ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS THE SECOND AMENDED COMPLAINT
Re: ECF No. 54
I. INTRODUCTION
Plaintiff Orchard Supply Hardware (“Plaintiff’ or “Orchard”) brings a Second Amended Complaint (“SAC”) against Defendants Home Depot USA, Inc., (“Home Depot”), Milwaukee Electric Tool Corpora
II. BACKGROUND
A. Factual Background
For the purposes of a motion to dismiss, the Court adopts the following factual allegations from the SAC.
Plaintiff owns and oрerates a chain of 92 all-purpose general hardware stores throughout California and Oregon, and is a retail competitor of Defendant Home Depot.
On June 7, 2012, Home Depot executive Craig Menear publicly announced that Defendant Home Depot “would take appropriate measures to answer competitive threats ... [and] lock down the supply of professional power tools.” Id. ¶ 139. Within a week, Defendant Makita gave notice that it would stop selling power tools to Orchard. Id., ¶¶ 18, 140. Two weeks later, Defendant METCo also informed Orchard that it “would cease to make further sales of any of its products to Orchard.” Id., ¶¶ 18, 142. Another power tool supplier, Black & Decker Dewalt (“Black & Decker”), disclosed to Plaintiff that Defendant Home Depot had also requested that Black & Decker refuse to deal with Orchard, but that Black & Decker had refused. Id. ¶ 144. In response, Black & Decker claims that Defendant
In the “spring or early summer of 2012” Home Deport “stated or implied” to each of the three major suppliers that it was conferring with the other suppliers about ceasing sales to Orchard and other companies. Id., ¶ 129. Defendants METCo and Makita acceded to Home Depot’s demand to supply products exclusively to Home Depot, despite having previously indicated they wished to continue and expand their sales to Orchard and other suppliers. Id., ¶¶ 18, 20. Both companies “cannot afford to cross” Home Depot, their principal trading рartner.
Finally, Plaintiff alleges that Defendant Home Depot engaged in false advertising. Id., ¶¶ 244 & 257. “Several of Home Depot’s stores at various locations in Southern California” displayed promotions and advertisements suggesting that Orchard charges more than Home Deport for the same products. Id. ¶244. In fact, the products depicted were not actually the same, and differed in quality and manufacturer. Id. ¶¶ 246-249.
B. Procedural History
Plaintiff filed a complaint in December 2012, asserting causes of action for violation of the Sherman Act, the Cartwright Act and the UCL, and for tortious interference with existing contracts and tortious interference with prospective economic relations. “Original Complaint,” ECF No. 1. The Court granted Defendants’ motion to dismiss the initial complaint in April 2013, and granted Plaintiff leave to file an amended complaint to allege additional facts to support the claims in the Original Complaint. Order Granting Motion to Dismiss without Prejudice (“Order”), ECF No. 42.
C. Jurisdiction
Plaintiffs first two causes of action arise under federal law, Section 1 of the Sherman Antitrust Act. 15 U.S.C. § 1. The Court has exclusive jurisdiction over those claims pursuant to Section 4 of the Clayton Act. 15 U.S.C. § 15. Since the third through seventh causes of action arise from the same “nucleus of operative fact” as the Sherman Act claims, this Court can, and hereby does, exercise supplemental jurisdiction over those claims pursuant to 28 U.S.C. § 1367(a).
Plaintiffs eighth cause of action arises under federal law, the Lanham Act, and therefore subject-matter jurisdiction is proper pursuant to 28 U.S.C. § 1331. Since the ninth cause of action arises from the same “nucleus of operative fact” as that claim, supplemental jurisdiction is also appropriate.
D. Legal Standard
“Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr.,
For purposes of a motion to dismiss, “all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.” Cahill v. Liberty Mut. Ins. Co.,
III. DISCUSSION
A. Sherman Act
Section 1 of the Sherman Act prohibits “unreasonable restraints” of trade. State Oil Co. v. Khan,
1. Per Se Violation: Unlawful Group Boycott
An unlawful group boycott is one type of per se violation of Section 1. NYNEX Corp. v. Discon, Inc. (“Discon ”),
Plaintiff does not argue in the SAC or in its opposition to the motion to dismiss that Makita and METCo communicated directly with each other. Instead, in the parlance of antitrust law, Plaintiff argues that Defendant Home Depot formed a “hub” connecting two “spokes” — Milwaukee and METCo — into a horizontal arrangement. Opposition of Orchard Supply Hardware LLC to Defendants’ Joint Motion to Dismiss its Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“Opp.”), ECF No. 55, at 3:1-10. A hub-and-spoke relationship can establish a horizontal arrangement, but there still must be a “rim”: an at-least-tacit understanding between the horizontal competitors that each would participate in the boycott.
This Court dismissed Plaintiffs original complaint because it lacked factual allegations that Defendants Makita or METCo had an arrangement with each other, tacit or otherwise. Order, at 5:1-2. The initial complaint failed to plead facts sufficient to give rise to a plausible inference that Makita and METCo engaged in illegal coordination as opposed to “merely parallel conduct that could just as well be independent action.” Id., at 5:12-15 (quoting Twombly,
In the SAC, Plaintiff alleges facts that it argues give rise to the inference of coordi
Most of these factors were alleged in the initial complaint and discussed in the last motion to dismiss. In particular, the Original Complaint emphasized the argument that Makita and METCo’s action was against their economic self-interest. The SAC contains no new facts demonstrating why this is so. While those two companies may have wanted to continue their relationships with Orchard, the complaint makes it clear that Makita and METCo are “extrаordinaryfily] dependent] on continued good relations with Home Depot”. SAC, at ¶ 49. Orchard even acknowledges that the degree of dependency is so great that the suppliers “could not afford' to reject [Home Depot’s] demands.” Id., ¶51. Either company stood to benefit significantly from becoming Home Depot’s sole supplier of professional power tools, if Home Depot went through on its threat to exclude non-conforming suppliers.
Orchard points out that Home Depot publicly announced its intention to lock up suppliers and then approached all three of its professional power tool suppliers to secure commitments to do so.
The remaining “plus factors” likewise fail to create a plausible inference of coordinated behavior. First, Orchard’s “inside” knowledge of Home Depot’s strategy and course of business provides little support. Orchard does no more that allege that two employees, who last worked at Home Depot over a decade ago, “surmised” that Home Depot would have subtly communicated to METCo and Makita what the other suppliers were doing. Opp., at 6:1. Second, as the Court explained in its order dismissing the original complaint, the fact that the market for professional tools is dominated by three suppliers “does not indicate thе two announcements probably would not have been independent responses to the common stimulus of Home Depot’s [demand].” Order, at 6:20-22. Altogether, the SAC’s allegations do not “nudge” the claim of coordinated behavior “across the line from conceivable to plausible.” Twombly,
The SAC does not allege facts sufficient to state a claim of a per se violation of Section 1.
2. “Rule of Reason” Violation
As an alternative to its claim of a per se violation, Plaintiff argues that the facts support a viable Section 1 claim under the rule of reason. Under the rule of reason, a court must determine whether a restraint on trade constitutes an “unreasonable restraint on competition ... taking into account “specific information about the relevant business” and “the restraint’s history, nature, and effect.” Leegin,
a. The Restraint of Trade
To the extent the complaint rests upon the allegation of a horizontal agreement between Defendants Makita and METCo, it is insufficient for the same reasons discussed above. But Plaintiff has also pled facts suggesting the existence of two vertical agreements (between Home Depot and METCO and between Home Depot and Milwaukee) that could be unreasonable restraints of trade under the rule of reason. SAC, ¶¶ 17 & 18.
Defendants object that Plaintiff has not alleged this type of antitrust violation in the SAC, and that both of Plaintiff’s antitrust claims are predicated оn the existence of a coordinated horizontal group boycott. Motion, at 10:20-11:1. Defendants base this assertion on the heading of the SAC’s second cause of action, which reads “Unlawful Group Boycott; Rule-of-Reason Violation and Quick Look Violation.” SAC, above ¶ 202. The SAC could certainly be clearer on this point, but in
b. Injury to Competition within a Product Market
To state a rule-of-reason claim, a plaintiff must show “an injury to competition, rather than just an injury tо plaintiffs business.” Sicor, Ltd. v. Cetus Corp.,
In its original complaint, Orchard alleged in a general way that Home Depot would be able to charge higher prices and deprive consumers of choice as a result of its agreements, arguing that this was “the very kind of harm to competition that lies at the heart of a rule-of-reason offense.” Original Complaint, at ¶¶20 & 166. The Court held that these generic allegations were insufficient to plead a viable injury to competition, noting, inter alia, that there were no allegations that the agreement facilitated horizontal collusion or foreclosed competitors from entering into or competing in a market. Order, at 9:5-7 (citing Brantley,
In the SAC, however, Orchard has alleged that the agreements are foreclosing competitors from competing in a specific product submarket: the market for certain specific professional power tools, as purchased by professional customers. SAC, ¶¶ 30-31, 66, 151-63. The SAC alleges that there is little or no cross-elasticity of demand among the products identified in the complaint, and that the majority of professional customers will view a store as “deficient” if it does not carry a full line of both METCo or Makita tools, resulting in those customers ceasing to purchase any products at that store. SAC, ¶¶ 32, 87-88. Orchard alleges that professional customers only consider a shopping at a relatively small number of hardware outlets, that only a few of those sellers compete with Home Depot on price, and that the challenged agreements therefore completely foreclose those outlets from competing for professional customers. Id., ¶¶ 14-16, 35(2), 69-88, 109, 156, 171-73, 175-76, 184, 191.
“The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe Co. v. United States,
Part of the difficulty with this area of analysis is that “injury to competition” and “injury to the plaintiffs business” are distinct but also significantly overlapping categories. That a business suffers harm does not mean competition has also been harmed. But if a company suffers a harm that excludes it from competing in a market, it will often argue that the harm it suffers will affect the marketplace and cause harm to competition. The Ninth Circuit’s recent decision in Gorlick Distribution Centers, LLC v. Car Sound Exhaust System, Inc.,
In Gorlick, plaintiff Gorlick alleged that car parts supplier Car Sound Exhaust System offered preferential terms to Allied, Gorlick’s rival in the aftermarket automotive parts market. Id.,
The allegations that the Ninth Circuit noted were missing in Gorlick are the allegations Orchard has made in its complaint. Orchard has alleged that METCo and Makitа (combined) are the dominant brands of professional power tools. It also has alleged that the submarket for the specified power tools, as purchased by professional customers seeking the lowest prices, is the sort of limited market that the automotive exhaust products market is not. On the facts of the complaint, Home Depot’s agreements shut competitors out of this specific submarket in the way that the Ninth Circuit noted that Allied was not shut out of the broader aftermarket automotive exhaust products market.
Defendants argue that Orchard has failed to allege harm to competition because it has alleged neither a reduction in the output or quality of goods, and has not demonstrated an increase in price caused by Orchard’s foreclosure from the market. Motion, 16:5-8. But these are not always necessary to prove harm to competition.
An antitrust plaintiff need not demonstrate that prices have actually been raised to plead a rule-of-reason claim. In F.T.C. v. Indiana Federation of Dentists,
A refusal to compete with respect to the package of services offered to customers, no less than a refusal to compete with respect to the price term of an agreement, impairs the ability of the market to advancе social welfare by ensuring the provision of desired goods and services to consumers at a price approximating the marginal cost of providing them. Absent some countervailing procompetitive virtue ... such an agreement limiting consumer choice by impeding the ordinary give and take of the market place cannot be sustained under the Rule of Reason.
Id. at 459,
Defendants also object that the SAC contains insufficient allegations that defendants actually had market power in the relevant submarket, and that therefore it has not validly pled harm to competition. Citing Newcal, Defendants argue that a “plaintiff must allege both that a ‘relevant market’ exists and that the defendant has power within that market.”
Finally, Defendants note that the SAC fails to specifically define Orchard’s market power within the submarket. Therefore, they argue that Orchard has not demonstrated that its foreclosure from the market will harm competition, and also that Orchard has not pled its own antitrust injury. Given the allegations that the agreements completely foreclosed previously existing competition within a specific product submarket, the Court can plausibly infer harm to competition without requiring Orchard to plead the specific percentage of market power that it, and other Home Depot competitors, previously held. The Court can also infer that Orchard has lost profits and suffered damages as a result of the challenged agreements, sufficient to allege antitrust injury. See SAC, ¶¶ 178-87.
In a motion for summary judgment or at trial itself, it will fall to Orchard to prove the allegations in the complaint. See McDaniel v. Appraisal Institute
c. Aggregation of Harm to Competition
Defendants also argue that Plaintiff has not alleged any facts showing the individual anticompetitive effect of each separate vertical agreement. Defendants
At oral argument, Defendants’ counsel acknowledged that there is no in-circuit precedent that clearly prohibits a plaintiff from aggregating the anticompetitive еffects of multiple agreements to make an allegation of an unreasonable restraint of trade. Defendants instead rely heavily on Dickson v. Microsoft Corp.,
The Ninth Circuit addressed the question of aggregation, and the reach of Dickson, in William O. Gilley Enterprises, Inc. v. Atl. Richfield Co.,
On appeal, the Ninth Circuit initially held that “the district court erred in not allowing [Plaintiffs] to allege the cumulative effects of a single Defendant’s ... agreements.” Gilley I,
The Ninth Circuit later withdrew Gilley 1, after concluding that the plaintiffs claims were actually barred by res judicata, and that the dismissal should therefore be affirmed on that ground. Gilley II,
Even were this Court to read Dickson as Defendants do, it would still need to consider the weight of in-circuit precedent, which leans away from disallowing aggregation in pleading Section 1 claims. See, e.g., Twin City,
As Defendants acknowledge, Twin City stands for the proposition that the “aggregation of a single defendant’s contracts may be appropriate when determining the anticompetitive impact of that single defendant’s conduct.” Defendants’ Reply in Support of Motion to Dismiss Complaint (“Reply”), ECF No. 56, at 10:10-14. In assessing the anticompetitive impact of Defendant Home Depot’s overall conduct in entering intо the two agreements, aggregation is appropriate.
Defendants also place inappropriate weight on a negative inference from Rebel Oil Co., Inc. v. Atl. Richfield Co.’s holding that “[t]he aggregation of market shares of several rivals is justified if the rivals are alleged to have conspired to monopolize.”
As Gilley I noted, a “defendant who restrains trade by an obvious pattern and practice of entering into individual contracts should not be allowed to do piecemeal what he would be prohibited from doing all at once.”
Aggregating the effect of the METCo-Home Depot agreement and the Makita-Home Depot agreement is appropriate for the purpose of showing the Defendant Home Depot’s conduct was anticompetitive. The Court agrees with Defendants, however, that it is inappropriate to aggregate the two vertical agreements in evaluating whether MET-Co and Makita’s conduct was anti-competitive. METCo and Makita each separately made an agreement with Home Depot. Orchard does not contend that, taken individually, these contracts have an anticompetitive effect. “A manufacturer of course generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently.” Monsanto,
Because Orchard has not pled any facts about either agreement individually, it cannot meet its burden to prove those agreements are anti-competitive. Therefore, the Rule of Reason claims against METCo and Makita must be dismissed.
d. Scope of the Geographic Market
In order to plead a viable claim of a rule of reason violation, Plaintiff must allege sufficient facts to support its claim that these agreements harmed competition with a relevant geographic and product market. Newcal,
The Court determined that the definition of the relevant geographic market in the original complaint was unacceptably vague and conclusory, and dismissed the rule of reason claim on that basis. Order, at 8:14-16. In the SAC, Orchard has provided substantially more allegations about the geographic markets. SAC, at ¶¶ 147-150. Orchard’s stores are organized into seven different markets in California, and one in Oregon, with the total number of stores in each market also provided. Id. ¶147. Defendants argue that Orchard has still not met its burden because it must allege both the relevant market and that the defendants have market power within each market. Plaintiff has alleged that Defendants have market power generally in the United States, and has alleged sufficient facts from which the Court can plausibly infer that Home Depot has market power within each of these smaller markets. This is sufficient under the liberal reading of the complaint required under Rule 12(b)(6). See Cahill,
For the reasons stated above, Orchard has adequately pled a claim against Home Depot for a rule of reason violation of section 1 of the Sherman Act, but has not pled that claim against Makita and MET-Co.
The Cartwright Act, California’s antitrust law, was “modeled after the Sherman Act,” and therefore the Court’s analysis “mirrors the analysis under federal law.” County of Tuolumne v. Sonora Community Hosp.,
C. Unfair Competition Law
California’s Unfair Competition Law (“UCL”) prohibits both “unlawful” and “unfair” business practices. Cal. Bus. & Prof. Code. §§ 17200 et seq. Plaintiff can only assert an “unlawful” practice insofar as it can assert violations of other laws. See AT & T Mobility LLC v. AU Optronics Corp.,
Therefore, for the same reasons as explained above, the Complaint states sufficient facts to establish a viable UCL claim against Home Depot, but not METCo or Makita.
D.Tortious Interference with Existing Contracts
To state a viable claim for tortious interference with existing contracts, a plaintiff must plead: (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts to induce a breach of the contractual relationship; (4) actual breach of the contractual relationship; and (5) resulting damage. Pacific Gas & Electric Co. v. Bear Stearns & Co.,
Defendant argues that Plaintiff has failed both to adequately plead this claim because the SAC fails to specifically allege that Orchard performed under the terms of the contract, and fails to specifically allege that the contract was breached. The Court disagrees, and believes that both of these elements can be plausibly inferred from the facts in the SA C. How
E. Tortious Interference with Prospective Economic Relations
In contrast to the tort of interference with existing contracts, a plaintiff need not show a specific enforceable contract in order to assert a claim for tortious interference with prospective economic relations. See Bed, Bath & Beyond of La Jolia, Inc. v. La Jolia Village Square Venture Partners,
F. Lanham Act
In the SAC, Plaintiff brings a new claim for false advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B). A plaintiff must prove five elements to demonstrate a Lanham Act claim: (1) a false statement of fact in a commercial advertisement about a product; (2) the statement actually deceived substantial segment of its audience; (3) the deception is material; (4) the defendant caused its false statement to enter interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the false statement. Skydive Arizona, Inc. v. Quattrocchi,
Defendants argue that Plaintiff has not alleged that Defendant caused the false statement to enter into interstate commerce because it alleges the advertisements were only in stores in Southern California. But as defined in the Lanham Act, “commerce” refers to “all commerce which may lawfully be regulated by Congress.” 15 U.S.C. § 1127. “It is well settled that so defined ‘commerce’ includes intrastate commerce which ‘affects’ interstate commerce.” Thompson Tank & Mfg. Co., Inc. v. Thompson,
Defendants also argue that Plaintiff has failed to plead the false advertising claim with particularity, as Rule 9(b) requires for claims grounded in fraud. Defendant specifically faults the SAC’s lack of information regarding the specific stores where these advertisements were displayed and the dates they were displayed. The purpose of Rule 9(b) is to give defendants adequate notice of the charges being brought so they can defend against them, and to deter the filing of frivolous charges related to fraud. In re Stac Electronics Securities Litigation,
G. California False Advertising Law Claims
Plaintiffs also bring a new claim of false advertising under California’s false advertising law, Cal. Bus. & Prof. Code. §§ 17500. To state such a claim “it is necessary only to show that members of the public are likely to be deceived” by an advertisement. Kasky v. Nike, Inc.,
H. Leave to Amend
The Court does not grant Plaintiff leave to amend the SAC to reassert the dismissed claims. In deciding whether to grant leave to amend, a court considers whether “the amendment of the complaint would cause the opposing party undue prejudice, is sought in bad faith, constitutes an exercise in futility, or creates undue delay,” as well as “whether plaintiff has previously amended his complaint.” Ascon Properties, Inc. v. Mobil Oil Co.,
Plaintiff had a full opportunity to allege facts sufficient to state a claim after receiving the Court’s guidance following the first motion to dismiss, and after a second motion it does not seem likely that Plaintiff will be able to state additional facts sufficient to plead the dismissed claims. The Court concludes that it would be futile to permit further amendment.
IY. CONCLUSION
For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART Defendants’ motion to dismiss. All claims against Defendants METCo and Makita are DISMISSED. The first and sixth causes of action are DISMISSED WITH PREJUDICE. The second, third, fourth, fifth, seventh, eighth and ninth causes of action against Home Depot remain.
Defendant Home Depot shall file an answer to the Second Amended Complaint not later than thirty days from the date of this order.
IT IS SO ORDERED.
Notes
. Orchard operates 90 stores in seven geographic markets in California, ("Central” Region, "Central-South Coast/Los Angeles County” Region, "East Bay” Region, "Monterey Bay” Region, "Orange County” Region, "San Francisco Peninsula” Region, "Silicon Valley” Region) as well as two stores in Oregon ("Portland” region). Id., ¶ 147.
. The power tool market Orchard refers to is one that contains seven professional-grade power tools. METCo, Makita and Black & Decker are the three leading suppliers of the full line of professional power tools. Id. ¶¶ 15, 31 & 70.
. Black & Decker, the third major supplier of "professional” power tools, is not similarly dependent on Home Depot for sales. Id. ¶ 49.
. Notably, Orchard alleges that Black & Decker has come forward to confirm that it was approached, threatened, and punished by Home Depot, but does not allege that Home Depot ever implied to Black & Decker that it should end its relationship with Orchard because METCo and Makita were going to do so as well.
. "[S]uppose that the defendant has entered into distinct tying or exclusive dealing contracts with four different purchasers. Each contract individually forecloses approximately 15 percent of the market in question and thus would ordinarily be insufficient to establish a violation. However, in the aggregate the contracts foreclose approximately 60 percent of the market, which is more than sufficient. In such a case it would clearly be improper for the court to examine each agreement with the same defendant separately, conclude that the agreement standing alone is insufficient to establish illegality, and dismiss the complaint without considering the impact of the aggregation.” 2 Areeda & Hovenkamp ¶31001, p. 201-02 (3d ed.2010).
. The SAC also alleged a claim based on tortious interference with Orchard's existing contractual relationships with its customers, but Orchard has dropped this aspect of its claim. Opp., at 24:13-16.