This is the second half of a review of some of the recent events in the history of Brunswick, the corporate owners of Boston Whaler boats. The first article describes the original trial, while this article describes the ensuing appeal of the verdict and other events.
In June of 1998, after three years of expensive legal preparation, a ten-week trial, a unfavorable verdict, more unfavorable rulings from the Court, and assessment against it of damages and costs of over $144-million, Brunswick Corporation was not in an enviable position in the recreational marine business. They had just been found guilty of illegal business practices and ordered to pay a huge settlement, and this was by no means the end of their legal difficulties. Potentially, it was just the beginning.
Of course, there would be an appeal of the decision. This would cost more money to mount, and while the brief was being prepared, a surety bond would have to posted in the amount of the judgement ($144-million) to satisfy the court of Brunswick's intention to pay if the appeal were unsuccessful. With so much riding on the outcome, careful preparation of the legal arguments would take some time. The appeal would not be filed until September 15, 1999, some fifteen months after the verdict.
The original group of plaintiffs in the case against Brunswick represented only a segment of their customers and competitors, in fact together it accounted for less than 20% of the total market. If Brunswick's actions had been illegal, anti-competitive, and damaging to those twenty four boat builders, there were dozens of other boat builders who were customers of Brunswick and may have been harmed by such practices and might be eligible for similar compensation. As well, there were several other builders of stern drive engines who could initiate action against Brunswick. And ultimately there were thousands and thousands of retail customers who bought Brunswick's stern drive products who could seek compensation for the alleged over-charging, anti-competitive, and monopolistic practices of Brunswick. All of these potential legal adversaries would have the precedent of the boat builders' decision working in their favor.
Four litigants quickley filed suits against Brunswick, charging similar damage to that cited by the original Arkansas case. One was a class action suit filed by a former Brunswick boat dealer purporting to represent all marine dealers who purchased from Brunswick MerCruiser stern drive and inboard engines and boats equipped with such engines. A second was another class action suit filed by an individual purporting to represent all retail purchasers of boats equipped with MerCruiser stern drive and inboard engines in 16 states and the District of Columbia. The third was Volvo-Penta.
In 1993 former competitors in the stern drive market Outboard Marine Corporation and Volvo-Penta of the Americas, Inc., had entered into a joint operation to manufacture and market stern drives in North American, which they called Volvo Penta Marine Products L.P. Just before Christmas of 1998 (and after the verdict in the Brunswick case) Volvo-Penta bought out OMC's share of the partnership, thus making Volvo-Penta the only other major manufacturer of stern drives in North America. They, too, joined the parade to the Court.
Just after New Year of 1999, Volvo-Penta filed a lawsuit in Federal District Court in Virginia claiming Brunswick violated various provisions of the antitrust laws in connection with its sales of MerCruiser stern drive and inboard engines.
A fourth lawsuit was filed by the same Mineapolis attorney who represented the plaintiffs in the successful Arkansas case, now representing even more independent boat builders who claimed they were harmed by Brunswick.
Ultimately, two more litigants filed class action suits against Brunswick, making a total of six actions pending against them. Should all of these litigants prevail, Brunswick's exposure to damage awards would be enormous, not to mention the considerable costs of defending itself in six lawsuits.
As 1999 wore on, Brunswick had plenty to worry about besides the Y2K bug. If things went badly for them and they lost all six lawsuits, they could suffer a very significant financial penalty, on the order of half a billion dollars or possibly more, and perhaps be subject to imposition of additional restraints in the stern drive marketplace which would prevent them from reaching their former level of sales and market share. Besides the potential damage awards, the legal fees from the defense of six lawsuits and the appeal of a seventh had to be mounting. Brunswick needed to make some deals with their customers and competitors and to settle some of these disputes. As the citizens of the eastern district of Arkansas had just demonstrated, you never know what kind of a verdict you're going to get from a jury trial.
On October 7, 1999, Brunswick made a big announcement: it had reached a settlement with three of the litigants that were suing. The exact details of these settlements have not been publicly announced, but it is known that Brunswick set aside approximately $33-million to cover their costs. In addition, and probably as part of the deal, Brunswick announced it had signed a "long-term supply agreement" with Volvo-Penta to purchase diesel stern drive and inboard engines for installation in certain models of boats manufactured by Brunswick, most likely larger SeaRay and Bayliner models. As a result of these settlements, the suits of Volvo-Penta and two of the class action plaintiffs were withdrawn. Thirty-three million dollars is a nice profit for ten months of paper work and negotiations. A lot of lawyer's wives got fur coats that Christmas.
A remaining unsettled suit was brought by attorney K. Craig Whitefang, of the Mineapolis law firm Winthrop and Weinstine that had conducted the original Arkansas case against Brunswick. Evidently, as the plaintiffs were similar to the original twenty four boat builders and similar legal arguments were being used in the new case, Brunswick was able to obtain a stay from the court on this matter, pending the outcome of the appeal of the Arkansas verdict. No settlement was offered to these litigants; they would live or die on the merits of the original case and its appeal before the United States Court of Appeals for the Eighth Circuit.
The details of the two other class action litigants are not known, but ultimately a settlement was reached with them, as well. In its Year-2000 10-K filing with the Securities and Exchange Commission, Brunswick Corporation reported that an astonishing $116-million pre-tax charge had been entered to cover the costs of settling these lawsuits. All the disputes were settled prior to the announcement of a decision from the Appeals Court. It was money spent by Brunswick "to manage its overall exposure to these actions." Considering the potential awards and judgments against it, it was probably a prudent course of action. If the appeal of the Arkansas case were lost, the litigants would be in no mood to settle and the costs could be astronomically higher.
After three years of pre-trial motions and a ten-week-long trial in Arkansas, the venue moved up the Mississippi River several hundred miles to St. Louis, and the United States Court of Appeals for the Eighth Circuit. In its brief filed with the appellate court on September 15, 1999, Brunswick focused primarily on this issue:
"Plaintiffs' case rested on the theory of their expert witness that any market share above 50% necessarily resulted from anti-competitive conduct and necessarily caused plaintiffs to pay monopolistic "overcharges."
[This and many other quotes are from the redacted version of brief filed under seal, United States Court of Appeals for the Eighth Circuit, Nos. 98-3732 & 98-4042]
It was upon this evidence that the plaintiffs had proven their case to the jury and satisfied the technical requirements of the law to the court. Brunswick would attack Dr. Hall's theory as the central point of their appeal, calling it "factually unsupported, economically unsound, self-contradictory, and contrary to fundamental antitrust principles." Further, they asserted that the plaintiffs' claims conflicted "with settled antitrust precedent."
In addition to criticism of Dr. Hall's theory, there was much other evidence in the case that Brunswick could point to as contradictory of the findings of the court. In total, Brunswick identified four principal issues:
Setting aside all the legal issues and expert testimony, just looking at the actual history of the market showed any number of facts that tended to be contradictory of the court's findings. Some of these are incredibly simple to understand and tend to imply the exact opposite of the conclusions of the jury.
The historical market share of the various companies provides a good starting point. The plaintiffs alleged that Brunswick used its discount program to illegally increase its market share, yet in fact Brunswick's share of the stern drive market in 1983 was 75%, before they introduced the market share discount program. By 1988, after five years of market share discounts, Brunswick's market share was down to near 50%. Clearly, use of market share discounts was not a guaranty of bigger market shares for Brunswick.
In 1985 when OMC introduced the Cobra stern drive, their market share significantly increased, and later, when problems with the drive developed and were not well handled by OMC, they similarly saw their market share decline. It seems quite clear that product suitability, price, service, and support were important in determining market share. Even the plaintiffs' own expert, Dr. Hall, testified that the shift cable problem with the Cobra outdrive and the way OMC poorly handled it "cost OMC engine sales."
And even crazier, OMC and Volvo also offered their own market share discount policies, concurrent with Brunswick's. How can it be illegal for Brunswick to offer discounts yet legal for OMC and Volvo? Even stranger, the discounts offered by OMC and Volvo were larger than those offered by Brunswick, and the market share required to earn them was higher. It is another contradiction in the case.
Another interesting historical aspect of the stern drive market is the fact that earlier much of the technology was patented, and the right to produce stern drives with that technology was owned by Volvo. Years ago, in order to initially enter the market and manufacture stern drives, Brunswick had to pay to use Volvo's patented technology on its MerCruiser line. This clearly disadvantaged Brunswick relative to Volvo on manufacturing costs, yet Brunswick had grown to become the market leader.
Brunswick also pointed to the relative size of the companies that were competing in the stern drive market. Competitor Volvo was a multi-national $20-billion company six times the size of Brunswick. Competitor OMC was larger than Brunswick's Marine Division. And in 1998 OMC and Volvo merged their stern drive operations into a joint venture to compete against Brunswick. Competitor Yamaha was another large, multinational company with resources greater than Brunswick. And the newest competitor in the marketplace, Toyota, was a $100-billion global firm with essentially unlimited capital and resources that could be used to compete against Brunswick. In most monopolistic markets, it is the big firms that squeeze out the little companies. In the stern drive marketplace, it was relatively small Brunswick that was outselling its larger rivals.
Another historical twist occured when Brunswick purchased Bayliner. At that time Bayliner was principally using OMC stern drives, so the loss of the Bayliner market would have significant impact on OMC. However, Bayliner had some long-term contracts in effect with OMC to supply stern drives, and these contracts were honored by Brunswick, who purchased OMC stern drives for use on Bayliner boats. It is generally thought that Brunswick was able to purchase Bayliner only after OMC declined to do so. OMC had been in negotiations to buy Bayliner but thought the price was too high. After Brunswick's acquisition of Bayliner and Sea Ray, OMC began a buying spree and acquired a number of builders of its own. This is another contradiction: it was illegal for Brunswick to acquire downstream customers yet somehow alright for OMC to do exactly the same.
Rather than sinister and illegal tactics, there was a much simpler explanation for Brunswick's dominant market position: they just made better products, sold them more aggressively, and supported them better after the sale. During the course of the trial, evidence came to light from market research done by consultants for Volvo who found "that dealers and consumers regarded the MerCruiser as better than other engine brands in every important respect." The plaintiffs bought nearly all of their engines from Brunswick in part because consumers simply just preferred them on their boats.
Central to the plaintiffs' case was the use by Brunswick of market share discounts which the plaintiffs alleged were unfair and illegal. What were they?
The market share discount program was just one of many sales incentives offered by Brunswick and others to their stern drive engine customers. There were discounts for prompt payment, discounts for "truckload" orders, and discounts for purchasing in large quantities ("volume" discounts). Customers of Brunswick might aggregate all these discounts and obtain as much as a 13-15% reduction from the standard price. Yet customers of Volvo could earn as much as a 21% discount! If the jury's verdict were to stand, then somehow, in all this, the 1-3% discount for market share that Brunswick provided must have horribly corrupted the marketplace in violation of the antitrust laws of the United States of America and damaged its competitors to the tune of $44-million.
Use of market share discounts by Brunswick began in 1984. For the first three years, the program was only available to smaller boat builders who could otherwise not qualify for a volume discount. If the smaller builders agreed to use Brunswick's engines on at least 60% of their boats, they would qualify for a 1% discount. If they built 70% of their boats with Brunswick engines, they earned a 2% discount, and for 80% market share, a 3% discount. By providing the smaller boat builders with a discount, Brunswick was actually enabling greater competition in the marketplace, as the small boat builders could now more effectively compete with the larger boat builders.
In 1987, the larger boat builders came to Brunswick and asked to be allowed to participate in the market share agreements. Eventually all of Brunswick's customers were eligible to participate in the market share discount program.
After many years of market share discounts, in 1995 Brunswick proposed adding a category for 95-100% market share which would be necessary to quality for the largest discounts. The boat builders buying cooperative objected and ended up negotiating a reduction in the market share levels necessary to qualify for discounts, earning 3% discount with only 70% share, 2% for 65% share, and 1% for 60% share.
Finally, in 1997 Brunswick eliminated the market share discount program entirely. Significantly, there was no change in the buying pattern of its customers!Market share for competitor Volvo remained approximately the same, with or without market share discounts being available to customers of Brunswick.
Brunswick was not alone in providing its customers with a market share discount program. Volvo began to offer its own market share discount incentives in 1984. OMC soon followed. In fact, these programs offered greater discounts and demanded higher shares to qualify than Brunswick's incentive program. If you went 100% with Volvo engines you could earn up to 5-6% discount. Competitor Yamaha also offered discounts for builders who chose to use Yamaha engines on 100% of their boats. Ironically, the plaintiff boat builders approached Brunswick in 1990 and asked that Brunswick provide a 4% discount for 100% market share. Brunswick chose not to. Five years later the boat builders would claim that Brunswick's market share discount program damaged them to the tune of $44-million, yet in 1990 they were asking Brunswick for higher market share discount levels and incentives.
As part of their argument, the plaintiffs' case alleged that the market share discount program bound them to Brunswick as a supplier of stern drives in some illegal fashion. In fact, participation in the program was completely voluntary. A boat builder simply signed an agreement indicating they planned to equip a certain percentage of their boats with Brunswick stern drives, and they received an immediate discount on their next invoice. They were under no obligation to purchase any engines at all, and they could, if they wanted, decide to change their mind at any time and purchase all their engines from other makers. By doing so they would just forego discounts on purchases they might have made from Brunswick.
In fact, no boat builder ever had to repay to Brunswick a discount it had obtained but had ultimately failed to qualify for. If a builder failed to meet the predicted market share as agreed, the discounts were adjusted on future purchases.
The court itself recognized that participation in the market share discount program did not "obligate [anyone] to purchase engines." The program simply provided that if a customer's purchases reached a certain level they would receive a discount. The court also acknowledged that boat builders were not restricted by the agreements from purchasing engines from makers other than Brunswick. A boat builder could buy 30% of its engines from others, and still qualify for the maximum discount available from Brunswick. If a boat builder switched all of its engine purchases to a rival of Brunswick, it would care not at all about market share discounts offered by Brunswick. They would be of no concern to such a boat builder. All the plaintiffs were free to do so if they wished.
Ironically, the plaintiffs bought a far higher percentage of their engines from Brunswick than they needed to qualify for market share discounts. Evidence was presented that one plaintiff, Mariah Boats, bought 95% of its engines from Brunswick "because its customers wanted them and because Volvo was not a dependable supplier." For Mariah, achieving Brunswick's market share minimum was of no significance.
The real purpose of market share agreements was described in testimony from Dr. Warren-Boulton, the former Chief Economist for the Antitrust Division of the Department of Justice, the branch of government responsible for prosecution of antitrust law. The market share discount program helped smaller boat builders compete with the plaintiffs, all generally larger boat builders, by allowing the smaller boat builders to obtain engines at a discount which they might otherwise not be able to qualify for in traditional volume based discount programs. This tended to increase competition and to make the stern drive market more efficient, not less! In testimony, the chairman of the board of the plaintiffs' buying cooperative admitted that the larger boat builders favored discounts based on volume, not market share. Such arrangements would give them a "competitive edge" over the smaller builders. In fact, the plaintiffs had asked Brunswick to eliminate market share agreements in favor of volume discounts and to raise volume discount thresholds, all of which would have disadvantaged smaller boat builders.
The market share discount program also aided Brunswick by improving the predictability of demand for its engines. By tending to assure long term demand, Brunswick could better manage its plants and employees, more efficiently order engine blocks and parts from its suppliers, better manage its inventory, and smooth out its production cycles, all leading to lower costs and eventually lower prices for its engines.
The plaintiffs argued that the market share discount program was illegal. Yet at the same time they never disputed the lawfulness of Brunswick's volume discounts. In fact, they favored them, as those discounts tended to raise the costs of engines sold to smaller builders. What made market share discounts illegal? Good question.
At the crux of the plaintiffs case were two paradoxical assumptions that had to be embraced in order to find that market share discounts were unlawful. First, in order for the boat builders to be eligible for damages from Brunswick's actions, the price that Brunswick charged them had to be so high that it amounted to a monopolistic overcharge, yet at the same time in order to be illegally foreclosing competition in the market place Brunswick's price had to be so low that it prevented any rival makers from competing with it.
To make an analogy, it were as if Brunswick was selling bread for $10 a loaf and it offered its customers a $1-discount. The plaintiffs's opinion was that such a discount would irresistibly bind the customers to buy Brunswick's bread at the exclusion of all others, and yet at the same time no other baker would be able to produce a loaf of bread for sale $9 and make a profit, nor would there be any way that new bakers could enter the market to compete.
In the words of Brunswick's lawyers in their appeal, "that theory is incoherent."
First of all, the discounted price of Brunswick engines was still well above their cost to manufacture. Dr. Hall, the plaintiffs' expert, even testified that for an engine that sold for $4400 after discounts, Brunswick's production costs were about $3000. This left ample margin to others who could manufacture engines as efficiently to adjust pricing to increase sales and still retain profitability. If Brunswick had really been selling bread at $9 a loaf, it would have had the effect of encouraging competitors to enter such a profitable marketplace.
Further, the plaintiffs' alleged that market share discounts were the de facto equivalent of "exclusive dealing", a practice outlawed by the antitrust legislation. Yet there was nothing in the market share agreements that prohibited purchasing engines from other manufacturers. The arrangements were structured so that customers were free to cease dealing with Brunswick at any moment and switch to alternative sources without incurring a penalty. The market history demonstrates this, as many boat builders who had been MerCruiser customers switched to OMC when it introduced its Cobra drive in 1985, driving Brunswick's market share down to 50% from 75%.
In controversial testimony in the case, the plaintiffs had used as evidence of Brunswick's anti-competitive intent the comments of Brunswick's own personnel and its consultants, who had made many aggressive statements about the effects the market share program would have on customers and competitors. Brunswick complained in their appeal that such internal business hyperbole and inflammatory rhetoric were not in themselves evidence of antitrust violation, but merely the expression of aggressive competition in the marketplace.
In its appeal, Brunswick also attacked the timing of the plaintiffs' actions against it. The plaintiff's own expert witness had testified that the acquisitions of Bayliner and SeaRay were by far the most important and most significant actions in their case against Brunswick. In fact, the claims of damage were calculated as accruing almost immediately after the 1986 acquisition.
The law, however, requires that antitrust actions for damages are "forever barred unless commenced within four years after the cause of the action accrued." The plaintiffs' had waited nine years to sue. And there could be no charge of illegal concealment of the acquisition, which would permit extension of the time deadlines. The Brunswick/Bayliner/SeaRay deal was very public knowledge.
Beyond the issue of timeliness, Brunswick argued that its acquisition of downstream companies was not anti-competitive. In fact, such "vertical integration" was recognized by existing law as being pro-competitive.
There is quite a bit of merit in this argument. Brunswick did not attempt to acquire all the competing stern drive engine makers and thus create a monopoly market. In did acquire some of its downstream customers. Doing so is only unlawful if it creates a barrier to entry in the acquiring firm's market, i.e., stern drive engines. However, there were hundreds of other independent boat builders in the marketplace to which competing engine builders could sell their stern drives. And there were few barriers to prevent new boat builders from entering the market.
Brunswick cited the case of Mariah boats as an example of how easy it was to enter the boat building market. The company was started by owner Jimmy Fulks in 1989 in a temporary garage. (Note that this was after Brunswick had made its acquisition of Bayliner and SeaRay.) Fulk's business quickly grew into one of the largest independent boat builders.
Thus, in appealing the Arkansas decision, Brunswick argued that not only were claims against it barred by timeliness issues, the basis for those claims were not justified. Its acquisitions accounted for only 30% of the marketplace, leaving its competitors to compete for 70% of the existing market. Further, the market was "open" to new boat builders, for whom there were no barriers to entry. The plaintiffs' assertion of a Brunswick monopoly was both incorrect and filed too late.
The plaintiffs' claims of damages asserted that Brunswick held monopoly power in the marketplace, and they offered Brunswick's market share as proof. But the legal definition of monopoly power is "the power of a firm to restrict output and thereby increase the selling price of its goods." It could be possible for a company to have 100% market share, and yet not have monopoly power in a market. Market share alone, argued Brunswick, was not sufficient to establish monopoly power.
The existence of a significant number of competitors also disproved any "monopoly power" for Brunswick. And the competitors were not small, under-capitalized firms. Brunswick competed with huge industrial corporations like Volvo/OMC, Yamaha, Caterpillar, Cummins, and Detroit Diesel. Competitors like Volvo/OMC had large dealer sales networks and were able--in the testimony of the plaintiffs' own expert--to compete "across the board" with Brunswick.
Further, there was another important legal point of a monopolistic market: the lack of "the ability of existing firms to quickly increase their own output in response to any attempt to raise prices above competitive levels." Going back to the bread analogy, if all the other bakers in a market had no capacity to bake more bread, then the monopoly baker (Brunswick) could drive bread prices higher simply by lowering its output. The competition would be unable to respond to market pressures for more product (which would allow the market to adjust the pricing) because they lacked excess capacity. Lack of excess capacity in rivals would enable Brunswick to maintain a monopoly market and over-charge for its products.
In the real market of stern drives, Brunswick argued their competitors had excess capacity for production. OMC/Volvo had a plant that had once produced 76,000 stern drives annually, yet was only producing 20,500 at this time. Clearly, if they wished, OMC/Volvo possessed the excess manufacturing capacity to increase production to take advantage of market opportunities created by alleged over-charging by a monopolistic competitor.
Besides the existence of excess capacity, the market for stern drives also had low barriers for entry by any new competitors. Brunswick pointed out that there were no relevant legal barriers to new entrants. There were no restrictive license requirements. Brunswick relied on other producers to make the core of its engines, and they held no patent on these or employed especially "high technology" in their conversion to marine use.
In addition, any power in the marketplace held by Brunswick was countered by sophisticated buyers with coordinated bargaining power. The boat builders had formed two large buying cooperatives which shopped for large group purchases and negotiated prices with competiting engine builders. The boat builders themselves testified that they "use our buying leverage to get the best deals that we can get."
Further, to be a monopoly one must be able to charge excessive prices yet maintain market share. Their own market share, Brunswick pointed out, had fluxuated up and down during the period in question, falling to near 50% when in vigorous competition with a popular product (Cobra drive). The plaintiffs had demonstrated nothing that would prevent such a market decline from occuring again, should a competitor produce a more attractive product.
All the claims against it of monopoly power were defeated by the realities of the market, argued Brunswick.
Even though the plaintiffs had presented no real proof that the market share discount program or the acquisition of Bayliner and Sea Ray had created any monopoly power for Brunswick, in trial the plaintiffs had been allowed to present claims of damage and liability against Brunswick, all based on the testimony of Dr. Hall, whose theory and conclusions were "patently unreasonable" in the words of Brunswick's appeal.
Dr. Hall's theory and model of the stern drive market reduced to an astonishingly simple proposition: every point of Brunswick's market share above 50% was necessarily attributable entirely to anti-competitive conduct, and any time their market share was above 50% Brunswick had been overcharging its customers. This theory was an essential part of the plaintiffs' proof of liability, causation, and damage but it was, to quote the Brunswick brief on appeal, "completely out of step with reality and inconsistent with established antitrust law."
Prior to letting the jury hear the testimony of Dr. Hall, Brunswick asked the court to examine it. Such pre-screening of "expert" testimony is often required to prevent the jury from becoming confused or mislead. In this process, Brunswick argued that the testimony to be presented must be able to differentiate and segregate market share gains that accrued due to lawful acts and unrelated market events from market share gains that occured from anti-competitive conduct. This was necessary to permit the jury to have a basis for assigning damages only to those actions taken that might be found to be illegal.
Naturally, counsel for the plaintiffs assured the court that the testimony would be able to accomplish this extremely difficult task. The court permitted Dr. Hall to present his findings. The jury seemed to buy into it completely. Their verdict represented almost complete agreement with Dr. Hall's testimony. His expert opinion had been crucial in producing the $144-million award against Brunswick. To overturn the results, Brunswick focused their attack on Dr. Hall's theory and his findings.
Underlying all of the analysis of Dr. Hall was a fundamental assumption that if the disputed marketplace were entirely free on any restraint from illegal competition, two competing firms would each hold a 50% share. This was known as the "Cournot" model, based on work developed in 1838 by Augustin Cournot. (Despite having stood for some 160 years prior to the trial, a search of case law in February of 2000 could not find any other federal antitrust case in which the Cournot model was discussed.) The Cournot model, however, also imposed three conditions on its marketplace: the products had to be undifferentiated (like spring water, for example); the producers had to have equal costs; and, the producers had to not aggressively compete against each other. Clearly, Brunswick argued, these conditions did not exist in the stern drive engine market. First, stern drive engines were not generic items but differed significantly in technology, features, support, service, and consumer favor. Second, there was no evidence that the costs to produce were equal. (In fact, Hall assumed otherwise!). And third, there was no question that the market was the scene of aggressive competition to increase sales. That was one of the reasons market share discounts and other sales incentives were used.
Let's assume for a moment that all of the accusations against Brunswick were true, they had acted illegally in the market place. If so, how can the damage be determined? Dr. Hall had a formula for that, too. Although apparently not explicitly stated in his methodology, in unrebutted testimony by other experts Dr. Hall's assessment of overcharges reduced to very simple arithmetic: anytime Brunswick's market share was above 50% they were overcharging, and the amount of the overcharge was in linear proportion to the percentage they exceeded a 50% market share.
The appeal even quoted the relevant testimony of Dr. Richard Rapp, Brunswick's expert on damages:
Q: So under Dr. Hall's analysis, all you need to know for 1996 is Mercruiser's share was 80 percent, and, bingo, his formula boils down to, in a matter of straight arithmetic, is always going to be an overcharge of 20 percent? A: That's correct. Q: Nothing else matters? A: Nothing else matters.
This may sound like a reasonable theory, but its implications were astonishing:
Finally, the whole case for "overcharging" rested on the implausible contention that stern drive prices were simultaneously irresistably low (supporting liability) and monopolistically high (supporting damages).
There were more problems with the theory of Dr. Hall. First, there was the lack of separation between lawful and unlawful conduct which might have created a market share for Brunswick greater than 50%. Despite assurances that Hall would be able to do this (which permitted his testimony to be heard in the first place), it was precisely this distinction that he failed to accomplish! In fact, Hall acknowledged explicitly that he had not adjusted his calculations to account for other market place effects.
The realities of the marketplace told a different story than Dr. Hall's model. Witness after witness testified that the conduct of OMC in supporting the Cobra drive in the field after customers began to experience problems with the shift cable accounted for loss of market share by OMC and gain by Brunswick. There was also testimony that missteps by the joint Volvo/OMC operation caused Brunswick to gain as much as an additional 10% market share; this from the president of the plaintiffs' own buying cooperative. In neither case did Hall adjust his calculations for overcharging.
Finally, there was the whole history of capitalism working against Dr. Hall. No market had ever maintained a 50-50 split, nor did any antitrust law require such a division. In fact, should two competitors conspire to sustain a 50-50 split and charge excessive prices, there would be nothing in Dr. Hall's model which would object.
Inconsistencies in market share in the stern drive engine marketplace, alleged Brunswick, were due entirely to vigorous competition which is the goal of antitrust legislation to preserve.
And finally, argued Brunswick, if the Appeals Court permitted this judgement to stand, it would engender a rash of "plug-in-the-numbers" antitrust suits based on the unprecedented theory of Dr. Hall. To demonstrate the effects, Brunswick cited the many lawsuits already filed against it which depended on this case for validation of their arguments.
In the face of all these arguments, Brunswick asked the Appeals Court to reverse the decision of the jury and remand the case to the Circuit Court with directions to enter judgement in Brunswick's favor. Or, at a minimum, order a new trial on the issue.
Curiously, Brunswick had an ally in the appeal. The National Association of Manufacturers filed a brief in Amicus on Behalf of Appellee, supporting Brunswick. Apparently for them the decision of the Arkansas jury had charted a course for antitrust litigation into troubled waters.
Having won the jury trial, the boat builders contention on the Appeal was that their evidence was sufficient to permit a reasonable jury to find that Brunswick had used its discounts and acquisitions to restrain trade and monopolize the market, and that they had proved that Brunswick's monopolization of the engine market resulted in higher prices which had forced its primary rivals, OMC and Volvo, to merge in 1992 and forced Yamaha to depart from the market in 1994. Regarding issues of timeliness, they cited evidence of continuing violation. They also argued that there was no requirement that the jury bind damages to particular violations; any violation was itself sufficient to sustain the damage award.
On March 24, 2000, in the fifth year of proceedings in this case, Brunswick won a huge victory in the United States Court of Appeals for the Eighth Circuit. They were sustained on virtually every argument they made.
On the question of timeliness of action, the Appeals Court found that the boat builders were aware of Brunswick's actions and computed damages from them beginning in 1986. Therefore under the four year rule they had until 1990 to file. Giving them the benefit of all reasonable inferences from their evidence, the court could postpone to 1990 the accrual of injuries, but this still left the boat builders with a claim that had expired. The court's ruling was that any claim to damages (under the cited laws) were time barred and Brunswick was entitled to judgement as a matter of law on those issues. Score: one huge win for Brunswick. They may have even done everything that they were charged, but the time to collect was past. There could be no damages for this group of plaintiffs. But this would still leave them liable to other lawsuits filed more timely. Score: A victory for Brunswick, but not the total answer.
The court assessed the effect of market share discounts and found that the boat builders had not demonstrated "that Brunswick's discount program was in any way exclusive." They also failed to demonstrate that it "foreclosed a substantial portion of the stern drive market." The boat builders had also "failed to account for numerous intervening economic and market factors which... may have been the actual cause of [their] injuries." Score: A huge win for Brunswick. Their actions were not illegal.
The court found that "giving the boat builders the benefit to which they are entitle of all legitimate inferences, they did not offer sufficient evidence to enable a jury to determine that Brunswick's market share discount program and acquisitions were anti-competitive." Therefore, Brunswick was again entitled to judgement as a matter of law. Score: 3-0 in favor of Brunswick. Again, no proof of violation of the law by Brunswick.
The Appeals Court cast an especially critical eye on Dr. Hall's testimony, the bedrock of the plaintiffs' case. In order for evidence from an expert witness to be admissible, it must not only be based on reliable science, it must "fit" the case. Dr. Hall might have a perfectly valid economic model and theory, but to be admissible in the case it must provide a good fit to the economic reality of the marketplace in dispute.
The Appeals Court's opinion was that Dr. Hall's construction of his hypothetical marketplace "was not grounded in the economic reality of the stern drive engine market, for it ignored inconvenient evidence." "The model also failed to account," wrote the court, "for market events that both sides agreed were not related to any anti-competitive conduct, such as the recall of OMC's Cobra engine and the problems associated with the Volvo/OMC merger."
Because the foundation of Dr. Hall's expert opinion was difficient, his conclusions were reduced to "mere speculation." His testimony, concluded the court, should not have been admitted. Dr. Hall's opinion was the basis for the boat builder's damage case, and the jury had obviously relied on it since their award of damages matched his calculations precisely. Therefore, admission of the testimony had affected Brunswick's rights (to a proper trial), and their motion for judgement as a matter of law should have been granted. Score: 4-0 in favor of Brunswick.
Based on all the above, the Appeals Court reversed and vacated the judgement against Brunswick, including the award of fees and costs, and remanded the case back to the lower Court for entry of a judgement in favor of Brunswick.
I am sure some rather expensive cigars were lighted in the executive offices of Brunswick, MerCruiser, and the several law firms that represented them on March 24, 2000. And for twenty four boat builders and their many, many attorneys, instead of dividing $144-million in damages amongst them, there were only expensive legal fees to pay or collect.
The case was not quite over. The plaintiffs exercise their option to pursue the matter to the next highest court, The Supreme Court of the United States. Accordingly, they submitted a request to that court to consider the case. Review of cases by the Supreme Court is at their option. Would the highest court in the land review this decision? Both Brunswick and the boat builders would have to wait to find out. On November 6, 2000, eight months after the huge victory for Brunswick in the Court of Appeals, the legal action against them by the boat builders finally came to an end. The Supreme Court declined to hear the case without comment. The battle was over. Brunswick could get out of defending itself, and get back to the marine industry.
Written by Jim Hebert, April 29, 2001, from various sources but principally from the actual findings of the court and associated documents.
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Author: James W. Hebert