Price-Fixing Lawsuit Still a Chocolate Mess

Having been vindicated by a federal judge who dismissed all charges of price fixing against them, chocolatiers Nestle (NASDAQOTH: NSRGY  ) , Hershey (NYSE: HSY  ) , and Mars filed to recoup their legal costs from the group of supermarkets that brought the allegations against them, saying precedent requires they be held jointly and severally liable for the winning side's expenses.

That might be putting the cart before the horse, however, since just as the chocolatiers were filing their motion, the retailers were submitting their own paperwork appealing the decision. Among those making the appeal are Kroger, Safeway, Walgreen, and CVS Caremark

It certainly seemed a slam-dunk win for the grocery stores, pharmacies, and consumers when they filed the lawsuit. Before 2002, there seemed to be little consistency in pricing patterns of the chocolate companies, but beginning in 2002 and running through 2007, it appears they saw the success their Canadian counterparts enjoyed fixing prices and embarked on a path of complementary increases here at home. In 2002, 2004, and 2007, as soon as Mars raised prices, the other two quickly followed suit.

Because the management teams were "significantly integrated," it was unlikely the practices in one country wouldn't naturally spill over into the other. When the price-fixing scandal broke in Canada, the chocolate makers ended up settling the allegations against them, albeit without admitting any wrongdoing. Nestle paid C$9 million; Cadbury, C$5.7 million; Hershey, C$5.3 million; and Mars, C$3.2 million.

When the lawsuit was filed in the U.S., Cadbury, which provided evidence against its peers in Canada in exchange for leniency, also quickly settled the domestic case against it, paying $1.3 million and contributing to the prosecution's case.

Yet the judge said despite all the discovery available to them, the retailers were unable to find a smoking gun to actually prove collusion. The chocolate companies themselves blamed the price hikes on rising costs, pointing out that between 2002 and 2009, cocoa prices soared 53%, which the judge agreed meant chocolate price hikes in and of themselves were not prima facie evidence of price fixing. With Hershey owning 42% of the market, Mars, 28%, and Nestle 8%, the three control more than three-quarters of the U.S. chocolate industry and were bound to find their actions closely aligned even absent collusion.

Moreover, internal communications at the chocolatiers often found management surprised at pricing actions at their rivals and wondering if they could do so as well. That wasn't proof of price fixing, but rather market forces at work. He tossed all the claims against the confectioners, and two weeks ago they moved to recoup their legal costs for defending themselves.

The retailers are looking to get a second bite at the apple. I was originally incredulous the judge would dismiss all the complaints given the facts in the Canadian case, even though they were two separate incidents. Cadbury, after all, twice melted faster than a chocolate bar on a hot, summer sidewalk. Still, some legal experts suggest the retailers will have a hard time overturning the ruling as it was a fairly straightforward application of the law in summary judgment decisions.  

Companies can't impose price increases at will. Hershey, for example, reported first-quarter earnings last month that saw sales in Latin America fall in part "due to volume elasticity related to a price increase." Nestle reported that its confectionery unit saw organic sales fall 0.5% and the organic growth it achieved companywide was due more to volume than pricing. In the end, any fallout from the decision being overturned would undoubtedly be minimal and investors could still be sweet on these chocolate makers.

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