No Horizontal Restraints on Smoking.

The gray market (grey?), and the Acts of Lanham and of Sherman all played roles in R.J.R. Tobacco v. Cigarettes Cheaper!, (7th Cir. 8/24/2006).  A suit begun to stop a seller of reimported cigarettes provoked an antitrust counterclaim.  The Sherman Act count went out on summary judgment, because RJR lacked “market power.”  That was affirmed, although the panel called the lack of power conclusion “both questionable and irrelevant.”  It would be irrelevant if the Robinson-Patman claim of a “horizontal” pricing conspiracy would lie, since that would be per se illegal, which takes out the rule of reason factors.  The predatory pricing claim, though, failed at trial.  Then, a further trial was held on the Lanham Act claim, RJR prevailed, and was awarded $4M.

If you enjoyed more than two semesters of economics, then you’d find Judge Easterbrook’s dissection of the antitrust claims a worthy read.  (You perhaps already know that, for the cig market, the “Herfindahl-Hirschmann Index exceeds 3,000”).  Most opinions on the economic drivers in a market offer the reader some chestnuts about capitalism, and often a literary allusion.  Here, one gleans these.  Capitalism is a “gale of creative destruction,” and “cutthroat competition” is a “term of praise.”  In analyzing the price-cutting evidence, the panel said proof that RJR had “played the role of cat’s paw …would suffice even if ..the[ir] motivation” was hard to understand.  That’s more in the dialect of undergrad classes, than what’s heard in law schools, but it resonates with antitrust wonks.

That gets us to the end of the decision, which affirms the Lanham Act award against the cigarette importer.  In gray market cases, the exception always overcomes the rule.  “The Lanham Act does not block reimportation and sale of genuine articles under their real trademarks …[but this] does not apply if the domestic and foreign products are materially different.”  In every case I’ve seen, the products have some differences, often small, and those always are considered material differences.  With cigarettes, the “loyalty programs,” i.e., coupons on the pack, differ here and abroad; domestically, cigs beyond their shelf life are removed by RJR, but they don’t police remiported cig stores.  While those seem modest differences, the jury accepted them. Sure, the coupons differ – why would a smoker in Italy want a Nascar cap?  No doubt too that RJR is not going to gray market stores to check shelf life labels, but for as long as the reimported cigs were fresh, then they were not materially different from the domestic products.

Sometimes it seems that when no other commercial claim will fit, that a Lanham Act or an antitrust claim can fill in the void.  Here, the fact is that gray market resellers are disfavored, even by jurors who like to get the same thing for a lower price.  If you are defending one of the these cases: invoke your advertising injury coverage, then work hardest to settle with the trademark owner.