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Packaging Systems, Inc. v. PRC-Desoto International, Inc.

United States District Court, C.D. California

July 14, 2017

PACKAGING SYSTEMS, INC., Plaintiff,
v.
PRC-DESOTO INTERNATIONAL, INC.; and PPG INDUSTRIES, INC., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS [13]

          OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         This is an antitrust action involving competitors in the aerospace sealant industry. Defendants PRC-Desoto International, Inc. and PPG Industries, Inc. (collectively “PPG”) manufacture and distribute aerospace sealant for use in military and commercial aircraft. Plaintiff Packaging Systems, Inc. purchases wholesale quantities of aerospace sealant from PPG, repackages the sealant into special injection kits, and sells the kits on the retail market (usually to aircraft maintenance companies). In August 2016, PPG issued a memo stating that the repackaging of its aerospace sealant for the purposes of resale was prohibited, and that it would stop selling sealant to any reseller that violated this prohibition. Plaintiff subsequently filed this action, alleging myriad violations of state and federal antitrust and unfair competition laws. PPG has moved to dismiss Plaintiff's complaint. (ECF No. 13.) For the reasons discussed below, the Court GRANTS IN PART and DENIES IN PART its Motion.[1]

         II. BACKGROUND

         A. Uses of Aerospace Sealant

         PPG manufactures and distributes aerospace sealant. (See First Am. Compl. (“FAC”) ¶ 29, ECF No. 11.) Aerospace sealant has a variety of uses on aircraft, including sealing fuel tanks, smoothing surfaces, and preventing moisture intrusion. (Id. ¶ 13.) Moreover, as one can imagine, aerospace sealant must be able to withstand a number of harsh environmental conditions, such as wide variations in temperature and pressure, inclement weather, ultraviolet light, noise, vibration, abrasion, moisture, fatigue, and high g-forces. (Id.) Because of this, aircraft manufacturers issue stringent specifications for any aerospace sealant used on their aircraft, and maintain a list of qualified products that meet these requirements. (Id. ¶¶ 17-18.) To land on a manufacturer's qualified product list (“QPL”), the sealant must pass rigorous testing at either Wright-Patterson Air Force Base or the Federal Aviation Administration. (Id. ¶ 18.) End-users of aerospace sealant-usually aircraft maintenance companies-will virtually never use non-QPL sealant for obvious safety and liability reasons. (Id.)

         Aerospace sealant comes from the manufacturer as separate pastes that must be mixed together prior to use. (Id. ¶¶ 15-16.) Once mixed, there is a relatively short window in which the mixture can be applied to the aircraft-sometimes as short as half an hour. (Id.) After the mixture's “working time” has passed, any excess mixture is unusable and must be discarded. (Id. ¶ 15.) End-users can mix sealant either by manually mixing the pastes or by using an injection kit. (Id. ¶ 16.) An injection kit is a disposable syringe-like tool that stores the pastes in separate compartments and mixes them together when its plunger is depressed. (Id. ¶¶ 16, 38.) Not only do injection kits simplify the mixing process, they reduce waste by mixing only the exact amount of sealant needed for one sitting. (See id.) However, filling kits with sealant is itself a difficult and labor-intensive process, and thus end-users tend to prefer purchasing the kits pre-filled. (Id. ¶ 42.)

         B. Production of Aerospace Sealant

         Plaintiff alleges that the production of aerospace sealant is its own unique market. (Id. ¶¶ 21-28.)[2] That is, there are no adequate substitutes for QPL-approved aerospace sealants because the properties of aerospace sealant are unique to the needs of aircrafts, and because aerospace sealant must undergo rigorous testing not required of non-aircraft sealants. (Id. ¶¶ 21-22.) Pricing for aerospace sealants is therefore highly inelastic. (Id. ¶¶ 26-28.)

         PPG produces over 90% of the aerospace sealant manufactured and used in the United States. (Id. ¶ 29.) According to Plaintiff, PPG is able to maintain such market dominance for two reasons. First, high barriers to entry prevent new competitors from entering the market. (Id. ¶ 31.) These barriers include “hundreds of millions of dollars” in startup costs, long delays in profit realization, entrenched distribution networks among preexisting producers, and intellectual property held by such producers covering critical production processes. (Id.) Second, PPG has consolidated its power in the market by continuously acquiring other companies in the aerospace sealant industry and the general aerospace industry-including SEMCO, which is one of the two main manufacturers of injection kits.[3] (Id. ¶¶ 34-35, 38-39.). This makes PPG a “one-stop shop” for all aerospace products, thus discouraging customers from shopping around for any one particular product. (Id. ¶ 35.)

         C. Distribution of Aerospace Sealant

         PPG sells sealant in both wholesale and retail quantities. (Id. ¶¶ 1, 36.) Generally, resellers buy wholesale quantities of sealant from PPG to sell at retail price to end-users, usually after repackaging the sealant into injection kits. (Id. ¶¶ 36, 40.) PPG also sells retail quantities of sealant directly to end-users, including sealant packaged into injection kits. (Id. ¶¶ 51-53.) PPG uses “application support centers” (“ASCs”) to package its sealant. (Id. ¶ 53.) These ASCs used to be independent repackaging companies before PPG acquired them. (Id. ¶ 51.) According to Plaintiff, PPG's ASCs continue to use the same repackaging procedure that they did prior to being acquired. (Id. ¶ 53.)

         Plaintiff has been a sealant repackager and reseller since 1976. (Id. ¶ 40.) Like other resellers, Plaintiff purchases sealant wholesale from PPG, purchases injection kits from either SEMCO or Techon, fills the kits with sealant, and sells them ready-to-use to the end-user. (Id.) Thus, Plaintiff competes with PPG in the retail distribution market. (Id. ¶¶ 51-53.) Plaintiff alleges that it has a competitive edge over PPG and other resellers in this market because it (1) maintains a substantial and varied inventory of repackaged sealants and (2) provides end-users with superior customer service. (Id. ¶¶ 41-42.) Plaintiff currently generates approximately $10 million in annual revenue from reselling PPG's sealants. (Id. ¶ 40.)

         Over the years, PPG has attempted to blunt competition in the retail distribution market. This includes: (1) “express[ing an] interest” on more than one occasion in acquiring Plaintiff and turning it into an ASC (id. ¶ 58); (2) telling end-users, most notably in 2001 and 2012, that Plaintiff and other non-PPG resellers were not authorized to repackage PPG sealant, even though at that time PPG had no policy against repackaging (id. ¶¶ 1, 59); and (3) increasing the per-unit price of sealant sold in bulk quantity at a faster rate than the per-unit price of sealant sold in retail quantity, which was against industry norm (id. ¶ 60).

         D. PPG's Repackaging Prohibition

         In August 2016, PPG sent a memo to all of its sealant resellers and distributors, wherein it “confirm[ed] PPG policy” prohibiting the repackaging of its sealants by anyone other than PPG or its ASCs. (Id. ¶ 45, Ex. A.) PPG stated that this policy was necessary to ensure the sealant's quality for end-users, and that it would refuse to sell sealant to any reseller that violated this policy. (Id.) Plaintiff requested clarification from PPG on the policy, including the reason for the policy and whether Plaintiff could “correct [its] business operations” to alleviate PPG's concerns. (Id. at Ex. B.) PPG declined to give a direct answer. (Id.)

         Plaintiff alleges that the quality control rationale is simply pretext, and that the real reason for this policy is to eliminate the increasingly successful competition in the retail market from non-PPG resellers. (Id. ¶ 53.) Plaintiff contends that there is no safety advantage to keeping repackaging in-house at PPG, as evidenced by the fact that its ASCs follow the exact same repackaging procedure that they did before PPG acquired them, and the fact that there were “no significant quality issues” associated with repackaging in the many decades that external repackaging had been around. (Id.) Moreover, given PPG's virtual monopoly in the production market, Plaintiff contends that this new policy will allow PPG to monopolize the retail distribution market as well-and in fact has already “vastly reduced” the amount of repackaged aerospace sealant sales by both Plaintiff and other non-PPG repackagers. (Id. ¶ 46.) Plaintiff filed this action soon thereafter.

         E. First Amended Complaint

         In its First Amended Complaint, Plaintiff asserts the following claims: (1) monopolization in violation of the Sherman Act, 15 U.S.C. § 2; (2) attempted monopolization in violation of the Sherman Act, 15 U.S.C. § 2; (3) tying in violation of the Sherman Act, 15 U.S.C. §§ 1, 2, 4; (4) tying in violation of the California Cartwright Act, Cal. Bus. & Prof. Code §§ 16720, 16727; (5) intentional interference with prospective economic advantage; (6) secret unearned discounts in violation of the California Unfair Practices Act, Cal. Bus. & Prof. Code § 17045; and (7) unfair competition in violation of the California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200. (ECF No. 11.) PPG has moved to dismiss all of Plaintiff's claims. (ECF No. 13.) That Motion is now before the Court for decision.

         III. LEGAL STANDARD

         A court may dismiss a complaint for lack of a cognizable legal theory or insufficient facts pleaded to support an otherwise cognizable legal theory. Fed.R.Civ.P. 12(b)(6); Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). To survive a dismissal motion, the complaint must “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The determination whether a complaint satisfies the plausibility standard is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679. A court is generally limited to the pleadings and must construe all “factual allegations set forth in the complaint . . . as true and . . . in the light most favorable” to the plaintiff. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). But a court need not blindly accept conclusory allegations, unwarranted deductions of fact, and unreasonable inferences. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). The court must grant the plaintiff leave to amend if there is any possibility that amendment could cure the deficiencies, even if the plaintiff fails to request such leave. Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (en banc).

         IV. DISCUSSION

         A. Monopolization and Attempted Monopolization

         PPG argues that Plaintiff's monopolization and attempted monopolization claims fail because Plaintiff does not (and cannot) allege that PPG has an antitrust duty to deal with Plaintiff at all, let alone on terms favorable to its business model. The Court disagrees.

         The Sherman Act makes it unlawful for any person to “monopolize[] or attempt to monopolize . . . any part of the trade or commerce among the several States, or with foreign nations.” 15 U.S.C. § 2. Monopolization and attempted monopolization claims require the plaintiff to establish, among other things, that the defendant engaged in “predatory or anticompetitive conduct”; the mere possession of (or attempt to attain) monopoly power is alone insufficient. Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997); Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004). Indeed, “[t]he opportunity to charge monopoly prices-at least for a short period-is what attracts ‘business acumen' in the first place; it induces risk taking that produces innovation and economic growth.” Trinko, 540 U.S. at 407. Thus, monopoly power itself is actually an “important element of the free-market system.” Id. The Ninth Circuit has also noted that monopolies obtained through competitive superiority (so-called “efficient monopolies”) benefit consumers through lower prices, whereas monopolies resulting from predatory conduct tend to lead to higher prices and thus harm consumers (“inefficient monopolies”). Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 547-49 (9th Cir. 1991).

         Anticompetitive conduct is broadly defined as “behavior that tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way.” Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 894 (9th Cir. 2008) (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 n.32 (1985)). Refusing to deal with a competitor (or limiting the terms on which one will deal with a competitor) is generally not considered anticompetitive, because it has long been the general rule that “businesses are free to choose the parties with whom they will deal, as well as the prices, terms, and conditions of that dealing.” Pac. Bell Tel. Co. v. Linkline Commc'ns, Inc., 555 U.S. 438, 448 (2009); see also United States v. Colgate & Co., 250 U.S. 300, 307 (1919); Aspen Skiing Co., 472 U.S. at 605; Trinko, 540 U.S. at 408. This rule, however, is not absolute. Lorain Journal Co. v. United States, 342 U.S. 143, 155 (1951); Aspen Skiing Co., 472 U.S. at 605; Trinko, 540 U.S. at 408. “If a firm has been ‘attempting to exclude rivals on some basis other than efficiency, ' it is fair to characterize its behavior as predatory.” Aspen Skiing Co., 472 U.S. at 605 (quoting R. Bork, The Antitrust Paradox 138 (1978)); see also Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 483 n.32 (1992) (there must be “legitimate competitive reasons for the refusal [to deal]”). “The leading [Supreme Court] case for § 2 liability based on refusal to cooperate with a rival . . . is Aspen Skiing, ” a case that the Court has characterized as a “limited exception” to the refusal-to-deal rule that is “at or near the outer boundary of § 2 liability.” Trinko, 540 U.S. at 408.[4] In Aspen Skiing, the defendant controlled three of four ski mountains in a particular area, and the plaintiff controlled the remaining mountain. For years, the two companies had jointly issued all-mountain ski passes and divided the profits among themselves. After the plaintiff refused the defendant's demand that it accept a lower percentage of profits from the joint ski pass, the defendant stopped participating in the joint pass. The plaintiff tried to recreate the joint pass on its own by purchasing tickets from the defendant at retail price and giving them to its customers, but the defendant refused to honor these tickets. Aspen Skiing, 472 U.S. at 587-95.

         The Supreme Court held that this constituted an anticompetitive refusal to deal. The Court in Trinko identified three facts from Aspen Skiing that were critical to establishing liability. First, the defendant terminated a prior profitable course of dealing with the plaintiff (i.e., the joint all-mountain ski pass). Trinko, 540 U.S. at 409. Second, the defendant in effect refused to sell ski-lift tickets to plaintiff at even retail price. Id. These two facts suggested that the defendant had “‘elected to forgo these short-run benefits because it was more interested in reducing competition . . . over the long run by harming its smaller competitor.'” Id. (quoting Aspen Skiing, 472 U.S. at 608). Third, the product that the defendant was refusing to sell to the plaintiff was one that it was already selling to other customers. Id. at 409-10. This fact ensured that remedying the alleged antitrust violation would not require the Court to create from scratch the terms on which the defendant must deal with the plaintiff-a task which courts are generally ill-equipped to handle. Instead, the Court could simply order the defendant to deal with the plaintiff on the same terms as it did everybody else. See Id. at 408; see also MetroNet Servs. Corp. v. Qwest Corp., 383 F.3d 1124, 1133 (9th Cir. 2004).[5]

         Drawing all inferences in Plaintiff's favor, the Court concludes that this case plausibly fits within the Aspen Skiing exception. First, PPG terminated a prior profitable course of dealing with Plaintiff. Plaintiff has been a reseller of aerospace sealant since 1976 and has repackaged PPG's aerospace sealant for resale since at least 2001. PPG knew that Plaintiff repackaged its sealant, yet besides making periodic comments to Plaintiff's customers that Plaintiff was not supposed to do so, PPG took no real steps to prevent Plaintiff from repackaging.[6] This tacit acceptance of Plaintiff's repackaging is in principle no different from the joint venture at issue in Aspen Skiing; in both cases, the parties knowingly and voluntarily participated in a (presumably profitable) course of dealing with each other for years. See Trinko, 540 U.S. at 409 (a voluntary course of dealing is “presumably profitable” for its participants); Aspen Skiing, 472 U.S. at 604 n.31 (“‘In any business, patterns of distribution develop over time; these may reasonably be thought to be more efficient than ...


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