K-Flex USA, L.L.C. v. Armacell, LLC

Filing 23

ORDER denying 11 Motion to Dismiss for Failure to State a Claim. Signed by US District Judge Terrence W. Boyle on 10/24/2017. (Stouch, L.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:17-CV-279-BO
K-FLEX, INC.,
Plaintiff,
v.
ARMACELL, INC.,
Defendant.

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ORDER

This matter is before the Court on defendant's motion to dismiss plaintiff's claims
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure [DE 11}. The matter has been

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fully briefed and is ripe for ruling. For the reasons discussed below, the motion td dismiss is
denied.

BACKGROUND
Defendant Armacell and plaintiffK-Flex both manufacture types of foam pipe insulation.
Plaintiff exclusively manufactures elastomeric foam, which is derived from rubber. Defendant
manufactures both elastomeric foam and polyethylene foam, known as PE foam. While both
types are used for insulation, elastomeric foam, with its higher cost and higher temperature
resistance, is primarily a product in industrial settings. K-Flex worked with a distributor, Sunbelt
Inc., in the southeast for several years. Sunbelt began working with Armacell in early 2017, and
almost immediately thereafter terminated its business arrangement with K-Flex. K-Flex alleges
that termination was due to Armacell's coercion, which forms the basis for the_instant complaint.
I
K-Flex has alleged four separate claims against Armacell: violations of Sections 1 and 2 of the
Sherman Act, a violation of the Clayton Act, and a violation of North Carolina's Unfair and

Deceptive Trade Practices Act. This Court has subject matter jurisdiction on the basis of a
federal question over the federal law claims, and exercises supplemental jurisdiction over the
remaining state law claim under 28 U.S.C. §1367.

ANALYSIS
Defendant's motion to dismiss the claims is made under Rule 12(b)(6) of the Federal
Rules of Civil Procedure. A Rule 12(b)(6) motion tests the legal sufficiency of the complaint.
Papasan v. Allain, 478 U.S. 265, 283 (1986). When acting on a motion to dismiss under Rule
12(b)(6), "the court should accept as true all well-pleaded allegations and should view the
complaint in a light most favorable to the plaintiff." Mylan Labs., Inc. v. Matkari, 7 F.3d 1130,
1134 (4th Cir.1993). A complaint must allege enough facts to state a claim for reliefthat is
facially plausible. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). Facial plausibility
means that the facts pled "allow[] the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged," and mere recitals of the elements of a cause of action
supported by conclusory statements do not suffice. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
A complaint must be dismissed if the factual allegations do not nudge the plaintiffs claims
"across the line from conceivable to plausible." Twombly, 550 U.S. at 570.
However, the Court need not accept a complaint's "leg<ill conclusions, elements of a cause
of action, and bare assertions devoid of further factual enhancement." Nemet Chevrolet Ltd. v.
Consumeraffairs.com, Inc., 591F.3d250, 255 (4th Cir. 2009). Although complete and detailed
factual allegations are not required, "a plaintiffs obligation to provide the 'grounds' of his
'entitle[ment] to relief requires more than labels and conclusions." Twombly, 550 U.S. at 555
(citations omitted). "Threadbare recitals of the elements of a cause of action, supported by mere

conclusory statements, do not suffice." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing
Twombly, 550 U.S. at 555). Plaintiff has four claims based in the same conduct by the defendant.

I.

Sherman Act, §1

A violation of § 1 of the Sherman Act occurs when there is an "agreement in the form of a
contract, combination or conspiracy that imposes an unreasonable restraint on trade." Oksanen v.
Page Mem 'l Hosp., 945 F.2d 646, 702 (4th Cir. 1991); When the restraint is vertical, that is,
when the restraint is between two parties at different distribution levels, more is required for the
restraint to be unreasonable than if the restraint is at the same level . Vertical restraints are often
economically useful, so courts generally apply the "rule of reason" analysis to determine whether
vertical restraints are permissible. See Cont 'l Airlines, Inc. v. United Airlines, Inc., 277 F. 3d
499, 509 (4th Cir. 2002). To sustain a claim under the rule ofreason, a plaintiff must allege that
defendant's actions unreasonably restrained trade in a plausible market. Id. Plaintiff must also
allege a conspiracy or other agreement that would operate in restraint of trade. AM Needle, Inc.
v. Nat'! Football League, 560 U.S. 183, 190 (2010). Parallel conduct is insufficient. A plan is
required.
Therefore, the first question is whether plaintiff has alleged facts regarding a particular
market-both a product market and a geographic market. Second, the plaintiff must argue there
is a contract or conspiracy. Here, such an allegation must include facts that, taken in the light
most favorable to the plaintiff, would show that Armacell actually made agreements in order to
restrain trade. K-Flex has pied enough facts to sustain a claim upon which relief can be granted.
First, K-Flex has alleged both a product market and a geographic market that would
support its claims. Determining what product market is appropriate requires a "plenary"

examination, covering "the facts peculiar to the business," among other concerns. Cont'[ Airlines,
Inc. v. United Airlines, Inc., 277 F.3d 499, 509 (4th Cir. 2002) (internal quotation marks

omitted). Products that have "reasonable interchangeability for the purposes for which they are
produced" belong in the same market; therefore, it follows that products that are not
interchangeable are not in the same market. United States v. E. L du Pon.t de Nemours & Co.,
351 U.S. 377, 404 (1956). At this stage, K-Flex's market allegations are sufficient to go forward.
K-Flex has pled facts to show that there is a separate market for elastomeric foam insulation, as
opposed to PE foam or other kinds of insulation. Elastomeric foam is made from different
material, has different characteristics and price points, and is primarily used in different settings.
The fact that K-Flex does not manufacture PE foam also bolsters its claim.
Second, K-Flex' s allegations of a geographic market are plausible. The appropriate
geographic market is "the area within which the defendant's customers ... can practicably tum to
alternative supplies ifthe defendant were to raise its prices." E.L du Pont de Nemours & Co. v.
Kolon Indus., Inc., 637 F.3d 435, 441 (4th Cir. 2011). _The market can be the entire nation.
Brown Shoe Co. v. United States, 370 U.S. 294, 377 (1962). In support ofthis domestic market

definition, K-Flex has alleged facts to show that because this insulation is so expensive to
transport, it would only be made in the United States for United States consumption.
Additionally, K-Flex has argued that the coercion taking place in the southeast will have effects
throughout the domestic market.
K-Flex can also sustain a claim that there was an agreement. While a conclusory
allegation of conspiracy is not enough, K-Flex has alleged more than that. Plaintiff has claimed
that Armacell is working directly with Sunbelt and other distributors to exert control over the
marketplace, to the detriment of the free flow of trade. Plaintiff has claimed that its own

distribution agreement was terminated due to Armacell's pressure. The allegations that this
restraint on competition will harm competition and lead to increased prices state a claim upon
which relief could be granted.

II.

Sherman Act. §2

In order to violate Section 2 of the Sherman Act, a defendant must "monopolize, or
attempt to monopolize, or combine or conspire with any other person or persons, to monopolize
any part of the trade or commerce amount the several States." 15 U.S.C. § 2. Therefore, either an
actual monopoly or an attempt at monopoly would be caught by this section.
A. Monopoly

In an actual monopoly claim, there are two required factors: the possession of monopoly
power, and the willful acquisition or maintenance of that power. E.I du Pont de Nemours & Co.
v. Kolon Indus., Inc., 637 F.3d 435, 441 (4th Cir. 2011). The fortunate windfalls of good

business are insufficient. Actual monopoly power means predominance in a particular
geographic and product market. The Fourth Circuit has found predominance when 70% of the
market was controlled by one player, White Bag Co. v. Int'l Paper Co., 579 F.2d 1384, 1387 (4th
Cir.1974), and other circuits have gone lower. See Domed Stadium Hotel, Inc., v. Holiday Inns,
Inc., 732 F.2d 480, 489 (5th Cir. 1984) ("A defendant must have a market share of at least 50

percent before he can be guilty of monopolization.") As was discussed above, K-Flex has
successfully alleged a particular product-elastomeric foam insulation-in a particular area-the
United States. K-Flex has also alleged that Armacell has an outsize presence in that market, as it
makes 70% of all elastomeric foam insulation. These facts are enough to sustain a claim of actual
monopoly power.

Possession of monopoly power will not be found unlawful unless it is accompanied by an
element of anticompetitive conduct. This willful acquisition or maintenance shifts the activity
from being lucky to being culpable. Anticompetitive conduct is conduct designed to "foreclose
competition, gain a competitive advantage, or destroy a competitor." Eastman Kodak Co.

v.

Image Technical Services, Inc., 504 U.S. 451, 482-83 (1992). That is to say, a de facto existence
of a disproportionate market share is not itself alone enough to sustain a monopoly claim. Some
sort of "predatory" behavior is necessary. M & M Med Supplies & Serv., Inc. v. Pleasant Valley
Hosp., Inc., 981F.2d160, 166 (4th Cir. 1992).
Here, the anti-competitive conduct at issue is tying and exclusive dealing. Plaintiffs
tying allegations are sufficient to state a claim on this element. A tying arrangement is "an
agreement by a party to sell one product but only on the condition that the buyer also purchases a
different (or tied) product." It's My Party, Inc. v. Live Nation, Inc., 811 F. 3d.676, 685 (4th Cir.
2016). Tying has four elements, which are simply a separation of the above idea into
components: a tying and a tied product, actual coercion by seller to buyer, the ability to coerce,
based on economic power, anticompetitive effects, and some connection to interstate commerce.
See Georgia-Pac. Consumer Prod LP v. Von Drehle Corp., 645 F. Supp. 2d 532, 540 (E.D.N.C.
2009). Tying, when coercive, as opposed to efficient, is anticompetitive on its face. See It's My
Party, Inc., 811 F. 3d at 684. A single tying arrangement merits prohibition under the law when
it has substantial effects in commerce. Advance Bus. Sys. & Supply Co. v. SCM Corp., 415 F.2d
55, 63 (4th Cir. 1969).
K-Flex has alleged that Armacell, which has 90% of the market of P.E. foam, only agreed
to sell its P .E. foam to Sunbelt if Sunbelt also agreed to sell its elastomeric foam, thus tying the
two types of insulation together. K-Flex alleged that this was the result of coercive pressure by

Armacell. And K-Flex has alleged that this arrangement has substantial economic effects,
because Sunbelt and K-Flex had previously been doing 7 million dollars' worth of business.
These facts, taken in the light most beneficial to the plaintiff, support a claim for tying such that
a dismissal is not warranted. K-Flex's allegatiqn that Armacell has used its market power to
force distributors to carry its products is plausible.
An exclusive dealing arrangement, while not per se illegal, will violate antitrust laws if it
is "likely to foreclose the ·entry into a substantial part of the market of products that compete with
the products benefitting from" the arrangement. Chuck's Feed and Seed Co. v. Ralston Purina
Co., 810 F.2d 1289 (4th Cir. 1987). At this stage in the pleadings, the substantiality of the market
does not need to be pled with specificity. See E.1 du Pont de Nemours & Co. v. Kolon Indus.,
Inc., 637 F.3d 435, 452 n. 12 (4th Cir. 2011).
Here, K-Flex has alleged facts that sustain a claim of exclusive dealing such that its claim
should not be dismissed. It has alleged that Armacell has an exclusive-dealing arrangement with
the distributor, Sunbelt, that forecloses any opportunity for participation by any other insulation
manufacturer. Because of Sunbelt's status as a high-volume distributor in the southeast, K-Flex
has alleged enough facts to sustain claim.

B. Attempted Monopoly
An attempted monopoly is distinct from an actual monopoly claim only in the status of
the market control in question. In its attempted monopolization claim, K-Flex alleges the same
facts that sustain its actual monopolization claim. Therefore, a detailed exposition of them is not
needed. Because K-Flex's claim of an actual monopoly is not an appropriate candidate for
dismissal, neither is its claim for attempted monopoly.

III.

Clayton Act

The Clayton Act provides a remedy for exclusive-dealing claims. 15 U.S;C. §14. There
are three requisite elements: an arrangement, in a line of commerce and area of effective
competition, that forecloses competition in a substantial share of the relevant market. Tampa
Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961).
Plaintiff has stated a Clayton Act claim for substantially the same reasons as it has stated
Sherman Act claims. First, K-Flex has put forward enough facts to show there is a particular line
of commerce: elastomeric foam plumbing insulation. The commerce is taking place in a
particular area: the geographic U.S. Plaintiff has alleged a particular arrangement between
Armacell and Sunbelt in order to exclusively deal Armacell's elastomeric foam. Finally, this
exclusive dealing arrangement forecloses competition in a substantial share, because Armacell
makes 70% of the country's elastomeric foam, K-Flex is one of its only competitors, and the
distributor that is the basis of the arrangement does millions of dollars in business. These facts,
taken as true, suffice to sustain a claim for relief under the Clayton Act.

IV.

Unfair and Deceptive Trade Practices Act

Likewise, plaintiff K-Flex has alleged facts that suffice to state a claim upon which relief
could be granted under the North Carolina Unfair and Deceptive Trade Practices Act.
N.C.G.S.A. § 75-1.1.
The statute is coextensive with the Sherman Act, as "proof of conduct violative of the
Sherman Act is proof sufficient to establish a violation of the North Carolina Unfair Trade
Practices Act." ITCO Corp. v. Michelin Tire Corp., Commercial Div., 722 F. 2d 42, 48 (4th Cir.
1983). Because K-Flex has alleged facts sufficient to sustain a claim under both Section 1 and

Section 2 of the Sherman Act, it has also stated a claim undef the Act, and further inquiry into
the factual allegations discussed earlier is unnecessary.

CONCLUSION
For the foregoing reasons, Defendant's motion to dismiss [DE 11] is DENIED.

SO ORDERED, on this~ day of October, 2017.

T RRENCE W. BOYLE
UNITED STATES DISTRICT JUD