Orchard Supply Hardware LLC v. Home Depot USA, Inc. et al

Filing 57

ORDER ADVISING PARTIES OF COURT'S TENTATIVE ORDER. Signed by Judge Jon S. Tigar on August 13, 2013. (Attachments: # 1 Exhibit A - not to be published or cited for any purpose)(wsn, COURT STAFF) (Filed on 8/13/2013)

Orchard Supply Hardware LLC v. Home Depot USA, Inc. et al

Doc. 57 Att. 1

The following is a tentative order, which has been issued solely to prepare counsel for

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oral argument. The tentative order does not constitute an opinion of the Court and should not

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be published or cited for any purpose.

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I.

INTRODUCTION
Plaintiff Orchard Supply Hardware (“Plaintiff” or “Orchard”) brings a Second Amended

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Complaint (“SAC”) against Defendants Home Depot USA, Inc., (“Home Depot”), Milwaukee

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Electric Tool Corporation (“METCo”) and Makita USA, Inc. (“Makita”) (collectively,

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“Defendants”) for violations of Section 1 of the federal Sherman Act (“Sherman Act”), 15 U.S.C.
§ 1, violation of California’s Cartwright Act, Cal. Bus. & Prof. Code §§ 16720 & 16726,

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United States District Court
Northern District of California

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violations of California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200 et

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seq., tortious interference with existing contracts, tortious interference with prospective economic

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relations, and false advertising in violation of both the federal Lanham Act, 15 U.S.C. § 1125, and

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California Business & Profession Code § 17500. ECF No. 53. Defendants have filed a joint

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motion to dismiss the SAC. ECF No 54. After considering the papers, the Court TENTATIVELY

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GRANTS IN PART and DENIES IN PART the motion to dismiss.

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II.

BACKGROUND

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A.

Factual Background
For the purposes of a motion to dismiss, the Court adopts the following factual allegations

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from the SAC.
Plaintiff owns and operates a chain of 92 all-purpose general hardware stores throughout

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California and Oregon, and is a retail competitor of Defendant Home Depot.1 SAC, ¶¶ 1 & 13.

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Defendant Home Depot is currently the largest, and dominant, seller of hardware products in the

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United States. Id., ¶ 105. Defendants METCo and Makita are each suppliers of power tools that

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Orchard operates 90 stores in seven geographic markets in California, (“Central” Region,
“Central-South Coast/Los Angeles County” Region, “East Bay” Region, “Monterey Bay” Region,
“Orange County” Region, “San Francisco Peninsula” Region, “Silicon Valley” Region) as well as
two stores in Oregon (“Portland” region). Id. ¶ 147.

Dockets.Justia.com

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distribute their products to consumers through retail hardware stores such as Plaintiff Orchard and

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Defendant Home Depot. Id., ¶¶ 14 & 17. Collectively, Defendants METCo and Makita control

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between 31 and 50 percent of the market share of various power tools, and are specially regarded

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among tradesmen and other professional customers. Id., ¶¶ 15 & 26. Plaintiff Orchard and

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Defendant Home Depot both do business with these two suppliers. Id., ¶¶ 14 & 17. METCo and

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Makita account for two of the three product lines that account for a “predominate [sic] share of the

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sales of professional power tools in the United States.” Id. ¶ 31. A retail hardware seller cannot

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remain a viable business in the power tool or related markets if it lacks tools made by both

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METCo and Makita. Id. ¶ 15.2
On June 7, 2012, Home Depot executive Craig Menear publicly announced that Defendant

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Home Depot “would take appropriate measures to answer competitive threats . . . [and] lock down

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the supply of professional power tools.” Id. ¶ 139. Within a week, Defendant Makita gave notice

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that it would stop selling power tools to Orchard. Id., ¶¶ 18, 140. Two weeks later, Defendant

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METCo also informed Orchard that it “would cease to make further sales of any of its products to

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Orchard.” Id., ¶¶ 18, 142. Another power tool supplier, Black & Decker Dewalt (“Black &

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Decker”), disclosed to Plaintiff that Defendant Home Depot had also requested that Black &

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Decker refuse to deal with Orchard, but that Black & Decker had refused. Id. ¶ 144. In response,

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Black & Decker claims that Defendant Home Depot has lessened its purchases of Black & Decker

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products and begun placing them in disadvantageous locations in its retail outlets. Id. Around the

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same time, Defendants Makita and METCo each also informed Amazon that it would no long

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make further sales to that company, and instructed its distributors not to fill any orders placed by

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Amazon. Id., ¶ 145. Defendants Makita and METCo also instructed national wholesale

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cooperatives to have their members “cease to fill ‘third-party orders’” of their products. Id. In the

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1990s, METCo and Makita ended their relationships with other companies, such as Lowes and

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Menards, in relatively simultaneous fashion. Id., ¶¶ 44 & 128.

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The power tool market Orchard refers to is one that contains seven professional-grade power
tools. METCo, Makita and Black & Decker are the three leading suppliers of the full line of
professional power tools. Id. ¶¶ 15, 31 & 70.
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In the “spring or early summer of 2012” Home Deport “stated or implied” to each of the

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three major suppliers that it was conferring with the other suppliers about ceasing sales to Orchard

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and other companies. Id., ¶ 129. Defendants METCo and Makita acceded to Home Depot’s

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demand to supply products exclusively to Home Depot, despite having previously indicated they

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wished to continue and expand their sales to Orchard and other suppliers. Id., ¶¶ 18, 20. Both

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companies “cannot afford to cross” Home Depot, their principal trading partner.3 Id., ¶ 22.

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However, most professional customers will consider a hardware provider “deficient” by if it does

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not carry the products of either of these two companies. Id., ¶ 32. Therefore, Home Depot’s

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threats to remove suppliers’ products were hollow unless at least one supplier agreed to the
requested arrangement. Id., ¶ 48. Similarly, no supplier would voluntarily give up their

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relationship with Orchard if there was no true risk to its relationship with Home Depot. Therefore,

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Orchard alleges upon information and belief that Home Depot “made clear by express and/or

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implied statements to Makita and [METCo]” that it was conferring with the other company, and

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Defendants METCo and Makita understood from Home Depot that the other company would also

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abandon sales to Orchard and Amazon around the same time. Id., ¶ 43, 199. Two of Orchard’s

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officers were formerly executives at Home Depot, and they claim the company would never make

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explicit illegal threats, but rather “adroitly suggest or insinuate” to the suppliers that it was

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conferring with the company’s other suppliers. Id., ¶ 47.
Finally, Plaintiff alleges that Defendant Home Depot engaged in false advertising. Id.,

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¶¶ 244 & 257. “Several of Home Depot’s stores at various locations in Southern California”

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displayed promotions and advertisements suggesting that Orchard charges more than Home

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Deport for the same products. Id. ¶ 244. In reality, the products depicted were not actually the

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same, and differed in quality and manufacturer. Id. ¶¶ 246-249.

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B.

Procedural History
Plaintiff filed a complaint in December 2012, asserting causes of action for violation of the

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Black & Decker, the third major supplier of “professional” power tools, is not similarly
dependent on Home Depot for sales. Id. ¶ 49.
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Sherman Act, the Cartwright Act and the UCL, and for tortious interference with existing

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contracts and tortious interference with prospective economic relations. “Original Complaint,”

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ECF No. 1. The Court granted Defendants’ motion to dismiss the initial complaint in April 2013,

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and granted Plaintiff leave to file an amended complaint to allege additional facts to support the

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claims in the Original Complaint. Order Granting Motion to Dismiss without Prejudice (“Order”),

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ECF No. 42.
In May, Plaintiff filed first amended complaint re-asserting its initial claims, and the Court

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granted the parties’ stipulated request to allow Plaintiff leave to file a second amended complaint

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adding claims for false advertising. ECF Nos. 45 & 51. Defendants then filed a motion to dismiss
the SAC, which the Court now considers. Motion.

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C.

Jurisdiction
Plaintiff’s first two causes of action arise under federal law, Section 1 of the Sherman

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Antitrust Act. 15 U.S.C. § 1. The Court has exclusive jurisdiction over those claims pursuant to

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Section 4 of the Clayton Act. 15 U.S.C. § 15. Since the third through seventh causes of action

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arise from the same “nucleus of operative fact” as the Sherman Act claims, this Court can, and

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hereby does, exercise supplemental jurisdiction over those claims pursuant to 28 U.S.C. § 1367(a).
Plaintiff’s eighth cause of action arises under federal law, the Lanham Act, and therefore

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subject-matter jurisdiction is proper pursuant to 28 U.S.C. § 1331. Since the ninth cause of action

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arises from the same “nucleus of operative fact” as that claim, supplemental jurisdiction is also

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appropriate.

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D.

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Legal Standard
“Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable

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legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela

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Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). Dismissal is also proper where the

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complaint alleges facts that demonstrate that the complaint is barred as a matter of law. See

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Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990); Jablon v. Dean Witter &

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Co., 614 F.2d 677, 682 (9th Cir. 1980).

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For purposes of a motion to dismiss, “all allegations of material fact are taken as true and

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construed in the light most favorable to the nonmoving party.” Cahill v. Liberty Mut. Ins. Co., 80

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F.3d 336, 337-38 (9th Cir. 1996). However, “[w]hile a complaint attacked by a Rule 12(b)(6)

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motion to dismiss does not need detailed factual allegations, a Plaintiffs’ obligation to provide the

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‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a

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formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly,

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550 U.S. 544, 555 (2007). “To be entitled to the presumption of truth, allegations in a complaint

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or counterclaim may not simply recite the elements of a cause of action, but must contain

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sufficient allegations of underlying facts to give fair notice and to enable the opposing party to
defend itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011) cert. denied, 132 S.

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Northern District of California

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Ct. 2101 (U.S. 2012). “The factual allegations that are taken as true must plausibly suggest an

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entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the

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expense of discovery and continued litigation.” Id. To survive a motion to dismiss, a pleading

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must allege “enough fact to raise a reasonable expectation that discovery will reveal evidence” to

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support the allegations. Twombly, 550 U.S. at 556.
“Dismissal with prejudice and without leave to amend is not appropriate unless it is clear

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on de novo review that the complaint could not be saved by amendment.” Eminence Capital, LLC

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v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).

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III.

DISCUSSION

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A.

Sherman Act

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Section 1 of the Sherman Act prohibits “unreasonable restraints” of trade. State Oil Co. v.

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Khan, 522 U.S. 3, 10 (1997). “[T]he accepted standard for testing whether a practice restrains

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trade in violation of § 1” is the “rule of reason.” Leegin Creative Leather Products, Inc. v. PSKS,

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Inc., 551 U.S. 877, 885 (2007). As an alternative, a plaintiff can also allege that a restraint is one

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that has already been “deemed unlawful per se.” Khan, 522 U.S. at 10. Plaintiff pursues both

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theories in the SAC.

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1.

Per Se Violation: Unlawful Group Boycott

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An unlawful group boycott is one type of per se violation of Section 1. NYNEX Corp. v.

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Discon, Inc., 525 U.S. 128, 134-36 (1998). In order to establish an unlawful group boycott,

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Plaintiff must establish, inter alia, the existence of a horizontal arrangement between

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METCo and Makita to jointly participate in the boycott. Id., 525 U.S. at 135. “The crucial

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question” is whether METCo and Makita’s conduct “stemmed from independent decision or from

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an agreement, tacit or express.” Theatre Enterprises, Inc. v. Paramount Film Distrib. Corp., 346

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U.S. 537, 540 (1954); see also Discon, 525 U.S. at 136. It would not be a per se violation for

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Home Depot to seek and obtain an exclusive distributorship agreement with a provider. See id. at

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136-37; see also Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984) (“[a]
manufacturer of course generally has a right to deal, or refuse to deal, with whomever it likes, as

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long as it does so independently”).

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Plaintiff does not argue in the SAC or in its opposition to the motion to dismiss that Makita

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and METCo communicated directly with each other. Instead, in the parlance of antitrust law,

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Plaintiff argues that Defendant Home Depot formed a “hub” connecting two “spokes” --

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Milwaukee and METCo -- into a horizontal arrangement. Opposition of Orchard Supply

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Hardware LLC to Defendants’ Joint Motion to Dismiss its Complaint under Rule 12(b)(6) of the

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Federal Rules of Civil Procedure (“Opp.”), ECF No. 55, at 3:1-10. A hub-and-spoke relationship

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can establish a horizontal arrangement, but there still must be a “rim”: an at-least-tacit

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understanding between the horizontal competitors that each would participate in the boycott.

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This Court dismissed Plaintiff’s original complaint because it lacked factual allegations

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that Defendants Makita or METCo had an arrangement with each other, tacit or otherwise. Order,

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at 5:1-2. The initial complaint failed to plead facts sufficient to give rise to a plausible inference

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that Makita and METCo engaged in illegal coordination as opposed to “merely parallel conduct

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that could just as well be independent action.” Id., at 5:12-15 (quoting Twombly, 550 U.S. at

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557). A complaint alleging an unlawful group boycott need not allege specific communications

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amongst conspirators, and circumstantial evidence can establish an antitrust conspiracy. See id., at

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6:23-26. The Court noted, however, that “considerably more than the allegations in the

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Complaint” was required before an illegal agreement could be inferred, and cited multiple cases in

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which plaintiffs had successfully pled antitrust conspiracies by alleging certain “parallel plus”

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behavior that gave rise to such an inference. Id., at 7:1-8. These so called “plus factors” are

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sufficient to sustain a claim of a “hub and spoke” conspiracy if they place the parallel behavior in

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a context that raises the “suggestion of a preceding agreement, not merely parallel conduct that

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could just as well be independent action.” In re Text Messaging Antitrust Litigation, 630 F.3d

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622, 627 (7th Cir. 2010). A complaint of antirust conspiracy should allege “parallel behavior that

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would probably not result from chance, coincidence, independent responses to common stimuli, or

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mere interdependence unaided by an advance understanding among the parties”. Twombly, at

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556, n.4 (quoting 6 Areeda & Hovenkamp, Antitrust Law ¶ 1425, at 167–185 (2d ed. 2003)). A

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conspiracy is not inferable from an “obviously reasonable [response] to a common external

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stimulus or business problem.” 6 Areeda & Hovenkamp, Antitrust Law ¶ 1425 at 182 (3rd. ed.

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2010).

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In the SAC, Plaintiff alleges facts that it argues give rise to the inference of coordinated

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behavior between METCo and Makita. SAC, at ¶¶ 44-49. In its opposition, Orchard lists seven

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specific “plus factors”: 1) confirmation from Black & Decker that Home Depot approached other

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suppliers; 2) Makita and METCo’s past history of shutting off supplies to Home Depot’s rivals in

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lockstep; 3) Home Depot’s public announcement of its plan to lock up suppliers; 4) the fact that

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Makita and METCo’s conduct was contrary to their own interests; 5) Orchard officers’ inside

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knowledge of Home Depot’s strategy; 6) the fact that METCo and Makita operate in a product

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market dominated by three suppliers; and 7) Makita and METCo’s simultaneous implementation

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of identical complex arrangements. Opp., at 9:14-13:28.

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Most of these factors were alleged in the initial complaint and discussed in the last motion

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to dismiss. In particular, the Original Complaint emphasized the argument that Makita and

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METCo’s action was against their economic self-interest. The SAC contains no new facts

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demonstrating why this is so. While those two companies may have wanted to continue their

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relationships with Orchard, the complaint makes it clear that Makita and METCo are

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“extraordinary[ily] dependen[t] on continued good relations with Home Depot”. SAC, at ¶ 49.

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Orchard even acknowledges that the degree of dependency is so great that the suppliers “could not

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afford to reject [Home Depot’s] demands.” Id., ¶ 51. Either company stood to benefit significantly

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from becoming Home Depot’s sole supplier of professional power tools, if Home Depot went

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through on its threat to exclude non-conforming suppliers.
Orchard points out that Home Depot publicly announced its intention to lock up suppliers

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and then approached all three of its professional power tool suppliers to secure commitments to do

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so.4 Given this, and the fact that METCo and Makita were totally dependent on Home Depot,

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Orchard gives no sufficient explanation for why METCo and Makita’s decision to implement

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identical arrangements with their own distributors and partners is not simply a reflection of the

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suppliers’ response to the “common stimuli” of Home Depot’s demand. Nor does Orchard

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suggest why the past instances of METCo and Makita simultaneously ending relationships with

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other Home Depot competitors were not responses to common demands from Home Depot at that

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time.
The remaining “plus factors” likewise fail to create a plausible inference of coordinated

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behavior. First, Orchard’s “inside” knowledge of Home Depot’s strategy and course of business

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provides little support. Orchard does no more that allege that two employees, who last worked at

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Home Depot over a decade ago, “surmised” that Home Depot would have subtly communicated to

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METCo and Makita what the other suppliers were doing. Opp., at 6:1. Second, as the Court

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explained in its order dismissing the original complaint, the fact that the market for professional

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tools is dominated by three suppliers “does not indicate the two announcements probably would

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not have been independent responses to the common stimulus of Home Depot’s [demand].”

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Order, at 6:20-22.
The SAC’s allegations do not “nudge” the claim of coordinated behavior “across the line

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Notably, Orchard alleges that Black & Decker has come forward to confirm that it was
approached, threatened, and punished by Home Depot, but does not allege that Home Depot ever
implied to Black & Decker that it should end its relationship with Orchard because METCo and
Makita were going to do so as well.
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from conceivable to plausible.” Twombly, 550 U.S. at 570. The SAC does not allege facts

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sufficient to state a claim of a per se violation of section 1.
“Rule of Reason” Violation

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2.

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As an alternative to its claim of a per se violation, Plaintiff argues that the facts support a

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viable Section 1 claim under the rule of reason. Under the rule of reason, a court must determine

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whether a restraint on trade constitutes an “unreasonable restraint on competition . . . taking into

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account “specific information about the relevant business” and “the restraint’s history, nature, and

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effect.” Leegin, 551 U.S. at 885 (2007) (internal citations omitted). To establish a rule of reason

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violation a plaintiff must plead “(1) a contract, combination or conspiracy among two or more
persons or distinct business entities; (2) by which the persons or entities intended to harm or

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restrain trade or commerce among the several States, or with foreign nations; (3) which actually

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injures competition.” Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1197 (9th Cir. 2012) cert.

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denied, (U.S. 2012) 133 S.Ct. 573. Generally, a plaintiff must also allege sufficient facts to

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support its claim that the restraint in question harmed competition within a relevant geographic

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and product market. Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 1044 (9th Cir.

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2008). Defendants argue that Orchard has failed to meets its burden to pled facts sufficient to

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establish any of these elements.

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a.

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The Restraint of Trade

To the extent the complaint rests upon the allegation of a horizontal agreement between

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Defendants Makita and METCo, it is insufficient for the same reasons discussed above. But

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Plaintiff has also pled facts suggesting the existence of two vertical agreements (between Home

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Depot and METCO and between Home Depot and Milwaukee) that could be unreasonable

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restraints of trade under the rule of reason. SAC, ¶¶ 17 & 18.

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Defendants object that Plaintiff has not alleged this type of antitrust violation in the SAC,

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and that both of Plaintiff’s antitrust claims are predicated on the existence of a coordinated

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horizontal group boycott. Motion, at 10:20-11:1. Defendants base this assertion on the heading of

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the SAC’s second cause of action, which reads “Unlawful Group Boycott; Rule-of-Reason

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Violation and Quick Look Violation.” SAC, above ¶ 202. The SAC could certainly be clearer on

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this point, but in this and past motion practice Plaintiffs do not appear to have abandoned the

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argument that the vertical agreements themselves could constitute illegal restraints of trade. See

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Opp., at 18:8-12, 19:1-27; see also Transcript of Proceedings, ECF No. 44, at 23:8-22, 30:25-

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31:24. Were it otherwise, the two causes of action would be simply redundant. There would be

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no need to prove the various elements of a rule-of-reason violation if Plaintiffs had alleged

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sufficient facts to state a claim for a horizontal group boycott, since that arrangement is a per se

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Section 1 violation.
b.

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Injury to Competition

Within the properly defined relevant market, Plaintiff must show “an injury to

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competition, rather than just an injury to plaintiff’s business.” Sicor, Ltd. v. Cetus Corp., 51 F.3d

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848, 854 (9th Cir. 1995). “In order successfully to allege injury to competition . . . a claimant

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must, at a minimum, sketch the outline of the antitrust violation with allegations of supporting

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factual detail.” Les Shockley Racing, Inc. v. Nat’l Hot Rod Ass’n, 884 F.2d 504, 507-08 (9th Cir.

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1989).

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In its original complaint, Orchard alleged in a very general way that Home Depot would be

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able to charge higher prices and deprive consumers of choice as a result of its agreements, arguing

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that this was “the very kind of harm to competition that lies at the heart of a rule-of-reason

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offense.” Original Complaint, at ¶¶ 20 & 166. The Court held that these generic allegations were

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insufficient to plead a viable injury to competition, noting, inter alia, that there were no

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allegations that the agreement facilitated horizontal collusion or foreclosed competitors from

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entering into or competing in a market. Order, at 9:5-7 (citing Brantley, 675 F.3d 1192, 1202 (9th

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Cir. 2012) cert. denied, 133 S. Ct. 573 (U.S. 2012).

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In the SAC, however, Orchard has alleged that the agreements are foreclosing competitors

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from competing in a market. Orchard alleges in extensive detail the nature of the professional

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power tools market, stating that the market is comprised of three leading manufacturers, including

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METCo and Makita. SAC, at ¶¶ 30-31. Orchard also alleges that the majority of professional

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customers will view a store as “deficient” if it does not carry METCo or Makita tools, which will

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result in those customers ceasing to purchase any products at that store. Id., ¶ 32. Without the

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ability to sell METCo and Makita tools, Orchard will cease to remain a viable seller of

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professional power tools. Id., ¶¶ 156 & 191. By limiting the supply of METCo and Makita power

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tools, Defendants have foreclosed Orchard’s ability to compete in the professional power tools

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market.

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Defendants argue that Orchard has failed to allege harm to competition because it has

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alleged neither a reduction in the output or quality of goods, nor an increase in price caused by

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Orchard’s foreclosure from the market. Motion 16: 5-8. But these are not always necessary to

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Northern District of California

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prove harm to competition.
Increased prices are not always required to prove a rule-of-reason claim. In F.T.C. v.

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Indiana Federation of Dentists, 476 U.S. 447, 452 (1986), for example, the Federal Trade

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Commission found that a dental association rule which forbid members from submitting x-rays to

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insurance carriers in connection with insurance claims was an unreasonable restraint on trade.

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Dental insurance companies sought the x-rays in order to limit their payment to the least expensive

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adequate method of treatment, a tactic designed to keep dental treatment costs down as

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policyholders demanded. Id. at 449. The Supreme Court upheld the F.T.C.’s finding that this

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constituted harm to competition, despite the lack of direct impact on the price patients paid for

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dental insurance.

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A refusal to compete with respect to the package of services offered
to customers, no less than a refusal to compete with respect to the
price term of an agreement, impairs the ability of the market to
advance social welfare by ensuring the provision of desired goods
and services to consumers at a price approximating the marginal
cost of providing them. Absent some countervailing procompetitive
virtue . . . such an agreement limiting consumer choice by impeding
the ordinary give and take of the market place cannot be sustained
under the Rule of Reason.
Id. at 459 (internal citations omitted).
Orchard has alleged that it has developed a new “brick-and-mortar format for displaying
and selling hardware products” which it plans on implementing company-wide. SAC, ¶ 35(3).

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Plaintiffs allege that these new stores have enabled Orchard to compete successfully against Home

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Depot with respect to customer service, store layout and product display. These are all elements

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of the package of services offered to customers when they purchase a hardware product, and so

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Orchard’s allegation that Home Depot’s conduct has eliminated this unique offering from the

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marketplace pleads harm to competition. In a motion for summary judgment or at trial itself, the

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burden will fall on Orchard to prove that it actually offered these services in a unique way, and

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that comparable services would not remain in the marketplace. See McDaniel v. Appraisal

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Institute 117 F.3d 421, 423 (9th Cir. 1997). However, since at this stage the Court must take

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Orchard’s allegations as true, Plaintiff has alleged harm to competition.

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Part of the difficulty with this area of analysis is that “injury to competition” and “injury to

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Northern District of California

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the plaintiff’s business” are distinct but also significantly overlapping categories. That a business

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suffers harm does not mean competition has also been harmed. But if a company offers a unique

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product or service on the marketplace, it will often argue that the harm it suffers will affect the

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marketplace and cause harm to competition. The Ninth Circuit’s recent decision in Gorlick

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Distribution Centers, LLC v. Car Sound Exhaust System, Inc., --- F.3d ---, Case No. 10-36083,

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2013 WL 3766902 (9th Cir. July 19, 2013) sheds some light on this distinction.

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In Gorlick, plaintiff Gorlick alleged that car parts supplier Car Sound Exhaust System

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offered preferential terms to Allied, Gorlick’s rival in the aftermarket automotive parts market.

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Id., 2013 WL 3766902, at *1. Gorlick alleged that this act harmed competition because Gorlick

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and Allied together account for 70% of the aftermarket automotive exhaust products market in

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Oregon and Washington, and so any practice that harms Gorlick automatically gives Allied

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increased market power and hurts competition. Id. at *5. In rejecting this argument, the court

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noted that it might have held otherwise if it were only concerned with the market for Car Sound’s

24

specific products, rather than the wider market for aftermarket automotive exhaust products. Id.

25

Although Allied’s favorable terms might have foreclosed Gorlick from selling Car Sound

26

products, there were many other manufacturers who made similar products. “Absent an allegation

27

that Car Sound was the only, or even the dominant, brand of automotive exhaust parts, the

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12

1

supposed arrangement between Car Sound and Allied doesn't affect competition in the relevant

2

market.” Id.

3

The allegations that the Ninth Circuit noted were missing in Gorlick are the allegations

4

Orchard has made in its complaint. Orchard has alleged that METCo and Makita (combined) are

5

the dominant brands of professional power tools. It also has alleged that the market for

6

professional power tools is the sort of limited market that the automotive exhaust products market

7

is not. On the facts of the complaint, Home Depot’s agreements shut Orchard out of the

8

professional power tools market in the way that the Ninth Circuit noted that Allied was not shut

9

out of the aftermarket automotive exhaust products market.

10

c.

Aggregation of Harm to Competition

United States District Court
Northern District of California

11

Defendants also argue that Plaintiff has not alleged any facts showing the individual

12

anticompetitive effect of each separate vertical agreement. Defendants argue that the Court cannot

13

consider the aggregate effect of both agreements in evaluating the rule of reason claims.

14

There are situations in which it is appropriate for courts to consider the aggregate effect of

15

multiple agreements in order to evaluate the anticompetitive effect of a defendant’s behaviors.

16

See Twin City Sportservice, Inc. v. Charles O. Finley & Co., Inc., 676 F.2d 1291, 1302 (9th Cir.

17

1982); see also Rebel Oil Co., Inc. v. Atlantic Richfield Co. 51 F.3d 1421, 1437 (9th Cir. 1995)

18

(“[t]he aggregation of market shares of several rivals is justified if the rivals are alleged to have

19

conspired to monopolize”). In Finley, a plaintiff stadium concessionaire sued a Major League

20

Baseball team owner for breach of contract. Id. at 1296. The team counterclaimed, arguing that

21

the contract violated sections 1 and 2 of the Sherman Act. Id. The district court defined the

22

relevant market as all major sports arenas and several other major concession locations. Id. at

23

1297. In assessing the antitrust claim, the district court aggregated all of plaintiff’s many contracts

24

in that market to arrive at a total market share of about 24%, instead of considering only the 1%

25

share of the market represented in plaintiff’s specific contract with defendant. Id. at 1302.

26
27

The Ninth Circuit affirmed this approach. Id. The Ninth Circuit quoted the Supreme
Court as sanctioning aggregation in some contexts, noting that the Sherman Act is not designed

28
13

1

“merely to compensate those who have been directly injured but also to vindicate the important

2

public interest in free competition.” Id. at 1303 (quoting Fortner Enterprises, Inc. v. U.S. Steel

3

Corp., 394 U.S. 495, 501 (1969).
Aggregating the METCo-Home Depot agreement and the Makita-Home Depot agreement

4
5

is appropriate for the purpose of showing the Defendant Home Depot’s conduct was

6

anticompetitive;5 a defendant cannot do piecemeal what it is prohibited from doing all at once.

7

Under Defendants’ approach, a company could reach separate agreements with eleven different

8

suppliers, each of whom has a nine percent market share, allowing that company to lock up 99

9

percent of the market, yet still be outside the reach of the Sherman Act.6 To so hold would

10

circumvent the purpose and spirit of the Sherman Act.

United States District Court
Northern District of California

11

The Court agrees with Defendants, however, that it is inappropriate to aggregate the two

12

vertical agreements in evaluating whether METCo and Makita’s conduct was anti-competitive.

13

METCo and Makita each separately made an agreement with Home Depot. Orchard does not

14

contend that, taken individually, these contracts have an anticompetitive effect. “A manufacturer

15

of course generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does

16

so independently.” Monsanto, 465 U.S. at 761. If an individual supplier could be held liable for

17

the cumulative impact of all suppliers’ conduct, a company would have to investigate what other

18

businesses were doing before it acted in order to make sure its own conduct wasn’t

19
20
21
22
23
24
25
26
27
28

5

Defendants rely heavily on Dickson v. Microsoft Corp., 309 F.3d 193 (4th Cir. 2002), arguing
that it prohibits aggregation of bilateral agreements to establish a violation of section 1. In that
case the plaintiff “alleged discrete conspiracies between Microsoft and two original equipment
manufacturers (OEMs): Dell and Compaq.” Id. at 210. The Fourth Circuit held that the complaint
“did not allege a conspiracy among Microsoft and all OEMs; it alleged discrete conspiracies
between Microsoft and Compaq and Microsoft and Dell.” Id. Therefore, the court “could not
consider the cumulative harm of Microsoft’s agreements with all OEMs but instead was required
to consider – individually – Microsoft’s agreements with Compaq and Dell.” Id. Dickson is
distinguishable from this case, because Orchard does expressly allege that both of Defendant’s
agreements, considered in the aggregate, have anticompetitive effects.
6

The Defendants appear to tacitly acknowledge that their argument does nothing to salvage Home
Depot from liability. Defendants state that Ninth Circuit precedent can be read “to allow
aggregation of one defendant’s conduct for purpose of proving that defendant’s conduct was
anticompetitive.” Defendants’ Reply in Support of Motion to Dismiss Complaint (“Reply”), ECF
No. 56, at 10:10-14.
14

1

anticompetitive, a burden the antitrust law does not impose.
Because Orchard has not pled any facts about either agreement individually, it cannot meet

2
3

its burden to prove those agreements are anti-competitive. Therefore, the Rule of Reason claims

4

against METCo and Makita must be dismissed.
d.

5

Scope of the Geographic and Product Market

In order to plead a viable claim of a rule of reason violation, Plaintiff must allege sufficient

7

facts to support its claim that these agreements harmed competition with a relevant geographic and

8

product market. Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d at 1044. “[S]ince the

9

validity of the ‘relevant market’ is typically a factual element rather than a legal element, alleged

10

markets may survive scrutiny under Rule 12(b)(6) subject to factual testing by summary judgment

11
United States District Court
Northern District of California

6

or trial.” Id. at 1045. Plaintiff has adequately pled a relevant product market: the market for seven

12

professional grade power tools. SAC ¶¶ 151-163.
The Court determined that the definition of the relevant geographic market in the original

13
14

complaint was unacceptably vague and conclusory, and dismissed the rule of reason claim on that

15

basis. Order, at 8:14-16. In the SAC, Orchard has provided substantially more allegations about

16

the geographic markets. SAC, at ¶¶ 147-150. Orchard’s stores are organized into seven different

17

markets in California, and one in Oregon, with the total number of stores in each market also

18

provided. Id. ¶ 147. Defendants argue that Orchard has still not met its burden because it must

19

allege both the relevant market and that the defendants have market power within each market.

20

Plaintiff has alleged that Defendants have market power generally in the United States, and has

21

alleged sufficient facts from which the Court can plausibly infer that Home Depot has market

22

power within each of these smaller markets. This is sufficient under the liberal reading of the

23

complaint required under Rule 12(b)(6). See Cahill, 80 F.3d at 337.
For the reasons stated above, Orchard has adequately pled a claim against Home Depot for

24
25

a rule of reason violation of section 1 of the Sherman Act, but has not pled that claim against

26

Makita and METCo.

27

B.

Cartwright Act

28
15

The Cartwright Act, California’s antitrust law, was “modeled after the Sherman Act,” and

1
2

therefore the Court’s analysis “mirrors the analysis under federal law.” County of Tuolumne v.

3

Sonora Community Hosp., 236 F.3d 1148, 1160 (9th Cir. 2001). The parties agree that the

4

Plaintiff’s ability to bring a claim under the Cartwright act is dependent on its ability to bring a

5

viable Sherman Act Claim. Opp., at 24:9-11; Reply, at 13:12-14. The Court has determined that

6

Plaintiff has a viable rule of reason claim under section 1 of the Sherman Act with respect to

7

Home Depot, but not with respect to METCo or Makita. Accordingly, Plaintiff has stated

8

sufficient facts to establish a viable Cartwright Act claim against Home Depot, but not the other

9

two Defendants.

10

C.

California’s Unfair Competition Law (“UCL”) prohibits both “unlawful” and “unfair”

11
United States District Court
Northern District of California

Unfair Competition Law

12

business practices. Cal. Bus. & Prof. Code. §§ 17200 et seq. Plaintiff can only assert an

13

“unlawful” practice insofar as it can assert violations of other laws. See AT & T Mobility LLC v.

14

AU Optronics Corp., 707 F.3d 1106, 1107, n.1 (9th Cir. 2013). Moreover, acts permissible under

15

antitrust laws “cannot be deemed ‘unfair’ under the unfair competition law,” at least not where a

16

plaintiff alleges that the acts are unfair for the same reason it argues that they violate antitrust law.

17

Chavez v. Whirlpool Corp., 93 Cal. App. 4th 363, 375 (2001). In its opposition, Plaintiff does not

18

argue that the pled facts support a viable UCL claim except insofar as they support viable Sherman

19

and Cartwright Act violations. Opp., at 24:9-12.
Therefore, for the same reasons as explained above, the Complaint states sufficient facts to

20
21

establish a viable UCL claim against Home Depot, but not METCo or Makita.

22

D.

23

Tortious Interference with Existing Contracts
To state a viable claim for tortious interference with existing contracts, a plaintiff must

24

plead: (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this

25

contract; (3) defendant’s intentional acts to induce a breach of the contractual relationship;

26

(4) actual breach of the contractual relationship; and (5) resulting damage. Pacific Gas & Electric

27

Co. v. Bear Stearns & Co. 50 Cal.3d 1118, 1126 (1990). The Court dismissed Plaintiff’s claim for

28
16

1

tortious interference with existing contracts pled in the original complaint was dismissed because

2

Plaintiff failed to plead the existence of any enforceable contracts. Order, at 10:21-26. In the

3

SAC, Plaintiff has alleged that Home Depot interfered with Orchard’s Universal Terms and

4

Conditions contract with both METCo and Makita, which allegedly required each supplier to

5

continue selling parts and accessories to Orchard for a ten-year period after it stopped selling any

6

given power tool to the company.7
Defendant argues that Plaintiff has failed both to adequately plead this claim because the

7
8

SAC fails to specifically allege that Orchard performed under the terms of the contract, and fails to

9

specifically allege the contract breach. The Court disagrees, and believes that both of these
elements can be plausibly inferred from the facts in the SAC. However, Defendant also argues

11
United States District Court
Northern District of California

10

that Plaintiff has failed to allege that Home Depot knew of the relevant contracts, which is a

12

required element in the claim. Plaintiff does not dispute this argument in its opposition, and the

13

Court therefore finds that Plaintiff has not pled sufficient factual allegations to state a claim for

14

tortious interference with existing contracts.

15

E.

Tortious Interference with Prospective Economic Relations

16

In contrast to the tort of interference with existing contracts, a plaintiff need not show a

17

specific enforceable contract in order to assert a claim for tortious interference with prospective

18

economic relations. See Bed, Bath & Beyond, 52 Cal. App. 4th at 879. However, Plaintiff must

19

show that the defendant’s conduct is “wrongful apart from the interference itself.” Korea Supply

20

Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1153-54 (2003). Since the SAC hinges its

21

allegations of wrongful conduct on the claimed antitrust violations, this allegation is sufficient to

22

state a claim against Home Depot, but insufficient to state a claim against METCo and Makita, for

23

the same reasons discussed supra.

24

F.

Lanham Act
In the SAC, Plaintiff brings a new claim for false advertising in violation of the Lanham

25
26
27
28

7

The SAC also alleged a claim based on tortious interference with Orchard’s existing contractual
relationships with its customers, but Orchard has dropped this claim. Opp., at 24:13-16.
17

1

Act, 15 U.S.C. § 1125(a)(1)(B). A plaintiff must prove five elements to demonstrate a Lanham

2

Act claim: (1) a false statement of fact in a commercial advertisement about a product; (2) the

3

statement actually deceived substantial segment of its audience; (3) the deception is

4

material;(4) the defendant caused its false statement to enter interstate commerce; and (5) the

5

plaintiff has been or is likely to be injured as a result of the false statement. Skydive Arizona, Inc.

6

v. Quattrocchi, 673 F.3d 1105, 1110 (9th Cir. 2012).

7

Defendants argue that Plaintiff has not alleged that Defendant caused the false statement to
enter into interstate commerce because it alleges the advertisements were only in stores in

9

Southern California. But as defined in the Lanham Act, “commerce” refers to “all commerce

10

which may lawfully be regulated by Congress.” 15 U.S.C. § 1127. “It is well settled that so

11
United States District Court
Northern District of California

8

defined ‘commerce’ includes intrastate commerce which ‘affects’ interstate commerce.”

12

Thompson Tank & Mfg. Co., Inc. v. Thompson, 693 F.2d 991, 993 (9th Cir. 1982). Plaintiff has

13

alleged that Home Depot and Orchard compete with each other in multiple states, as well as

14

against ubiquitous online realtors such as Amazon. While the alleged false advertisements were

15

limited to one state, the Court can infer, reading the complaint liberally as it must, that the

16

advertisements affected interstate commerce.

17

Defendants also argue that Plaintiff has failed to plead the false advertising claim with

18

particularity, as Rule 9(b) requires for claims grounded in fraud. Defendant specifically faults the

19

SAC’s lack of information regarding the specific stores where these advertisements were

20

displayed and the dates they were displayed. The purpose of Rule 9(b) is to give defendants

21

adequate notice of the charges being brought so they can defend against them, and to deter the

22

filing of frivolous charges related to fraud. In re Stac Electronics Securities Litigation, 89 F.3d

23

1399, 1405 (9th Cir. 1996). The SAC includes a great deal of detail about the content of the

24

advertisements in questions, including the serial numbers and prices of some of the relevant

25

products. SAC, ¶ 246. Orchard has also alleged these advertisements were located in Southern

26

California stores. Orchard’s allegations are not an example of generic or vague claims, and it has

27

pled more than enough facts to put Home Depot on notice regarding the specific advertisements in

28
18

1

question, and to describe the who, what, when, where and how of the alleged fraud. Orchard has

2

met its burden under Rule 9(b).

3

G.

California False Advertising Law Claims

4

Plaintiffs also bring a new claim of false advertising under California’s false advertising

5

law, Cal. Bus. & Prof. Code. §§ 17500. To state such a claim “it is necessary only to show that

6

members of the public are likely to be deceived” by an advertisement. Kasky v. Nike, Inc., 27

7

Cal.4th 939, 951 (2002). Plaintiff has met this burden, and for the reasons discussed above, it has

8

satisfied the particularity requirement of Rule 9(b).

9

H.

Leave to Amend
The court does not grant Plaintiff leave to amend the SAC to re-assert the dismissed

11
United States District Court
Northern District of California

10

claims. “Leave need not be granted where the amendment of the complaint would cause the

12

opposing party undue prejudice, is sought in bad faith, constitutes an exercise in futility, or creates

13

undue delay.” Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989). The

14

fourth and fifth factors can be dispositive on their own. Sisseton-Wahpeton Sioux Tribe of Lake

15

Traverse Indian Reservation, N. Dakota & S. Dakota v. United States, 90 F.3d 351, 355-56 (9th

16

Cir. 1996). “The district court’s discretion to deny leave to amend is particularly broad where

17

plaintiff has previously amended the complaint.” Ascon, 866 F.2d at 1160.
Plaintiff had a full opportunity to allege facts sufficient to state a claim after receiving the

18
19

Court’s guidance following the first motion to dismiss, and a second motion it does not seem

20

likely that Plaintiff will be able to allege new facts that will meet its burden. At this point, the

21

Court concludes that it would be futile to permit further amendment.

22

V.

23

CONCLUSION
For the foregoing reasons, the Court TENTATIVELY GRANTS IN PART and DENIES

24

IN PART Defendants’ motion to dismiss. All claims against Defendants METCo and Makita are

25

TENTATIVELY DISMISSED. The first and sixth causes of action are TENTATIVELY

26

DISMISSED WITH PREJUDICE. The second, third, fourth, fifth, seventh, eighth and ninth

27

causes of action against Home Depot remain.

28
19