SARAH S. VANCE, UNITED STATES DISTRICT JUDGE.
Defendants Pool Corporation, SCP Distributors LLC, and Superior Pool Products (collectively, "Pool"), move to exclude the testimony of Dr. Gordon C. Rausser, an expert for the Direct-Purchaser Plaintiffs (DPPs).
This is an antitrust case that direct-purchaser plaintiffs (DPPs) and indirect-purchaser plaintiffs (IPPs) filed against Pool and the Manufacturer Defendants. Pool is the country's largest distributor of products used for the construction and maintenance of swimming pools (Pool Products).
DPPs have filed two consolidated amended complaints — the first on June 29, 2012
When expert testimony offered by one party is subject to a Daubert challenge, the Court must act as a "gatekeeper" under Federal Rule of Evidence 702.
A district court has considerable discretion to admit or exclude expert testimony under Rule 702. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 138-39, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997); Seatrax, Inc. v. Sonbeck Int'l, Inc., 200 F.3d 358, 371 (5th Cir.2000). Rule 702, which governs the admissibility of expert witness testimony, provides:
Fed. R. Evid. 702.
In Daubert v. Merrell Dow Pharmaceuticals, Inc., the Supreme Court held that Rule 702 requires the district court to act as a gatekeeper to ensure that "any and all scientific testimony or evidence admitted is not only relevant, but reliable." 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993); see also Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 147, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999) (clarifying that the Daubert gatekeeping function applies to all forms of expert testimony). The Court's gatekeeping function thus involves a two-part inquiry into reliability and relevance.
First, the Court must determine whether the proffered expert testimony is reliable. The party offering the testimony bears the burden of establishing its reliability by a preponderance of the evidence. See Moore v. Ashland Chem. Inc., 151 F.3d 269, 276 (5th Cir.1998). The reliability inquiry requires the Court to assess whether the reasoning or methodology underlying the expert's testimony is valid. See Daubert, 509 U.S. at 592-93, 113 S.Ct. 2786. The aim is to exclude expert testimony based merely on subjective belief or unsupported speculation. See id. at 590, 113 S.Ct. 2786.
The Court in Daubert articulated a flexible, non-exhaustive, five-factor test to assess the reliability of an expert's methodology: (1) whether the expert's theory can be or has been tested; (2) whether the theory has been subject to peer review and publication; (3) the known or potential rate of error of a technique or theory when applied; (4) the existence and maintenance of standards and controls; and (5) the degree to which the technique or theory has been generally accepted in the scientific community. Id. at 593-95, 113 S.Ct. 2786. The Supreme Court has emphasized, however, that these factors "do not constitute a `definitive checklist or test.'" Kumho, 526 U.S. at 150, 119 S.Ct. 1167 (quoting Daubert, 509 U.S. at 593, 113 S.Ct. 2786). Rather, district courts "must have considerable leeway in deciding in a particular case how to go about determining whether particular expert testimony is reliable." Id. at 152, 119 S.Ct. 1167. Courts have also considered whether experts are "proposing to testify about matters growing naturally and directly out of research they have conducted independent of the litigation, or whether they have developed their opinions expressly for purposes of testifying,"
A district court's gatekeeper function does not replace the traditional adversary system or the role of the jury within this system. See Daubert, 509 U.S. at 596, 113 S.Ct. 2786. As the Supreme Court noted in Daubert: "Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Id. The Fifth Circuit has held that, in determining the admissibility of expert testimony, district courts must accord proper deference to "the jury's role as the proper arbiter of disputes between conflicting opinions. As a general rule, questions relating to the bases and sources of an expert's opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the jury's consideration." United States v. 14.38 Acres of Land, More or Less Situated in Leflore Cty., Miss., 80 F.3d 1074, 1077 (5th Cir.1996) (quoting Viterbo v. Dow Chem. Co., 826 F.2d 420, 422 (5th Cir.1987)).
Nonetheless, expert testimony "must be reliable at each and every step or else it is inadmissible. The reliability analysis applies to all aspects of an expert's testimony: the methodology, the facts underlying the expert's opinion, the link between the facts and the conclusion, et alia." Knight v. Kirby Inland Marine Inc., 482 F.3d 347, 355 (5th Cir.2007) (citation omitted). "Where the expert's opinion is based on insufficient information, the analysis is unreliable." Paz v. Brush Engineered Materials, Inc., 555 F.3d 383, 388 (5th Cir.2009).
In Joiner, the Supreme Court explained that "nothing in either Daubert or the Federal Rules of Evidence requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert." 522 U.S. at 146, 118 S.Ct. 512. Rather, "[a] court may conclude that there is simply too great an analytical gap between the data and the opinion proffered." Id.; see also LeBlanc v. Chevron USA, Inc., 396 Fed.Appx. 94, 98 (5th Cir.2010).
Second, the Court must determine whether the expert's reasoning or methodology is relevant. The question here is whether the reasoning or methodology "fits" the facts of the case and will thereby assist the trier of fact to understand the evidence. See Daubert, 509 U.S. at 591, 113 S.Ct. 2786. "[F]undamentally unsupported" opinions "offer[] no expert assistance to the jury" and should be excluded. Guile v. United States, 422 F.3d 221, 227 (5th Cir.2005) (citing Viterbo, 826 F.2d at 422).
Defendants challenge five aspects of Dr. Rausser's opinion. The Court begins by summarizing Dr. Rausser's opinion and methodology. The Court then summarizes the substantive antitrust and class certification law necessary to understand how the challenged portions of Dr. Rausser's opinion matter to DPPs' antitrust claims and motion for class certification. The Court then assesses defendants' five challenges to Dr. Rausser's opinion.
Dr. Rausser opines that Pool could charge inflated prices for Pool Products as a result of a mixture of conduct by Pool and the Manufacturer Defendants. He states that his "liability analysis" is how he shows the conduct had an impact on prices and thereby on plaintiffs.
To begin, Dr. Rausser states that Pool communicated with the Manufacturer Defendants about "cutting off" Pool's rivals.
Dr. Rausser also opines that Pool used its preferred vendor program to "facilitate its control of the market."
First, he states that the preferred vendors' supply agreements usually contained a most-favored-pricing clause (colloquially called "most favored nation" provisions — "MFNs" for short).
Second, Dr. Rausser states that Pool pressured its preferred vendors to police their own minimum acceptable advertised price (MAPP) and lowest acceptable advertised price (LAPP) policies. He states that "MAPP/LAPP provisions between manufacturers and their customers (either distributors or Dealers who purchased direct) prohibited the customers from advertising (not selling) the manufacturers' products at a price below the manufacturer's set minimum."
Dr. Rausser also identifies two strategies supposedly targeted at eliminating competition from buying groups. Buying groups allowed Dealers to purchase product directly from vendors at pre-negotiated prices, thus enabling Dealers to circumvent distribution. First, Dr. Rausser asserts that Pool encouraged the Manufacturer Defendants to increase their minimum purchase amounts for receiving free freight. He notes that the Manufacturer Defendants began announcing increases to their free-freight minimums in the fall of 2007 and that all three had raised their minimum from $10,000 to $20,000 by February 2008.
Finally, Dr. Rausser suggests that, in certain instances, Pool sought to directly influence its rivals' pricing, either through the medium of one of its vendors, or by contacting the rival directly.
Dr. Rausser summarizes the alleged effect of these various forms of conduct as follows:
At his deposition, Dr. Rausser confirmed that it is his narrative liability analysis that demonstrates the impact of the defendants' conduct on Pool's prices.
Having concluded that an impact exists, Dr. Rausser proceeds to evaluate whether
Dr. Rausser also conducts a "Common Factors" regression, which seeks to identify the key variables that predict variation in Pool Products prices. For example, the Common Factors regression includes variables to represent costs, demand, seasonal variation, customer size, and product characteristics. He contends that because his Common Factors regression can predict 99% of the variation in prices, it shows that "common factors predominate" in determining pricing across the class.
Next, Dr. Rausser uses a "before-and-after" analysis to quantify the alleged impact on the class. The before-and-after analysis seeks to quantify damages by comparing two time periods: a "before" time period, when the allegedly anticompetitive conduct was still underway, and an "after" time period, also referred to as the "benchmark" period, when most of the allegedly anticompetitive conduct had supposedly stopped. To compare the two time periods, he runs his "Common Factors" regression, but adds one additional variable, a "dummy" variable, which is set to 1 during the class period and to 0 during the benchmark period. He calls this regression his "Overcharge" regression. He uses November 21, 2011, as the dividing date between the before period and the benchmark period, because that is the date the Federal Trade Commission "publicly announced its investigation into Pool Products distribution" and "[d]uring that benchmark period, Pool[] was effectively prohibited from engaging in their previous anticompetitive conduct."
Defendants challenge Dr. Rausser's before-and-after analysis on two grounds. First, they challenge the benchmark period Dr. Rausser uses on the ground that many of the types of conduct challenged by the DPPs continued into the benchmark period. They argue that the benchmark period must be completely free of challenged conduct to be a reliable basis for a "before-and-after" analysis and that, because his benchmark period is not completely clean, his analysis should be excluded as unreliable. Second, defendants argue that Dr. Rausser's analysis does not "fit" the facts of this case because it does not disaggregate the effect of "any particular allegedly unlawful acts."
Dr. Rausser's opinion also includes a proposed method for calculating "individual damages" for each individual transaction during the class period. Dr. Rausser estimates the individual overcharge for each transaction in two steps. First, he uses his
Defendants challenge his method on two grounds. First, they argue that his calculated "individual" overcharge for each transaction inappropriately includes an error term. Second, they challenge the final stage of his calculations, in which he substitutes a median overcharge term for his individualized estimates. They argue that this substitution obscures the differences between transactions and leads to "false positives." Ultimately, they contend that his method does not provide a reliable basis for the trier of fact to assess individual damages.
Dr. Rausser concludes that the relevant geographic market is the United States. He provides two bases for this conclusion. First, he opines that Pool Product prices should have been "spatially integrated" across the country.
DPPs rely on Dr. Rausser's opinions to support their antitrust claims and their motion for class certification. The Court sets out the substantive law necessary to understand how the challenged portions of Dr. Rausser's opinion matter to DPPs' antitrust claims and motion for class certification.
Section 2 of the Sherman Act forbids monopolization and attempts to monopolize. 15 U.S.C. § 2. DPPs maintain one attempted monopolization claim against Pool. To prevail on the claim, DPPs must prove that Pool (1) engaged in predatory or anticompetitive conduct, (2) with the specific intent to monopolize, and (3) with "a dangerous probability" of achieving monopoly power. Spectrum Sports v. McQuillan, 506 U.S. 447, 456, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993). In appraising whether there is a dangerous probability of success, courts focus principally on the defendant's share of the relevant market. See, e.g., Pastore v. Bell Tel. Co., 24 F.3d 508, 512 (3d Cir.1994) ("Determining whether a `dangerous probability' exists requires `inquiry into the relevant product and geographic market and the defendant's economic power in that market.'" (quoting Spectrum Sports, 506 U.S. at 459, 113 S.Ct. 884)). Market definition is a necessary component of this analysis, because without a definition of a relevant market, there is no way to measure a defendant's ability to lessen or destroy competition. Walker Process Equip. v.
In addition to establishing a Section 2 violation, to recover as private antitrust plaintiffs, DPPs must establish that they suffered injury in their "business or property by reason of anything forbidden in the antitrust laws." Bell Atl. Corp. v. AT&T Corp., 339 F.3d 294, 302 (5th Cir.2003) (citing Clayton Act § 4, 15 U.S.C. § 15). They must also provide "some indication of the amount of damage." Id. (citing Alabama v. Blue Bird Body Co., Inc., 573 F.2d 309, 317 (5th Cir.1978)).
Section 1 of the Sherman Act prohibits "every contract, combination ... or conspiracy, in restraint of trade or commerce among the several states." 15 U.S.C. § 1. The Supreme Court has made clear, however, that the prohibition on "every" restraint on trade actually "prohibits only agreements that unreasonably restrain trade." NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 133, 119 S.Ct. 493, 142 L.Ed.2d 510 (1998).
DPPs' remaining section 1 claims are three separate vertical conspiracy claims: one alleging an agreement between Pool and Pentair, another alleging an agreement between Pool and Hayward, and another alleging an agreement between Pool and Zodiac. Vertical restraints are tested by the rule of reason. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 907, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007) (overruling Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 31 S.Ct. 376, 55 L.Ed. 502 (1911), and extending application of rule of reason to all vertical restraints).
Under the rule of reason, courts must assess whether a challenged restraint "unreasonably restrained trade," that is, whether it caused an "injury to competition." Doctor's Hosp. of Jefferson, Inc. v. Se. Med. Alliance, Inc., 123 F.3d 301, 307 (5th Cir.1997) (citations omitted). Courts must balance
Id. (citing Hornsby Oil Co. v. Champion Spark Plug Co., 714 F.2d 1384, 1392 (5th Cir.1983)). When assessing the effect on competition of a vertical conspiracy in a case that includes multiple "discrete conspiracies," a court must evaluate each alleged agreement individually:
Dickson v. Microsoft Corp., 309 F.3d 193, 210-11 (4th Cir.2002) (citations omitted). If, on balance, the challenged conduct injures competition, then the conduct violates Section 1; if not, then not.
F.T.C. v. Ind. Fed'n of Dentists, 476 U.S. 447, 460-61, 106 S.Ct. 2009, 90 L.Ed.2d 445 (1986). In most instances, however, plaintiffs cannot present direct evidence of detrimental effects. In that event, they must be able to define the relevant market. Hornsby Oil Co., 714 F.2d at 1392-93.
In addition to proving a violation of the antitrust laws, to establish private antitrust liability, DPPs must prove that they suffered an injury from the violation, and they must provide "some indication of the amount of damage." Robinson v. Tex. Auto. Dealers Ass'n, 387 F.3d 416, 422 (5th Cir.2004) (citation omitted). The injury must be "antitrust injury," which is "injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977). In other words, the injury must be "congruent with the rationale for finding an antitrust violation in the first place." 2A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 355c4, at 81 (4th ed. 2014). Thus, a plaintiff cannot demonstrate antitrust injury without first establishing a violation. In addition, the causal link between the violation and the injury "may not be based on speculation," but rather "must be proved as a matter of fact and with a fair degree of certainty." Blue Bird Body Co., 573 F.2d at 317.
Once antitrust injury has been established, plaintiffs enjoy a "relaxed burden" with respect to the amount of damages. Pierce v. Ramsey Winch Co., 753 F.2d 416, 435 (5th Cir.1985). But "the standard for proving the quantum of damages is not without bounds, for antitrust damages may not be determined by guesswork or speculation." El Aguila Food Prods., Inc. v. Gruma Corp., 131 Fed.Appx. 450, 453 (5th Cir.2005). Rather, there must be enough for a factfinder to make a "just and reasonable estimate of the damage based on relevant data." Id. (quoting Lehrman v. Gulf Oil Corp., 464 F.2d 26, 46 (5th Cir. 1972).
To be certified under Rule 23, the class must first satisfy four threshold requirements. A court may certify a class only if:
Fed. R. Civ. P. 23(a). The party seeking certification bears the burden of establishing these requirements. Unger v. Amedisys, 401 F.3d 316, 320 (5th Cir.2005) (citing Berger v. Compaq Comput. Corp., 257 F.3d 475, 479-80 (5th Cir.2001)).
If the prerequisites of Rule 23(a) are met, the proposed class must also satisfy one of the three provisions for certification under Rule 23(b). For certification of a 23(b)(3) damages class, the court must make a finding that questions of law or fact common to class members predominate over questions affecting only individual members and that a class action is the best way to adjudicate the controversy. Fed. R. Civ. P. 23(b)(3); Unger, 401 F.3d at 320.
To determine whether the class claims meet the predominance requirement, the court must "identify the substantive issues that will control the outcome, assess[] which issues will predominate, and then determin[e] whether the issues are common to the class." Bell Atl. Corp. v. AT&T Corp., 339 F.3d 294, 302 (5th Cir. 2003). As summarized above, establishing the predicate antitrust violation to support each of DPPs' claims is only the first of three steps necessary to establish private antitrust liability. DPPs must also prove that they suffered "antitrust injury" and make a showing as to the amount of damages.
The Court will need to determine whether injury and amount of damages are susceptible to common proof. If injury "cannot be established for every class member through proof common to the class, the need to establish antitrust liability for individual class members defeats Rule 23(b)(3) predominance." Bell Atl., 339 F.3d at 302. Likewise, when plaintiffs fail to adduce a formula capable of providing "a just and reasonable estimate of the damages of every class member," individual issues as to amount of damages will defeat predominance. Id. at 304; Piggly Wiggly Clarksville, Inc. v. Interstate Brands Corp., 100 Fed.Appx. 296, 297 (5th Cir.2004) ("The necessity of calculating damages on an individual basis, by itself, can be grounds for not certifying a class." (citing Bell Atl., 339 F.3d at 308)). In Piggly Wiggly, the Fifth Circuit held that a district court did not abuse its discretion by refusing to certify a class on the ground that many individualized damages determinations would be required "because many of the class members negotiated a price rather than being charged strictly on price lists." Id. at 298. In short, "[c]lass treatment... may not be suitable where the calculation of damages is not susceptible to a mathematical or formulaic calculation, or where the formula by which the parties propose to calculate individual damages is clearly inadequate." Bell Atl., 339 F.3d at 307.
Defendants challenge five aspects of Dr. Rausser's opinion. The Court addresses each in turn.
Dr. Rausser opines that Pool "used a tightly controlled centralized pricing system to determine prices across geographical regions, products, and customers."
To prove that Pool centrally controlled pricing, Dr. Rausser asserts that "catalog" (or "P") pricing was the most prevalent form of pricing Pool used and that Pool could "commonly elevate[] prices across its Dealer customers" through "bulk matrix updates" of its prices.
The parties agree that Pool uses three main types of pricing: regional catalog, or "P," prices; matrix, or "M," prices; and override, or "OV" prices. Pool issues approximately fifteen different regional catalogs.
The parties also agree that Pool uses two types of matrix pricing: "asterisk" (or "*") pricing, and "dollar sign" (or "$") pricing. Asterisk pricing reflects a set markup or discount from the catalog price, or a set markup from cost.
Pool's expert, Dr. Johnson, argues that Dr. Rausser inaccurately represents the nature of the matrix and override pricing. According to Dr. Johnson, Dr. Rausser represents that commonality exists among transactions associated with the same price code, even though matrix and override pricing are, by definition, individualized.
Dr. Rausser and Dr. Johnson also disagree about how prevalent each type of pricing is, and what the prevalence of each pricing type implies about the degree to which Pool's pricing is "centralized." Dr. Rausser represents that approximately 43% of Pool's sales were made at catalog prices during the class period.
Finally, Dr. Johnson argues that Dr. Rausser misrepresents the nature of Pool's bulk updates. In his initial report, Dr. Rausser characterized Pool's bulk updates as a mechanism for Pool to manipulate prices "on a common basis"
When determining the admissibility of evidence, district courts must afford "proper deference to the jury's role as the arbiter of disputes between conflicting opinions." 14.38 Acres of Land, 80 F.3d at 1077 (quoting Viterbo, 826 F.2d at 422). "As a general rule, questions relating to the bases and sources of an expert's opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the jury's consideration." Id. (quoting Viterbo, 826 F.2d at 422).
The Court has reviewed the documents cited by both experts in support of their conclusions about the nature and degree of centralization of Pool's pricing. The Court concludes that defendants' arguments consist of factual disputes and challenges to Dr. Rausser's conclusions, which are more appropriately explored through cross examination. "Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Daubert, 509 U.S. at 596, 113 S.Ct. 2786. Dr. Rausser's conclusions about Pool's pricing are not devoid of factual support. Indeed, Dr. Rausser's reports cite a number of internal Pool documents that demonstrate some level of centralized
For example, he cites a document produced by Pool central management entitled "District Pricing Manager Responsibilities."
Dr. Rausser also cites internal Pool emails discussing how to improve pricing discipline at the branch level. For example, he points to a 2006 email to senior staff from Manny Perez, Pool's president and CEO, in which Perez lists disciplinary actions to be taken against employees who grant unauthorized pricing exceptions. The list includes requiring the responsible employee to pay Pool for the difference between the sale price and the authorized price ("equivalent to reimbursing the Company for stealing") and "termination."
Dr. Rausser also points to Pool's "Price Management 2011 Action Plan," which provides detailed instructions on managing Pool's active price matrices. The plan instructs managers to review all price matrices for specific customers, eliminate obsolete entries, and then "[i]ncrease the gross margin percent on every matrix for every customer."
This document arguably provides step-by-step instructions for Pool's managers to implement across-the-board price increases for their customers.
These documents, and others like them, provide support for Dr. Rausser's opinion that Pool's pricing was subject to centralized control. Although Pool's pricing may not be as "tightly controlled" as Dr. Rausser
The Court reaches a similar conclusion about Dr. Rausser's opinion on the effect of Pool's bulk updates. Although there is no dispute that the bulk updates do not update all prices for all products at one time, Dr. Rausser has pointed to some evidence that the bulk updates facilitated common, if not completely uniform, increases in prices. Specifically, he has analyzed the effect of the bulk updates on pricing for different product lines, and he presents his results in a series of graphs demonstrating step-like increases in prices corresponding to the bulk updates.
The Court denies defendants' motion to exclude Dr. Rausser's opinion about the centralization of Pool's pricing.
Dr. Rausser opines that the relevant geographic market is the United States.
Dr. Rausser recognizes that the FTC complaint, which did not allege a national market, referred to "local geographic markets, focusing on demand-side effects — i.e. the limited ability of Dealers in certain locales to switch to distributors operating far away."
Defendants challenge Dr. Rausser's spatial integration theory as ungrounded in the facts of the case.
At his deposition, Dr. Rausser could identify only two pieces of evidence in support of his spatial integration opinion. First, he identified a memo in which Pool management discussed the need to review with branches matrix pricing producing a "gross margin of 10% or less based on replacement cost."
Second, Dr. Rausser identified a regional manager report that discussed Pool's internal mechanism for transferring product from one branch to a branch that is out-of-stock.
The regional manager report is not evidence of shifting product to increase margins.
But this is a bit like saying that the evidence for his theory is that there is no evidence. That Dealers, for the most part, ship locally may be consistent with a market that is integrated and in equilibrium, but it is equally consistent with an unintegrated market.
Ultimately, the Court finds that there is simply too great an analytical gap between the underlying evidence presented and Dr. Rausser's opinion. As the Fifth Circuit has repeatedly held, "[i]f an opinion is fundamentally unsupported, then it offers no expert assistance to the jury." Guile, 422 F.3d at 227 (quoting Viterbo, 826 F.2d at 422). Thus, "an expert's opinion should not be admitted if it does not apply to the specific facts of the case." Diggs v. Citigroup, Inc., 551 Fed.Appx. 762, 765 (5th Cir.2014) (citing Kumho Tire, 526 U.S. at 154, 119 S.Ct. 1167). Here, Dr. Rausser has failed to point to any evidence indicating that the theory of spatial integration applies to the facts of the Pool Products market. The lack of evidence is telling; it is hard to imagine how Pool could have executed a nationwide program of margin-maximizing product transfers without having some sort of company policy in place. Because Dr. Rausser's opinion of spatial integration is without support in the record, it offers no help to the fact finder, and the Court excludes it as irrelevant.
In two footnotes, Dr. Rausser describes a "cointegration test" that he ran, which supposedly supports his conclusion that prices are spatially integrated. First, in footnote 109 of his rebuttal report, Dr. Rausser writes:
That is all the description that Dr. Rausser provides of his cointegration test. Dr. Rausser does not provide any evidence of his calculations or any description of his results. Without this, the Court is unable to evaluate Dr. Rausser's methodology. Dr. Johnson, who has apparently seen Dr. Rausser's work papers, writes, "Dr. Rausser does not describe either his testing or the associated results. It is unclear from a replication of his work papers what serves as the basis for his claim that he continues to find support for his conclusion."
In addition, however, the Court has identified at least four substantive problems with the "methodology" of Dr. Rausser's cointegration test. First, as Dr. Johnson observes, Dr. Rausser's sample set of 621 products is quite small. It represents less than 1% of the products sold by Pool.
Second, the Court finds no support for the use of four generic census regions for a test of geographic market integration in the Pool Products market. The census regions do not correspond to the organization of the Pool Products industry or of Pool's business. Moreover, each census region includes states that have little logical connection with one another. For example, the "West" census region comprises Alaska, Hawaii, Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Arizona, Nevada,
Third, Dr. Rausser admits that his data for the cointegration test does not correct for the "unit-of-measure issue." The unit-of-measure issue is a significant data coding issue that plagued Dr. Rausser's initial and rebuttal reports. The problem may be summarized as follows. For some transactions, Pool records a quantity of "one," indicating that one unit of a product was sold. For others, a quantity of "one" indicates "one case," indicating that twelve (or some other number greater than one) units of the product were sold. Thus, without the unit-of-measure variable, it is impossible to know whether the price given for a particular transaction is the price for one unit or for multiple units.
Dr. Rausser explains that he did not correct for unit-of-measure in the data set for his cointegration test because unit-of-measure information is "not consistently available throughout the time period."
Finally, the Court observes that Dr. Rausser has not followed the best practices prescribed by the very authorities he cites. Dr. Rausser's cointegration discussion cites P.L. Fackler & B.K. Goodwin, Spatial Price Analysis, in HANDBOOK OF AGRICULTURAL ECONOMICS 971 (Bruce L. Gardner & Gordon C. Rausser, eds. 2001). He states that the article "describe[s] how cointegration tests can be used to investigate spatial integration."
Id. at 1017 (emphasis added). The article goes on to summarize:
Id. at 1018 (emphasis added). Thus, the very article to which Dr. Rausser directs the Court's attention undermines his approach here. He has conducted just one test, instead of the variety of tests and techniques prescribed by the article. Moreover, the article makes clear that the results of any one test standing alone are simply not enough from which to draw conclusions. Dr. Rausser's isolated use of the cointegration test violates accepted best practice as described by the authority upon which he relies. For all of these reasons, Dr. Rausser's opinion about his cointegration test is excluded as unreliable.
Damages calculations in antitrust cases seek to compare plaintiffs' actual experience in the real world with what the plaintiffs' experience would have been, "but for" the antitrust violation. See ABA Section of Antitrust Law, Antitrust Law Developments 783 (7th ed. 2012). One widely accepted methodology for proving damages is a before-and-after analysis, which "compares ... the prices [a plaintiff] paid during the period of violations with ... prices paid ... after [the violation period's] termination." Id. at 786.
Dr. Rausser employs a before-and-after analysis here. Dr. Rausser uses November 21, 2011, as the dividing date between the "before" period — when the allegedly anticompetitive conduct was still underway — and the "benchmark" period — when most of the allegedly anticompetitive conduct had supposedly stopped. Dr. Rausser says he chose the date because it is the date the Federal Trade Commission "publicly announced its investigation into Pool Products distribution" and "[d]uring that benchmark period, Pool[] was effectively prohibited from engaging in their previous anticompetitive conduct."
Defendants challenge Dr. Rausser's chosen benchmark period on the ground that many of the types of conduct challenged by the DPPs continued into the benchmark period. They argue that the benchmark period must be completely free of challenged conduct to be a reliable basis for a "before-and-after" analysis, and that because his benchmark period is not completely clean, his analysis should be excluded as unreliable. They cite National Farmers' Organization, Inc. v. Associated Milk Producers, Inc., 850 F.2d 1286 (8th Cir.1988), amended, 878 F.2d 1118 (8th
The Court rejects this argument. Defendants do not dispute that the before-and-after method is an accepted methodology to estimate overcharge damages. Nor do they provide any authority for the proposition that an expert's opinion must be excluded if the "after" period is not free of any residual effects of the challenged exclusionary or collusive conduct. National Farmers' Organization, cited by defendants, does not stand for that proposition, or anything close to it. Indeed, the Eighth Circuit's decision is a ringing endorsement of a liberal approach to calculating damages once the plaintiff has shown the fact of injury. See 850 F.2d at 1293 (explaining "a lesser standard of proof is applicable to proof of the amount of damages"). Further, as plaintiffs note, the court in In re Linerboard Antitrust Litigation rejected the argument that an expert's opinion must be excluded if the benchmark period is not free of collusion. See 497 F.Supp.2d 666, 675 (E.D.Pa.2007). In Linerboard, the plaintiffs alleged a horizontal price-fixing conspiracy. The plaintiffs' expert constructed a model that used variables representing cost, demand, and other predictive factors to predict what prices should have been absent the alleged collusion. For inputs, the expert used data that excluded the period of the alleged conduct. The expert subtracted the predicted but-for prices generated by his model from the prices paid by the plaintiffs during the damages period. The defendants argued that, in choosing variables for his regression, the expert incorrectly assumed his benchmark period was free from collusion. The court concluded that even if the benchmark was not "perfectly competitive," the argument was unavailing. It reasoned that if there was in fact some collusion during the benchmark period, then the but-for price estimates would be too high, resulting in a "more conservative" estimate. Id.
The FTC Consent Decree required Pool to cease and desist from engaging in practices designed to induce or coerce manufacturers to refuse to deal with other distributors, as well as from exacting penalties, discriminating, or retaliating against manufacturers because they dealt with or intended to deal with other distributors. Further, the Consent Decree required Pool to desist from conditioning participation in its preferred vendor program on whether a manufacturer sold to other distributors. Thus, the focus of the FTC Consent Decree and, indeed, the most serious of plaintiffs' allegations, involve Pool's efforts to induce or coerce manufacturers to refuse to deal with actual or would-be competitors. The Court has seen nothing in the record to indicate that Pool persisted in that conduct during the after period. That the preferred vendor program continued in the after period is not inconsistent with a cessation of anticompetitive activities. Pool was not required to forego the program completely; it was required only to stop using it as a tool to exclude competitors. Further, Dr. Rausser stated that during the after period, he did not "see any events with regard to foreclosure that one witnesses during the class period."
Fourth, defendants challenge Dr. Rausser's analysis on the ground that it does not disaggregate the impact of "any particular allegedly unlawful acts."
In response, DPPs argue that Dr. Rausser's aggregated analysis is "[c]onsistent with DPPs' allegations and the evidence."
Dr. Rausser confirms that he has taken an aggregated approach to analyzing the effect of the challenged conduct. He explains that his model "measures the increase in prices ... attributable to Pool-Corp's exercise of market power whatever the basis for the maintenance or enhancement of that power."
Dr. Rausser defends his approach. Indeed, he criticizes the defense experts for evaluating specific "alleged anti-competitive acts in isolation" and "attempting to trace the particular effects of each one as though none of the other conduct had taken place."
Here, defendants challenge the "fit" of Dr. Rausser's methods to the issues in this case, making a relevance argument. What is relevant to the proof of a claim depends
The Court begins with DPPs' attempted monopolization claim against Pool. Liability in a private antitrust action requires that DPPs prove (1) a violation of the antitrust laws, (2) the fact of damage, and (3) some indication of the amount of damage. El Aguila Food Prods., Inc. v. Gruma Corp., 131 Fed.Appx. 450, 452 (5th Cir. 2005). "The fact of damage requirement is one of causation; the plaintiff must show that the defendant's unlawful conduct was a material cause of injury to it[.]" Id. In a section 2 case, "[t]he fact finder should be able to consider the entire sum of unlawful exclusionary practices," although "care must be taken lest ... causation and damages relate predominantly to lawful rather than unlawful conduct." 2B Areeda & Hovencamp at ¶ 310c7, at 235-237 (4th ed. 2014). "The dominant conduct causing the plaintiffs injuries must still be found to be unlawful." Id. at 237. Here, DPPs rely on all of the challenged conduct in support of their attempted monopolization claim against Pool. Thus, so long as all of the challenged conduct is found to be unlawful, proof of the aggregated effect of that conduct can satisfy the injury requirement for DPPs' section 2 claim. Therefore, the aggregated analysis is relevant to DPPs' attempted monopolization claim against Pool. Thus, Dr. Rausser's aggregated analysis need not be excluded as to DPPs' attempted monopolization claim.
Next, the Court assesses the evidence's relevance to DPPs' three vertical conspiracy claims. With respect to these claims, the Court concludes that Dr. Rausser's aggregate analysis does not answer the relevant question. His opinion cannot help the fact-finder determine whether any one of these vertical conspiracies had an anticompetitive effect on the relevant market. As discussed earlier, DPPs' vertical conspiracy claims are assessed under the rule of reason. To prevail on a rule of reason claim, a plaintiff must demonstrate that a challenged restraint caused an adverse effect on competition, not simply to isolated competitors. See Doctor's Hosp. of Jefferson, 123 F.3d at 307. In assessing anticompetitive effects in the context of these vertical claims, the focus is not just on Pool's market share, but also on whether each Manufacturer Defendant had market power of antitrust concern. See Dickson, 309 F.3d at 207-11. Absent such power, a Manufacturer Defendant's collusion with Pool would be ineffective.
Dr. Rausser does not demonstrate that any Manufacturer Defendant had the market power necessary to foreclose competition through an agreement with Pool. Dr. Rausser does not provide the market shares of each Manufacturer Defendant and merely provides how much of the Manufacturer Defendants' sales went to Pool and how much they collectively made up of Pool's sales. But Pool's purchases and sales do not constitute a market. Dr. Elzinga estimates, for example, that Zodiac's share of the total Pool Products purchased was between 6 and 7 percent.
Finally, defendants challenge Dr. Rausser's proposed method for calculating "individual damages" for the members of the class. Defendants challenge two aspects of his proposed method: (1) its supposed inclusion of an error term in its estimates of the overcharge applicable to each transaction analyzed, and (2) its use of a median overcharge term instead of an individualized overcharge estimate in the final stage of each calculation. Defendants argue that as a result of these two alleged flaws, Dr. Rausser's proposed method leads to "false positives" and does not provide a reliable formula for calculating individual damages across the class.
Dr. Johnson represents that Dr. Rausser's individualized overcharge calculation for each transaction is equivalent to the uniform overcharge estimated by Dr. Rausser's Overcharge regression model, plus the prediction error associated with the transaction.
The Court rejects this argument. Dr. Rausser estimates the individual overcharge for each transaction in two steps. First, he uses his regression model to generate a "Predicted But-For Price" for the transaction. Because this price is a prediction, it naturally includes an element of prediction error. (This is the "error term" to which Dr. Johnson refers.) Second, Dr. Rausser subtracts the Predicted But-For Price from the Actual Price that the customer paid for the transaction. The difference between the Actual Price paid and the Predicted But-For Price is the "individual overcharge" for that transaction.
Defendants also challenge Dr. Rausser's use of median overcharges instead of individualized overcharge estimates in the final stage of each calculation. They argue that this method leads to "false positives" and does not provide a reliable basis for the trier of fact to assess individual damages.
The Court begins by summarizing Dr. Rausser's method. First, Dr. Rausser calculates "individual" overcharges for each transaction, as described above. Then, to ameliorate the effects of prediction error, Dr. Rausser takes the median overcharge for each product in a month and assigns that overcharge to all customers who purchased that product that month. He argues that this approach is "necessary given random prediction error," and that using medians "decreases individual overcharges that are too high (due to prediction error)" and "increas[es] individual overcharges that are too low or negative (due to prediction error)."
If DPPs can establish an antitrust violation and antitrust injury, they will enjoy a "relaxed burden" with respect to the amount of damages. Pierce, 753 F.2d at 435. As the Fifth Circuit has explained, "[O]nce the causation hurdle has been overcome, the expert on damages need not be armed on the right hand with a slide rule, on the left hand with a computer. He is allowed some economic imagination so long as it does not become fantasy." Terrell v. Household Goods Carriers' Bureau, 494 F.2d 16, 25 (5th Cir.1974). Thus, while "antitrust damages may not be determined by guesswork or speculation," plaintiffs need provide only a sufficient basis a factfinder to make a "just and reasonable estimate of the damage based on relevant data." El Aguila, 131 Fed.Appx. at 453.
Defendants have not established that Dr. Rausser's model fails to provide a basis for the factfinder to make a "just and reasonable estimate" of the damages for each plaintiff. DPPs' theory of the case is that class members were overcharged fairly uniformly across product lines and geographic regions. If DPPs persuade the factfinder that their theory of the case is correct, then, theoretically, a damages formula simply applying the estimated average overcharge to each plaintiff's purchases would be sufficient to provide a reasonable estimate of individual damages. See Greenhaw v. Lubbock Cty. Beverage Ass'n, 721 F.2d 1019, 1029 (5th Cir.1983), overruled in part on other grounds by Int'l Woodworkers of Am., AFL-CIO & its Local No. 5-376 v. Champion Int'l Corp., 790 F.2d 1174 (5th Cir.1986) (approving the application of an average overcharge figure, rather than an overcharge figure tailored by purchase location, to calculate damages for individual purchasers when it would have been impossible to determine how purchasers' shopping patterns would have differed in a competitive market). Here, Dr. Rausser has presented a model even more refined than one simply applying the average overcharge to all purchases. His individual damages model goes one step further, providing an overcharge estimate specific to the product purchased and the month of purchase.
Defendants argue that In re Rail Freight Fuel Surcharge Antitrust Litigation, 725 F.3d 244 (D.C.Cir.2013), requires the Court to reject Dr. Rausser's model. In Rail Freight, the D.C. Circuit reversed the district court's class certification order,
To that end, Dr. Rausser has determined that using medians to control for prediction error results in more reasonable estimates. And defendants have not provided any reason to refute that using a median is an appropriate econometric method to mitigate prediction error when generating an estimate. Moreover, an estimate is precisely what antitrust law permits plaintiffs to present, once they have cleared the evidentiary hurdles of establishing a violation and antitrust injury. For these reasons, the Court will not exclude Dr. Rausser's proposed "formula ... to calculate individual damages." Bell Atlantic, 339 F.3d at 307.
For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART defendants' motion to exclude the testimony of Dr. Rausser. The Court excludes Dr. Rausser's opinion about (1) spatial integration, including his cointegration test; and (2) aggregate causation to demonstrate the effect of the alleged vertical conspiracies.
