On Appeal from the United States District Court for the Eastern District of Pennsylvania. (Civil Action No. 93-3253).
Before: Stapleton, Greenberg and Cowen, Circuit Judges,.
GREENBERG, Circuit Judge.
Appellant Advo, Inc. sued appellee Philadelphia Newspapers, Inc. ("PNI") charging that PNI attempted to monopolize the market for delivering preprinted advertising circulars in the greater Philadelphia area, in violation of section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2. Advo alleged that PNI has offered predatorily low prices to major purchasers of services for delivering circular advertising, and that, in light of specific features of the market, PNI's scheme to force Advo from the market has a dangerous probability of succeeding.
After extensive discovery, the district court entered summary judgment in favor of PNI. Because we concur that PNI could not have recouped the investment in predation it might have made, and because Advo failed to present evidence that could support a finding that PNI either priced below cost or had a specific intent to monopolize, we will affirm.
1. General Features of the Market for Retail Advertising
Before presenting the specific facts of this case, we find it useful to provide general information on the relevant advertising markets. Until recent decades, grocery stores, discount stores, hardware stores, and other large retailers promoted their goods primarily through newspapers. They used two kinds of advertisements. Those appearing directly on newspaper editorial pages are called "run of press" ("ROP") advertising. Separate pieces of paper included with the newspaper (e.g. supermarket multi-page ads) are called "circulars" or "preprints."
Retailers found newspaper advertising wanting in two ways. First, it provides only limited "penetration" into an area's households. For example, in Philadelphia the major daily newspapers reach only 25.4% percent of the households and even the Sunday paper reaches only 49.1%. Second, newspaper advertising cannot focus on specific neighborhoods within a large metropolitan area. To give a concrete example of both of these shortcomings, a supermarket chain understandably wants its advertisements to reach every household within close proximity to its stores. Newspaper advertising, be it ROP or preprint, cannot provide such targeted saturation coverage.
In response to these shortcomings, literally hundreds of "marketing communications" services ("MC services") have sprung up over the last 30-odd years. Taking advantage of comprehensive computer databases containing the addresses of every household in a region, they have been able to provide almost complete penetration in delivering advertising materials, be it in an entire metropolitan area or within, e.g., specific zip code areas. These services, of course, deliver only preprints since they do not publish any sort of newspaper. The dispute in this case involves the delivery of print advertising for retailers targeted at consumers within a metropolitan area.
MC services deliver either by United States mail or by hiring delivery people to walk door-to-door and hang bags of preprints on doorknobs. The former is often called "shared mail"; the latter is known as "alternate delivery." Some costs are common to both methods; e.g. computerized mailing lists, and labor to stuff preprints into packets and sort the packets in order of delivery. Alternate delivery involves other significant fixed costs. In addition to hiring delivery persons and planning their routes, management must employ a second tier of "verifiers" to perform spot-checks and ensure that delivery employees simply are not dumping their packets into the first available dumpster.
Because mail rates increase with the weight of the advertising packets, alternate delivery becomes attractive, despite these high fixed costs, as an MC service attracts more customers. Once delivery and verification staff are in place, the incremental costs of adding more advertising material to the packet are minimal.
To cover the high fixed costs of alternate delivery, or even the lower but still significant fixed costs incurred in mail delivery, MC services need "base players" that distribute large numbers of circulars on a routine basis. Supermarket chains, which depend on multi-page weekly circulars to attract shoppers, are one of the most important types of base players. Large discount chains, such as K-Mart, also play this role. There are, of course, only a small set of such base players in a given metropolitan area.
2. Advo and the Philadelphia Market for Preprint Advertising
Advo is a national MC services company and is the largest full-service direct mail marketing company in the country. It distributed at least three billion advertising packages in 1992, generating nearly a billion dollars in revenue. Advo began operating in the eight-county area that comprises the Philadelphia market*fn1 in the mid-1960s, and appears to have grown rapidly since obtaining the Acme supermarket chain as a base advertiser for shared mailings in 1983.
Ironically, Advo faced a Sherman Act section 2 suit as a result of capturing the Acme account and expanding its business in Philadelphia. Cassidy Distrib. Serv. v. Advo-Sys., Inc., No. 84-3464 (E.D. Pa. 1987). A small competitor that previously had serviced Acme sued Advo charging predatory conduct in furtherance of a plan to monopolize the market for distributing advertising circulars in the region. In the course of countering this charge, Advo argued that there are few, if any, barriers to entering the business of marketing communications, and thus there is little, if any, chance that a predator could recoup the costs of illegally obtaining a monopoly. See app. at 1772-1908, 2317-2340, 2341-2348.
The market for circular advertising distribution appears to have become more competitive in recent years. When Advo changed its delivery schedule in 1989 to accommodate Acme, other major customers became dissatisfied and invited CBA, a MC services company from outside the area, to enter the Philadelphia market. Despite start-up costs of over $3,000,000, CBA turned a profit within 14 months. In a move admittedly taken to avert a "price war," Advo acquired CBA's Philadelphia preprint distribution operations in 1992. This acquisition apparently encountered no antitrust scrutiny.
3. The Effect of Marketing Communications Services on Major Philadelphia Newspapers, and Their Response
Much of Advo's growth has come at the expense of PNI, publisher of the Philadelphia market's major daily newspapers, The Philadelphia Daily News and The Philadelphia Inquirer. PNI estimates that it has lost at least $4,000,000 per year in ROP and circular advertising to Advo and similar competitors.
To counter Advo's advantages in market penetration and the ability to target specific neighborhoods, PNI in 1991 began working on a "total market coverage" ("TMC") program to supplement ROP advertising with alternate delivery to non-subscriber households. PNI started implementing the program in small stages by 1992. Although it faced substantial start-up costs, PNI claims that it hoped to turn a profit on its TMC program by 1995.
Facing the same cost structure as Advo, PNI needed a base player to help cover the high fixed costs of delivering preprinted advertising packets door-to-door. In September 1992, and again in January of 1993, PNI offered to distribute circulars for the Super Fresh supermarket chain, a major Advo customer, for about $30 per thousand circulars. As part of its proposal, PNI offered discounts on ROP advertising tied to the total volume of advertising that Super Fresh purchased. Advo retained the account by cutting its rate by about 37%, from $58 to $36 per thousand circulars. Thus, Super Fresh retained Advo despite its base rate exceeding that in PNI's proposal by about 20%. Although the expert opinion testimony is conflicting, there appears to be no factual basis to Advo's claim that PNI's proposed prices were below its costs. There is also no support for Advo's claim that PNI tendered Super Fresh prices below those offered to comparable advertisers.
PNI made similar efforts to wrest the accounts of Acme and Fleming Foods supermarkets, Bradlees department stores, and Circuit City consumer electronics stores from Advo; in each case Advo retained the accounts after cutting its rates substantially. In fact no major account has switched from Advo. Thus, it is clear that to date PNI's activities have been pro-competitive, as they have resulted in lower prices.
Advo filed its complaint against PNI on June 17, 1993, alleging that PNI was engaged in a predatory pricing scheme designed to achieve a monopoly over the Philadelphia market for circular and ROP advertising in violation of section 2 of the Sherman Act, 15 U.S.C. § 2. Advo requested damages, 15 U.S.C. § 15, and injunctive relief, 15 U.S.C. § 26. The district court exercised subject matter jurisdiction over Advo's antitrust claims under 28 U.S.C. § 1331 (federal question jurisdiction) and 28 U.S.C. § 1337 (interstate commerce jurisdiction).
The parties undertook extensive discovery, including deposing at least 30 of each other's corporate officials as well as other industry experts. Each side presented expert economic analysis. In addition, the eight-volume appendix, running to over 2300 pages, includes relevant documents such as business plans, annual reports, and internal memoranda.
After reviewing this voluminous record, receiving extensive briefs, and hearing oral argument, the district court on June 13, 1994, granted PNI's motion for summary judgment on the antitrust claims. Advo, Inc. v. Philadelphia Newspapers, Inc., 854 F. Supp. 367 (E.D. Pa. 1994). The court found that even if it accepted, arguendo, that PNI had engaged in predatory conduct with specific intent to monopolize, there was no dangerous probability that PNI could achieve a monopoly and maintain it long enough to recoup the costs of predation. The court reaffirmed its decision in response to Advo's motion under Fed. R. Civ. P. 59(e) for reconsideration on July 15, 1994.*fn2
On August 11, 1994, Advo timely appealed from the district court's order of summary judgment and from the order denying the motion for reconsideration. We have jurisdiction under 28 U.S.C. § 1291.
A. The Standard for Summary Judgment
1. Predatory Pricing Suits in ...