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Roxul USA, Inc. v. Armstrong World Industries Inc.

United States District Court, D. Delaware

March 8, 2019



          KEARNEY, J.

         Commercial acoustical ceiling tile manufacturer Roxul USA, Inc., doing business as Rockfon, claims its largest American competitor Armstrong World Industries, Inc. requires building supply distributors sign agreements, as a condition of selling Armstrong ceiling tiles, prohibiting the distributor from selling a ceiling tile other than Armstrong ceiling tile and, even if the distributor does not sell Armstrong ceiling tile in a certain geographic area, to still not sell Roxul's ceiling tile sold through its Rockfon company. Roxul seeks damages from Armstrong alleging anti-competitive conduct prohibited by federal law. Armstrong claims its agreements are not anti-competitive under federal law. Roxul hired Professor Einer Elhauge of Harvard University to assist the jury in understanding the alleged anti-competitive conduct. Armstrong hired Dr. Janusz Ordover of New York University to assist the jury in understanding how its agreements are not anti-competitive. We face the prototypical battle of economic competition experts. Armstrong now moves we preclude Professor Elhauge's opinions as lacking a reliable fact basis and possibly not fitting Roxul's anti-competitive claims. We studied Professor Elhauge's lengthy opinions. At counsel's request, we evaluated his testimony in a hearing where Armstrong cross-examined him. After this analysis, we find Professor Elhauge's testimony based on his disclosed opinions is reliable, fits the issues, and will assist our jury. We deny Armstrong's motion to preclude his opinions at trial.

         I. Analysis.[1]

         Armstrong argues Professor Elhauge's methodology supporting his opinions lacks reliability and his opinions do not fit the facts of this complex anti-trust challenge in a national market with multiple channels to sales. Roxul, the seller of acoustical ceiling tile through its United States company Rockfon, responds Professor Elhauge used reliable methods fitting the facts. While finding Armstrong raises several fair questions better suited for jury evaluation, we cannot preclude Professor Elhauge's opinions.

         Federal Rule of Evidence 702 governs admissibility of an expert's testimony. Rule 702 provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.[2]

         When determining whether to exclude testimony, we act "as a gatekeeper to ensure that the expert's opinion is based on the methods and procedures of science rather than on subjective belief or unsupported speculation."[3] As a gatekeeper, we must ensure the proffered expert opinions "reliably follow from the facts known to the expert and the methodology used."[4] We do not preclude expert opinions because we may disagree with the findings. Roxul, in adducing Professor Elhauge's opinions, bears the burden of showing a basis for admitting his testimony by a preponderance of the evidence.

         Armstrong advances several arguments as to why we should exclude Professor Elhauge's testimony as to foreclosure, anticompetitive conduct, and injury. We address each in turn.

         A. Professor Elhauge may opine as to substantial foreclosure and anticompetitive harm.

         1. Armstrong's challenge to falsity of foreclosure assumption.

         Armstrong argues we should exclude Professor Elhauge's opinion regarding substantial foreclosure because (1) he ignored Rockfon's growth, (2) he failed to assert Armstrong's exclusivity agreements bind contractors to purchase Armstrong tiles, (3) he failed to prove contractors cannot freely choose to purchase different tile brands.

         Roxul argues (1) Professor Elhauge did not ignore Rockfon's growth but found Rockfon would have grown "two times faster but-for the market foreclosure, "[5] and (2) our Court of Appeals rejected arguments against foreclosure when the defendant did not foreclose the "ultimate consumers." Roxul can still show foreclosure despite its growth. In McWane, Inc. v. FTC, the court of appeals for the Eleventh Circuit held a plaintiff can prove foreclosure even when "the targeted rival gained market share-but less than it likely would have absent the conduct."[6] The court, citing our Court of Appeals' decisions in ZF Meritor and Dentsply, explained "exclusive dealing measures that slow a rival's expansion can still produce consumer injury."[7]

         While Armstrong argues its exclusivity agreements do not bind contractors, we do not look only at contractors as the "ultimate consumers." In Dentsply, the defendant manufacturer argued because the plaintiff could sell its tooth products directly to dental laboratories, it had not foreclosed the plaintiff by exclusively dealing with dental distributors. The district court concluded the defendant could not exclude rivals from the market because it did not have exclusive agreements with the "ultimate consumers," the dental laboratories.[8] Our Court of Appeals explained the district court clearly erred by focusing on "ultimate consumers" when manufacturers sell to both distributors and dental laboratories.[9] Our Court of Appeals found the defendant excluded rivals from the market through its exclusive arrangements with distributors, even though the agreements did not contractually bind the dental laboratories.

         We do not exclude Professor Elhauge's opinion on foreclosure. Professor Elhauge amply demonstrates while Rockfon grew in the relevant time period, it grew "less than it likely would have absent the conduct." Professor Elhauge cites evidence showing, while Armstrong's exclusivity agreements do not bind contractors, contractors may not have "the ability to make a meaningful choice" because of their reliance on preferred distributors.[10] Professor Elhauge cited evidence showing the tiles brands a distributor carries influence a contractor's choice.[11]

         Both Professor Elhauge and Dr. Ordover relied on a survey amongst contractors.[12] When asked whether they prefer a particular ceiling tile brand, several contractors identified distributor availability as the most important factor, with responses including "[n]umber 1 is our supplier," "the main thing [is] the service I get from my distributor," and "having the distributor have the product in stock."[13] When asked to rate factors "important to contractors in determining their preferred brand," the most important factors were "lowest price for product" and "availability and service from the distributor or dealer you prefer."[14] Professor Elhauge also relied on evidence showing distributors' sales forces influence the brands contractors purchase.[15] We do not exclude as unreliable Professor Elhauge's opinion regarding foreclosure because Armstrong's exclusivity agreements do not contractually bind end-users.

         2. Challenge to including repair and replace sales.

         Armstrong argues we must exclude Professor Elhauge's foreclosure opinion because it incorrectly includes Armstrong's "repair and replace" sales. Roxul responds Armstrong's foreclosure share includes "all sales subject to the foreclosing conduct, even if [Armstrong] still would have made some of those sales but-for the foreclosing conduct."[16] Professor Elhauge testified at our Daubert hearing Armstrong's position in "repair and replace" jobs exacerbate the effect of its exclusivity agreements.

         While Armstrong argues Roxul's inclusion of "repair and replace" sales warrants exclusion of Professor Elhauge's opinion, we note our Court of Appeals have affirmed foreclosure findings even when the foreclosure calculations include sales the defendant would have made despite the alleged anticompetitive conduct.[17] To the extent Armstrong challenges Professor Elhauge's foreclosure calculation, it can cross-examine him on his basis and conclusions.

         3.Challenge to aggregating USG and Armstrong conduct.

         Armstrong argues Professor Elhauge improperly aggregates the conduct of USG and Armstrong to arrive at its foreclosure calculation. Roxul argues Supreme Court precedent allows Professor Elhauge to aggregate Armstrong and USG's conduct.

         In Standard Oil Co. of California v. United States, the United States sued Standard Oil alleging its exclusivity contracts with petroleum dealers violated the Sherman and Clayton Acts.[18]The Supreme Court considered Standard Oil's competitors used similar exclusivity agreements. In finding foreclosure, the Court explained the effect of Standard Oil and its competitors' conduct "ha[d] been to enable the established suppliers individually to maintain their own standing and at the same time collectively, even though not collusively, to prevent a late arrival from wresting away more than an insignificant portion of the market."[19]

         In Federal Trade Commission v. Motion Picture Advertising Service Co., the defendant advertising company had exclusivity agreements with movie theaters to play advertisements in the theaters.[20] The defendant and three other companies in the market maintained exclusive agreements with theaters.[21] The Commission charged only the defendant and found the "[defendant]'s exclusive contracts unreasonably restrain competition and tend to monopoly" under the Federal Trade Commission Act.[22] The Supreme Court affirmed the Commission. It found substantial evidence to support the Commission's finding, explaining the "[defendant] and the three other major companies have foreclosed to competitors 75 percent of all available outlets for this business throughout the United States."[23] The Supreme Court also found the defendant's conduct violated the Sherman Act.

         Armstrong cites the dissent in Motion Picture to support its argument Roxul may not aggregate foreclosure. Concerning the court's decision to aggregate the conduct of the defendant and the non-defendant companies, Justice Frankfurter, who wrote the majority opinion in Standard Oil, explained "[w]hile the existence of the other exclusive contracts is, of course, not irrelevant in a market analysis, this Court has never decided that they may, in the absence of conspiracy, be aggregated to support a charge of Sherman Law violation."[24]

         While Armstrong cites district court cases outside our circuit, we find the Supreme Court approved aggregation in the context of the antitrust laws. Again, Armstrong can cross-examine Professor Elhauge on his basis and conclusions.

         4.Challenge to anticompetitive harm for denying "most efficient" distributors.

         Armstrong argues Professor Elhauge's opinion warrants exclusion because he bases anticompetitive harm on Armstrong foreclosing the "most efficient" distributors. Roxul argues our Court of Appeals allows a finding of foreclosure when the defendant prevents access to the most efficient distributors.

         In Dentsply, the defendant signed exclusivity agreements with distributors to sell artificial teeth. The defendant argued against foreclosure because manufacturers could sell teeth directly to dental laboratories. The defendant's competitor sold through dealers, but the defendant maintained exclusivity agreements with twenty-three "key dealers" in the market, leaving hundreds of other distributors for competitors.[25] Our Court of Appeals reversed the district court's grant of summary judgment for the defendant, holding the defendant excluded rivals because the defendant maintained exclusive dealing agreements with "the key dealers."[26] Although competitors could sell through nonexclusive distributors, the court held such alternative channels were not viable as the defendant "block[ed] access to the key dealers," explaining "the firm that ties up the key dealers rules the market."[27]

         Armstrong's argument for excluding Professor Elhauge's opinion citing preclusion from the "most effective dealers" fails. As explained, a jury may find no foreclosure if we find Rockfon can utilize alternative channels for selling ceiling tiles. But these alternative channels must be viable. If Rockfon's distributors were so inefficient as to prevent competition from rivals, a jury may find such alternatives to foreclosed distributors are not viable. Professor Elhauge cited evidence Armstrong's largest distributors-Foundation and Gypsum Management-purchased smaller distributors selling Rockfon tiles. After the acquisition, the "No Rockfon" clause in Foundation and Gypsum Management's agreements then bound these smaller distributors, foreclosing a portion of the distribution network. Roxul contends Foundation and Gypsum Management are two of the biggest distributors in the market.

         Roxul adduced evidence Armstrong had exclusivity agreements with "stronger distributors."[28] Professor Elhauge explained the 2017 Simon-Kutcher report shows Rockfon had access to lesser quality distributors due to foreclosure. Simon-Kutcher rated distributors on a scale of one to five, weakest to strongest.[29] It concluded distributors covered by Armstrong's exclusivity agreements rated on average 3.5, while unforeclosed distributors rated 2.2.[30] Professor Elhauge also cited evidence Armstrong's exclusivity forced Rockfon to rely on an insulation distributor with "lack of specialized [ceiling tile] knowledge and ceiling contractor relationships."[31]

         We cannot exclude Professor Elhauge's testimony based on this evidence-based opinion. In his foreclosure analysis, Professor Elhauge assesses the ceiling tile market, including the effectiveness of the distributors in the market. He cites evidence Rockfon could not access the most effective distributors. A jury can use this evidence to determine whether the alternative channels available to Rockfon-here, the inferior "unforeclosed" distributors-were a viable means to sell its products. Armstrong cites caselaw outside of our Circuit to argue we cannot find foreclosure because Rockfon could not access the most efficient distributors. But our Court of Appeals requires we must look whether alternative channels are viable. Professor Elhauge's opinion assists the jury in this analysis, subject to cross-examination and rebuttal.

         5. Challenge to failing to show substantial anticompetitive effect.

         Armstrong argues Professor Elhauge fails to show the exclusivity agreements had a "substantial" anticompetitive effect on competition.[32] Roxul argues Professor Elhauge shows (1) Rockfon would have 100% greater revenue shares but for foreclosure, (2) foreclosure caused Rockfon to delay investment in a United States manufacturing plant; (3) Rockfon's slow growth prevented it from achieving economies of scale.

         We find Professor Elhauge shows substantial anticompetitive effect. Our Court of Appeals explained when a monopolist enacts exclusivity agreements impeding a new market entrant, anticompetitive effect results "from the delay that the dominant firm imposes on the smaller rival's growth."[33] We find Professor Elhauge presents evidence of substantial anticompetitive effect. The jury may not believe this opinion. But it is reliable and fits the issues.

         B. Professor Elhauge may opine Armstrong's exclusivity ...

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