier, which means that it formulates the key input (concentrate syrup) for CSD beverages for its brands such as Pepsi and Mountain Dew, and it owns the intellectual property relating to those brands.³ Concentrate suppliers such as PepsiCo sell concentrate to bottlers. Concentrate suppliers may also engage in marketing activities for their soft drink brands, such as national advertising campaigns. Concentrate suppliers sometimes negotiate directly with large, nationwide retailers about those retailers' wholesale purchases of finished CSD products, albeit subject to constraints that may exist in concentrate supplier-bottler relationships, as discussed below.

Concentrate suppliers may also perform some or all of the functions of a bottler in-house. In 2010, PepsiCo acquired two independent bottlers and distributors who were consolidated into PBC. At that time, PBC was responsible for about 56% of bottler-distributed sales for PepsiCo's CSD brands. Mahaska alleges that PepsiCo uses and has historically used a network of independent bottlers, each having exclusive geographic territories, to deliver finished CSD products to consumers. Exclusive territorial rights for bottlers or distributors appears to be the norm for concentrate suppliers, such that retailers who purchase any given brand of CSD in any given territory will be served by only one wholesale seller, whether that seller is an independent bottler or a bottling arm of the parent concentrate supplier. Exclusive distributorship agreements between concentrate companies and independent bottlers often include restrictions on those independent bottlers' ability to bottle for competing concentrate companies.

B. Mahaska's Historical Relationship with PepsiCo

Mahaska initially entered into an exclusive distributorship arrangement with PepsiCo in 1928 as part of a broad PepsiCo initiative to expand its brand penetration using independent bottlers. In 1948, Mahaska and PepsiCo entered into an Exclusive Bottling Appointment (EBA) that, as amended, still governs the parties' relationship. The EBA grants Mahaska the exclusive right to bottle and distribute certain specified Pepsi-brand products in perpetuity within the southeast Iowa territory defined in the EBA.⁴ The EBA specifies that Pepsi will provide to Mahaska the necessary key ingredients for bottling Pepsi–Cola, and Mahaska will adhere to Pepsi's quality standards and will make vigorous efforts to sell Pepsi-brand products. Under the EBA, Mahaska must bear its own expenses in bottling, selling, and distributing Pepsi products but is also allowed to set its own prices with retailer customers.

PepsiCo has acknowledged the important role that independent bottlers have played in its business. In 1975, PepsiCo's president testified before the Federal Trade Commission (FTC) that the promise of perpetual exclusivity was critical to getting independent bottlers to sign up with Pepsi. Am. Compl. ¶ 26 (citing Pepsi–Cola Bottling Co. of Pittsburg, Inc. v. PepsiCo, Inc., 431 F.3d 1241, 1249 (10th Cir. 2005) ), ECF No. 25.⁵ In 1980, PepsiCo's vice president for corporate affairs testified before Congress about the need to protect PepsiCo's exclusive appointments. Pepsi–Cola Bottling Co. of Pittsburg, 431 F.3d at 1250. As highlighted in the Amended Complaint, this PepsiCo executive testified:

If Exclusive Territories are eliminated, dozens and dozens of our Pepsi–Cola bottlers will be driven out of business by their larger neighbors. This will be accomplished quickly through the ability of larger bottlers by virtue of their location in major areas and their bottling capacity to take the cream of the business ... leaving smaller bottlers with less profitable accounts to service.... Long term, not only will there be fewer outlets handling soft drinks, but after the bottler ranks are decimated, the survivors, I am certain, will be able to raise soft drink prices higher than ever....

We totally support our bottlers in their efforts to preserve the Exclusive Territories we granted them because we are deeply grateful for their past and continuing commitment to their parent company and because we need such fiercely competitive partners in our future.

Id. at 1250 ; see also Am. Compl. ¶ 27.

Nevertheless, beginning in the early 1990s Pepsi perceived headwinds pushing against its distribution partnerships that led it to seek constraints on the independence of its independent bottlers. As the Tenth Circuit Court of Appeals outlined:

First, significant consolidation occurred on the retail side of the soft drink industry as a result of the growth of large, nationwide retail chains like Wal–Mart and Sam's Club. PepsiCo's biggest customers had stores in multiple bottling territories and began demanding that PepsiCo service their needs at a national rather than a local level. Second, in the 1980's, PepsiCo's chief rival, [Coke,] established a single anchor bottler ... and began acquiring its individual bottlers. This consolidation enabled Coke to benefit from the economy of scale and to negotiate more effectively with the large retail chains.

Pepsi–Cola Bottling Co. of Pittsburg, 431 F.3d at 1250. As a result, PepsiCo developed Customer Development Agreements (CDAs) with large national retailers in the early 1990s. These CDAs purported to set uniform national wholesale prices for finished CSD products for these customers. These agreements were not binding on local independent bottlers such as Mahaska, who retained full discretion to set prices in their territories pursuant to their EBAs. Additionally, PepsiCo offered Marketplace Investment Agreements (MIAs) to bottlers, whereby PepsiCo would make payments to bottlers who accepted a portion of rebates given to national retailers in exchange for retailer promotional efforts on behalf of Pepsi brands. Bottlers such as Mahaska had the right to decline to participate in either of these arrangements; Mahaska appears to have declined to participate.⁶ In addition, PepsiCo encouraged consolidation of...