Nicsand, Inc. v. 3M Co.

• Decision Date: 17 October 2007
• Docket Number: No. 05-3431.,05-3431.
• Citation: 507 F.3d 442
• Parties: NICSAND, INC., Plaintiff-Appellant, v. 3M COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

507 F.3d 442

NICSAND, INC., Plaintiff-Appellant, v. 3M COMPANY, Defendant-Appellee.

No. 05-3431.

United States Court of Appeals, Sixth Circuit.

Argued: March 7, 2007.

Decided and Filed: October 17, 2007.

ARGUED: Dennis E. Murray, Jr., Murray & Murray Co., L.P.A., Sandusky, Ohio, for Appellant. Dean Ringel, Cahill, Gordon & Reindel, New York, New York, for Appellee. ON BRIEF: Dennis E. Murray, Jr., Murray & Murray Co., L.P.A., Sandusky, Ohio, for Appellant. Dean Ringel, Cahill, Gordon & Reindel, New York, New York, James P. Murphy, Squire, Sanders & Dempsey, Washington, D.C., J. Philip Calabrese, Squire, Sanders & Dempsey, Cleveland, Ohio, for Appellee.

Before: BOGGS, Chief Judge; MARTIN, SILER, BATCHELDER, DAUGHTREY, COLE, CLAY, GILMAN, GIBBONS, ROGERS, SUTTON,^* COOK, McKEAGUE, and GRIFFIN, Circuit Judges.

SUTTON, J., delivered the opinion of the court, in which BOGGS, C. J., SILER, BATCHELDER, GILMAN, GIBBONS, ROGERS, COOK, McKEAGUE, and GRIFFIN, JJ., joined. MARTIN, J. (pp. 459-70), delivered a separate dissenting opinion, in which DAUGHTREY, COLE, and CLAY, JJ., joined.

OPINION

SUTTON, Circuit Judge.

Between 1987 and 2001, NicSand and 3M were the only nationwide suppliers in the market for do-it-yourself automotive sandpaper, and they competed for the business of six large retailers, which controlled 80% of the market and which (with one exception) offered their shelf space on an exclusive basis for a year at a time. NicSand developed this niche market and eventually gained a 67% share of it. Between 1997 and 2001, however, it lost most of the market when 3M offered the large retailers greater up-front discounts and longer exclusive agreements than NicSand had offered in the past or apparently was willing to offer in the future.

When NicSand filed an antitrust lawsuit to complain about 3M's conduct, the district court dismissed the complaint for lack of antitrust standing and, more particularly, for lack of a cognizable antitrust injury. Because 3M did not engage in below-cost-or predatory-pricing, because five of the six large retailers demanded exclusivity as a precondition for doing business, because the allegations show no more than that 3M competed with its rival on the same essential terms that NicSand and the large retailers had already established for this market and because the antitrust laws in the end protect competition, not competitors, we affirm.

I.

This case comes to us as an appeal from a Rule 12(b)(6) dismissal. We thus look to NicSand's allegations in the complaint (in truth, the first amended complaint) to determine the details of the dispute—who the parties are, how the market for do-it-yourself automotive sandpaper works and how the parties competed with each other.

The parties. NicSand is an Ohio corporation based in Berea, Ohio, and has been in business since 1982. It makes a variety of products for automotive body repair, including automotive sandpaper (technically speaking, coated abrasives), which consumers use before, during or after painting a car or truck. Sales of automotive sandpaper accounted for one-half of NicSand's revenue in 1996. 3M is a Delaware corporation based in Maplewood, Minnesota. In addition to making a variety of other products, 3M produces automotive sandpaper.

The market for do-it-yourself automotive sandpaper. NicSand "largely developed" the market for do-it-yourself automotive sandpaper, increasing the number of products offered in the market from 20 in 1987 to 80 in 2000. Am. Compl. ¶ 10. The development of the market, NicSand claims, was "fueled primarily by [its] superior marketing, superior packaging, innovation, and superior value." Id. ¶ 11.

Between 1987 and 2000, just two companies supplied automotive sandpaper (and related products) in the national market: NicSand and 3M. As of 1995, NicSand was the dominant player, holding a 67% share of the market.

NicSand and 3M did not sell their automotive sandpaper products directly to consumers; they instead relied on retailers to distribute the products through a "highly concentrated" retail market. Id. ¶ 14. In 1997, just six large retailers—Advance Auto Parts, AutoZone, CSK Auto, Kmart, Pep Boys, Wal-Mart—controlled 80% of the retail market, while smaller retailers divided up the remaining 20% of the market.

Perhaps due to the relatively "small value" of the market, five of the six large retailers sold just one brand of the product at a time, meaning they permitted NicSand or 3M, but not both, to sell its products at the stores. Id. ¶ 62. "In order to simplify planning and reduce costs," the large retailers also re-negotiated these single-brand agreements just once a year, giving the supplier a year-long "de facto exclusive agreement" with each retailer. Id. ¶ 25. In order to replace an existing supplier of automotive sandpaper, a new supplier not only had to offer favorable prices but also had to (1) produce a full line of do-it-yourself automotive sandpaper, (2) provide racks and other display equipment for the retailer, (3) provide a discount on the retailer's first order and (4) purchase the retailer's existing supply of the sandpaper. Because the large retailers typically restocked the full line of sandpaper products five to seven times a year, buying out a retailer's existing supply of the sandpaper could cost a supplier up to 14% to 20% of its annual revenues from that retailer.

NicSand complied with these requirements in seeking to obtain the large retailers' business, and by every measure it succeeded. By 1996, it was the exclusive supplier for four of the large retailers: Kmart, Advance Auto, CSK Auto and AutoZone. And along with 3M it supplied Pep Boys, the one large retailer that did not insist on an exclusive agreement.

3M was the sole supplier of the sixth large retailer—Wal-Mart. NicSand did not—and could not—compete for this business, because Wal-Mart sought a single supplier that could meet all of its sandpaper needs, which included providing two products that NicSand did not make: sandpaper for Wal-Mart's power tool and paint departments.

NicSand made substantial profits on its exclusive-sales agreements with four of the six large retailers. In 1996, NicSand's annual sales to Kmart totaled $475,000 with profit margins of 38%. In 1997, its sales to Advance Auto totaled $550,000 with margins of 49%, and its sales to CSK Auto totaled $369,000 with margins of 44%. In 1999, its sales to AutoZone totaled $2,200,000 with margins of 39%.

Competition between the two companies from 1997 through 2001. According to NicSand, 3M sought to monopolize the market for do-it-yourself automotive sandpaper beginning in 1997. To that end, 3M offered Kmart $300,000 in 1997 as an incentive to switch suppliers and to enter into an "explicit or sub rosa" exclusive-dealing agreement for "several years." Id. ¶ 23. Kmart accepted 3M's offer and told NicSand that it would not review price quotes from NicSand for a "few years." Id. ¶ 26 (emphasis omitted).

One year later, 3M did the same thing with Advance Auto and CSK Auto, offering the one $285,000 and the other $200,000 to switch suppliers and to enter into "multi-year" exclusive-dealing agreements. Id. ¶¶ 30, 32. Advance Auto and CSK Auto accepted 3M's offers and refused to discuss switching suppliers with NicSand "for at least a few years." Id. ¶ 37.

Two years later, in 2000, 3M offered a similar deal to AutoZone, which long had been NicSand's largest customer. 3M offered AutoZone $1,000,000 to switch suppliers and to enter a "multi-year" exclusive-dealing agreement. Id. AutoZone accepted the offer. When contacted by NicSand, AutoZone refused to discuss switching back to NicSand as a supplier "for at least a few years." Id.

By 2001, NicSand's only remaining customers were Pep Boys (which sold NicSand and 3M products) and several smaller retailers. With a significant drop in its sales volume, NicSand lost its economies of scale; its "raw material costs increased dramatically," id. ¶ 41; and it could no longer "fill existing orders at an appropriate cost," id. ¶ 60. Because NicSand could "no longer . . . compete," it left the market for do-it-yourself automotive sandpaper in 2001 and sought to reorganize under Chapter 11 of the Bankruptcy Code. Id. ¶ 41. Since leaving the market, NicSand alleges that retailers (though it makes no allegations about suppliers like 3M) have raised consumer prices for do-it-yourself automotive sandpaper by as much as 70%.

The complaint. On December 30, 2003, NicSand filed this lawsuit under § 4 of the Clayton Act, claiming that 3M had monopolized, or attempted to monopolize, the market for automotive sandpaper in violation of § 2 of the Sherman Act. See 15 U.S.C. §§ 2, 15. The complaint sought (1) to recover NicSand's "lost profits" or the "value" of NicSand's business and (2) to treble those damages as permitted under the antitrust laws. Compl. at 9. The district court dismissed the complaint under Rule 12(b)(6) for lack of antitrust standing because NicSand "failed to . . . plead an injury to competition resulting from 3M's conduct." 2005 WL 4704988, at 3.

II.

A.

At first glance, one might fairly wonder whether a complaint like this one should be dismissed for lack of antitrust standing. Standing, in a conventional Article III sense, requires just proof of actual injury, causation and redressability. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). And NicSand readily satisfies these requirements: It was injured (when it lost these accounts); 3M caused the injury (when it offered better terms to the retailers than NicSand had offered in the past); and NicSand's request for damages will redress its injury (by permitting it to recover the profits—indeed, three times the profits—it made before 3M entered the picture). Seemingly making matters easier for NicSand, we look at its complaint through the prism of Rule 12(b)(6), requiring us to accept all of its...