Law, Business and Society 11th Edition by Tony McAdams

Exercise 35

Justice Chavez
BACKGROUND
The following facts are undisputed. Plaintiffs are "[p]ersons in the State of New Mexico... who purchased cigarettes indirectly from Defendants, or any parent, subsidiary or affiliate thereof, at any time from November 1,1993 to the date of the filing of this action [April 10, 2000]." The original Defendants were Philip Morris, R.J. Reynolds ("RJR"), Brown Williamson ("B W"), Lorillard, and Liggett. The events leading up to this lawsuit were set in motion in response to a Philip Morris strategy beginning with an event known as "Marlboro Friday." Prior to Marlboro Friday, Philip Morris, the market leader, had been steadily losing market share to discount and deep discount cigarettes since 1980, when Liggett pioneered the development of generic cigarettes. In an attempt to regain market share, Philip Morris announced Marlboro Friday on April 2, 1993, "a nationwide promotion on Marlboro that reduced prices at retail by approximately 20 percent, an average of 40[cents] per pack." In response, RJR and B W instituted similar promotions. As part of its strategy, Philip Morris announced on July 20,1993, that there would be a similar reduction on all premium brands, discount brands, and deep discount brands starting on August 9, 1993. Defendants RJR and B W also followed these price reductions. After these decreases, Defendants began to increase their wholesale list prices on premium and discount cigarettes in near lock-step fashion. Some increases were due to settlements with the 50 states, some because of increases in federal excise taxes, and others were simply planned. Even with these increases, wholesale list prices did not exceed pre-Marlboro Friday levels until August 3, 1998, or when adjusted for inflation, ongoing settlement costs, and federal excise taxes, the list prices did not surpass pre-Marlboro Friday amounts until August 1999. During the time period of the alleged agreement to fix prices, 1993 to 2000, Defendants were engaged in competition with one another regarding promotions at the retail level, resulting in a direct reduction of the retail prices of cigarettes.
Plaintiffs filed this class action lawsuit on April 10, 2000, alleging violations of New Mexico antitrust and consumer protection laws. Defendants filed motions for summary judgment. In granting the motion for summary judgment, the district court held that Plaintiffs had met their initial burden of showing a pattern of parallel behavior, but failed to meet their second burden of showing the existence of plus factors that would tend to exclude the possibility that the alleged conspirators acted independently.
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On appeal, the Court of Appeals acknowledged that "Marlboro Friday and the industry-wide price reductions that occurred afterward represented the triumph of competition over oligopolistic price coordination." Although the Court affirmed summary judgment in favor of Lorillard and Liggett because the evidence showed that they had merely acted "consistent with conscious parallelism," the Court reversed summary judgment in favor of Philip Morris, RJR, and B W because "we think that a reasonable factfinder could view conscious parallelism as a relatively implausible explanation for the anticompetitive scenario that played out following Marlboro Friday."
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FEDERAL SUBSTANTIVE ANTITRUST LAW: PROVING THE CONSPIRACY
There is no doubt that the tobacco industry, in which five companies manufacture more than 97% of the cigarettes sold in the United States, is a classic oligopoly. Because the cigarette industry is an oligopoly, it is likely that when one tobacco company (i.e., Philip Morris) acts in a certain manner (i.e., Marlboro Friday and subsequent price increases), the other firms (RJR, B W, Lorillard, and Liggett) will determine whether it is in their best interestto follow the leader's actions. As we will discuss below, when Philip Morris began raising prices after Marlboro Friday, RJR's and B Ws conduct in following subsequent price increases was just as likely due to their own independent analysis of what was in their best interests as it was the result of an illegal price-fixing agreement. Therefore, Plaintiffs must present evidence that tends to exclude the possibility that Defendants acted independently or they cannot meet their burden of establishing a genuine issue of material fact.…
The United States Supreme Court has explicitly stated that "when allegations of parallel conduct are set out in order to make a Section 1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action." Bell Atl. Corp., 550 U.S. at 557.
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[W]e must determine whether Plaintiffs' proffered evidence of plus factors tends to exclude the possibility that Defendants acted independently. Plaintiffs cite to the following plus factors, in addition to parallel pricing, as tending to exclude the possibility that Defendants acted independently: (1)the economies of the marketplace, such as a highly concentrated market, cigarette fungibility, high barriers to entry in the industry, absence of close substitutes, and a history of collusion; (2) a strong motivation to conspire, resulting from the desperate times facing the cigarette industry, including "a dramatic decline in its sales as a result of... increased public awareness of the detrimental health effects of smoking"; (3) the condensation of price tiers to facilitate the conspiracy; (4) actions contrary to self-interest, including Philip Morris's pre-announcing its price reductions and Defendants' failure to attempt to re-widen the price gap by reducing discount prices; (5) conspiratorial meetings in other markets; (6) a smoking and health conspiracy; (7) the manner in which Defendants monitored the conspiracy through Management Science Associates ("MSA"); (8) opportunities to conspire; and (9) pricing decisions made at high levels.
We reject Plaintiffs' plus factors … because Defendants' conduct is just as consistent with lawful, independent action as it is with price fixing, and therefore it does not tend to exclude independent conduct. We briefly discuss Plaintiffs' plus factors to address why they do not tend to exclude the possibility of independent conduct by Defendants. (1) The majority of the economies of the marketplace to which Plaintiffs cite are nothing more than inherent characteristics of an oligopoly and cannot tend to exclude independent action.
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(2) The motivation to conspire cited by Plaintiffs cannot serve as tending to exclude independent conduct because "[p]rofit is a legitimate motive in pricing decisions, and something more is required before a court can conclude that competitors conspired to fix pricing in violation of the Sherman Act." In re Baby Food Antitrust Litig., 166 F.3d at 134-35. (3) When Philip Morris took action to condense the price tiers, it is just as likely that they did so to reduce the price gap and maximize profits as to facilitate a price-fixing agreement, and thus this does not tend to exclude independent conduct. (4) Plaintiffs argue that Defendants took actions contrary to self-interest by preannouncing price decisions and failing to re-widen the price gap. Philip Morris argues that the June 20, 1993 pre- announcement of a price decrease to take effect twenty days later was not a signal to the other cigarette manufacturers, but was made to allow wholesalers and retailers to avoid an immediate reduction in the value of their inventory and to accommodate the burden of implementing a price reduction.
(5) The alleged conspiratorial meetings in other markets cannot serve as tending to exclude independent conduct because Plaintiffs offered no support to connect the actions in foreign markets with the actions in the United States.… (6) Similarly, concluding that an alleged smoking and health conspiracy facilitated coordination of a conspiracy in this case would require the jury to engage in speculation.... (7) The manner in which Defendants monitored the conspiracy through MSA is not evidence tending to exclude independent conduct because there is an equally rational legal explanation for this such as to "devise competitive strategies, gauge the success of their promotions, monitor the impact of new styles or packing on the market, and determine whether increased promotional spending was needed in certain geographic areas to compete with competitors' programs."...
Defendants made a prima facie case supporting summary judgment by providing evidence of fierce retail competition that undermined the plausibility of a price-fixing agreement [and by] demonstrating that wholesale prices remained lower than pre-Marlboro Friday levels and did not exceed pre-Marlboro Friday levels until almost five years later.… This evidence showed that Defendants "'had no rational economic motive to conspire, and... their conduct is consistent with other, equally plausible explanations.'" Clough, 108 N.M. at 804,780 P.2d at 630 (quoting Matsushita Elec. Indus. Co., 475 U.S. at 596-97). In reviewing Plaintiffs' plus factors, we find that the district court properly granted summary judgment.
Reversed.
a. Why did the New Mexico Supreme Court require a showing of "plus factors" to demonstrate that the cigarette companies had engaged in price fixing?
b. Why did the Court reject the plus factors offered by the plaintiffs as evidence of a price-fixing conspiracy?