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The Provi Beat Rolls On

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Source: https://irishliquorlawyer.com/

June 7, 2024

Southern Glazer’s Wine and Spirits, LLC (“Southern”) and Republic National Distributing Company, LLC (“RNDC”) received bad news last week that Provi’s case alleging Southern and RDNC’s violation of the Sherman Antitrust Act can move forward.

Southern and RNDC filed a motion to dismiss the charges in response to Provi’s lawsuit against them. A motion to dismiss filed pursuant to Civil rules of Federal Procedure 12(b)(6) challenges the sufficiency of the complaint and does not challenge the merits. A court under a motion to dismiss review considers the Plaintiff’s well pleaded facts as true and draws reasonable inferences from those facts in the plaintiff’s favor.

To survive a motion to dismiss, the complaint “must assert a facially plausible claim and provide fair notice to the defendant of the claim’s basis. A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw, the reasonable inference that the defendant is liable for the misconduct alleged.”[1]

The judge concluded that Provi adequately alleged violations of § 1 of the Sherman Act, which forbids horizontal and vertical conspiracies, violations of § 2 of the Sherman Act which forbids monopolization, tortious interference, and Illinois and California state antitrust violations.

Why this matters and why we should care

A lawsuit does not take on meaning unless it can survive a motion to dismiss. Once it can survive a motion to dismiss, it moves onto the next stage which is discovery.

In discovery opposing counsel gets access to witnesses, intercompany documents, and relevant communication pertaining to this matter. If a business is engaging in nefarious activity, this could become uncovered in discovery. Without surviving the motion to dismiss, Provi wouldn’t have this legal access. This helps Provi on two fronts: 1. discovery can be used to support what the judge deems circumstantial evidence for some of their claims; 2. There may be enough damning evidence uncovered in discovery that Southern and RNDC may want to settle this case.

If I was going to predict, I believe this case will settle based on the latter’s reasoning.

Friday was a big event in this case, and I think it is time to back up the Brink’s truck for Provi on this one. Southern and RNDC went for an early knockout punch and missed badly, everyone of Provi’s claims survived.

I see settlement and not trial becoming the end game. Wholesalers in legal fights usually can drown out their opposition with greater resources but that is not the case here. This is not their usual fight where they wear down an opponent and win in round 5. Provi is well funded and has top legal minds working on their behalf and Provi is not going away. They are willing to go the distance with Southern and RNDC, something no one has really ever been willing to do. For Southern and RNDC, the risk of losing a decision in terms of dirt and in damages, I think will be too expensive!

Legal Analysis

I want to provide a legal analysis of the federal issues and what influenced the Court’s decision to deny the motion to dismiss.

There are many factors that go into deciding whether a violation of the Sherman Act has occurred, I will go into each relevant legal issue discussed.

Relevant Commercial Market

Before evaluating a claim for violating § 1 & § 2 of the Sherman Act, the plaintiff must prove that there is the existence of a relevant commercial market.  “In other words, the products in a market must have unique attributes that allow them to be substituted for one another but make them difficult to replace with substitute products from outside the market.”[2]

The Defendants (Southern & RNDC) argued that there were alternatives to the online market such as ordering via phone, email, or in-person and that these are reasonable substitutes. The Court disagreed and concluded that Provi sufficiently alleged a product market when it demonstrated that in-person, phone, and email ordering were not adequate alternatives to an online marketplace for placing orders.

Geographic Markets

Provi took the position that the geographic market for alcohol products should be state-by-state to account for the different state regulatory regimes.

Defendants deemed this theory implausible and “it is merely an attempt to “bootstrap” Defendants’ alleged control over the alcohol distribution market in some states.”[3]

The Court sided with Provi because Provi provided sufficient allegations that suppliers base advertising campaigns on the states where retailers are based, and that each state’s unique regulatory regime dictates the market.

Provi further took the position that the same geographic market theory should apply to its market for data-analytics and advertising services. The Court agreed based on the same grounds it applied for Provi’s alcohol products business.

Sherman Act claims

Because Provi adequately plead the existence of relevant markets, the Court could look at Provi’s monopolization claims under § 2 of the Sherman Act.

Monopoly Power

Section 2 requires that a plaintiff demonstrate that the defendant “(1) possesses ‘monopoly power in the relevant market’ and (2) engages in ‘the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.’”[4]

Monopoly power in the relevant market is established when the plaintiff provides “direct evidence of anticompetitive effects” or “by proving relevant product and geographic markets and by showing that the defendant’s share exceeds whatever threshold is important for the practice in that case.”

The Court concluded that Provi adequately alleged that Defendant’s utilized monopoly power. The Court found credible Provi’s allegations that Defendants eliminated competition in the relevant markets ((Online Alcohol Marketplaces, Advertising on Online Alcohol Marketplaces, and Data Analytic Services), which forced retailers to use their platform. This action led to higher prices, reduced innovation, and decreased quality in the relevant markets.

Next the Court considered Provi’s evidence of monopoly power. Provi based its theory on Defendants’ substantial market share in the wine and spirits market and the Defendants exclusive rights to distribute must have brands and that retailers are not likely to split their baskets and will shop in one space.

According to the Court this theory is a plausible explanation for “why Defendants’ market shares in the distilled spirits and wine distribution markets would translate into the three relevant markets, given the interrelatedness among all of these markets.”[5]

Exclusionary Conduct

The Court looked at whether Provi adequately plead the second part of the § 2 monopolization claim. Under this test, the Court examines whether there is “willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”[6]

The Court concluded that Provi properly stated a claim under the second part of § 2 of the Sherman Act for numerous reasons. Mainly that Defendants entered into a voluntary relationship with Provi, utilized Provi’s platform, even as they rolled out their platforms, and suddenly publicly announced they would stop using Provi and blocked orders placed through Provi.

Further, Provi alleged that the Defendants attempted to destroy Provi’s relationship with retailers and reminded retailers of the Defendant’s boycott of Provi’s platform. These alleged factors were enough to sustain Provi’s second part of the § 2 monopolization claim.

Horizontal Conspiracy

Provi alleges a horizontal conspiracy where Defendants entered into an illegal agreement to boycott Provi in violation of § 1 of the Sherman Act.  A plaintiff bringing a § 1 claim “must allege that the defendant (1) entered into an agreement that (2) unreasonably restrains trade in the relevant market and (3) caused the plaintiff an antitrust injury.”[7]

Although Provi could not provide direct evidence that agreement occurred between the parties, the court held that there was enough plausible circumstantial evidence, which allowed the complaint to survive a motion to dismiss.

The court focused on the allegations of parallel conduct between the parties and plus factors.

The Court found that Provi’s allegations of parallel conduct were sufficient because the Defendants launched their online platforms within days of each other, both Defendants had similar and nearly simultaneous communication that it was terminating its business relationship with Provi, and both Defendants blocked Provi’s email domain so orders would go unfulfilled.

Because the Defendants claim this could have resulted from innocent conduct, the Court took the extra step of requiring Provi to assert plus factors indicating and agreement.

“Relevant plus factors to bolster circumstantial evidence of an agreement include whether the parallel acts were against the economic self-interest of the parties, the market structure of the relevant markets, and whether there were opportunities to collude.”[8]

The Court concluded that Provi’s allegation met these standards. Provi alleged that Defendants acted against their own economic self interest when they didn’t accept orders that retailers desired through Provi, and thus sacrificing revenue and good will.

Next the Court agreed with Provi’s allegation that the Defendants based on their strength in the marketplace had concentrated market power.

The Court also agreed with Provi’s allegation that the Defendants had the opportunities to collude based on mutual relationship in trade associations, their close relationship and frequent communication. However, the Court admitted these allegations are flimsy, and that the Court put little weight on this plus factor.

Finally, the Court held that Defendants not ordering from Provi constituted a departure from their past practices.

Vertical Conspiracy

Provi next alleged that the Defendants used their market power to coerce retailers into dropping Provi, and thus violating § 1 of the Sherman Act. A vertical conspiracy theory must rely on “direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective.”[9]

Provi’s theory rest on the Defendant’s exercising power over retailers and weaponizing their exclusive distribution agreement of must have brands, in order to coerce retailers to boycott Provi.

The Defendants claimed that Provi could not prove whether there was a meeting of the minds between Defendants and retailers.

The Court concluded that Provi adequately alleged a vertical conspiracy by concluding that Provi’s allegations were plausible enough that Defendants sought retailers acquiescence to their demand to stop using Provi and the retailers followed suit, because they could be worried about losing access to must have brands.

Sherman Act § 1 Claim – Tying Claim against Southern

The Court looked into whether there was a plausible tying claim against Southern under § 1 of the Sherman Act.

“A plaintiff must establish three elements for a per se illegal tying agreement: (1) the tying arrangement is between two distinct products or services, (2) the defendant has sufficient economic power in the tying market to appreciably restrain free competition in the market for the tied product, and (3) a not insubstantial amount of interstate commerce is affected.”[10]

The Court decided that at the outset Provi adequately alleged that the tying arrangement between two distinct products or services.

Southern challenged the tying claim stating that Provi failed to allege it had an economic interest in the sale of tied product because it did not charge retailers to use Proof. However, the Court bought Provi’s argument that Southern puts conditions on a retailer’s access to distribution services and that only retailers that used Southern’s Proof platform maintained access to these services.

Provi made a “negative tie” argument which stands for the proposition that a customer promises not to take tied product from a competitor. Although negative tie theories are uncommon, they are still illegal under § 1 of the Sherman Act.

The next element the Court analyzed was whether there was sufficient power in the tying market. The Court opined that Provi adequately demonstrated that Southern has sufficient market power in the tying market to force retailers’ course of dealings based on Southern’s over 50% share of wine and spirits in certain marketplaces.

Foreclosure of a Substantial Volume of Commerce

Southern claimed that Provi did not properly allege that there was a substantial volume of commerce foreclosed based on the tying arrangement. Southern relied on evidence that twelve of the fourteen largest distributors integrated with the platform.

The Court disagreed, Provi claimed the quantity of commerce in the Online Alcohol Marketplaces is at least $1 billion annually.[11]

Antitrust Injury and Standing

Defendants took the position that Provi failed to allege a factual record which demonstrates anticompetitive impact, such as a reduction in output or an increase in price, which are required for establishing antitrust injury. They argued that the loss in profit was not from Defendants blocking Provi but is based on retailers making their own decisions where to purchase orders from and for suppliers where to advertise.


The Court disagreed, in numerous instances the Seventh Circuit held that excluding a competitor from a market constitutes antitrust injury.

Finally, the Court looked at standing. “This inquiry centers on proximate causation and asks about “the existence of other parties that have been more directly harmed” by the alleged anticompetitive conduct.”[12]

Defendant argued Provi was the wrong plaintiff and instead the plaintiffs should be retailers, distributors, and advertisers.

The Court disagree stating that customers and competitors in an effected market maintain standing. The Court indicated that Provi adequately alleged injury resulting from Defendants’ actions and Provi adequately alleged three markets where it competes with Defendants.

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