Republic Tobacco, Lp.v. North Atlantic Trading, 98 C 4011.
| Decision Date | 05 April 2002 |
| Docket Number | No. 98 C 4011.,98 C 4011. |
| Parties | REPUBLIC TOBACCO, L.P., Plaintiff, v. NORTH ATLANTIC TRADING COMPANY, INC., et al., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Katherine Romano Schnack, Federal Trade Commission, Assistant Regional Director, Chicago, IL, Lynn Hagman Murray, Charles S. Bergen, Marc S. Lauerman, Heather Labadot Smedstad, Grippo & Elden, Chicago, IL, Darrell J. Graham, Perkins Coie LLC, Chicago, IL, for plaintiff.
Anne Giddings Kimball, Mark L. Durbin Wildman, Harrold, Allen & Dixon, Chicago, IL, John K Bush, Eric A Braun, Janet P. Jakubowicz, Greenebaum, Doll & McDonald, Louisville, IL, William F. Cavanaugh, Jr., Willard C. Shih, Patterson, Belknap, Webb & Tyler, New York, NY, for defendants.
Before the court are the parties' crossmotions for summary judgment. For the following reasons, both motions are granted in part and denied in part.
Plaintiff Republic Tobacco, L.P. ("Republic") imports and sells tobacco, rollyour-own ("RYO") cigarette papers, and other tobacco-related products. Defendant North Atlantic Trading Company, Inc. ("NATC") is Republic's direct competitor. Defendants North Atlantic Operating Company, Inc. ("NAOC") and National Tobacco Company, L.P. ("National") are wholly-owned subsidiaries of NATC. NAOC imports RYO cigarette papers and other tobacco-related products sold under the "ZIG-ZAG" brand name. National distributes and sells ZIG-ZAG cigarette papers, Beech-Nut loose leaf chewing tobacco, and other tobacco-related products. We will refer to all defendants collectively as "North Atlantic" where appropriate. The following relevant facts are taken from plaintiffs Second Amended Complaint and from defendants' Counterclaim.
Republic and North Atlantic sell their RYO cigarette paper to distributors and wholesalers, who resell the products to outlets such as convenience, drug, and variety stores and gas station/mini-marts. As part of its marketing strategy, Republic offers certain incentive programs to these customers for stocking, selling (and promoting, in the case of distributors) Republic's products. Customers joining these programs can receive rebates, free products, and free travel in exchange for stocking or promoting specified amounts of Republic's RYO cigarette paper brands and meeting certain sales goals.1 (Second Amended Complaint, Sample Incentive Program Agreements, Exs. A-D.)
North Atlantic and its predecessors sometimes sold their RYO cigarette papers in limited promotional runs, packaged in a plastic display box.2 Customers received the display box along with their purchase of the products inside. Some of Republic's customers wanted to use the boxes to display and sell Republic's cigarette papers, so Republic obtained unused boxes from third-party distributors. Then Republic re-labeled the boxes with its own labels, restocked the boxes with its products, and made them available to customers who requested them.
Republic alleges that North Atlantic engaged in an unlawful "pattern of anticompetitive conduct" by making disparaging remarks to Republic's customers regarding Republic's incentive programs and display boxes. Republic claims that North Atlantic contacted Republic's customers, both orally and in writing, and falsely told these customers that Republic's incentive programs violated federal and state antitrust and unfair competition laws. Republic alleges that "North Atlantic's statements were designed to interfere with Republic's customer relationships by causing customers to be concerned about the legality of the programs and to believe that Republic would be unable to honor its obligations under the programs." (Second Amended Complaint, 116.)
Republic claims that North Atlantic made unlawful disparaging remarks on several occasions. It is undisputed that John Czerewko, North Atlantic's director of sales for the Midwest, sent a letter in late January 1998 (the "Czerewko Letter") to Clark Refining and Marketing Company ("Clark"), which sells Republic's products to customers of its gas station/convenience stores. The letter discussed the modifications to the display boxes and asserted that North Atlantic's patent and trademark had been violated, prompting its attorneys to "initiate[ ] legal action." (Republic App. I, Vol. I, Ex. 11.) Republic contends that these statements were false because North Atlantic held no patent or trademark rights in the boxes and had not initiated litigation against anyone in connection with the display boxes. Republic also asserts that the Czerewko Letter falsely hinted that Republic's incentive programs are illegal by referring to them as "[s]moke & [m]irrors" and warning Clark to "[b]e aware of the Robinson-Patman Act."3
Republic alleges that Clark forwarded the Czerewko Letter to Clark's supplier, Eby-Brown, which buys products directly from Republic, and that Eby-Brown discontinued its participation in Republic's incentive programs after receiving the letter. Republic also claims that Clark subsequently discontinued its participation in Republic's incentive programs as well.
It is undisputed that on August 13, 1998, North Atlantic sent a letter (the "August 13 Letter") to its customers, many of whom are also Republic's customers. The August 13 Letter stated that North Atlantic filed a lawsuit against Republic in Kentucky, and described North Atlantic's allegations in that suit. The allegations addressed, among other things, Republic's incentive programs and modification of the display boxes. The August 13 Letter did not mention the instant action, which was filed in late June 1998.4
Republic contends that North Atlantic's alleged misstatements have caused Republic to lose sales and have discouraged Republic's customers from participating in its incentive programs. (Second Amended Complaint, H 46.)
North Atlantic alleges that Republic has engaged in wrongful conduct in two principal ways. First, North Atlantic refers to Republic's re-labeling of the North Atlantic display boxes as "defacement." On some boxes, North Atlantic's Zig-Zag name can be seen underneath Republic's new label. North Atlantic also alleges that Republic has also placed a "conversion chart" on the vendor displays that instructs sales clerks how to "convert" a customer's request for a North Atlantic brand of RYO cigarette papers into a Republic brand. According to North Atlantic, the re-labeling confuses consumers into buying Republic's brands thinking that they are affiliated with North Atlantic.
Second, North Atlantic alleges that Republic has engaged in anticompetitive practices regarding the sales of RYO cigarette papers to consumers in the southeastern United States (which North Atlantic defines as consisting of nine states— Alabama, Florida, Georgia, Kentucky, Mis sissippi, North Carolina, South Carolina, Tennessee, and Virginia).5 Republic has claimed that its market share in the region is as much as 95 to 98 percent. North Atlantic attributes this dominant market share to "cash payments to distributors and retailers who are Republic's customers" and "rebate and incentive programs that reward various merchandise and extravagant trips and cruise vacations" based on the quantity of products a distributor or retailer purchases from Republic. (Counterclaim, f 3.) According to North Atlantic, distributors and wholesalers are the "gatekeepers" to specific regions because RYO cigarette paper importers rely on them to market their products, as a majority of retailers buy from distributors. North Atlantic contends that distributors and wholesalers make buying decisions at a regional level.
In recent years, Republic has revised its rebate and incentive programs to require exclusivity from distributors and retailers in the Southeast in order to qualify for certain program benefits. When a distributor or retailer decided to carry Republic's RYO cigarette papers exclusively, Republic bought the entire quantity of North Atlantic's products carried by that distributor or retailer and resold them outside of the Southeast. North Atlantic claims that Republic has "selectively enforced" the exclusivity requirements by informing some incentive program participants that they would lose "points" in Republic's program if they carried North Atlantic's products, when other similarly situated customers had not incurred such a penalty. North Atlantic also claims that Republic representatives contacted the parties' mutual customers in an attempt to undermine their relationship with North Atlantic, offering the distributors and their employees and family members cash incentives, vacations, personal gifts, and other items.
North Atlantic asserts that Republic's conduct has harmed competition in the Southeast market by: (1) materially excluding North Atlantic and other competitors from the region; (2) effectively eliminating consumer choice in the region; and (3) raising the price of RYO cigarette papers above the competitive level in areas where Republic's exclusivity agreements have prevented its competitors from entering the market. North Atlantic contends that there is no legitimate business justification for Republic's exclusivity programs.
On June 30, 1998, Republic filed a fourcount complaint in the instant case against NATC and NAOC. On July 15, 1998, NAOC and National filed an action against Republic and its affiliated companies in the United States District Court for the Western District of Kentucky, primarily alleging antitrust violations. The two pending actions have some overlapping facts; all discovery matters were heard in this court.
In the instant case, after the defendants moved to dismiss several counts of the complaint, we gave Republic leave...
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