News | November 30, 2000

Case Review: Pepsi's unsuccessful antitrust suit against Coke

Restaurant chains, movie theater chains and other foodservice outlets purchase fountain soda syrup through intermediaries who, in turn, have supply agreements with the syrup manufacturers. These intermediaries include distributors and bottlers. Certain distributors, so-called "independent foodservice distributors," provide "one-stop shopping," which allows the customer to obtain all necessary supplies from one distributor at each of the customer's locations.

The type of distribution provided by independent foodservice distributors is referred to as "systems distribution," and these independent foodservice distributors are sometimes referred to as systems distributors. Bottlers provide fountain syrup and beverages to customers, but do not provide the "one-stop shopping" characteristic of foodservice distributors.

Independent foodservice distributors receive fountain syrup products according to agreements with the particular fountain syrup manufacturer. Coca-Cola's agreements contain a so-called "loyalty" or "conflict of interest" policy, which provides that distributors who supply customers with Coca-Cola may not "handle the soft drink products of PepsiCo."

Foodservice distributors who breach the loyalty policy risk termination by Coca-Cola. Thus, a distributor subject to the loyalty policy can supply all its customers with either Pepsi or Coke, but not both. Because distributors are given an all or nothing choice, a customer of a distributor subject to Coca-Cola's loyalty policy who wants Pepsi must go elsewhere to get it.

Coca-Cola had been distributing fountain syrup through independent foodservice distributors for many years. PepsiCo traditionally distributed its fountain syrup through bottlers, but in the late 1990s, decided to change that distribution method to utilize independent foodservice distributors. However, Coca-Cola began to enforce its loyalty policy. Thus, PepsiCo was essentially prohibited from distributing its syrup via then-existing systems distribution.

PepsiCo brought an antitrust lawsuit against Coca-Cola for alleged monopolization of the market for fountain-dispensed soft drinks distributed through independent foodservice distributors. PepsiCo contended that Coca-Cola's enforcement of the loyalty policy amounted to unlawful monopolization and attempted monopolization.

Coca-Cola argued that PepsiCo had improperly defined the relevant product market. Specifically, Coca-Cola maintained that the relevant market could not be limited to fountain drinks "distributed through independent foodservice distributors." According to Coca-Cola, customers of independent foodservice distributors could obtain fountain drinks through other acceptable substitutes, such as bottlers.

Coca-Cola also argued that there was no evidence that Coca-Cola had monopoly power or any dangerous probability of achieving it and that Coca-Cola's conduct had not caused PepsiCo any injury.

Coca-Cola further contended that its distributor agreements did not restrain trade unreasonably and did not demonstrate an unlawful conspiracy among the foodservice distributors.

After reviewing all the evidence, the district court decided to dismiss PepsiCo's case without it going to a jury. Here, in part, is what the district court said:

"...while customers view fountain syrup delivered through independent foodservice distributors as preferential and advantageous, they view fountain syrup delivered through other means as acceptable. Indeed, the customers view the delivery method of the fountain syrup as only one of many criteria in the selection of a fountain syrup supplier. Despite one-stop shopping's advantageous features, the evidence does not show that the preference for independent foodservice distributors is so strong so as to eliminate delivery through other means as an acceptable alternative."

Source: PepsiCo, Inc. v. Coca-Cola Co., 2000 U.S. Dist. LEXIS 13361 (United States District Court For The Southern District Of New York)(September 19, 2000)

Stephen Gibson is president of Ornel, Inc. Tel: 781-340-9683; He is providing a series of court case review reports for Beverage Online.