R.J. Reynolds Tobacco Company and Gmb, Inc. v. Cigarettes Cheaper!
Docket: 05-1456
Court: Court of Appeals for the Seventh Circuit; September 15, 2006; Federal Appellate Court
R.J. Reynolds Tobacco Company and its subsidiary GMB, Inc. initiated litigation against Cigarettes Cheaper under the Lanham Act, alleging that the sale of reimported Reynolds products constituted trademark violations. Cigarettes Cheaper argued that the marks were genuine and counterclaimed under antitrust laws, alleging that Reynolds conspired with retailers to eliminate competition (Sherman Act) and engaged in discriminatory pricing practices (Robinson-Patman Act). The district court granted summary judgment for Reynolds on the Sherman Act claim, citing Reynolds' lack of market power. The Robinson-Patman claim proceeded to a five-week trial, resulting in a jury verdict favoring Reynolds. A separate trial on the trademark claim concluded with a jury finding that the domestic and foreign cigarettes were materially different, awarding Reynolds approximately $4 million in damages. Cigarettes Cheaper appealed, challenging both the key decisions and numerous evidentiary rulings that it contended affected the juries' deliberations. The case highlights the conflict between discount retailers and manufacturers, with the latter potentially benefiting from reduced distribution costs associated with discount sales.
A manufacturer can only benefit from increasing the price gap between wholesale and resale if the retailer provides services that exceed the additional distribution costs. In the cigarette industry, advertising is a crucial service provided by retailers, as manufacturers lack access to many promotional channels. Consequently, manufacturers offer selective wholesale discounts based on a retailer's promotional commitments. Reynolds, a cigarette manufacturer, must compete aggressively with Marlboro, the leading brand, which comprises one-third of U.S. sales, compared to Reynolds’s total share of 25%.
Cigarettes Cheaper! complicates Reynolds's position by securing low wholesale prices from Philip Morris for Marlboro in exchange for extensive advertising, which Reynolds claims is an "exclusive" contract that limits Cigarettes Cheaper!’s ability to promote other brands. Cigarettes Cheaper! contests this exclusivity but acknowledges its commitment to significant Marlboro branding. The district court's finding that Reynolds's market share is too low to confer market power is criticized as questionable and potentially irrelevant. The cigarette market is concentrated, making new entries challenging, and consumers differentiate between brands, mitigating sales losses from price increases. Reynolds’s pricing strategies indicate it can adjust prices without severe impacts on sales, further raising doubts about the district court's conclusions. Additionally, if Cigarettes Cheaper! asserts that Reynolds is part of a horizontal conspiracy among retailers, proving market power may not be necessary.
Cigarettes Cheaper! faces challenges in its antitrust claim, primarily concerning the assertion of antitrust injury, as the discounts offered by Reynolds to competitors are deemed beneficial to consumers. Although Reynolds did not thoroughly contest this point, it does not affect the court's jurisdiction since Cigarettes Cheaper! has sustained an injury in fact, albeit not one recognized under antitrust laws. The court will first evaluate whether Cigarettes Cheaper! has a viable claim based on unilateral action by Reynolds and whether there is evidence of a horizontal conspiracy.
Reynolds’ practice of providing discounts to certain retailers but not to Cigarettes Cheaper! raises potential claims under the Robinson-Patman Act. However, under the Sherman Act, price discrimination is permissible, with concerns primarily focused on the potential for future monopoly power. To establish a predatory pricing claim, Cigarettes Cheaper! must show that Reynolds sold products below cost and that exit from the market has occurred or is imminent, allowing Reynolds to set monopoly prices. Cigarettes Cheaper! has not claimed that Reynolds sold below cost or that it is at risk of exiting the market, and its long-standing contract with Reynolds suggests it is thriving in a competitive market. The court is unwilling to rule in favor of Cigarettes Cheaper! without fulfilling the stringent requirements of predatory pricing claims, emphasizing the high costs of price-cutting for producers and the robustness of competition in the cigarette retail market.
Cigarettes Cheaper! aimed to present evidence regarding Reynolds's selective discounts as a strategic attempt to undermine its business, rather than focusing on the economic implications of those discounts. The company uncovered various internal communications suggesting a desire to eliminate its competition. Despite selling Marlboros at lower prices than competitors selling Camels and Winstons, Reynolds and its retailers retaliated with their own discounts and expressed dissatisfaction over these market dynamics. The document emphasizes that aggressive competition, often regarded positively in antitrust contexts, is not inherently harmful to consumers. Cigarettes Cheaper! accused Reynolds of employing pricing strategies that generally benefit consumers, while asserting that Reynolds coordinated with retailers to form a cartel which could harm consumer interests. However, the rationale behind such a cartel is questioned, as it could damage Reynolds's own profitability. Cigarettes Cheaper! failed to provide concrete evidence of an actual retail conspiracy or any compensatory arrangement for retailers involved. The summary judgment decision hinged on the lack of substantive evidence supporting the allegations, distinguishing this case from others where insufficient detail about conspiracies led to dismissals. The focus remains on the need for evidence rather than mere allegations to support claims of anti-competitive behavior.
Cigarettes Cheaper! failed to present sufficient evidence of a horizontal agreement orchestrated by Reynolds. During oral arguments, the evidence cited, particularly a memorandum from Vons Groceries, highlighted Vons's concerns about competing with Cigarettes Cheaper! and its strategies to maintain pricing advantages. However, the memo did not indicate any conspiracy among retailers; it merely outlined Vons's competitive tactics and Reynolds's pricing support for its brands to ensure they were cheaper than Marlboro products. Similarly, another memorandum regarding Reynolds's dealings with Albertson's indicated a competitive pricing strategy without suggesting a coordinated effort to raise prices among retailers. Testimony from an Albertson's executive further confirmed that price fluctuations were linked to market competition rather than collusion. Overall, the documents presented by Cigarettes Cheaper! did not substantiate claims of a retail conspiracy or an intent to elevate prices unlawfully. Consequently, the district court's decision to grant summary judgment against Cigarettes Cheaper! under the Sherman Act was upheld, as Reynolds's pricing strategies were justified by competition and available to all retailers under similar conditions.
Cigarettes Cheaper! contended that the five-week trial was overly brief and sought to introduce intent evidence that the district judge excluded. Under the Robinson-Patman Act, bad intent is not required for a prima facie case, and good intent does not justify price discrimination. The judge's exclusion of the intent evidence was justified under Fed. R. Evid. 403, as it could confuse jurors who may not grasp the economic principles involved. Cigarettes Cheaper! aimed to use this evidence to challenge Reynolds's witnesses regarding their claims of cooperation, but the judge correctly kept such discussions about motive out of the trial, rendering any error harmless.
There was a dispute concerning jury instructions. The judge stated that RJR could meet competition on a broader basis, which Cigarettes Cheaper! argued misinterpreted the Robinson-Patman Act by downplaying the significance of individual competitive situations. However, the jury was also informed that to succeed in a meeting-competition defense, Reynolds had to demonstrate that the prices it matched were available from another source. Thus, the contested instruction did not negate this requirement, as Reynolds's argument centered on the general availability of discounts from producers like Philip Morris.
The Robinson-Patman Act supports general price schedules, as established in Falls City Industries, Inc. v. Vanco Beverage, Inc. The district judge correctly instructed the jury on this principle. Cigarettes Cheaper! failed to propose a clear distinction between "general competition" and "generally available price schedules," which undermined their argument against the judge's instruction. The case centers on Reynolds' trademark claim regarding the reimportation of cigarettes sold abroad. Cigarettes Cheaper! views the lower prices of foreign cigarettes as price discrimination; however, Reynolds argues that these differences reflect varying costs due to domestic litigation and settlement expenses, akin to an excise tax. Selling domestic and foreign cigarettes at the same price would disadvantage Reynolds against foreign competitors who do not incur such costs.
Reynolds seeks to maintain separation between domestic and foreign markets under the Lanham Act, which permits the sale of genuine products under their trademarks unless the products are materially different. If significant differences exist, selling foreign products in the U.S. could mislead consumers regarding quality. Reynolds asserts that its foreign cigarettes differ materially from those sold domestically, citing variations in additives and taste. Cigarettes Cheaper! requested detailed disclosures about the contents of Reynolds' cigarettes, but Reynolds withdrew this claim to protect trade secrets, except for the Winston brand, which is marketed as containing only tobacco and water.
The district court issued a protective order limiting discovery on additives, focusing only on Winstons. At trial, the court excluded evidence beyond the discovery scope. Reynolds contended that the presence of some additives in foreign Winstons made them materially different from domestic ones, also highlighting differences in loyalty programs and post-manufacturing quality control practices, such as domestic inspections that do not apply to reimported gray market products.
Cigarettes Cheaper! argues that the jury's verdict is questionable due to potential assumptions about undisclosed differences in cigarette additives and taste. The company contends that it should have been allowed to conduct discovery regarding these additives to support its defense against gray market sales. However, the court found that additives were only relevant to the Winston brand and that taste was irrelevant to trademark issues. The jury was instructed to limit its focus to the trial's arguments, and Cigarettes Cheaper! was not entitled to additional evidence as it could lead to forcing Reynolds to disclose trade secrets or relinquishing Lanham Act protections.
The district judge's decision to limit discovery was justified, particularly as Reynolds had previously abandoned claims about differences in additives and taste. Cigarettes Cheaper! claimed that internal documents from Reynolds indicated a belief that selling reimported cigarettes was lawful, which raises concerns about the reliability of such evidence given the vast amount of internal communications within a large corporation. The judge excluded much of the proposed evidence on intent to prevent trial distractions, noting that mental states do not mitigate actual damages awarded by the jury.
Cigarettes Cheaper! also failed to present sufficient evidence regarding its "good faith" defense, particularly by invoking attorney-client privilege when asked about legal advice concerning the sale of reimported cigarettes. Additionally, the company raised objections to several jury instructions in its brief, but these arguments were undeveloped and deemed forfeited. The court affirmed the lower court's rulings.
