R.J. Reynolds Tobacco Co. v. Cigarettes Cheaper! (462 F.3d 690, 2006)

EASTERBROOK, Circuit Judge.

R.J. Reynolds sells cigarettes (Camel, Winston, Salem, and Doral are its principal brands) in both domestic and foreign commerce. For several years Cigarettes Cheaper!, which operates a chain of retail outlets, reimported Reynolds products for domestic sale. (We refer to the practice as “reimportation” even though some of the cigarettes in question were manufactured outside the United States by firms licensed to use the trademarks in their own countries.) That practice led to this litigation, which Reynolds commenced under the Lanham Act. GMB, one of Reynolds’s subsidiaries, owns the marks and is an additional party for that reason. To prevent needless repetition, for the rest of this opinion we treat Reynolds as the sole plaintiff.

Reynolds argued that the sale of gray market products violates the Lanham Act, 15 U.S.C. §§ 1051 to 1127, which protects trademarks used in interstate commerce. Cigarettes Cheaper! replied that the marks are genuine (after all, they were applied by Reynolds or under its license) and took the offensive with two antitrust counterclaims, one based on the Sherman Act and the other on the Robinson-Pat-man Act. 15 U.S.C. § 13. The Sherman Act theory is that Reynolds conspired with retail dealers, in violation of 15 U.S.C. §§ 1 and 2, to drive it out of business; the Robinson-Patman theory is that Reynolds charged different prices to different retail dealers and in particular refused to sell cigarettes to Cigarettes Cheaper! at its lowest level of discounts (which is, Cigarettes Cheaper! maintains, why it searched abroad for cigarettes to reimport).

The three claims took separate paths. The district court granted summary judgment for Reynolds on the Sherman Act claim after concluding that Reynolds lacks market power. The Robinson-Patman Act claim went to trial, which lasted five weeks. A jury returned a general verdict in favor of Reynolds. Finally the trademark claim was tried to a different jury, after the district judge rejected Cigarettes Cheaperl’s argument that the Lanham Act always permits the use in the United States of trademarks affixed by their proprietor. If the products designed for domestic and foreign markets are materially different, then sale of the reimported product under a mark that consumers associate with the domestic product could be confusing and hence unlawful, the district court ruled. The trial to determine whether the domestic and foreign cigarettes are materially different lasted two weeks. The jury concluded that they are different and awarded Reynolds approximately $4 million in damages. Having lost on all three claims, Cigarettes Cheaper! has appealed; it complains not only about the principal decisions but also about a large number of evidentiary and other procedural rulings that it says prevented the juries from approaching the issues correctly.

I

As its name implies, Cigarettes Cheaper! is a discounter. That makes it unpopular with other retailers, which don’t like competition — but, one would suppose, pleases manufacturers, whose sales increase as the cost of distribution falls. From a manufacturer’s perspective, the cost of retail distribution is the difference between the wholesale price it realizes and what the ultimate customer pays. As this cost of distribution drops, the manufacturer sells more units for the same wholesale price, raises the wholesale price to capture the gains, or does a little of each. A manufacturer can gain by increasing the gap between wholesale and resale price only if the retailer supplies services that are worth more than the increase in the cost of distribution. In the cigarette business, retailers furnish at least one important service: advertising. Cigarette manufacturers lack access to television and radio, billboards, many magazines, and some other normal promotional channels. That increases the importance of point-of-sale signs, placards, and other attention-getting devices. And manufacturers are willing to pay for these through selective wholesale discounts. The more a retailer promises to do in promoting a product, the lower the wholesale price.

Manufacturers also reduce wholesale prices in order to match (and sometimes exceed) price reductions by rivals. Reynolds perceives that it must meet or beat the price for Marlboro cigarettes, the market’s leading brand. Marlboro, produced by Philip Morris, accounts for about one-third of all cigarette sales in the United States; all of Reynolds’s brands combined, by contrast, account for only 25% of domestic sales. Cigarettes Cheaper! made life difficult for Reynolds and its retailers by charging particularly low prices for Marlboro cigarettes, having negotiated with Philip Morris a contract that afforded it very low wholesale prices in exchange for extensive signage and other promotional services. Reynolds contends that this was an “exclusive” contract that prevented Cigarettes Cheaper! from offering the same level of promotion to any other producer and says that this is why it was unwilling to give Cigarettes Cheaper! its lowest-price-for-highest-promotion package; Cigarettes Cheaper! denies that its deal with Philip Morris deserves the label “exclusive” but allows that it did require especially prominent signs and vigorous promotion of the Marlboro brand and afforded Philip Morris some weeks when other firms’ brands could not be promoted.

The district court concluded that Reynolds’s 25% share of the cigarette market is too small to create market power. That decision is both questionable and irrelevant. It is questionable as an empirical matter because the record (which on summary judgment must be construed favorably to Cigarettes Cheaper!) does not demonstrate that Reynolds lacks power to make significant price increases without substantial loss in sales. The cigarette market is concentrated (the Herfindahl-Hirschmann Index exceeds 3,000); new entry is difficult if not impossible; customers perceive quality differences among brands (so that a price increase for one brand does not immediately divert customers to rivals); Reynolds’s own discounting practices show that it regularly changes price substantially without creating dramatic swings in its sales. See generally William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L.Rev. 937 (1981); George J. Stigler & Robert A. Sherwin, The Extent of the Market, 28 J.L. & Econ. 555 (1985). The Supreme Court has found market power in circumstances more favorable to the defendant. See United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963). What’s more, the subject may be irrelevant if, as Cigarettes Cheaper! maintains, Reynolds has engineered (or serves as an agent of) a horizontal conspiracy among retail dealers, for then market power need not be shown. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224 n. 59, 60 S.Ct. 811, 84 L.Ed. 1129 (1940).

This does not lead to a remand for trial, however, for Cigarettes Cheaper! must surmount additional hurdles. It is doubtful that Cigarettes Cheaper! suffers antitrust injury: the discounts to rivals of which it complains are beneficial to consumers. See Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 110 S.Ct. 1884, 109 L.Ed.2d 333 (1990); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977). Because Reynolds has not argued this point, however (a passing citation to Atlantic Richfield is short of focused argument), and it does not affect subject-matter jurisdiction (for Cigarettes Cheaper! suffers injury in fact, even if not the sort of injury that the antitrust laws guard against), we bypass this subject in favor of the topics on which issue has been joined. We ask first whether Cigarettes Cheaper! has a good claim if Reynolds acted unilaterally, and next whether evidence supports Cigarettes Cheaperi’s argument that a horizontal conspiracy was formed.

Reynolds gave other retailers discounts that it denied to Cigarettes Cheaper!. That creates a claim under the Robinson-Patman Act, which we take up in Part II. So far as the Sherman Act is concerned, however, there’s nothing wrong with price discrimination. See, e.g., Schor v. Abbott Laboratories, 457 F.3d 608, 610-11 (7th Cir.2006); In re Brand Name Prescription Drugs Antitrust Litigation, 186 F.3d 781 (7th Cir.1999). The problem is not discrimination (exemplified by lower prices to favored customers) today, but monopoly and higher prices tomorrow if the pricing scheme knocks firms out of the market and prevents new entry. Antitrust also has a framework for assessing claims that low prices today will produce monopoly tomorrow: predatory pricing.

To make out a predatory-pricing claim, the plaintiff must establish not only that the defendant has sold products below cost but also that exit from the market has occurred or is imminent, enabling the aggressor to recoup by setting monopoly prices that injure consumers. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993); Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Yet Cigarettes Cheaper! does not contend that Reynolds sold to any dealer below any measure of cost (sparing us the need to determine which is the appropriate measure). Nor does it contend that it has been knocked out of the market or is in imminent danger of leaving. Cf. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993). In 2000 Cigarettes Cheaper! signed a retail contract with Reynolds and has been selling legitimate domestic cigarettes ever since, enjoying Reynolds’s discounts.

Not that any one firm’s departure from retail sales would enable Reynolds or its favored customers to recoup: There are so many cigarette retailers, and entry into retail sales is so easy, that the market approximates economists’ vision of perfect competition. To the extent Cigarettes Cheaper! invites us to rule in its favor without insisting that the requirements of a good predatory-pricing claim have been met, we are unwilling to oblige; price cutting is expensive enough to producers without adding antitrust risks. See Monahan’s Marine, Inc. v. Boston Whaler, Inc., 866 F.2d 525, 527-28 (1st Cir.1989) (Breyer, J,); see also Bruce Kobayashi, The Economics of Loyalty Discounts and Antitrust Law in the United States, 1 Comp. Policy Int. 115 (2005); Herbert Hovenkamp, The Law of Exclusionary Pricing, University of Iowa Legal Studies Research Paper 05-34 (Jan.2006).

Instead of proffering evidence about the likely economic effect of Reynolds’s selective discounts, Cigarettes Cheaper! wanted to regale a jury with evidence that its retail rivals (and perhaps Reynolds too) intended to deal it a fatal blow. One memo, for example, discusses ways to “shut down” and “kill” Cigarettes Cheaper! “on the beach” (though presumably without machine guns and tank traps). Cigarettes Cheaper! found plenty of such tidbits in discovery. Cigarettes Cheaper! sold Marlboros for less than many outlets sold Camels and Winstons; neither Reynolds nor its retail outlets were willing to take this lying down. They responded with discounts of their own and generated reams of paper expressing unhappiness about the need to do so.

Yet as we remark frequently in antitrust litigation, “cutthroat competition” is a term of praise rather than condemnation. Joseph Schumpeter called capitalism a “gale of creative destruction.” Capitalism, Socialism and Democracy 84 (3d ed.1950). Businesses need not love their rivals (or firms that compete with their customers); consumers gain when firms try to “kill” the competition and take as much business as they can. See, e.g., Israel Travel Advisory Service, Inc. v. Israel Identity Tours, Inc., 61 F.3d 1250, 1255-56 (7th Cir.1995); A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1403-04 (7th Cir.1989); Schachar v. American Academy of Ophthalmology, Inc., 870 F.2d 397, 399 (7th Cir.1989). The question is not whether the defendant has tried to knock out other businesses but whether the means it has employed to that end are likely to benefit or injure consumers. Cigarettes Cheaper! accused Reynolds of using a means — lower prices — that usually if not always brings benefits to consumers.

Organizing firms into a cartel, however, injures consumers, and Cigarettes Cheaper! maintains that Reynolds has organized the retail dealers in this way. Why it would do any such thing is a mystery. As we’ve observed already, producers gain when the costs of distribution are lowest; a retail cartel that charged a monopoly price for distribution services would hurt Reynolds as well as (if not more than) ultimate consumers, so it is a surprise to see Reynolds accused of facilitating its own injury. Members of a retail cartel might be able to compensate a producer that organizes and coordinates their group, but there is no sign of compensation: Cigarettes Cheaper! complains about discounts that Reynolds gives to other retailers, not about a hike in the wholesale price that might imply compensation. See Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 932-34 (7th Cir.2000); cf. Denny’s Marina, Inc. v. Renfro Productions, Inc., 8 F.3d 1217 (7th Cir.1993).

Concrete evidence that Reynolds has played the role of cat’s paw in a retail conspiracy would suffice even if it was hard to understand the motivation. Nothing to which Cigarettes Cheaper! has pointed in this voluminous record shows, however, that there is an agreement at the retail level. And it is evidence, not allegations, on which the appeal turns. Unlike Twombly v. Bell Atlantic Corp., 425 F.3d 99 (2d Cir.2005), cert. granted, — U.S. -, 126 S.Ct. 2965, — L.Ed.2d - (2006), in which the district court dismissed a complaint for lack of evidentiary detail about a potential conspiracy, this case proceeded through discovery and was decided on summary judgment; the complaint is no longer relevant.

At oral argument we asked Cigarettes Cheaper!’s counsel to highlight the best evidence for the proposition that Reynolds orchestrated a horizontal agreement. None of the evidence to which our attention was directed would allow a reasonable jury to infer that there was any horizontal agreement. Take, for example, a document on which Cigarettes Cheaper! harps in its brief. Someone at Vons Groceries prepared a memorandum showing that Vons is worried about losing business to Cigarettes Cheaper! and wants to “keep Cigarettes Cheaper! from their required carton volume” and “defeat [Cigarettes Cheaper!’s] format.” The memorandum discusses what Vons sees as weaknesses in Cigarettes Cheaper!’s business model and proposes to exploit those weaknesses to achieve what the author in a flight of fancy calls “a degree of pricing invincibility”. The memo continues: “Once results are achieved Vons/Pavilions slowly over time will reduce VonsClub discounts back to normal Vons/Pavilions retail pricing”. The document tells us that “RJR will underwrite $3.80 per carton and 20 cents per pack for these brands as long as Vons maintains a $1.00 advantage over Marlboro and a 20 cent advantage over Marlboro packs.” In other words, Reynolds reduced its price so that Vons could sell RJR-brand cigarettes .for $1.00 a carton (or 20