Barry C. Harris submitted a declaration and provided deposition testimony on behalf of Del Monte in this matter. Laura A. Malowane and Matthew B. Wright assisted with the analysis. All three have extensive experience in analyzing monopolization claims.

Assessing Monopolization Claims in the Face of Innovation

To prove a monopolization claim under Section 2 of the Sherman Act, plaintiffs need to establish a) the possession of monopoly power in the relevant market and b) the acquisition or maintenance of such power through anticompetitive conduct, rather than as a result of superior skill or business acumen. The first element requires a substantial degree of market power—defined in economics as the ability to charge prices above competitive levels—and the durability of such power. The second element ensures that firms are not punished for competing successfully on the merits. Together, the two elements protect competition while allowing firms to reap the rewards of successful innovations that produce better products, lower costs, and greater consumer welfare.

The U.S. District Court for the Southern District of New York recently issued a decision that demonstrated these principles in In re Fresh Del Monte Pineapples Litigation. The case involved new hybrid "gold" varieties of pineapple, which differ from the Champaka pineapple variety that once dominated U.S. sales. The gold pineapples are sweeter, have a higher Vitamin C content, and have a golden shell color. A research cooperative called the Pineapple Research Institute began to develop one such hybrid variety, and in the 1980s it released plant material for this variety to its members, one of which was Del Monte. While other pineapple producers continued to focus on traditional pineapple varieties, Del Monte conducted experiments for over a decade to develop and test the new variety and determine that it would be suitable for commercialization.

Del Monte's decision to commercialize the new hybrid variety involved substantial risks. Pineapple plants grow slowly, and each plant yields just one pineapple per growing cycle, so it takes a long time to develop enough plants to allow widespread sales of a new variety. Moreover, production of pineapples in general, and new varieties in particular, presents significant agronomic challenges. New varieties also present marketing risks, as producers cannot be certain about their level of consumer acceptance. Adding to the inherent risk in growing and marketing the new hybrid was Del Monte's decision to convert rapidly its production from the Champaka variety to the hybrid variety. This decision required Del Monte to destroy productive Champaka plants to use the land to grow the hybrid variety.

Del Monte was the first to market the hybrid variety, which it designated the MD-2, when it introduced the new product under the Del Monte Gold Extra Sweet brand in May 1996. Del Monte's MD-2 pineapple was an enormous commercial success, and Del Monte's introduction of the new variety transformed the marketplace for fresh whole pineapples. In the decade after Del Monte introduced the MD-2, gold pineapples largely supplanted traditional Champaka pineapples in sales of fresh pineapples. Notably, Del Monte's innovation also led to significant increases in output, as fresh pineapple consumption roughly doubled in the United States during this time. As a result of its successful innovation, Del Monte achieved a leading share of fresh, whole pineapples within just a few years after the MD-2's introduction.

In 2004, a class action complaint was filed alleging that Del Monte violated Section 2 of the Sherman Act by improperly obtaining and maintaining a monopoly over the propagation, marketing, and sale of fresh, whole, extra-sweet pineapples. Among other claims, the plaintiffs alleged that Del Monte improperly delayed its competitors' entry into gold pineapples by issuing threatening letters to Costa Rican seed laboratories that were propagating MD-2 plant material and by pursuing sham litigation. The plaintiffs alleged that as a result, Del Monte unlawfully obtained monopoly power and used this power to charge supracompetitive prices for its gold pineapples.

The District Court recently rejected the arguments of the plaintiffs and its experts and granted summary judgment to Defendant Del Monte. Notably, the Court rejected the plaintiffs' claims that Del Monte’s conduct improperly delayed its competitors' entry. Rather, the evidence indicated that Del Monte's competitors had business reasons, unrelated to Del Monte's alleged actions, for delaying their own entry into gold pineapples. The Court cited evidence that some of Del Monte's competitors were concerned about the risks associated with production and marketing of gold pineapples and did not commit to the new varieties until Del Monte had demonstrated its success in producing and marketing them. Other competitors had a different corporate focus, and likewise decided to enter only after the success of Del Monte's gold pineapples became apparent.

The plaintiffs sought to buttress their Section 2 claims by asserting that Del Monte "achieved a huge operating profit to sales ratio . . . in its Gold business unit." The Court discounted such evidence, and there are sound economic reasons for it to have done so. It is inappropriate to draw conclusions about monopoly power based on the level of accounting profits associated with a single risky investment. Such investments, when successful, will tend to earn a risk premium and will naturally have margins that exceed those for other "competitive" benchmarks. Moreover, it is reasonable to expect that the profitability of Del Monte's gold pineapple operations would have persisted while its competitors sought to emulate Del Monte's success. The evidence indicates that Del Monte believed it had a competitive advantage by virtue of its having started to commercialize the MD-2 years ahead of other companies. The first-mover advantage would reasonably have allowed Del Monte for a time to earn a premium price and achieve lower production costs because of its more extensive experience with gold pineapples.

Del Monte's experience with gold pineapples demonstrates that firms that take risks and successfully innovate can earn substantial rewards while simultaneously increasing output and enhancing consumer welfare. Moreover, substantial profits and high market shares can persist for a time for innovative companies, even in the absence of significant entry barriers or exclusionary conduct.

Additional Articles in December 2009 Issue of Economists Ink

Merger Guidelines to be Reviewed

FERC Changes Its Approach in Two Price Manipulation Cases

EI News and Notes