The Franchise Memorandum

A federal court denied a distributor’s motion for a preliminary injunction and dismissed its antitrust claims against a competitor, holding that the distributor failed to adequately plead its claims under either Section 1 or Section 2 of the Sherman Act. Nicolosi Distrib., Inc. v. FinishMaster, Inc., 2018 WL 4904918 (N.D. Cal. Oct. 9, 2018). Plaintiff Nicolosi Distributing is a small distributor of automotive paints and supplies that sells to auto body shops in the San Francisco Bay Area. It sued FinishMaster and its Canadian parent company, alleging that FinishMaster entered into exclusive dealing contracts with “A-list” body shops, and that these contracts, along with FinishMaster’s practice of purchasing and shutting down smaller distributors, unreasonably restrained trade and contributed to the formation or attempted formation of a monopoly in the relevant market.

The court noted that exclusive dealing contracts, in light of their “well-recognized economic benefits,” are analyzed under the rule of reason. It then held that Nicolosi had failed to allege sufficient facts to support a rule-of-reason antitrust claim by failing to (1) provide evidence of the relevant geographic or commercial market, (2) plausibly allege that FinishMaster had foreclosed a substantial share (typically 40% to 50%) of that market, and (3) show that any anticompetitive effects in that market resulted from FinishMaster’s contracts. That is, Nicolosi had failed to show: (i) Bay-Area body shops did not buy paint from outside the Bay Area, or even that the Bay Area was a unified market (further, “A-list” shops were not clearly a discrete market); (ii) FinishMaster controlled any more than (on a generous reading) 33% of the market by Nicolosi; and (iii) any reduced output or increased prices had resulted from FinishMaster’s contracts. These flaws undermined Nicolosi’s monopoly claims, as well, since a plaintiff cannot show that a market is monopolized without defining the relevant market or showing the defendant controls a substantial portion of the market. In dismissing the Sherman Act and identical state-law claims, the court accorded Nicolosi the opportunity to amend its complaint.