Sterling Merch. Inc. v. Nestle

• Decision Date: 23 June 2010
• Docket Number: Civil No. 06-1015.
• Citation: 724 F.Supp.2d 245
• Parties: STERLING MERCHANDISING, INC., Plaintiff v. NESTLE, S.A., et al., Defendants.
• Court: U.S. District Court — District of Puerto Rico

724 F.Supp.2d 245

STERLING MERCHANDISING, INC., Plaintiff

v.NESTLE, S.A., et al., Defendants.

Civil No. 06-1015.

United States District Court,D. Puerto Rico.

June 23, 2010.

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David C. Indiano-Vicic, Jeffrey M. Williams-English, Seth Erbe, Indiano & Williams, PSC, Javier A. Morales-Ramos, Javier A. Morales Ramos Law Office, San Juan, PR, PHV Adam C. Briggs, PHV David J. Gilles, PHV Josh Johanningmeier, Godfrey & Kahn, S.C., PHV Jennifer Cotner, PHV Kevin J. O'Connor, Lafollete Godfrey & Kahn, Madison, WI, for Plaintiff.

Luis A. Oliver-Fraticelli, Roberto A. Camara-Fuertes, Fiddler, Gonzalez & Rodriguez, Lavinia Aparicio-Lopez, Commonwealth Department of Justice, San Juan, PR, PHV Erik T. Koons, PHV, Carmine R. Zarlenga, Howrey LLP, Washington, DC, for Defendants.

OPINION & ORDER

SALVADOR E. CASELLAS, Senior District Judge.

Plaintiff, Sterling Merchandising, Inc. (“Sterling”), brings this action against defendant corporations, Nestlé, S.A., Nestlé Holdings, Inc., Nestlé Puerto Rico, Inc. (“Nestlé PR”), and Payco Foods Corporation (“Payco”) (collectively, “Nestlé” or “Defendants”), alleging antitrust violations and injury stemming from the merger of two local ice cream distributors, and several subsequent business practices. The complaint charges Defendants with: conspiracy to monopolize, and unlawful restraint of trade in violation of Sections 1 & 3 of the Sherman Antitrust Act (“Sherman Act”), 15 U.S.C. § 1, 3; monopolization in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, exclusive dealing in violation of Section 3 of the Clayton Antitrust Act (“Clayton Act”), 15 U.S.C. § 14; unlawful restraint of trade in violation of the Puerto Rico Anti-Monopoly Act, 10 P.R. Laws Ann., §§ 257-276; and monopolization and attempted monopolization in violation of Section 260 of the Puerto Rico Anti-Monopoly Act, 10 P.R. Laws. Ann., § 260. Defendants have moved this court for summary judgment on Counts I through VIII of the Amended Complaint, which allege violations of Sherman Act Sections 1, 2, and 3 (15 U.S.C. §§ 1-3), Clayton Act § 3 (15 U.S.C. § 14), and the Puerto Rico AntiMonopoly Act (10 P.R. Laws Ann. §§ 257-276).

Given the complex nature of the present suit, and after an unsuccessful effort at mediation, this Court held a special hearing for the parties to further present any relevant arguments regarding the motion currently under review. Docket # 221. Taking into account the arguments presented there, and after reviewing the facts and the pertinent law, summary judgment DISMISSING WITH PREJUDICE Sterling's federal claims shall be GRANTED, while all state law causes of action shall be DISMISSED WITHOUT PREJUDICE.

Background ¹ Relevant Cast

Sterling is an ice cream distributor, founded by John Williams (“Williams”) and Stanley Pasarell (“Pasarell”) in 1993. PSUF # 1. From its beginnings, the company has had the exclusive rights to distribute Edy's Ice Cream (“Edy's”) in Puerto Rico, a brand manufactured by Dreyer's Grand Ice Cream, Inc. (“Dreyer's”). Id. Williams and Pasarell each own 50% shares in Sterling. DSUF # 11(a) & (b). Williams is President and Pasarell is Chairman of the Board. Id.

Nestlé S.A., headquartered in Vevey, Switzerland, is currently the largest ice cream manufacturer in the world. PSUF # 4. A subsidiary, Nestec S.A., is responsible for the analysis and review of merger, acquisition, and divestiture proposals within the Nestlé corporate structure. DOSUF # 5. Nestlé S.A. operates in Puerto Rico through separate marketing subsidiaries that sell their products in the market. DSUF # 166. These include Nestlé PR, which owns 100% of the shares of Payco. DSUF # 2. Dreyer's, manufacturer of Edy's, is also a subsidiary of Nestlé S.A. ² DSUF # 182.

Thomas Ward (“Ward”) was the President and principal owner of Payco until the merger with Nestlé PR in 2003, with the exception of the period between 1999 and 2001. DSUF # 9(a); POSUF # 9(a). However, even during said period, Ward acted as Chief Executive Officer (“CEO”) and Chairman of the Board. Id. Valerie Cornut (“Cornut”) is currently CEO of Payco, a position she has held since 2005. POSUF # 9(b).

Dr. Thomas Overstreet (“Overstreet”) is an economist at CRA International, where he holds the position of Vice President. Sterling retained his services “to conduct an economic analysis of the issues raised in the Complaint filed in this matter.” DSUF # 15(a). Sterling's other expert is David W. Whitehouse, a marketing specialist, who conducted two surveys about the ice cream market in Puerto Rico. DSUF # 15(b). ³ Defendants' experts are David Scheffman, an economist and Director of LECG, LLC, an international consulting company, and José J. Villamil, President and CEO of Estudios Técnicos, Inc., an economics and planning consulting firm in Puerto Rico. DSUF # 16.

Unilever is a major Nestlé competitor in the ice cream business, producing brands such as Breyers and Ben and Jerry's. DSUF # 6. Breyers is distributed by Payco, while Sterling distributes other Unilever products, such as Ben and Jerry's ice cream. See DSUF # 19, DUSF # 17, PSUF # 3.

Market Structure

Beginning in 2002, Nestlé managers studied and discussed purchasing Payco, along with other strategies within the Puerto Rico market. PSUF # 8. Nestlé also expanded its presence in the world wide ice cream market after 2000, and in 2003 acquired Dreyer's. DSUF # 182. The Federal Trade Commission (“FTC”) investigated and approved Nestlé Holdings, Inc.'s acquisition of Dreyer's, but did not include Puerto Rico in its analysis. PSUF # 60. The FTC also required Defendants to provide advance written notification of the acquisition of any direct store delivery ice cream distribution business for $7.5 million or more in the United States, except for those in Puerto Rico. PSUF # 61.

Dreyer's products first entered the Puerto Rico market in 1992, and in 1993 the company assigned the exclusive right to distribute its Edy's line to Sterling. DSUF # 176. Sterling has distributed Dreyer's branded products in Puerto Rico since 1993. DSUF # 25. Since as early as April, 2001, Edy's has been, and continues to be, the number one selling ice cream brand in Puerto Rico. ⁴ DSUF # 26. In August, 2000, Sterling purchased selected assets from Caribbean Fruitti, an ice cream distributor in Puerto Rico, and thereby acquired the distribution rights to certain Unilever brands including Good Humor ice cream products. DSUF # 27. Sterling also added J & J Snacks, Rich's Ice Cream and Turkey Hill products to their offerings between 2005 and 2006. DSUF # 28. The amount and variety of ice cream brands and products offered in the relevant market has not diminished significantly since Nestlé PR's acquisition of Payco. ⁵ DSUF 32-33.

Nestlé PR entered the Puerto Rico ice cream distribution market in 1998 via the acquisition of Mantecados Nevada, Inc.'s (“Nevada”) ice cream manufacturing and distribution business. DSUF # 21. Prior to the acquisition of a local distributor, Nestlé PR sold its branded ice cream products, mostly imported from the U.S. mainland, via local distributors, including Sterling, Payco, and Nevada. PSUF # 9. Nevada ran an ice cream factory in addition to its distribution business, so Nestlé PR offered ice cream products that were manufactured in the Puerto Rico factory, as well as Nestlé branded products. PSUF # 10. The company's ice cream sales volume in this period (1999-2001) fluctuated between $18.1 million and $ 18.6 million. PSUF # 11. Nearly contemporaneously, Payco reported sales of $27.8 million, $29.1 million, and $31.1 million in 2000, 2001 and 2002, respectively. PSUF # 15.

From the time of the 1998 Nevada acquisition until the Payco merger in June 2003, Nestlé PR's ice cream division suffered heavy losses. DSUF # 22. In response to this reality, and before the 2003 merger with Payco, Nestlé PR approached Sterling about a possible joint approach for retail space, but this option was never seriously pursued. PSUF # 155. This did not lead to an agreement, and because Nestlé PR was not economically successful, it began merger talks with Payco in 2001, and the two merged on June 11, or July 1, 2003 through Nestlé's acquisition of 50% of Payco's stock, which was controlled by Ward. ⁶ DSUF 23 & 209; PSUF 22 & 27. On September 2, 2005, Nestlé PR acquired the remaining 50% of Payco's shares from Ward. DSUF # 210. After the Nestlé PR/Payco merger, Ward remained as President and CEO of Payco until 2005. PSUF # 53.

The Puerto Rico Office of Monopolistic Affairs (“PROMA”) reviewed and ultimately approved the Nestlé PR / Payco transaction, conditioned upon various stipulations. ⁷ DSUF # 30. The then head of PROMA, José Díaz Tejera, has no knowledge that the terms of the agreement have ever been breached. DUSF # 31. After the merger, all of the sales of ice cream that were previously made by Nestlé PR, including all Nestlé brands, were shifted to Payco. DSUF # 214.

During the years prior to the Nestlé PR/Payco merger, Nestlé explored the possibility of strategic collaboration, and even a possible merger with Sterling. PSUF # 51. Nestlé also studied the possibility of exchanging its Unilever line for Sterling's Edy's line in order to promote brand alliance rationalization. PSUF 86 & 90. This included discussions with Sterling's co-owner, Pasarell, about the possible purchase of his share of the company. PSUF # 88.

In the mid-1990s, Ward acquired Payco and began distributing various brands of ice cream. These came to include Payco, Lady Richmond, Carrusel, Flav-O-Rich, Unilever's Breyer's ice cream line, Masterfood Interamerica's Mars novelty ice cream line, and Wells' Dairy, Inc.'s (“Wells' Dairy”) Blue Bunny line of ice cream products. DSUF 17-20; PSUF # 13. Prior to the Nestlé PR / Payco merger in 2003, Blue Bunny ice cream products were Payco's most successful ice cream line....