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K-Flex, Inc. v. Armacell, LLC

United States District Court, E.D. North Carolina, Western Division

October 25, 2017

K-FLEX, INC., Plaintiff,
ARMACELL, INC., Defendant.



         This matter is before the Court on defendant's motion to dismiss plaintiffs claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure [DE 11]'. The matter has been fully briefed and is ripe for ruling. For the reasons discussed below, the motion to dismiss is denied.


         Defendant Armacell and plaintiff K-Flex both manufacture types of foam pipe insulation. Plaintiff exclusively manufactures elastomeric foam, which is derived from rubber. Defendant manufactures both elastomeric foam and polyethylene foam, known as PE foam. While both types are used for insulation, elastomeric foam, with its higher cost and higher temperature resistance, is primarily a product in industrial settings. K-Flex worked with a distributor, Sunbelt Inc., in the southeast for several years. Sunbelt began working with Armacell in early 2017, and almost immediately thereafter terminated its business arrangement with K-Flex. K-Flex alleges that termination was due to Armacell's coercion, which forms the basis for the instant complaint. K-Flex has alleged four separate claims against Armacell: violations of Sections 1 and 2 of the Sherman Act, a violation of the Clayton Act, and a violation of North Carolina's Unfair and Deceptive Trade Practices Act. This Court has subject matter jurisdiction on the basis of a federal question over the federal law claims, and exercises supplemental jurisdiction over the remaining state law claim under 28 U.S.C. §1367.


         Defendant's motion to dismiss the claims is made under Rule 12(b)(6) of the Federal Rules of Civil Procedure. A Rule 12(b)(6) motion tests the legal sufficiency of the complaint. Papasan v. Allain, 478 U.S. 265, 283 (1986). When acting on a motion to dismiss under Rule 12(b)(6), "the court should accept as true all well-pleaded allegations and should view the complaint in a light most favorable to the plaintiff." Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993). A complaint must allege enough facts to state a claim for relief that is facially plausible. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). Facial plausibility means that the facts pled "allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged, " and mere recitals of the elements of a cause of action supported by conclusory statements do not suffice. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint must be dismissed if the factual allegations do not nudge the plaintiffs claims "across the line from conceivable to plausible." Twombly, 550 U.S. at 570.

         However, the Court need not accept a complaint's "legal conclusions, elements of a cause of action, and bare assertions devoid of further factual enhancement." Nemet Chevrolet Ltd. v., Inc., 591 F.3d 250, 255 (4th Cir. 2009). Although complete and detailed factual allegations are not required, "a plaintiffs obligation to provide the 'grounds' of his 'entitle[ment] to relief requires more than labels and conclusions." Twombly, 550 U.S. at 555 (citations omitted). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555). Plaintiff has four claims based in the same conduct by the defendant.

         I. Sherman Act. §1

         A violation of § 1 of the Sherman Act occurs when there is an "agreement in the form of a contract, combination or conspiracy that imposes an unreasonable restraint on trade." Oksanen v. Page Mem 7 Hosp., 945 F.2d 646, 702 (4th Cir. 1991): When the restraint is vertical, that is, when the restraint is between two parties at different distribution levels, more is required for the restraint to be unreasonable than if the restraint is at the same level. Vertical restraints are often economically useful, so courts generally apply the "rule of reason" analysis to determine whether vertical restraints are permissible. See Cont'l Airlines, Inc. v. United Airlines, Inc., 277 F.3d 499, 509 (4th Cir. 2002). To sustain a claim under the rule of reason, a plaintiff must allege that defendant's actions unreasonably restrained trade in a plausible market. Id. Plaintiff must also allege a conspiracy or other agreement that would operate in restraint of trade. AM. Needle, Inc. v. Nat'l Football League, 560 U.S. 183, 190 (2010). Parallel conduct is insufficient. A plan is required.

         Therefore, the first question is whether plaintiff has alleged facts regarding a particular market-both a product market and a geographic market. Second, the plaintiff must argue there is a contract or conspiracy. Here, such an allegation must include facts that, taken in the light most favorable to the plaintiff, would show that Armacell actually made agreements in order to restrain trade. K-Flex has pled enough facts to sustain a claim upon which relief can be granted.

         First, K-Flex has alleged both a product market and a geographic market that would support its claims. Determining what product market is appropriate requires a "plenary" examination, covering "the facts peculiar to the business, " among other concerns. Cont'l Airlines, Inc. v. United Airlines, Inc., 277 F.3d 499, 509 (4th Cir. 2002) (internal quotation marks omitted). Products that have "reasonable interchangeability for the purposes for which they are produced" belong in the same market; therefore, it follows that products that are not interchangeable are not in the same market. United States v. E. I du Pont de Nemours & Co., 351 U.S. 377, 404 (1956). At this stage, K-Flex's market allegations are sufficient to go forward. K-Flex has pled facts to show that there is a separate market for elastomeric foam insulation, as opposed to PE foam or other kinds of insulation. Elastomeric foam is made from different material, has different characteristics and price points, and is primarily used in different settings. The fact that K-Flex does not manufacture PE foam also bolsters its claim.

         Second, K-Flex's allegations of a geographic market are plausible. The appropriate geographic market is "the area within which the defendant's customers.. .can practicably turn to alternative supplies if the defendant were to raise its prices." EI. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 441 (4th Cir. 2011). The market can be the entire nation. Brown Shoe Co. v. United States, 370 U.S. 294, 377 (1962). In support of this domestic market definition, K-Flex has alleged facts to show that because this insulation is so expensive to transport, it would only be made in the United States for United States consumption. Additionally, K-Flex has argued that the coercion taking place in the southeast will have effects throughout the domestic market.

         K-Flex can also sustain a claim that there was an agreement. While a conclusory allegation of conspiracy is not enough, K-Flex has alleged more than that. Plaintiff has claimed that Armacell is working directly with Sunbelt and other distributors to exert control over the marketplace, to the detriment of the free flow of trade. Plaintiff has claimed that its own distribution agreement was terminated due to Armacell's pressure. The allegations that this restraint on competition will harm competition and lead to increased prices state a claim upon which relief could be granted.

         II. Sherma ...

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