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In a recent opinion affirming a jury verdict against The Coca-Cola Company and several Coca-Cola bottlers, the Texas Court of Appeals at Texarkana applied the Texas Free Enterprise and Antitrust Act (“TFEAA”) to enjoin allegedly anticompetitive conduct in three neighboring states. Specifically, the court enjoined the defendants from engaging in a variety of marketing activities in an interstate geographic region (the “Relevant Geographic Territory”) encompassing eleven counties in Texas, three counties in Oklahoma, twenty-one counties in Arkansas, and five parishes in Louisiana. The Texas court held that the promotional activities at issue clearly violated the TFEAA. This case is interesting because similar practices had been upheld under the federal antitrust laws and the competition laws of other states.

The case began when a group of carbonated soft-drink (CSD) bottlers whose products compete with Coca-Cola beverages sued the defendants in Texas trial court for restraint of trade, monopolization, and interference with existing and prospective business relationships. The plaintiffs complained that the defendants were using promotional contracts called “Calendar Marketing Agreements” (CMAs) to exclude competitors’ products from valuable retail store space and to induce local retailers to promote Coca-Cola beverages over competing drinks from other manufacturers.

The more than 100 CMAs in the case were independent contracts governing specific relationships between Coca-Cola bottlers and local retailers in one or more of the four States implicated by the suit. However, all of the agreements did require Coca-Cola bottlers to provide promotional payments to retailers in exchange for preferred promotional activities including advertising, product placement, and sale pricing that favored Coca-Cola beverages. The duration of the CMAs ranged from one to several years and the majority of the contracts were terminable at will by either party. Coca-Cola’s CMAs are similar to promotional agreements employed elsewhere in the beverage and other retail industries.

The plaintiffs alleged that the CMAs were anticompetitive because they did more than give retailers volume discounts for purchasing certain quantities of Coca-Cola products. The plaintiffs alleged that the agreements violated the antitrust laws because they required retailers to exclude competing products from prime shelf and floor space, restricted retailers’ ability to advertise competing brands in their stores and in local media during certain times of year, and, in some cases, required retailers either to carry only Coca-Cola brands of certain drinks or to price competitors’ beverages at or above the price of CocaCola products.

At trial, the plaintiffs presented evidence that: (1) Coca-Cola products occupied a 75 to 80 percent share of the relevant market (i.e., the market for branded CSDs in sales territories occupied by the plaintiffs); (2) Coca-Cola’s CMAs adversely affected the plaintiffs’ distribution and sales; and (3) at least one retailer felt compelled to accept a Coca-Cola CMA that restricted its ability to promote non-CocaCola products it desired to sell. The plaintiffs also presented expert opinion testimony that Coca-Cola’s CMAs were consistent with an attempt by a monopolist to gain control of the relevant retail distribution chain.

The defendants’ countered plaintiffs’ claims with (1) uncontroverted evidence that the CMAs fostered price competition in the relevant market; (2) evidence that plaintiffs’ products remained available for purchase throughout the relevant market; (3) evidence that Coca-Cola continued to face vigorous competition from Pepsi products, which occupied approximately 15% of the relevant market; and (4) evidence that the defendants’ conduct did not preclude the plaintiffs from offering retailers their own CMAs on terms equal to, or better than, the challenged Coca-Cola agreements.

At the close of the evidence, the jury found that the defendants had willfully violated the TFEAA by monopolizing and unreasonably restraining trade in the alleged CSD market. The jury also found that the defendants violated Texas common law by interfering with the plaintiffs’ existing or prospective business relationships. Based on these verdicts, the jury awarded the plaintiffs $14.6 million in damages for lost profits and for future lost profits or franchise value.

Following a post-trial hearing, the court issued a final judgment incorporating the jury’s verdict and enjoining the defendants from engaging in the challenged marketing activities with any retailer in the four-state “Relevant Geographic Territory” alleged in the complaint.

The defendants appealed the trial court’s final judgment to the Sixth Court of Appeals at Texarkana. They began by challenging the trial court’s injunction of conduct in neighboring States as contrary to the TFEAA and to precedents limiting the extraterritorial application of state antitrust laws. They then challenged the lower court’s finding of antitrust liability on the grounds that: (1) the plaintiffs evidence proved, at most, harm to competitors, not to competition or consumers as required by Texas law; (2) the antitrust laws do not preclude even monopolists from using price cuts or other incentives, including short-term exclusive dealing contracts, to win business from rivals; and (3) the plaintiffs failed to demonstrate that the challenged CMAs harmed consumers or impaired competition to a greater extent than similar promotional practices upheld by federal and other state courts.

In a published opinion issued in July 2003, the appellate court affirmed every aspect of the trial court’s judgment except its award of attorneys’ fees, which it remanded for reconsideration.

The Court of Appeals began by upholding the lower court’s use of the TFEAA to enjoin the defendants’ marketing practices inother states. Rejecting the defendants’ contention that the lower court erred in applying the TFEAA extraterritorially, the court held that the statute by its terms encompasses out-of-state activities because it applies to any trade or commerce that occurs “partly” within the state. The court then relied on this language to distinguish several precedents limiting the extraterritorial application of state antitrust laws, including a Fifth Circuit decision refusing to apply the TFEAA to conduct that occurred in California, on the grounds that those cases did not involve equally broad mandates or, in the Fifth Circuit case, out-of-state conduct that occurred “partly” within Texas.

Having affirmed the TFEAA’s application to all commercial conduct occurring “partly” within the state, the court held that the defendants’ marketing activities were subject to the Act and clearly affected Texas consumers. In support of this determination, the court emphasized that a number of the CMAs covered sales areas that included stores both inside and outside Texas, and that the defendants voluntarily agreed to the application of Texas law when they negotiated and executed all the challenged agreements in the state. The court then concluded that it was unnecessary to apply the other state antitrust laws invoked in the complaint because the defendants failed to allege any material difference between those laws and the TFEAA.

In conducting its extraterritoriality analysis, the court did not offer its insight as to why the absence of Texas business operations for certain of the plaintiffswas not relevant. Nor did it offer information about its assessment of the defendants’ evidence that (i) some of the challenged CMAs governed retailers and operations wholly outside the state, or (ii) that only one of the more than 100 CMAs in the case contained a Texas choice of law provision. It simply rejected as untenable Coke’s “position that the effects of competition appear and dissipate at state lines.” It did not consider the propriety of limiting the TFEAA’s application to wholly intrastate conduct or to conduct that affects primarily Texas consumers.

The court next considered the jury’s finding of antitrust liability. With respect to market definition, the court held that Coca-Cola’s evidence that branded CSDs compete with other beverages created, at most, a fact issue for the jury about whether the product market should be limited to branded CSDs. The court then upheld the jury’s decision to so limit the market despite the plaintiffs’ failure to submit market studies because the alleged market was “generally well known” and “familiar” to consumers.

On the issue of geographic market, the court held that the plaintiffs were not required to “prove” that the area in which the defendants faced competition and to which retailers could reasonably turn for supplies should be limited to the areas occupied by the plaintiffs’ distributorships. Rather, the court held that the franchise territories were “readily ascertainable areas” of competition and that retailers’ ability to purchase beverages from suppliers outside these areas was irrelevant absent proof that such “outside” suppliers had a “major impact” on the plaintiffs’ territories.

Having defined the relevant market, the court upheld the jury’s finding that the defendants’ CMAs unreasonably restrained trade in that market. The court held that the plaintiffs were not required to demonstrate the requisite harmful effect on competition with specific evidence of market foreclosure because Coke’s large market share was alone sufficient to demonstrate such an effect. The court acknowledged that the individual promotional tactics Coke allegedly used to achieve its market share had been upheld in other jurisdictions. But the court reasoned that these cases were distinguishable because they did not involve the same combination of marketing tactics present in Coca-Cola’s CMAs.

In reaching this conclusion, the court specifically rejected a line of state and federal precedents refusing to find even exclusive dealing contracts anticompetitive where such contracts are of limited duration or terminable at will. The court acknowledged that Coca-Cola’s CMAs were typically not exclusive and that they were all either of short duration or terminable at will. The court also acknowledged that other bottlers (notably Pepsi bottlers not party to the action) used similar agreements to compete in the alleged market. But the court held that these facts were not barriers to liability because: (i) the CMAs did not have to foreclose all competition in the market to violate the antitrust laws; and (ii) the defendants’ use of the CMAs to increase their already large market share was sufficient to show the CMAs’ adverse effects on competition as a function of consumer choice.

The court applied the same reasoning to reject the defendants’ argument that the CMAs did not unreasonably restrain trade because their procompetitive benefits —most notably lower prices on bottled beverages —outweighed their adverse effect on competitors’ sales. The defendants argued that, by fostering price competition among competing bottlers, tthe CMAs benefited consumers and competition in precisely the manner contemplated by the antitrust laws and that any resulting harm to Coke’s competitors was a necessary consequence of, not a justification for condemning, the agreements. The court rejected this argument on the grounds that the purpose of the antitrust laws is not simply to foster price competition , but to ensure the existence of more than one real supplier of a product. Applying this theory, the court upheld the lower court’s determination that Coca-Cola’s CMAs presented a sufficient threat to consumer product choice to justify liability.

The court concluded its antitrust analysis by upholding the jury’s verdict that the defendants unlawfully monopolized, or attempted to monopolize, the relevant CSD market. The court acknowledged that monopoly market share is unlawful only if it is willfully acquired or maintained as a result of something other than a superior product or business strategy. The court upheld the monopolization finding on the grounds that Coca-Cola used the CMAs to maintain or increase its already large market share by taking business away from rivals. But the court did not offer its insight regarding how it weighed the following issues: whether retailers’ acceptance of the challenged CMAs was based on more than the superiority of Coke products or Coke’s ability to offer better prices or promotional incentives than its competitors, how the challenged CMAs would preclude an equally efficient rival from competing with Coke by offering retailers the same or better promotional terms, and use by Pepsi bottlers of similar CMAs to maintain market share.

The appellate court’s judgment in Harmar raises several important legal questions — about the purpose of modern competition laws, the importance of uniform enforcement of federal and state antitrust statutes, and the propriety of extraterritorial application of state antitrust principles — whose significance extends far beyond application of the TFEAA.

With respect to the specific marketing practices at issue in the case, the appellate court’s decision is viewed by some as being in tension with three federal precedents upholding similar promotional activities, most notably the Fifth Circuit’s decision in Bayou Bottling, Inc. v. Dr Pepper Co., 725 F.2d 300, 304 (5th Cir. 1984). The appellate court did attempt to distinguish these cases on the ground that they did not involve the same combination of marketing tactics present in Harmar. But there is no specific explanation of why the combination in Harmar had a more pernicious effect on competition than the practices upheld in the federal cases.

The court’s absence of specific reasoning as to how Coca-Cola’s combination of tactics crossed the line that separates vigorous competition (which necessarily harms competitors) from anticompetitive conduct that hurts consumers should not be overlooked because it goes directly to the purpose of antitrust enforcement. In condemning Coca-Cola’s CMAs as anticompetitive, the court did not differentiate between the defendants’ use of legal practices, like volume discounts or pass-through promotional payments, that foster price competition and their use of potentially anticompetitive tactics, like price matching restrictions, that may harm consumers by depriving them of the opportunity to purchase rival products at the most competitive prices. Because it does not contain this analysis, the court’s opinion does not offer insights on how to distinguish the precedents upholding marketing practices similar to the CMAs or when agreements can be challenged despite their price-lowering effects.

With respect to competition policy generally, the basic tenets underlying the Texarkana court’s decision are different from other reccent antitrust jurisprudence. As noted above, the court’s decision to condemn the CMAs as an unreasonable restraint of trade despite their price lowering potential was based primarily on the notion that the court had a duty to protect the existence of “more than one real supplier of a type of product.” The antitrust laws do condemn conduct (such as predatory pricing) that threatens to eliminate alternate suppliers on grounds other than efficiency or product superiority. The reason is that such conduct harms consumers by eliminating legitimate competitive restraints on the defendants’ price, output, or quality. The antitrust laws do not, however, prevent even a monopolist from gaining market share from a rival based on efficiency (i.e., price) or product superiority. See, e.g., United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966); Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 116 (1986); Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993); Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 221-23 (1993); Virgin Atlantic Airways Ltd. v. British Airways, PLC, 257 F.3d 256, 266-72 (2d Cir. 2002).

The Texarkana court’s focus on the number of suppliers in the market irrespective of their efficiency or ability to compete appears to revive the notion, perhaps most famously expressed in the Second Circuit’s 1945 decision against Alcoa, that the antitrust laws exist to protect even less efficient rivals from the competition by larger, and more efficient, market players. See, e.g., United States v. Aluminum Co. of America, 148 F.2d 416, 431 (2d Cir. 1945). In this respect, the Texarkana decision is in tension with other federal antitrust cases that have rejected the Alcoa court’s approach to antitrust enforcement because it “encourages inefficient conduct” and ultimately harms consumers by preventing successful market players from engaging in vigorous competition. E.g., R. Posner, Antitrust Law 262-62 (2d ed. 2001) (citing a series of Supreme Court and federal appellate court decisions rejecting Alcoa, including the Fifth Circuit’s opinion in Bayou Bottling).

The Texarkana court’s focus on Coca-Cola’s market share as evidence of its anticompetitive behavior is similarly in tension with other cases. At least two Texas cases have held that monopolists may engage in vigorous price or quality competition that harms, “if not destroy[s],” their competitors. E.g., Caller Times Pub. Co. v. Triad Communications, 826 S.W.2d 576 (Tex. 1992); Cargill, 479 U.S. at 116. The Texarkana court did not explain how the challenged CMAs allowed Coca-Cola to reduce or eliminate its competitors’ market share on the basis of something other than quality or efficiency. Did the jury improperly condemn the agreements simply because they helped Coca-Cola maintain its dominant market position? This question is important because current antitrust doctrine requires courts to differentiate between aggressive competition and unlawful, anticompetitive acts, both of which adversely affect competitors but only the latter of which adversely affects consumers.

The significance of the court’s antitrust determinations is amplified by its decision to apply its antitrust analysis to conduct in neighboring states. It is not clear from the court’s opinion whether all the CMAs in the case governed activities occurring, in whole or in part, within Texas. Nor is it clear that the Texas legislature intended the TFEAA’s protections to extend to out-of-state plaintiffs with no business operations in Texas. The court’s decision to protect non-Texas plaintiffs by enjoining commercial activity in other states raises important constitutional and prudential questions about the reach of state antitrust statutes. The court’s application of the TFEAA to marketing practices in neighboring states raises Commerce Clause issues. And the court’s extraterritorial application of the Texas Act should be assessed in light of federal due process precedents protecting the interest that litigants and states have in regulating local conduct.

Other states have limited the application of their antitrust laws to wholly intrastate conduct or to conduct that primarily affects in-state consumers. The Texarkana court’s decision rejects this approach and, like its antitrust analysis, suggests a potential conflict with other jurisprudence encouraging interstate competition to the full extent permitted by federal law and, accordingly, a more limited approach to state antitrust enforcement.

The Texarkana court’s opinion is reported at The Coca-Cola Company et al. v. Harmar Bottling Co. et al., 111 S.W.3d 287 (Tex. App. – Texarkana 2003), and has been the subject of commentary in the National Law Journal and the BNA Antitrust & Trade Regulation Reporter. See Texas Court Sustains Coke Monopoly Finding, NATIONAL L.J., p. 14 (Aug. 4, 2003).

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at info@fedsoc.org.