Keurig’s Rivals Launch Antitrust Attacks

Ready for another lesson in how antitrust law penalizes America’s best companies for their excellence? Consider the private antitrust suits recently filed against Keurig Green Mountain, the company that invented the popular “K-cup” single-serve coffee pods.

If you’re of a certain age, you’ll remember when there was only the Communal Office Coffeepot. If you were lucky, someone had just brewed a fresh pot of your favorite brand. More likely, what started out as average java had gotten stronger and more bitter from sitting on the warmer for hours — or else the pot was almost empty, requiring you to wash it out, fumble with the coffee and filter, and wait for another pot to brew. Oh, and when someone forgot to turn off the heating element at night, next day’s early bird found a malodorous pot coated with primeval ooze that required serious scraping.

The individuals who invented the K-cup back in the 1990s wanted to improve that experience. Their idea was simple: a pod containing just enough coffee for a single cup, brewed fresh and fast, with minimal cleanup and maintenance, and a wide choice of blends. But to actually create the pod and brewing machine took years of careful, patient, frustrating trial and error. (Daniel McGinn’s fascinating account in The Boston Globe is worth reading as a case study in business success.) The result was a product that consumers strongly preferred over similar offerings from Nespresso, Senseo, and others. Currently, Keurig products account for three-quarters of the U.S. market for single-serve coffee, not just in offices but in homes as well.

In September 2012, Keurig’s patent on the K-cup expired. This bestowed a huge gift on competitors, who can now legally make K-cups for use with existing Keurig brewers, of which there are something over 10 million in America’s offices and homes.

Meanwhile, instead of stagnating (which is legally preferable, from an antitrust point of view), Keurig kept on innovating. Its Keurig 2.0 brewing machines, scheduled for release later this year, can make either a full carafe or a single cup. What’s more, newly patented single-serve pods are designed to be “read” by software in the brewing machine, which will automatically adjust several parameters for an optimal result. Keurig will stop making machines that accept the old K-cup, and the new machines will accept only the new pods.

Now Keurig is being attacked in two separate lawsuits by competing firms (TreeHouse Foods, Inc. and Rogers Family Co.) brought under the Sherman Act and Clayton Act, two key antitrust statutes. What do the plaintiffs want? Basically, two things:

First, they want the courts to strike down certain “exclusive dealing” contracts that Keurig has been making with suppliers and distributors. Such contracts make sense when Keurig wants to, say, be the only source for a certain coffee blend the company thinks will have a special appeal to consumers. But Keurig can’t dictate terms to any such supplier — Keurig must offer enough value that the supplier doesn’t need other customers in order satisfy its bottom line. In the upside-down world of antitrust, such exclusive contracts can be forbidden for the benefit of rivals who can’t offer enough value to attract suppliers and distributors voluntarily. In short, the plaintiffs want to penalize Keurig for its popularity — for the productive power that makes suppliers and distributors comfortable with Keurig as their only customer.

Second, the plaintiffs want a court order requiring Keurig to redesign its 2.0 machines so that they’re backward-compatible with the old K-cup pods. This would allow rivals to continue riding the gravy train let loose by Keurig’s expired patents on those pods. In the upside-down world of antitrust, courts can handicap a successful company with such orders, for the benefit of less imaginative rivals. In other words, the plaintiffs want to penalize Keurig for its innovation — for its audacious plan to win over consumers with the newly patented, software-readable pods.

The word “keurig” is Danish for “excellence.” Enough said.