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LIGGETT GROUP INC. v. R.J. REYNOLDS TOBACCO CO.

May 30, 2000

LIGGETT GROUP INC., PLAINTIFF,
V.
R.J. REYNOLDS TOBACCO CO., DEFENDANT.



The opinion of the court was delivered by: Lechner, District Judge.

  OPINION

This is an action brought by the plaintiff, Liggett Group, Inc. ("Liggett"), against defendant, R.J. Reynolds Tobacco Company ("RJR"). On 3 March 2000, Liggett filed a complaint (the "Complaint") that alleges, inter alia, violations of the Federal antitrust laws in connection with the distribution and sale of discount cigarettes. See Complaint. Liggett specifically alleges RJR violated Section 1 ("Section 1") of the Sherman Act, 15 U.S.C. § 1, Section 4 ("Section 4") and Section 16 ("Section 16") of the Clayton Act, 15 U.S.C. § 15 and 26. See id. at ¶¶ 11, 31-39 and pp. 13-14. On 12 April 2000, RJR filed an answer to the Complaint.

Currently pending is a motion, filed by RJR, to transfer the action (the "Motion to Transfer") to the United States District Court for the Middle District of North Carolina (the "Middle District of North Carolina"), pursuant to 28 U.S.C. § 1404(a) ("Section 1404(a)").*fn1 For the reasons set out below, the Motion to Transfer is granted; the action is transferred for all purposes to the Untied States District Court for the Middle District of North Carolina.

Background

A. Parties

Liggett is a corporation organized and existing under the laws of the State of Delaware. See id. at ¶ 9. Liggett, is also an indirect, wholly-owned subsidiary of Brooke Group Holding, Inc. See id. Liggett maintains substantially all of its manufacturing facilities in or near Durham, North Carolina. See id. The premium cigarette brand manufactured by Liggett is Eve®. See id. The "mass-market" discount cigarette brand manufactured by Liggett is Pyramid®. See id. In addition, Liggett manufactures various "private label," "control label" and generic cigarettes.*fn2 See id.

RJR is a corporation organized and existing under the laws of the State of New Jersey, with its principal place of business located in Winston-Salem, North Carolina. See id. at ¶ 10. It appears RJR transacts business in New Jersey through its sales office located in Middlesex County. See id. RJR manufactures cigarettes for sale through retail outlets throughout the United States under various brand names, including Camel®, Winston®, Doral® and the Forsyth family brands. See id.

B. Facts

As mentioned, Liggett primarily alleges violations of the Federal antitrust laws as the basis of the instant action. See id. at ¶ 1. For example, Liggett alleges RJR illegally contracted and conspired with cigarette retailers to "restrain trade by engaging in a pervasive scheme of anticompetitive conduct." See id. At issue is the "Every Day Low Price" (the "EDLP") plan promulgated by RJR and the EDLP contracts (the "EDLP Contracts") utilized by RJR to implement the program. See id. at ¶ 2. Liggett alleges the purpose and effect of the EDLP plan "has been to impede the functions of the marketplace by reducing consumer choice, raising prices paid by consumers, and foreclosing competition in the manufacture and sale of discount cigarettes throughout the United States."*fn3 Id.

As stated in the Complaint, it appears cigarettes are sold by manufacturers to wholesalers who, in turn, sell cigarettes to retailers throughout the United States. See id. at ¶ 13. In addition, it appears cigarettes are directly sold by manufacturers to large retailers located in the United States. See id. Liggett alleges retailers "typically" do not buy cigarettes through any other means. See id. at ¶ 15. As a result, the Complaint alleges Liggett, like other cigarette manufactures, maintains direct relationships with its retailers. See id. In an effort to foster its relationship with retailers, Liggett alleges it provides direct discount payments to retailers designed to reduce the retail price of its products and make those products competitively priced to the consumer. See id.

Liggett alleges the relevant market effected by the EDLP plan is the manufacture and sale of discount cigarettes throughout the United States. See id. at ¶ 14. Liggett alleges that because of the "substantial" price disparity between discount and premium tobacco products (cigarettes, pipe tobacco and cigars), consumers of discount cigarettes do not consider premium tobacco products to be viable substitutes for discount cigarettes. See id. Liggett further alleges manufacturers of cigarettes view discount and premium cigarettes as distinctly different products. See id. Liggett alleges, moreover, that industry analysts view discount cigarettes as an entirely separate market. See id.

Liggett alleges RJR is one of four major cigarette manufacturers in the United States and accounts for an estimated 30% of the discount cigarette sales in the country. See id. at ¶ 16. The Complaint further alleges the importance of RJR in the discount cigarette market is magnified by the "high barriers" unique to the entry into the market for the manufacture and sale of discount cigarettes in the United States. See id. at ¶ 17. For example, Liggett alleges the "entry barriers" include the "requirements for extensive distribution organizations, large capital outlays for sophisticated production equipment, substantial inventory investment and costly promotional spending." Id.

As mentioned, the instant action challenges the EDLP plan developed by RJR and implemented through the EDLP Contracts entered into between RJR and various cigarette retailers. See id. at ¶ 2. Liggett alleges the EDLP Contracts require retailers to insure that no competitive cigarettes are priced below RJR brand cigarettes. See id. In this regard, the Complaint alleges RJR accomplishes its price-fixing "scheme" by requiring that cigarette retailers, inter alia, raise the prices of competing discount cigarettes in return for "substantial payments" (the "EDLP Payments"). See id. at ¶¶ 2, 21.

Liggett further alleges that despite RJR competitors offering retailers "substantial discounts" (for the purpose of reducing the price of their product) the EDLP plan prohibits retailers from lowering the price of competing discount cigarettes, regardless of manufacturer discounts. See id. at ¶ 2. Liggett alleges the EDLP Payments are made to retailers to compensate them for the increased price and resultant decrease in sales of competing discount cigarettes. See id. at ¶ 21. "The EDLP Contracts thus have the effect of preventing retailers from accepting any discounts from other manufacturers (Liggett) that would lower the price of competing product below that of the RJR product." Id. at ¶ 2.

The Complaint further alleges the anticompetitive effects of the EDLP plan are "intensified" by the enforcement mechanism implemented by RJR. See id. at ¶ 22. Liggett alleges that retailers are required to rely upon their individual RJR sales representative to explain and construe the obligations of the retailers under the EDLP Contracts. See id.

EDLP Contracts specifically provide that the opinion of the RJR representative is final regarding contract interpretation. Cigarette retailers, fearing a loss of EDLP Contract payments or other punitive measures by RJR, succumb to obligations as set forth by their RJR representatives. The requirements enforced by RJR representatives often go beyond the express terms of the EDLP Contracts.

Id.

In particular, Liggett alleges that the EDLP Contracts provide in relevant part:

Retailer, if given certain pricing protection against other competitive products, agrees to offer and promote [RJR Discount Cigarette Brand] as its primary cigarette in the lowest price category at the everyday low price at all times and to provide [Retailer's Store] with a minimum of one prominent price communication sign, as well as preferred merchandising space and locations as compared to other products in the low price category.

Id. at ¶ 23. (alterations in the Complaint).

As a result of the implementation of the EDLP plan, the Complaint alleges RJR and participating retailers have increased prices to consumers and excluded competition from other discount cigarette manufacturers. See id. at ¶ 26. "Competing discount cigarette makers have been deprived of effective retail sales outlets for their products. By suppressing price competition, and consequently, sales of competitive discount products, RJR has maintained higher prices, and increased its own sales and profits at the expense of the consuming public and competing manufacturers." Id. Liggett, moreover, alleges

But for RJR's EDLP Contracts, there would be more competition in the market for the manufacture and sale of discount cigarettes in the United States. RJR's unlawful conduct has caused and is causing significant injury to competition in the relevant market by, inter alia: (a) setting minimum retail prices for discount cigarettes and fixing related prices between RJR and Liggett's discount cigarettes; (b) materially excluding and/or impeding Liggett and other cigarette makers from competing on price for the sale of discount cigarettes through retail outlets by interfering with the manner in which retail outlets price competing cigarette products; (c) raising prices on discount cigarettes, reducing output and/or otherwise distorting the competitive and efficient operation of the retail cigarette market that would otherwise prevail but for RJR's unlawful practices; and (d) raising the costs of other cigarette makers by hindering their efforts to compete on price.

Id. at ¶ 27. Liggett further alleges it is unable to maintain or increase sales "not because of weakened consumer demand but because of the chokehold [sic] that RJR has placed at the retail level of the relevant market, preventing Liggett from competing on price and substantially reducing the volume of Liggett's sales and profits." Id. at ¶ 28.

In Count one of the Complaint, Liggett alleges, inter alia, the EDLP Contracts, as enforced by RJR, create a "naked restraint" on interbrand price competition which constitutes a per se violation of Section 1 of the Sherman Act. See Count One, ¶¶ 31-34.*fn4

Liggett alleges RJR instituted a similar suit against Philip Morris Inc. ("Philip Morris"), in the Middle District of North Carolina (the "RJR North Carolina Case").*fn5 Liggett posits that RJR alleged Philip Morris engaged in an interbrand price-fixing scheme. Id. at ¶ 33. Liggett specifically alleges "RJR admits that similar contracts imposed by Philip Morris significantly restrict interbrand price competition." Id. (quoting the RJR North Carolina Case Memorandum in Support of Motion for Preliminary Injunction at 2). The Complaint, moreover, alleges that RJR further argued that "[Philip Morris's] substantial prohibition against competitive price promotions is even more antithetical to competition than per se unlawful vertical price-fixing, since the restraint here operates to stifle interbrand and not simply intrabrand price competition." Id. (quoting the RJR North Carolina Case Memorandum in Support of Motion for Preliminary Injunction at 29).

In Count two of the Complaint, Liggett alleges the EDLP Contracts have resulted in "actual detrimental effects," which include price increases for discount cigarettes in the United States; "and[,] or[,] the effective exclusion of Liggett and other competitors from sales of discount cigarettes." Id. at ¶ 36. Liggett further alleges these "detrimental effects" indicate the EDLP Contracts constitute a violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. See id.

Liggett, moreover, alleges RJR does not have a legitimate business purpose for instituting and enforcing the EDLP Contracts. See id. at ¶ 38. In the alternative, Liggett alleges that even assuming RJR has a legitimate business purpose for the EDLP Contracts, that purpose is "far outweighed by the excessive burdens imposed thereby, and any legitimate business purposes could be accomplished by less restrictive means." Id.

In Count three of the Complaint, Liggett alleges the "detrimental effects" resulting from the EDLP Contracts constitute a per se violation of the New Jersey Antitrust Act (the "New Jersey Antitrust Act"), N.J.S.A. 56:9-3.*fn6 See id. at ¶ 41. In the alternative, the Complaint alleges that the conduct of RJR constitutes a "rule of reason violation of the New Jersey Antitrust Act."*fn7 Id. (citing N.J.S.A. 56:9-3).

In count four of the Complaint, it is alleged Liggett had, and continues to have, a reasonable expectation of economic benefit from its business relationships with cigarette retailers. See id. at ¶ 45. Liggett also alleges RJR "knew of the existence of Liggett's expectation of economic benefit . . . [and] intentionally and wrongfully engaged in acts and conduct that interfered with Liggett's expectation of economic benefit. . . ." Id. at ¶ 46. Liggett further alleges it would have received its anticipated economic benefit "but for RJR's interference." See id. at ¶ 47. Liggett, moreover, alleges that the complained-of conduct of RJR is not privileged and is without justification. See id. at ¶ 48.

Finally, Liggett demands that RJR be enjoined from its practice of "soliciting, entering into and enforcing exclusionary contracts with retailers for the distribution and sale of discount cigarettes, and from engaging in other practices designed to foreclose and exclude Liggett from the relevant market, pursuant to Section 16 of the Clayton Act." See id. at ¶¶ 34, 39, 43, pp. 13, ¶ b (citation omitted). Liggett also seeks compensatory damages, as provided for by Section 4 of the Clayton Act. See id. at pp. 13, ¶ d.

Discussion

RJR argued the instant action should be transferred to the Middle District of North Carolina, pursuant to Section 1404(a), because the Middle District of North Carolina is the forum where both Liggett and RJR maintain their principal place of business and where the "central events giving rise to this suit occurred. . . ." See Moving Brief at 1, 11; Blynn Declaration at ¶¶ 3, 6, 8, 9-11; Reply Brief at 1-7; Toulon Declaration at ¶¶ 2-3. In addition, RJR argued that to the extent the EDLP plan caused Liggett to experience reduced sales of its discount cigarettes, the impact of the EDLP plan would be most noticeably felt in the Middle District of North Carolina (the location of the sole manufacturing facility and principal place of business of Liggett). See Moving Brief at 2, 14; Blynn Declaration at ¶¶ 2, 11; Reply Brief at 2-3, 7.

By contrast, Liggett argued that the "plaintiff's choice of a proper forum is a paramount consideration," and "RJR has offered no adequate reason to negate Liggett's choice of this [c]ourt as the appropriate forum to try RJR's unlawful conduct." Opp. Brief at 9. Specifically, Liggett argued that of its five "autonomous strategic business units," (a three-branch marketing and sales unit, a manufacturing unit and an executive unit), one of the three co-equal headquarters for marketing and sales is located in New Jersey.*fn8 See Opp. Brief at 12, 18; Petch Declaration at ¶¶ 3-11; Gallo Declaration at 5. Liggett, therefore, maintained that its field sales managers and representatives from the NSBU "are likely to be witnesses in any trial regarding the scope, nature, and effects of RJR's EDLP program." Gallo Declaration at ¶ 5 (emphasis added). Liggett, however, also asserted that "[b]ecause of the structure of [Liggett] . . . and based on our investigation, we anticipate that roughly equal numbers of Liggett's relevant witnesses and documents will be drawn from New Jersey, North Carolina, and Texas." Id. at ¶ 6 (emphasis added). In addition, Liggett argued that RJR is a New Jersey corporation and maintains a regional sales office in New Jersey. See Opp. Brief at 4.

Liggett, moreover, argued that because the EDLP plan operates on a national scale, causing Liggett injury "in every state in the nation," non-party witnesses could potentially include "approximately 57,000 cigarette retailers nationwide. . . ." See Opp. Brief at 1, 10 (emphasis added). In this regard, Liggett identified twenty-three potential non-party retailer witnesses. See id.; Gallo Declaration at ¶ 2. In addition, Liggett asserted that these potential non-party witnesses "may possess information related to the [EDLP] program's effects on discount cigarette prices." Gallo Declaration at ¶ 2 (emphasis added). As mentioned, Liggett also argued the majority of relevant party proof will be produced from "outside of North Carolina," as the "field offices of both parties will be the source of a significant number of relevant witnesses and documents." See Opp. Brief at 11-12; Petch Declaration at ¶ 8; Gallo Declaration at ¶ 5. Finally, Liggett contended New Jersey has a strong interest in "preventing businesses from engaging in anticompetitive conduct within its borders, especially when that conduct harms New Jersey consumers." See Opp. Brief at 14.

I. Standard of Review Under Section 1404(a)

Section 1404(a) authorizes a District Court to transfer a case to any other district where venue is proper "[f]or the convenience of the parties and witnesses, in the interests of justice. . . ." 28 U.S.C. § 1404(a).*fn9 The purpose of Section 1404(a) is to avoid the waste of time, energy and money and, in addition, to safeguard litigants, witnesses and the public against avoidable inconvenience and expense. See Lexecon Inc., et al. v. Milberg Weiss Bershad Hynes & Lerach, et al., 523 U.S. 26, 33, 118 S.Ct. 956, 140 L.Ed.2d 62 (1998); Jumara v. State Farm Ins. Co., 55 F.3d 873, 879 (3d Cir. 1995); In re Emerson Radio Corp., 52 F.3d 50, 55 (3d Cir. 1995); SmithKline Beecham Corp. v. Geneva Pharmaceuticals, Inc., 2000 WL 217642 at *1 (E.D.Pa. Feb. 11, 2000); Westcode, Inc. v. RBE Electronics, Inc., 2000 WL 124566 at *7 (E.D.Pa. Feb. 1, 2000); Ricoh Co. Ltd. v. Honeywell, Inc., 817 F. Supp. 473 (D.N.J. 1993); American Tel. & Tel. Co. v. MCI Communications Corp., 736 F. Supp. 1294, 1305 (D.N.J. 1990).

There are three factors to consider when determining whether to transfer a matter (1) the convenience of the parties, (2) the convenience of the witnesses, and (3) the interests of justice. See 28 U.S.C. § 1404(a); Jumara, 55 F.3d at 879; Geneva Pharmaceuticals, Inc., 2000 WL 217642 at *1; Larami Ltd. v. Yes! Entertainment Corp., 244 B.R. 56, 60-61 (D.N.J. 2000); RBE Electronics, 2000 WL 124566 at *7; Hudson United Bank v. Chase Manhattan Bank of Conn., NA, 832 F. Supp. 881, 887 (D.N.J. 1993), aff'd, 43 F.3d 843 (3d Cir. 1994); Honeywell, 817 F. Supp. at 479. The transfer analysis is not limited, however, to these factors.

The decision to transfer must incorporate "all relevant factors to determine whether on balance the litigation [will] more conveniently proceed and the interests of justice be better served by transfer to a different forum." Geneva Pharmaceuticals, Inc., 2000 WL 217642 at *1 (quoting Jumara, 55 F.3d at 879) (citation omitted); Yes! Entertainment, 244 B.R. at 60-61; Tischio v. Bontex, Inc., 16 F. Supp.2d 511, 519 (D.N.J. 1998); Rappoport v. Steven Spielberg, Inc., 16 F. Supp.2d 481, 498 (D.N.J. 1998); Hudson United Bank, 832 F. Supp. at 888.

As mentioned, the alternative forum proposed by RJR in the instant action is the Middle District of North Carolina. See Moving Brief at 1; Blynn Declaration at ¶ 1; Reply Memorandum at 1; Toulon Declaration at ¶ 1. As a preliminary matter, it must be determined whether the proposed transferee venue is one in which the case "might have been brought." See 28 U.S.C. § 1404(a); Jumara, 55 F.3d at 879; In re ...


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