Third Circuit: Foreign Conspiracy Does not Support Inference of US Conspiracy | Practical Law

Third Circuit: Foreign Conspiracy Does not Support Inference of US Conspiracy | Practical Law

The US Court of Appeals for the Third Circuit affirmed a district court decision in In re Chocolate Confectionary Antitrust Litigation, holding that a conspiracy among US chocolate manufacturers could not be inferred from evidence of a conspiracy among some of the parties' foreign counterparts.

Third Circuit: Foreign Conspiracy Does not Support Inference of US Conspiracy

Practical Law Legal Update w-000-5928 (Approx. 5 pages)

Third Circuit: Foreign Conspiracy Does not Support Inference of US Conspiracy

by Practical Law Antitrust
Published on 18 Sep 2015 • USA (National/Federal)
The US Court of Appeals for the Third Circuit affirmed a district court decision in In re Chocolate Confectionary Antitrust Litigation, holding that a conspiracy among US chocolate manufacturers could not be inferred from evidence of a conspiracy among some of the parties' foreign counterparts.
On September 15, 2015, the US Court of Appeals for the Third Circuit upheld the US District Court for the Middle District of Pennsylvania's decision in In re Chocolate Confectionary Antitrust Litigation that plaintiffs were unable to prove a conspiracy between The Hershey Company, Hershey Canada, Inc., Nestle USA, Inc., Mars, Inc. and Mars Snackfood U.S. LLC (Chocolate Manufacturers) to raise the price of chocolate in the US between 2002 and 2007 (No. 14-2790 (3d Cir. Sept. 15, 2015)).

Background

In Chocolate, plaintiffs, a certified class of direct purchasers and a separate group of individual plaintiffs, argued that a conspiracy to raise prices was evident through the Chocolate Manufacturers' actions, including:
  • Initiating three parallel price increases.
  • Potentially exchanging information on planned price increases before public notice.
  • Nestle and non-party Cadbury using a proposed sale of Hershey's to obtain information about Hershey's business.
  • A contemporaneous antitrust conspiracy investigation involving Canadian chocolate manufacturers.
The District Court granted summary judgment in favor of the Chocolate Manufacturers. The court reasoned that plaintiffs failed to show:
  • Traditional conspiracy evidence.
  • The Chocolate Manufacturers acted against their self-interest.
The court noted that the Chocolate Manufacturers' actions could just as easily have been legitimate business decisions as an illegal conspiracy, and therefore did not raise a reasonable inference of a price-fixing conspiracy.

Appellate Decision

On appeal, the court held that plaintiffs failed to show evidence of an unlawful conspiracy based on their allegations of parallel price increases and traditional conspiracy evidence.

Parallel Price Increases

The court first refuted plaintiffs' argument that the parallel price increases were evidence of a conspiracy. The court noted that the US chocolate market is an oligopoly, where a single firm's change in output or price will likely solicit a similar change from the few other competitors in the market as part of their rational decision-making. That practice, otherwise known as conscious parallelism, is legal under the Sherman Act. For conscious parallelism to be anticompetitive, a plaintiff must show certain plus factors, including:
  • The defendant had a motive to enter a price-fixing conspiracy.
  • The defendant acted against its self-interest, meaning inconsistently with a competitive market.
  • Circumstantial evidence of a traditional conspiracy.
However, the court noted that:
  • An oligopolistic market is highly interdependent and conducive to the first two factors even without an illegal conspiracy.
  • For an alleged conspiracy among oligopolists, the first two factors are not sufficient to preclude summary judgment.
  • For plaintiffs to prove a an oligopolist conspiracy through traditional evidence, they must show certain plus-factors, including:
    • defendants met and agreed on a plan of common action; or
    • defendants adopted a common plan despite no evidence of meetings, conversations or exchanged documents.

Traditional Conspiracy Evidence

The plaintiffs presented several categories of plus-factor conspiracy evidence, including:
  • A contemporaneous conspiracy among chocolate manufacturers in Canada.
  • Exchange of advance pricing information.
  • Improper communications.
  • Departures from pre-conspiracy conduct.
  • Pretextual justification for price increases.

Canadian Chocolate Conspiracy

The court found that the contemporaneous Canadian chocolate conspiracy investigation did not provide sufficient evidence to support an inference of a US chocolate conspiracy. The court noted that it had not before considered the inferences that may be drawn from an international conspiracy regarding a US conspiracy. The court relied on the Areeda treatise, which states that:
  • Illegal behavior occurring elsewhere does not support an inference of an immediate conspiracy.
  • A past, proved conspiracy does not support an inference of an immediate conspiracy involving parallelism if that parallelism could likely be a result of interdependence.
  • If there is a contemporaneous conspiracy in an adjacent market, defendants have the burden of supplying evidence that their behavior is not related to the conspiracy.
The court found that plaintiffs did not adequately link the Canadian conspiracy to the alleged US conspiracy, and that the Canadian conspiracy could not be used to support an inference of a US conspiracy. The court explained that:
  • Though two of the Canadian companies are subsidiaries whose executives sometimes report to US executives, there was no evidence that the US executives had any role in Canadian price-fixing.
  • The Canadian and US chocolate markets are only geographically adjacent, as the Canadian chocolate manufacturers are separate legal entities from the Chocolate Manufacturers, operating in a different country.
  • The Canadian conspiracy evidence was significantly more substantial than any evidence of a conspiracy in the US.
The court also rejected plaintiffs' actuation theory, which alleged that the Canadian conspirational conduct and outcome influenced a US conspiracy. The court noted that plaintiffs were unable to show that:
  • US chocolate executives knew of the Canadian conspiracy.
  • The Canadian conspiracy gave US executives confidence in their own alleged illegal conspiracy.
The court explained that if a conspiracy could be inferred by a US executive simply noting the outcome of a parallel price increase in another market, it would chill lawful conduct. The court rejected a set of emails between Canadian and US executives as evidence of actuation, reasoning that the emails were nothing more than normal business conduct.

Advance Pricing Information

The court rejected plaintiffs' argument that a conspiracy is supported by documents showing exchange of pricing information in advance of public notice. Plaintiffs argued that internal Hershey documents showed that Hershey was aware of Mars and Nestle price increases before they were made public. The court held that:
  • Possession of competitive memoranda is not evidence of a conspiracy to fix prices.
  • Plaintiffs did not submit any evidence showing that the pricing information originated from top-level executives of Hershey's competitors, and information coming from low-level employees was less worrisome.
  • Gathering competitors' price information can just as likely be lawful interdependence as a conspiracy.

Improper Communications

The court rejected plaintiffs' argument that the Chocolate Manufacturers had the opportunity to conspire:
  • During the proposed Hershey's sale.
  • At trade meetings.
The court explained that:
  • Nothing in the Hershey's sale process suggests that the Chocolate Manufacturers developed a price-fixing conspiracy at that time, especially because 2002 sales leader Mars was uninvolved in the potential sale.
  • A reasonable inference of a conspiracy cannot be drawn from the Chocolate Manufacturers' executives being in the same place at the same time.
The court also held that occasional communication between the Chocolate Manufacturers' low-level employees with no pricing authority was unpersuasive evidence.

Pre-conspiracy Conduct

The court held that plaintiffs were unable to show that departures from the Chocolate Manufacturers' pre-conspiracy conduct was evidence of a conspiracy. Plaintiffs argued that pre-conspiracy, the Chocolate Manufacturers had not followed each others' price increases. The court held that for a change in conduct to support an inference of conspiracy, the change must be abrupt or radically different from industry practices, and the Chocolate Manufacturers' conduct was not. The court noted that the chocolate industry had a history of parallel pricing, and it was not uncommon for industries to swing from independent to interdependent.

Price Increase Justification

The court rejected plaintiffs' argument that the Chocolate Manufacturers' justification for the price increase, rising costs, was pretextual. The court found that the Chocolate Manufacturers' price increases could have been justified by rising costs for raw materials, labor and energy costs or other input costs. Further, the court noted that pretext alone does not support a reasonable inference of conspiracy.
For more information on conspiracies and parallel conduct, see Practice Note, Establishing an Agreement under Section 1 of the Sherman Act.