P. David Bailey v. Allgas, Inc.

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 01-10559 MARCH 08, 2002
________________________ THOMAS K. KAHN
CLERK
D. C. Case No. 96-00631 CV-B-S

P. DAVID BAILEY,
DORIS BAILEY,
Plaintiffs-Counter-
Defendants-Appellants,

versus

ALLGAS, INC.,
Defendant-Counter-
Claimant-Appellee,
WILLIAM ERVIN,
LAMPTON-LOVE, INC.,
LIQUIFIED PETROLEUM GAS MANAGEMENT, INC.,

Defendants-Appellees.
________________________

Appeal from the United States District Court
for the Northern District of Alabama
_________________________
(March 8, 2002)

Before BLACK, HILL and STAPLETON*, Circuit Judges.

BLACK, Circuit Judge:

*
Honorable Walter K. Stapleton, U.S. Circuit Judge for the Third Circuit, sitting by
designation.
 This antitrust action arises from a price war that erupted between liquid

propane gas competitors in northern Alabama. Following the demise of their

business, Appellants P. David and Doris Bailey brought suit against competitor

Allgas, Inc., alleging the company engaged in discriminatory below-cost pricing in

violation of the Robinson-Patman Act and Alabama state law. In support,

Appellants offered the expert testimony of an economist. The district court held

the expert testimony with respect to key elements of the Robinson-Patman Act

claim was inadmissible. Additionally, the district court held Appellants’ claims

failed even if the testimony was admissible. Accordingly, the district court granted

summary judgment. We affirm.

I. BACKGROUND

A. Factual Background

Appellee Allgas, Inc. (Allgas) is a distributor and seller of liquid propane

gasoline operating in Alabama. Allgas sells propane gas for both residential and

industrial use. The company maintains several offices throughout Alabama. Each

office exclusively serves a separate district, with the price of propane gas varying

2
from office to office. The Allgas district offices serving northern Alabama are

located in Altoona, Arab, Gadsden, Gardendale and Huntsville.1

In August 1984, Allgas hired Appellant P. David Bailey as manager of its

Altoona district office. The Altoona office, which is located in eastern Etowah

County, serves customers in portions of several counties, including: Blount

County, St. Claire County, Etowah County, DeKalb County, and Marshall County.

Approximately 50% of the customers served by the Altoona office are residential

users; the remaining 50% are comprised of industrial purchasers. Generally, the

price of propane gas sold to industrial purchasers is less than the price sold to

residential users due to economies of scale, as industrial purchasers receive

significantly larger volumes of gas per delivery.2

In 1991, Bailey was promoted to manager of Allgas’ Gardendale district

office, located in Cullman County, Alabama. His brother Max Bailey then was

hired as manager of the Altoona office. In October 1993, Bailey became

1
At the time of the price war at issue, Allgas also maintained an office in Winchester,
Tennessee, which served, in part, northern Alabama. The Winchester office is now part of
Allgas of Tennessee.
2
As stated by Bailey: “When you got to a point of delivery, you could pump off 1200
just as cheap as you could pump off 6.” See November 25, 1996 Deposition of Pronce David
Bailey (Bailey Depo.) at 62.

3
disgruntled over his compensation and resigned from employment with Allgas.

Max Bailey, however, remained as manager of the Altoona office.

Soon after resigning from Allgas, Bailey decided to open a competing liquid

propane gasoline business. To fund his new business, Bailey obtained a $400,000

loan from the Small Business Administration (SBA) and a $100,000 personal loan

from a friend. In his application for the SBA loan, Bailey stated his intent to hire

the “best office worker” and the “two most productive route salesmen” from

Allgas’ Gardendale office and to hire the “best office worker” and the “two most

productive route salesmen” from Allgas’ Altoona office. See Bailey Depo. at 100-

17. Ultimately, Bailey hired four Allgas employees to work for his new business,

including his brother Max Bailey.3

Bailey and his wife, Doris, opened Bailey’s Propane Gas in September 1994.

The business was headquartered in Susan Moore, Alabama, which is located in

northern Blount County. Susan Moore is approximately ten miles from Altoona,

Alabama. The intended service area of Bailey’s Propane Gas included portions of

three counties: Blount County, Etowah County, and Marshall County.4 Although

3
Bailey also approached other Allgas employees, including drivers Lowell Gilliland and
Amos Caldwell, who did not accept employment with Bailey’s Propane Gas.
4
In their complaint, the Baileys listed Blount County, Etowah County and Marshall
County as the intended service area of Bailey’s Propane Gas. Later interrogatory responses
indicated the service area also might include portions of Cullman County and St. Clair County.

4
the region served by Bailey’s Propane Gas and the region served by Allgas’

Altoona office overlapped to a certain degree, the two service areas were not

coextensive with one another. Additionally, Bailey’s Propane Gas only served

residential customers.

On or about the day Bailey’s Propane Gas opened for business, Allgas cut

the price of propane gas offered to residential customers of its Altoona office by

17¢ — from 67¢ per gallon to 50¢ per gallon. The price reduction was effective

only in the district served by the Altoona office; no other Allgas district office

offered residential gasoline for 50¢ per gallon. The price reduction was a pre-

emptive maneuver intended to protect against the loss of customers serviced by the

Altoona office.5 Bailey already had approached several Allgas employees about

defecting to his new company, and Allgas was particularly concerned about losing

its drivers. Because the nature of the liquid propane business mandates delivery of

the product to the consumer, Allgas’ drivers generally were the only employees

having personal contact with its customers.

Unable to match Allgas’ price of 50¢ per gallon, Bailey’s Propane Gas

offered residential customers a price of 67¢ per gallon. In late December 1994,

5
Robert Love, Jr., vice-president of Allgas, testified that Allgas believed its Altoona
office was going to be “the center fix of what [Bailey’s Propane Gas was] going to be trying to
pick up as far as customers go.” See Deposition of Robert Y. Love, Jr. at 93.

5
after experiencing wholesale price increases from its supplier, Allgas raised

residential prices to approximately 65¢ per gallon. Over the next few months,

Allgas’ prices steadily increased. According to the Baileys, however, the prices

charged by Allgas did not normalize until July or August of 1995. By August

1995, Bailey’s Propane Gas was out of business.

B. Procedural Background

Following the demise of their business, the Baileys brought suit against

Allgas.6 They alleged Allgas had engaged in price discrimination in violation of

the Robinson-Patman Act, 15 U.S.C. § 13.7 The Baileys also put forward a number

of state law claims, including a claim for tortious interference with a business or

contractual relationship.8 Allgas counterclaimed, alleging Bailey had

misappropriated trade secrets and engaged in intentional interference with its

business relations.

6
Bailey also sued Allgas’ parent company, Lampton-Love, Inc., a related company,
Liquid Petroleum Gas Management, and William Ervin, president of Allgas.
7
The Baileys also made claims under § 1 and § 2 of the Sherman Act, 15 U.S.C. §§ 1, 2.
Those claims were dismissed earlier in the proceedings and are not at issue here.
8
Other state law claims included claims for violation of the Alabama Motor Fuel
Marketing Act, the Alabama Unfair Practices Act, emotional distress, and outrage. The
emotional distress and outrage claims were dismissed by the district court on or about July 16,
1996. The Alabama Unfair Practices Act claim was dismissed by the district court on or about
January 9, 2001. None of these dismissals was appealed. As to the Alabama Motor Fuel
Marketing Act claim, the district court agreed to hold the claim in abeyance pending resolution
of the instant appeal.

6
 In support of their Robinson-Patman Act claim, the Baileys offered the

expert testimony of Dr. William Gunther, then Professor of Economics at the

University of Alabama. Shortly before trial, the district court conducted a Rule

104 hearing to determine whether Gunther was qualified to testify concerning

essential elements of the claim.9 In March 1998, following extensive briefing by

the parties and a full hearing on the issue, the district court issued a memorandum

opinion concluding Gunther’s report and deposition were so deficient as to

disqualify him from testifying on the antitrust issues. The court then granted

summary judgment in favor of Allgas and entered a final judgment under Fed. R.

Civ. P. 54(b) dismissing the Baileys’ Robinson-Patman Act and tortious

interference claims. The Baileys appealed.

On June 11, 1999, this Court reversed the exclusion of Gunther’s testimony

and vacated the judgment in favor of Allgas, noting “the district court erred by

conflating the admissibility of Gunther’s evidence with the sufficiency of that

evidence to overcome Allgas’s motion for summary judgment.” See Bailey v.

Allgas, Inc., No. 98-6278, slip op. at 9 (11th Cir. June 11, 1999). Of particular

concern was the failure of the district court to assess whether Gunther’s

9
“Preliminary questions concerning the qualification of a person to be a witness, the
existence of a privilege, or the admissibility of evidence shall be determined by the court, . . . .”
Fed. R. Evid. 104(a).

7
methodology was sufficiently reliable as determined by the sort of inquiry

mandated under Daubert v. Merrell Dow Pharmaceuticals, Inc.10 Although the

case was remanded to the district court “for a determination of whether summary

judgment [was] still appropriate in light of Gunther’s evidence,” the Court

indicated certain issues could be re-examined on remand:

We do not address the following issues, which the district court
identified but did not reach: 1) Allgas’s contention that Gunther’s
identification of the relevant geographic market is unreliable and must
be excluded; and 2) its contention that Gunther’s estimation of
Allgas’s market power is also unreliable and due to be excluded. Nor
do we address whether, even with the aid of Gunther’s expert
evidence, Bailey has failed to raise a genuine issue of material fact
with respect to his Robinson-Patman claim, particularly in light of the
district court’s enumeration of the problems with Gunther’s efforts to
define a relevant geographic market. The district court may address
these and other matters on remand.

Bailey, No. 98-6278 at 16 n.5.

On remand, Allgas again moved to strike the testimony of Gunther and for

summary judgment. After determining the Court’s mandate did not preclude re-

examination of Gunther’s proposed testimony, the district court11 found his

10
509 U.S. 579, 113 S. Ct. 2786 (1993) (discussing the admissibility of scientific expert
testimony); see also Kumho Tire Co. v. Carmichael, 426 U.S. 137, 147-48, 119 S. Ct. 1167,
1174 (1999) (holding the district court’s gatekeeping function applies to all expert testimony, not
only scientific testimony).
11
On remand, the case was reassigned from the Honorable Robert B. Propst to the
Honorable Sharon Lovelace Blackburn.

8
methodology “fail[ed] to meet the criteria of professional soundness and validity

that are at the core of Daubert’s reliability requirement.” See Bailey v. Allgas, Inc.,

148 F. Supp. 2d 1222, 1235-36 (N.D. Ala. 2000). Concluding his report and

deposition testimony demonstrated “an utter lack of expertise and reliability,” the

district court held Gunther’s expert testimony was inadmissible under Fed. R. Evid.

702. Id. at 1246. Furthermore, the district court held Allgas was entitled to

summary judgment because, even if Gunther’s opinions were admissible, they did

not constitute sufficient evidence to support the Baileys’ Robinson-Patman Act

claim. Id. Finally, in a separate order, the district court granted summary

judgment in favor of Allgas on the Baileys’ tortious interference claim because the

Baileys could not demonstrate Allgas engaged in illegal tactics when lowering its

price of residential gas.

The Baileys then filed the instant appeal. On appeal, the Baileys contend the

exclusion of Gunther’s testimony violates the mandate of the Court’s prior opinion.

Additionally, the Baileys assert the district court again erred by conflating the

admissibility of Gunther’s evidence with the sufficiency of that evidence to

overcome summary judgment. Finally, the Baileys dispute summary judgment is

warranted even if Gunther’s testimony is admissible. Because we conclude Allgas

9
is entitled to summary judgment even in light of Gunther’s evidence, we do not

need to consider the first two issues raised by the Baileys.

II. STANDARD OF REVIEW

We review de novo a district court’s grant of summary judgment, applying

the same standard as the district court. See Johnson v. Bd. of Regents of the Univ.

of Ga., 263 F.3d 1234, 1242 (11th Cir. 2001). Summary judgment is appropriate

only if “the pleadings, depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is no genuine issue as to

any material fact and that the moving party is entitled to a judgment as a matter of

law.” Fed. R. Civ. P. 56(c). We “‘view the evidence and all factual inferences

therefrom in the light most favorable to the party opposing the motion’” and “‘all

reasonable doubts about the facts [are] resolved in favor of the non-movant.’” See

Burton v. City of Belle Glade, 178 F.3d 1175, 1187 (11th Cir. 1999) (quoting

Clemons v. Dougherty County, 684 F.2d 1365, 1368-69 (11th Cir. 1982)).

Once the moving party has properly supported its motion for summary

judgment, the burden shifts to the non-moving party to “come forward with

‘specific facts showing that there is a genuine issue for trial.’” Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356 (1986)

(quoting Fed. R. Civ. P. 56(e)). The mere existence of some evidence to support

10
the non-moving party is not sufficient for denial of summary judgment; there must

be “sufficient evidence favoring the nonmoving party for a jury to return a verdict

for that party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct.

2505, 2511 (1986). “If the evidence is merely colorable, or is not significantly

probative, summary judgment may be granted.” Id. at 249-50, 106 S. Ct. at 2511

(internal citations omitted).

III. DISCUSSION

A. Robinson-Patman Act Claim

Price discrimination is made unlawful by § 2(a) of the Clayton Act, as

amended by the Robinson-Patman Act, which provides:

It shall be unlawful for any person engaged in commerce, in the
course of such commerce, either directly or indirectly, to discriminate
in price between different purchasers of commodities of like grade
and quality . . . where the effect of such discrimination may be
substantially to lessen competition or tend to create a monopoly in any
line of commerce, or to injure, destroy, or prevent competition with
any person who either grants or knowingly receives the benefit of
such discrimination, or with customers of either of them.

15 U.S.C. § 13(a) (1997). By its terms, the Robinson-Patman Act only prohibits

price discrimination to the extent it threatens to injure competition.

“That below-cost pricing may impose painful losses on its target is of no

moment to the antitrust laws if competition is not injured: It is axiomatic that the

antitrust laws were passed for ‘the protection of competition, not competitors.’”

11
Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224, 113

S. Ct. 2578, 2588 (1993) (quoting Brown Shoe Co. v. United States, 370 U.S. 294,

320, 82 S. Ct. 1502, 1521 (1962)). “Even an act of pure malice by one business

competitor against another does not, without more, state a claim under the federal

antitrust laws; those laws do not create a federal law of unfair competition or

‘purport to afford remedies for all torts committed by or against persons engaged in

interstate commerce.’” Id. at 225, 113 S. Ct. at 2589 (quoting Hunt v. Crumboch,

325 U.S. 821, 826, 65 S. Ct. 1545, 1548 (1945)).

Cutting prices to meet or beat competitors is the fundamental basis of

competition, which makes proving price discrimination difficult. “[T]he

mechanism by which a firm engages in predatory pricing — lowering prices — is

the same mechanism by which a firm stimulates competition; because ‘cutting

prices in order to increase business often is the very essence of competition. . . .’”

Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 122 n.17, 107 S. Ct. 484, 495

n.17 (1986) (quoting Matsushita, 475 U.S. at 594, 106 S. Ct. at 1360). “Thus,

mistaken inferences in [antitrust cases] are especially costly, because they chill the

very conduct the antitrust laws are designed to protect.” Matsushita, 475 U.S. at

594, 106 S. Ct. at 1360.

12
 Price cutting designed to purge competition from the market is known as

primary-line injury.12 Such injury occurs in two stages:

In the first stage, or “price war” period, the defendant sets prices
below its marginal cost hoping to eliminate rivals and increase its
share of the market. During this phase, the predator, and any rival
compelled to challenge the predatory price, will suffer losses. Though
rivals may suffer financial losses or be eliminated as a result of the
below-cost pricing, injury to rivals at this stage of the predatory
scheme is of no concern to the antitrust laws. [Brooke Group, 509
U.S. at 224, 113 S. Ct. at 2588.] Only by adopting a long-run strategy
is a predator able to injure consumer welfare. See Cargill, Inc. v.
Monfort of Colorado, Inc., 479 U.S. 104, 117, 107 S. Ct. 484, 493, 93
L. Ed. 2d 427 (1986). A long-run strategy requires the predator to
drive rivals from the market, or discipline them sufficiently so that
they do not act as competitors normally should. Id. If the predator
reaches this long-run goal, it enters the second stage, the
“recoupment” period. It then can collect the fruits of the predatory
scheme by charging supracompetitive prices — prices above
competitive levels. The predator’s hope is that the excess profits will
allow it to recoup the losses suffered during the price war. Brooke
Group, [509] U.S. at [225-26], 113 S. Ct. at 2589.

Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995).

Thus, in order to establish a primary-line injury, an aggrieved plaintiff must prove:

(1) the prices complained of are below an appropriate measure of the predator’s

costs; and (2) the predator had a reasonable expectation of recouping its investment

12
The other type of violation under the Robinson-Patman Act, not at issue here, is called
“secondary-line” price discrimination, which involves price discrimination by a seller which
affects competition among its buyers. See Chrysler Credit Corp. v. J. Truett Payne Co., 670
F.2d 575, 580 (Former 5th Cir. 1982).

13
in below-cost pricing.13 See Brooke Group, 509 U.S. at 222-24, 113 S. Ct. at 2587-

88.

1. Below-Cost Pricing

Under the facts of this case, it is not necessary to address whether Allgas’

Altoona district prices fell below an “appropriate measure” of its costs. The

district court did not base its summary judgment ruling on this element, nor does

either party raise the issue of price below cost on appeal. For purposes of this

appeal, therefore, we assume the Baileys can prove, at a minimum, there is a

genuine issue of material fact as to whether Allgas’ Altoona office sold propane

gas at a price below an “appropriate measure” of its costs.

2. Ability to Recoup Losses

The ability of a price discrimination scheme to drive competitors from the

market through below-cost pricing does not alone constitute an antitrust injury.

Crucial to the determination of an antitrust injury is whether the predator has a

13
A primary-line injury claim also has a jurisdictional requirement; the discriminatory
sales must take place “in commerce.” See 15 U.S.C. § 13(a). This requirement has been
interpreted to mean at least one sale, whether it be the below-cost sale or the sale to which the
below-cost sale is being compared, must have crossed a state line. See Gulf Oil Corp. v. Copp
Paving Co., 419 U.S. 186, 200-01, 95 S. Ct. 392, 401 (1974).
Whether the Baileys have met the jurisdictional requirement of the Robinson-Patman Act
was not raised on appeal. It is likely, however, the jurisdictional requirement is met. Although
the complaint merely alleged Allgas served a large area in the State of Alabama, the president of
Allgas testified that the company’s service area also included portions of Tennessee.

14
rational expectation of later recouping its losses. See generally Matsushita, 475

U.S. at 589, 106 S. Ct. at 1357 (“The success of any predatory pricing scheme

depends on maintaining [market] power for long enough both to recoup the

predator’s losses and to harvest some additional gain.”). Price discrimination that

is unaccompanied by an ability to recoup losses only serves to benefit, rather than

injure, consumers:

Recoupment is the ultimate object of an unlawful predatory pricing
scheme; it is the means by which a predator profits from predation.
Without it, predatory pricing produces lower aggregate prices in the
market, and consumer welfare is enhanced. Although unsuccessful
predatory pricing may encourage some inefficient substitution toward
the product being sold at less than its cost, unsuccessful predation is in
general a boon to consumers.

Brooke Group, 509 U.S. at 224, 113 S. Ct. at 2588.

Determining whether recoupment of predatory losses is likely requires a

close analysis of the structure and conditions of the relevant market. In order to

recoup their losses, predators “must obtain enough market power to set higher than

competitive prices, and then must sustain those prices long enough to earn in

excess profits what they earlier gave up in below-cost prices.” Matsushita, 475

U.S. at 590-91, 106 S. Ct. at 1358; see also IIA Phillip E. Areeda et al., Antitrust

Law ¶ 501 (2d ed. 2002) (“Thus, the substantial market power that concerns

antitrust law arises when the defendant (1) can profitably set prices well above its

15
costs and (2) enjoys some protection against a rival’s entry or expansion that would

erode such supracompetitive prices and profits.”). Determining whether Allgas

had the ability to recoup its losses sustained by engaging in its allegedly predatory

scheme, therefore, requires a bipartite examination of: (a) whether Allgas

possessed sufficient market power to set supracompetitive prices, and (b) whether

Allgas could sustain supracompetitive prices long enough to recoup its losses.

a. Possession of Market Power

The most common method of demonstrating a predator possesses sufficient

market power to set supracompetitive prices is to show the existence of a

monopoly. A monopoly may arise where one seller controls all or the bulk of a

product’s output. See generally IIA Areeda, supra ¶ 403a (defining the term

“monopoly”). A less common method of demonstrating market power is to show

the existence of an oligopoly.14 An oligopoly may arise where a handful of

relatively large sellers control the bulk of a product’s output. See generally IIA

Areeda, supra ¶ 404a (defining the term “oligopoly”). Whether the Baileys can

14
Whereas § 2 of the Sherman Act condemns predatory pricing posing a dangerous
probability of actual monopolization, the Robinson-Patman Act merely forbids predatory pricing
posing a reasonable possibility of harm to “competition.” Compare 15 U.S.C. § 2 with 15 U.S.C.
§ 13(a). Based on the difference in language between the Sherman Act and the Robinson-
Patman Act, the United States Supreme Court has held competitive injury under the Robinson-
Patman Act “must extend beyond the monopoly setting.” Brooke Group, 509 U.S. at 229, 113 S.
Ct. at 2591. As a result, the Robinson-Patman Act can be violated when primary-line injury
occurs in an oligopoly setting. Id., 113 S. Ct. at 2591.

16
prove Allgas operated in either a monopoly or an oligopoly environment will be

examined in turn.

1) Existence of a Monopoly

The most direct method of establishing monopoly power is through

economic proof, namely, demand and supply curves. See generally IIA Areeda,

supra ¶ 507. Because demand is difficult to establish with accuracy, evidence of a

seller’s market share may provide the most convenient circumstantial measure of

monopoly power. See generally United States v. Grinnell Corp., 384 U.S. 563,

571, 86 S. Ct. 1698, 1704 (1966) (noting “[t]he existence of such [monopoly]

power ordinarily may be inferred from the predominant share of the market”); U.S.

Anchor Mfg. v. Rule Indus., Inc., 7 F.3d 986, 999 (11th Cir. 1993) (stating the

“principal measure of actual monopoly power is market share”).

The first step in assessing a seller’s market share is to define the relevant

market. See Rebel Oil, 51 F.3d at 1434 (“Without a definition of the relevant

market, it is impossible to determine market share.”). Defining the relevant market

requires identification of both the product at issue and the geographic market for

that product. Spectrofuge Corp. v. Beckman Instruments, Inc., 575 F.2d 256, 276

(5th Cir. 1978). Once the relevant market has been determined, it is possible to

calculate a seller’s percentage share of that market. Construction of the relevant

17
market and a showing of monopoly power must be based on expert testimony. See

Colsa Corp. v. Martin Marietta Servs., Inc., 133 F.3d 853, 855 n.4 (11th Cir.

1998).

After a thorough examination of the record, we conclude the evidence

presented by Gunther, the Baileys’ sole expert, does not provide a sufficient basis

upon which a reasonable jury could find Allgas possessed monopoly power. As

discussed in more detail below, Gunther’s assessment of the relevant product

market was cursory and unclear. In defining the relevant geographic market,

Gunther ignored instructive guidelines set forth in this Court’s precedent.

Furthermore, even if the geographic market had been correctly drawn, Gunther

failed to determine Allgas’ market share for that particular geographic area.

Finally, even assuming Gunther’s determination of Allgas’ market share was

correct, the percentage share calculated by Gunther is insufficient as a matter of

law to constitute circumstantial evidence of a monopoly.

a) Failure to Prove the Relevant Product Market

A relevant product market does not consist solely of the specific product

over which parties engage in a price war. Rather, in determining a seller’s

monopoly power, it is necessary to examine both the product at issue and all

reasonable substitutes available to consumers. “The outer boundaries of a product

18
market are determined by the reasonable interchangeability of use or the

cross-elasticity of demand between the product itself and substitutes for it.” Brown

Shoe Co. v. United States, 370 U.S. 294, 325, 82 S. Ct. 1502, 1523-24 (1962).

In his preliminary report, Gunther stated the relevant product market was

liquid propane gasoline. Additionally, at various times in his report, Gunther

indicated the relevant product market was limited to propane gas sold for

residential use.15 See, e.g., Letter from Gunther to L. Vastine Stabler, Jr. enclosing

the Preliminary Report (Gunther Letter) at ¶ 2 (stating “there tend to be few

product substitutes for propane gas for home heating purposes”); March 19, 1997

Preliminary Report of Dr. William Gunther (Preliminary Report) at 3 (“This report

focuses primarily on the second largest use of propane gas, residential/commercial

use, and the retailing (marketing) of the propane gas to the final customer.”).

Despite recognizing propane gas is viewed as homogeneous by the final consumer,

Gunther did not analyze whether residential use constitutes a legitimate sub-market

for the propane gas market.

Of equal concern is Gunther’s cursory assessment of reasonable substitutes

for liquid propane gas. Gunther acknowledged the existence of several alternative

15
At the Rule 104 hearing regarding the admissibility of Gunther’s testimony, the
Baileys contradicted the testimony of Gunther and represented to the district court that the
relevant product market consisted of liquid propane gasoline sold to both residential and
industrial customers.

19
residential fuel sources, including electricity, coal, wood, and heating oil.16

Nevertheless, he quickly dismissed these alternative sources as reasonable

substitutes for propane gas based on the expense of installing or retrofitting heating

equipment. See Preliminary Report at 7 (“For a home located in the rural areas,

there would appear to be limited substitutability of one fuel source for others given

the required infrastructure to switch sources.”). Despite acknowledging the

majority of residential homes have electricity, Gunther immediately dismissed

electrical heat as a reasonable substitute for liquid propane gas. His rejection of

coal, wood and heating oil heat as reasonable substitutes was equally as brief.

Gunther, however, was presented as an expert in economics, not an expert in the

liquid propane gas industry. The sole extent of his research on the industry itself

consisted of visiting the website of a national liquid propane gas association and

placing two brief telephone calls to unknown persons at the association. At no

point did Gunther conduct a survey of the homes in the geographic market, or

otherwise research the area, to determine the percentage of houses already fitted for

alternative heating sources. Gunther also failed to calculate the actual cost of

retrofitting the houses in order to determine the cross-elasticity of demand between

16
Allgas’ expert, Dr. Robert McLeod, testified there are four main alternatives to
propane gas heat: (1) natural gas; (2) electric heat; (3) wood heat; and, (4) coal heat.

20
propane gas and other fuel sources. In light of these deficiencies, we conclude

Gunther’s evidence is insufficient to establish the relevant product market.

b) Failure to Prove the Relevant Geographic Market

The relevant geographic market is “the area of effective competition . . . in

which the seller operates, and to which the purchaser can practicably turn for

supplies.” Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327, 81 S. Ct.

623, 628 (1961). Measurement of the relevant geographic market depends on a

number of factors, including “[p]rice data and such corroborative factors as

transportation costs, delivery limitations, customer convenience and preference,

and the location and facilities of other producers and distributors.” T. Harris

Young & Assocs., Inc. v. Marquette Elecs., Inc., 931 F.2d 816, 823 (11th Cir.

1991).

In his preliminary report, Gunther indicated the relevant geographic market

was comprised of the 20-mile radius encircling Susan Moore, Alabama. In making

this determination, however, Gunther failed to properly assess the factors which

must be considered when measuring the relevant geographic market. Gunther did

not conduct any analysis of the historical prices charged by Allgas and its

competitors within northern Alabama. Likewise, Gunther did not determine the

21
location or facilities of any other propane gas retailers. Finally, Gunther’s report

failed to address customer convenience and preference.

The only factors Gunther considered were transportation costs and delivery

limitations. Noting transportation costs are a significant component of final price,

Gunther concluded the geographic markets for propane gas are highly localized.

Nevertheless, Gunther struggled to pinpoint the actual delivery range applicable to

the propane gas market. In his preliminary report, Gunther relied heavily on

evidence from Allgas’ records, which purportedly indicated most customers

resided within a 10-mile radius of the facility from which they were serviced:

Indeed, based upon Allgas records, the transportation distances from a
retailer tank site to customers tends to be in the range of 10 miles one
way or 20 miles round trip. That would argue that customers which
are more than 20 miles away from the tank site would be better served
by a competitor provided they were located closer.

See Preliminary Report at 6. In a later portion of his preliminary report, however,

Gunther sought to measure the projected annual sales volume available to Bailey’s

Propane Gas by calculating the number of housing units “within a 20 mile radius”

of the company’s office. Id. at 8. Gunther’s deposition testimony was equally as

contradictory. On the one hand, Gunther confirmed Allgas’ customers were

located within 10 miles, one-way, of its tanks. See March 19, 1997 Deposition of

Dr. William Gunther (Gunther Depo.) at 36. On the other hand, Gunther indicated

22
he assessed market share by using a 20-mile radius. Id. at 38-39. Ultimately, it is

impossible to determine from Gunther’s evidence whether propane gas retailers

tend to serve customers within a 10-mile or 20-mile radius of their facilities. The

difference between the two is significant — a company which serves customers

within a 20-mile radius has a 400% larger service area than a company with a

service area of 10 miles.17

Regardless of the inconsistencies regarding delivery limitations in the retail

propane gas market, Gunther’s determination of the relevant geographic market is

unacceptable as a matter of law. In his deposition, Gunther admitted he chose the

20-mile radius surrounding Susan Moore as the relevant geographic market solely

because it coincided with the intended service area of Bailey’s Propane Gas:

Q. . . . Now, I just want to make sure I understand your testimony
right. The radius for what the relevant market is should be 10 miles
from the headquarters?
A. No. The AllGas material shows that their average distance was 11
miles but Mr. Bailey testified or I’m told he did, that his intended
radius, or where he would go, would be about 20 miles.
Q. Okay
A. So I used a 20 mile radius for Susan Moore.

Gunther Depo. at 78; see also Gunther Depo. at 80 (“The Susan Moore Market was

a 20 mile radius because Mr. Bailey said that was what he intended to drive in

17
The area of a circle with a 10-mile radius is approximately 314 square miles; the area
of a circle with a 20-mile radius is approximately 1256 square miles.

23
order to serve his customers.”). The law is clear, however, that a geographic

market cannot be drawn simply to coincide with the market area of a specific

company. See Am. Key Corp. v. Cole Nat’l Corp., 762 F.2d 1569, 1581 (11th Cir.

1985) (“The relevant market is the ‘area of effective competition’ in which

competitors generally are willing to compete for the consumer potential, and not

the market area of a single company.”). Based on these deficiencies, Gunther’s

evidence is insufficient to establish the relevant geographic market.

c) Failure to Establish Market Share

Once the relevant market has been defined, both in terms of the relevant

product market and the relevant geographic market, a predator’s percentage share

of that market can be determined. Measurement of a predator’s market share is

necessary to assess whether the predator possesses sufficient leverage to influence

marketwide output. See Rebel Oil v. Atl. Richfield Co., 51 F.3d 1421, 1437 (9th

Cir. 1995); see also IIA Areeda, supra at ¶ 403a. A monopolistic predator controls

such a large portion of the market that its own restriction of output results in a

market-wide reduction which cannot be offset by the expanded output of

competitors. Rebel Oil, 51 F.3d at 1437. Such a predator has the power to charge

supracompetitive prices merely by restricting its own output. Id.

24
 The evidence presented by Gunther failed to demonstrate Allgas possessed a

sufficiently large share of the relevant market for it to be characterized as a

monopolist. First, Gunther neglected to calculate Allgas’ market share of the

purportedly relevant market. Moreover, even if Gunther’s estimate of market

share was for the correct market, the market share attributable to Allgas was

insufficiently low to infer the existence of monopoly power.

i) Market Share of the Incorrect Market

Several propane gas retailers competed against Allgas and Bailey’s Propane

Gas in northern Alabama, including Dowdle Gas, Ferrell Gas, Country Gas,

Amerigas, Jordan Gas, Empire Gas, and Southland Gas. Gunther, however, did not

personally assess the market shares of any of these competitors within the

purported relevant market, an area defined by Gunther as encompassing the 20-

mile radius surrounding Susan Moore. In lieu of conducting his own analysis,

Gunther relied on the affidavit Max Bailey for generalized estimates of market

share. In his affidavit, Max Bailey estimated Allgas’ overall market share as 35-

40% and its market share of sales to residential customers at close to 50%.18 The

overall market shares of competitors was estimated to be 35-40% for Dowdle Gas,

18
Because Allgas’ main competitor, Dowdle Gas, purportedly served a larger percentage
of agricultural customers, Max Bailey estimated Allgas’ share of the residential market was
significantly higher than its share of the overall market.

25
20-30% split between Ferrell Gas and Country Gas, and the remaining small

percentage split between Amerigas, Jordan Gas, Empire Gas, and Southland Gas.

Adopting these estimates, Gunther concluded Allgas possessed a 35-40% overall

share of the relevant market and a close to 50% residential share of the relevant

market.

Regardless of the propriety of an expert relying solely on the opinion of a

lay witness when measuring market share, Gunther’s reliance on Max Bailey’s

affidavit is fundamentally flawed because Bailey did not estimate market shares for

the purportedly relevant market. Rather, Max Bailey estimated the market shares

of Allgas and its competitors for “the Altoona District.” See April 8, 1997

Affidavit of Max Bailey at ¶ 6. The “Altoona District” was defined as the service

area of Allgas’ Altoona district office. Id. ¶ 5. The service area of Allgas’ Altoona

district office, however, was not coextensive with the service area of Bailey’s

Propane Gas; i.e., the “Altoona District” was not limited to the 20-mile radius

surrounding Susan Moore. The affidavit of Max Bailey, therefore, reveals nothing

about the respective market shares of competitors within a 20-mile radius of Susan

Moore. As a result, Gunther’s reliance on the affidavit for his sole evidence of

26
market share is insufficient to establish the market share of Allgas in the allegedly

relevant market.19

ii) Insufficiently Low Market Share

Even if Gunther’s measurement of market share was correct, such that

Allgas possessed 35-40% of the overall propane gas market and close to 50% of

the residential propane gas market surrounding Susan Moore, these market shares

would be insufficient circumstantial evidence that Allgas was a monopolist. A

market share at or less than 50% is inadequate as a matter of law to constitute

monopoly power. See, e.g., Yoder Bros., Inc. v. California-Florida Plant Corp.,

537 F.2d 1347, 1368 (5th Cir. 1976) (finding 20% market share insufficient); U.S.

Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d 986, 1000 (11th Cir. 1993) (“we have

discovered no cases in which a court found the existence of actual monopoly

established by a bare majority share of the market”); Cliff Food Stores, Inc. v.

Kroger, Inc., 417 F.2d 203, 207 n.2 (5th Cir. 1969) (indicating “something more

19
Gunther’s preliminary report itself demonstrates a flaw in his conclusion Allgas
controls almost 50% of the allegedly relevant market. Using data from the 1990 Census,
Gunther estimated there were approximately 16,657 residential homes in the “Susan Moore
market” which used liquid propane gas. See Preliminary Report, at 8. Assuming each
residential customer consumed between 600 and 1,500 gallons of propane gas during the year,
Gunther estimated potential residential demand in the relevant market of between 9,994,221 and
24,985,553 gallons per year. Id. Allgas records, however, indicate domestic sales by its Altoona
district office of no more than 1,370,000 gallons per year. Thus, even if all of the propane gas
sold by the Altoona office was sold within the “Susan Moore market,” Allgas would possess a
market share in the relevant market of between 5.48% to 13.7%.

27
than 50% of the market is a prerequisite to a finding of monopoly”); IIIA Phillip E.

Areeda & Herbert Hovenkamp, Antitrust Law ¶ 801a (2d ed. 2002) (“Although one

cannot be too categorical, we believe it reasonable to presume the existence of

substantial single-firm market power from a showing that the defendant’s share of

a well-defined market protected by sufficient entry barriers has exceeded 70 or 75

percent for the five years preceding the complaint.”). As a result, we conclude the

Baileys cannot establish Allgas possessed market power through the existence of a

monopoly.

2) Existence of an Oligopoly

An oligopoly differs from a monopoly in that no one firm can control the

market price of a product merely by altering its own output. IIA Areeda, supra ¶

404a. Where a market is highly concentrated, however, it is possible for sellers to

share market power sufficient to control prices “by recognizing their shared

economic interests and their interdependence with respect to price and output

decisions.” Brooke Group, 509 U.S. at 227, 113 S. Ct. at 2590. “Thus, the

distinctive characteristic of oligopoly is recognized interdependence among the

leading firms: the profit-maximizing choice of price and output for one depends on

the choices made by others.” IIA Areeda, supra ¶ 404a.

28
 The hallmark of an oligopoly is tacit collusion among competitors.

Although economic theory suggests oligopolies can arise in any market comprised

of only a handful of competitors, the practical realities of the marketplace make the

actual existence of an oligopoly unlikely:

Firms that seek to recoup predatory losses through the conscious
parallelism of oligopoly must rely on uncertain and ambiguous signals
to achieve concerted action. The signals are subject to
misinterpretation and are a blunt and imprecise means of ensuring
smooth cooperation, especially in the context of changing or
unprecedented market circumstances. This anticompetitive minuet is
most difficult to compose and to perform, even for a disciplined
oligopoly.

Brooke Group, 509 U.S. at 227-28, 113 S. Ct. at 2590. Nevertheless, the United

States Supreme Court has recognized the possibility that competition could be

injured through the operation of a successful oligopoly. See generally id. at 229,

113 S. Ct. at 2591.

The method by which an aggrieved competitor can prove the existence of an

oligopoly has not been extensively discussed by the courts. The most reliable

method of proving an oligopoly may be through extensive analysis of the historical

price and output data for all the competitors within a relevant market. By

examining such data, and even comparing the data with similar retailers operating

in non-oligopolistic markets, it may be possible to discern whether there is an

interdependence in price and output between leading retailers in the market. It also

29
may be possible to discern whether the prices charged in the relevant market are

inflated as compared with non-oligopolistic markets. In this case, however, we

need not decide whether such evidence would be sufficient to prove the existence

of an oligopoly, as Gunther made no attempt to analyze the historical price and

output data of Allgas and its competitors.

Despite failing to analyze the interdependence of retailers within the alleged

relevant market, Gunther nevertheless concluded Allgas’ Altoona office operated

within an oligopoly. This conclusion was based on his determination the company

as a whole extracted supracompetitive profits in 1993 and 1994. The method by

which Gunther determined Allgas earned supracompetitive prices was to compare

Allgas’ estimated rate of return on assets (ROA) for those two years with the

average rate of return for Fortune 500 companies.20 For example, finding Allgas

earned a 12.12% ROA in 1993 as compared with an average Fortune 500 ROA of

3.5%, Gunther concluded “in 1993, Allgas, Inc. earned a supranormal profit in the

retail marketing of propane gas and the Altoona, Alabama market was a significant

20
Even after acknowledging the calculation of ROA should be based on after-tax profit,
Gunther used Allgas’ estimated change in retained earnings as a proxy. Gunther then compared
Allgas’ ROA with the average ROA for Fortune 500 companies, which Gunther assumed was
based on after-tax profit rather than retained earnings. The propriety of using change in retained
earnings will not be addressed herein.

30
contributor to the supranormal profits being earned by Allgas, Inc.” See Gunther

Letter, ¶ 4.

As an initial matter, we are highly skeptical of the reliability of Gunther’s

methodology in measuring oligopoly power. Although the consistent extraction of

supracompetitive profits may be an indication of anticompetitive market power,

such profits could just as easily be obtained as a result of good management,

superior efficiency, or differences in accounting, none of which is inconsistent with

an efficient market. In re IBM Peripheral EDP Devices Antitrust Litig., 481 F.

Supp. 965, 981 (N.D. Cal. 1979).

More troubling is Gunther’s use of a seller’s ROA to measure

supracompetitive profits. A company’s ROA is based upon data collected and

analyzed by accountants, not economists. As a result, these rates of return are

31
more a reflection of various accounting conventions than true economic profit.21 A

21

Differences between accounting and economic costs. Accounting profits
differ from economic profits in several important ways. First, accountants try to
determine costs (and profits) for the firm (or perhaps a division of it) over some
regularized period, such as a year or a quarter. By contrast, the economist wants
to know the profitability of a project over its entire lifetime, including all planning
and investment costs, and “spillovers.” Any given project might show accounting
losses in one year and profits in the next, but the final accounting is the only
important one for the economist. Unlike the accountant, moreover, the economist
measuring monopoly profit is less interested in the total of a firm’s profits made
from all its various projects over the firm’s life. Rather, the antitrust analyst
wants to know whether the firm now has market power over some particular
product (or group of products).
Second, accountants identify costs by looking at historical expenditures,
while economists count so-called opportunity costs. The opportunity cost of
capital, sometimes called the normal rate of return, or profit, is the smallest
payment that must be made to the owners of a firm’s capital to induce them to
invest in the firm, rather than in their next best investment alternative. This rate
of return precisely compensates investors for the profit they could achieve
elsewhere that they have foregone by investing in the firm. Economists regard
capital’s opportunity cost as a cost and define economic profit as the return to
investors above and beyond what is necessary to induce them to invest. By
excluding such costs, accounting profits exceed economic profits. Thus, the
perfectly competitive firm in equilibrium earns zero economic profits though its
normal returns are reflected in positive accounting profits. Hence, substantial
accounting profits — say, 20 percent — may be consistent with trivial or zero
economic profit and thus do not necessarily indicate any market power.
Accounting costs fail to reflect opportunity costs in other respects as well.
For example, accountants depreciate durable resources on the basis of their
historical cost. By contrast, the economic value of a resource is determined by its
value to the owner in the best alternative use. With any inflation, historical costs
understate economic costs — increasing so as the asset is more durable — such
that accounting profit exceeds economic profit. Consider the accounting
treatment of a warehouse that the firm either rents for $1,000 monthly or owns.
The accountant counts the rental as a cost. But if the warehouse is owned, it may
count for much less. If the warehouse is fully depreciated and there is no
mortgage interest, the accountant may count the “cost” of owning the warehouse
as zero, not counting maintenance and taxes. But this warehouse still “costs” the
firm the $1,000 it foregoes by using the warehouse itself rather than renting it to
others at the $1,000 market price. Whether owned or rented, the warehouse is a
necessary productive input whose value in its best alternative use (in this case,

32
company’s ROA, thus, reveals very little about its market power:

[T]he rate of return indicated by accounting data is greatly
influenced by the firm’s growth rate, accounting procedures, the
useful life of its assets and the way that those assets are depreciated,
and which expenses are capitalized or treated as current costs.
Moreover, when a firm produces products in addition to the one under
scrutiny, there may be serious dispute over the allocation of overhead
and joint costs. These factors are largely irrelevant to economic
profit. The overall picture suggests extreme caution in using such
data to infer market power.

IIA Areeda, supra ¶ 516f1. In light of these inadequacies, it is not surprising the

use of ROA to measure market power has yet to be accepted by any circuit. See

generally Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d

1406, 1412 (7th Cir. 1995) (“[N]ot only do measured rates of return reflect

accounting conventions more than they do real profits (or losses), as an economist

would understand these terms, . . . but there is not even a good economic theory

that associates monopoly power with a high rate of return.”).

Even if ROA legitimately could be used to measure market power, the

comparison of a company’s ROA to the average ROA for Fortune 500 companies,

over the course of only two years, would be insufficient to prove supracompetitive

profits indicative of an oligopoly. In order for the comparison to have any

renting it to someone else) must be considered before finding economic profits.

IIA, Areeda, supra ¶ 516f1.

33
significance, the predator’s ROA must be measured against the ROA of similar

firms in the same or similar industries. “One must have not only industries with

the same risk level, but also assets that have been evaluated and depreciated in the

same way, and markets that have faced the same growth rate.” IIA Areeda, supra ¶

516f2. Simply comparing a predator’s ROA with the average ROA of the Fortune

500, which contains a broad cross-section of industries and types of companies,

will not provide a true measure of excessive returns.22

22
In his deposition, Gunther appeared to recognize a better comparator to Allgas’
ROA would have been the ROA for the liquid propane gas industry:

A. Well, you have to have some reference point. If I’m selling ball point pens
and I’m making a 50 percent return on my investment, but the average ball point
pen maker in the whole U.S. is making five percent return on investment, then,
without knowing what the other players are in my market, then I’m obviously
doing better than my opportunity costs of being somewhere else, then one can
conclude that you’re making an economic profit.
Q. So at least you need to know what the industry average is?
A. You need a reference point, yeah, to — to know. Because the idea of super
normal is above that which is an average or normal, super normal. What’s
normal? Normal is when — if you could go to the bank and put your money in
six percent and that’s your opportunity cost, then you’re not making a profit until
you at least cover that.
Q. But if you are manufacturing pens, you are not going to compare that rate of
return to, say, someone who is manufacturing silicon chips, right?
A. No. You would have to make the next best available opportunity so it would
not be a brain surgeon or a garbage collector.

Gunther Depo. at 76-77. Later, when asked about his use of the ROA for Fortune 500
companies, Gunther stated: “Unfortunately, there is no data that I could find anywhere that
talked about the average profitability of a propane retail marketer. That was one of the questions
that I asked of this lady at the National Propane Gas Association and she said that I really needed
to talk to Bill Butterball in Washington, D.C., who’s the director of regulatory affairs and he was
not available.” See Gunther Depo. at 104-05. Gunther did not make any other efforts to find
data for companies similar to Allgas.

34
 Not only would a company’s ROA need to be compared against an

appropriate benchmark, but the ROA also would need to be compared over the

course of several years. “Whatever the structure of the market, excess returns are a

necessary ingredient of the dynamic adjustment of an industry’s capacity to

respond to changes in demand.” IIA Areeda, supra ¶ 516b. When demand

increases, existing firms may enjoy a period of inflated profits until such time as

existing competitors can expand their capacity or new entrants provide additional

supply. Id. The mere existence of supracompetitive profits for some period of

time, thus, may be entirely consistent with an effective market. Only when excess

returns are persistent over a longer period of time may there be an indication of an

In a supplemental affidavit, Gunther purported to compare Allgas’ ROA with the ROA of
companies within the 5900 category of Moody’s Industrial Review (propane gas companies are
classified under 5984). See April 11, 1997 Affidavit of William Gunther. An examination of the
comparators reveals they consisted of retail drug stores, including Arbor Drugs, Inc., Walgreen
Co., and Eckert Corp. Id. These companies are in no way similar to Allgas or its industry.
Comparison with these companies, therefore, is meaningless.

35
unhealthy market.23 See generally id. ¶ 516f2 (indicating one to five years is not a

sufficient amount of time to compare rates of return).

Gunther’s own analysis demonstrates the need to measure ROA over the

course of several years. In his report, Gunther presumed Allgas operated in an

oligopoly because its ROA for 1993 was 12.12% and its ROA for 1994 was

12.55%. Noting the Fortune 500 average ROA for 1993 was 3.5%, Gunther

concluded Allgas earned supracompetitive profits and, from this, Gunther inferred

the existence of an oligopoly.24 Omitted from Gunther’s report, however, were

23
In his deposition, Gunther himself admitted his methodology would need to be applied
over the course of several years:

Certainly, if a company is earning economic profits in one year, and you
say, well, you know, should the Justice Department begin to take action? You
would say that doesn’t make a lot of sense because the way the market is suppose
to work is that the presence of the super normal profits becomes a market signal
for entry. And so what you want to do is allow opportunity for entry to occur.
And competition will take care of the problem. So you don’t want to have a lot of
heavy regulations. But if you were observing that a company, let’s take the ready
to eat cereal anti-trust case, where for 8 or 10 or 15 years one could show that
they were earning super normal profits, well, then it’s clear that entry wasn’t
taking care of the problem and that’s why the Justice Department brought the suit.
So, no, I would not say that super normal profits in one year is a clear indication.
While it isn’t of something wrong, it’s an indication that the economic profits to
be made or one ought to look at the opportunity for economic profits to be made
because there are these super normal profits.

See Gunther Depo. at 102-03. As discussed infra, Gunther only included the data for two years
in his preliminary report despite measuring Allgas’ ROA over the course of four years.
24
Interestingly, Gunther’s assessment of ROA led to the following conclusion:
“Economic theory suggests that these economic profits would attract competition and new firms
would be expected to enter the market.” Preliminary Report at 9. As discussed infra, the
existence of elevated profits for some period of time may be indicative of a perfectly competitive

36
Allgas’ ROAs for 1992 and 1995. According to Gunther’s calculations, Allgas had

a negative ROA of –7.3% in 1992, and a minimal ROA of 4.10% in 1995. Thus,

Gunther’s own calculations indicated Allgas was not earning supracompetitive

profits in 1992 and 1995. Gunther’s complete ROA calculations, therefore, belie

the existence of an oligopoly. Especially in light of its ROAs for 1992 and 1995,

the fact Allgas may have enjoyed supracompetitive profits in 1993 and 1994 is

insufficient to establish the existence of an oligopoly.25

An additional deficiency with Gunther’s methodology was measurement of

the ROA for Allgas as a whole rather than for its Altoona, Alabama district. The

oligopoly alleged by the Baileys existed in and around the geographic area serviced

by Allgas’ Altoona district office. Gunther, however, did not measure the retained

earnings of the Altoona district office to determine whether that office, in fact, was

earning supracompetitive profits. Rather, Gunther calculated the ROA of the entire

company. Allgas operates in the entire state of Alabama, but the Altoona district

covers only a small portion of the state. As a result, even if the company as a

market where the supranormal returns serve as a signal to new entrants. The fact that returns are
inflated for a short time, therefore, does not itself indicate the market operates as an oligopoly.
25
When asked in his deposition about the omission of Allgas’ ROAs for 1992 and 1995,
Gunther indicated: “But what I’m trying to establish here is whether there is sufficient reason for
the entry of new firms. Was there the presence of economic profits being earned at the time Mr.
Bailey was considering entering the market?” See Gunther Depo. at 96-97. The purpose of
Gunther’s testimony, however, was to demonstrate Allgas operated within an oligopoly, not
whether it was rational for the Baileys to enter the market.

37
whole was earning supracompetitive profits as alleged by Gunther, that fact alone

indicates nothing about whether the Altoona district was the cause of such profits.

Consequently, Gunther’s measurement of ROA for the entire company, without

more, is virtually meaningless.26

Even if the existence of an oligopoly could be substantiated through

measurement of ROA, and even if Gunther’s methodology was not otherwise

fundamentally flawed, his evidence nevertheless is insufficient to demonstrate

Allgas’ Altoona district operated within an oligopoly. According to Gunther’s

testimony, Allgas earned supracompetitive profits in 1993 and 1994. The primary

period of predation, however, occurred in 1994. Purportedly, Allgas dropped the

residential price of its propane gas to 50¢, a price allegedly below its costs, in

September 1994. Allgas did not raise its prices until late December 1994. If

Allgas was engaging in predation during one-third of the year, it is illogical the

company would have earned supranormal profits for 1994. Gunther’s evidence,

26
Gunther himself acknowledged the need to focus on the Altoona district:

Q. . . . . But for our purposes in terms of determining whether there are excess
economic profits for the Altoona office, the best test would have been to evaluate
the asset base there, what their retained earnings were for the office, right?
A. That’s correct.

Gunther Depo. at 87-88.

38
therefore, is inconsistent with the facts. Based on the foregoing, we conclude

Gunther’s testimony is insufficient to prove the existence of an oligopoly.

b. Ability to Sustain Supracompetitive Prices

Even if the Baileys could prove Allgas possessed sufficient market power to

set supracompetitive prices, whether through the existence of a monopoly or an

oligopoly, they also would need to demonstrate Allgas could sustain the

supracompetitive prices long enough to recoup its losses. The key to an antitrust

violation is the ability to recoup losses incurred:

The success of any predatory scheme depends on maintaining
monopoly power for long enough both to recoup the predator’s losses
and to harvest some additional gain. Absent some assurance that the
hoped-for monopoly will materialize, and that it can be sustained for a
significant period of time, “[t]he predator must make a substantial
investment with no assurance that it will pay off.”

Matsushita, 475 U.S. at 589, 106 S. Ct. at 1357 (quoting Easterbrook, Predatory

Strategies and Counterstrategies, 48 U. Chi. L. Rev. 263, 268 (1981); see also III

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 724b (2d ed. 2002)

(“Recoupment requires not merely that post-predation monopoly prices be

maintainable, but that they be of sufficient duration and magnitude to offset the

costs of predation, even after the costs are adjusted for the risk and time value of

the earlier investment in predation.”). Without the ability to maintain inflated

39
prices long enough to recoup losses, competition is not ultimately injured by the

prior predatory pricing.

In his preliminary report, Gunther stated Allgas incurred approximately

$557,502 in losses as a result of its price war with Bailey’s Propane Gas. Gunther

projected Allgas would recoup its losses in 8.7 years. Taking into consideration

the present value of money, Gunther estimated full recoupment in approximately

10 years. In reaching this conclusion, however, Gunther failed account for

structural factors in the market that would affect Allgas’ ability to maintain

supernormal prices for 10 years. See III Areeda & Hovenkamp, supra ¶ 724b (“If

structural factors indicate that monopoly or oligopoly prices could not be

maintained for a significant time after the predation campaign has destroyed or

disciplined rivals, then such ‘recoupment’ is not possible, and the claim must be

dismissed.”).

The most significant structural factor bearing on the ability to recoup

predatory losses through inflated prices is the ease or difficulty of entry into the

market. Where a market has low barriers to entry, sellers charging

supracompetitive prices will soon attract new competitors. See, e.g., Rebel Oil Co.

v. Atl. Richfield Co., 51 F.3d 1421, 1439 (9th Cir. 1995) (“[W]ith easy entry, a

predator charging supracompetitive prices will quickly lose market share (as well

40
as any chance of reaping monopoly profits) as new rivals enter the market and

undercut its high price.”). Entry barriers include trade secrets, patents, licenses,

capital outlays required to start a new business, pricing elasticity, and difficulties

buyers may have in changing suppliers. See McGahee v. N. Propane Gas Co., 858

F.2d 1487, 1495 (11th Cir. 1988).

In his preliminary report, Gunther conceded the lack of barriers to entry by

new liquid propane gas retailers:

Given the economic profits being earned by Allgas, Inc. and the
likelihood of the entry of new firms, the question of the existence of
barriers to entry arises. There do not appear to be any significant
barriers to entry in the retail marketing of propane gas. . . . Entry
barriers must be characterized as relatively weak and given
information on the existence of economic profits in the industry, entry
of new firms would be expected.

Preliminary Report at 9. Furthermore, Gunther failed to demonstrate the inability

of existing firms to expand their output in response to a predator’s attempts to raise

prices above competitive levels. In light of these facts, we conclude Gunther’s

evidence is insufficient to demonstrate Allgas could maintain supracompetitive

prices long enough to recoup its losses.

B. State Law Claim for Tortious Interference

In addition to arguing Allgas violated the Robinson-Patman Act by lowering

the residential price of its propane gas to 50¢ per gallon, the Baileys also contend

41
the price reduction unlawfully induced its potential customers to purchase propane

gas from Allgas rather than Bailey’s Propane Gas. As a result, the Baileys assert a

claim for tortious interference with contractual or business relationships.

The tort of intentional interference with business or contractual relations

requires: (1) the existence of a contract or business relation; (2) the defendant’s

knowledge of the contract or business relation; (3) intentional interference by the

defendant with the contract or business relation; (4) absence of justification for the

defendant’s interference; and, (5) damage to the plaintiff as a result of the

defendant’s interference. Gross v. Lowder Realty Better Homes & Gardens, 494

So. 2d 590, 597 (Ala. 1986). As noted in Gross, the fourth element of a claim for

tortious interference with business relations, the absence of justification, actually

relates to an affirmative defense to be pleaded and proved by the defendant. Id. at

597 n.3. Legitimate business competition qualifies as justification for intentional

interference with a rival’s business. Soap Co. v. Ecolab, Inc., 646 So. 2d 1366,

1369 (Ala. 1994) (“‘One’s privilege to engage in business and to compete with

others implies a privilege to induce third persons to do their business with him

rather than with his competitors. In order not to hamper competition unduly, the

rule stated in this Section entitles one not only to seek to divert business from his

competitors generally but also from a particular competitor. And he may seek to

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do so directly by express inducement as well as indirectly by attractive offers of his

own goods or services.’”) (quoting Restatement (Second) of Torts, § 768 (1977)).

In response to the Bailey’s claim for tortious interference, Allgas raised the

defense of justification. Allgas produced evidence that, in regard to the matters in

dispute, it was attempting to protect its own clients from being lured away by

Bailey’s Propane Gas. Allgas also lowered its price to prevent defection by its

drivers, who fostered the closest relationships with its customers.27 Thus, because

Allgas produced evidence it was engaging in legitimate business competition, the

burden shifted to the Baileys to show a genuine issue of material fact existed.

In response to Allgas’ justification defense, the Baileys assert Allgas did not

engage in legitimate business competition because the company violated the

Robinson-Patman Act when it reduced the price of its residential propane gas. As

discussed supra, however, the Baileys have failed to set forth sufficient evidence

upon which a jury could find Allgas violated the Robinson-Patman Act. Likewise,

the Baileys have failed to set forth sufficient evidence disputing Allgas’ evidence

of legitimate business competition; that is, the Baileys have failed to submit

sufficient evidence upon which a jury could find absence of justification. The

27
Allgas drivers earned compensation via a combination of base salary and commission,
with commissions comprising approximately 45% of the total compensation. Allgas was
concerned erosion of its customer base would convince drivers to switch employment to Bailey’s
Propane Gas, thereby further reducing its clientele.

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district court, therefore, correctly granted summary judgment in favor of Allgas on

the Bailey’s tortious interference claim. See generally Bridgeway

Communications, Inc. v. Trio Broad., Inc., 562 So. 2d 222 (Ala. 1990) (granting

summary judgment in favor of defendant where the plaintiff failed to demonstrate a

genuine issue of material fact disputing the existence of legitimate business

competition).

IV. CONCLUSION

Regardless of whether the testimony of the Baileys’ expert is admissible, we

conclude the testimony is insufficient to establish a violation of the Robinson-

Patman Act. Not only did the expert fail to prove Allgas possessed sufficient

market power to set supracompetitive prices, but he also failed to show Allgas

could sustain such supracompetitive prices long enough to recoup its losses

incurred in the alleged price discrimination. Accordingly, we affirm summary

judgment in favor of Allgas.

AFFIRMED.

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