Chase Manufacturing, Inc. v. Johns Manville Corp.

          ORDER

          Michael E. Hegarty, United States Magistrate Judge

         Calsil is an insulation product that is used in large industrial facilities. This action arises from a clash in the United States' calsil market between the only two companies that currently compete in that market. Plaintiff Chase Manufacturing, Inc. d/b/a Thermal Pipe Shields is one competitor, while Defendants Johns Manville Corporation and its wholly owned subsidiary Industrial Insulation Group, LLC are the other. Plaintiff's first foray into the calsil market occurred in the spring of 2018, while Defendants are the leading producers of calsil who control ninety-eight percent of the domestic market. Based on Plaintiff's belief that Defendants are engaging in anticompetitive conduct to restrict its ability to sell calsil, Plaintiff filed the Complaint alleging claims under the Sherman Act, the Lanham Act, and Colorado common law. In response to the Complaint, Defendants filed a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) seeking dismissal of all claims because Plaintiff has failed to state a claim upon which relief can be granted. For the following reasons, the Court grants Defendants' motion and dismisses the Complaint without prejudice.

         BACKGROUND

         I. Statement of Facts

         The following are relevant factual allegations (as opposed to legal conclusions, bare assertions, or merely conclusory allegations) made by Plaintiff in the Complaint, which are taken as true for analysis under Fed.R.Civ.P. 12(b)(6) pursuant to Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         Calsil, short for hydrous calcium silicate, is a mechanical insulation designed to encapsulate pipes, tanks, and other equipment in industrial facilities such as oil refineries, chemical and power generation plants, and pulp and paper mills. Calsil's physical properties and ability to resist heat, corrosion, abuse, and fire make it especially suitable for industrial applications in which heat-resistant insulation is required or workers may need to walk across the piping encapsulated by calsil. Because of these unique characteristics and uses, customers who purchase calsil demand that the product meet or exceed the requirements set forth in ASTM C533 Type I, a standard developed by an international standards organization that publishes material specifications relied on by engineers to qualify generic product types.

         Johns Manville Corporation manufactures and sells construction products, including insulation products. Industrial Insulation Group, LLC is a wholly owned subsidiary of Johns Manville Corporation which also manufactures and sells insulation products. Defendants own and operate the only two remaining calsil manufacturing plants in North America and maintain a market share of at least ninety-eight percent of the United States' calsil market. Defendants have total annual sales of all of their products of over three billion dollars, with calsil accounting for approximately fifty million dollars of total sales.

         In 2017, Plaintiff was approached by the owner of BEC Industrial (Shanghai) Co., Ltd. (“BEC”), a Chinese factory that had previously produced calsil for Defendants. BEC offered Plaintiff the chance to be the exclusive United States importer of BEC calsil. During this period, Defendants were also trying to persuade Plaintiff to purchase their calsil. To win Plaintiff's business, Defendants offered to test the BEC calsil against Defendants' calsil to determine which product was superior. The test results showed that BEC's calsil met or exceeded the ASTM allowable thresholds. Based on these results and other independent tests, Plaintiff and BEC signed an exclusive agreement in March 2018.

         Plaintiff began marketing its calsil under the brand-name TPSX-12™. As part of its marketing strategy, Plaintiff arranged for its calsil to be tested side-by-side with Defendants' calsil. Those results indicated that TPSX-12™ met or exceeded the requirements of ASTM C533 Type I, never contained asbestos (which is relevant as described below), and outperformed Defendants' calsil in several categories.

         Plaintiff and Defendants sell their products to national and regional distributors which then resell the products to industrial customers or plant operators. Essentially, five major mechanical insulation distributors dominate most of the regions in the country. The distributors' customers require the distributors to carry other construction products made by Defendants. Defendants' fiberglass products and expanded perlite products are most relevant here. Defendants' fiberglass products occupy up to ninety percent of the market share in many major metropolitan areas and enjoy a high market share in many areas of the United States. Defendants are also major suppliers of expanded perlite pipe and block insulation, which is regularly used as industrial insulation along the Gulf Coast.

         In late 2017, when at least one of Defendants' large customers expressed an interest in purchasing Plaintiff's calsil, Defendants began threatening customers that they would not sell them calsil or any other products if the customers purchased TPSX-12™. These threats were communicated by Defendants' sales employees from at least late 2017 through late January 2019. According to Plaintiff, Defendants made other anti-competitive comments to their customers. The threats included a warning that Defendants were tracking and monitoring import records to enable them to watch Plaintiff's calsil sales. As stated in the Complaint, Defendants also told customers that Plaintiff's calsil was “poor quality” and “cannot be trusted to meet ‘specifications, '” “‘may have asbestos, '” and was “Chinese, ” referring to where it was produced.

         Plaintiff sold less than one million dollars of calsil from March 2018 through March 2019. Plaintiff claims that it would have sold substantially more but for Defendants' threats and other anti-competitive conduct. Plaintiff also claims Defendants' actions were intended to perpetuate their monopoly, and to eliminate the only competitor in the United States' calsil market. Again, the total domestic calsil market is approximately fifty million dollars per year, and calsil is sold in every market in the country.

         II. Procedural History

         Plaintiff filed its Complaint on March 22, 2019. ECF No. 1. Plaintiff asserted five claims: (1) monopolization in violation of Section 2 of the Sherman Act; (2) tying in violation Sections 1 and 2 of the Sherman Act; (3) false advertising in violation of Section 43(a) of the Lanham Act; (4) common law trade disparagement; and (5) common law tortious interference with business. Id. ¶¶ 121-66. Defendants filed the motion to dismiss on May 15, 2019. ECF No. 18. Plaintiff filed its response on June 5, 2019, in which it contested the dismissal of the first three claims, but Plaintiff voluntarily withdrew claims (4) and (5). ECF No. 24. Accordingly, the only issues for the Court to determine are whether Plaintiff states plausible claims for monopolizing, tying, and violating the Lanham Act. Defendants filed their reply on June 14, 2019. ECF No. 25. The Court held a hearing on the motion to dismiss on June 18, 2019.

         LEGAL STANDARDS

         The purpose of a motion to dismiss under Fed.R.Civ.P. 12(b)(6) is to test the sufficiency of the plaintiff's complaint. Sutton v. Utah State Sch. For the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 2008). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pled facts which allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Twombly requires a two-prong analysis. First, a court must identify “the allegations in the complaint that are not entitled to the assumption of truth, ” that is, those allegations which are legal conclusions, bare assertions, or merely conclusory. Id. at 680. Second, the Court must consider the factual allegations “to determine if they plausibly suggest an entitlement to relief.” Id. at 681. If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. Id. at 679.

         Plausibility refers “‘to the scope of the allegations in a complaint: if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs ‘have not nudged their claims across the line from conceivable to plausible.'” Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012) (quoting Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008)). “The nature and specificity of the allegations required to state a plausible claim will vary based on context.” Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1215 (10th Cir. 2011). Thus, while the Rule 12(b)(6) standard does not require that a plaintiff establish a prima facie case in a complaint, the elements of each alleged cause of action may help to determine whether the plaintiff has set forth a plausible claim. Khalik, 671 F.3d at 1192.

         However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. The complaint must provide “more than labels and conclusions” or merely “a formulaic recitation of the elements of a cause of action, ” so that “courts ‘are not bound to accept as true a legal conclusion couched as a factual allegation.'” Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). “Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679. “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, ” the complaint has made an allegation, “but it has not shown that the pleader is entitled to relief.” Id. (quotation marks and citation omitted).

         DISCUSSION

         Defendants seek to dismiss the Complaint on three grounds: (1) Plaintiff has not stated a monopoly claim under the Sherman Act; (2) Plaintiff has not stated a tying claim under the Sherman Act; and (3) Plaintiff has not stated a claim based on a violation of the Lanham Act.^[1]The Court analyzes the first and second grounds for dismissal together because “[t]ying can support a Sherman Act claim either under § 1, as an unlawful restraint on trade, or under § 2, as an unlawful act of monopolization or attempted monopolization.” Avaya Inc., RP v. Telecom Labs, Inc., 838 F.3d 354, 397 (3d Cir. 2016). Further, the parties do not distinguish between Plaintiff's tying allegations in support of its monopoly claim and Plaintiff's stand-alone tying claim. See ECF No. 24 at 22 (“We already addressed the validity of the tying claim in our discussion of monopolization.”); ECF No. 25 at 18 (“Therefore, as explained in [the section addressing tying conduct as to Plaintiff's monopoly claim] above, the Court must also dismiss the stand-alone tying claim.”). Consequently, the following discussion evaluates Plaintiff's monopoly claim, including Plaintiff's tying allegations, and Plaintiff's Lanham Act claim.

         I. Monopolization Claims

         Plaintiff first claims Defendants created and maintained a monopoly in the calsil market through exclusionary conduct in violation of Section 2 of the Sherman Act. Section 2 of the Sherman Act makes it illegal to “monopolize . . . any part of the trade or commerce among the several States . . . .” 15 U.S.C. § 2. The purpose of the Sherman Act “is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993).

         There are three elements to a Section 2 monopolization claim. The first element is a “monopoly power in the relevant market.” Lenox MacLaren Surgical Corp. v. Medtronic, Inc. (Lenox I), 762 F.3d 1114, 1119 (10th Cir. 2014). The second element is “willful acquisition or maintenance of this power through exclusionary conduct.” Id. In considering whether conduct is exclusionary “it is relevant to consider its impact on consumers and whether it has impaired competition in an unnecessarily restrictive way.” Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985). “If a firm has been attempting to exclude rivals on some basis other than efficiency, it is fair to characterize its behavior as predatory.” Id. (internal quotation marks omitted). However, an entity that has acquired a lawful monopoly is not prohibited outright from taking advantage of its scale economies because of its size; such an advantage is “a consequence of size and not the exercise of monopoly power.” Id. at 597. Monopoly power under the second element “can be proven through identification of a relevant produce and geographic market, with a showing that the defendant had a sufficient market share and that new competitors would face significant barriers to entry.” Lenox I, 762 F.3d at 1123 (internal quotation marks omitted). The final element is “harm to competition.” Id. at 1119

         Defendants argue Plaintiff has failed to plead a monopoly claim because the Complaint does not establish that Defendants acquired or maintained a monopoly through “exclusionary conduct, ” the second element. ECF No. 18 at 9. Plaintiff counters that the following actions, outlined in the Complaint, show that Defendants engaged in exclusionary conduct violative of the Sherman Act: tying, exclusive dealing, refusal to deal, spying, ...