Tuesday, April 30, 2019

antitrust/false advertising claims against Keurig's K-Cup conduct survive

In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., 2019 WL 1789789, No. 14-MD-2542 (VSB) (S.D.N.Y. Apr. 22, 2019)

Big antitrust litigation in which many claims survive; I'm only discussing the false advertising-relevant bits, but the basic antitrust claims under federal law and the law of a number of states survive.  Direct purchaser plaintiffs (DPPs) alleged that Keurig’s anticompetitive practices caused the DPPs to be overcharged for their purchases of cups or pods used in Keurig’s single-server brewer machines, while indirect purchaser plaintiffs made similar claims.

Keurig’s K-Cup Brewer was the first commercially successful Single Serve Brewer. To be usable with a particular Single Serve Brewer, a Portion Pack must be compatible with that Single Serve Brewer. Keurig makes and licenses Portion Packs compatible with K-Cup Brewers. Keurig’s competitors also make their own compatible Competitor Cups. Keurig controls at least 89% of the market for Single Serve Brewers, 73% of the market for Portion Packs, and 95% of the market for K-Cup Compatible Cups.

In 2012, patents covering the K-Cup filtering technology expired. (Shortly before that some competitors introduced nonfiltered cups, resulting in litigation both by Keurig and by consumers.) Threatened by the rise of competition, Keurig responded by allegedly (i) filing baseless lawsuits against new entrants; (ii) entering into non-competition, tying, and exclusive dealing agreements and threatening companies who would do business with Compatible Cup manufacturers,; (iii) redesigning K-Cup Brewers and introducing the Keurig 2.0 K-Cup Brewer to lock out Competitor Cups and misinforming customers about the motivation for, and the abilities of, this lock-out technology, and (iv) maligning Competitor Cups and otherwise interfering with competitors’ business relationships.

Although competitor Sturm has definitely engaged in bad behavior (it put instant coffee in Portion Packs, leading consumers to believe they were buying ground coffee—and it charged ground coffee prices in part to keep consumers from getting suspicious), Keurig’s patent lawsuits against competitors Sturm and Rogers were dismissed as (in one court’s words) an attempted “end-run” around the patent laws with “a tactic that the Supreme Court has explicitly admonished,” with Keurig attempting “to impermissibly restrict purchasers of Keurig brewers from using non-Keurig [Competitor Cups] by invoking patent law.”   

Keurig also entered into over 600 exclusive and restrictive agreements with various entities involved in the line of manufacture and distribution of Compatible Cups (suppliers of cups, lids, and filters, as well as suppliers of the lock-out technology, a special taggant ink that is included on the lid of the Compatible Cup), as well as with potential competitors. In addition, Keurig allegedly locked up virtually all of the distributors who provide Compatible Cups for use outside of the home in long-term exclusive contracts. Keurig also has exclusive contracts with numerous major coffee brands and eliminated potential competitors through acquisitions of competitors and previous licensees.

Alleged false advertising: The packaging of the 2.0 Brewer states “Works only with Keurig Brand Packs,” and the user manual warns consumers that their “Keurig 2.0 brewer will not work with packs that don’t have the Keurig logo,” among other alleged misrepresentations. The 2.0 Brewer itself displays a misleading message, “[t]his pack wasn’t designed for this brewer” when a consumer attempts to use a Competitive Cup in it. Plaintiffs also alleged false and misleading messaging online regarding quality and safety issues with respect to Competitor Cups; misstatements to consumers about quality and safety issues with the use of non-Keurig cups in the 2.0 Brewer and about how use of unlicensed Compatible Cups affects the brewer warranty; and misrepresentations to both consumers and retailers about compatibility and quality issues.

The 2.0 Brewer was allegedly solely intended to further lock out competitors. Keurig developed a “taggant,” a special kind of ink, used to authenticate that a Portion Pack was a Keurig or Keurig-licensed pack. Keurig allegedly knowingly made false representations that its lockout technology had consumer benefits, and disparaged all Competitor Cups. Nonetheless, some competitors have reverse-engineered 2.0 Brewer-compatible Portion Packs.

Keurig’s anti-competitive conduct allegedly caused consumers to pay supra-competitive prices for K-Cups. IPPs were not efficient antitrust enforcers, but the DPPs adequately pled antitrust standing.

Competitor Rogers also pled sufficent anticompetitive conduct—product design alone likely wouldn’t have been enough, but allegations of exclusive dealing, tying agreements, sham lawsuits, and product disparagement together were sufficient.

It’s hard to base an antitrust claim on false advertising.  Because courts don’t like antitrust claims, “a plaintiff asserting a monopolization claim based on misleading advertising must ‘overcome a presumption that the effect on competition of such a practice was de minimis.’ ” Factors include whether representations “were (1) clearly false, (2) clearly material, (3) clearly likely to induce reasonable reliance, (4) made to buyers without knowledge of the subject matter, (5) continued for prolonged periods, and (6) not readily susceptible of neutralization or other offset by rivals.” Here, there was enough to go forward with discovery. Though Keurig argued that its statements were susceptible to neutralization, that retailers are not buyers without knowledge of the subject matter, that statements that non-approved products may void the warranty are true, and that its statements about how the 2.0 Brewer operates weren’t clearly false, “these challenges are more appropriately raised on summary judgment.” 

This isn’t the district court’s problem, but I’ve never seen a coherent explanation of why these factors are important to whether false advertising harmed competition, not just competitors.  (Time might be the best candidate, but even that can be context-specific: false advertising just as competition threatens might be enough to maintain a monopoly.) They are best understood as a channeling doctrine: competitor false advertising claims should be brought as Lanham Act claims unless there’s a good reason to think they harmed competition, not just competitors.  I would think that harm to the structure of competition would be more closely tied to whether the defendant was advertising in ways that harmed all competitors—promoting its own product or disparaging all the competition—than to the other factors listed.  The “clearly” factors might plausibly go to whether the claims were likely to affect a more-than-substantial number of consumers—20% deception might be enough for Lanham Act false advertising, but we might want something more like 75% for antitrust, though that doesn’t really help distinguish “literally” false from “clearly” false.  Relatedly, jumping off what Mark McKenna & Mark Lemley have written, if a false claim was material to some subset of consumers, those consumers would arguably be a relevant submarket.

Anyway, plaintiffs were entitled to discovery in order to substantiate their disparagement claims.

Unsurprisingly, Lanham Act claims by the competitor plaintiffs also survived.  Keurig argued that they only challenged subjective statements of quality, performance, and safety. But claims about inferior quality are actionable under the Lanham Act, which covers “more than blatant falsehoods. It embraces innuendo, indirect intimations, and ambiguous suggestions evidenced by the consuming public’s misapprehension of the hard facts underlying an advertisement.” Keurig argued that its adjectives, such as “perfect,” were “puffery,” but not in context. For example, alleged misrepresentations about the necessity of using Keurig brand cups, as opposed to Competitor Cups, “involve more than the mere use of qualifiers and cross the line into statements of direction or fact.” Anyway, a determination on this wasn’t appropriate for summary judgment.

Keurig argued that its statements to consumers who called to complain about the 2.0 Brewers weren’t “advertising,” nor were messages displayed on the 2.0 Brewer and messages in the 2.0 Brewer warranty because they were received by consumers who had already purchased the brewer and thus were not made “for the purpose of influencing consumers to buy defendant’s goods or services.” Keurig ignored that it also sells/licenses K-Cups; the statements were “advertising or promotion” as to K-Cups. Also, “Keurig cites no case law, and I have found none, in which a court has held that warranty policies fall outside the scope of the Lanham Act as a matter of law.” And some of the statements were made to consumers by using Facebook and Amazon.com. Even assuming they were were all made to consumers who had already bought the brewer, they were viewable by everyone.  “This type of communication is materially different from a one-on-one communication between a manufacturer and a consumer inquiring about the product owned by the consumer. Therefore, such statements are appropriately viewed as being made for consumption by a wider audience for the purpose of influencing other consumers to buy defendant’s goods or services.” 

The coordinate state law claims also survived.

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