ANN D. MONTGOMERY, District Judge.
On September 6, 2017, the undersigned United States District Judge heard oral argument on Defendants C&S Wholesale Grocers, Inc.'s ("C&S") Motion to Exclude Expert Testimony [Docket No. 790] and Motion for Summary Judgment [Docket No. 809].
This multi-district litigation consolidates the antitrust lawsuits of retail grocers against C&S and SuperValu, Inc. ("SuperValu") (collectively, "Defendants"), the two largest full-line grocery wholesalers in the United States.
Grocery wholesalers such as SuperValu and C&S act as "middlemen" in the grocery supply chain, purchasing products from manufacturers, storing those products at distribution centers, and later reselling those products to retail grocers. Expert Report Jeffrey J. Leitzinger, Ph.D., Supp. Pls.' Mot. Class Certification [Docket No. 621] ("Leitzinger Class Report") ¶ 11; Expert Report Dr. John H. Johnson, IV, Related Class Certification [Docket No. 624] ("Johnson Class Report") ¶ 26. "Full-line" wholesalers such as SuperValu and C&S distribute tens of thousands of products in every product category, whereas "partial line" wholesalers offer a more limited set of product categories. Leitzinger Class Report ¶¶ 40-42;
SuperValu's business is primarily in the Midwest, and C&S's business is largely concentrated in New England. Second Am. Compl. ¶ 1. Prior to June 2002, SuperValu was C&S's largest competitor in New England, where C&S was the primary wholesaler.
In 2003, Fleming declared bankruptcy, and C&S announced its intention to acquire Fleming's Midwest wholesale grocery distribution business, which would have resulted in C&S becoming SuperValu's major competitor in the Midwest. Leitzinger Class Report ¶ 17;
In September 2003, C&S and SuperValu entered into the AEA, which provided that SuperValu would receive Fleming's Midwestern assets and SuperValu in turn agreed to transfer its New England assets to C&S.
Plaintiffs filed this antitrust action in 2009, alleging that the purpose of the AEA was to allocate customers and territory and to agree not to compete with each other for the customers and territories they exchanged. Second Am. Compl. ¶¶ 1-3, 33, 76-83. Plaintiffs aver the elimination of competition between SuperValu and C&S in regional markets allowed each Defendant to charge supra-competitive prices to their retail customers.
In the Midwest market, SuperValu uses a pricing formula known as "activity based sell" ("ABS") pricing for its dry grocery, general merchandise, dairy, and frozen product categories.
Operating fees consist of SuperValu's costs in filling the customer's order (calculated using nine "fee driver" classifications) plus a margin. Leitzinger Class Report ¶ 19, n.43. Operating fees apply in approximately 85% of ABS sales.
Plaintiffs assert that Defendants' alleged conspiracy enabled SuperValu to "ensure[] the continuation of ABS pricing in the Midwest rather than having to engage in aggressive price competition like that which it experienced in competing with C&S in New England . . . . As a result, retail customers . . . in the Midwest have sustained overcharges in their purchases of grocery wholesale products and services from Defendants." Second Am. Compl. ¶ 40.
On October 31, 2011, Plaintiffs moved to certify two broad putative classes: (1) retailers who purchased products or related services from Defendants in the Midwest market (the "Midwest Class"); and (2) retailers who purchased products or services in the New England market (the "New England Class").
This Court denied class certification of both proposed classes on July 16, 2012, after determining that Plaintiffs could not show class-wide impact through common evidence.
Addressing the Midwest Class, the Court noted that the "formulaic nature" of the ABS pricing method applied by SuperValu to charge customers in the Midwest market made a better case for certification than the New England Class.
On August 31, 2012, D&G requested leave to move for certification of a narrower Midwest Class of grocers who were charged using ABS pricing and who were supplied by SuperValu's Champaign, Illinois DC.
On January 11, 2013, the Court granted summary judgment to Defendants.
On May 21, 2014, the Eighth Circuit reversed the grant of summary judgment against D&G, but affirmed the denial of certification of the Midwest Class.
In March 2016, the Midwest Plaintiffs moved for certification of five litigation classes consisting of customers who paid ABS fees in all four SuperValu ABS product categories (grocery, frozen, dairy, and general merchandise) purchased directly from one of four SuperValu Midwest DCs from December 31, 2004 through September 13, 2008 (the "Class Period"). Pls.' Mot. Class Cert. [Docket No. 607].
In support of their renewed request for class certification, the Midwest Plaintiffs presented a three-pronged argument that class-wide impact could be shown with common evidence:
In
According to a net margin comparison conducted by the Midwest Plaintiffs' expert, Dr. Jeffrey Leitzinger ("Dr. Leitzinger"), SuperValu's net margins for the Class DCs after the AEA (when SuperValu faced no competition from C&S in the Midwest) were over 5%, whereas its net margins in New England prior to the AEA (where SuperValu formerly competed with C&S) were only 1.7%.
Leitzinger Class Report ¶ 140. The amount by which the net margins of the Class DCs exceed those of pre-AEA New England is the amount by which SuperValu's ABS fees were allegedly inflated. The Midwest Plaintiffs referred to this amount as the "overcharge amount."
According to Dr. Leitzinger, the net margin in a given market depends solely on two factors: market demand elasticity and the nature of competition.
In their renewed request for class certification, the Midwest Plaintiffs also argued that damages could be proven with common evidence because each individual class member's overcharge damages can be calculated using a single formula: multiplying each class member's ABS purchases from their Class DC by the percentage of price inflation of that DC's ABS prices. Pls.' Mem. Supp. Class Certification at 27; Leitzinger Class Report ¶ 155. Although some individualized adjustments for customer-specific ABS pricing modifications or off-invoice discounts would be required for some class members, these individual issues did not overwhelm the common issues stemming from class members' purchases of products under SuperValu's largely universal ABS pricing formula.
The Court granted the Midwest Plaintiffs' motion, holding that class-wide impact could be proven using common evidence because for each proposed class, the large majority of every member's ABS purchases were charged under an ABS operating fee formula that was identical to other members of that class.
On March 1, 2017, the Court approved the class notice drafted by Midwest Plaintiffs.
Dr. Leitzinger's Merits Report [Docket No.799] ("Merits Report") incorporates the findings from his Class Certification Reports with one exception.
Dr. Leitzinger opines that the $158 million figure in his Class Certification Reports only accounts for 70% of the net-margin inflation, and that the actual net margin inflation at the Class DCs shows that the total overcharges on Class member purchases are $226 million.
C&S has filed a motion to exclude the expert testimony of Dr. Leitzinger, arguing that his margin analysis is unreliable. C&S also contends that if Dr. Leitzinger's opinions are not excluded entirely, they should be limited to exclude several damage categories. Additionally, C&S has filed a motion for summary judgment, arguing that because Dr. Leitzinger's opinions are inadmissible, the Midwest Plaintiffs have no evidence of injury, which is a required element of their antitrust claim. C&S thus contends it is entitled to judgment as a matter of law.
The admission of expert testimony is governed by Rule 702 of the Federal Rules of Evidence, which provides:
When evaluating the admissibility of expert testimony, a trial court serves as the gatekeeper to ensure that the proffered testimony is reliable and relevant.
"[R]ejection of expert testimony is the exception rather than the rule," and expert testimony should be admitted if it "advances the trier of fact's understanding to any degree."
C&S argues that Dr. Leitzinger's margin analysis must be excluded as unreliable because it fails to consider other economic factors that could explain the difference in the post-AEA Midwest and pre-AEA New England margins. C&S raises three challenges to the reliability of Dr. Leitzinger's margin analysis.
C&S first argues that SuperValu's higher margins in the post-AEA Midwest as compared to pre-AEA New England are not reliable evidence that the Midwest Plaintiffs paid supracompetitive prices because higher margins may be the result of lower business costs.
In his Class Certification Reports, Dr. Leitzinger asserted that if competition and demand are the same across two markets, differences in costs will be reflected in different prices, rather than different margins. Leitzinger Class Report ¶ 137; Leitzinger Class Rebuttal ¶ 103. According to Dr. Leitzinger, this is because under recognized economic principles, the net margin in a given market depends solely on two factors: market demand elasticity and the nature of competition.
C&S argues that Dr. Leitzinger's assertions in the Class Reports have since been undermined by his merits deposition testimony. Dr. Leitzinger stated during his merits deposition that margins can increase due to lower business costs, even where prices stay the same or go down.
Dr. Leitzinger also admitted in the deposition that price was not a factor in his net margin calculations, and that ABS fees actually declined during the class period at SuperValu's Midwest DCs.
C&S insists that SuperValu's increased margins in the Midwest were due to higher efficiency and lower business costs at its Midwest DCs after the AEA because SuperValu was able to spread its fixed costs over a larger volume of sales. C&S further contends that SuperValu's ABS fees decreased on average during the class period. C&S thus concludes that SuperValu's higher margins in the Midwest are not evidence that SuperValu charged supracompetitive prices.
This argument fails to recognize that had C&S—the only wholesaler in the nation with similar size, scale, and sales volume to SuperValu—been competing head to head with SuperValu in the Midwest, it would have enjoyed similar efficiencies and economies of scale in the Midwest. Thus, price competition would have forced SuperValu to pass its business cost savings on to customers rather than retaining margins in the Midwest that were three times higher than its margins in New England.
Based on these considerations and the economic principles underlying them, Dr. Leitzinger's statement in his deposition that it is mathematically possible for net margins to increase as a result of lower costs without raising prices does not render his net margin analysis unreliable. Additionally, any decrease in ABS prices during the class period is not necessarily fatal to Dr. Leitzinger's margin analysis. A price may be supra-competitive without actually increasing if a competitive price would be lower than the price charged.
C&S next argues that Dr. Leitzinger's opinion is inadmissible because it fails to account for competition from other wholesalers in New England that may have caused SuperValu's lower margins at its New England DCs before the AEA. In his merits deposition, Dr. Leitzinger stated that he did not determine the impact of C&S on SuperValu's margins in New England versus the impact of other competitors on SuperValu's New England margins. Leitzinger Merits Dep. at 112:1-4. C&S concludes from this statement that Dr. Leitzinger failed to take New England competitors into account when performing his benchmark comparison between pre-AEA New England and post-AEA Midwest.
This argument is unavailing because Dr. Leitzinger investigated the competitive conditions in New England, including the sales, capacity and buying power of SuperValu's other competitors. Leitzinger Class Report ¶ 129. Dr. Leitzinger concluded that "the competitive dynamics in New England were very similar to those that would have existed in the Midwest but for Defendants' agreement (albeit with the respective roles of the two Defendants reversed)."
Dr. Leitzinger also measured market concentration in the Midwest using the Herfindahl-Hirschman Index ("HHI").
C&S argues that the competitive landscape was not similar among the regions because one of the major wholesalers competing with SuperValu in the Midwest was facing serious problems, including poor financial results and SEC issues.
C&S next argues that Dr. Leitzinger's assumption that the entire difference in SuperValu's profit margins between New England and the Midwest is attributable to the lack of competition from C&S fails to account for SuperValu's lower operating costs in the Midwest. Labor costs were lower in the Midwest, and SuperValu's technology at its Midwest DCs was superior to its New England DCs. Moreover, Dr. Leitzinger admitted in his merits deposition that SuperValu's operating costs were higher in New England prior to the AEA than they were in the Midwest after the AEA, and that increased costs could be among the reasons why SuperValu's margins were lower at its New England DCs than its Midwest DCs. Leitzinger Merits Dep. 100:16-101:6; 106:3-10. C&S argues that Dr. Leitzinger's opinions must be excluded because they fail to account for these cost-based reasons for the differences in SuperValu's margins.
However, if C&S had been competing in the Midwest it would have benefitted from some of the same operational cost savings that SuperValu enjoyed in that region, including lower labor costs. Leitzinger Class Rebuttal ¶ 104. Additionally, like SuperValu, C&S also had highly sophisticated technology that reduced operating costs. Leitzinger Class Report ¶ 15 n.27. Thus, if C&S had been competing head to head with SuperValu in the Midwest, to stay competitive SuperValu may have been forced to lower its prices instead of maintaining its high net margins. Leitzinger Class Rebuttal ¶¶ 103, 104. Based on these considerations, the differing operational costs between New England and the Midwest do not impeach Dr. Leitzinger's margin analysis sufficiently to be inadmissible for jury consideration.
Based on the foregoing, the Court concludes that Dr. Leitzinger's margin analysis is supported by sufficiently reliable methodology and facts, and is not "so fundamentally unsupported that it can offer no assistance to the jury."
C&S argues that if Dr. Leitzinger's margin analysis is not excluded, the Court should nevertheless exclude four aspects of his opinion that overinflate the damages calculation.
In addition to the $158 million damage figure for ABS sales that Dr. Leitzinger calculated in his Class Certification Report, Dr. Leitzinger's Merits Report now includes another $68 million in alleged overcharges that he attributes to sales of ABS and non-ABS products by SuperValu to class members. Merits Report ¶ 7. C&S argues that testimony about non-ABS fees must be excluded because non-ABS purchases are not included in this case. The Court agrees.
Throughout the course of this litigation, the Midwest Plaintiffs' theory of liability has been that the that Defendants' alleged agreement not to compete resulted in overcharges in
In moving for class certification, the Midwest Plaintiffs "offer[ed] only a single theory of impact—viz., supracompetitive ABS fees paid by each class member resulting from Defendants' agreement not to compete." Pls.' Reply Mem. Supp. Class Certification [Docket No. 635] at 13. Plaintiffs also repeatedly argued that damages could be proven with common evidence because each individual class member's overcharge damages could be calculated using a single formula: "multiplying each class member's ABS purchases from a class DC by the percentage by which that DC's ABS prices were inflated." Pls.' Mem. Supp. Mot. Class Certification [Docket No. 618] at 27;
Because the Midwest Plaintiffs have repeatedly and expressly limited their theory of liability to supra-competitive ABS pricing in the Midwest, testimony about alleged overcharges on non-ABS purchases will not be allowed.
In his Merits Report, Dr. Leitzinger opines that the overcharge percentages on ABS products would have been be more pronounced than on non-ABS products because ABS products are often supplied only by full-line wholesalers, and the Defendants' alleged conspiracy eliminated SuperValu's largest full-line competitor. Merits Report ¶¶ 10-12. Non-ABS products, on the other hand, are carried by partial-line wholesalers, and SuperValu continued to face competition from partial-line suppliers after the AEA.
To apportion the additional overcharges between ABS and non-ABS sales, Dr. Leitzinger "employ[s] the economic principle that higher market concentration can generally be associated with higher degrees of market power and, ultimately, higher prices."
C&S argues that Dr. Leitzinger's apportionment methodology is speculative and unreliable because his market concentration calculations lack foundation. To determine market concentration for a given product category at a given DC, Dr. Leitzinger assumed that the percentage of non-ABS product category sales to total sales at the DC was equivalent to the percentage of a DC's square footage that was devoted to that product category. Leitzinger Merits Dep. at 218:12-16. For example, if produce sales were 7% of sales at a particular DC, Dr. Leitzinger assumed that produce occupied 7% of the total square footage at that DC.
Dr. Leitzinger, however, did not visit any of the DCs to confirm the square footage that he allocated to the product lines was correct.
The Midwest Plaintiffs attempt to revive Dr. Leitzinger's analysis by arguing that the allocation methodology is reliable because according to Section 5.3 of the DOJ's and FTC's Horizontal Merger Guidelines, a firm's capacity is a proper measure of the firm's competitive importance in a homogenous market such as wholesale grocery products and services. This argument fails to address that Dr. Leitzinger's capacity calculations are entirely speculative and are not supported by actual data. Because Dr. Leitzinger's methodology for apportioning overcharges among ABS and non-ABS sales is founded on speculative and unverified data, it is not sufficiently reliable under
C&S also argues that Dr. Leitzinger improperly included ABS service fees in calculating the Midwest Plaintiffs' alleged overcharges. In 2012, this Court concluded that "service fees do not vary across distribution centers, [and] are the same regardless of whether a distribution center was within the Midwest, where anticompetitive affects are alleged, or in other regions unaffected by the AEA. Therefore, on their face, service fees do not include any anticompetitive price `premium.'"
C&S argues that Dr. Leitzinger's damage calculations improperly include damages for SuperValu customers located more than 160 miles from any former Fleming DC. C&S notes that Dr. Leitzinger has opined that the distance beyond which DCs in the Midwest could practicably supply customers (the "competitive service radius" or "CSR") is 160 miles.
The Midwest Plaintiffs respond that SuperValu set a single ABS pricing formula for all ABS customers at a given SuperValu DC, and thus all SuperValu DC customers were charged inflated ABS prices, not just those located within the CSR of a former Fleming DC.
C&S insists that had SuperValu been competing with C&S in the Midwest it would not have made economic sense to uniformly lower its ABS pricing for all customers of a given SuperValu DC if the majority of customers from that SuperValu DC were outside of C&S's competitive reach. For example, if the location of a former Fleming DC would have made that DC a viable competitor for only 20% of the customers of a SuperValu DC, SuperValu may have chosen to keep their prices higher and risk losing that 20% customer base, because maintaining 80% of its business at higher margins would have been more profitable than keeping 100% of its business at lower margins.
These arguments are best tested and explored through cross examination and defense expert testimony. Thus, the Court denies C&S's request to exclude Dr. Leitzinger's damage calculations for ABS customers located more than 160 miles from a former Fleming DC.
Summary judgment is appropriate if there are no genuine issues of material fact and the moving party can demonstrate that it is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). A fact is material if it might affect the outcome of the suit, and a dispute is genuine if the evidence is such that it could lead a reasonable jury to return a verdict for either party.
To prevail on their claim under Section 4 of the Clayton Act, the Midwest Plaintiffs must prove (1) an antitrust violation, (2) injury, (3) a causal relationship between the violation and the injury, and (4) the amount of damages.
C&S' Summary Judgment Motion is contingent upon the success of the Motion to Exclude Expert Testimony. Because Dr. Leitzinger's opinion is admissible and raises genuine issues of material fact on the element of injury, C&S's Motion for Summary Judgment is denied.
Based upon the foregoing, and all the files, records, and proceedings herein,
1. Defendant C&S Wholesale Grocer, Inc.'s Motion to Exclude Expert Testimony [Docket No. 790] is
2. C&S's and Motion for Summary Judgment [Docket No. 809] is
