On February 24, 2005, the U.S. Court of Appeals for the Third Circuit issued a significant antitrust decision in United States v. Dentsply International, Inc. that has important implications for firms with large market shares. The Third Circuit reversed a district court decision and held that an exclusivity policy imposed by Dentsply on its dealers of artificial teeth, which was terminable at will, violated Section 2 of the Sherman Act and constituted unlawful monopolization. This is the second major decision the Third Circuit has recently issued with respect to unlawful monopolization, following its controversial decision in LePage’s, Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc) (finding that a dominant firm’s use of above-cost bundled rebates to the detriment of a rival manufacturer constituted unlawful monopolization), cert. denied, 124 S. Ct. 2932 (2004).
Dentsply is the largest manufacturer of prefabricated artificial teeth in the United States, with a 75-80 percent share of the relevant market. Dentsply sells artificial teeth to dental products dealers, who in turn sell them to dental laboratories that prepare devices for sale to dentists. While Dentsply sells exclusively through dealers, certain competing manufacturers sell either through dealers and/or directly to dental laboratories. Since 1993, Dentsply has operated under a policy that essentially precludes its dealers from carrying competing tooth product lines. This policy was not expressed in a formal contract with dealers, and the dealers’ supply relationship with Dentsply was terminable at will.
The Department of Justice Antitrust Division (the Government) sued Dentsply in 1999, challenging the company’s policy of terminating the sale of its products to dealers that carried competing lines. The Government alleged that Dentsply acted unlawfully to maintain a monopoly in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, entered into illegal restrictive dealing agreements prohibited by Section 3 of the Clayton Act, 15 U.S.C. § 14 and used unlawful agreements in restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. After a five-week bench trial, the district court denied the injunctive relief sought by the Government and entered judgment for Dentsply. The district court held that although Dentsply’s distribution policy was designed expressly to exclude its rivals from access to dealers, it did not foreclose competition because other dealers were available, direct sales to laboratories were a viable method of doing business and Dentsply’s dealers were free to leave the network at any time.
A three-judge panel of the Third Circuit unanimously reversed and remanded, directing the district court to grant the injunctive relief requested by the Government. The court held that a monopolist violates Section 2 when it prevents rivals from distributing through established dealers, even if its rivals are not entirely excluded from the market. In evaluating Dentsply’s conduct, the court relied heavily on testimony of two former Dentsply managers who testified that the sole reason for the exclusivity provisions was to exclude competition and maintain its share of the relevant market. The court also reviewed efforts by Dentsply to “pressure” dealers to carry only Dentsply products. Notwithstanding the fact that Dentsply’s dealers could terminate their relationship at any time, the court found that Dentsply’s large market share gave dealers a “strong economic incentive” to continue carrying Dentsply’s teeth. The Third Circuit drew frequent parallels between Dentsply’s conduct and that of defendant 3M in LePage’s, noting that in both instances a dominant firm had excluded competitors from a “narrow” but “high volume” distribution channel.
The ruling in Dentsply is significant because it represents another judicial opinion that a monopolist will be held to a more stringent standard when evaluating its conduct under Section 2 of the Sherman Act. In Dentsply, the Third Circuit held that a monopolist’s conduct may violate Section 2 notwithstanding the fact that the same conduct would not be found to violate Section 1 of the Sherman Act or Section 3 of the Clayton Act. Because it was a monopolist, Dentsply’s imposition of an exclusivity policy upon its dealers was a sufficient predicate for Sherman Act Section 2 liability notwithstanding the fact that the relationship was essentially terminable at will – a circumstance that will normally preclude a finding of liability under Sherman Act Section 1 or Clayton Act Section 3.
In light of Dentsply, firms with large market shares, particularly those subject to the jurisdiction of courts in the Third Circuit, should expect more stringent judicial review of conduct under Section 2 of the Sherman Act that might otherwise appear to pass antitrust muster. Following LePage’s, leading firms are in the process of examining their pricing practices with an eye towards possible “bundling” issues. Dentsply suggests that exclusive dealing arrangements – even if terminable at will – should be added to the antitrust audit list.