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U.S. Horticultural Supply, Inc. v. Scotts Co.

January 13, 2009

U.S. HORTICULTURAL SUPPLY, INC.,
v.
THE SCOTTS COMPANY, ET AL.



The opinion of the court was delivered by: McLaughlin, J.

MEMORANDUM & ORDER

On November 5, 2004, U.S. Horticultural Supply ("USHS") sued The Scotts Company ("Scotts") and Griffin Greenhouse Supplies ("Griffin") for alleged violation of Section 1 of the Sherman Act, which prohibits contracts and conspiracies in restraint of trade. 15 U.S.C. § 1. USHS' theory of the conspiracy is that Scotts and Griffin, beginning in 1998, agreed to push USHS out of the mid-Atlantic market, and to prevent its entry into the New England market, so as to allow Griffin to act as the only major distributor in those areas.

USHS and Griffin reached a settlement of USHS' claims. Scotts has filed a motion for summary judgment. Because USHS has failed to carry its burden of providing evidence raising a genuine issue of material fact relevant to its claims, the Court will grant Scotts' motion for summary judgment.

I. Earlier Litigation Between USHS and Scotts and Current Procedural Posture

In 2003, before the filing of this case, USHS sued Scotts for attempted monopolization pursuant to Section 2 of the Sherman Act based on the same non-renewal of a distribution contract that is the focus of the current litigation. The earlier complaint also alleged two counts of promissory estoppel and one count of breach of contract. Scotts moved to dismiss the Sherman Act claim and the promissory estoppel claims. USHS voluntarily withdrew the promissory estoppel claims, leaving only the Sherman Act claim as the subject of its motion to dismiss. Scotts' argued that USHS' Section 2 claim should be dismissed on the grounds that the plaintiff lacked antitrust standing and could not otherwise make out the elements of a Section 2 monopolization claim. The Court denied the defendant's motion to dismiss. U.S. Horticultural v. The Scotts Co., No. 03-773, 2004 WL 1529185 (Feb. 18, 2004).

On February 17, 2005, under threat of Rule 11 sanctions being filed by Scotts, USHS filed a notice of voluntary dismissal as to the Section 2 claim. Def.'s Letter in Opp'n, Ex. A, U.S. Horticultural v. The Scotts Co., No. 03-773, (E.D. Pa. Feb. 22, 2005). Scotts opposed this attempt to dismiss the Section 2 claim. USHS had filed its notice of dismissal pursuant to Rule 11, which Scotts argued offered no mechanism for such dismissal. Scotts then filed a motion for sanctions, claiming that USHS had multiplied the number of claims against Scotts in bad faith. The Court granted dismissal of the Section 2 claim pursuant to an agreement of the parties on February 28, 2005. Scotts then filed a motion for summary judgment as to the remaining breach of contract claim, which the Court granted on July 20, 2005. Finally, the Court denied Scotts' motion for sanctions on June 1, 2006.

Contemporaneous with the Section 2 litigation in this Court, in the United States District Court for the Southern District of Ohio, Scotts demanded arbitration to collect a sum owed under a distribution agreement with USHS. Arbitration was scheduled to commence on February 3, 2004, but USHS filed for bankruptcy on February 2, 2004. The bankruptcy filing triggered an automatic stay of Scotts' claims in that arbitration, but the arbitrator proceeded to adjudicate USHS' promissory estoppel counter-claims against Scotts (the same promissory estoppel claims that USHS had withdrawn from its Section 2 suit in this Court). USHS eventually withdrew its counter-claims and also consented to the dismissal of its bankruptcy proceedings. With the stay lifted, Scotts moved for and received an entry of a final arbitration award. This award was confirmed and in April of 2005 Scotts obtained a judgment against USHS for $1,842,671.11, plus interest.

On September 29, 2004, while USHS was still litigating the Section 2 claim, the Court denied the plaintiff's motion for leave to amend to add a claim under Section 1 of the Sherman Act. Following that decision, USHS filed this complaint on November 5, 2004 against Scotts and Griffin. On June 1, 2006, the Court denied Scotts' motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

Following the denial of that motion, the parties proceeded to discovery and on January 31, 2008, Scotts filed the present motion for summary judgment. At the same time, Scotts filed two Daubert motions and a motion in limine seeking to exclude post-discovery affidavits submitted by USHS.

II. The Summary Judgment Record

A. The Parties

The Scotts Company is a manufacturer of consumer and professional horticultural products, which sells its products through a nationwide network of distributors. Scotts sells controlled release fertilizers ("CRF"), water soluble fertilizers ("WSF"), growing media or soil products ("Media"), plant protection products ("PPP"), aquatrols and various specialty agricultural products. Certain of Scotts' products are sold for use in nurseries, others for use in greenhouses. Def.'s Statement of Undisputed Fact at 2-5 [hereinafter Def.'s St.].*fn1

Of these products, CRF is at the heart of this case. Scotts sells approximately fifty different varieties of CRF. Def. Ex. 27.

Griffin Greenhouse Supplies ("Griffin") has been a distributor of Scotts' horticultural products since at least 1993. In the mid-1990s, Griffin expanded its operations in the eastern United States. In 1997, Griffin had opened facilities in Virginia and New York. By 2000, Griffin had facilities in Maine, Massachusetts, Connecticut, New York, New Jersey, Pennsylvania and Virginia. Def.'s St. at 15-16. In September of 2002, Griffin made an offer to buy out USHS in an asset sale, which USHS ultimately accepted. Def.'s St. at 19-20.

USHS was a horticultural products distributor and retailer (previously, USHS operated under the name "E.C. Geiger, Inc.") from 1928 until it was purchased in an asset sale by Griffin in 2002. USHS sold Scotts' products, which accounted for approximately 20 percent of USHS' sales revenue. Def.'s St. at 5. USHS has sold horticultural products nationwide and, at times, internationally in South and Central America, Asia, Canada, Europe and the Carribean. Def.'s Ex. 34. The record contains sales documents that reflect that many of USHS' sales took place in Connecticut, Delaware, New Jersey, New York, Pennsylvania and Virginia. Pl.'s Ex. 52. USHS' documents compiled while preparing for its sale to Griffin list a number of the company's competitors in these states. Def.'s Ex. 52.

Among the Scotts products that USHS sold was a line of "private label" products. "Private labeling" consists in placing products manufactured by another company (in this case, by Scotts) in packaging bearing USHS' own label. USHS then sells the Scotts-made product under its own brand name and using a USHS label. At certain times throughout the Scotts-USHS relationship, and for certain products, Scotts offered a performance program related to USHS' privately labeled Scotts products. This performance program offered USHS a rebate on Scotts' prices depending on USHS' success in selling the privately labeled products: higher volumes of sales would result in higher rebates. An internal memorandum from Scotts describes a rise in the percentage of sales by USHS under its private label as opposed to sales under the Scotts label. This memorandum states that in 1999 the percentage of sales of WSF under USHS' private label was 24.2% and sales under Scotts' label accounted for 75.8%; in 2001 these percentages had flipped and USHS' label accounted for 77.4% of WSF sales. Pl.'s Ex. 86.

On May 12, 1995, USHS (at that time called "Geiger") formed a company called Geiger South. A letter addressed to Geiger South's vendors, including Scotts, and sent by the President of USHS on May 12, 1995, stated that USHS would "corporately guarantee all purchases by" Geiger South. Def.'s Ex. 36. USHS' President Ronald Soldo testified that Geiger South's market entry strategy relied in part on selling products at low prices and low margins, and that this low-pricing strategy was ultimately not successful. Def.'s App. Dep. Tr. 16 at 170-171, 198 [hereinafter Soldo Dep. Feb. 28, 2007]. Geiger South went bankrupt in 1997. At the time of Geiger South's bankruptcy, it owed Scotts a substantial sum for products sold by Scotts on credit; USHS covered this debt by issuing a promissory note to Scotts in the amount of $480,000. Pl.'s Ex. 87.

B. The Scotts-USHS Relationship

In 1996, USHS and Scotts signed a Horticultural Products Distributor Agreement. This agreement provided that Scotts would deliver its products to USHS' warehouses and customers within a defined territory. The territory defined in the agreement included the states of North Carolina, Virginia, West Virginia, Pennsylvania, New Jersey, Maryland, Delaware, and Connecticut, as well as the District of Columbia, several counties of New York and Long Island. The territory would also encompass Texas and Louisiana if USHS established branches in those states. Pl.'s Ex. 99. The parties agree that this 1996 Agreement was drafted as part of a deal to have USHS issue a promissory note guaranteeing payment for Geiger South's debts. Def.'s St. at 11.

The 1996 Distribution Agreement expired by its terms on December 23, 2000. Scotts continued to provide USHS with Scotts products in the absence of a distributor agreement from December 23, 2000, to August 3, 2001. On August 3, 2001, USHS and Scotts agreed to renew their distributorship agreement for a term ending on September 30, 2002. This new agreement amended the definition of the territory to which Scotts would ship its products by removing the language regarding potential expansion into Texas and Louisiana. When the expiration date for this contract was reached, Scotts chose not to renew the contract. Pl.'s Exs. 99, 177; Def.'s Ex. 49.

Prior to the expiration of the 1996 Agreement, on March 19, 2002, Scotts and USHS entered into a distribution agreement that established USHS as a distributor of a CRF variety called "Ficote" (the "Ficote Agreement"). The Ficote Agreement expired by its terms on September 30, 2003. Scotts and USHS also entered into a distributor agreement on that same day establishing USHS as a distributor of another CRF variety called "Grocote" (the "Grocote Agreement"). The Grocote Agreement expired by its terms on September 30, 2006. Pl.'s Exs. 29, 101.

Throughout their relationship, Scotts offered USHS a credit line of varying amounts. In the time leading up to Geiger South's bankruptcy, USHS allowed Scotts to view its financial statements, after which Scotts reduced USHS' credit line. After that credit reduction, USHS refused to allow Scotts to view its financials. Soldo Dep. Feb. 28, 2007 at 239. Despite USHS' refusal to disclose its financial information, Scotts provided a partially secured line of credit from 1998 to 2002 and beyond. From 1998 to 2002, USHS' credit line increased from $1 million to $3 million. Pl.'s Opp'n at 22; Def.'s Exs. 37, 38. A memorandum drafted by the President of USHS in January of 2002 explained that regularly sending checks to Scotts would maintain the impression that payments to Scotts were among USHS' priorities. The memorandum states that USHS had "pulled a fast one on the Scotts bosses by getting them to go to [$3 million]." Def.'s Ex. 41. Following the non-renewal of the distributor agreement in September of 2002, while the Grocote and Ficote Agreements continued in force, Scotts provided a $350,000 line of credit to USHS to enable the purchase of Grocote and Ficote. Pl.'s Ex. 100.

The record contains undisputed evidence of denial of credit to USHS by suppliers other than Scotts over the same time period. A series of letters between USHS and supplier X.S. Smith, Inc., demonstrates that USHS' refusal to provide financial information contributed to the denial of a credit line by that supplier. Def.'s Exs. 45, 46, 47. The last letter in that series, written by USHS' president and CEO, states that USHS had "made an irrevocable decision approximately 2.5 years ago in that it would NOT provide financial statements to any vendors."

Def.'s Ex. 47. That letter states that despite its refusal to provide financial information to other vendors, USHS still benefitted from a $2 million credit line from Scotts. Id. USHS' president testified that he did allow one Scotts' employee to view USHS' financial records, but that no written records were provided. Pl.'s Ex. 93 at 103 [hereinafter Soldo Dep. Jan. 20, 2004].

A Scotts internal credit policy document states that "for those companies not supplying us their financial statements: they will be individually evaluated based on payment habits and length of company's existence per Dun and Bradstreet and the bank and trade references provided." Pl.'s Ex. 150. The record contains several items relevant to USHS' payment history. The first is a Scotts document titled "Credit Limit Arbitration," which states in part that USHS' "payment record has been quite consistent with a four year history." Pl.'s Ex. 26. The deposition of a Scotts' officer also contains testimony that USHS was 30 days past-due on payment for certain periods of time in 2002, but that "except for the one instance . . . [the officer] was not aware of [any] issues with [USHS] paying us as they said they would pay us on the due dates." Pl.'s Ex. 27 at 28:9-13 [hereinafter Robinson Dep.].

In contrast to the USHS-Scotts credit agreements, Griffin received a line of credit from Scotts ranging from $7.5 million to $10 million from 1999 to 2004. Def.'s Ex. 51. Griffin's owner has testified that Griffin never reached the limit of its credit line, Def.'s App. Dep. Tr. 4 at 332 [hereinafter Hyslip Dep.], although other deposition testimony states that Griffin was occasionally past-due on payments to a small extent. Pl.'s Ex. 27 at 132.

The record also contains statements by USHS officials asserting that their company's costs exceeded revenue from 1996 to 2002. The former vice-president of sales and marketing for USHS testified that his company experienced "cash flow problems" from 1997 to 2000, partially as a result of the under-performance of Geiger South. Def.'s App. Dep. Tr. 12 at 78-80 [hereinafter Salettel Dep. Dec. 29, 2004]. USHS' president and CEO has testified that he recalled his company showed a loss on its corporate tax returns for the years 1999, 2000 and 2001. Def.'s App. Dep. Tr. 15 at 187 [hereinafter Soldo Dep. Jan. 5, 2005]. He also testified at a separate deposition that his IRS Form 1120-S for the year 2002 reflected an operating loss of $1,108,617. Def.'s App. Dep. Tr. 17 at 278:7-20 [hereinafter Soldo Dep. Mar. 1, 2007].

C. Evidence of Conspiracy

The record contains several documents that USHS contends reflect the existence of an anticompetitive agreement between Scotts and Griffin.

(1) A note written in 1999 by William Kusey, a Scotts officer, memorializes a meeting with Griffin [the "Kusey Note"]. Toward the end of the note, Kusey wrote, "1. Griffin drop Nutricote, Hoffman, ProGro [Scotts competitors] if Scotts drops [USHS]--their offer. 2. [Scotts] counter offer? Drop all competing WSF & Fatard [a Griffin competitor]." Def.'s Ex. 54.

(2) Another memorandum sent to Griffin from Bill McEvoy of Scotts on December 21, 1999, discusses Griffin's concern over USHS' pricing [the "Dinosaur Memorandum"]. The memorandum states that "the [USHS pricing] is not in sync with Scotts' distributor strategy of profitability with our products." The memorandum states at the end that "historically, distributors that engage in such pricing practices have traveled the road of the Dinosaurs." Pl.'s Ex. 107.

(3) An internal email sent by Lisa Wallace, a Scotts credit officer, on December 8, 2000, states that USHS would not release to Scotts its financial information, but that USHS claimed a 10% increase in sales. Wallace stated that she recommended maintaining USHS' credit line at $2 million over the course of the next year, but that Scotts should "focus during this one year renewal period, upon positioning others to fill in the gap that [USHS] would leave." Pl.'s Ex. 28.

(4) An email chain contains a conversation between Ronald Soldo, the President and CEO of USHS, and Philip Trump of Scotts. Soldo complains that he has heard about Scotts' employees "telling the trade that [USHS' private label WSF] is an inferior brand." Trump responded that he had never told any "trade end user customer" such a thing. A hand-written note on the print-out of this email chain reads, "Ron on a new war path! Let's reactivate Griffin partnership in PA[;] discussion asap." Pl.'s Ex. 126.

Apart from these four documents, USHS identifies facts relating to the circumstances of Scotts' non-renewal of the distributor contract, along with deposition testimony, as evidence of an illegal conspiracy to terminate USHS.

First, the record contains deposition testimony offered by Scotts' employee Michael Kelty stating that one factor in choosing not to renew the 1996 Distributor Agreement was that "sales of Osmocote were being sold at aggressive pricing." Kelty went on to testify that "Osmocote is a leading brand of The Scotts Company, and we want it to be sold in the market--extract the value from the marketplace. And we didn't want a distributor going out and selling it, you know, at low prices, being consistent with managing the brand, stewarding the brand." Pl.'s Ex. 31 at 22:13-24 [hereinafter Kelty Dep.].

USHS identifies the Scotts-Griffin contract regarding distribution of the Ficote variety of CRF as further evidence of conspiracy. The contract states that Griffin will "eliminate Meister, Multicote and Poly-On controlled release fertilizer products from its distribution system by [September 30, 2008] and thereafter, so long as this Agreement is in effect, purchase only controlled release fertilizer manufactured by Scotts (Excluding Nutricote)." Pl.'s Ex. 179 at 14.

With respect to Nutricote, several statements are in the record regarding its status as a competitor with Scotts' CRF. Two of these statements are relevant to the issue of conspiracy. First, USHS' President and CEO has testified that in 1998 Nurticote "was making a huge inroad on the indoor use." Soldo Dep. Jan. 5, 2005 at 177:23. Second, a letter sent on May 12, 1998, from the President and CEO of USHS to Chris Treadgill at Scotts stating that Nutricote was making inroads in the CRF Greenhouse market. The letter also states that "three major distributors who were former Scotts distributors . . . are now actively selling Nutricote against Scotts." Pl.'s Ex. 71.

USHS offers several documents purporting to show that prices of CRF increased after Scotts' non-renewal of the distributor contract with USHS, consistent with the goals of the alleged conspiracy. The first of these documents is a declaration offered by an accountant, Jeffery Press, who stated that he reviewed sales records produced by USHS and Griffin in relation to this case. Press states that he found "105 instances in which customers that had purchased select Scotts CRF products during the period 1999 through 2002 paid increased prices of at least 10% during the period 2003 through 2005." Pl.'s Ex. 165, ¶¶ 4-5.*fn2

Finally, the record contains a chart, produced by Scotts, illustrating the trend in its CRF margins. The chart reflects that from the years 1999 to 2002, Scotts margins decreased gradually. From the beginning of 2002 to 2003, however, the chart reflects an up-tick in CRF margins. Pl.'s Ex. 159.

D. Evidence Pertaining to Markets

USHS' theory of this case involves a vertical price fixing conspiracy. The complaint alleges a product market for CRF sold to nurseries and alleged geographic markets of the United States (at the wholesale level) and the mid-Atlantic and New England (at the retail level).

1. Geographic Markets

a. Geography at the Wholesale Level

Scotts sells its products worldwide. To support its assertion of a "United States" market, USHS offers three internal documents produced by Scotts. The first is a map of the United States with the heading "Geographical Distribution--All Products." A sub-heading states "Scotts 2003 Sales by State," and a list contains the "Top 10 Hort States." The map's coloration symbolizes the dollar value of sales within each state, with the heaviest sales in states producing $2--$11 million and the lowest sales in states producing $0--$200,000. Pl.'s Ex. 7.

A second map, this time of the continental United States only, is titled "Production Sites." Dots of a certain color signify the location of production sites of CRF. USHS has asserted that Scotts' market for all products was the United States (with regional markets for CRF in a "northern" region). The map shows that, for all products, Scotts had eighteen production sites located across the country. These sites are concentrated along the East coast, with four sites in the midWest, two sites in Mississippi, and two sites in California.

Pl.'s Ex. 8.

A third map is included in a presentation slide with the title "Geographical Distribution--All Products." Two bullet-points on the slide seem unrelated to the map itself. The "[m]aps denote: [1] "Ship-to" distributor addresses; [2] Direct grower shipments." The map itself, however, appears to be an exact copy of the first map discussed above with respect to Scotts' 2003 sales by state. Pl.'s Ex. 155.

USHS also offers a series of charts capturing Scotts' percentage share of the "North America Horticultural Input Market." This document reflects that Scotts at one point realized fifty percent of the total sales of CRF in North America. Pl.'s Ex. 80. Although this document pertains to "North America," USHS has asserted that Scotts internal documents (discussed above) make clear that the United States was the only relevant geographic area within North America. Pl.'s Opp'n at 87.

Scotts points to a document in the record suggesting that North America is a relevant geographic area. This document is a print-out of a presentation entitled "Professional Business Group Business Review." The document contains the first two maps of the United States discussed above. Along with those maps, the presentation contains slides which discuss Scotts' competitive position in terms of a North American horticultural input market. Def.'s Ex. 58.

Within North America, Scotts divides its sales of CRF between three geographic regions: "Northern," "Southern," and "Western." Def.'s St. at 3. Although USHS asserts that the relevant market at the wholesale level is the United States, it has also "acknowledged that a CRF market corresponding to Scotts' 'northern' region existed owing to the technological superiority of Scotts' CRF in temperate climates." Pl.'s Opp'n at 88. Scotts defined the Northern Region, at issue in this case, to include 26 states: Connecticut, Delaware, Iowa, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, North Dakota, Nebraska, ...


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