Reference no: EM131473295

Question: MONSANTO CO. v. SPRAY-RITE SERVICE CORP., 465 U.S. 752 (1984)

FACTS Spray-Rite Service Corp., an agricultural herbicide distributor, sued Monsanto Co., a chemical manufacturer, under Section 1 of the Sherman Act, alleging that Monsanto and some of its distributors had conspired to fix the resale prices of Monsanto's herbicides and that Monsanto had terminated SprayRite's distributorship in furtherance of this policy and had encouraged distributors to boycott Spray-Rite. From 1957 to 1968, Spray-Rite had sold agricultural herbicides manufactured by Monsanto. Spray-Rite was a family-owned discount operation, which bought in large quantities and sold at a low margin. In 1968, Monsanto refused to renew Spray-Rite's one-year distributorship term. At the time, Spray-Rite was Monsanto's tenthlargest distributor (out of approximately 100 distributors) and 16 percent of its sales were Monsanto products. Although Spray-Rite was subsequently able to purchase some Monsanto products from other distributors, it was unable to purchase as much of Monsanto's products as it wanted or as early in the growing season as it wanted, Monsanto argued that it had terminated SprayRite's distributorship because of Spray-Rite's failure to hire trained salesmen and to promote sales to dealers.

DECISION At trial, the jury found that Spray-Rite's termination was the result of a conspiracy between Monsanto and its distributors to set resale prices and awarded $3.5 million in damages, which the District Court trebled to $10.5 million. The U.S. Court of Appeals for the Seventh Circuit affirmed on the grounds that there was sufficient evidence to show that there was a conspiracy to set resale prices because proof of termination following competitor complaints is sufficient to support an inference of concerted action. The evidence at trial had shown numerous complaints from distributors to Monsanto about Spray-Rite's price-cutting practices. The U.S. Supreme Court also affirmed but found that the Court of Appeals had applied an incorrect standard to the evidence in the case. The Supreme Court stated: [T]he fact that a manufacturer and its distributors are in constant communication about prices and marketing strategy does not alone show that the distributors are not making independent pricing decisions.

A manufacturer and its distributors have legitimate reasons to exchange information about the prices and the reception of their products in the market. Inferring a price-fixing agreement from the existence of complaints from other distributors, or even from the fact that termination resulted in response to complaints, could deter or penalize legitimate conduct. Something more than mere complaints is necessary. Thus, the Supreme Court held, to support a finding of an unlawful contract, combination, or conspiracy, "the antitrust plaintiff should present 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.'" The Supreme Court found that there was sufficient evidence for the jury to have concluded that Monsanto and its distributors had conspired to maintain resale prices and to terminate price cutters. The evidence included:

(1) threats that Monsanto would not ship adequate supplies of Monsanto products to price-cutting distributors;

(2) after Monsanto complained to a parent company about its subsidiary's price-cutting, the parent instructed the subsidiary to comply, and the subsidiary assured Monsanto that it would; and

(3) a Monsanto distributors' newsletter, sent to its dealer-customers, which could reasonably have been interpreted as referring to agreements that distributors and dealers would maintain prices, that Monsanto's company-operated distributors would not undercut those prices, and that discounters would be terminated.

Moreover, there was circumstantial evidence showing that Spray-Rite's termination was made pursuant to a conspiracy between Monsanto and its competitors. Spray-Rite's president had testified that Monsanto made explicit threats to terminate Spray-Rite unless it raised its prices. In a post-termination meeting between Spray-Rite and Monsanto, Monsanto mentioned the many complaints it had received about Spray-Rite's prices as a factor in its termination decision.