Pacific Steel Group v. Commercial Metals Company

Background

Pacific Steel Group brought eight causes of action against Commercial Metals Company, its subsidiaries CMC Steel Fabricators, Inc. doing business as CMC Rebar, CMC Steel US, LLC, and Gerdau Reinforcing Steel, collectively referred to as the CMC Defendants, and against Danieli Corporation. The claims included violations of Sections 1 and 2 of the Sherman Act, California antitrust laws, the California Unfair Practices Act, the California Unfair Competition Law, and California common law.

Pacific Steel alleged that it wanted to enter the rebar-manufacturing market by building a micro mill using Danieli’s proprietary technology. According to the complaint, Danieli was the only company that had developed and sold such a micro mill. Pacific Steel alleged that Danieli and CMC entered into an agreement giving CMC an exclusivity zone covering a 500-mile radius, which Pacific Steel claimed prevented it and other potential competitors from building rebar mills in much of California and surrounding areas. Pacific Steel also alleged that CMC-affiliated companies priced Furnish-and-Install services below cost and used loss leaders to limit Pacific Steel’s growth.

Rule 12(b)(6) Standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legally recognized claim. The court had to accept well-pleaded factual allegations as true and view them favorably to Pacific Steel, but it did not have to accept conclusory allegations, unsupported deductions, or unreasonable inferences. The court also explained that leave to amend should generally be granted when additional facts might cure the pleading problem.

Federal Antitrust Claims

The court explained that an antitrust complaint must plausibly allege a relevant market, including both a geographic market and a product market, and must allege that the defendant has market power in that market.

The court found Pacific Steel’s alleged Furnish-and-Install geographic markets plausible because the complaint alleged that rebar is costly to ship and that most sales occur within 200 miles of a fabrication plant. The court also found the alleged 500-mile geographic market for rebar manufacturing plausible because the complaint alleged that transportation costs make local sourcing economically important. The court found both alleged product markets plausible as well.

For the rebar-manufacturing market, Pacific Steel alleged that CMC accounted for approximately 50% of sales and that substantial barriers to entry made CMC’s market power durable. The court found those allegations sufficient at the pleading stage. For the Furnish-and-Install market, however, Pacific Steel alleged that CMC Rebar’s market share ranged from 15% to 30%. The court found that this market share, combined with the other alleged conduct, did not plausibly establish market power. The court therefore dismissed Pacific Steel’s Sherman Act claims against CMC concerning the Furnish-and-Install market with leave to amend.

The court also dismissed the claims against Danieli with leave to amend. Pacific Steel did not allege that Danieli had market power in either the rebar-manufacturing or Furnish-and-Install market. Danieli supplied steel mills but was not alleged to participate in the markets Pacific Steel claimed were restrained. The court also rejected, on the current allegations, an argument that Danieli had an antitrust duty to provide Pacific Steel with the particular micro mill, technology, location, and contract terms Pacific Steel preferred. The court noted that Pacific Steel might be able to plead facts supporting a narrow exception involving a terminated profitable course of dealing, but it had not done so in the existing complaint.

Section 1 Conspiracy Claim

For the Section 1 conspiracy claim, the court found that the contract between CMC and Danieli adequately alleged an agreement. But the court treated the alleged exclusivity arrangement as a vertical restraint, meaning an agreement between firms at different levels of the supply chain. The court held that Pacific Steel had not shown why the arrangement should be treated as automatically unlawful rather than evaluated under the rule of reason, a fact-specific approach that examines market power and the restraint’s actual effect on competition.

The court concluded that Pacific Steel had not plausibly alleged that the exclusivity arrangement completely foreclosed entry into rebar manufacturing. Pacific Steel’s allegations showed that micro mills might be the most efficient means of entry, but they did not show that micro mills were the only viable means. The complaint indicated that traditional and mini mills supplied at least half of the relevant market and that mini mills could generate profits. The court therefore dismissed the conspiracy-in-restraint-of-trade claim with leave to amend.

Sections 2 and State-Law Claims

The court dismissed Pacific Steel’s monopolization, attempted-monopolization, and conspiracy-to-monopolize claims with leave to amend. Those claims required allegations of monopoly power, willful acquisition or maintenance of that power, and antitrust injury. The court found that Pacific Steel had not adequately alleged that the exclusivity arrangement prevented entry through mini mills or otherwise caused harm to competition, rather than merely harming Pacific Steel as a competitor.

Because the court dismissed all federal claims, it declined to exercise supplemental jurisdiction over the remaining state-law claims unless and until Pacific Steel could state a valid federal claim. The court did not reach the merits of those state-law claims in this order.

Other Motions and Disposition

The court denied CMC’s request for judicial notice because the request asked the court to resolve a factual dispute using disputed facts from documents. The court also denied as moot the defendants’ motion to stay discovery pending resolution of the dismissal motions.

The court granted the defendants’ motions to dismiss with leave to amend. Pacific Steel could file an amended complaint within 21 days of the order, but it could not add new causes of action or defendants.