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Security Data Supply LLC v. Nortek Security and Control LLC

United States District Court, N.D. Texas, Dallas Division

July 22, 2019




         This Order addresses Defendants Earnest Bernard's ("Bernard") Motion to Dismiss [ECF No. 104], Nortek Security and Control LLC's ("Nortek") Motion to Dismiss [ECF No. 106], and Wave Electronics Inc.'s ("Wave") (collectively, "Defendants") Motion to Dismiss [ECF No. 108] (the "Motions"). For the following reasons, the Court grants in part and denies in part the Motions.

         I. BACKGROUND

         A. Procedural History

         Plaintiffs Security Data Supply, LLC ("SDS") and its franchisees ("SDS Franchisees") (collectively, "Plaintiffs") filed this lawsuit on October 12, 2017, in the U.S. District Court for the Eastern District of Louisiana alleging violations of the federal antitrust laws and tortious interference. Resp. 1, 4, Defendants moved to dismiss for lack of personal jurisdiction, and the Louisiana District Court transferred the case to this Court on May 31, 2018. See ECF No. 62. During a hearing on September 20, 2018, Plaintiffs orally moved for leave to file an amended complaint, which the Court granted. See ECF No. 99. After Plaintiffs filed their Second Amended Complaint on October 5, 2018, Defendants again moved to dismiss. See ECF Nos. 102, 104, 106, 108. The parties through their counsel appeared before the Court for oral argument on the pending Motions on June 19, 2019.

         B. Factual History

         Nortek is a leading manufacturer of security, home automation, and personal security systems that distributes its products through wholesale distributors such as SDS. Second Am. Compl. ¶¶ 17-18. Although Nortek maintains a 10% market share of intrusion alarm systems overall, Nortek is the sole manufacturer of 2GIG-"an intelligent connected system for residential intrusion detection." Id. ¶¶ 19-20. Nortek sells its products to wholesale distributors, who then sell it to retailers and installers, who provide the equipment to the end user. Id. ¶ 18. Nortek manufactures and distributes its 2GIG products from California and Colorado. Id. ¶ 37.

         Plaintiffs are wholesale distributors of CCTV, intrusion alarm systems, access control, fire alarms, and home automation systems, including Nortek's 2GIG and other products. Id. ¶¶ 3-15. Plaintiffs maintain outlets in Texas and Louisiana, and have been distributing Nortek's products since 2004. Id. ¶¶ 32-33, 37. Nortek's prices were generally consistent and only varied in limited circumstances, such as when Nortek sold to dealers in extraordinary volume. Id. ¶ 44. Plaintiffs contend that SDS and the SDS Franchisees operate as a single enterprise, Id. ¶¶ 89-92. SDS and the SDS Franchisees have entered into a "Cost Plus [sic] Contract," whereby the SDS Franchisees purchase all of their inventory from SDS for a set price based upon a standard mark-up on the wholesale price, Id. ¶ 90. Thus, "there is a functional or economic unity between SDS .. . and its franchisees." Id. ¶ 91. Nortek also treated SDS and the SDS Franchisees as a single enterprise. Id. ¶ 92.

         Wave began distributing Nortek's 2GIG products in 2015, and has since been Plaintiffs' direct competitor, maintaining outlets in Texas and Louisiana. Id. ¶¶ 18, 22-23, 35-37. By 2017, Wave became the largest purchaser of 2GIG products. Id. ¶ 38, According to Plaintiffs, this was possible because Nortek and Wave entered into a special pricing program called the "Four Star Program." Id. ¶¶ 28, 38. Plaintiffs also interviewed former Wave employees aware of the alleged pricing scheme, who told Plaintiffs that the Four Star Program was designed to attract customers to Wave. Id. ¶ 68. This pricing program allegedly involved special rebates that Wave's customers received after the sale was complete. Id., ¶ 45. According to Plaintiffs, the rebate was "kicked back" to Wave, which allowed Wave to earn a significant profit while selling Noitek's products up to 40% below the wholesale price Nortek charged Plaintiffs and other distributors. Id., ¶¶ 45-46, 97.

         Although there were some requirements for a customer to obtain special pricing, Wave provided the special pricing to nearly all of its customers, allegedly with Nortek's tacit consent. Id. ¶¶ 47-48. When Plaintiffs inquired about entering into a similar arrangement, Nortek denied the existence of the Four Star Program. Id. ¶ 49. Bernard, Nortek's sales representative, purportedly told Plaintiffs that they were receiving Nortek's best price and that ail of the distributors were paying the same amount for Nortek's products. Id.

         Plaintiffs allege that Bernard and other Nortek employees were receiving "bribes . . . consisting of payments and American Express gift cards" from Wave in exchange for maintaining the pricing program. Id. ¶¶ 26, 28, 38-39, 53, 70-75. As part of this scheme, Nortek's employees would also identify Plaintiffs' customers to Wave as potential "leads." Id. ¶¶ 60-61. Once Nortek learned of these employees' activities, Bernard resigned and the other employees engaged in the alleged bribery were terminated. Id. ¶ 54. Nonetheless, Plaintiffs allege that even after Nortek discovered the pricing program and allowed Plaintiffs to provide limited special pricing to a handful of their customers, Nortek continued to give Wave preferential treatment. See Id. ¶ 62. For example, two days after Plaintiffs had Nortek approve Plaintiffs' longstanding and largest client for special pricing, the client was approached by Wave's branch manager and a Nortek employee about switching to Wave for "even . . . better pricing." Id. Nortek also extended Wave's pricing program for an extra sixty days and grandfathered in Wave's top thirty dealers, allowing Wave to maintain an edge over Plaintiffs. Id. ¶ 81.

         Moreover, Nortek's outside counsel allegedly warned Nortek that the pricing program was illegal. Id. ¶ 85. Similarly, Nortek's executives and management allegedly admitted in discussions with Plaintiffs' representatives that the Four Star Program "provided for unfair competition, was illegal and needed to be stopped." Id. ¶¶ 76-85. Nortek's sales manager further admitted that allowing Wave to grandfather in thirty of its best dealers was unfair and "would have a detrimental impact upon the relevant market." Id. ¶ 81. Despite warnings from internal advisers and outside counsel, Nortek allowed the rebate program to continue until the end of 2017. Id. ¶¶ 55-56, 83-87.

         Once Nortek phased out the pricing program, Wave entered into a special pricing arrangement with Nortek's competitor, Quolsys. Id. ¶ 57. Plaintiffs allege that all of Wave's customers currently purchase Quolsys products instead of Nortek's 2GIG products, Id. Although the pricing scheme has stopped, Plaintiffs allege that it injured competition. Id. ¶ 93. Plaintiffs allegedly "lost a significant number of customers to Wave, have been unable to compete with Wave for new potential customers and have suffered significant financial losses including the loss of sales, profits and market share." Id. ¶94. By preliminary estimates, Plaintiffs lost approximately 59 existing clients, or $9, 575, 000 in "annual losses," and an unspecified number of potential customers, Id. ¶¶ 95-98.

         Once Nortek began offering Plaintiffs the pricing program, Plaintiffs' sales of 2GIG products increased by 40% between July and December 2017. Id. ¶ 99. In January 2018, however, Nortek pulled its products from Plaintiffs without providing them with the contractually required notice. Id. ¶ 100. Although Plaintiffs offered to pay all of the outstanding invoices for the unsold inventory, Nortek refused to accept the return of unsold merchandise and initiated a lawsuit in California seeking the collection of the past due invoices. Id. ¶ 101.

         In response, Plaintiffs initiated the present action. In Count I against Nortek and in Count II against Wave, Plaintiffs allege that Nortek and Wave violated §§ 2(a) and (f) of the Robinson-Patman Act ("RPA"), 15 U.S.C. §§ 13(a) and 13(f), by knowingly inducing, receiving, or engaging in price discrimination. Id., ¶¶ 103-38. In Count III, Plaintiffs allege that Defendants engaged in commercial bribery in violation of RPA § 2(c), 15 U.S.C § 13(c). Id. ¶¶ 139-51. Finally, Plaintiffs assert claims for tortious interference in Count IV, against Wave and Bernard, and in Count V, [1] against all Defendants. Id. ¶¶ 152-70.


         To defeat a motion to dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6), a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombty, 550 U.S. 544, 570 (2007); Reliable Consultants, Inc. v. Earle, 517 F.3d 738, 742 (5th Cir. 2008). To meet this "facial plausibility" standard, a plaintiff must "plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged," Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Plausibility does not require probability, but a plaintiff must establish "more than a sheer possibility that a defendant has acted unlawfully." Id. The court must accept well-pleaded facts as true and view them in the light most favorable to the plaintiff. Sonnier v. State Farm Mut. Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir. 2007). However, the court does not accept as true "conclusory allegations, unwarranted factual inferences, or legal conclusions." Ferrer v. Chevron Corp., 484 F, 3d 776, 780 (5th Cir. 2007). A plaintiff must provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal citations omitted). "Factual allegations must be enough to raise a right to relief above the speculative level... on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id. (internal citations omitted).

         The ultimate question is whether the complaint states a valid claim when viewed in the light most favorable to the plaintiff. Great Plains Tr. Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312 (5th Cir. 2002). At the motion to dismiss stage, the court does not evaluate the plaintiffs likelihood of success. It only determines whether the plaintiff has stated a claim upon which relief can be granted. Mann v. Adams Realty Co., 556 F.2d 288, 293 (5th Cir. 1977).

         III. ANALYSIS

         A. Standing

         Defendants moved to dismiss the portions of Counts I and II that are asserted by the SDS Franchisees, arguing that the SDS Franchisees lack standing to assert a claim for price discrimination under RPA § 2. Standing in a private antitrust action for damages arises under § 4 of the Clayton Act. See 15 U.S.C. § 15; J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557, 562 (1981) ("[P]roof of a violation does not mean that a disfavored purchaser has been actually 'injured' within the meaning of § 4."); Feeney v. Chamberlain Mfg. Corp., 831 F.2d 93, 95 (5th Cir. 1987) (analyzing an RPA claim for damages under §§ 4 and 7 of the Clayton Act). "Standing to pursue an antitrust suit [exists] only if [Plaintiffs] show[]:' 1) injury-in-fact, an injury to [Plaintiffs] proximately caused by [Defendants'] conduct; 2) antitrust injury; and 3) proper plaintiff status, ..'" Waggoner v. Denbury Onshore, LLC, 612 Fed.Appx. 734, 736 (5th Cir. 2015) (quoting Doctor's Hosp. of Jefferson, Inc. v. Se. Med. All, Inc., 123 F.3d 301, 305 (5th Cir. 1997)). For the following reasons, the Court finds that the SDS Franchisees have standing to assert a violation of RPA § 2.

         (1) I ...

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