antitrust claim based in part on false advertising in concentrated market survives

Chase Manufacturing, Inc. v. Johns Manville Corp., 2020 WL 1433504, No. 19-cv-00872-MEH (D. Colo. Mar. 23, 2020) (magistrate)

Chase sued JM for violations of the Lanham Act and the Sherman Act for tying and monopolization. JM sells construction products, including mechanical insulation products. Chase is a mechanical insulation supplier; both parties sell calcium silicate thermal insulation, aka “calsil,” which is designed to encapsulate pipes, tanks, and other equipment in industrial facilities. JM has at least a 98% share of the domestic calsil market, which is approximately $50 million in sales per year, though this is only approximately 2% of JM’s $3 billion annual sales for all products.

Customers who buy calsil allegedly demand that the product meet or exceed the requirements set forth in ASTM C533 Type I. Only three factories in the world produce such calsil that fits North American sizing norms: two in the United States owned and operated by JM, and one in Shanghai, which previously produced calsil for JM but now sells its calsil in North America exclusively through Chase.

Chase’s head-to-head testing indicated that its calsil met or exceeded the requirements of ASTM C533 Type I, never contained asbestos, and outperformed JM’s calsil in several categories.

There are five major mechanical insulation distributors that dominate the country, accounting for approximately 85% of calsil sales; “approximately ten or fewer” smaller, independent distributors account for the remaining 15% of the calsil market. Customers require the distributors to carry other construction products made by JM, including, as relevant to this case, Defendant’s fiberglass pipe insulation and expanded perlite products. JM is one of only three fiberglass pipe insulation manufacturers in the United States, with allegedly at least a 60% share of that market. JM is also one of only two North American suppliers of expanded perlite pipe and block insulation, and with allegedly not less than a 50% share of that market.

JM allegedly threatened to cut off sales, extend lead times, or alter rebate programs for fiberglass pipe insulation and/or expanded perlite as punitive measures to both large and small distributors who buy calsil from Chase. It has also threatened to refuse to supply its own calsil to both large and small distributors who purchase calsil from Chase. JM’s sales managers allegedly told customers that Plaintiff’s calsil was “poor quality” and “cannot be trusted to meet ‘specifications,’ ” “ ‘may have asbestos,’ ” and was “Chinese,” referring to where it was produced. The “Frequently Asked Questions” page on Defendant’s website states, in part: “[Defendant] is the only insulation manufacturer in North America to produce water resistant calcium silicate. While we are aware of one other manufacturer in Asia that produces [calsil], it is an expensive, custom-order product that is not readily available.” This course of conduct allegedly choked off Chase’s growth. 

Chase’s per se tying Sherman Act claim was plausibly alleged.  So was the monopolization claim, based on tying, refusal to supply, exclusive dealing, and product disparagement.

As to product disparagement, antitrust treats it weirdly (watch this space for an article Mike Carrier and I have written on that). In the Tenth Circuit, as in a number of other circuits, there’s an unwarranted presumption that false advertising’s effect on competition is de minimis.  To rebut the de minimis presumption, a plaintiff must plausibly allege the disparagement was “(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 to neutralization or other offset by rivals.”  [For one thing, assume that the plaintiff shows at trial that the false advertising kept it and other potential rivals out of the market. Why should it have to show any of these subfactors? If it shouldn’t have to show those subfactors then, why should it have to plead them? Anyway.]

The disparagement claim was based on four statements attributed to JM sales reps. (1) Chase’s calsil “may have asbestos and may put your customers and employees at risk.” (2) Chase’s calsil was “poor quality and cannot be trusted to meet ‘specifications.’ ” (3) Chase’s calsil was “Chinese.” (4) The sales rep asked why a purchaser “would want to ‘risk buying an unproven product that may not meet the specifications.’ ” Two of the five large distributors, allegedly heard JM’s comments and “word gets around” a market with such concentrated buyers.

The allegations plausibly overcame the de minimis presumption. Likely to induce reasonable reliance: Chase alleged that JM “has a high degree of credibility in the industry,” and has particular experience with asbestos liability. It was reasonable that JM’s history with asbestos (it had to declare bankruptcy) would give it credibility when discussing asbestos, products that could put buyers “at risk,” or products fail to meet safety specifications. “Additionally, and importantly, given the scope of potential liability related to asbestos, buyers are very likely to rely on statements regarding its presence or related safety concerns rather than make a potentially business-ending purchase.”

Knowledge of subject matter: JM allegedly targeted its disparagement to distributors that are its existing customers, all of whom but one have never purchased calsil from Chase. “Because the vast majority of the audience were and are not present customers of Plaintiff, they do not have firsthand knowledge of Plaintiff’s calsil. As alleged misrepresentations bear on the quality and safety of Plaintiff’s goods, firsthand knowledge is critical, particularly in a market where much of the sales and product information are conveyed through individualized relationships with distributors.” JM argued that Chase included test results as part of its initial marketing materials, showing that buyers had knowledge of the subject matter. But it wasn’t clear that the testing addressed asbestos or what specific information from the test results were included in the marketing materials, or how widely disseminated Plaintiff’s marketing launch was. It was reasonable that the distributors that heard the disparaging remarks had no knowledge of Chase’s safety or quality. [To a certain extent the court is stretching what the relevant “subject matter” is, but it’s doing so because this factor is not helpful. One can have knowledge of the subject matter and still decide to trust someone else’s specific factual claims. If the deception worked, the listeners’ expertise wasn’t enough to prevent it from working.

Duration: throughout 2018 was enough. Although there were only a few specific examples, it was reasonable to infer, as plaintiff specifically argued, that JM was making these disparaging remarks throughout the launch.

Susceptible to neutralization by rivals: Chase alleged that “[p]otential liability from possible asbestos exposure is so great that no reasonable customer would buy a product where there was any question about the presence of asbestos, no matter how much the seller assures them that the product does not contain asbestos.” JM’s own bankruptcy trust for asbestos victims and their families is currently valued at $2.5 billion. Chase alleged a specific example of a “failed attempt” to assuage a potential buyer’s asbestos concerns, that “[s]uch rumors, once started, are not easy to dispel,” and that “it could take many years to do so.” The court found it “more than plausible” that such statements are not readily susceptible to neutralization.

Antitrust injury/harm to competition: JM argued that the alleged injury was merely Chase’s failure to gain market share quickly. But JM alleged that Chase’s exclusionary and anticompetitive conduct caused limitation of customer choice of suppliers, increased prices, and reduction in calsil output. There was a plausible claim for monopolization.

Lanham Act false advertising: Originally, Chase didn’t provide enough allegations that the disparagement amounted to commercial advertising and promotion by being sufficiently disseminated in the relevant market. In its amended complaint, it alleged that five major distributors account for 85 percent of calsil sales, and estimates that “approximately ten or fewer” smaller, independent distributors account for the remaining 15 percent. It identified two of the smaller distributors as the recipients of the alleged misrepresentations, as well as two of the five larger distributors.  The allegations were those above, as well as (1) an allegedly false statement to a smaller distributor that JM had never sold calsil made in China, and (2) a website statement that “[w]hile we are aware of one other manufacturer in Asia that produces water resistant calcium silicate, it is an expensive, custom-order product that is not readily available.”

Chase sufficiently alleged advertising/promotion because it alleged that “informal” means of communication—like in-person meetings, social gatherings, social media, and email—as opposed to traditional media are the primary means of commercial promotion in the calsil market. Chase also alleged that “other Gulf Coast contractors” have corroborated the suspicion “that these statements were widely disseminated by Johns Manville salespeople.” This made it plausible that the statements were part of an organized campaign by JM, despite the statements’ informal or behind the scenes methods of communication.

As for the webpage, JM argued that it didn’t refer to Chase by name; that it wasn’t adequately pled to be false/material; and that it didn’t injure Chase. Although the no-identification point is silly—there’s only the one and it’s Chase—Chase didn’t adequately allege injury from the page; it didn’t even allege that customers or potential customers saw it or that it lost sales because of it.