ZF Meritor, LLC v. Eaton Corp.

• Decision Date: 28 September 2012
• Docket Number: Nos. 11–3301,11–3426.,s. 11–3301
• Citation: 696 F.3d 254
• Parties: ZF MERITOR, LLC; Meritor Transmission Corporation, Appellants, No. 11–3426, v. EATON CORPORATION, Appellant, No. 11–3301.
• Court: U.S. Court of Appeals — Third Circuit

696 F.3d 254

ZF MERITOR, LLC; Meritor Transmission Corporation, Appellants, No. 11–3426,

v.EATON CORPORATION, Appellant, No. 11–3301.

Nos. 11–3301, 11–3426.

United States Court of Appeals, Third Circuit.

Argued June 26, 2012.

Filed: Sept. 28, 2012.

Caeli A. Higney, Thomas G. Hungar, Theodore B. Olson (Argued), Cynthia E. Richman, Geoffrey C. Weien, Gibson, Dunn & Crutcher, Erik T. Koons, William K. Lavery, Joseph A. Ostoyich, Baker Botts, Washington, DC, Donald E. Reid, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, Counsel for Eaton Corporation.

Jay N. Fastow (Argued), Dickstein Shapiro, New York, NY, Robert B. Holcomb, Adams Holcomb, Washington, DC, Christopher H. Wood, Denver, CO, Counsel for ZF Meritor, LLC and Meritor Transmission Corp.

Michael S. Tarringer, Cafferty Faucher, Philadelphia, PA, Counsel for American Antitrust Institute.

Before: FISHER and GREENBERG, Circuit Judges, and OLIVER,^* District Judge.

OPINION OF THE COURT

FISHER, Circuit Judge.

This case arises from an antitrust action brought by ZF Meritor, LLC (“ZF Meritor”) and Meritor Transmission Corporation (“Meritor”) (collectively, “Plaintiffs”) against Eaton Corporation (“Eaton”) for allegedly anticompetitive practices in the heavy-duty truck transmissions market. The practices at issue are embodied in long-term agreements between Eaton, the leading supplier of heavy-duty truck transmissions in North America, and every direct purchaser of such transmissions. Following a four-week trial, a jury found that Eaton's conduct violated Section 1 and Section 2 of the Sherman Act, and Section 3 of the Clayton Act. Eaton filed a renewed motion for judgment as a matter of law, arguing that its conduct was per se lawful because it priced its products above-cost. The District Court disagreed, reasoning that notwithstanding Eaton's above-cost prices, there was sufficient evidence in the record to establish that Eaton engaged in anticompetitive conduct—specifically that Eaton entered into long-term de facto exclusive dealing arrangements—which foreclosed a substantial share of the market and, as a result, harmed competition. We agree with the District Court and will affirm the District Court's denial of Eaton's renewed motion for judgment as a matter of law.

We are also called upon to address several other issues. Although the jury returned a verdict in favor of Plaintiffs on the issue of liability, prior to trial, the District Court granted Eaton's motion to exclude the damages testimony of Plaintiffs' expert. The District Court also denied Plaintiffs' request for permission to amend the expert report to include alternate damages calculations. Consequently, the issue of damages was never tried and no damages were awarded. Plaintiffs cross-appeal from the District Court's order granting Eaton's motion to exclude and the District Court's subsequent denial of Plaintiffs' motion for clarification. For the reasons set forth below, we will affirm the District Court's orders to the extent that they excluded Plaintiffs' expert's testimony based on the damages calculations in his initial expert report, but reverse to the extent that the District Court denied Plaintiffs' request to amend the report to submit alternate damages calculations. Finally, although the District Court awarded no damages, it did enter injunctive relief against Eaton. On appeal, Eaton argues that Plaintiffs lack standing to seek injunctive relief because they are no longer in the heavy-duty truck transmissions market, and have expressed no concrete desire to re-enter the market. We agree and will vacate the District Court's order issuing injunctive relief.

I. BACKGROUND

A. Factual Background

1. Market Background

The parties agree that the relevant market in this case is heavy-duty “Class 8” truck transmissions (“HD transmissions”) in North America. Heavy-duty trucks include 18–wheeler “linehaul” trucks, which are used to travel long distances on highways, and “performance” vehicles, such as cement mixers, garbage trucks, and dump trucks. There are three types of HD transmissions: three-pedal manual, which uses a clutch to change gears; two-pedal automatic; and two-or-three-pedal automated mechanical, which engages the gears mechanically through electronic controls. Linehaul and performance transmissions,which comprise over 90% of the market, typically use manual or automated mechanical transmissions.¹

There are only four direct purchasers of HD transmissions in North America: Freightliner, LLC (“Freightliner”), International Truck and Engine Corporation (“International”), PACCAR, Inc. (“PACCAR”), and Volvo Group (“Volvo”). These companies are referred to as the Original Equipment Manufacturers (“OEMs”). The ultimate consumers of HD transmissions, truck buyers, purchase trucks from the OEMs. Truck buyers have the ability to select many of the components used in their trucks, including the transmissions, from OEM catalogues called “data books.” Data books list the alternative component choices, and include a price for each option relative to the “standard” or “preferred” offerings. The “standard” offering is the component that is provided to the customer unless the customer expressly designates another supplier's product, while the “preferred” or “preferentially-priced” offering is the lowest priced component in data book among comparable products. Data book positioning is a form of advertising, and standard or preferred positioning generally means that customers are more likely to purchase that supplier's components. Although customers may, and sometimes do, request components that are not published in a data book, doing so is often cumbersome and increases the cost of the component. Thus, data book positioning is essential in the industry.

Eaton has long been a monopolist in the market for HD transmissions in North America.² It began making HD transmissions in the 1950s, and was the only significant manufacturer until Meritor entered the market in 1989 and began offering manual transmissions primarily for linehaul trucks. By 1999, Meritor had obtained approximately 17% of the market for sales of HD transmissions, including 30% for linehaul transmissions. In mid–1999, Meritor and ZF Friedrichshafen (“ZF AG”), a leading supplier of HD transmissions in Europe, formed the joint venture ZF Meritor, and Meritor transferred its transmissions business into the joint venture.³ Aside from Meritor, and then ZF Meritor, no significant external supplier of HD transmissions has entered the market in the past 20 years.⁴

One purpose of the ZF Meritor joint venture was to adapt ZF AG's two-pedal automated mechanical transmission, ASTronic, which was used exclusively in Europe, for the North American market. The redesign and testing took 18 months, and ZF Meritor introduced the adapted ASTronic model into the North American market in 2001 under the new name FreedomLine. FreedomLine was the first two-pedal automated mechanical transmission to be sold in North America. ⁵ When FreedomLine was released, Eaton projected that automated mechanical transmissions would account for 30–50% of the market for all HD transmission sales by 2004 or 2005.

2. Eaton's Long–Term Agreements

In late 1999 through early 2000, the trucking industry experienced a 40–50% decline in demand for new heavy-duty trucks. Shortly thereafter, Eaton entered into new long-term agreements (“LTAs”) with each OEM. Although long-term supply contracts were not uncommon in the industry, and were also utilized by Meritor in the 1990s, Eaton's new LTAs were unprecedented in terms of their length and coverage of the market. Eaton signed LTAs with every OEM, and each LTA was for a term of at least five years.

Although the LTAs' terms varied somewhat, the key provisions were similar. Each LTA included a conditional rebate provision, under which an OEM would only receive rebates if it purchased a specified percentage of its requirements from Eaton.⁶ Eaton's LTA with Freightliner, the largest OEM, provided for rebates if Freightliner purchased 92% or more of its requirements from Eaton.⁷ Under Eaton's LTA with International, Eaton agreed to make an up-front payment of $2.5 million, and any additional rebates were conditioned on International purchasing 87% to 97.5% of its requirements from Eaton. The PACCAR LTA provided for an up-front payment of $1 million, and conditioned rebates on PACCAR meeting a 90% to 95% market-share penetration target. Finally, Eaton's LTA with Volvo provided for discounts if Volvo reached a market-share penetration level of 70% to 78%.⁸ The LTAs were not true requirements contracts because they did not expressly require the OEMs to purchase a specified percentage of their needs from Eaton. However, the Freightliner and Volvo LTAs gave Eaton the right to terminate the agreements if the share penetration goals were not met. Additionally, if an OEM did not meet its market-share penetration target for one year, Eaton could require repayment of all contractual savings.

Each LTA also required the OEM to publish Eaton as the standard offering in its data book, and under two of the four LTAs, the OEM was required to remove competitors' products from its data book entirely. Freightliner agreed to exclusively publish Eaton transmissions in its data books through 2002, but reserved the right to publish ZF Meritor's FreedomLine through the life of the agreement. In 2002, Freightliner and Eaton revised the LTA to allow Freightliner to publish other competitors' transmissions, but the revised LTA provided that Eaton had the right to “renegotiate the rebate schedule” if Freightliner chose to publish a competitor's transmission. Subsequently, Freightliner agreed to a request by Eaton to remove FreedomLine from all of its data books. Eaton's LTA with International also required that International list exclusively Eaton transmissions in its electronicdata book. International did, however, publish ZF Meritor's manual transmissions...