Supreme Court denial of certiorari leaves exclusive dealing and loyalty discount jurisprudence in flux

On 29 April 2013, the Supreme Court declined to review a recent Third Circuit ruling, ZF Meritor LLC v Eaton Corporation (Meritor), 696 F.3d 254 (3d Cir. 2012), which implicated the ability of dominant manufacturers to provide loyalty or market share discounts to customers. The court’s decision to let the Third Circuit ruling stand could lead to uncertainty for manufacturers interested in using such discounts. Combined with the Federal Trade Commission’s recent focus on exclusive dealing arrangements, the Meritor case suggests a measure of caution when analysing arrangements that involve full or partial exclusivity or could be characterised as such.

The Meritor case arose out of a series of long-term supply agreements between Eaton Corporation, a manufacturer of transmissions for heavy duty trucks and the major manufacturers (OEMs) of heavy duty trucks in the United States. ZF Meritor, a competitor to Eaton, alleged that these agreements contained substantial discounts tied to market-penetration and purchasing targets, which caused the OEMs to buy most of their transmissions from Eaton and effectively locked Meritor out of the market. In October 2009, a jury found that Eaton violated Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act, and in June 2012, a divided Third Circuit panel upheld the verdict, characterizing Eaton’s agreements as “de facto” exclusive dealing contracts rather than supply agreements with pricing provisions. As a result, in order to prevail under the traditional exclusive dealing framework, ZF Meritor needed to demonstrate that the “probable effect” of the agreements was to substantially lessen competition, which the jury so found. Had the agreements been considered supply agreements with pricing provisions the standard as articulated by the Supreme Court in Brooke Group Ltd. V. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), and acknowledged by the Third Circuit in Meritor would have been whether Eaton was selling its transmissions below cost…

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