Emily Westridge Black 2012-12-26 00:09:21
In 2012, a federal court of appeals issued a significant antitrust opinion that recognized the possibility that nonexclusive contracts may constitute de facto exclusive dealing arrangements. At the same time, Texas state courts have considered whether attorneys’ fees may be awarded in cases — like many class action merger lawsuits — that result in non-monetary recovery for plaintiffs. These developments should give antitrust and business litigators much to ponder in 2013. ZF Meritor v. Eaton Corp.: Long-Term Agreements Analyzed Under Rule of Reason In ZF Meritor v. Eaton Corporation,1 the U.S. Court of Appeals for the 3rd Circuit held that non-exclusive longterm supply contracts may constitute de facto exclusive dealing agreements and should be analyzed under the rule of reason, rather than the price-cost test. In the wake of this decision, companies would be well advised to reconsider whether their long-term supply agreements run afoul of the antitrust provisions. In the North American market, ZF Meritor and Eaton are the only significant manufacturers of transmissions for heavy-duty trucks. Eaton “has long been a monopolist” in the market,2 which consists of only four direct purchasers. In the early 2000s, Eaton entered into long-term supply agreements with each of the direct purchasers that allegedly foreclosed more than 90 percent of the market for at least five years. Although the specifics of the agreements varied, and none of them contained express exclusivity provisions, each contained several potentially exclusionary terms. First, the direct purchasers were offered rebates conditioned on meeting percentage purchase goals (i.e., 90 percent of their total transmission purchases). Second, Eaton required the purchasers to list Eaton products as the “standard” — or only — offering in their data books. Third, Eaton required them to offer “preferential” prices for Eaton products, as compared to competitors’ equivalent products. Finally, the agreements contained “competitiveness” clauses that allowed direct purchasers to make purchases from other suppliers if, after receiving notice of the competitor’s offer, Eaton could not match the price or quality of the goods. ZF Meritor sued Eaton for anticompetitive conduct under Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act, and prevailed before a jury. Eaton appealed, arguing that the long-term agreements did not constitute exclusive dealing arrangements because they did not require purchasers to buy only Eaton products. Instead, Eaton argued, ZF Meritor alleged only predatory pricing claims that should be rejected under the Brooke Group price-cost test, which requires a plaintiff to show that the challenged prices are “below an appropriate measure of [the defendant’s] costs.”3 The 3rd Circuit rejected Eaton’s argument, noting that “just as ‘total foreclosure’ is not required for an exclusive dealing arrangement to be unlawful, nor is complete exclusivity required with each customer.”4 Accordingly, the court held that the agreements could constitute de facto exclusive dealing and should be analyzed under the rule of reason. Applying that test, the court held that the “probable effect” of the conduct was to substantially lessen competition. It affirmed the decision below. Rocker v. Centex: A Substantial Disincentive for Class Action Merger Litigation in Texas State Courts? Because many companies are incorporated or headquartered in Texas, the state has been a popular jurisdiction for class action merger litigation in recent years. However, given recent developments on attorneys’ fee awards, merger litigation plaintiffs may soon decide to bring their lawsuits elsewhere. In Rocker v. Centex Corporation,5 the Dallas Court of Appeals held that when a class action settlement results in the recovery of non-monetary benefits — such as supplemental disclosures — the attorneys’ fees awarded must also be in non-monetary form. The Centex case began as a classic pre-merger challenge by shareholders of the target company. Centex Corporation, a homebuilding company headquartered in Dallas, announced that it was planning to merge with its competitor, Pulte Homes, through a stock-for-stock merger. Centex shareholders filed a series of putative class actions in Texas state courts, alleging that both the disclosures regarding the proposed merger and the value to be received by Centex shareholders were inadequate. Shortly thereafter, the parties reached a settlement agreement. The plaintiffs agreed not to seek to enjoin a shareholder vote of the merger and to release all claims of any Centex shareholder arising from the merger. In return, Centex agreed to provide supplemental disclosures regarding the fairness of the transaction. The parties agreed that class counsel should be awarded $1.1 million in fees. The trial court approved the settlement and the fee award over the objections of Rocker, another Centex shareholder. The Dallas Court of Appeals reversed and extended the so-called “coupon rule” to merger litigation. Under the coupon rule, which was part of the tort reform laws passed in 2003, if any portion of the benefits recovered for a class are coupons or “other noncash common benefits,” then a corresponding portion of the attorneys’ fees awarded must also be noncash.6 The appellate court held that the trial court erred because “if there was no cash recovery for the class, fees could not be awarded in cash, regardless of the value of the benefit to the class.”7 The appellate court remanded the case to the trial court to reconsider the award of attorneys’ fees — “within the constraints” of the coupon rule. A petition for review has been filed, but as of the time of this publication, the Supreme Court of Texas has not addressed it. Meanwhile, two other Texas appellate courts — the 1st Court of Appeals8 and the 14th Court of Appeals,9 both in Houston — will also have the opportunity to address whether the coupon rule applies in class action merger litigation. If the position adopted by the Dallas Court of Appeals gains traction, class action plaintiffs and their lawyers — may flee for other jurisdictions. Notes 1. 2012 WL 4483899 (3rd Cir. Sept. 28, 2012). 2. Id. at *2. 3. Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222 (1993). 4. ZF Meritor, 2012 WL 4483899 at *18. 5. 2012 WL 3264023 (Tex. App.—Dallas 2012, pet. filed). 6. See Tex. Civ. Prac. & Rem. Code Ann 26.003(b) (West 2008); Texas Rule of Civil Procedure 42(i)(2). 7. 2012 WL 3264023. 2012 WL 3264023 at *14. 8. See Dynegy Inc. v. Witmer, et. al, Docket No. 01-11-00853-CV. 9. See Kazman v. Frontier Oil Corp., et. al, Docket No. 14-12-00320-CV. EMILY WESTRIDGE BLACK is an attorney in the Dallas office of Haynes and Boone, L.L.P. She specializes in white-collar criminal defense, antitrust litigation, and the prosecution and defense of complex commercial litigation matters.
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