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Global Reinsurance Corp. v. Equitas Ltd.

Supreme Court, New York County


March 3, 2009

GLOBAL REINSURANCE CORPORATION - U.S. BRANCH F/K/A GERLING GLOBAL REINSURANCE CORPORATION U.S. BRANCH, PLAINTIFF,
v.
EQUITAS LTD.; EQUITAS REINSURANCE LTD.; AND EQUITAS POLICYHOLDERS TRUSTEE LTD., DEFENDANTS.

The opinion of the court was delivered by: Bernard J. Fried, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the printed Official Reports.

Before me is a motion to dismiss the second amended complaint pursuant to CPLR §§ 3211(a)(2) and (a)(7). The second amended complaint, filed August 6, 2008, sets forth three counts: tortious interference with contract,*fn1 violation of the Donnelly Act, Gen. Bus. Law § 340, and injunctive relief. For the reasons that follow, the motion is granted and the second amended complaint is dismissed with prejudice.

In reviewing a motion to dismiss under CPLR § 3211(a)(7), I must accept the pleading's allegations as true. A more complete statement of the factual allegations underlying the Donnelly Act claim can be found in my July 3, 2008 decision deciding defendants' motion to dismiss the first amended complaint. Global Reins. Corp. U.S. Branch v. Equitas Ltd., 20 Misc 3d 1115(A), 2008 WL 2676805, **1-3 (Sup. Ct. Jul 03, 2008) ("July 3, 2008 Decision"). Since those factual allegations are substantially preserved in the second amended complaint, I will not reiterate them.

The Donnelly Act prohibits any agreement or arrangement by which a monopoly is established or competition is restrained. Gen. Bus. Law § 340(1). To state a claim under the Donnelly Act, a plaintiff must: (1) identify the relevant product market; (2) describe the nature and effects of the purported conspiracy; (3) allege how the economic impact of that conspiracy is to restrain trade in the market in question; and (4) show that there is a conspiracy or reciprocal relationship between two or more entities. Creative Trading Co., Inc. v. Larkin-Pluznick-Larkin, Inc., 136 AD2d 461, 461-62 (1st Dep't 1988). In interpreting the Donnelly Act, New York courts generally follow federal caselaw analyzing the Sherman Act of 1890, 15 U.S.C. §§ 1-39. People v. Rattenni, 81 NY2d 166, 171 (1993).

"No heightened pleading requirements apply in antitrust cases. [A] short plain statement of a claim for relief which gives notice to the opposing party is all that is necessary.'" Todd v. Exxon Corp., 275 F.3d 191, 198 (2d Cir. 2001) (quoting George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 554 (2d Cir.1977)). "Because market definition is a deeply fact-intensive inquiry, courts hesitate to grant motions to dismiss for failure to plead a relevant product market." Todd, 275 F.3d at 199-200. Nevertheless, it is "improper to assume that the [plaintiff] can prove facts that it has not alleged or that the defendants have violated the antitrust laws in ways that have not been alleged.'" Id. at 198 (quoting Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983)) (plaintiff's allegation that the relevant market was the market for the services of certain professional and technical employees in the oil and petrochemical industry in the continental U.S. was plausible enough to survive motion to dismiss, based on allegation that those employees "accumulate industry-specific knowledge that renders them more valuable to employers in the oil and petrochemical industry than to employers in other industries"); see also Theatre Party Assocs., Inc. v. Shubert Org., Inc., 695 F. Supp. 150, 154-55 (S.D.NY 1988) (granting motion to dismiss plaintiff's monopolization claim, which was based on an alleged market of advance sales of selected tickets to the early run of "Phantom of the Opera," where plaintiff failed to explain why other Broadway shows or entertainment events were not adequate substitute products).

Thus, to survive a motion to dismiss, it is sufficient for the complaint to allege "specific facts that support a narrow product market in a way that is plausible and bears a rational relation to the methodology courts prescribe to define a market for antitrust purposes." Todd, 275 F.3d at 203. While "market definition is most often a factual inquiry," a motion to dismiss may be granted, however, "if the alleged market makes no economic sense under any set of facts.'" Pepsico, Inc. v. Coca-Cola Co., 1998 WL 547088, *6 (S.D.NY Aug 27, 1998) (quoting National Communications Ass'n v. Am. Tel. & Tel. Co., 808 F. Supp. 1131, 1134 (S.D.N.Y.1992)).

Defendant's principal arguments on its motion to dismiss for failure to state a claim are that Global has failed to allege either a relevant product market or a restraint of trade in that market. I will first address the adequacy of the relevant product market allegations.

The second amended complaint, under the heading, "The Worldwide Market for Non-Life Retrocessional Reinsurance and the Lloyd's Submarket," alleges that the relevant product market is the worldwide market for non-life retrocessional coverage: i.e., the purchase, sale, and servicing of retrocessional coverage for risks written by reinsurers, with respect to property, casualty, and related lines of insurance business. (Compl.*fn2 ¶ 28.) The complaint also alleges that this market is recognized within the reinsurance industry as a distinct product market, as it involves specialized sellers and products, because its products are not interchangeable with other insurance products. (Compl. ¶¶ 29-30.) The complaint further alleges that the Lloyd's marketplace is a distinct submarket of this market. (Compl. ¶ 34.)

As a preliminary matter: plaintiff has asserted in its opposition brief and at oral argument that the second amended complaint pleads in the alternative that Lloyd's is a relevant product market in its own right. Plaintiff also argues that I am constrained by "law of the case" to uphold the adequacy of this alternative theory, because I sustained the adequacy of the product market allegations in the first amended complaint. I disagree with both contentions.

In my July 3, 2008 decision, I held that the first amended complaint had alleged a relevant product market with a geographic scope consisting only of Lloyd's. (July 3, 2008 Dec'n at *13-14.) In deciding the motion to dismiss the first amended complaint, I was limited to the factual allegations in that complaint, which alleged a market for non-life retrocessional reinsurance within Lloyd's and nowhere alluded to a broader geographic market outside Lloyd's. There were no factual allegations in the first amended complaint that suggested that any product market existed outside of Lloyd's. Therefore, I refused to consider the parties' arguments in their briefs and at oral argument that Lloyd's was only a subset of a worldwide market.

Plaintiff sought permission, however, to move for leave to amend its first amended complaint to allege a broader geographic market. I granted its request. (July 3, 2008 Dec'n at *14.) Plaintiff so moved, leave was granted, and the second amended complaint is now before me.

An amended complaint supersedes the original pleading. See Dragon Inv. Co. II LLC v. Shanahan, 49 AD3d 403, 405 (1st Dept. 2008) (original complaint was superseded by amended complaint and was therefore no longer before the court); Hayes v. Utica Mut. Ins. Co., 16 AD2d 732, 732 (4th Dept. 1962) (since amended complaint superseded and replaced original complaint, "the original complaint... is not before us").*fn3

It is clear that plaintiff's second amended complaint amends and replaces the first amended complaint. Not only is the second amended complaint styled as an "amended" complaint, but plaintiff was even careful to replead the tortious interference cause of action, which had been dismissed from the first amended complaint, in the expectation that the earlier complaint would not be considered in an appeal from the order of dismissal. (2d Am. Compl. ¶ 1 n.1.) Because the first amended complaint has been amended, it is no longer before me; it has been superceded and replaced with the second amended complaint. The second amended complaint must stand on its own.

The second amended complaint delineates precisely the scope of the alleged product market at issue in a new section, under the heading: "The Worldwide Market for Non-Life Retrocessional Reinsurance and the Lloyd's Submarket." (Compl. ¶¶ 28-36.) This section alleges that a worldwide market exists for the non-life retrocessional reinsurance. There is not a single sentence or paragraph that alleges that the geographic scope of the relevant product market could be limited to Lloyd's, or any allegation that the product in question is unique to Lloyd's, or any hint of an alternative theory about the geographic scope of the relevant product market. The second amended complaint alleges only one product market—the Lloyd's submarket of the worldwide market for non-life retrocessional reinsurance. Indeed, at oral argument, plaintiff's counsel was unable to point to any sentence or phrase of the second amended complaint in which plaintiff had alleged an alternative product market. (Trans. at 34-35.)

Plaintiff argues, however, that the second amended complaint does not actually remove any of the allegations in the first amended complaint; it has simply supplemented them with additional paragraphs and a new heading. Even assuming this is true, the second amended complaint, read as a whole, casts the original paragraphs concerning the Lloyd's market in an entirely new light the light of the newly-alleged worldwide market for non-life retrocessional reinsurance. The relevant product market alleged in the second amended complaint is a different market from that alleged in the first amended complaint. Therefore, my conclusion in my July 3, 2008 decision that a relevant product market had been alleged in the first amended complaint does not bind my determination about whether a relevant product market has been stated in the second amended complaint.*fn4 Based on the specific product market allegations in the second amended complaint, I am obliged to determine whether plaintiff has alleged a restraint in a relevant product market under the Donnelly Act as a matter of law.

I turn to defendants' contention that the complaint falls short of alleging that Lloyd's is a true submarket of the worldwide market for non-life retrocessional reinsurance. Because there is little Donnelly Act caselaw on this question, I will rely heavily on federal antitrust caselaw.

"[A] market is any grouping of sales whose sellers, if unified by a hypothetical cartel or merger, could profitably raise prices significantly above the competitive level." AD/SAT, Div. of Skylight, Inc. v. Associated Press, 181 F.3d 216, 228 (2d Cir. 1999) (internal quotations omitted). "A relevant product market consists of products that have reasonable interchangeability for the purposes for which they are produced price, use and qualities considered.' Products will be considered to be reasonably interchangeable if consumers treat them as acceptable substitutes.'" PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 105 (2d Cir. 2002) (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 404 (1956)) (affirming grant of summary judgment dismissing Sherman Act claims because alleged market was not a true submarket).

"A market within a market, also termed a submarket, may also be the subject of a monopoly provided that its confines are well defined through the rule of reasonable interchangeability." Vitale v. Marlborough Gallery, 1994 WL 654494, 32 U.S.P.Q.2d 1283, 1285 (S.D.NY Jul. 05, 1994). "The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors." Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (1962), superceded by statute on other grounds as noted in Texas Instruments, Inc. v. Hyundai Elecs. Indus., Co., 49 F. Supp.2d 893 (E.D. Tex. 1999).

The pleading requirements to allege a submarket are not different from those necessary to allege a product market. "[A] submarket' definition turns on the same inquiry as a market' definition whether the products in a proposed submarket are reasonably interchangeable in use or production with products in the broader market.'"*fn5 PepsiCo, 1998 WL 547088, at *5; accord Frito-Lay, Inc. v. Bachman Co., 659 F. Supp. 1129, 1137-38 (S.D.NY 1986) (holding that corn chips did not constitute a submarket within the salted snack food market, because a corn chips consumer would be likely to substitute other salted snack foods, such as potato chips, if corn chips were unavailable).

"In economists' terms, two products or services are reasonably interchangeable where there is sufficient cross-elasticity of demand. Cross-elasticity of demand exists if consumers would respond to a slight increase in the price of one product by switching to another product." AD/SAT, 181 F.3d at 227 (affirming dismissal on summary judgment of attempted monopolization claim, finding that defendant's market share of under 20% was insufficient to support it, and rejecting proposed submarket because it was characterized by low barriers to entry and rapid market development). See also U.S. v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 137-40 (E.D.NY 1997) (rejecting plaintiff's characterization of two "anchor" hospitals as a submarket within relevant product market of general acute care inpatient hospitals, due to their prominent reputation, as unnecessarily restrictive, where such services were available elsewhere, other hospitals had good reputations, and data from injunction hearing showed consumers were willing to travel for treatment).

Here, the complaint does not contend that non-life retrocessional reinsurance policies sold at Lloyd's differ from those non-life retrocessional reinsurance policies sold outside Lloyd's. Plaintiff appears to concede that the actual product sold by Lloyd's syndicates is not different from the product sold elsewhere in the worldwide market.

A product market, however, need not be defined by the uniqueness of the goods sold. It may also be defined by reference to a particular channel of distribution. "[I]t is appropriate to limit a market to a discrete channel of distribution so long as it is shown, using established market-definition criteria, that enough customers do not view other methods of distribution as viable substitutes to the distribution method in question." PepsiCo, 1998 WL 547088, at *8.

For instance, in PepsiCo, the plaintiff survived a motion to dismiss, because it had adequately alleged that Coca-Cola monopolized a distinct submarket for fountain-dispensed soft drinks distributed through food service distributors, within the broader market for fountain-dispensed soft drinks. The court found plausible its allegation that drinks dispensed through food service distributors were a distinct submarket within the market for all fountain-dispensed soft drinks, because "the complaint allege[d] market realities force the end users in question to make their purchases exclusively through food service distributors." Id., 1998 WL 547088,at *9.

Similarly, the court in F.T.C. v. Staples, Inc., 970 F. Supp. 1066 (D. D.C. 1997) concluded, after development of a factual record, that the sale of consumable office supplies through office supply superstores was a distinct submarket within the larger market of all superstores selling office supplies, based on data indicating that "office superstore prices are affected primarily by other office superstores and not by non-superstore competitors." Staples, 970 F. Supp. at 1077. The data indicated that Staples's prices were more than 5% higher in markets where it had no office superstore competition, than in markets where it competed with the other office superstores.

In Staples, as in PepsiCo, the non-interchangeability was based not on a difference between the products sold inside and outside the submarket—in both cases, the products were identical. Rather, the non-interchangeability came from the fact that "the character and value of the product actually manufactured by the parties... changes in the eyes of buyers by virtue of the manner in which it is delivered." PepsiCo, 1998 WL 547088, at *9 ("[b]ecause foodservice distributors satisfy all of their customers' supply needs at once, offering consolidated delivery and accounting systems, their customers buy supplies through them to the exclusion of all other methods of distribution").

Defendants' counsel has taken the position that "what establishes that Lloyd's is a submarket of the worldwide market is the distinctness" of Lloyd's in the worldwide market as alleged in paragraph 36 of the complaint. (Trans. at 41; see also id. at 37-42.)

In paragraph 36, the complaint alleges four specific facts: (a) Lloyd's is the "single most significant seller of most forms of non-life retrocessional coverage to reinsurers worldwide"; (b) Lloyd's "provides the benchmark for prices, terms, and conditions for most forms of non-life retrocessional coverage; (c) any prospective purchaser of retrocessional coverage "would have to at least consider approaching Lloyd's for quotes and would have to take into account the terms and conditions offered by various Lloyd's syndicates in determining what to purchase"; and (d) "competition within the Lloyd's marketplace is more significant to prospective purchasers of retrocessional coverage than is competition between Lloyd's as a whole and other sellers, because Lloyd's is expected to, and does, set the lead in establishing coverage." (Compl. ¶ 36.)

In order to state a claim that Lloyd's is a true submarket, the complaint must allege that the products sold at Lloyd's are not interchangeable with other reinsurance products sold outside the Lloyd's market. The allegations in paragraph 36, however, do not do that.

First, the allegation that Lloyd's is the "single most significant seller of most forms of non-life retrocessional coverage to reinsurers worldwide," (Compl. ¶ 36(a)), does not describe a true submarket. The test of a relevant product market is whether the products are interchangeable outside the proposed market, not the seller's "significance" in the world market, and this allegation does not indicate that the products at issue are not interchangeable with those sold outside Lloyd's.

Similarly, the allegation that Lloyd's "provides the benchmark for prices, terms, and conditions for most forms of non-life retrocessional coverage," (Compl. ¶ 36(b)), does not describe a true submarket. A "benchmark" is: (a) "a point of reference from which measurements may be made"; (b) "something that serves as a standard by which others may be measured or judged"; and (c) "a standardized problem or test that serves as a basis for evaluation or comparison (as of computer system performance)." Merriam-Webster's Online Dictionary, at http://www.merriam-webster.com/dictionary/benchmark (accessed Jan. 26, 2009). In other words, a "benchmark" for prices is a standard or a point of reference by which other prices can be measured or evaluated. This allegtion is quite different from alleging that economic realities compelled customers to shop at Lloyd's, even if it charged higher prices or less favorable terms and conditions; therefore, this allegation falls short of describing a distinct submarket.

For the same reason, the allegation that any prospective purchaser of retrocessional coverage "would have to at least consider approaching Lloyd's for quotes and would have to take into account the terms and conditions offered by various Lloyd's syndicates in determining what to purchase," (Compl. ¶ 36(c)), falls short of plaintiff's pleading obligation. Even assuming it is true that prospective customers must "consider" asking Lloyd's for quotes and take Lloyd's quotes into account before purchasing coverage, this allegation falls short of alleging that market forces compel consumers to choose Lloyd's, even if its quotes are not competitive in the worldwide market.

Finally, the allegation that "competition within the Lloyd's marketplace is more significant to prospective purchasers of retrocessional coverage than is competition between Lloyd's as a whole and other sellers, because Lloyd's is expected to, and does, set the lead in establishing coverage," (Compl. ¶ 36), too, is inadequate to state a claim. The complaint qualifies its statement that consumers find competition within Lloyd's "significant" (whatever that means) by explaining the reason for Lloyd's significance: "because Lloyd's is expected to, and does, set the lead in establishing coverage." Again, "setting the lead" in establishing the terms and prices of coverage is another way of saying that Lloyd's sets the "benchmark" for prices and terms of coverage. It falls short of alleging that customers are somehow obliged by market forces to buy products through Lloyd's, and that they will continue to buy products through Lloyd's, even if its terms and prices are less favorable than those offered by sellers outside Lloyd's. Plaintiff is asking me to expand the definition of a submarket well beyond that outlined persuasively in antitrust decisions such as Staples and PepsiCo, and I see no good reason to do so.

While market definition is a fact-sensitive inquiry, I may not assume that plaintiff can prove facts that it has not alleged or that defendants have violated the antitrust laws in ways that the complaint has not alleged. Todd, 275 F.3d at 198. Even assuming all the product market allegations in the complaint are true, they are inadequate to state a claim under the Donnelly Act.

Defendants also contend that the complaint fails to allege a restraint of trade in the relevant market.This element requires an allegation of market power or genuine adverse effects on competition. Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., 996 F.2d 537, 546 (2d Cir.1993). "Market power" is "the ability to raise price significantly above the competitive level without losing all of one's business." CDC Techs., Inc. v. IDEXX Labs., Inc., 186 F.3d 74, 81 (2d Cir. 1999) (Sherman Act claim) (internal quotations omitted). Since I have already concluded that the complaint fails adequately to allege a relevant product market, I do not reach the question of whether the complaint alleges a restraint of trade by means of either market power or an adverse effect on consumers. The second cause of action is dismissed. The third cause of action for injunctive relief is consequently dismissed as well. I decline to permit plaintiff to amend its complaint for a third time.

Finally, at oral argument, I requested supplemental briefs on defendants' novel argument, under CPLR § 3211(a)(2), that the Foreign Trade Antitrust Improvements Act of 1982 ("FTAIA"), 15 U.S.C. § 6a, prohibits my exercise of jurisdiction over the Donnelly Act claim. In light of my conclusion that plaintiff failed to state a claim under the Donnelly Act, however, I do not reach this question. I regret that the parties were obliged to expend additional effort to brief this issue.

In accordance with this decision, it is

ORDERED that the second amended complaint is dismissed with prejudice.


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