Williamson Oil Co., Inc. v. Philip Morris Usa

• Decision Date: 22 September 2003
• Docket Number: No. 02-14037.,02-14037.
• Citation: Williamson Oil Co., Inc. v. Philip Morris Usa, 346 F.3d 1287 (11th Cir. 2003)
• Parties: WILLIAMSON OIL COMPANY, INC., on behalf of itself and all others similarly situated, Holiday Wholesale Grocery Co., et al., Plaintiffs-Appellants, v. PHILIP MORRIS USA, R.J. Reynolds Tobacco Co., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

346 F.3d 1287

WILLIAMSON OIL COMPANY, INC., on behalf of itself and all others similarly situated, Holiday Wholesale Grocery Co., et al., Plaintiffs-Appellants, v.PHILIP MORRIS USA, R.J. Reynolds Tobacco Co., et al., Defendants-Appellees.

No. 02-14037.

United States Court of Appeals, Eleventh Circuit.

September 22, 2003.

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Dianne M. Nast, Roda & Nast, P.C., Lancaster, PA, Martin D. Chitwood, Craig Gordon Harley, William Thomas Lacy, Jr., Chitwood & Harley, Atlanta, GA, Paul T. Gallagher, Michael D. Hausfeld, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Washington, DC, Stanley M. Chesley, Waite, Schneider, Bayless & Chesley, Cincinnati, OH, Jon Peter Ferguson, Jeffrey Parker Bean, Chandler, Franklin & O'Bryan, Bainbridge Island, WA, for Plaintiffs-Appellants.

Kenneth L. Chernof, Heller, Ehrman, White & McAuliffe LLP, Gaithersburg, MD, William V. O'Reilly, Thomas F. Cullen, Jr., Edwin Louis Fountain, Jones, Day, Reavis & Pogue, Peter D. Isakoff, Weil, Gotshal & Manges, Amy J. Mauser, Boies, Schiller & Flexner, LLP, Washington DC, Stephen R. Patton, Andrew R. McGaan, Kirkland & Ellis, Chicago, IL, Matthew J. Calvert, Ashley Cummings, Hunton & Williams, Joseph B. Haynes, King & Spalding, Edward B. Krugman, Bondurant, Mixson & Elmoe, Atlanta, GA, Michael T. Williams, Darryl L. Snider, Jerry L. Marks, Heller, Ehrman, White & McAuliffe LLP, Los Angeles, CA, David Boies, Boies, Schiller & Flexner LLP, Armonk, NY, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before MARCUS and WILSON, Circuit Judges, and RESTANI^*, Judge.

MARCUS, Circuit Judge:

This is an antitrust action brought pursuant to section 1 of the Sherman Act,15 U.S.C. § 1, andsections 4and16 of the Clayton Act,15 U.S.C. §§ 15and26, by a class of several hundred cigarette wholesalers ("the class" or "the wholesalers") against Philip Morris, Inc.("PM"), R.J. Reynolds Tobacco Co.("RJR"), Brown & Williamson Tobacco Corp.("B & W") and Lorillard Tobacco Co.("Lorillard")(collectively "the manufacturers").The class alleges that the manufacturers conspired between 1993 and 2000 to fix cigarette prices at unnaturally high levels, and that this collusion resulted in wholesale list price overcharges of nearly $12 billion.The district court ultimately entered summary judgment in favor of the manufacturers.It reasoned that the wholesalers had failed to demonstrate the existence of a "plus factor," as is necessary to create an inference of a price fixing conspiracy, and that even if the class had shown that a plus factor was present, the manufacturers were able to rebut fully the inference of collusion, as the economic realities of the 1990s cigarette market rendered the class's conspiracy theory untenable.Rather, the district court held that the manufacturers' pricing behavior evidenced nothing more than "conscious parallelism," a perfectly legal phenomenon commonly associated with oligopolistic industries.

On appeal, the wholesalers say that the district court misapplied the summary judgment standard, that they presented sufficient evidence to withstand the manufacturers' motions, and that the court erred by excluding portions of the testimony proffered by their primary expert witness.In the end, we conclude that none of the class's arguments are compelling and that the district court's treatment of the wealth of complicated issues in this case was nuanced, insightful and, ultimately, correct.Accordingly, we affirm the court's entry of final summary judgment in favor of PM, RJR, B & W and Lorillard.

I

The modern American tobacco industry is a classic oligopoly.Between 1993 and 1999, appellees — the nation's four largest cigarette manufacturers — along with Liggett Group, Inc.,¹ manufactured more than 97% of the cigarettes sold in the United States.Moreover, the composition of the industry has been remarkably stable over time, a condition that has resulted largely from the fact that during the twentieth century the major tobacco players engaged in minimal price competition.Because price fluctuations were relatively rare, smokers typically had no reason to change brands, brand loyalties were solidified and sizable market share shifts were uncommon.

During the early 1990s, however, a price gap widened between premium brands like Marlboro, Newport and Camel and discount and deep discount brands² such as GPC, Basic and Doral.This price differential was the result of extremely competitive pricing of the non-premium brands, especially by B & W and RJR, which focused a large percentage of their competitive efforts on the discount and deep discount markets.This led some "premium smokers" to shift to one of the non-premium brands, and by 1993 these brands had captured over 40% of the United States market.At that time, there were 10 different wholesale list price points, i.e., cigarette price tiers.

Although this trend toward the discount and deep discount brands benefitted RJR and B & W, it was extremely undesirable from the perspective of premium-intensive manufacturers like PM and Lorillard.³As such, PM — which at the time was (and remains) the market leader, with a market share that ranged from 42% to 50% during the period of the alleged conspiracy — sought in April, 1992 to raise the price of its lowest tier products by $4 per thousand.This effort was unsuccessful, however, because RJR, B & W and Lorillard did not follow suit, and PM was forced to rescind its price increase.Although PM again attempted to increase its deep discount prices in March, 1993, this effort similarly was rebuffed by its competitors.

Though temporarily unsuccessful, PM continued looking for ways to reverse the trend toward discount cigarettes, and roughly one year after its failed $4 per thousand price increase it found one.On April 2, 1993, PM decided to take what appellants refer to as "the single boldest commercial move in U.S. cigarette market history": it announced that it was cutting the retail price of Marlboro cigarettes — which were by far the single best selling brand in America, enjoying a 21% market share — by 40 cents per pack and foregoing price increases on other premium brands "for the foreseeable future."April 2, 1993 subsequently became widely known throughout the industry as "Marlboro Friday."This highly competitive pricing decision was extremely significant for several reasons.First, it left no doubt that PM was willing to take drastic competitive measures (indeed, to sacrifice profits) in order to protect the market share of its flagship brand.Second and quite importantly, it slimmed the price gap between premium and discount cigarettes.Because this price differential was constricted, consumers suddenly had less of an economic incentive to purchase discount cigarettes, and as a result premium brands like Marlboro regained some of market share they had lost prior to Marlboro Friday.

Finally, it set off a price war among appellees, as RJR, B & W and Lorillard were immediately confronted with a need to respond in some way to PM's bold action.In order to remain competitive, these manufacturers matched PM's retail price reductions.Although these pricing actions cut into the market share held by discount brands generally, and thus led to a reduction in the overall share held by RJR and B & W, which, as stated, were more heavily invested in these brands, the decision to match PM's price reduction meant that no manufacturer suffered unduly large market share losses.

However, this vast decrease in cigarette prices was disastrous for PM, RJR, B & W and Lorillard alike in terms of profits,⁴ and appellees were forced to rethink their profitability strategies.Indeed, appellants recognize that this economic landscape became especially difficult in light of increasing regulation of the industry and the surge of health-related litigation.To exacerbate its competitors' predicament, on July 20, 1993, PM announced that its Marlboro Friday price reduction would be made permanent and expanded to all of its premium brands, e.g., Parliament and Virginia Slims.Moreover, PM simultaneously lowered the wholesale price of its discount cigarettes and raised the wholesale price of its deep discount brands by 10 cents per pack, thereby consolidating the prices of these brand categories.This action reduced what had been 10 price points in the American cigarette market to four: 85 mm (regular length) premium cigarettes occupied one price tier, 100 mm (extra-long) premiums occupied another, and 85 mm and 100 mm discounts occupied the remaining two tiers.Again, PM's competitors promptly matched these newly announced prices.What's more, the very next day RJR announced that it would collapse the prices of its regular and 100 mm cigarettes, thereby reducing the price tiers to two: premium and discount.PM, B & W and Lorillard quickly followed suit.

Appellants contend that it is only at this point that PM, RJR, B & W and Lorillard began conspiring to fix and steadily increase prices to make up for the tremendous financial losses they suffered as a consequence of this price war.The class says that PM's actions on Marlboro Friday constructively informed its competitors that price discounting to gain market share would no longer be tolerated, and that only when such efforts were abandoned, and the premium/discount price gap narrowed, could prices again rise.By appellants' account, the manufacturers' conspiracy began in earnest when appellees began using trade press — i.e., tobacco industry financial analysts like Gary Black — to "signal" each other regarding their willingness to comply with PM's implicit demands so as to facilitate price increases.For example, the class points to a statement made by Martin Broughton, the CEO and Deputy Chairman of British American Tobacco ("BAT"), B & W's parent company, that "BAT may be one of those who...