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Clean Water Opportunities, Inc. v. The Willamette Valley Company

United States District Court, M.D. Louisiana

February 6, 2018

CLEAN WATER OPPORTUNITIES, INC. D/B/A ENGINEERED POLYURETHANE PATCHING SYSTEMS
v.
THE WILLIAMETTE VALLEY COMPANY

          RULING AND ORDER

          JOHN W. DEGRAVELLES, JUDGE UNITED STATES DISTRICT COURT.

         I. INTRODUCTION

         Before the Court is a Motion to Dismiss the Amended and Restated Complaint (“Amended Complaint”) for Failure to State a Claim filed by Defendant The Williamette Valley Company (“Defendant”). (“Motion, ” Doc. 40). Plaintiff Clean Water Opportunities, Inc., d/b/a Engineered Polyurethane Patching Systems (“Plaintiff”) has filed an Opposition, (Doc. 48), and Defendant has filed a Reply in further support of the Motion, (Doc. 51).

         For the reasons discussed below, the Motion is granted, and this action will be dismissed.

         II. PLAINTIFF'S ALLEGATIONS AND PROCEDURAL BACKGROUND

         This action concerns Defendant's alleged monopolization of the market for “patch, ” a product used to fill imperfections in mill-produced plywood. (Doc. 34 at 2-3). Patch is applied to sheets of plywood traveling down a conveyor belt at the rate of six to twelve sheets per minute and is applied by an employee using a “patch gun, ” which is a handheld piece of equipment that mixes the two components of patch. (Id. at 3). Patch is sold to manufacturers on a per-gallon basis, but, as part of the price, the seller provides and services patch application equipment. (Id.).

         The American Plywood Association (“APA”) is an industry-based governing organization that sets standards for different grades of plywood. (Id.). The APA also produces a guide for synthetic repairs that includes repair using patch. (Id.). The APA allows two other types of “veneer repair, ” namely “wood plug” and “wood dough” or “wood putty” repair. (Id. at 4). Wood plug repair requires that imperfections be punched out and ultimately re-inserted in sheets of plywood by hand, while wood dough repair's mechanical and reliability limits “render it ‘not approved' for the majority of defects commonly found in panel faces today.” (Id.). Wood dough repair also requires long drying time and may leave “residual cracks.” (Id.). Therefore, according to Plaintiff, “there are no market substitutes for patch.” (Id.).

         Patch is a “disbursed suspension” with a functional shelf life of two to four weeks. (Id. at 5). This shelf life shortens when the suspension is agitated, “like it would be while being transported in a semi-bulk container on a flat-bed trailer (the standard method of delivery).” (Id.). Between patch's limited shelf life and the requirement that a patch seller service patch application equipment (including on an emergency basis), Plaintiff contends that the relevant geographic market in this action includes patch users within a five-hundred-mile, six-hour drive radius around Baton Rouge, Louisiana. (Id. at 5-6). This corresponds with a “Southern Market” for patch allegedly “defined” by Defendant, which includes east Texas, Louisiana, Mississippi, Alabama, southern Arkansas, and the Florida panhandle. (Id. at 5).

         Defendant is the sole supplier of patch in the continental United States. (Id. at 6). Defendant installs patch application equipment where patch is sold, but it does not allow others to purchase the equipment, which is not commercially sold, nor will it supply data to others on how to build it. (Id. at 6-7). Additionally, only two companies have the equipment to make patch “mixing tubes, ” and, to purchase them at a low enough price to be competitive, a supplier “would have to purchase a minimum of 10, 000.” (Id. at 7). One component of patch is a “non-standard” formula within the polyurethane industry that a new manufacturer would need to develop independently, and this component must meet numerous performance standards. (Id.). The other component is available “off the shelf” but there are “hundreds of varian[ts]” that a potential supplier would need to try, and the component is costly to store and ship. (Id. at 7-8).

         To make patch, raw materials must be purchased, and these raw materials must be obtained at competitive prices to make the sale of patch economically feasible. (Id. at 8). “[S]ome of the better choices in raw materials” are also “essentially unavailable” because Defendant uses them. (Id.).

         A patch supplier must also have APA approval to operate in a mill, and approval to operate industry-wide is contingent upon three tests of a supplier's patch and equipment at three different mills. (Id. at 8-9).

         Plaintiff also alleges, “perhaps most importantly, ” that the “mere suggestion” that Defendant will no longer supply patch to a particular mill will, “in virtually all cases, ” be sufficient to stop a mill from using a different supplier. (Id. at 9).

         In 1990, Plaintiff's principal owner, David Edwards, entered into the business of supplying patch to mills. (Id.). At that time, there were several companies in the market for providing patch; however, by 1997 or 1998, only Edwards's former company and Defendant remained. (Id. at 10). In 2000, Defendant bought Edwards's former company, which was then enjoying 10 to 15 percent market share, and Edwards signed a ten-year noncompete agreement. (Id.).

         Spurred either by Defendant raising prices or by mills becoming concerned about Defendant's monopoly, a competitor entered the market nine months after Defendant first established its monopoly. (Id.). The competitor was “viable” for about a year before Defendant bought it out. (Id.).

         About three years after the noncompete agreement ended, Edwards began developing and selling patch through Plaintiff, his new company. (Id.). Edwards reentered the market after observing that, while he had been out of the market, the cost of patch components had risen fifty percent but the selling price of patch had risen 250 percent. (Id. at 10-11). He also thought the industry would “embrace a second source” for patch and believed he could make cost-saving technological improvements to patch application equipment. (Id. at 11).

         In July 2014, Plaintiff entered into a production contract with MARTCO, a plywood manufacturer, under which Plaintiff would provide patch and application equipment for one of two production lines at MARTCO's plant. (Id.). At that time, Plaintiff was selling patch for $15 per gallon and Defendant was selling patch for $17 per gallon. (Id.). At some point, MARTCO advised Plaintiff that Plaintiff would be permitted to take over a second production line if Defendant did not lower its prices. (Id. at 12). Plaintiff “encouraged” MARTCO to allow it to sell patch on both lines and offered a five-year contract at $12.90 per gallon. (Id.).

         Defendant then offered MARTCO “substantial discount[s]” on all items Defendant sold MARTCO, including ones that did not use patch, with the contingency that MARTCO purchase all patch from Defendant and for the purpose of undercutting Plaintiff. (Id.). Plaintiff “reasonably believes and avers that, ” when these discounts are considered, MARTCO was buying patch at a price below Defendant's variable costs of production. (Id. at 14).

         Plaintiff also offered MARTCO a discount but was advised that it would be unable to match Defendant's discount. (Id. at 13). In a meeting between representatives of MARTCO and Plaintiff, MARTCO assured Edwards that it was protected “long term.” (Id.). MARTCO terminated its relationship with Plaintiff and required Plaintiff to remove its patch application equipment by April 23, 2015. (Id.). Plaintiff believes that similar discount agreements were accepted by two other manufacturers with which Plaintiff had been in discussions about supplying patch. (Id. at 13-15).

         In June 2015, because it had been unable to enter into sales agreements with patch customers and Plaintiff was not “financially viable, ” Plaintiff's assets were sold to Defendant. (Id. at 15-16).

         Plaintiff claims that, based on the prevailing price of patch when Defendant last had significant competition, the current competitive price of patch should be around $10 per gallon, not the $17 per gallon actually charged. (See Id. at 16). This difference is passed on to plywood consumers. (Id. at 17).

         Plaintiff claims that Defendant engaged in illegal conduct to maintain its monopoly, including predatory pricing, threatening termination of its relationships with mills that did business with Plaintiff, and an unlawful merger. (Id. at 17-18). Plaintiff alleges violations of the Sherman Antitrust Act, 15 U.S.C. § 2; the Clayton Antitrust Act, 15 U.S.C. §§ 4, 7; and the Louisiana Antitrust Statute, La. R.S. 51:122, 51:123, 51:124(A). (Id. at 18-20).

         Plaintiff's original Complaint raised many of the same claims. The Court dismissed the Complaint on March 30, 2017, ruling that Plaintiff had failed to address barriers to entry to the market for patch and sufficiently define the relevant market, both in geographic terms and in terms of possible substitutes for patch. (Doc. 33 at 4-7, 9). The Court also granted leave to amend “to the extent Plaintiff finds it necessary to amend its complaint to specifically allege how Defendant's conduct was unlawful.” (Id. at 9). The Court further observed that Plaintiff's “illegal acquisition” claim could not be maintained absent its other claims, as Plaintiff was required to show that Defendant's anticompetitive conduct was the but-for cause of Plaintiff's acquisition. (Id. at 11-12).

         III. DISCUSSION

         A. General Standards

         In Johnson v. City of Shelby, Miss., --- U.S. ---, 135 S.Ct. 346 (2014), the Supreme Court explained that “[f]ederal pleading rules call for a ‘short and plain statement of the claim showing that the pleader is entitled to relief, ' Fed.R.Civ.P. 8(a)(2); they do not countenance dismissal of a complaint for imperfect statement ...


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