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In re Wholesale Grocery Products Antitrust Litigation

United States District Court, D. Minnesota

October 24, 2017

In re Wholesale Grocery Products Antitrust Litigation This Relates to All Actions

          W. Joseph Bruckner, Esq., and Elizabeth R. Odette, Esq., Lockridge Grindal Nauen PLLP, Minneapolis, MN; Matthew J. Henken, Esq., and Richard B. Drubel, Esq., Boies, Schiller & Flexner LLP, Hanover, NH; and Daniel A. Kotchen, Esq., Kotchen & Low LLP, Washington, DC, on behalf of the Midwest Plaintiffs.

          David J. Lender, Esq., Eric Shaun Hochstadt, Esq., and Luna Ngan Barrington, Esq., Weil Gotshal & Manges LLP, New York, NY; and Todd A. Wind, Esq., Fredrikson & Byron, PA, Minneapolis, MN, on behalf of Defendant C&S Wholesale Grocers, Inc.

          Stephen P. Safranski, Esq., Robins Kaplan LLP, Minneapolis, MN, on behalf of Defendant SuperValu, Inc.

          MEMORANDUM OPINION AND ORDER

          ANN D. MONTGOMERY U.S. DISTRICT JUDGE.

         I. INTRODUCTION

         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].[1] The Midwest Plaintiffs oppose both Motions. For the reasons set forth below, the Motion to Exclude Expert Testimony is granted in part and denied in part, and the Motion for Summary Judgment is denied.

         II. RELEVANT BACKGROUND[2]

         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. See Second Consol. Am. Class Action Compl. [Docket No. 99] (“Second Am. Compl.”) ¶ 1. The Plaintiff retail grocery stores purchased wholesale grocery products and related services directly from Defendants. Id. ¶¶ 5-7, 9-10. Plaintiffs allege that in 2003, Defendants conspired to allocate customers and territories through an Asset Exchange Agreement (“AEA”), and that Defendants used the allocations to charge retailer grocers supra-competitive prices, in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. See id. ¶¶ 34-44, 77-83. Plaintiffs assert their claims as a class action and are suing for damages under Section 4 of the Clayton Act, 15 U.S.C. § 15. Id. ¶¶ 67-75, 83.

         A. Wholesale Grocery Industry

         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; In re Wholesale Grocery Prods. Antitrust Litig., 752 F.3d 728, 729 (8th Cir. 2014), cert. denied 135 S.Ct. 2805 (2015). The large volume purchases by full-line wholesalers result in cost and logistics benefits that are passed from the wholesaler to the retailer in the form of lower prices. Leitzinger Class Report ¶ 11. The Plaintiff grocers require access to a full-line wholesaler to maintain their competitiveness because full-line wholesalers generate economies of scale and also carry the full line of products that Plaintiffs need to sell to their customers. Id. ¶ 46.

         B. New England and Midwest Markets

         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. Wholesale Grocery, 752 F.3d at 729. C&S did not compete with SuperValu in the Midwest, where SuperValu's main competitor was Fleming Companies (“Fleming”). Id. at 729-30; Leitzinger Class Report ¶ 17.

         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; Wholesale Grocery, 752 F.3d at 730.

         C. Asset Exchange Agreement

         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. Wholesale Grocery, 752 F.3d at 730. The AEA included reciprocal non-compete provisions. Id. Each Defendant agreed not to supply former customers served from a distribution center exchanged in the agreement for two years. Id. Each Defendant also agreed not to solicit those customers for a period of five years. Id.

         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. Id. ¶¶ 39-40.

         D. SuperValu's ABS Pricing

         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. See In re Wholesale Grocery Prods. Antitrust Litig., No. 09-MD-2090, 2012 WL 3031085, *3 (D. Minn. July 25, 2012) [Docket No. 352]. The ABS pricing system sells products to retail grocers at each product's actual average cost to SuperValu plus two types of fees-operating fees and service fees. Id.

         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. Wholesale Grocery, 2012 WL 3031085, at *3. Service fees are fixed fees that apply when orders with sufficient volume requirements are placed far in advance. Expert Rebuttal Report Jeffrey J. Leitzinger, Ph. D. [Docket No. 637] (“Leitzinger Class Rebuttal”)[3] ¶ 14, n.16. Service fees apply in approximately 15% of ABS sales. Wholesale Grocery, 2012 WL 3031085, at *3.

         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.

         E. Class Certification History

         1. Certification of Two Broad Midwest and New England Classes Denied

         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”).[4] Plaintiff D&G Inc. (“D&G”) was the class representative of the Midwest Class, and Plaintiff DeLuca's Corporation (“DeLuca's”) was the class representative of the New England Class. See Pls.' Mot. Class Certification [Docket No. 202] at 1-3.

         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. See Wholesale Grocery, 2012 WL 3031085, at *9-17. The Court found that prices charged to retail grocer customers in the New England Class are individually negotiated and that upcharges vary from customer to customer depending on the size and frequency of a customer's orders, local market conditions, the distance from a customer's store to a C&S distribution center (“DC”), and individually-negotiated price concessions. Id. at *2. The Court rejected Plaintiffs' argument that classwide impact could be shown through three methods-the contrary hypothesis test, the variance test, and list prices-because none of the methods could establish that upcharges had uniformly increased for all class members. Id. at *10-14.

         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. Id. at *16. Nevertheless, the Midwest Class could not prove impact by common evidence because each of SuperValu's DCs across the Midwest inserted different values into the ABS formula, requiring an analysis of each DC's fees and competitive conditions. Id.

         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. See Letter, Aug. 31, 2012 [Docket No. 362].[5] D&G argued that the Champaign DC-based Class would “entirely avoid[] the problems created by different ABS formulas for different distribution centers.” Id. at 1.

         On January 11, 2013, the Court granted summary judgment to Defendants. In re Wholesale Grocery Prods. Antitrust Litig., No. 09-MD-2090, 2013 WL 140285 (D. Minn. Jan. 11, 2013) [Docket No. 427]. Based on the grant of summary judgment to Defendants, the Court denied as moot D&G's request for renewed class certification of the narrower Midwest Class. Id. at *15. D&G appealed both the summary judgment ruling and the denial of certification of the Midwest Class. Notice of Appeal [Docket No. 429].[6]

         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. Wholesale Grocery, 752 F.3d at 733-36. Additionally, the Eighth Circuit vacated the denial of D&G's request for leave to pursue certification of a narrower class of SuperValu customers in the Midwest who were supplied by the Champaign, Illinois DC and charged using the ABS pricing formula. Id. at 736. The Eighth Circuit stated that “the evidence suggests the ABS fee inputs would be standardized for this narrow class, ” and that this Court should “consider, in light of our holding that the wholesalers are not entitled to summary judgment, whether to certify this class.” Id.

         2. Five Classes of Midwest Plaintiffs Certified

         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].[7]

         a. Class-Wide Impact: Dr. Leitzinger's Margin Analysis

         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: first, the Defendants' conspiracy eliminated competition, enabling SuperValu to achieve supra-competitive net margins; second, the supra-competitive margins strongly support the conclusion that SuperValu charged supra-competitive ABS prices; and third, every class member paid supra-competitive ABS prices because every member (i) made purchases in all four ABS product categories and (ii) was charged according to the same ABS formula for the vast majority of its purchases.

         In step one of the argument, the Midwest Plaintiffs asserted that after Defendants' alleged agreement not to compete, SuperValu enjoyed net margins at its Midwest Class DCs that were more than three times higher than they would have been but for Defendants' alleged conspiracy.

         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%.

Net Margins: Class Period

Net Margins: Class Period

Net Margins: New England Pre-AEA

Net Margin Difference (Overcharge Amount)

Champaign, IL

5.3%

1.7%

3.5%

Green Bay, WI

5.8%

1.7%

4.1%

Hopkins, MN

5.3%

1.7%

3.6%

Pleasant Prairie, WI

5.6%

1.7%

3.9%

         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 ...


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