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In re McCormick & Co., Inc., Pepper Products Marketing & Sales Practices Litigation

United States District Court, District of Columbia

November 11, 2016

IN RE MCCORMICK & COMPANY, INC., PEPPER PRODUCTS MARKETING AND SALES PRACTICES LITIGATION This Document Relates To ALL CONSUMER S MDL No. 2665

          MEMORANDUM OPINION

          ELLEN SEGAL HUVELLE, United States District Judge

         Plaintiffs, who are retail purchasers of black pepper supplied by defendant McCormick & Co., claim that they were deceived about the amount of pepper in the containers and paid inflated prices for them as a result of a conspiracy between McCormick and its retailers, including defendant Wal-Mart. Plaintiffs claim that defendants violated Section 1 of the Sherman Act, 15 U.S.C. § 1 (Count I), violated consumer protection statutes in twenty-five different states (Count II), and were unjustly enriched under the laws of all fifty states and the District of Columbia (Count III). Defendants have moved to dismiss all three counts. The Court grants their motions with respect to Count I, but it denies them without prejudice with respect to Counts II and III.

         Plaintiffs originally filed separate class actions in federal courts in several states, but the Judicial Panel on Multi-District Litigation consolidated them before this Court, along with a suit by McCormick's competitor Watkins, which claims that Watkins lost sales as a result of the same deception that the consumer plaintiffs allege. See In re McCormick & Co., Inc., Pepper Prods. Mktg. & Sales Practices Litig., Misc. No. 15-1825, 2016 WL 6078250 (D.D.C. Oct. 17, 2016) (dismissing Watkins' claim of unfair competition but not its claims under the Lanham Act and state unfair trade practices statutes). After consolidation of the cases before this Court, the consumer plaintiffs filed a consolidated complaint on March 2, 2016. (See Consol. Am. Class Action Compl., ECF No. 34 (“Compl.”).) According to the complaint, McCormick and its retailers agreed to implement a price increase by decreasing the quantity in both the branded McCormick pepper containers and the store-branded containers which were also supplied by McCormick. Furthermore, plaintiffs claim that defendants misled them about the reduction in quantity by keeping the non-transparent containers the same size. Plaintiffs sue on behalf of “[a]ll persons in the United States who purchased McCormick-brand black pepper, Walmart's Great Value-brand black pepper, Publix-brand black pepper and/or McCormick-filled private-label black pepper between January 1, 2015, and the present, for their personal or household use.” (Id. at ¶ 64.)

         Defendants have moved to dismiss. (See McCormick's Mot. Dismiss, ECF No. 38; Wal-Mart's Mot. Dismiss, ECF No. 40.) First, they argue that this Court should dismiss the antitrust claim (Count I) because plaintiffs have not adequately alleged (1) an anticompetitive agreement; (2) antitrust injury; or (3) relevant markets. (See McCormick's Mem. at 3-13, ECF No. 38-1; Wal-Mart's Mem., ECF No. 40-1.) Second, they argue that named plaintiffs have standing to raise state-law claims (Counts II and III) only under their own states' laws, so this Court should dismiss all class claims under other states' laws. (See McCormick's Mem. at 14-18.) Finally, they argue that this Court should dismiss all of the state-law claims for class treatment because of (1) variation among states' laws; and (2) the need for individualized factual inquiries. (See Id. at 18-38.) Plaintiffs filed their opposition on April 27, 2016. (See Pls.' Opp., ECF No. 43.) Defendants filed their replies on May 18, 2016. (See McCormick's Reply, ECF No. 47; Wal-Mart's Reply, ECF No. 49.) This Court held a hearing on October 25, 2016.

         For the reasons stated below, defendants' motions to dismiss consumer plaintiffs' complaint are granted in part and denied without prejudice in part.

         FACTUAL ALLEGATIONS

         According to plaintiffs, “McCormick controls as much as 70% of the black pepper retail market.” (Compl. at ¶ 58.) McCormick is the “clear market leader in the sale of spices (including black pepper).” (Id. at ¶ 1.) In addition to supplying retailers with black pepper under the McCormick brand, it “supplies about half of the store-brand spices sold annually in the United States, ” including Wal-Mart's Great Value brand. (Id. at ¶¶ 3, 48.) Plaintiffs allege that for decades prior to 2015, McCormick sold ground black pepper in “non-transparent metal tins” whose “sizes have become the industry norm.” (Id. at ¶ 35.) The tin measuring 3 1/16” tall contained 2 ounces of pepper, the tin measuring 3 10/16” tall contained 4 ounces, and the tin measuring 4 10/16” tall contained 8 ounces. (Id.) McCormick also sold a small peppercorn grinder containing 1.24 ounces and a large grinder containing 3.1 ounces. (Id. at ¶¶ 44, 47.) Wal-Mart's Great Value tins are “of a similar size and shape” as McCormick's and, until 2015, contained the same quantities of pepper that the McCormick-branded tins did. (Id. at ¶¶ 48, 51-52.)

         Plaintiffs allege that “[s]ince 2010 the cost of raw black pepper has increased by approximately 500%, ” with a particularly steep increase in 2014. (Id. at ¶ 31.) “In 2015, unable to meet its cost savings targets without a substantial reduction in costs or increase in prices, McCormick began shipping millions of pepper tins and grinders to retail stores containing 25% and 19% less black pepper, respectively, than the containers were designed to hold.” (Id. at ¶ 34.) The containers “note the [new] weight in small print” on the front, but they are the “exact same size” as before. (Id. at ¶¶ 38-40, 45.) In addition, “McCormick and the Retailers agreed that McCormick would reduce the amount of ground black pepper contained in the McCormick-supplied, store-branded tins, even though the actual size of the store-branded tins has, at all relevant times, remained the same.” (Id. at ¶ 50.)

         Plaintiffs further allege that “McCormick and the Retailers agreed to, and did, maintain the same retail prices (as if the black pepper tins and grinders were full) for the now slack-filled black pepper containers.” (Id. at ¶ 62.) There are no allegations about specific communications or documents evidencing such an agreement, but plaintiffs allege that “McCormick and each of the Retailers had regular opportunities to meet, exchange information, and agree with one another as to the fill of the pepper containers.” (Id. at ¶ 59.) Furthermore, “McCormick and the Retailers had a motive to maintain their profit margins” and “McCormick was in a position to act as the ‘hub' in a ‘hub-and-spoke' conspiracy.” (Id. at ¶ 61.) As a result of this “conspiracy in restraint of trade to artificially fix, raise, maintain, and stabilize prices for pepper, ” plaintiffs claim that they paid “supra-competitive, artificially inflated prices for pepper.” (Id. at ¶¶ 74, 76.)

         According to plaintiffs, they were also harmed because the non-transparent tins “falsely appear[ed] to contain the same amount of ground black pepper” as they had before. (Id. at ¶¶ 38-40.) The named plaintiffs allege that they “reasonably expected that the tin was full of black pepper” and “did not know that in fact the tin contained just 75% of the pepper that the tin was designed to hold.” (Id. at ¶¶ 9-23.) They “would not have paid for Defendants' black pepper had they known that the containers were under-filled.” (Id. at ¶ 90.) Thus, plaintiffs assert that defendants engaged in “unfair and deceptive acts.” (Id. at ¶ 87.)

         ANALYSIS

          I. ANTITRUST CLAIM

         Section 1 of the Sherman Act bars contracts and conspiracies in restraint of trade. 15 U.S.C. § 1. Defendants argue that plaintiffs have failed to state a claim under Section 1 because they have not plausibly alleged an agreement in restraint of trade, an antitrust injury, or relevant product and geographic markets. Because the Court finds that defendants are correct about the first two arguments, it will dismiss Count I without reaching the third argument.

         A. Agreement in Restraint of Trade

         Plaintiffs have alleged and briefed two alternative agreements that they contend violated Section 1 of the Sherman Act. First, they allege that McCormick agreed with Wal-Mart and other retailers to reduce the weight of pepper in store-branded containers supplied by McCormick at the same time that McCormick made the same reduction in weight for containers that bore its own brand name. (Compl. at ¶¶ 4, 5, 50; see Pls.' Opp. at 11.) Second, they allege that McCormick and its retailers not only agreed on the weight of pepper but also agreed on the retail price. (Compl. at ¶ 62; see Pls.' Opp. at 9-11.) At the hearing on the motion to dismiss, plaintiffs stated that they were claiming an agreement only on quantity of pepper. (Mot. Hr'g Tr. at 69, 93, Oct. 25, 2016 (“Tr.”) (COURT: “You are arguing there is an explicit agreement on price . . . or are you saying something about quantity then gets translated into cost?” MS. FEGAN: “So, Your Honor, the answer is the latter.”).) However, the Court will address the adequacy of pleading for both alternative agreements because plaintiffs' pleadings and some of their arguments at the hearing seemed to suggest an agreement on price.

         1. Agreement on Price

         To state a claim for violation of Section 1 of the Sherman Act, plaintiffs' allegations “must be placed in a context that raises a suggestion of a preceding agreement, not merely … conduct that could just as well be independent action.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007). The Supreme Court has explained that there is a “need at the pleading stage for allegations plausibly suggesting (not merely consistent with) agreement” so that courts can avoid sending parties into expensive discovery without a sufficient likelihood that the plaintiffs can support their claim. Id. at 557-59. In Twombly, plaintiffs claimed that local telephone carriers must have entered into an illegal agreement not to compete in each other's territory, but the Supreme Court found that “a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing.” Id. at 568. Given this “obvious alternative explanation, ” the Court concluded that there was no plausible suggestion of conspiracy and therefore the complaint should be dismissed. Id. at 567-70.

         Following Twombly, courts dismiss Section 1 complaints when there is an independent business justification for the observed conduct and no basis for rejecting it as the explanation for the conduct. For example, in a case involving parallel reductions in the commissions that airlines paid to travel agents, the Sixth Circuit concluded that “each defendant had a reasonable, independent economic interest in adopting a competitor's commission cut” and therefore there was no reason to infer agreement. In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 908-09 (6th Cir. 2009). The Second Circuit dismissed a parallel pricing complaint because it found that the similar contract terms could reflect similar bargaining power and commercial goals. In re Elevator Antitrust Litig., 502 F.3d 47, 51 (2d Cir. 2007). In the Northern District of Illinois, a judge explained why an industry-wide increase in text-messaging prices did not permit an inference of agreement: “The far more likely inference from Sprint-Nextel's price ‘leadership' is that it raised per-message prices to push more subscribers to purchase bundled calling and texting plans. . . . The defendant companies had self-interested reasons to follow Sprint-Nextel's lead . . . .” In re Text Messaging Antitrust Litig., No. 08 C 7082, 2009 WL 5066652, at *11 (N.D. Ill.Dec. 10, 2009). The common theme in all of these cases is that if the most natural explanation for defendants' conduct is not collusion, merely alleging that the conduct was collusive does not make it plausible.

         To make their allegations of conspiracy plausible, plaintiffs must allege plus-factors, such as details about the making of the agreement, reasons a supposed business justification seems pretextual, or motivations for defendants to make the agreement. In this district, a judge refused to dismiss a price-fixing complaint because plaintiffs had identified the meetings at which the agreement was reached and alleged that defendants had used hurricanes as a pretext to withhold supply and raise prices, when in fact the natural gas resource base had not decreased. City of Moundridge v. Exxon Mobile Corp., 250 F.R.D. 1, 4-6 (D.D.C. 2008). The judge handling the Apple e-books litigation denied defendants' motion to dismiss the complaint, which alleged a conspiracy between Apple and publishers to raise the price of e-books, because the complaint described specific conversations from which it was fair to infer an agreement and because it alleged motives for both Apple and the publishers to join the conspiracy. In re Elec. Books Antitrust Litig., 859 F.Supp.2d 671, 682-83, 690 (S.D.N.Y. 2012). The fact that defendants had opportunities for communication contributes to making an alleged agreement plausible, but feasibility is not enough on its own to support a reasonable inference of agreement. In re Text Messaging, 2009 WL 5066652, at *7. Therefore, in the absence of specific allegations about the making of the agreement, an alleged agreement is not plausible without allegations that the defendants had a motive to make the agreement and would not have had independent business justifications for their conduct.

         Plaintiffs' complaint fails to plausibly suggest an agreement between McCormick and Wal-Mart or any other retailer to fix retail prices. In the language of Twombly, there is an “obvious alternative explanation” for the continuity in retail prices that does not require any agreement. 550 U.S. at 567. That “natural explanation, ” Id. at 568, is that McCormick maintained its wholesale prices when it reduced the fill level of pepper to offset the increased cost of raw pepper, and retailers in turn maintained their retail prices to preserve their usual allowance for operating costs and their traditional profit margin. Retailers could well have expected that most consumers would be insensitive to the precise amount of pepper in a container and therefore willing to pay the same retail prices as before. Retailers could also have expected their competitors to reach the same conclusions, and therefore, they did not worry that they needed to reduce their traditional profit margins in order to avoid being undercut by their competitors. Cf. VI Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1434c (3d ed. 2010) (explaining that a significant rise in raw material costs is an independent explanation, other than an agreement, for an oligopolist's price increase).

         Plaintiffs have offered no basis for rejecting this logical and lawful explanation. Although they make a conclusory allegation of agreement, they do not allege a single fact that plausibly suggests agreement. First, while they allege that McCormick and its retailers would have had an opportunity to make an agreement on prices at the same time that they communicated about their supply agreements, mere feasibility is insufficient to make agreement plausible. Plaintiffs do not allege any specific communications from which an agreement can be inferred. Second, they allege no facts to suggest that defendants would have been acting against their independent economic self-interest if they had chosen the same prices as charged before without having an agreement about them. Indeed, plaintiffs conceded at the hearing that each retailer would have had an independent economic motive to maintain the retail price if McCormick reduced the amount of pepper without reducing the wholesale price. (Tr. at 86.)

         Finally, plaintiffs fail to allege any motivations for McCormick and the retailers to make an agreement about retail prices. Without an agreement, the retailers could each choose to maintain their traditional prices, because plaintiffs have not alleged any reason that retailers would have had to fear being undercut by competitors. Meanwhile, there is no apparent incentive for McCormick to insist on maintaining retail prices. As the preeminent antitrust treatise explains, “manufacturers ordinarily maximize their profits through intense competition among dealers.” VIII Areeda ¶ 1601. Although there are circumstances in which a manufacturer can benefit from restricting retail prices (and often do so without hurting consumers), see id., plaintiffs have not offered any reason why this would be one of those circumstances.[1]

         In sum, the complaint fails to plausibly suggest an agreement on prices because there is an obvious lawful explanation for the observed prices, no allegations of specific communications that suggest agreement, no allegations that defendants were acting against their independent economic self-interest, and no alleged motivations for defendants to make an agreement on price.

         2. Agreement on Quantity

         a. There is no restraint of trade.

         Only agreements “in restraint of trade” can violate Section 1 of the Sherman Act. 15 U.S.C. § 1. Agreements between suppliers and customers are ubiquitous, for they are necessary to do business, so courts “need to be clear on which ones should be of concern to antitrust law.” VII Areeda ¶ 1437a, b. In particular, an “ordinary sales contract fixes the transaction price, but it does not restrain trade.” Id. at ¶ 1437a. For example, car dealers who had contracts with General Motors once tried to argue that GM had engaged in illegal price-fixing because the contracts set prices at which GM would compensate its dealers for providing warranty repair parts and services. 49er Chevrolet, Inc. v. Gen. Motors Corp., 803 F.2d 1463, 1467-68 (9th Cir. 1986). The Ninth Circuit ...


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