In Long-Awaited Opinion, Court Rules That Keurig Must Face Antitrust Suits by Competitors and Customers
In a recently unsealed opinion, U.S. District Judge Broderick (S.D.N.Y.) explained his reasoning for allowing a consolidated antitrust suit to proceed against Keurig Green Mountain, Inc. and its affiliates, the makers of single serve brewer machines and compatible single serve coffee packets, “K-Cups.” As discussed below, the case may influence future cases involving exclusive licensing agreements and allegedly false marketing tactics.
In 2014, two competing coffeemakers—Rogers Family Co. and TreeHouse Foods, Inc.—alleged that Keurig’s anticompetitive conduct had excluded them from the market for coffee “cups” that are compatible with Keurig’s single-serve brewer. Putative classes made up of direct and indirect purchasers of Keurig’s products also alleged that Keurig’s anticompetitive conduct caused them to pay supracompetitive prices for compatible cups. The cases were consolidated before Judge Broderick, and Keurig moved to dismiss the amended complaints in February 2015. In November 2017, the court denied Keurig’s motions to dismiss the complaints by Rogers, TreeHouse, and the direct purchasers, but granted in large part Keurig’s motion to dismiss the indirect purchasers’ complaint.
Nearly 18 months later, Judge Broderick has unsealed an April 4, 2019 opinion explaining his reasoning for allowing the suit to proceed. As a threshold matter, the court found the indirect purchasers lacked antitrust standing because they are not “efficient enforcers” of the antitrust laws, given that Keurig did not allegedly overcharge them directly. The court ruled that the direct purchasers—who sought largely overlapping injunctive relief—were better suited to enforce the antitrust laws.
The plaintiffs alleged that Keurig enjoyed monopoly power over two markets—the single-serve brewer market and the compatible cup market—both of which the court found adequately defined. In rejecting Keurig’s arguments, the court relied on Keurig’s alleged licensing agreements, which explicitly defined “competing systems” and made clear that Keurig’s brewer does not compete with “hopper-based” or “espresso pod-based” brewing systems. The plaintiffs also alleged that, through brand ownership or exclusive licensing, Keurig controls between 86% and 95% of the compatible cup market. The court rejected Keurig’s argument that aftermarket products such as compatible cups require more than allegation of market share: where, as here, the defendant is alleged to have monopoly power in the primary product market, it is sufficient to allege market share for the aftermarket product.
According to the plaintiffs’ allegations, Keurig acts to prevent competition by (1) coercing distributors and retailers to enter into exclusive agreements that restrain market entry and exclude competitors; (2) conspiring with competitor coffeemakers to enter into agreements that exclude competitors, allocate markets, and limit output; (3) initiating baseless litigation and appeals against competitor manufacturers of compatible cups; (4) tying the purchase of K-Cups to the purchase of K-Cup Brewers to restrain competition from competitor manufacturers of compatible cups; (5) interfering with competitors’ business relationships by making false and disparaging comments to customers and potential customers regarding competitors’ products; (6) threatening to introduce the Keurig 2.0 brewing system, which unnecessarily excludes competitors from the compatible cup market; (7) requiring manufacturers of competitor cups to enter restrictive licensing agreements; and (8) making material misrepresentations to retailers, distributors, and consumers regarding the compatibility, performance, safety, and quality of competitor cups as compared to K-Cups.
The court found that each category of alleged conduct supported the plaintiffs’ monopolization claims under Section 2 of the Sherman Act. In so holding, the court explained that anticompetitive product design, when combined with “associated conduct” such as exclusive dealing, tying agreements, and product disparagement, has the “overall effect” of coercing customers to purchase K-Cups, rather than competing on the merits. In finding that Keurig’s alleged exclusive agreements stated a claim for monopolization, the court rejected Keurig’s argument that competitors have continued to sell, and in some cases increased sales of, competitor cups, explaining that the law does not require complete foreclosure of the market, only “substantial” foreclosure.
Plaintiffs Rogers and TreeHouse also alleged that Keurig violated Section 1 of the Sherman Act by entering into horizontal and hub-and-spoke conspiracies with coffee brands, distributors, and retailers to restrain competition. The court agreed with the plaintiffs that Keurig’s agreements with distributors were horizontal—despite the fact that such agreements are typically treated as vertical in nature—because Keurig’s agreements were with licensees who would otherwise compete in the compatible cup market and who would potentially seek to compete in the single serve brewer market. The court distinguished such horizontal agreements from vertical agreements between distributors and manufacturers where those parties also happened to compete in other markets at the distribution level, finding that Keurig’s agreements’ directly related to the competitive landscape in the relevant markets, and that the allegations were independently sufficient for a claim of concerted refusal to deal or group boycott. The court also agreed with the plaintiffs that various “spokes” entered into restrictive agreements with Keurig to keep prices supracompetitive: coffee roasters and brands allegedly entered into licensing or manufacturing agreements with Keurig with express knowledge of Keurig’s anticompetitive agreements with other competitor roasters and brands.
We will continue to monitor this case and report on future developments.
The case is In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., No. 14-MD-2542 (VSB) (S.D.N.Y.).