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U.S. INFORMATION SYS. v. INTERNATIONAL BHD. OF ELEC. WRKRS.

February 24, 2004.

U.S. INFORMATION SYSTEMS, INC., ODYSSEY GROUP, INC. and BLUE DIAMOND FIBER OPTIC NETWORKS, INC., Plaintiffs, -against- INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL UNION NUMBER 3, AFL-CIO, A R COMMUNICATION CONTRACTORS INC., ADCO ELECTRICAL CORPORATION, FIVE STAR ELECTRIC CORPORATION, FOREST ELECTRIC CORPORATION, HUGH O'KANE ELECTRIC COMPANY LLC, IPC COMMUNICATIONS, INC. and NEAD INFORMATION SYSTEMS, Defendants


The opinion of the court was delivered by: JAMES FRANCIS, Magistrate Judge

MEMORANDUM AND ORDER

For want of unbiased data, expert evidence is lost. The defendants in this antitrust case have moved to exclude the proposed testimony of the plaintiffs' expert witness, Dr. Frederick C. Dunbar, pursuant to Federal Rules of Evidence 702 and 703 on the ground that his methods and the resulting testimony are unreliable. Many of the defendants' arguments are without merit. However, because the plaintiffs have failed to demonstrate that the data set upon which Dr. Dunbar's analysis was based was unbiased, the defendants' motion must, in large part, be granted. Page 2

Background

  The plaintiffs in this action are electrical contractors who employ workers represented by the Communications Workers of America, AFL-CIO (the "CWA") to install telecommunications systems for commercial customers. The plaintiffs allege that the defendants — who include the International Brotherhood of Electrical Workers ("IBEW") Local Union Number 3, AFL-CIO ("Local 3") and a number of electrical contractors — conspired to violate the antitrust laws by excluding from the market contractors who, like the plaintiffs, employ workers who are members of the CWA, rather than Local 3. The plaintiffs have alleged violations of the Sherman Antitrust Act, 15 U.S.C. § 1, 2 (the "Sherman Act"), and New York's Donnelly Act, N.Y. Gen. Bus. Law § 340 (the "Donnelly Act"). (Second Complaint dated Feb. 22, 2002 ("Sec. Compl.") ¶¶ 70-92).*fn1 The plaintiffs' principal claim is that the defendants have "combined and conspired with each other, and others presently unidentified, to carry out a common plan to coerce and induce building owners and tenants, building managers, general contractors, information technology consultants, and others in the Page 3 construction industry to exclude the plaintiffs from the market for telecommunications installation work." (Sec. Compl., ¶ 36). The plaintiffs further allege that "[i]n the absence of collusion, each electrical contractor defendant would have an economic incentive to perform the electrical installation work correctly and without incident in order to satisfy the customer. No rationally profit-maximizing contractor in the defendants' position would commit the illegal activities that the defendants have committed except in furtherance of the unlawful conspiracy among the defendants." (Sec. Compl., ¶ 40). Finally, the plaintiffs claim that "because of the universal nature of, and reliance by all businesses upon, the telecommunications industry, an antitrust violation in this arena is especially harmful." (Sec. Compl., ¶ 46).

  The plaintiffs seek to introduce the expert testimony of Dr. Dunbar on economic issues related to antitrust liability and damages in this case. (Declaration of Dr. Frederick C. Dunbar Opposing Defendants' "Daubert" Motion dated March 7, 2003 ("Dunbar Decl."), ¶ 1). Dr. Dunbar is a Senior Vice President of National Economic Research Associates, Inc. ("NERA"), specializing in antitrust and financial economics. (Dunbar Decl., ¶ 3). Dr. Dunbar's practice at NERA includes "providing valuation services, performing economic research on public policy matters, and consulting on antitrust economics." (Dunbar Decl., 1 4). Dr. Dunbar issued an initial report on October 3, 2002, as well as a Page 4 rebuttal report on December 17, 2002, outlining his findings. (Dunbar Decl., ¶ 1). Additionally, he was deposed for three and one-half days regarding his conclusions. (Declaration of Jeffrey M. Eilender in Support of Defendants' Motion to Exclude the Testimony of Plaintiffs' Proposed Expert, Dr. Frederick C. Dunbar, dated Feb. 7, 2003 ("Eilender Decl."), ¶ 15). The defendants have submitted several expert reports of their own, including reports by a certified public accountant, Stephen W. Shulman, and economists Orley C. Ashenfelter, Henry S. Farber, and John R. Woodbury. (Expert Report of Stephen W. Shulman, CPA, dated Oct. 31, 2002 ("Shulman Report"); Expert Report of Orley C. Ashenfelter and Henry S. Farber dated Oct. 31, 2002 ("Ashenfelter/Farber Report"); Expert Report of John R. Woodbury dated Oct. 30, 2002 ("Woodbury Report")).

  Dr. Dunbar's initial report analyzed a number of issues that are relevant to the plaintiff's claim of monopoly leveraging — that is, the use of market power in one market (electrical installation services) to reduce competition and inflict antitrust injury in another market (telecommunications installation). (Dunbar Decl., ¶ 7; Expert Report of Frederick C. Dunbar dated Oct. 3, 2002 ("Dunbar Report") at 40). To establish a Sherman Act conspiracy, the plaintiffs must produce evidence sufficient to show: (1) a combination or some form of concerted action between at least two legally distinct economic entities; and (2) that such Page 5 combination or conduct constituted an unreasonable restraint of trade either per se or under the "rule of reason." U.S. Information Systems, 2002 WL 91625, at *4; see also Tops Markets, Inc. v. Quality Markets, Inc., 142 F.3d 90, 95-96 (2d Cir. 1998). The plaintiffs must also "adequately . . . define the relevant product market." Rock TV Entertainment, Inc. v. Time Warner, Inc., No. 97 Civ. 0161, 1998 WL 37498, at *2 (S.D.N.Y. Jan. 30, 1998) (quotations and citation omitted). Finally, the plaintiffs must establish that they have "antitrust standing" and have suffered "antitrust injury." National Camp Association, Inc. v. American Camping Association, Inc., No. 99 Civ. 11853, 2000 WL 1844764, at *3 (S.D.N.Y. Dec. 15, 2000); Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334 (1990).

  In examining these elements of the plaintiffs' claims, Dr. Dunbar asserts that he applied "well-recognized statistical procedures to unbiased data as well as well-accepted economic theory to facts." (Dunbar Decl., ¶ 7). He summarized his findings in five categories.

  1. Market Power

  First, Dr. Dunbar examined the market for electrical installation and discussed how "market power" could be asserted in that market.

  Market power is the ability to raise prices above competitive levels persistently. Market power is absent if an attempt to raise prices above competitive levels would be made unprofitable by an increase in supply from Page 6 other firms in the market or by short run entry from firms outside the market.

 (Dunbar Report at 4). Using this "standard economic definition for market power," Dr. Dunbar concluded that the defendants have monopolized the market for electrical installation by controlling the supply of electricians.*fn2 (Dunbar Report at 5). Dr. Dunbar came to this conclusion by examining several factors.

  First, he analyzed the market for electrical installation services generally and Local 3's role in that market. Local 3 is the sole collective bargaining agent of electricians in the New York metropolitan area, giving it significant power to control the labor force and raise the wages of its members. (Dunbar Report at 6). Because Local 3 does not deal directly with end users, it works in conjunction with electrical contractors to sell its members' services. (Dunbar Report at 7). Local 3 has agreements with the New York Electric Contracting Association and the Association of Electrical Contractors, Inc. that provide that for each job, certain key decision makers of the contractor must be Local 3 members. (Dunbar Report at 8). Additionally, a Joint Page 7 Industry Board ("JIB"), consisting of fifteen members representing the union and fifteen members representing the employers, controls and manages the supply of electricians to the contractors and administers benefits and pensions. (Dunbar Report at 9).

  To estimate the size of the electrical installation services market in the New York metropolitan area, Dr. Dunbar relied upon: (1) data that Local 3 produced in its semi — annual surveys regarding the total number of inside construction electricians and the number of electricians used in the commercial construction industry in Local 3's jurisdiction; (2) the ratio of the National Electrical Benefit Fund ("NEBF") wages earned within Local 3's jurisdiction relative to the county wages (data that was also produced by Local 3); (3) the value of commercial construction in New York State that is published by the Bureau of Census; and (4) data on the dollar value of the top construction projects in New York, as published by the New York Construction News. (Dunbar Report at 10). Local 3 surveys estimate that electricians employed on commercial projects represent about 35% of the total inside electricians and that NEBF wages represent 70% of the total wages of the relevant counties. (Dunbar Report at 10). From this, assuming all Local 3 workers to be equally productive, Dr. Dunbar calculated the wages of electricians who are working in the construction industry to be approximately $344 million. (Dunbar Report at 10-11). Assuming that labor represents 40% to 50% of the total value of the work, Page 8 Dr. Dunbar estimated the size of the market for electrical installation to be in the range of $1 billion to $1.2 billion. (Dunbar Report at 11).

  Dr. Dunbar next examined Local 3's dominance over the supply of electricians to large commercial projects within its jurisdiction. After reviewing evidence from several sources, including testimony of members of the JIB, testimony of a member of the IBEW, and court transcripts from cases dealing with Local 3 over the past 60 years, Dr. Dunbar concluded that "electrical contractors who are bidding on electrical installation jobs in the New York metropolitan area employ only Local 3 electricians." (Dunbar Report at 11-14).

  2. Distinct Markets

  Dr. Dunbar next examined the market for telecommunication installation services and the market for electrical installation services to determine whether there were strong economic reasons for providing the two services together. He concluded that the two markets are "historically separate," that "the jobs are bid separately and often the contractors are two independent companies," and that there are "no obvious economies to having electrical and telecom installation provided by the same contractor." (Dunbar Report at 14). In analyzing the size of the telecommunications installation market, Dr. Dunbar relied heavily on a consulting report for Information Transport Systems ("ITS"), a New York Page 9 telecommunications contractor. (Dunbar Report at 15). The report estimated that the size of the New York metropolitan market was between $300 million and $500 million annually. (Dunbar Report at 15).

  Dr. Dunbar identified several reasons why the provision of telecommunications installation is separate from electrical installation. First, telecommunications installation requires specialized training different from the training needed to perform electrical installation. (Dunbar Report at 17). Based on a survey conducted by the IBEW and the National Electrical Contractors Association ("NECA"), the IBEW concluded that in Local 3, the percentage of the union's journeymen who can perform telecommunications installation work is about 38%, with just over half of those actually having the certification to do so. (Dunbar Report at 17). Relying on this same survey, Dr. Dunbar pointed out that when asked whether their region could support a separate telecommunications unit within their local area and whether such a unit would require separate classifications, training programs and agreements, over 80% of local unions responded that their area could support a separate unit, and over 90% responded that such a unit would require a distinct structure. (Dunbar Report at 18).

  Next, Dr. Dunbar pointed to the separate bidding processes for telecommunications and electrical installation supporting his determination that the two markets are distinct. Dr. Dunbar Page 10 discussed the way that "bid leveling" sheets are prepared by consultants hired to review bids submitted by various parties. Separate bid leveling sheets are prepared for the electrical and telecommunications segments of each project. (Dunbar Report at 21). Dr. Dunbar identified several examples, including the renovations on the Doubletree Hotel in New York City and the construction project for the National Football League's offices. (Dunbar Report at 21-22).

  Finally, Dr. Dunbar attempted to show that "[t]he defendants, and industry participants in general, view electrical and telecommunications installation as separate markets." (Dunbar Report at 23). He examined the 2002 Strategic Marketing Plan" of ITS and defendant IPC Communications, Inc., as well as the depositions of various parties and non-parties, to demonstrate what he found to be a generally-held belief that the markets are distinct. (Dunbar Report at 23-24).

  3. Anticompetitive Conduct

  Dr. Dunbar next examined whether there was "parallel behavior, motive and opportunity, the ability to communicate, and behavior that was inconsistent with independent action in a competitive market" in order to determine whether there was anticompetitive conduct by the defendants. (Dunbar Decl., ¶ 25; Dunbar Report at 25-35). He asserted that this methodology is widely accepted by economists and that "[p]laintiffs often point to parallel business Page 11 behavior, such as stable, noncompetitive pricing, and add it to evidence that implies the existence of an explicit agreement. Thus, plaintiffs search for so-called plus factors — i.e., other factors and circumstances that supplement evidence of parallel behavior — to support an inference of conspiracy." (Dunbar Decl., ¶ 25). He concluded that "Local 3, in concert with defendant electrical contractors, engaged in anticompetitive conduct to injure competition in the telecommunications installation services market." (Dunbar Report at 25). Dr. Dunbar claimed that "the predictions of market equilibrium when suppliers would be competing independently on the merits are quite different from the outcomes that are observed in this market." (Dunbar Decl., ¶ 29). According to Dr. Dunbar, this imbalance in market equilibrium leads to the situation where "the union needs the contractors to leverage its monopoly into telecommunications; and the contractors employ the reputation effect of being able to control delays and vandalism in order to compete with lower — priced, equally or better qualified CWA contractors." (Dunbar Decl., ¶ 29).

  Dr. Dunbar reached his conclusions by examining several factors: (1) lack of demarcation between Local 3 and the electrical contractors, (2) communication by defendant electrical contractors of Local 3's threats of possible vandalism and unwillingness to work overtime, (3) the failure to discipline workers who refused to work, (4) the incentive of defendant electrical contractors that rely on Page 12 Local 3 labor to act in concert with Local 3 to reduce competition from lower priced bidders that use CWA labor, and (5) the benefits that would come to the defendant electrical contractors based on this scheme. (Dunbar Report at 25-29). Dr. Dunbar identified several instances where the plaintiffs' telecommunications installation work was vandalized. He pointed to deposition testimony from various sources claiming that members of Local 3 committed these acts of vandalism. (Dunbar Report at 29-32). He also described instances when the defendants "agreed not to work overtime on projects where the plaintiffs (or other firms that did not use Local 3 labor) obtained the telecommunications installation services contract." (Dunbar Report at 32-35 & Attachment 4).

  4. Iniury to Competition

  After looking at the conduct described above, Dr. Dunbar concluded that it constituted "an attempt by the union and co-defendants to expand into a distinct market." (Dunbar Report at 35). He opined that "[i]f such an expansion was from competition on the merits, then we would expect lower prices and/or improved service quality. . . . Local 3 intends to extend its monopoly power from electrical installation into telecommunications installation with the result being higher prices and no service improvement." (Dunbar Report at 35). Dr. Dunbar asserted that "[a]ll of the elements necessary to establish a monopoly — leveraging claim are present here. The practices permitted the defendants to gain a Page 13 competitive advantage over the plaintiffs in the telecommunications installation services market, causing injury to both the plaintiffs (in the form of lost profits and business) and to consumers generally (in the form of higher prices)." (Dunbar Report at 35).*fn3

  Dr. Dunbar addressed a common criticism of the monopoly leveraging argument: that "there is only one monopoly profit, which implies that the monopolist gains nothing by seeking to leverage its monopoly into another market;" the monopolist would instead "charge the monopoly price in its primary market and garner its monopoly profits there." (Dunbar Report at 36). Dr. Dunbar disputed the relevance of that argument to the facts at hand for several reasons. First, because individual members of the union get compensation only if they actually work, the union cannot simply increase the union wage and reduce the total number of hours worked, as that would deny some members of the union any benefit:

  [T]he nature of the union implies that it can extract some, but not all, of the monopoly profits available in its primary market, the market for electrical installation services. Consequently, it would benefit by increasing the number of hours worked in markets other than the electrical installation services market, such as the telecommunications installation market. Given that the defendants charge higher prices than other parties that supply telecommunications installation services, they could either lower the prices that they charge in Page 14 that market (a competitively acceptable practice) or take steps to leverage their monopoly power in the electrical installation market into the telecommunications installation market (a competitively harmful practice).

 (Dunbar Report at 36).

  Dr. Dunbar also asserted that, because craft trades other than electrical installation contractors are also present at the construction site, the defendant contractors would have an incentive to extend their monopoly into other trades in order to avoid sharing profits. (Dunbar Report at 36-37). According to Dr. Dunbar, as a result of such incentives, "the defendants repeatedly took steps to dissuade the customers of telecommunications installation services . . . from utilizing the services of the plaintiffs for reasons not related to competition on the merits but rather to achieve anticompetitive ends." (Dunbar Report at 37). Additionally, Dr. Dunbar claimed that there is "considerable evidence that the defendants charged significantly more for telecommunications installation services than did the plaintiffs." (Dunbar Report at 38). To make this determination, he "analyzed the bidding and bid leveling data" which purportedly shows that "bids submitted by Local 3 contractors for telecommunication installation services are 46% higher than those submitted by CWA contractors." (Dunbar Decl., ¶ 34; Dunbar Report, Exhs. V-l, V-2, V-3). Based on the data, he also contended that "for those instances in which a CWA contractor was the low bid, but the contract was awarded to a Local 3 contractor, the customer paid on average 36% more than the low bid." (Dunbar Page 15 Decl., ¶ 34).

  Because of what he identified as "anticompetitive leveraging," Dr. Dunbar asserted that "Local 3 contractors have managed to coerce consumers into hiring them at higher prices." (Dunbar Report at 40-41). Out of 24 bids for which he had data on the winning bidder, he found that a CWA contractor was chosen only three times and that a Local 3 contractor was chosen 20 times (and in one case the union affiliation was unknown). (Dunbar Report at 41). This, according to Dr. Dunbar, demonstrates that "Local 3 contractors are at or close to market dominance" and that the practices at issue "pose a very real risk of producing a market where the only firms supplying telecommunications installation services are firms that use Local 3 workers. (Dunbar Report at 41-45).

  5. Damages

  After reaching the conclusion the plaintiff USIS has been injured by the anticompetitive practices of the defendants, Dr. Dunbar addressed the issue of damages. (Dunbar Report at 41-45). First, he identified the various sources of damages as follows: (1) occasions where USIS won the competition to provide telecommunications installation services, but subsequently lost the contract to a Local 3 contractor; (2) projects where USIS was not awarded a project even though it was the lowest bidder, with the project ultimately going to Local 3; (3) the loss of follow-up maintenance work on contracts USIS was not awarded; (4) costs Page 16 incurred by USIS due to vandalism committed on projects where USIS was providing the telecommunications installation services; (5) additional marketing, sales, and supervisory costs to "counter the impact on prospective customers and their advisors from the anticompetitive conduct of the ...


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