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.

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