ECON 309 Competition Policy Discussion Questions

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Citations:
Bluebook 21st ed.
Donald N. Thompson, Nutrasweet: The Evolution of Law on Abuse of Dominant Position,
18 CAN. Bus. L.J. 17 (1991).
ALWD 7th ed.
Donald N. Thompson, Nutrasweet: The Evolution of Law on Abuse of Dominant Position,
18 Can. Bus. L.J. 17 (1991).
APA 7th ed.
Thompson, D. N. (1991). Nutrasweet: the evolution of law on abuse of dominant
position. Canadian Business Law Journal, 18(1), 17-42.
Chicago 17th ed.
Donald N. Thompson, “Nutrasweet: The Evolution of Law on Abuse of Dominant Position,”
Canadian Business Law Journal 18, no. 1 (May, 1991): 17-42
McGill Guide 9th ed.
Donald N. Thompson, “Nutrasweet: The Evolution of Law on Abuse of Dominant Position”
(1991) 18:1 Can Bus LJ 17.
AGLC 4th ed.
Donald N. Thompson, ‘Nutrasweet: The Evolution of Law on Abuse of Dominant Position’
(1991) 18(1) Canadian Business Law Journal 17
MLA 9th ed.
Thompson, Donald N. “Nutrasweet: The Evolution of Law on Abuse of Dominant Position.”
Canadian Business Law Journal, vol. 18, no. 1, May, 1991, pp. 17-42. HeinOnline.
OSCOLA 4th ed.
Donald N. Thompson, ‘Nutrasweet: The Evolution of Law on Abuse of Dominant Position’
(1991) 18 Can Bus LJ 17
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NUTRASWEET: THE EVOLUTION OF LAW ON ABUSE OF
DOMINANT POSITION
Donald N. Thompson*
1.
Introduction
Very little use was made of ss. 78 and 79 of the Competition Act
(“the Act”) concerning monopolization and the abuse of
dominant position in the four years following revision of the Act in
1986. The 1986 Competition Act dropped the old criminal offence
of “monopoly”, replacing it with a civil review process. The
requirement of proving “detriment” was replaced with what was
thought to be a less difficult test of establishing “substantial
lessening of competition”.
Given the wave of mergers and acquisitions in Canada over the
past few years, and the high degree of market concentration
already present in the Canadian economy, a substantial number of
monopolization or dominant position cases might have been
expected. Almost every observer noted that the more effectively
Canadian law dealt with abuses of market power, the more liberal
the Bureau of Competition Policy (“the Bureau”), and the
Competition Tribunal (“the Tribunal”), could afford to be in
permitting mergers. The effectiveness of the “monopolization and
dominant position” sections in preventing abuse of market power
were also said to reflect on the types of s. 93 and s. 96 “efficiency
offset” risks that the Tribunal might be willing to accept in evaluating mergers.
At the time of writing however, the only case to have been filed
with the Tribunal is NutraSweet.’ The NutraSweet fact situation is
*Donald N. Thompson is Professor of Administrative Studies at York University,
Toronto.
1 Canada(Directorof Investigationand Research)v. NutraSweet Co. (1990), 32C.P.R. (3d)
1 (Competition Tribunal) (an application by the Director of Investigation and Research
under ss. 79 (abuse of dominant position) and 77 (exclusive dealing and tied selling) of the
Competition Act, R.S.C. 1985, c. C-34, as amended, filed with the Registrar, Competition Tribunal, on June 1, 1989). Tosoh Canada Ltd., a rival producer of aspartame,
applied for and was granted leave to intervene in the proceedings. The Tribunal’s Reasons
17
18
Canadian Business Law Journal
[Vol. 18
so rich and diverse in its range of marketing practices that it is
perhaps unique as a textbook economic example of “abuse of
dominant position”. This paper looks at the range of marketing
practices in NutraSweet. It considers the Tribunal’s landmark
decision in NutraSweet in terms of evolving Canadian law on
monopolization and abuse of dominant position, and in
comparison
with the legal situation in the United States and the
2
EEC.
2.
NutraSweet and the Market for Aspartame
NutraSweet Canada is a branch of the NutraSweet Company, a
Delaware Corporation. The NutraSweet Company was purchased
by the Monsanto Company from G.D. Searle & Co. in 1986.
NutraSweet Canada sells an artificial sweetener branded Nutra-
Sweet, a commodity chemical approved for use in Canada in 1981,
which is a form of the generic di-peptide aspartame. 3 About 78%
and Order in The NutraSweet Company CT-89/2 (#176a) were released on October 4,
1990.
A second abuse of dominant position case, involving the Canadian telephone directory
“yellow pages” advertising, became public when the Director filed a brief outlining its
substance in Submission to the Canadian Radio-Television and Telecommunications
Commission, In the Matter of the CRTC-Telecom Public Notice, 1988-46, Bell Canada
Provision of Telephone Directory Data Base in Machine Readable Form (submitted
September, 1988). The “yellow pages” case has never been filed with the Tribunal. A
third case, concerning a refusal by Xerox Canada to supply copier parts, appears on its
facts to have fitted the definition of abuse of dominant position, but was filed with the
Tribunal in November of 1989 as a s. 75 case citing Xerox’ refusal to supply.
2 It is tempting to regard U.S. jurisprudence as having already considered the important
questions relating to abuse of dominant position. But s. 2 of the Sherman Act is much
broader in scope than are ss. 78 and 79 of the Competition Act, which focus not on an
attempt to achieve a dominant position, but on the nature of the activities of persons with
such a position. Section 2 deals with “monopolization”, which is roughly analogous to the
s. 78 and 79 coverage, but s. 2 goes on to deal with attempts to monopolize and with
combinations or conspiracy to monopolize.
There is also U.S. jurisprudence under s. 5 of the Federal Trade Commission Act,
which makes unlawful unfair acts, practices, or methods of competition. The issue of
shared monopoly has arisen in s. 5 cases such as the ready-to-eat cereals and Ethyl cases,
which contain extensive discussion of the economic circumstances in which the F.T.C. was
willing to find “conscious parallelism plus” behaviour as being shared monopoly. See Re
Kellogg Co., 42 A.T.R. R. 182 (1982); and Ethyl Corp. v. F. T. C., 729 F. 2d 128 (2nd Cir.,
1984).
Jurisprudence under art. 86 of the Treaty of Rome may be more directly comparable, in
that the article focuses on “abuse of dominant position”.
3 It is a generic chemical in the sense that all major producers appear capable of supplying
the particle size and distribution, solubility, colour and other quality factors acceptable to
major customers.
1991]
NutraSweet –
Abuse of Dominant Position 19
of the world market for aspartame is in diet soft drinks, most of it
with Coca-Cola and Pepsi-Cola. Aspartame is also used in
chewing gum, breakfast cereal, breath mints and a variety of other
food products. Total Canadian sales of aspartame are about 385
metric tonnes, with a wholesale value of $25 million. Five softdrink manufacturers, Coke, Pepsi, Crush, Cadbury-Schweppes
and A&W, account for 300 metric tonnes per year. Canadian sales
are about 5% of the world market of 7500 metric tonnes, with 75%
of the market in the United States, and 15% in Europe.
More than 95% of this Canadian demand is supplied by NutraSweet, which also has 85% of European sales of aspartame, and
100% of U.S. sales. 4 There are no close substitutes for the
product, as aspartame is currently the only intense sweetener
(about 180 times as sweet as sugar by weight) approved by the
Canadian Health Protection Branch for more than tabletop use,
and notably for use in soft drinks. 5
The Canadian product patent for aspartame expired in July of
1987. The U.S. patent, which was also to expire in 1987, was
extended by Congress for a five-year period as part of a U.S. Food
and Drug Administration package which extended some patent
periods as a quid pro quo for easing the requirements governing
generic drug approvals. 6 Aspartame was the only non-prescription
4 In most jurisdictions, a 95% market share would automatically establish either dominance
or monopoly power. In the U.S., it has been settled since United States v. Aluminum Co.
of America (the “Alcoa” case), 148 F. 2d 416 (2d Cir., 1945), that a 90% market share s
sufficient to constitute monopoly power, and a 33% market share is not sufficient.
Monopoly power implies dominance, while dominance does not necessarily imply
monopoly power.
The Department of Justice’s Merger Guidelines indicate that apparent market power
may be disregarded if there is evidence that firms could construct new production facilities
or modify existing ones to produce and sell the product in question within two years. See
Merger Guidelines 3.3, 49 Fed. Reg. at 26832. However, new entry or expansion is
deemed less likely if the facilities are single purpose, or if a substantial scale of operation is
required to achieve economies of scale. Both of these are applicable in NutraSweet.
5 The artificial sweeteners sucralose, acesulfame-k and alitame, potential substitutes for
aspartame in some uses, are currently seeking regulatory approval in Canada for use in
carbonated soft drinks. Acesulfame-k has been approved for use in the United States, but
not in Canada. Alitame and sucralose have been seeking approval in Canada and the
United States for three years, with no findings yet issued. Cyclamates are approved for
table-top use in Canada but are banned in the United States. Saccharin can be sold for
table-top use in Canada and only in drug stores. It is uncertain how long it might be before
any one of these potential substitute sweeteners receives regulatory approval in Canada
for use in carbonated soft drinks.
6 NutraSweet holds two relevant United States patents, U.S. Patent No. 3,492,131 (“the
131 patent”), and U.S. Patent No. 3,780,189 (“the 189 patent”). Certain claims of these
20
Canadian Business Law Journal
[Vol. 18
product to have its patent life extended under this agreement. The
aspartame patent was also extended from 1983 to 1987 in the
United Kingdom, and until December of 1992 in Australia. The
United States and Australia are now the only two countries in the
world where aspartame is patent-protected. 7 One result of the
existence of the U.S. patent is that the price level for aspartame in
the United States is about twice as high as it is in Canada or in
Europe.
The only Canadian competitor to NutraSweet is Tosoh Canada
Ltd., which markets aspartame manufactured by the Holland
Sweetener Company in the Netherlands. 8 Apart from NutraSweet
and Holland Sweetener, the only other company in the world with
the capability to produce aspartame from low-cost, dedicated
plants is thought to be Ajinomoto and Co. Ltd. in Japan. 9 NutraSweet has a cross-licensing agreement with Ajinomoto which
grants NutraSweet sole North American marketing rights for any
aspartame manufactured by Ajinomoto until 1996, and appears to
grant Ajinomoto sole Japanese marketing rights for any
aspartame manufactured by NutraSweet. Thus, Ajinomoto is not
able to compete with NutraSweet for sales of aspartame in
patents were extended from their normal expiration dates by 35 U.S.C. 155. The
extended 131 patent claims a composition and use for aspartame plus a carrier for sweetening edible materials, and expires in December 1992. The extended 189 patent claims a
blend of aspartame and saccharin and the use thereof as a sweetener, and expires in
January 1996. The 189 patent is generally believed to be invalid, and is currently under a
process of rejection by the U.S. Patent Office.
A number of process patents, some extending to the late 1990’s, also exist on the
various processes used by NutraSweet, Holland Sweetener, and others to produce
aspartame. It is not clear whether a newcomer could easily circumvent these process
patents to begin efficient-scale production when the U.S. product patent expires in 1992.
7 In 1987, a patent extension bill on behalf of G.D. Searle’s aspartame and parallel to the
U.S. bill, was introduced in the Canadian House of Commons and Senate. The extension
was passed without debate (and with no background information for members) by the
House of Commons, rejected in the Senate after objections were raised, and after some
public criticism never reintroduced in the House.
8 Holland Sweetener Company is itself a joint venture between Naamloze Vennootschap
DSM of Holland, and Tosoh Corporation of Japan. It operates a 500 tonne per annum
capacity plant in Holland.
9 Ajinomoto’s manufacturing capacity is approximately 1500 tonnes per annum. Only 10%
of this is sold in Japan, where per capitasales of aspartame are very low. The rest is sold by
NutraSweet or NutraSweet AG (Europe) under the NutraSweet trade name, in Europe or
North America.
In view of their supply commitment in Europe and Japan, it is likely that neither
Holland Sweetener nor Ajinomoto could supply all of the yearly aspartame requirements
of Coke or Pepsi in Canada. Each would have to enter supply agreements with these
customers as a second supplier.
1991]
NutraSweet
–
Abuse of Dominant Position 21
Canada. Ajinomoto and NutraSweet are joint owners of NutraSweet AG, which markets aspartame under the NutraSweet trade
mark in Europe.
The requirement of “dedicated” or single-product production
facilities is important. To achieve competitive-cost production of
aspartame compared with cost levels estimated for existing NutraSweet production facilities, a plant must be dedicated, must be of
substantial capacity, and must be operated at a high percentage of
design capacity. Specifically, multi-use plants, very small plants,
or plants operated at very low capacity utilization are unlikely to
be cost competitive compared to existing NutraSweet cost levels.
Dedicated aspartame production facilities require substantial
amounts of fixed capital investment, with a competitive-scale
plant costing well in excess of $100 million. 10 The Competition
Tribunal in its decision cites evidence that there are economies of
scale for a plant with a capacity of more than one-third of current
world output, and that the NutraSweet Company’s 2100-tonne
plant under construction in Augusta, Georgia, while it may fall
short of minimum efficient scale, nevertheless represents more
than a quarter of world output and more than the total sales of
aspartame outside the United States.” These production characteristics produce a “chicken and egg” problem, in that a new
entrant or expanding competitor cannot be cost competitive with
NutraSweet at low volumes, and cannot bid for high volume
business without production capacity in place.
No producer of aspartame in North America or Europe, except
NutraSweet, has the production capacity to satisfy the entire
current requirements of the largest North American buyers of
aspartame, or to satisfy the current requirements of the two largest
Canadian buyers.
The Canadian and U.S. markets for aspartame have enjoyed
substantial growth rates, but appear to be approaching maturity.
Anticipated percentage growth rates in Europe, Japan and the
rest of the world are much higher than those in North America.
10 Aspartame
is produced by coupling two amino acids, aspartic acid and phenylalanine.
Aspartic acid is available from a number of sources, but phenylalanine is used almost
solely as an input in aspartame, so aspartame producers must invest in expensive
backward integration into its production.
11NutraSweet, supra,footnote 1, at p. 27.
22
Canadian Business Law Journal
3.
[Vol. 18
The Tosoh Complaint
Tosoh Canada filed a complaint with the Bureau of Competition Policy in February 1988, alleging that NutraSweet was
engaged in anti-competitive practices in marketing aspartame in
Canada, and was effectively preventing Tosoh from gaining
market share. Specifically, Tosoh alleged that NutraSweet had
engaged in exclusive dealing, tied selling and a series of other
marketing practices that constituted abuse of dominant position.
In his application to the Tribunal in June of 1989, the Director of
Competition Policy (“the Director”) submitted that NutraSweet
was engaged in a practice of anti-competitive acts within the
meaning of s. 78 of the Competition Act, and that such practices
“lessened competition substantially” in the supply of aspartame in
12
Canada.
In a decision dated October 4, 1990, the Competition Tribunal
concluded that NutraSweet Canada had substantially controlled
the sale of aspartame in Canada through its market power, and
that it had engaged in a practice of anti-competitive acts which had
13
the effect of preventing or lessening competition substantially. It
also concluded, in relation to s. 77 on exclusive dealing, that
NutraSweet had induced exclusive dealing which itself had
lessened competition substantially.
The section which follows discusses the issues raised by the
Director in his application, and discussed by the Tribunal in its
Reasons and Order.
12 In 1986, the European Commission received similar complaints about NutraSweet’s
marketing practices from the Holland Sweetener Company and from Angus Fine
Chemicals Limited, each of which wished to compete with NutraSweet in the supply of
aspartame in the European Community. The complaints alleged infringement of art. 85
of the Treaty of Rome, and contained elements of the same marketing practices
described in the Director’s filing. The Commission challenged the exclusionary clauses in
the Coke and Pepsi agreements dealing with exclusive dealing and unreasonable restraint
of trade, and ruled against the exclusive dealing provisions in the two contracts, but did
not consider the question of abuse of dominant position.
Following prolonged negotiations, NutraSweet agreed to amend the contracts such
that world-wide exclusive contracts no longer applied to the European Community.
Coke and Pepsi were required to purchase a fixed quantity of aspartame from NutraSweet over a two-year period, with the quantity set such that newcomer firms had the
opportunity to sell within the Community.
In 1987, there was an additional complaint to the European Commission on the abuse
of dominant position issue, alleging that NutraSweet practices also violated art. 86 of the
Treaty of Rome. The art. 86 complaint was apparently settled following negotiations
with the company, but with no public announcement as to the terms of the disposition.
13 NutraSweet, supra, footnote 1.
NutraSweet –
1991]
4.
Abuse of Dominant Position 23
The Relationship Between U.S. Patent and Canadian
Competition
The fact that NutraSweet can sell aspartame in the United
States, where it has product patent protection, and in Canada,
where it does not, while its competitors can sell only outside the
United States, can make it difficult or impossible for competitors
to meet the Canadian prices offered by NutraSweet. A simple
numerical example illustrates the difficulty.
Assume that U.S. sales are 95% of the combined North
American (Canada plus U.S.) unit sales. If aspartame is $10 per
unit in the U.S., the return to NutraSweet from U.S. sales is $10
per unit. If prices in Canada are half those in the (patent
protected) U.S., the return to NutraSweet from Canadian sales is
$5 per unit. The weighted net return to NutraSweet per unit from
all North American sales is [(.95 x $10) + (.05 x $5)] = $9.75 per
unit.
Now assume that NutraSweet faces competition in Canada and
meets the competition by discounting its Canadian price to $4 per
unit. NutraSweet’s per unit net return from all North American
sales, United States plus Canada, is now [(.95 x $10) + (.05 x $4)]
= $9.70 per unit. NutraSweet’s revenue from North American
sales has dropped $.05 per unit on average, from $9.75 to $9.70, a
percentage drop of .05%. NutraSweet’s Canadian competitor has
had to drop its price from $5 to $4 per unit to compete, a
percentage drop of 20%.
Using the same arithmetic, if NutraSweet were to drop its
Canadian price to $1 per unit, its average North American
revenue per unit would drop to $9.55, a drop of 2.1% from the
original case. Its competitors’ revenue at $1 per unit would drop
80% from the original $5 price.
It can be seen how NutraSweet can undercut a Canadian selling
price of a competitor to almost any degree, and probably sell
below its own marginal cost, while having little effect on its
average North American unit return from sales. It is NutraSweet’s
patent-protected status in the United States, and the inability of a
competitor to bid away excess U.S. returns, which permits NutraSweet to cut prices to almost any degree in Canada. The strategy
might be worthwhile if NutraSweet were able, by deterring a
competitor’s Canadian sales, to prevent the development of a
viable, Canadian-based competitor which could compete for
24
Canadian Business Law Journal
[Vol. 18
United States sales on the expiration of NutraSweet’s United
States patent in 1992.14
Three anti-competitive acts were alleged by the Director to flow
from the existence of the United States use patent. First, and
related to the discussion above, the patent was claimed to have
been used as a way of financing below-cost pricing in Canada, the
U.S. patent providing NutraSweet with a “deep pocket” source of
funding. The Tribunal decided that this was not in itself an anticompetitive act. Secondly, existence of the patent was alleged to
have been instrumental in causing Coke and Pepsi to agree to
exclusive supply contracts outside of the United States. The
Tribunal did not accept that this was a separate anti-competitive
act.
The third way the patent was alleged to have been used involved
U.F.L. Foods Inc., a Canadian co-packer which provides lowcalorie foods used by a diet-system company called Nutri/System.
Tosoh Canada had been providing Nutri/System with aspartame.
NutraSweet approached Nutri/System and offered it a number of
incentives to switch suppliers, among them a rebate on all
products containing NutraSweet aspartame imported by Nutri/System from co-packers in the United States, and equal to the
difference between NutraSweet’s U.S. and Canadian prices. The
Tribunal found this to be evidence that NutraSweet was willing to
price in Canada without regard to its cost in order to prevent the
expansion of Tosoh Canada.
5.
NutraSweet “Branded Ingredient Strategy”
(1) Advertising to Final Consumers
NutraSweet has made a substantial effort to create brand recognition and preference for the NutraSweet brand of aspartame
among final consumers, rather than with its actual customers who
are food manufacturers. But in a market where virtually everyone
14
This is an illustration of the “chicken and egg” problem in new competitor entry. A
potential NutraSweet competitor. cannot easily build up volume in Canada because
NutraSweet can always undercut its prices, and thus cannot reasonably make a case for
major investment in a large-scale plant. Without a large-scale plant, the competitor
cannot credibly hope to achieve cost levels low enough to bid for major Canadian
accounts, or for major United States accounts following expiration of the U.S. product
patent. It cannot even hope to build a large-scale plant and break even while waiting to
enter the United States market, because to attempt to sell any quantity in Canada can
result either in sales at prices very much below cost, or in no sales at all.
“1991]
NutraSweet – Abuse of Dominant Position 25
who uses an intense, calorie-reduced sweetener in carbonated
beverages already uses NutraSweet, why would the company
promote the NutraSweet name and logo rather than that of the
final product? NutraSweet agrees that consumers shop for a “Diet
Coke” or “Diet Pepsi”, and not for a “NutraSweet flavoured
drink”. In advertising directly to ultimate consumers, NutraSweet
is certainly raising the potential cost to its own customers of
switching to another aspartame supplier. 15 NutraSweet is also
illustrating its ability to become an advertising competitor, rather
than just an ex-supplier, to any processor who switches suppliers.
This “branded ingredient strategy” of inducing users of its
ingredient to affix the NutraSweet logo and brand name to their
own branded product is very unusual, and possibly unique. There
appears to be no significant ingredient producer in the world,
other than NutraSweet, which has attempted such a strategy, and
certainly no other ingredient producer which has a “branded
ingredient” strategy for a consumer good. The strategy is in NutraSweet’s interest, but clearly not in the interest of its food processor
customers, 16 leading to an allegation by the Director that it was an
anti-competitive act which could be imposed on buyers only
17
because of NutraSweet’s dominant supply position.
15 As well as the risk of losing customer patronage, the tie-in of ingredient purchase and of
NutraSweet trade mark and logo display creates a one-time but substantial cost of
switching for customers who are currently using NutraSweet exclusively. A purchaser of
NutraSweet which decides to purchase and use any quantity of aspartame from another
supplier faces a cost of buying new dies to remove the NutraSweet name and logo from
future containers. There is also a scheduling problem in delaying using the second
supplier’s aspartame until the “old” inventory of cans or cartons is used up.
16 There are obvious advantages for NutraSweet in associating its trade name on the
packaging of widely recognized, high quality consumer products like Coke and Pepsi.
The quality connotation is particularly important at the introductory stages, for the
public acceptance by quality manufacturers of an “artificial sweetener” product whose
predecessors (like cyclamates) were associated in the public mind with bitter aftertaste
and possible carcinogenic properties. The Coke/Pepsi association is also important in
getting quick acceptance for aspartame by secondary users in products like chewing gum.
There are however no initial advantages for Coke or Pepsi (except in obtaining supply
of aspartame) in association with an unknown trade name, and there is considerable risk
in associating with an ingredient whose quality control is out of their hands, and whose
long-run health effects were still being evaluated by regulatory authorities. Each
promotion of NutraSweet also makes it more difficult and expensive for a producer to
switch to an equivalent but less expensive sweetener sometime in the future.
17It is well established in U.S. law that otherwise legitimate business practices can become
monopolistic when used by a dominant firm. In the classic United Shoe Machinery case,
United States v. United Shoe Machinery Corp., 110 F. Supp. 295 (D. Mass. 1953), a case
under s. 2 of the Sherman Act, the issue was whether business practices might, when
practised by a dominant firm such as United (with a 75% market share), erect
26
Canadian Business Law Journal
[Vol. 18
The branded ingredient strategy was characterized by NutraSweet as a “Teflon” strategy, after a practice, used over several
decades by Dupont, of having makers of cookware and other
items include the Teflon brand name with their own on final
products. However, the strategy used by Dupont is very different
from that used by NutraSweet. In Dupont’s case, the less well-
known manufacturer piggybacks on the better known Dupont
trade name; furthermore, “Teflon” and other Dupont features
have superior attributes (and are more costly) than other
competing ingredients.18
(2) Advertising and Display Allowances
NutraSweet managed its branded ingredient strategy by
offering customers a trade mark (or “swirl logo”) display
allowance of about 40% off the gross price of aspartame. 19 In
overwhelming barriers to entry into the market for shoemaking equipment. United
distributed its equipment only through long-term leases, maintained its leased machinery
without charge thus deterring independent service organizations, gave discounts on new
equipment if it replaced their old equipment, and required lessees to use United’s
equipment to full capacity if work were available, before competitor’s machinery could
be used. The court found that this combination of practices limited actual competition
and deterred potential competition. In a more recent action under ss. 1 and 2 of the
Sherman Act, CASS Student Advertising Inc. v. National Educational Advertising
Service, 2 Trade Cases (N.D. Illinois, 1976), at p. 667, the court again found that legitimate business practices can become monopolistic where dominant market power is
present.
18Dupont used this strategy over a number of years for (i) nylon (which is a fibre, not a final
product), (ii) Teflon, a permanent, non-stick, non-toxic coating material, (iii) Silverstone, a more modem version of Teflon, (iv) Stainmaster, a stain-repellant coating for
carpet fibre, (v) Lycra, a fibre, (vi) Spandex, a fibre, and other products. The strategy is
based on the fact that each new “ingredient”, for example Teflon, is superior to
competing ingredients and costs more, but the difference is not immediately visible or
obvious to potential buyers of the final good. The maker of cookware is often a less wellknown firm with a less-known trade name, which cannot afford to advertise the superior
product attributes of the cookware product widely or frequently enough to justify its
higher price. The cookware product is purchased by customers infrequently, at fairly
high unit cost, and the buyer only searches for production information at relatively long
intervals. Dupont itself advertises the attributes of its Teflon, and the dealer piggybacks
on this by including Dupont’s Teflon name on the branded cookware.
In NutraSweet, the NutraSweet name is less well-known than those of its larger
customers such as Coke and Pepsi, and was far less well-known at the inception of the
strategy, so NutraSweet is piggybacking on the Coke or Pepsi trade-name, rather than
the other way around. The NutraSweet product has the same attributes as those of
competing aspartame sweeteners, so NutraSweet does not have to justify a higher cost
for products containing its artificial sweetener. Products containing NutraSweet also
tend to be low unit-cost, and have a higher frequency of repeat purchase, so less initial
effort is required to get the customer to try the product, and less reminder advertising is
necessary to keep the ingredient name before the potential buyer.
19 NutraSweet, supra, footnote 1, at p. 41.
1991]
NutraSweet –
Abuse of Dominant Position
27
return, the customer must display the NutraSweet name and logo
on its packaging and in print and television advertising featuring
the product containing NutraSweet brand aspartame. The pricing
terms included not only the display allowance, but also free
products and money to customers for co-operative marketing
programmes involving products which contain only NutraSweet
brand aspartame as the sweetening agent, and rebates to a
customer such as a supermarket buyer for inducing a co-packer
such as a yoghurt manufacturer to purchase from NutraSweet
rather than from a competitor. 20
Note that a condition of receiving the trade mark, logo display,
and other allowances is that no aspartame, or other intense
sweetener supplied by a company other than NutraSweet, may be
blended with NutraSweet brand sweetener. In other words, the
incentive is paid not only for saying “this product contains NutraSweet brand aspartame”, but for ensuring that “the product
21
contains NutraSweet brand aspartame and no other sweetener”.
The trade mark, logo display and other allowances are calculated
and paid based on how much aspartame is purchased from NutraSweet, rather than on the number of advertising impressions
created by the manufacturer, or the amount of money
spent by the
22
manufacturer on promoting the NutraSweet brand.
20
The rebate is apparently not in the form of an advertising allowance or logo display
allowance, but is simply a monetary payment (which may or may not be known to the copacker) for each unit purchased by the co-packer, and payable to the retailer or wholesaler. This practice by NutraSweet is probably unique among ingredient suppliers for
processed food product. An open question is why