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MacDermid Printing Solutions LLC v. Cortron Corp.

United States Court of Appeals, Second Circuit

August 10, 2016

MacDermid Printing Solutions LLC, Plaintiff-Counter-Defendant-Appellee,
v.
Cortron Corporation, Defendant-Counter-Claimant-Appellant.

          Argued: May 13, 2016

         On Appeal from the United States District Court for the District of Connecticut

         On appeal from a judgment of the United States District Court for the District of Connecticut (Michael P. Shea, Judge), which awarded damages of $64, 670, 821 pursuant to a jury verdict on claims for violations of federal and state antitrust laws, breach of contract, misappropriation of trade secrets, spoliation, and violations of state statutes prohibiting computer crimes and unfair trade practices. Defendant-appellant argues that the District Court erred in denying a new trial or judgment as a matter of law on plaintiff-appellee's antitrust claims; permitting plaintiff-appellee to present evidence previously withheld under the attorney-client privilege and work- product doctrine; and failing to remit or to order a new trial on damages regarding the antitrust and trade-secrets claims.

         We hold that the District Court erred in denying defendant- appellant judgment as a matter of law with respect to the antitrust claims because plaintiff-appellee failed to prove that the challenged conduct harmed competition. We therefore REVERSE the judgment of the District Court with respect to the federal and state antitrust claims. We otherwise AFFIRM the judgment of the District Court and REMAND the cause to the District Court to recalculate damages in a manner consistent with this opinion.

          John R. Horvack, Jr. (James K. Robertson, Jr., Fatima Lahnin, John L. Cordani, Jr., on the brief), Carmody Torrance Sandak & Hennessey LLP, New Haven, CT; for Plaintiff-Counter-Defendant-Appellee.

          John P. Elwood (Joshua S. Johnson, on the brief), Vinson & Elkins LLP, Washington, DC; Harry First, New York, NY; Craig A. Raabe, Nuala E. Droney, Robinson & Cole LLP, Hartford, CT; for Defendant-Counter- Claimant-Appellant.

          Before: Cabranes, Straub, and Lohier, Circuit Judges.

          José A. Cabranes, Circuit Judge

         This appeal primarily concerns the requirements for proving an adverse effect on competition for purposes of section 1 of the Sherman Act, 15 U.S.C. § 1, in cases where the plaintiff has not proved that the allegedly anticompetitive behavior led to higher prices, reduced output, or lower quality in the market. We hold that in such cases, a plaintiff may not prevail under the "rule of reason" merely by proving that (1) the defendant exercised "market power, " and (2) the challenged behavior may have misled consumers to believe that certain products were no longer available, without showing that consumers actually experienced reduced access to those products.

         Defendant-appellant Cortron Corp. ("Cortron") appeals from a February 17, 2015 judgment of the United States District Court for the District of Connecticut (Michael P. Shea, Judge), which awarded damages of $64, 670, 821 pursuant to a jury verdict for plaintiff- appellee MacDermid Printing Solutions LLC ("MacDermid") on its claims for violations of federal and Connecticut antitrust laws, breach of contract, misappropriation of trade secrets, spoliation, and violations of Connecticut statutes prohibiting computer crimes and unfair trade practices. MacDermid had alleged that its commercial rival, nonparty E. I. du Pont de Nemours & Co. ("DuPont"), filed a bogus patent-infringement suit against Cortron, MacDermid's supplier, and that when Cortron and DuPont settled that suit, they entered into an anticompetitive conspiracy that damaged MacDermid's business and hurt consumers.

         On appeal, Cortron argues that the District Court erred in (1) denying Cortron a new trial or judgment as a matter of law on its antitrust claims; (2) permitting MacDermid to present evidence of its lawyers' patent advice; (3) concluding that the jury's identical awards on each of the antitrust claims were not duplicative; and (4) failing to remit or to order a new trial on damages regarding the antitrust and trade-secrets claims.

         We agree with Cortron that the District Court erred in denying Cortron judgment as a matter of law with respect to MacDermid's antitrust claims because MacDermid failed to present evidence that Cortron's conduct harmed competition. We therefore REVERSE the judgment of the District Court with respect to the antitrust claims. We otherwise AFFIRM the judgment of the District Court and REMAND the cause to the District Court to recalculate damages in a manner consistent with this opinion.

         I. BACKGROUND

         A. Factual Background[1]

         MacDermid and DuPont market thermal flexographic processors, which are used to make plates for printing commercial packaging. Such processors are typically sold either to commercial printers, which produce packaging for consumer-goods companies, or to "trade shops, " which supply plates to commercial printers.

         DuPont introduced the first thermal flexographic processor in 2000, under the "FAST" trade name. In 2002, MacDermid began to develop an alternative to FAST, which it introduced in 2004 under the "LAVA" trade name. At all relevant times, MacDermid and DuPont were the only companies that marketed thermal flexographic processors, and DuPont had a dominant share of that market.[2]

         Soon after introducing its LAVA machines, MacDermid entered into two contracts with Cortron. Under the "Joint Development Agreement, " signed in November 2004, MacDermid would pay Cortron to develop a second-generation LAVA processor. Under the "Manufacturing Agreement, " signed in April 2005, MacDermid would pay Cortron to build first-generation LAVA processors and to safeguard MacDermid's proprietary information.

         In 2008, DuPont scheduled a meeting with Cortron, ostensibly to discuss potential business opportunities. During the meeting, which took place on April 1, 2008, DuPont informed Cortron that it had filed a lawsuit alleging that Cortron's work for MacDermid infringed DuPont Patent No. 6, 797, 454 ("the '454 patent").

         DuPont and Cortron settled that suit in June 2008. As part of the settlement, Cortron agreed "to immediately cease manufacturing, selling, and offering to sell" thermal flexographic systems;[3] "to immediately cease and desist providing all service and/or technical support" for LAVA products; and to give DuPont "all Technical Information relating to" LAVA.[4] In exchange, DuPont agreed, inter alia, to dismiss its patent-infringement suit with prejudice and to indemnify Cortron against any lawsuit brought by MacDermid. In addition, under a separate agreement, DuPont paid Cortron about $140, 000 for design work related to certain DuPont products. Pursuant to the settlement agreement, Cortron gave DuPont all technical information it had regarding LAVA technology before deleting that information from its own systems. About five months later, Cortron ceased operations.

         DuPont announced the settlement in a press release issued on July 30, 2008:

Under the terms of the agreement, Cortron . . . agrees to immediately cease manufacturing LAVA [processors], as well as to immediately discontinue providing all service, spare parts, and technical support for any LAVA equipment . . . . Thermal processing equipment manufactured by Cortron has been marketed and sold by MacDermid Printing Solutions, LLC under the LAVA trade name.[5]

         Unsurprisingly, DuPont hoped that this press release would make potential customers "more likely to buy DuPont's FAST" processors and "less likely" to buy MacDermid's competing LAVA products.[6] Later that day, MacDermid issued its own press release, which accused DuPont of "inappropriately rais[ing] some questions regarding MacDermid's ability to support" its LAVA products and "assure[d] [MacDermid's] customers that it will continue to sell, support and service" LAVA equipment.[7]

         Meanwhile, MacDermid had already started searching for a new manufacturer to replace Cortron. MacDermid had been concerned about Cortron's financial stability even before the DuPont lawsuit. In 2007, MacDermid had started to plan for Cortron's potential failure, and by February 2008, MacDermid had contacted three possible alternative suppliers. MacDermid's concerns only deepened after it learned about the pending litigation. In July 2008- after learning about DuPont's lawsuit, but before the Cortron- DuPont settlement agreement was announced-MacDermid decided to switch from Cortron to a new manufacturer, OLEC Corporation.

         Ordinarily, MacDermid would have expected Cortron to facilitate the transition by transferring to OLEC any technical information it had regarding LAVA machines. But because Cortron had given all extant LAVA technical information to DuPont, and because MacDermid did not have its own copy of that information, OLEC had to reverse-engineer the specifications needed to manufacture new LAVA machines. The reverse-engineering process cost $29, 970 and took about nine months. During this transition period, MacDermid was unable to obtain new LAVA machines. Nonetheless, MacDermid always retained an inventory of LAVA processors and "never was unable to fulfill a sale, " according to the testimony of its general manager.[8]

         B. Procedural History

         MacDermid filed the instant action in September 2008 in Connecticut state court, alleging that Cortron and DuPont had engaged in an antitrust conspiracy in violation of section 1 of the Sherman Act, 15 U.S.C. § 1, and the Connecticut Antitrust Act, Conn. Gen. Stat. §§ 35-26, 35-28. MacDermid also brought claims under the Connecticut Uniform Trade Secrets Act ("CUTSA"), Conn. Gen. Stat. §§ 35-50 to 35-58; under the state computer-crime statute, Conn. Gen. Stat. §§ 53a-251, 52-570b; under the Connecticut Unfair Trade Practices Act ("CUTPA"), Conn. Gen. Stat. §§ 42-110a to 42-110q; under state contract law; and for spoliation of evidence. Cortron filed various counterclaims[9] and removed the case to the United States District Court for the District of Connecticut.

         After a trial in June and July 2014, the jury found for MacDermid on all issues and awarded it approximately $35.4 million in compensatory damages.[10] The District Court denied Cortron's post-verdict motion for judgment as a matter of law, and denied its post-verdict motion for a new trial on condition that MacDermid agree to a remitted award of $19, 757, 854 in compensatory damages.[11] The District Court also awarded punitive damages of $3, 790, 939 under CUTSA "as punishment for Cortron's willful and malicious disclosure of MacDermid's trade secrets, " as well as $100, 000 in punitive damages for the "intentional or recklessly indifferent violation of CUTPA in destroying MacDermid's trade secrets."[12] All told, the final judgment against Cortron-including attorneys' fees, interest, and treble antitrust damages-totaled $64, 670, 821. This appeal followed.

         II. DISCUSSION

         A. Judgment as a Matter of Law on MacDermid's Antitrust Claims

         We first consider Cortron's argument that the District Court erred in denying it judgment as a matter of law ("JMOL") on MacDermid's federal and state antitrust claims.

         1. Standard of Review

         We review de novo a district court's denial of JMOL pursuant to Rule 50(b) of the Federal Rules of Civil Procedure.[13] Where a jury has rendered a verdict for the non-movant, a court may grant JMOL "only if the court, viewing the evidence in the light most favorable to the non-movant, concludes that a reasonable juror would have been compelled to accept the view of the moving party."[14]

         "In order for a party to pursue a request for JMOL on appeal, the party must have made timely motions for JMOL in the district court."[15] In particular, a party must first move for JMOL pursuant to Rule 50(a) before the case is submitted to the jury. If the Rule 50(a) motion is denied, "the movant may, no later than 28 days after the entry of a judgment, 'file a renewed motion for judgment as a matter of law.'"[16] "Because the Rule 50(b) motion is only a renewal of the preverdict motion, it can be granted only on grounds advanced in the preverdict motion."[17] A district court may grant a Rule 50(b) motion based on a ground not advanced in a Rule 50(a) motion "only if necessary to prevent manifest injustice."[18]

         Here, Cortron moved for JMOL both before and after the case was submitted to the jury. The parties disagree, however, about which arguments Cortron preserved in its Rule 50(a) motion. The District Court found that Cortron properly preserved its argument that MacDermid had failed to prove harm to competition, but that it did not preserve several other arguments raised in its Rule 50(b) motion.[19] Cortron continues to press two of those purportedly unpreserved arguments on appeal: (1) that MacDermid failed to prove lost sales because its case relied on "expert testimony founded on statistically insignificant results";[20] and (2) that the DuPont press release was "commercial speech" that is presumptively harmless under antitrust laws.[21]

         We agree with the District Court that Cortron preserved its argument that MacDermid failed to prove harm to competition[22]-a conclusion MacDermid does not challenge on appeal. We therefore consider this argument de novo. Because we conclude below that this argument offers a sufficient reason to entitle Cortron to JMOL on the antitrust claims, we need not consider whether Cortron preserved its other antitrust arguments.

         2. The Legal Framework Governing MacDermid's Antitrust Claims

         MacDermid's federal and state antitrust claims are identical for purposes of this appeal.[23] Accordingly, we focus here on MacDermid's federal claim, which was brought pursuant to section 1 of the Sherman Act.

         Section 1 of the Sherman Act prohibits, in relevant part, "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce."[24] Under section 1, some restraints on trade, such as horizontal agreements to fix prices, are unlawful per se, while others must be evaluated under the so- called "rule of reason."[25] MacDermid alleged that Cortron violated section 1 of the Sherman Act under the rule of reason.

         A plaintiff seeking to prove an antitrust violation under the rule of reason must initially show that the challenged action adversely affected competition in the relevant market.[26] (Here, the relevant market is thermal flexographic processors.[27]) A plaintiff may satisfy this requirement in either of two ways. First, a plaintiff may offer direct evidence of harm to competition by proving higher prices, reduced output, or lower quality in the market as a whole.[28]Alternatively, a plaintiff may demonstrate an adverse effect indirectly by establishing that the alleged conspirators had sufficient "market power" to cause an adverse effect, "plus some other ground for believing that the challenged behavior" has harmed competition.[29] "Market power" is "defined as the ability of a single seller to raise prices and restrict output."[30]

         In Tops Markets, Inc. v. Quality Markets, Inc., we held that a plaintiff seeking to prove an adverse effect indirectly need show only "that the challenged behavior could harm competition."[31] Other Second Circuit cases, however, have required evidence that the challenged behavior will harm competition.[32] But despite differences in phrasing, our cases have always required, as a practical matter, some evidence that the challenged action has already had an adverse effect on competition, even if consumers have not yet felt that effect.[33]

         Indeed, although we have sometimes described "direct" and "indirect" proof as alternative ways of satisfying the adverse-effect requirement, there is really only one way to prove an adverse effect on competition under the rule of reason: by showing actual harm to consumers in the relevant market.[34] How "actual harm" is shown determines whether proof of market power is also required. If a plaintiff proves that consumers have already experienced harm from the challenged behavior because of higher prices, reduced output, or lower quality, then proof of market power is not required. Otherwise, it is.[35]

         Our cases suggest that it is possible, at least in theory, to prove that a challenged action harmed competition without offering evidence of higher prices, reduced output, or reduced quality. We have never explained, however, what such proof would look like. Indeed, in no precedential opinion in this Circuit has a plaintiff successfully proved an adverse effect on competition without offering evidence of changed prices, output, or quality.

         We first discussed "indirect" proof in Capital Imaging Associates, P.C. v. Mohawk Valley Medical Associates, Inc.[36] In that case, we suggested that a plaintiff that is unable to prove an actual adverse effect through price, output, or quality "must at least establish that defendants possess the requisite market power so that [the challenged action] has the potential for genuine adverse effects on competition."[37] Because the plaintiff in that case failed to prove market power, we had no need to consider what additional evidence of harm to competition might have been required.

         We revisited the issue in K.M.B. Warehouse Distributors, Inc. v. Walker Manufacturing Co.[38] In K.M.B., we emphasized that under the rule of reason, "a showing of market power, while necessary to show adverse effect indirectly, is not sufficient, " and that a plaintiff must offer "other grounds to believe that the defendant's behavior will harm competition market-wide."[39] As in Capital Imaging, however, we had no cause to decide what "other grounds" might suffice, because the plaintiff offered no reason at all to think that the challenged behavior had harmed or would harm competition.[40]

         We did suggest, in dicta, two possible examples of such "other grounds": "the inherent[ly] anticompetitive nature of [a] defendant's behavior or the structure of the interbrand market."[41] We have never had occasion to determine in a precedential opinion, however, in what situations either of these considerations would actually enable a plaintiff to indirectly prove an adverse effect on competition. We have suggested that actions that reduce consumer choice are inherently anticompetitive.[42] We have also suggested that "the structure of the interbrand market" means, in practice, an inquiry into whether the challenged behavior "significantly restrict[ed]" competitors' ability to enter the relevant market and compete-in other words, whether the challenged behavior created significantly higher barriers to entry.[43] In no case, however, have we actually held that proof of market power plus any particular interbrand market structure was sufficient to prove an adverse effect on competition as a whole.

         In sum, proving an adverse effect on competition without showing increased price, reduced output, or reduced quality in the market has remained possible in theory but elusive in practice.

         3. Application

         MacDermid sought to prove an antitrust violation under the rule of reason. As such, it was required to prove an adverse effect on competition. It has failed to do so here.

         a. Direct Proof of Competitive Harm

         As an initial matter, we agree with the District Court that MacDermid has not directly proved an adverse effect on competition.[44] Although MacDermid contends that the jury could reasonably have found that the purported conspiracy increased prices, MacDermid does not suggest, much less show, that prices for thermal flexographic processors actually rose after DuPont's settlement with Cortron. Instead, MacDermid argues that DuPont would have decreased its prices but for the conspiracy.[45] But this amounts to little more than speculation. To prove an actual adverse effect on price, a plaintiff must show just that-that prices actually increased.[46]

         Nor has MacDermid produced evidence that the purported conspiracy led to reduced output in the market. A reasonable jury could have found that the Cortron-DuPont settlement resulted in MacDermid's losing its critical supplier, which in turn prevented the production of new LAVA machines for about nine months. But while this disruption may have reduced the total number of thermal flexographic processors in the world, it did not reduce the number of such processors from the perspective of consumers.[47] During MacDermid's transition from Cortron to OLEC, MacDermid always maintained an inventory of LAVA machines, which always exceeded consumer demand.[48] Accordingly, the production of additional LAVA machines during that time would not have increased, in any meaningful sense, the number of machines that consumers could actually buy.[49]

         We note, finally, that MacDermid does not argue that the purported conspiracy reduced the overall quality of processors in the market.[50] We turn, then, to indirect evidence of harm to competition.

         b. Indirect Proof of Competitive Harm

         As discussed above, to prove harm to competition indirectly, MacDermid was required to show (1) that the conspirators had sufficient "market power" to cause an adverse effect, and (2) "some other ground for believing that the challenged behavior" harmed competition.[51] Even if we assume arguendo that MacDermid has proved market power, MacDermid has failed to provide any reason to think that the Cortron-DuPont agreement harmed competition in the market as a whole.

         MacDermid offers three possible reasons to believe that Cortron's behavior harmed competition, none of which has merit. First, MacDermid suggests that the Cortron-DuPont settlement "was inherently anticompetitive" because "Cortron and DuPont had a competitive relationship at the time."[52] But as the District Court correctly observed, Cortron and DuPont did not compete for customers. Rather, Cortron was an upstream supplier of MacDermid and later of DuPont. Accordingly, the mere fact that Cortron and DuPont reached an agreement was no more inherently anticompetitive than the earlier agreement between Cortron and MacDermid. And although the settlement of patent litigation is not immune from possible antitrust liability, neither is it inherently anticompetitive.[53]

         Second, MacDermid argues that "the relevant interbrand market was a duopoly, " which "is ground alone for finding [that] the challenged behavior harmed competition."[54] But although "competition is necessarily limited" in a duopoly, [55] the mere fact that a market has few competitors does not transform every action by one of them into an antitrust violation. Rather, even in a duopoly, a plaintiff must ...


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