The Aftermath of a Type I Error: The Case of Conwood Co. v. United States Tobacco

Josh Wright —  17 October 2007

It looks like California consumers, unlike their counterparts in several other states, will be getting cash instead of coupons in their settlement against U.S. Tobacco in one of the many follow-on actions to Conwood Co. v. United States Tobacco.  The settlement looks to be in the range of $96 million with qualifying customers taking home anywhere between $195 and $585 depending on how many consumers are willing to sign a sworn statement that they purchased more than 30 cans of certain brands in the relevant time period.

In the original case, a federal jury in Kentucky deliberated for about four hours before finding that UST’s actions in distributing moist snuff tobacco violated Section 2 of the Sherman Act and awarded Conwood treble damages in the amount of $1.05 billion.  The decision was later affirmed by the Sixth Circuit.  It is not surprising that Conwood prevailed in the private litigation once the case got to the jury.  After all, UST’s conduct included some pretty distasteful stuff that was surely tortious, e.g. destroying rival’s product and display racks, misleading retailers, etc. 

For this reason, Conwood is most often talked about my antitrust commentators as a classic example of a “cheap exclusion case,” much like the textbook example of blowing up the rival’s factory.  But there are some problems with this characterization, not the least of which is that Section 2 still requires that plaintiffs demonstrate actual competitive harm and engage in some analysis on that issue.  Also, commentators frequently (following the Sixth Circuit’s example) ignore the fact that Conwood prevailed under a Section 2 theory that included not just the tortious conduct, but also presumptively pro-competitive conduct such as offering loyalty programs and category management services to retailers.  The Sixth Circuit never disaggregated lawful from unlawful conduct for the purposes of liability or damages analysis.

Unfortunately, some language in the Sixth Circuit decision also broadly condemns category management (when a manufacturer provides valuable input for shelf space allocation decisions) without any analysis.  This part of the decision, which ignores the potentially pro-competitive virtues of both category management and exclusive contracts is an excellent of example of the following tendency noted by Coase (1972):

“…if an economist finds something ­ a business practice of one sort or other–that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.”

Coase, of course, was talking about economists.  But I think the warning is equally applicable to antitrust lawyers and judges and especially appropriate in the retail context where these mistakes are made frequently.  While it is true that UST’s tortious conduct is indefensible, a monopoly explanation is unlikely for those acts.  Further, the real analytical error is that the antitrust law requires a showing that this conduct harms consumers even when the conduct is surely not “competition on the merits.”  The bigger mistake, in my view, is not about the tortious conduct.  It’s about the category management contracts — an arrangement that is incredibly pervasive in modern retail distribution.  The Sixth attaches a causal connection between the UST’s position as category manager and the tortious acts without any explanation, justification, or even attempt to evaluate the conduct within the well established frameworks for analyzing such arrangements in antitrust.  This does not bode well for category managers with significant market shares trying to figure out whether their category management arrangements might create Section 2 liability nightmares.

Further, the damages calculations at trial in the original Conwood case have been heavily criticized by many prominent scholars.  See, e.g. D.H. Kaye’s analysis here and here, a scathing amicus brief in support of a writ for certiorari from several leading economists attacking the damages estimates, and a lengthy critical discussion in Herbert Hovenkamp’s Antitrust Enterprise which makes Conwood the poster child of sorts of the case against private litigation.

My own critique of the Conwood decision which covers these and some other points, as well as a pro-competitive economic theory of category management, can be found in this draft article (currently under review at a journal). 

2 responses to The Aftermath of a Type I Error: The Case of Conwood Co. v. United States Tobacco

  1. 

    Nice post, Josh. Conwood is a disgrace. It’s reminiscent of an earlier era of antitrust adjudication, when, to quote Bork, antitrust was “in the good old American tradition of the sheriff of a frontier town: he did not sift evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.” UST got itself a billion dollar pistol-whipping.

  2. 
    market failure, right here 17 October 2007 at 12:36 pm

    Doesn’t look like the best damages testimony ever, but it seems to me like the Court should have higher priorities–such as establishing that anticompetitive pharmaceutical settlement agreements violate Section 1.