United States: LePage’s and Dentsply: The Limitations Section 2 Imposes on a Dominant Firm’s Ability To Engage In Exclusive Dealing

Last Updated: July 6 2005
Article by Mark W. Ryan and Robert L. Bronston

Exclusive dealing has long been a source of concern under the antitrust laws. Section 3 of the Clayton Act, 15 U.S.C. § 14, expressly prohibits conditioning a sale or discount upon the purchaser refusing to deal with the seller’s competitors when the effect of such a sale or discount would be substantially to lessen competition or to tend to create a monopoly. It also is settled that, under appropriate circumstances, the use of exclusive dealing arrangements can violate Section 2 of the Sherman Act, 15 U.S.C. § 2, when those arrangements illegally help a monopolist to achieve or maintain its monopoly power. See, e.g., United States v. Grinnell Corp., 384 U.S. 563 (1966). In two recent cases, the Third Circuit has clarified the limitations that Section 2 places on the ability of dominant firms to engage in exclusive or quasi-exclusive practices with its customers. See LePage’s, Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc) ("LePage’s"); United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005) ("Dentsply").

The two cases arrived at the Third Circuit in somewhat different factual contexts and procedural postures. In LePage’s, a manufacturer of private label transparent tape sued 3M for engaging in a variety of anticompetitive practices aimed at restricting competition in the market segment for private label and second brand transparent tape in order to preserve the monopoly profits 3M derived from its Scotch brand. 3M’s anticompetitive practices fell into two broad categories: a system of bundled rebates and the use of de facto exclusive dealing arrangements to displace or foreclose competitors from the large superstores that were critical distributors of tape. A jury found that 3M’s practices violated Section 2 of the Sherman Act, and 3M appealed that verdict to the Third Circuit. On appeal, 3M did not dispute that it possessed monopoly power in the relevant market. With respect to the exclusive dealing evidence, 3M sought reversal on two grounds. First, 3M argued that it was immune from liability under Section 2 of the Sherman Act because the jury had found in its favor on LePage’s claims under Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 3 of the Clayton Act. Second, 3M minimized the scope of the remaining exclusive dealing evidence by claiming that only explicit exclusive dealing contracts were cognizable under Section 2. Because most of 3M’s exclusive dealing agreements were de facto rather than explicit, 3M argued that its explicit arrangements did not foreclose a sufficiently large share of the market to give rise to antitrust liability. A panel of the Third Circuit, by a 2-1 vote, accepted 3M’s arguments and reversed the jury’s verdict against it. 277 F.3d 365 (3d Cir. 2002); 2002 WL 46961. The Third Circuit then voted to rehear the case en banc, and the full court reinstated the jury verdict.

In Dentsply, the United States sued the dominant manufacturer of artificial teeth under Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act. The crux of the government’s case concerned the effect of a policy that Dentsply had adopted called "Dealer Criterion 6," which provided that dealers carrying Dentsply teeth were not permitted to add the tooth lines of competing firms to their product offering. Any dealers carrying competing lines of teeth prior to the adoption of Criterion 6 in 1993 were permitted to continue to do so, but Dentsply enforced Criterion 6 by indicating it would terminate any dealer that after 1993 added an additional line of teeth. The district court declined to impose liability on Dentsply. 277 F. Supp. 2d 387 (D. Del. 2003). The district court’s analysis of the structure of the relevant market was critical to its conclusion. Manufacturers of artificial teeth sell their products either to a system of distributors or in direct sales to dental laboratories, the ultimate consumers of artificial teeth. The district court found that Dentsply lacked the power to exclude competitors from the relevant market because, although Dentsply’s Dealer Criterion 6 effectively precluded competitors from encroaching upon its dealer network, competitors were not precluded from marketing their products directly to dental labs. See id. at 452. The United States appealed only the aspect of the judgment under Section 2, arguing on appeal that a monopolist that prevents its rivals from distributing their products through established dealers has violated Section 2. The Third Circuit agreed and reversed the district court.

While the cases are therefore very different factually and legally, the Third Circuit’s analysis is nevertheless strikingly similar in both cases. In both cases, the Third Circuit adopted an approach that is very practical in nature, eschewing theoretical or economic per se rules in favor of a detailed analysis of the factual realities in the marketplace. And in both cases, that approach resulted in antitrust liability being imposed upon the monopolist.

Section 2 Immunity Based On Favorable Section 3 Judgment

The first rule of per se legality advocated by the defendants in both cases concerned the effect of a judgment in the defendant’s favor on a Section 3 claim based on the same facts. The defendants relied heavily on a statement by the Supreme Court in Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320 (1961). After concluding that the conduct in that case did not give rise to a Section 3 violation, the Court declared that it "need not discuss the respondents’ further contention that the contract also violates § 1 and § 2 of the Sherman Act, for if it does not fall within the broader proscription of § 3 of the Clayton Act, it follows that it is not forbidden by those of the former." Id. at 335. Because both defendants had prevailed on a Section 3 claim, they argued based on Tampa Electric that they were necessarily not liable under Section 2.

Critical to both courts’ rejection of that claim was the fact that both defendants had monopoly power in their markets, and that admitted monopolists are subject to heightened scrutiny. "Where a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws — or that might even be viewed as procompetitive — can take on exclusionary connotations when practiced by a monopolist." Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting) (citing 3 P. AREEDA & D. TURNER, ANTITRUST LAW 813, pp. 300-302 (1978)); see also Dentsply, 399 F.3d at 187 ("Behavior that otherwise might comply with antitrust law may be impermissibly exclusionary when practiced by a monopolist."). For example, an exclusive dealing arrangement that forecloses 9% of the market may well fail to reach antitrust significance in the Section 3 context but nevertheless result in liability under Section 2 when a monopolist essentially owns 90% of the market demand for the monopoly product and competes only at the margins.

The LePage’s court therefore had no difficulty concluding that "[t]he jury’s finding against LePage’s on its exclusive dealing claim under § 1 of the Sherman Act and § 3 of the Clayton Act does not preclude the application of evidence of 3M’s exclusive dealing to support LePage’s § 2 claim." LePage’s, 324 F.3d at 157 n.10. The Dentsply court agreed, relying largely on LePage’s. See 399 F.3d at 197.

Explicit Versus De Facto Exclusives

Another issue on which the Third Circuit adopted a practical rather than a per se approach concerned the extent to which agreements that did not contain an explicit promise of exclusive dealing could nevertheless violate the antitrust laws. This issue was most important in LePage’s, where 3M had entered into contracts containing express promises of exclusivity with only two relatively small distributors. At several large distributors, however, 3M engaged in more ambiguous conduct that could be interpreted fairly as exclusive dealing. For example, 3M offered one distributor a "growth" reward of $1,000,000 that, as a practical matter, required the distributor to stop buying from LePage’s in order to meet the necessary growth target. 3M paid another distributor $1,500,000 and offered a 1% discount on the distributor’s Scotch tape purchases if it switched its LePage’s business to 3M. 3M argued that these arrangements could not support liability for exclusive dealing because they were not explicit exclusive arrangements.

In the panel opinion that reversed the jury’s verdict against 3M, the court adopted a series of per se rules that completely absolved 3M of any antitrust liability. First, the court considered only 3M’s explicit exclusive dealing arrangements. See 2002 WL 46961, at *13 ("In any event, the record shows only two allegedly exclusive contracts * * *."). Because those two contracts foreclosed a trivially small portion of the market, the court found that they did not have antitrust significance. See id. Second, the court appeared to adopt a rule of per se legality for exclusive contracts that were one year or less in duration: "Even assuming, however, that 3M did have exclusive contracts with some of the customers, LePage’s has not demonstrated that 3M acted illegally, as one-year exclusive contracts have been held to be reasonable and not unduly restrictive." Id. at *12 (citing FTC v. Motion Picture Adver. Serv. Co., 344 U.S. 392, 395-396 (1953)). Because tape distributors purchased in annual cycles, the court discounted all of 3M’s exclusive agreements. See id.

The Third Circuit’s en banc opinion adopted a remarkably different approach. Noting that "3M * * * disclaims as exclusive dealing any arrangement that contained no express exclusivity requirement," the court emphasized that "the law is to the contrary." 324 F.3d at 157. Citing the Supreme Court’s opinion in Tampa Electric, the Third Circuit observed that "the Court took cognizance of arrangements which, albeit not expressly exclusive, effectively foreclosed the business of competitors." Id. (citing 365 U.S. at 327). The court also firmly disposed of the notion that one-year-long exclusive agreements enjoy antitrust immunity, finding that such a notion "is not supported by a reading of the decision" the dissent cited. Id. at 157 n.11. Instead, the court adopted a more pragmatic approach, considering the record evidence and concluding that "LePage’s introduced powerful evidence that could have led the jury to believe that rebates and discounts to Kmart, Staples, Sam’s Club, National Office Buyers and ‘UDI’ were designed to induce them to award business to 3M to the exclusion of LePage’s." Id. at 158. Based on the totality of those de facto exclusive dealing arrangements, the court ultimately affirmed the judgment in favor of LePage’s.

The Dentsply court also touched upon this issue. The court noted that "Dentsply sells teeth to the dealers on an individual transaction basis and essentially the arrangement is ‘atwill.’" 399 F.3d at 193. The court nevertheless treated that arrangement as identical to a long-term exclusive relationship memorialized in a contract because "the economic elements involved — the large share of the market held by Dentsply and its conduct excluding competing manufacturers — realistically make the arrangements here as effective as those in written contracts." Id.

Market Structure: The Power To Exclude

In Dentsply, the Third Circuit first confronted the nature of the allegedly anticompetitive conduct in the context of the issue of monopoly power. The district court had found that it could infer monopoly power from Dentsply’s sustained predominant market share, but nevertheless refused to do so, finding that any power Dentsply had over its distributors did not preclude its competitors from marketing teeth directly to dental labs, and therefore that "Dentsply does not have the power to exclude competitors from the ultimate consumer." 277 F. Supp. 2d at 452. Based on competitors’ theoretical ability to market directly to the ultimate consumer (which was happening in only a very small portion of the market), the district court found that Dentsply lacked monopoly power.

The Third Circuit reversed the district court on this largely factual question. The court began its analysis with the premise that "economic realities rather than a formalistic approach must govern review of antitrust activity." 399 F.3d at 189. Based on the Third Circuit’s review of the evidence, "[t]he reality is that over a period of years, because of Dentsply’s domination of dealers, direct sales have not been a practical alternative for most manufacturers." Id. Importantly, "[i]t has not been so much the competitors’ less than enthusiastic efforts at competition that produced paltry results, as it is the blocking of access at key dealers." Id. The Third Circuit concluded that "the Court’s scrutiny should have been applied not to the ‘ultimate consumers’ who used the teeth, but to the ‘customers’ who purchased the teeth, the relevant category which included dealers as well as laboratories." Id. at 190. That "mis-focus led the District Court into clear error." Id.

The Third Circuit also found that the district court had underestimated Dentsply’s power over its own dealers, dismissing the district court’s finding that Dentsply’s competitors could have convinced one of Dentsply’s dealers to violate Dealer Criterion 6. "Although its rivals could theoretically convince a dealer to buy their products and drop Dentsply’s line, that has not occurred." 399 F.3d at 189. The court found that Dentsply brought its monopoly power to bear in enforcing Dealer Criterion 6, and that on at least one occasion when facing a recalcitrant dealer, "Dentsply threatened to sever access not only to its teeth, but to other dental products as well." Id. at 190. According to the Third Circuit, "[t]he evidence demonstrated conclusively that Dentsply had supremacy over the dealer network and it was at that crucial point in the distribution chain that monopoly power over the market for artificial teeth was established." Id. "The reality in this case is that the firm that ties up the key dealers rules the market." Id.

The Dentsply court concluded that "the factual pattern here is quite similar to that in [LePage’s, where] a manufacturer of transparent tape locked up high volume distribution channels * * *." 399 F.3d at 190. The court summarized its finding on monopoly power by observing that "through the use of Dealer Criterion 6 Dentsply has been able to exclude competitors from the dealers’ network, a narrow, but heavily traveled channel to the dental laboratories." Id.

Anti-Competitive Effects

In both LePage’s and Dentsply, the crux of the legal analysis involved whether the challenged conduct actually produced sufficient anticompetitive effects in the relevant market to constitute a violation of Section 2. In this respect, both courts performed a very similar analysis. Instead of focusing on the percentage of the market foreclosed by the exclusive dealing practices (a statistic that can be misleading in the context of a monopolist that enjoys a large structural market share), both courts conducted a more qualitative analysis, examining the importance of the distribution channel that had been foreclosed and particularly the importance of that distribution channel in preserving the monopolist’s power.

The LePage’s court understood from the record that "[i]n transparent tape manufacturing, large volume customers are essential to achieving efficiencies of scale." 324 F.3d at 161; see also id. at 160 n.14 ("In the transparent tape market, superstores like Kmart and Wal-Mart provide a crucial facility to any manufacturer — they supply high volume sales with the concomitant substantially reduced distribution costs.").

In fashioning its test for anticompetitive effects, the en banc Third Circuit borrowed heavily from the D.C. Circuit’s en banc decision in United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001). As part of that test, the question of anticompetitive effects was measured not by the percentage of the market foreclosed, but by how necessary the foreclosed distribution links would be for a firm to compete effectively with the monopolist. "In Microsoft," the Third Circuit explained, "the court of appeals determined that Microsoft had foreclosed enough distribution links to undermine the survival of Netscape as a viable competitor." 324 F.3d at 159-160 (citing Microsoft, 253 F.3d at 71). The Third Circuit determined that that test had been met based on the evidence before it: "Similarly, in this case, the jury could have reasonably found that 3M’s exclusionary conduct cut LePage’s off from key retail pipelines necessary to permit it to compete profitably." 324 F.3d at 160.

The Dentsply court viewed its task in similar terms. "The test is not total foreclosure, but whether the challenged practices bar a substantial number of rivals or severely restrict the market’s ambit." 399 F.3d at 191 (citing LePage’s, 324 F.3d at 159-160; Microsoft, 253 F.3d at 69). The court had no difficulty assuring itself that dealers were a critical link in the distribution chain because they provided numerous benefits. Disregarding the district court’s finding of fact that dental labs prefer to buy direct from manufacturers, the Third Circuit determined that "laboratories are driven by the realities in the marketplace to buy far more heavily from dealers than manufacturers. This may be largely attributed to the beneficial services, credit function, economies of scale and convenience that dealers provide to laboratories, benefits which are otherwise unavailable to them when they buy direct." 399 F.3d at 192.

The court found a similar basis to overturn the district court’s finding that manufacturers selling directly to dental labs was a "viable" method of distributing artificial teeth. "[W]e are convinced that it is ‘viable’ only in the sense that it is ‘possible,’ not that it is practical or feasible in the market as it exists and functions." 399 F.3d at 193. "The undeniable reality * * * is that dealers have a controlling degree of access to the laboratories." Id. The court emphasized that "[t]he proper inquiry is not whether direct sales enable a competitor to ‘survive’ but rather whether direct selling ‘poses a real threat’ to defendant’s monopoly." Id. (citing Microsoft, 253 F.3d at 71). "The minuscule 5% and 3% market shares eked out by [Dentsply’s primary direct-selling competitors] reveal that direct selling poses little threat to Dentsply." Id.

The Dentsply court ended its analysis of anticompetitive effects by expressly analogizing Dentsply’s teeth dealers to the superstores in LePage’s. "Dentsply’s authorized dealers are analogous to the high volume retailers at issue in LePage’s." 399 F.3d at 196. "There are other ways across the ‘river’ to consumers, but high volume retailers provided the most effective bridge. The same is true here. The dealers provide the same advantages to Dentsply * * * *. Dentsply’s dealers provide a critical link to end-users." Id. Because, in its view, Dealer Criterion 6 had denied Dentsply’s competitors access to that "critical link," the Third Circuit found that "Dentsply’s exclusionary policies and particularly Dealer Criterion 6 violated Section 2." Id.

Business Justification

One final way in which both the LePage’s and the Dentsply courts focused on market realities rather than theoretical benefits was in their examination of the monopolist’s business justification for the challenged conduct. 3M had asserted theoretical economic efficiencies for its conduct, but the LePage’s court found it more significant that "3M cites to no testimony or evidence in the 55 volume appendix that would support any actual economic efficiencies* * *." 324 F.3d at 164. Similarly, the Dentsply court found it particularly "[s]ignifican[t]" (399 F.3d at 196) that Dentsply was unable to provide a plausible pro-competitive rationale for its policies. The Third Circuit accepted the district court’s finding that "‘Dentsply’s asserted justifications for its exclusionary policies are inconsistent with its announced reason for the exclusionary policies, its conduct enforcing the policy, its rival suppliers’ actions, and dealers’ behavior in the marketplace.’" Id. at 196-197 (quoting the district court’s finding of fact 356).


The Third Circuit’s decisions in LePage’s and Dentsply provide significant insight into the types of exclusive dealing arrangements by monopolists that will violate Section 2. It is important to remember that the defendants in these cases enjoyed very large market shares over long periods of time. 3M did not bother to dispute its monopoly power on appeal; Dentsply disputed the inference to be drawn from its market share only on the basis that a competitor theoretically could have invoked a relatively unused method of distribution to challenge its market position. Under those circumstances, where the reviewing court is reasonably certain that the defendant can exercise monopoly power, it will conduct a searching examination of the defendant’s exclusive dealing arrangements, particularly if those arrangements appear to foreclose competitors from distribution channels that are qualitatively very important.

That examination will involve marketplace realities rather than theoretical constructs. Once a Section 2 plaintiff has proved monopoly power, the monopolist will be hard pressed to argue that the arrangements are not truly exclusive because customers could theoretically have chosen not to deal with the monopolist, or that competitors theoretically could have developed alternative methods of distribution to compete with the existing, efficient methods. If those events have not taken place, courts are increasingly less likely to blame the plaintiff for not having eroded the defendant’s monopoly, and more likely to examine the monopolist’s claims with suspicion.

Note: Mr. Ryan was lead trial counsel for LePage’s, and Mr. Bronston also represented LePage’s.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

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