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Race Tires America, Inc. v. Hoosier Racing Tire Corp.

July 23, 2010

RACE TIRES AMERICA, INC., A DIVISION OF SPECIALTY TIRES OF AMERICA, INC.; SPECIALTY TIRES OF AMERICA, INC.; SPECIALTY TIRES OF AMERICA (PENNSYLVANIA), INC.; SPECIALTY TIRES OF AMERICA (TENNESSEE), LLC, APPELLANTS
v.
HOOSIER RACING TIRE CORP; DIRT MOTOR SPORTS INC, D/B/A WORLD RACING GROUP



On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil No. 2-07-cv-01294) District Judge: Hon. Terrence F. McVerry.

The opinion of the court was delivered by: Cowen, Circuit Judge

PRECEDENTIAL

Argued April 14, 2010

BEFORE: FISHER, and COWEN, Circuit Judges and DITTER*fn1, District Judge.

OPINION

The Plaintiff in this antitrust matter, a tire supplier, appeals from the order of the United States District Court for the Western District of Pennsylvania granting the respective motions for summary judgment filed by the Defendants, a tire supplier competitor and a motorsports sanctioning body. Plaintiff's claims arise out of the adoption of the so-called "single tire rule" by various sanctioning bodies in the sport of dirt oval track racing as well as the related exclusive supply contracts between these sanctioning bodies and the Defendant tire supplier. Plaintiff further challenges the District Court's denial of its motion for leave to amend its complaint. We will affirm.

I.

A. The Parties

We refer to the four companies listed as the Plaintiffs in the current matter by the name of the parent company, "STA."*fn2 STA manufactures and sells specialty tires for a variety of vehicles, such as aircraft, farming equipment, and racing cars. It specifically manufactures and sells a "house brand" known as "American Racer." This American Racer line includes dirt track racing tires, asphalt track racing tires, ATV ("all terrain vehicle") racing tires, passenger performance tires, and race track equipment tires. Defendant Hoosier Racing Tire Corp. ("Hoosier") is a family-owned business, which focuses almost exclusively on the racing tire business (in contrast to STA, which sells a large variety of different kinds of specialty tires and is owned by a holding company named Polymer Enterprises, Inc.). Hoosier is the largest race tire manufacturer in the world that specializes in manufacturing racing tires.

STA, Hoosier, and the Goodyear Tire and Rubber Co. ("Goodyear") represent the three major competitors in the alleged market of tires for dirt oval track racing in the United States and Canada. There were at least five competitors in this market in the 1980s and the 1990s, namely, STA, which was previously known as McCreary, Hoosier, Goodyear, Firestone, and M & H.

The evidence in the record indicates that Hoosier's market share in the dirt oval track market grew from 59.6% in 1998 to 65% in 2000. In terms of sales revenue, Hoosier's market share for dirt track racing tires increased from 69% in 2003 to 79% in 2007. For dirt sprint car tires, Hoosier's market share increased from 87% in 2003 to 94% in 2007. On the other hand, STA's share of the dirt tire market dropped from 29% to 19% between 2003 and 2007, while Goodyear's share remained the same at approximately 2%. STA's dirt sprint tire share likewise fell from 10% in 2003 to 5% in 2007, and Goodyear's share similarly went from 3% in 2003 to 1% in 2007.

Defendant Dirt Motor Sports, Inc. d/b/a World Racing Group ("DMS") is a motorsports sanctioning body. As explained in more detail in Section I.B, infra, DMS and the other sanctioning bodies organize and promote races and, in turn, promulgate rules governing these races. DMS, in particular, owns such well-known touring series as the "World of Outlaw Sprint Car Series" and the "Late Model Series." It sanctions over 5,000 races per year at over 200 dirt oval tracks in twenty-one states. In 2005, DMS acquired another sanctioning body known as United Midwest Promoters ("UMP"). There are two other major sanctioning companies in the field of dirt oval track racing: (1) Amicus International Motor Contest Association ("IMCA") (sanctioning races at approximately 112 dirt oval tracks); and (2) WISSOTA Promotions, Inc. ("WISSOTA") (sanctioning races at approximately fifty-seven dirt oval tracks). Combined, DMS, IMCA, and WISSOTA sanction modified, late model, sprint, or stock car races at over 70% of the 636 weekly tracks in the United States.

B. The Role of Sanctioning Bodies and the "Single Tire Rule"

As the District Court recognized, the role played by sanctioning bodies in dirt oval track racing (and, in fact, in motorsports racing in general) is of special importance here. Track owners or promoters typically belong to a sanctioning body, which charges sanctioning fees in exchange for this privilege of membership. These bodies sanction races, and they formulate rules for such races. These sanctioning bodies (like the track owners and promoters) compete to attract car owners (generally known as "racers"), drivers, and fans to their respective races. Accordingly, the sanctioning bodies create various incentives in order to get the most racers, drivers, and fans.

The record reveals that these sanctioning bodies often choose to adopt a "single tire rule." Such a rule generally requires that a specific tire type and brand be used on one or more wheel positions for one or more classes of cars for a series of races or racing seasons.

Significantly, the sanctioning bodies generally do not buy the tires themselves, and the tires are purchased by the participating racers and drivers. The organizations instead establish the tire parameters and requirements for the race. Some rules may define the permissible tire by merely a bead size or some other physical dimension. Other rules may require that the tires at one or more wheel locations be a particular type or brand. Tire rules that do not require a specific brand of tire are generally called "open tire rules."

Tires are not the only components of a race car subject to a single source or manufacturer rule. Sanctioning bodies make rules that may specify the appropriate carburetors, mufflers, chassis, or other kinds of equipment to be used. For example, Amicus United States Auto Club, Inc. ("USAC") has a "spec engine rule" for its Ford Focus Midget Series, which requires the use of Ford engines. United Racing Club ("URC") has a rule requiring a single brand of cylinder heads, manufactured by the sanctioning body's sponsor. The International Race of Champions Series mandates that the drivers actually use identical cars. Regardless of the kind of equipment at issue, the record indicates that a sanctioning body makes these fundamental determinations based on an assessment of its own self-interest.

C. Single Tire Rules and Exclusive Agreements

Evidence in the record further demonstrates that STA has, at least in the past, supported the single tire rule. In fact, its own website takes credit for the concept itself, stating that:

In the 1970's [sic], Joe Jacobs, the developer of the race tire business that eventually became Race Tires America, proposed and encouraged race tracks and promoters to adopt spec tire or track tire rules. Under this concept, track owners and promoters adopted a manufacturer's tire for a particular class of races for the duration of a racing season. The purpose of the rule was to avoid the almost constant pace of tire changes that were particularly costly to racers, and to encourage racer parity by removing the "'hot'" tire setups. With all racers competing on a single tire design and compound, the tire wars would be quelled and race results would be more related to a driver's skill and ability and not a more expensive "'state-ofthe-art'" tire. The acceptance of spec tire rules contributed to the success and popularity of dirt track racing in America.

(A484.) STA's website goes on to attack the abuse of such "spec tire rules," claiming that such abuse has resulted, inter alia, in the concentration of market power in the hands of a single monopolistic tire supplier, the loss of true competition between the few remaining tire suppliers, and harm to STA, other suppliers, track owners, promoters, and the drivers themselves. In this litigation, STA attempts to distinguish its prior support for the single tire rule by claiming that it merely promoted the adoption of a track rule that would remain in effect for a single racing season, in contrast to Hoosier's practice of entering into a series of exclusive supply contracts with major sanctioning bodies that, in turn, encompass thousands of races and last for periods of up to seven years.

In fact, the above statement from the website actually comes from a proposal by STA for a "Declaration in Favor of Competition." The accompanying petition or "Declaration" expressly calls for: (1) the establishment of track tire rules based on various objective criteria; (2) the prohibition of "any rule, policy, or practice mandating or providing for the use of a single manufacturer's tire;" (3) the creation of "non-discriminatory compensation rates" to offset "the cost of driver point funds and driver amenities;" (4) the related prohibition against tire suppliers making "lump sum or flat fee" payments to the sanctioning bodies, promoters, and tracks, and (5) changes on the part of the tire suppliers in order to ensure adequate inventories and company representatives at all racing events. (Id.) The petition also goes on to condemn the fact that the single tire formula previously used to achieve competitive parity has since evolved into "a scheme allowing a single manufacturer to capture and monopolize the market for dirt race tires." (Id.) It appears that approximately 1300 racers, drivers, and other racing industry participants have actually signed STA's "Declaration in Favor of Competition."

Irish Saunders, the contract services manager for Hoosier, internally circulated a sarcastic e-mail dated September 14, 2007, in response to this "Declaration in Favor of Competition." This e-mail purportedly described Hoosier's "Declaration in Favor of Taking Over the Industry," as proposed by the tire supplier's general manager, "Smash."

The District Court also reviewed the process that sanctioning bodiesmay use to select a particular supplier under the applicable tire rule. In short, a sanctioning body may decide to send a formal Request for Proposal ("RFP") to the various tire suppliers. The organization usually requires the supplier to provide sponsorship contributions. In general, these contributions may be used as part of the sanctioning body's "point funds." These point funds are generally paid to winning drivers at the end of the racing season, and they represent one of the major incentives used by sanctioning bodies to attract racers and drivers. Nevertheless, the money received by the sanctioning body may actually be used in whatever manner the sanctioning body itself wants, such as to fund its general operations. A sanctioning body, in turn, is certainly free to request a less expensive tire instead of greater financial contributions. Furthermore, if a sanctioning body is satisfied with its current tire supplier, it may elect to remain with that supplier rather than solicit bids from the supplier's competitors.

According to STA, "[f]or the years 2003-2007, Hoosier knew of only seven instances (four of which were after RTA filed this suit) where sanctioning companies or tracks had requested competitive bids." (Appellants' Brief at 20 (citing A543-A544).) However, it still appears that the tire suppliers were generally aware when a contract exists and could seek to compete for the business if they wanted it. Tire suppliers have accordingly been successful in their efforts to take business away from their competitors over the years.

The record in this case indicates that STA itself has competed, often successfully, to become the exclusive supplier of tires to several sanctioning bodies. In fact, STA, either directly or through its distributors, has successfully procured single tire contracts to the exclusion of Hoosier. Its distributors are required by contract to "interact[] with track owners/promoters and Associations and to actively pursue track rule and other race tire business." (A1439.) Even after the filing of this lawsuit, STA's distributors have continued to bid on exclusive tire supplier contracts, with some success. Furthermore, STA has repeatedly offered to pay money to the sanctioning bodies in exchange for an American Racer-only arrangement. For instance, Lias Tire, an STA distributor, recently won an exclusive agreement with URC, agreeing, inter alia, to pay $14,500.00 to this sanctioning body for the right to provide the exclusive tire at approximately thirty events in 2008. STA likewise has not instructed its distributors to cease making such exclusive deals or to refrain from offering or providing financial support to the sanctioning bodies.

Nevertheless, STA claims that Hoosier's exclusive single tire contracts foreclose competition. STA claims that these exclusive contracts date as far back as 1997, when Hoosier allegedly began to implement its "form contract" strategy.

Hoosier's form contract specifically obligates the sanctioning bodies and tracks "to insure that Hoosier Racing Tires are the only tires sold or run" in all events. (A1578-A1579 (emphasis omitted).) The form further provides that Hoosier would pay promotional money to the sanctioning body or track. These promotional fees are unrestricted and accordingly may be used either for general operations or for point funds. In turn, the form contains a continuous renewal requirement, providing that the arrangement would be automatically renewed for another year unless written notice of intention to terminate was given by August 1. Such "nullification" of the agreement would allegedly release Hoosier from its obligation to provide at least some of the promised financial support. According to STA, "there is a strong incentive to renew, because non-renewal would jeopardize the prospect of a November payment" of the promised money. (Appellants' Brief at 12.) Hoosier's "Negotiating Guidelines" document also indicates that Hoosier seeks longer contracts based on the respective profit margins. Finally, Saunders sent out a January 24, 2007 e-mail, which was entitled "American Racer Pricing" and addressed at some length the issue of competition between STA and Hoosier.

Hoosier identifies over seventy exclusive contracts that it or its distributors have entered into with sanctioning bodies since 2003. Although referring in its appellate brief to other sanctioning bodies, STA generally focuses on five sanctioning bodies that have selected Hoosier as their exclusive supplier: (1) IMCA; (2) WISSOTA; (3) American Spring Car Series ("ASCS"); (4) USAC; and (5) DMS. In turn, the District Court itself considered at some length the practices of these five sanctioning bodies, and we will do so as well.

1. IMCA

IMCA sanctions races in the Midwest on both dirt and asphalt surfaces. It appears that, from the 1980s to approximately 2005, IMCA required its drivers to use the G-60 American Racer tire manufactured by STA. But this long-standing yet informal arrangement between STA and IMCA involved no set duration, no up-front money, no penalties, no automatic renewal, no enforcement mechanism, and was not even in writing. On the other hand, STA also evidently refused to disclose pricing information to IMCA or to explain a sharp increase in its tire prices.

In December 2003, IMCA sent an RFP to Goodyear, Hoosier, and STA for a three-year exclusive contract. Hoosier offered a five-year contract, informing the sanctioning body that this proposal was "very important to our overall business strategy." (A1418.) In addition, it evidently proposed substantial up-front money to IMCA, including a signing bonus, even though the sanctioning body did not request any such up-front payments. It further offered to pay IMCA money based on the number of tires ultimately sold. IMCA eventually entered into a five-year automatically renewable exclusive contract with Hoosier, which would, inter alia, purportedly limit price increases in the future. STA meanwhile has continued to sell its G-60 American Racer tire to non-IMCA tracks, including at least one track that chose to drop its IMCA sanction.

2. WISSOTA

WISSOTA has its principal place of business in Minnesota and sanctions races in Minnesota, North and South Dakota, Wisconsin, Wyoming, and Canada. It appears that WISSOTA has had a Hoosier-only rule since 1984. Hoosier extended the contract to 2007 in exchange for Hoosier making a significant payment of money to be used to pay off a court judgment obtained by an excluded transmission manufacturer against the sanctioning body.

In October 2006, WISSOTA sent out an RFP to Goodyear, Hoosier, and STA. The sanctioning body's president, Terry Voeltz, advised STA that its racers and drivers wanted a low tire price without point funds. STA offered (through a distributor) a lower tire price than Hoosier (at least at the beginning of the contract term). It also offered less financial support to the sanctioning body than Hoosier. On the other hand, Hoosier proposed a higher (initial) tire price, a higher annual payment to the sanctioning body, as well as additional payments to the individual WISSOTA track promoters themselves as part of a bonus program. In fact, these promoters (and WISSOTA board members) were already receiving bonus payments from Hoosier.

WISSOTA's board of directors then met in July 2007 to review the bids and select an exclusive tire supplier. WISSOTA's board decided to accept the Hoosier proposal. Voeltz testified at his deposition that STA essentially offered the same price as Hoosier after taking into account STA's higher price escalation over the course of the contract. The president indicated that he had expected to select American Racer tires but was surprised by STA's actual bid. In turn, STA informed WISSOTA in its own bid that "[t]he process that has led to this proposal has been open, honest and fair." (A1524.) STA's general manager, David Mateer, subsequently discussed the process with Voeltz, who indicated that STA could have gotten the contract if it had matched Hoosier's financial contribution.

However, such a matching proposal would have evidently reduced or eliminated STA's own profit margin.

3. ASCS

ASCS, headquartered in Oklahoma, runs sprint car races in several regional series as well as a national series. Since 1999, Hoosier has had automatically renewing and exclusive contracts with this sanctioning body. In 2007, STA recognized an opportunity to become the exclusive right-rear tire supplier for ASCS's "360 sprint car series." ASCS did not circulate a formal RFP, but STA still met with the sanctioning body and submitted a bid. Its bid attempted to match Hoosier's proposal and included a financial contribution in exchange for exclusivity. Nevertheless, ASCS ultimately chose to retain its Hoosier-only rule for the right-rear wheel position.

4. USAC

USAC, headquartered in Indiana, sanctions sprint car races on both dirt and asphalt races, primarily in the Midwest and West. It appears that Hoosier has had long-term contracts with this sanctioning body since before 1998, despite some tension between the sanctioning body leadership and certain members regarding these arrangements. In 1998, the USAC president actually informed these members that the sanctioning body ...


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