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FRANCIS MATHIAS, WEIMAR NEWS DELIVERY v. DAILY NEWS

July 23, 2001

FRANCIS MATHIAS, WEIMAR NEWS DELIVERY, INC., LUCIAN DEBONIS, DEBONIS NEWS HOME DELIVERY, INC. TOM WINTER, TOMCO NEWSPAPER DELIVERY, CHRISTINE DESTEFANO, CHRISCO NEWS HOME DELIVERY SERVICE, JOSEPH FAY, CHRISTOPHER CIRRI, JOSEPH PARRINELLO, C&F NEWSPAPER HOME DELIVERY SERVICE, INC., CHRISTOS MATIATOS, DAWN NEWS, INC., PAUL D'AGOSTINO, C.C. SWEN, INC., NICK CALABRESE, C&G NEWS, INC., DANIEL SCALERO, D&L NEWS, MICHAEL D'ESPOSITO, D'ESPOSITO DAILY NEWS, MARIA GAGOLEWSKI, M.N.S. NEWS, NICK DESTANIS, DN HOME DELIVERY, KATHERINE GEISSLER, G&G NEWS, INC., PASQUALE CAMPINELLI, CAMRIS, INC., DOUGLAS A. BARR, PRINCEWOOD HOME DELIVERY, INC., JOSEPH LIOCE, PLAINTIFFS,
v.
DAILY NEWS, L.P., JOHN DOE AND JANE DOE #1-50, DEFENDANTS.



The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.

  DECISION AND ORDER

I. INTRODUCTION

The Carriers allege five causes of action under federal law in this Court, numbered and labeled as follows:

• First: "Indirect Price Discrimination," in violation of § 2(a) of the Clayton Act, also referred to as the "primary-line price discrimination claim."
• Second: "Price Discrimination — Treble Damages and Injunction," pursuant to §§ 2(a), (d) and (e)*fn4 of the Clayton Act, also referred to as the "secondary-line price discrimination claim."
• Third: "Conspiracy in restraint of trade," in violation of § 1 of the Sherman Act.
• Fourth: "Further Conspiracy in restraint of Trade," in violation of § 2 of the Sherman Act, or the "monopolization claims."
• Twelfth: "Vertical restraint of trade, monopolization, and price-fixing," which the Court refers to as the "maximum resale price maintenance claim."*fn5

The Daily News now moves under Rule 12(b)(6) of the Federal Rules of Civil Procedure (hereinafter the "Daily News's Motion") for dismissal of all federal claims for failure to state a claim for relief and, consequently, for dismissal of the remaining state law claims on the ground that the exercise of supplemental jurisdiction would be improper. Alternatively, the Daily News moves for a stay of all proceedings pending disposition of the original action in state court. In addition, a group of purported individual defendants move pursuant to Rules 12(b)(4) and (b)(5) of the Federal Rules of Civil Procedure to dismiss the complaint because of purported deficiencies in service of process (hereinafter the "Individual Defendants' Motion").

For the reasons set forth below, the Daily News's Motion is granted as to the Carriers' First, Third, Fourth and Twelfth causes of action. The only viable federal cause of action that remains against the Daily News is the Carriers' Second claim alleging secondary-line price discrimination. Because the Court sustains this claim, dismissal of the state law claims is unwarranted at this time. Furthermore, the Individual Defendants' Motion is granted. The Carriers are granted leave to file an amended complaint within 20 days of the date of this Decision and Order.

II. FACTS AND PROCEDURAL HISTORY

The Carriers are residents of the State of New York and are engaged in the business of newspaper home delivery in Brooklyn and Staten Island. (Compl. ¶¶ 4-36). The Daily News publishes, markets and distributes the Daily News (the "Newspaper") and has its principal place of business in the State of New York. (Compl. ¶¶ 37, 39). Defendants John Doe Nos. 1-50 and Jane Doe Nos. 1-50 (the "Alternate Carriers") are engaged in the business of home delivery of the Newspaper, either as employees, agents, or independent carriers. (Compl. ¶ 38).

Since the 1960's, the Daily News has distributed the Newspaper through a number of independent contractors who signed "Carrier Agreements," granting the contractors primary responsibility for home delivery of the Newspaper in specifically defined territories. (Compl. ¶¶ 40-42). All of the Carriers have signed such Carrier Agreements with the Daily News. (Compl. ¶ 44). Pursuant to these agreements, the Carriers are solely responsible for billing (including setting the price) and collecting remittance from their home delivery customers. (Compl. ¶ 46(L)). The Carrier Agreements provide that nothing in the contracts shall "restrict the right of either party to buy from or sell to any person anywhere other copies of the News . . . ." Defendants' Notice of Motion to Dismiss, dated May 31, 2000, Ex. C, section III.

Since approximately 1995, the Daily News has implemented a "pay-by-mail" program, under which it sells the Newspaper directly to customers. (Compl. ¶ 46(M)). Under this program, the Daily News mails bills directly to customers and directs these customers to mail payments directly back to it. (Compl. ¶ 46(P)). The Daily News then pays either the Carriers or the Alternate Carriers a fee to deliver a copy of the Newspaper to each customer. (Compl. ¶¶ 46(O) & (P)). Although not clearly stated in the complaint, the Carriers suggest that there is at least one other possible mode of distribution for pay-by-mail, that is, sales of the Newspaper to other independent delivery firms which, in turn, resell directly to the customer. (Compl. ¶ 46(B)). The Carriers contend that this "pay-by-mail" program places the Daily News in direct competition with the Carriers for the sale of the Newspaper to home delivery customers. (Compl. ¶¶ 51, 52).

According to the Carriers, after entering the market for direct sales to customers, the Daily News adopted new business practices designed to hamper the Carriers' ability to compete. These practices include (1) changing the methods and schedules for delivery of the Newspaper to independent carriers; (2) instituting a computer-based information tracking system, also known as "DISCUS," without properly training the Carriers and failing to grant them access to that vital information; (3) adopting a centralized customer complaint system which impeded the Carriers' ability to respond to their customers' service concerns; and (4) improperly retaining gratuities earmarked for the Carriers' delivery personnel. (Compl. ¶¶ 46(E)-(P)).

The Carriers also accuse the Daily News of serious violations of the antitrust laws. They allege that the Daily News has sold the Newspaper to the Alternate Carriers and other home delivery customers at below-cost prices or at prices not yielding a reasonable return. (Compl. ¶¶ 46(A) & (B)). Further, they assert that the Daily News has guaranteed below-cost pricing to favored carriers for long periods of time, sometimes more than a year, but that the Daily News has never offered these preferential prices to the Carriers. (Compl. ¶ 46(B)).

The Carriers also assert that the Daily News conspired with others to systematically exclude them from the home delivery business and that the Carriers were forced to buy the Newspaper from the Daily News at "unreasonably high prices." (Compl. ¶¶ 71, 72). Finally, the Carriers allege that the Daily News fixed and maintained the prices at which the Carriers could sell the Newspaper to customers and that they were injured because they were prevented from charging more than the Daily News's price. (Compl. ¶¶ 164(D), 166-67).

The Daily News's Motion asserts that none of the five federal causes of action sufficiently pleads violations of the antitrust laws. The Individual Defendants also move to dismiss the complaint for improper service of process.

III. STANDARD OF REVIEW UNDER RULE 12(b)(6)

In considering a motion to dismiss under Rule 12(b)(6), the Court is obliged to accept the well-pleaded assertions of fact in the complaint as true and to draw all reasonable inferences and resolve doubts in favor of the non-moving party. See Kaluczky v. City of White Plains, 57 F.3d 202, 206 (2d Cir. 1995) (citations omitted); Global Discount Travel, L.L.C. v. Trans World Airlines, Inc., 960 F. Supp. 701, 704 (S.D.N.Y. 1997) (citations omitted). The focus of the Court's inquiry is not whether plaintiffs will ultimately prevail, but whether the claimants are entitled to an opportunity to offer evidence in support of their claims. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds, Davis v. Scherer, 468 U.S. 183 (1984). Therefore, a motion to dismiss must be denied "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

Under the Federal Rules of Civil Procedure, the standard for assessing the sufficiency of a complaint in an antitrust action is the same as in any other case: "a short, plain statement of a claim for relief which gives notice to the opposing party is all that is necessary." See George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 554 (2d Cir. 1977); Global Discount Travel, 960 F. Supp. at 704; Fed. R. Civ. P. 8(a). Nevertheless, courts have warned that "conclusory allegations which merely recite the litany of antitrust will not suffice. This court retains the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed." John's Insulation, Inc. v. Siska Constr. Co., 774 F. Supp. 156, 163 (S.D.N.Y. 1991) (citations omitted).

IV. PRIMARY-LINE PRICE DISCRIMINATION

In their First cause of action, the Carriers assert a primary-line price discrimination claim pursuant to § 2(a) of the Clayton Act, as amended by the Robinson-Patman Act. Primary-line price discrimination occurs when a seller's discriminatory pricing injures the seller's direct competitors. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 220, reh'g denied, 509 U.S. 940 (1993); George Haug Co., Inc. v. Rolls Royce Motor Cars, Inc., 148 F.3d 136, 141 n. 2 (2d Cir. 1998). Thus, a primary-line Robinson-Patman Act claim contemplates price discrimination by the defendant among its customers in an attempt to harm those competing with the defendant for those sales. See, e.g., Intimate Bookshop, Inc. v. Barnes & Noble, Inc., 88 F. Supp.2d 133, 137 n. 1 (S.D.N.Y. 2000); Coastal Fuels of Puerto Rico, Inc. v. Caribbean Petroleum Corp., 79 F.3d 182, 188 (1st Cir.), cert. denied, 519 U.S. 927 (1996); Julian O. Von Kalinowski, et al., Antitrust Law and Trade Regulation: Desk Edition § 5.01[2], at 5-7 to 5-8 (2000) (hereinafter "Von Kalinowski"). The Carriers contend that they compete directly with the Daily News for sale of the Newspaper to customers as a result of the Daily News's institution of a competing distribution system that operates in the Carriers' previously assigned marketing territories. (Compl. ¶ 51).

To succeed on a claim of primary-line price discrimination, plaintiffs must prove that: "(1) the alleged price discrimination meets the `in commerce' requirement, i.e., that `either of any' of the purchases involved are in commerce; (2) there has been discrimination in price between different purchasers of products of like grade and quality; and (3) the effect of the discrimination may be substantially to lessen competition or tend to create a monopoly." See Cardinal Indus., Inc. v. Pressman Toy Corp., No. 96 Civ. 4590, 1996 WL 724730, at *3 (S.D.N.Y. Dec. 17, 1996) (quotations omitted); see also John B. Hull, Inc. v. Waterbury Petroleum Prods., 588 F.2d 24, 27 (2d Cir. 1978), cert. denied, 440 U.S. 960 (1979).

Although their allegations with respect to the first two elements are sparse, the Carriers have pleaded the bare minimum necessary to satisfy those elements. The Carriers allege that

[d]efendants have sold the News, wholesale, at prices below cost, or at margins of profit not yielding a reasonable return on gross sales, with the intent and effect of restraining, suppressing, destroying, and eliminating the competition of Plaintiffs and other independent dealers. . . . In some instances, Defendant Publisher has guaranteed below cost prices to the Defendants/Alternate Carriers and other home delivery customers for periods as long as one year or more, but has never offered below cost pricing to the Plaintiffs.

(Compl. ¶ 46(B) (emphasis added)). The Carriers also allege that, "[t]he Publisher is further engaged in selling and distributing its publication in interstate commerce to readers or other purchasers throughout the United States." (Compl. ¶ 39). Although the Daily News disputes each of these points,*fn6 the Carriers have provided a short, plain statement of these elements sufficient to give notice to the Daily News of these aspects of a claim for relief.

The insufficiency of the Carriers' pleading becomes apparent in connection with the third element, often referred to as the competitive injury requirement. This element of primary-line price discrimination claims has been the source of confusion and the subject of extensive scholarly debate. See Cardinal Indus., 1996 WL 724730, at *3; George Haug, 148 F.3d at 141 ("[t]he language in Section 2(a) relating to injury to competition is the key to the legality of most differential pricing practices and has engendered significant legal uncertainty. . . .").

However, in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 220 (1993), the Supreme Court sought to clarify Utah Pie with respect to the weight of a defendant's subjective intent: "[a]s the law has been explored since Utah Pie, it has become evident that primary-line competitive injury under the Robinson-Patman Act is of the same general character as the injury inflicted by predatory pricing schemes actionable under § 2 of the Sherman Act." By harmonizing the competitive injury requirements under the Robinson-Patman Act and the Sherman Act, the Court effectively abrogated the inference of competitive injury permitted under Utah Pie. See Cardinal Indus., 1996 WL 724730, at *3.

Since Brooke Group, the Second Circuit has recognized the requirement for pleading competitive injury in primary-line price discrimination cases. See George Haug, 148 F.3d at 143. Furthermore, courts in this Circuit have applied a two-prong test, derived from Brooke Group, for establishing such injury. The plaintiff must show that (1) competitive injury resulted from a rival's prices that were below an appropriate measure of the rival's costs and (2) the competitor had a reasonable prospect of later recouping its investment in below-cost prices, or, in other words, there was a reasonable likelihood that the competitor could succeed in diminishing or eliminating competition and subsequently raise prices in order to offset its earlier expected losses. See Cardinal Indus., 1996 WL 724730, at *4.

By imposing this two-part test for primary-line price discrimination cases, the Supreme Court harmonized the competitive injury requirements in discriminatory pricing actions under the Robinson-Patman Act and predatory pricing schemes under § 2 of the Sherman Act. Although it recognized material differences in the language of the two statutes, the Court stated that the essence of a claim under both statutes is identical: "A business rival has priced its products in an unfair manner with an object to eliminate or retard competition and thereby gain and exercise control over prices in the relevant market." Brooke Group, 509 U.S. at 222.

The Court reasoned that the first prong of the competitive injury requirement is necessary because only below-cost pricing can inflict competitive injury. See id. at 223. This finding reflected, in part, the Court's recognition that above-cost pricing that remains below general market prices is more often competition-enhancing. See id. Any condemnation of above-cost price cutting carries the risk of depriving consumers of lower prices, while protecting weak competitors from lost profits — a result that contradicts established antitrust policy.*fn7

The second prong of the primary-line price discrimination test requires the plaintiffs to show that the defendant had a reasonable prospect of recouping its investment in below-cost prices. See Brooke Group, 509 U.S. at 224; see also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 584-85 n. 8 & 592 n. 16 (1986). In order for discriminatory pricing to be anticompetitive, the predatory firm must succeed in eliminating would-be price cutters and in charging higher prices later to compensate for price cutting in the short run. See Matsushita, 475 U.S. at 592. Absent the reasonable possibility of success in such recoupment, below-cost pricing cannot be anticompetitive because a failed predatory pricing scheme only results in lower aggregate prices for the consumer, again, a pro-competitive outcome. See Brooke Group, 509 U.S. at 224; Matsushita, 475 U.S. at 594 ("cutting prices in order to increase business often is the very essence of competition. Thus, mistaken inferences in cases such as this one are especially costly because they chill the very conduct the antitrust laws are designed to protect.").

Thus, both prongs of the competitive injury test exist to ensure that the antitrust laws are not wielded to suppress vigorous competition. In other words, the test forces courts to distinguish between clearly anticompetitive below-cost pricing and price discrimination that promotes competition. See Cardinal Indus., 1996 WL 724730, at *4 (the two-part test "filter[s] out acts of price discrimination that increase competition.").

In the context of a Rule 12(b)(6) motion, Cardinal Indus. held that the failure of the pleadings to assert facts establishing the two prongs of the competitive injury requirement necessitated dismissal: "Plaintiff has failed to allege, even in a conclusory manner, that defendant sold its Jumbo Color Dot Dominoes at below-cost prices or that, even if defendant did so, it could eventually recoup its losses. . . . Plaintiff has failed to ...


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