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Bitter battle brewing over coffee cup format

|Written By Jennifer Brown
Bitter battle brewing over coffee cup format
Davit Akman says there may be questions about whether statements made by Club Coffee amount to defamation.

In a move some competition lawyers say is “odd,” Club Coffee has filed a formal complaint with the Competition Bureau of Canada asking for an investigation of coffee company Keurig Green Mountain alleging it has created a monopoly and driven up prices in the K-cup format of single hot beverages.

Its filing with the Competition Bureau comes a month after Club Coffee filed a $600-million lawsuit against Keurig. Club Coffee, which also manufactures the popular single-serve coffee pods, is suing Keurig saying it uses “anti-competitive measures to maintain a near monopoly and keep single serve coffee prices artificially high.”

Club Coffee’s CEO John Pigott announced the complaint in a speech to the Economic Club of Canada Nov. 13 in Ottawa.

He noted, “Keurig is trying to please investors at the obvious expense of everyday coffee consumers. Canadians know we deserve an open market with real choice. We deserve innovation. And as Canadians, we have laws that can follow through with action.”

The K-cup case engages the issues of product design and interoperability of after-market products of independent third parties into their machine. Keurig has announced plans to launch the new Keurig 2.0 brewer with “lock-out” technology to interact only with Keurig-licensed and approved K-cup packs.

Keurig is said to control 90 per cent of the North American market for the popular single-serve coffee pods. In Europe, the French competition authority earlier this year found another single-serving coffee maker was engaging in anti-competitive behaviour when it put locking technology into its machines.

Keurig’s strategy has been to lock up all of the major brands of coffee under exclusive licence agreements, says Coffee Club’s counsel Robert Russell, national chairman of the competition and foreign investment review group at Borden Ladner Gervais LLP.

The battle has been percolating for the last few years since key Keurig patents expired in 2012 and Club Coffee targeted the high-growth market. Building on its soft-bottom coffee pods for Keurig brewers, Club Coffee is said to be “weeks away” from rolling out a compostable pod designed to meet municipal organic waste standards. In a statement, Pigott noted competition led to cost savings for Canadians who paid an average of 40-per-cent less for each Club Coffee-produced K-cup format pod than for Keurig licensed and produced equivalents.

“The commercial strategy of knowing you have a patent which has a limited lifetime which expired in the U.S. in 2012 is to get your strength while you have your monopoly on those consumables in the U.S. and that’s what’s happened as is set out in the statement of claim,” says Russell.

Davit Akman, a partner with Gowling Lafleur Henderson LLP, suggests the case is “odd” citing the publicity of the initial filing of the $600-million lawsuit Oct. 1, and the speech by Pigott to the Economic Club — both considered “unusual in the competition context.”

“Making serious allegations of anti-competitive conduct online, in the press, and in a public speech — that’s unusual,” says Akman. “There may also be questions about whether statements like that might amount to defamation and whether any protection would be accorded to such public statements.”

Russell says it isn’t unusual, especially in light of the civil action.

“We were asked if we were involving the Competition Bureau and so for the company to say that’s what we’re doing isn’t that unusual,” says Russell, adding Keurig has said disparaging things about Club Coffee’s product such as it being stale, and a claim that the club pods would make Keurig machines malfunction is incorrect.

“There are a number of disparagements that are outlined in the statement of claim,” he says.

So why has Club Coffee so publicly announced its Competition Bureau complaint?

“If I had to speculate I would say Club Coffee approached the bureau before it issued its claim and the bureau wasn’t interested,” says Akman. “It then issued the complaint trying to whip up publicity and has now very publicly taken the step of filing a formal complaint in an attempt to force the bureau to pursue this.”

Russell confirms Club Coffee had gone to the bureau prior to the formal complaint.

The company ended up using a measure under s. 9 of the Competition Act that allows for the filing of a “six resident” complaint which is one way to compel the commissioner to start an inquiry. It requires six Canadian residents over the age of 18 to sign a document then send it into the bureau.

Under the act, the commissioner “shall” start an inquiry under those circumstances. Competition lawyers say typically a company wouldn’t go the route of the six-resident complaint. Instead, it would quietly try and get the commissioner engaged from the inside.

It hits an area where anti-trust law has to be pretty careful about intervening, says Melanie Aitken, former commissioner of the Competition Bureau and co-chairwoman of the competition, antitrust, and foreign investment practice with Bennett Jones LLP in Washington, D.C.

“There could be some scope for a case but the bar for the plaintiffs is pretty high and it’s likely to be an extremely fact-intensive inquiry with the real focus probably being on proving the effect is sufficient enough,” says Aitken. “It’s not problematic unless there is a real substantial lessening of competition.”

Akman says it is not unusual for manufacturers, where their products might be used in conjunction with secondary products, to ensure the secondary products are compatible with their products and result in a positive customer experience.

“Consumers make choices all the time about which products they buy based on which other products can be used with them. For example, you might buy one smartphone instead of another because one smartphone gives you access to certain apps while the other does not,” he says.

Correction: Removed reference to Tassimo in connection to French competition authority ruling.

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