MILES DISTRIBUTORS, INC., Plaintiff-Appellant, v. SPECIALTY CONSTRUCTION BRANDS, INC., Defendant-Appellee.
No. 06-1992
United States Court of Appeals For the Seventh Circuit
ARGUED DECEMBER 8, 2006—DECIDED FEBRUARY 6, 2007
Before BAUER, FLAUM, and KANNE, Circuit Judges.
Appeal from the United States District Court for the Northern District of Indiana, South Bend Division. No. 3:04-CV-561—Christopher A. Nuechterlein, Magistrate Judge.
I. BACKGROUND
TEC manufactures industrial and residential building products, including a line of tile installation products, i.e., grout and mortar.2 Miles sells numerous brands of tile and, until 2004, carried TEC‘s tile installation products. Michael Miles incorporated the company in 1969, and his son Doug is the company‘s current president. Although Miles was originally centered in northern Indiana, its business expanded in 2001, putting it in competition with a number of other TEC distributors, including Virginia Tile, Louisville Tile, Sobol Sales, Millers Wholesale, and American Equipment. During the relevant time period, two of Miles‘s competitors expanded their businesses as well. Both Millers Wholesale and Virginia Tile began selling TEC products in South Bend, Indiana, where Miles is headquartered.
Historically, Miles paid more for TEC products than some of its competitors, due to a regional pricing system. In March 2003, however, a significant change occurred when TEC implemented a new national pricing program that gave all of its distributors an equal opportunity to receive lower prices if they purchased TEC product in bulk. As a result, Miles began paying the same price for TEC materials as Virginia Tile and Louisville Tile. Although Miles began paying less for TEC materials, it did not raise its price margins, i.e., its markup for resale,
As TEC distributors expanded and prices changed, TEC began to receive complaints from other distributors about Miles‘s pricing. As early as April 2002, Louisville Tile‘s President, Randy Parker, complained to TEC that Miles‘s margins were lower than those charged by Louisville Tile. In September 2002, a Louisville Tile representative complained to TEC that Miles‘s margin on a particular TEC product was 22% while Louisville‘s price margin was 30%. At some point, Parker remarked to Doug Miles, “Hey Doug, let‘s keep our margins up on TEC down here.”
During a March 2003 trade show, TEC‘s Nationwide Sales Manager, Christopher Bailey, informed Doug Miles that TEC was dissatisfied with Miles‘s pricing. Although Bailey characterized the discussion as one about market tactics rather than price, he conceded that “the gist of [the meeting] was do you have a new price list or what are you doing out there with our product or you‘re causing me headaches.” According to Miles‘s Sales and Marketing Manager, John Zolman, Bailey was more blunt during the trade show conversation, warning Zolman and Doug Miles that Miles‘s pricing structure would cause problems in Indianapolis, that Miles‘s prices were too low, and that Louisville Tile was already complaining about Miles‘s pricing. Later, at a September 2003 meeting, Bailey again expressed concerns about Miles‘s pricing and asked Doug Miles to consider raising prices in the field. Doug Miles and Zolman said they would look into the
On April 23, 2003, Bailey sent Virginia Tile‘s General Sales Manager, Jack Mulder, an email message in which he wrote, in part: “it has come to my attention that there may be some lingering concerns or pricing issues with TEC,” and that “my ultimate fear is that we are unaware of these issues and don‘t get a chance to address and/or alleviate them before a radical decision gets made by Virginia Tile.” Bailey further stated, “We do not want to see a 2nd line get brought into Virginia Tile[,] and we will do all in our power to make this unnecessary.” Mulder responded by email the next day expressing concerns that Miles‘s price list could force Virginia Tile to lower its prices. Mulder continued, “let‘s decide to make a committed effort to responding by ensuring and protecting OURS and YOUR market share currently held together.”
On July 8, 2003, Randy Parker emailed Jack Mulder writing, “Miles continues to ‘poach’ work from us in area. It is very important to all that our two companies take the high road and work together.”
After receiving more complaints from TEC‘s other distributors, Bailey considered terminating TEC‘s relationship with Miles. At a January 2004 trade show, Bailey approached Parker and said, “Randy, very hypothetically, if we were to [terminate our relationship with Miles], and I‘m not saying we‘re going to, I‘m saying if we were to do, what would you do in order to make up that massive loss of [sales] volume?” Parker indicated he would think about it.
In February 2004, TEC‘s management discussed terminating Miles at its quarterly meeting and decided to begin studying the issue so that TEC could revisit it at the next quarterly meeting. Bailey instructed two TEC Strategic Area Managers, Marc Mularoni and Charlie Renner, to
Meanwhile, Renner sought similar feedback from TEC distributors in his territory. By April 13, 2004, Renner had been in discussions with Virginia Tile and Millers Wholesale about the aftermath of terminating Miles. A few days later, Virginia Tile agreed to aggressively pursue the South Bend market and to develop a game plan for Fort Wayne. In an April 19 email exchange, Mularoni told Renner that “Louisville Indy will be taking TEC to Fort Wayne . . . [and will] do a blitz with TEC when our decision is implemented.”
During the course of its discussions with TEC, Louisville Tile also agreed that it would begin selling TEC products in its Chattanooga store, where it had previously sold only a competing brand.4 Similarly, Virginia Tile agreed to increase its stock of TEC products in its Cleveland store. Renner testified that this increase in TEC stock was “something we hoped to gain from the decision [to terminate Miles].”
After consulting with the competing distributors, Renner and Mularoni decided to terminate Miles. According to their proposed post-termination plan, key distributors
Mularoni communicated the final decision to Louisville Tile and American Equipment, and Renner informed Virginia Tile. Just before TEC informed Miles of its decision, Virginia Tile sent the following memorandum to its sales team:
This morning (Friday June 11) TEC is notifying MILES DISTRIBUTING of South Bend they will no longer be a TEC Distributor. This is a culmination of two things: 1) many discussions that VIRGINIA TILE COMPANY and Miller Wholesale has had with TEC Mgmt and 2) TEC‘s consideration for the manner of marketing that MILES Distributing uses and the compatibility to their long range goals. . . .
We need to relate our knowledge of this event in a very CONSISTENT manner. If a Customer inquires to the reasoning behind this, our response is to be: THIS IS A RESULT OF A TEC DECISION! Whether on the record OR OFF THE RECORD, do NOT imply that it was a result of any discussions we have had or any dissatisfaction we expressed over the manner in which they marketed the line.
TEC is counting on VIRGINIA TILE COMPANY to pick up this additional business as it goes “back on the street” with some extra effort. We are counting on you to find this business and bring it to VIRGINIA TILE COMPANY. If you have any questions please call me immediately.
We have decided to consolidate our distribution channels in the Midwest, and have made the difficult decision to cease our direct sales to your company. After August 18, 2004[,] we can no longer accept purchase orders for shipment to your facilities. This notice allows for a two month transition period.
Shortly before the letter arrived, Bailey called Michael Miles to inform him of the termination, telling him that TEC was consolidating its distribution in the Midwest and that TEC had to end its relationship with Miles. Michael Miles was shocked by the news. Despite Bailey‘s proffered reason for terminating Miles, TEC closed no other distributors in the Midwest in 2004. In fact, Mularoni‘s March 2004 quarterly report suggested that TEC “look to expand distribution in markets where there are multiple existing TEC customers.”
In a May 26, 2004 document entitled “Miles Termination Plan,” TEC laid out “talking points” concerning reasons for the termination under a heading that said, “Miles not on premium strategy.” The talking points included: (1) currently stocking three competing manufacturers in all markets; and (2) weak promotional strategy. The document did not mention pricing or consolidation of distribution channels.
Until TEC terminated Miles, it did not complain about the manner in which Miles supported the product or express concerns that Miles was “free-riding” the brand recognition and good-will generated by other TEC distribu-
Suspicious of the circumstances surrounding its termination, Miles filed suit against TEC on August 27, 2004, alleging antitrust violations. On May 19, 2005 Miles amended its complaint, adding a state law claim. On October 3, 2005, TEC moved for summary judgment, which the district court granted on February 27, 2006. This appeal followed.
II. DISCUSSION
Section one of the Sherman Act forbids contracts, combinations, and conspiracies that unreasonably restrain trade. See
A. Summary Judgment Standard
We review the district court‘s grant of summary judgment in favor of TEC de novo. Gordon v. United Airlines, 246 F.3d 878, 885 (7th Cir. 2001). In considering Miles‘s appeal, we draw our own conclusions of law and fact from the record, making all reasonable inferences in favor of Miles, and will uphold summary judgment in TEC‘s favor only if there is no genuine issue of material fact and TEC is entitled to judgment as a matter of law. Id. See also
B. Classification of Alleged Conspiracy
When an agreement between competitors at the same level of distribution restrains trade, it has traditionally been denominated horizontal. See Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988). Trade restraining agreements between firms at different levels of distribution, e.g., a wholesale supplier and a retail distributor, are deemed vertical restraints. Id. In this case, the district court did not classify the alleged conspiracy as either horizontal or vertical, reasoning that such a classification was immaterial to the outcome. Specifically, the court stated:
A review of the cases suggests that whether one classifies the agreement as horizontal or vertical is not of consequence in this case because plaintiff must still prove an agreement to fix the price or price levels
after termination. Therefore, the appropriate analysis is not whether this agreement is vertical or horizontal, but rather whether the plaintiff has provided sufficient evidence of an agreement to fix price or price levels to withstand a motion for summary judgment.
Miles Distribs., Inc. v. Specialty Constr. Brands, Inc., 417 F. Supp. 2d 1030, 1036 (N.D. Ind. 2006). In fact, the classification of the alleged conspiracy is of consequence, because it determines what evidence Miles must produce in order to survive summary judgment. To prove a vertical conspiracy that is per se illegal, Miles must show an agreement to fix prices. See Bus. Elecs., 485 U.S. at 735-36. However, certain horizontal conspiracies, like horizontal group boycotts,6 are illegal regardless of price fixing. See NYNEX Corp., 525 U.S. at 134. If, as Miles has suggested, its competitor tile stores conspired together to force TEC to terminate Miles, then the conspiracy constitutes an antitrust violation.7 See, e.g., Klor‘s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212 (1959) (noting that horizontal group boycotts have long been forbidden). We therefore consider whether Miles has shown that a genuine issue of material fact remains under either a horizontal or vertical conspiracy analysis.
C. Horizontal Conspiracy
A plaintiff may prove a horizontal conspiracy by either direct or circumstantial evidence. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 934 (7th Cir. 2000). When a plaintiff attempts to defeat summary judgment by highlighting circumstantial evidence of a conspiracy, some of the evidence must tend to exclude the possibility that the alleged conspirators acted independently rather than in concert. Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984); Toys “R” Us, 221 F.3d at 934 . Miles argues that it submitted sufficient evidence of concerted action among competing TEC distributors so that a reasonable jury could find a horizontal conspiracy. First, it notes that all of the competing TEC distributors complained to TEC about Miles‘s prices. This evidence, however, is insufficient to create a genuine issue of material fact. The Supreme Court has noted that such complaints are natural and unavoidable reac-
Miles next identifies threats made by various TEC distributors, noting that Virginia Tile threatened to carry a competing brand of installation products and that Louisville Tile threatened, among other things, to stop promoting the TEC brand. Miller Wholesale also threatened to bring in another line of installation products. As the Supreme Court noted in Matsushita, although all reasonable inferences must be drawn in favor of the nonmovant on motions for summary judgment, antitrust law limits the range of inferences that can be drawn from ambiguous evidence in a § 1 case. 475 U.S. at 587-88. Thus, conduct that is as consistent with permissible competition as with illegal conspiracy does not, standing alone, support an inference of antitrust conspiracy. Id. at 588. In this case, the distributors’ threats are as consistent with permissible competition as with a conspiracy. Indeed, distributors can legitimately decide to carry or promote other brands if they are dissatisfied with reduced profits caused by price-cutters. Therefore, the fact that several of Miles‘s competitors told TEC that they were considering carrying or promoting other tile installation brands does not support the inference that Miles‘s competitors conspired together to boycott TEC.
Naturally, Miles attempts to identify additional evidence of concerted action among TEC distributors. He relies heavily on the email message between Mulder and Parker in which Parker refers to Miles‘s “poaching” and emphasizes that “our two companies take the high road and work together.” He also refers to Virginia Tile‘s memo
In short, the evidence, viewed in the light most favorable to Miles, does not suggest that the competing tile stores conspired to boycott TEC unless it terminated Miles. As a result, Miles cannot proceed under a horizontal group boycott analysis.
D. Vertical Conspiracy
Miles also argues that it offered evidence from which a jury could find an illegal vertical conspiracy. The Supreme Court has held that a vertical restraint is not illegal per se unless it includes some agreement on price or price levels. Bus. Elecs., 485 U.S. at 735-36. Although the post-termination sales blitz shows concerted activity between TEC and its distributors, Miles must still demonstrate that the concerted activity involved an agreement on price. Id.; see also Monsanto, 465 U.S. at 762 (recognizing that constant communication between a manufacturer and its distributors about prices and market strategy does not show that the distributors are not making pricing decisions independently).
In this case, it is undisputed that the competing distributors, Virginia Tile, Louisville Tile, Sobol Sales, Miller‘s Wholesale and American Equipment complained about the prices Miles charged for TEC products. It is also clear that TEC covertly worked hand-in-hand with those distributors to formulate a plan to blitz the market as soon as it terminated Miles. Notably, TEC did not circulate a price list or suggest price margins to its distributors. Nonetheless, Miles asserts that TEC conspired with its other distributors to terminate Miles knowing that doing so would stabilize prices. Miles also emphasizes that TEC asked Miles to raise its prices.
Moreover, Miles highlights its competitors’ actions after its termination as evidence that TEC and its distributors made quid pro quo arrangements in exchange for the termination. In contemplating its options, TEC sought assurances from its other distributors that they would work to recover sales lost in the event that Miles ceased distributing TEC products. During this time, Louisville Tile agreed to begin selling TEC product in its Chattanooga store where it had previously sold only a competing brand. Similarly, Virginia Tile agreed to increase the presence of TEC product in Cleveland and, in fact, did so after Miles was terminated.
As with the horizontal conspiracy, we must ask whether this evidence sufficiently excludes the possibility that TEC and its non-terminated distributors were acting independently. Monsanto, 465 U.S. at 764. There is no question that TEC and its other distributors acted in concert regarding non-price issues like retaining customer accounts and promoting the TEC product, even going so far as to blitz the market upon Miles‘s termination. Nonetheless, a reasonable jury could not infer concerted action to fix prices from the fact that TEC and its other distributors acted in concert in other respects. See Monsanto, 465 U.S. at 763 (“[I]t is of considerable importance that . . . concerted action on nonprice restrictions[ ] be distinguished from price-fixing agreements . . . .“). Nor could a jury infer a price fixing agreement from the fact that Miles‘s termination pleased its competitors. Clearly, the termination eliminated the downward pressure Miles put on TEC products in the market, but no reasonable jury could infer a price-fixing agreement from the fact that the prices stayed the same before and after Miles was terminated. See Bi-Rite Oil Co. v. Ind. Farm Bureau Coop. Ass‘n, 900 F.2d 200, 203 (7th Cir. 1990) (recognizing that many legitimate factors may lead to a decision to terminate a price-cutter).
Despite the paucity of its evidence, Miles argues that its evidentiary burden is lessened by the Supreme Court‘s decision in Matsushita. Miles argues that Matsushita
the absence of any plausible motive to engage in the conduct charged is highly relevant to whether a ‘genuine issue for trial’ exists . . . . Lack of motive bears on the range of permissible inferences that might be drawn from ambiguous evidence: if petitioners had no rational economic motive to conspire, and if their conduct is consistent with other, equally plausible explanations, the conduct does not give rise to an inference of conspiracy.
Id. (emphasis supplied). The Court added in a footnote that it did not mean to imply that “if petitioners had had a plausible reason to conspire, ambiguous conduct could suffice to create a triable issue of conspiracy,” and noted that Monsanto still controlled the interpretation of ambiguous evidence. Id. at 597 n.21. In other words, a plausible motive for TEC to engage in anticompetitive behavior does not lessen Miles‘s evidentiary burden.
Finally, Miles cites cases from other circuits to argue that the allegedly pretextual justifications for its termination raise genuine issues of material fact as to whether TEC‘s actions were legal. See Alvord-Polk, Inc. v. F. Schumacher & Co., 37 F.3d 996, 1012 (3d Cir. 1994) (recognizing that where facts show that a defendant‘s proffered explanation for its actions is, in fact, pretextual, it tends to support an inference of concerted action); Ezzo‘s Invs., Inc. v. Royal Beauty Supply, Inc., 94 F.3d 1032, 1034-35 (6th Cir. 1996) (holding that a reasonable jury could infer a price-fixing conspiracy from a supplier‘s pretextual reason for cutting off a beauty product distributor).
Even assuming that TEC‘s initial reasons were pretextual, all of Miles‘s evidence suggests that it was terminated based on price complaints from other TEC distributors rather than an illegal price-fixing agreement. Because the Supreme Court has already said that manufacturers can legitimately terminate distributors based on price complaints, the fact that TEC offered different reasons initially does not change the analysis. Although pretextual reasons have some probative value, we hold that they are insufficient to create a genuine issue of fact without other evidence pointing to a price-fixing agreement. See, e.g., H.L. Hayden Co. of N.Y., Inc. v. Siemens Med. Sys., Inc., 879 F.2d 1005, 1014 (2d Cir. 1989) (stating that mere fact that defendant‘s purported reason is undermined does not, by itself, justify the inference that the conduct was the result of a conspiracy). Taking the evidence as a whole, Miles has not shown that a genuine issue of fact exists regarding a price-fixing agreement.
C. Interference with Prospective Business Advantage
Under Indiana state law, in order to prevail on a tortious interference with prospective business relations claim, a plaintiff must prove: 1) the existence of a business relationship; 2) the defendant‘s knowledge of the existence of that relationship; 3) the defendant‘s intentional interference with that relationship; 4) the absence of any justification; and 5) damages. Levee v. Beeching, 729 N.E.2d 215, 222 (Ind. Ct. App. 2000). Where there is no contract, “illegal conduct is an essential element of tortious
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district court‘s entry of summary judgment in favor of the defendant.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of Appeals for the Seventh Circuit
USCA-02-C-0072—2-6-07