The Franchise Memorandum

In an instructive opinion arising from the appeal of two related antitrust suits, the Third Circuit in Howard Hess Dental Laboratories Inc. v. Dentsply International, Inc., 602 F.3d 237 (3d Cir. 2010), affirmed the dismissal of two dental laboratories’ claims for monopolization against a manufacturer of artificial teeth and for conspiracy to monopolize and restrain trade against the manufacturer and its dealers. The laboratories, which purchased artificial teeth to make dentures, alleged that the manufacturer set anticompetitive prices for artificial teeth and prohibited dental dealers from carrying competitors’ artificial teeth. Alleging an exclusive dealing arrangement, their theory was that the manufacturer served as the “hub” of a “hub and spoke” conspiracy with its dealers, i.e., the “spokes,” and that the “rim of the wheel” was the connecting agreements between all the dealers to assist the manufacturer in maintaining its monopolization of the distribution of artificial teeth. The district court had dismissed the complaint.

On appeal, the Third Circuit rejected the laboratories’ argument that their monopolization claim  could be established on collateral estoppel grounds because of the previous, successful monopolization action brought by the U.S. Department of Justice against the same manufacturer. In so doing, the court held that the laboratories failed to allege their injury and noted that the necessary issue in the DOJ suit was only injury to the manufacturer’s competitors, not to “upstream purchasers” like the laboratories. Applying the heightened pleading standard under the recent Twombly Supreme Court opinion, the court found no factual allegations to “plausibly suggest” that the dealers knew about a monopolistic agreement, and that simply alleging, without more, that the dealers had knowledge was not enough. That the dealers independently had an economic motivation to abide by their agreements with the manufacturer so they could charge higher prices made logical sense to the court and implied parallel conduct, but the court found that this did not suggest joint action or give rise to an inference of any coordination between the dealers. Put another way, the allegations did not suggest to the court an unlawful “meeting of the minds” among the dealers. Interestingly, the court found some merit in the notion that several vertical conspiracies may have existed between the manufacturer and the dealers, which the laboratories argued as their alternative theory. Nevertheless, the court parsed the allegations of the complaint and found that it repeatedly characterized the conduct as one collective conspiracy among all the defendants and could not “be fairly understood” to allege several bilateral, vertical conspiracies.