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Vizio, Inc. v. Klee

United States District Court, D. Connecticut

December 22, 2016

VIZIO, INC., Plaintiff,
v.
ROBERT KLEE, in his official capacity as the Commissioner of THE STATE OF CONNECTICUT DEPARTMENT OF ENERGY AND ENVIRONMENTAL PROTECTION, Defendant.

          ORDER ON MOTION TO DISMISS

          Victor A. Bolden United States District Judge.

         Plaintiff, VIZIO, Inc. (“VIZIO”), brought this action against Defendant, the Commissioner of the State of Connecticut Department of Energy and Environmental Protection, challenging the constitutionality of Connecticut's E-Waste Law. ECF No. 1.

         Defendant previously filed a motion to dismiss under Rule 12(b)(6), arguing that VIZIO had failed to state a claim upon which relief could be granted. ECF No. 21. The Court granted the motion to dismiss the Complaint in its entirety, dismissing all of VIZIO's claims with prejudice, except for a Dormant Commerce Clause claim based on an extraterritoriality theory. ECF No. 36. The Court gave Plaintiff leave to amend its Complaint, but only to the extent of adding factual allegations supporting a claim that the E-Waste Law directly controls Plaintiff's interstate prices. Vizio, Inc. v. Klee, No. 3:15-CV-00929 (VAB), 2016 WL 1305116, at *15 (D. Conn. Mar. 31, 2016).

         VIZIO then amended its complaint. ECF No. 41. Defendant now moves to dismiss the Amended Complaint under Rule 12(b)(6), arguing that VIZIO has failed to plead that the E- Waste law directly controls interstate prices and therefore has failed to state a claim upon which relief could be granted. ECF No. 44.

         For the reasons that follow, the Court GRANTS Defendant's renewed motion to dismiss because Plaintiff has failed to plead factual allegations that the E-Waste Law directly controls Plaintiff's interstate prices.

         I. FACTUAL ALLEGATIONS

         The factual background of this case is described in greater detail in the Court's prior order granting Defendant's first motion to dismiss. See Vizio, 2016 WL 1305116, at *2-4. In the interests of clarity, the Court also summarizes the relevant background of the case below.

         VIZIO is an American company that manufactures television sets. Amend. Compl. ¶ 1, ECF No. 41. VIZIO was incorporated in late 2002, and first entered the television market in 2003. Id. ¶ 32. As a result of its relatively recent incorporation, VIZIO has only distributed flat panel televisions, not the bulkier cathode ray tube (“CRT”) or rear projection televisions that were common several decades ago. Id. ¶ 3.

         In July 2007, Connecticut enacted Public Act No. 07-189, which has been amended several times and is codified at Conn. Gen. Stat. Ann. §§ 22a-629 through 22a-640. The Connecticut Department of Energy and Environmental Protection (“DEEP”) subsequently promulgated regulations, located at Conn. Agencies Regs. Sections 22-a-630(d)-1 and 22-a-638-1 (collectively, the “E-Waste Law”). DEEP is responsible for administering the E-Waste Law, which applies to each manufacturer of covered electronic devices (“CEDs”). Conn. Gen. Stat. § 22a-630(a). VIZIO is considered a “manufacturer” under this statute. See Conn. Gen. Stat. §§ 22a-629(7), (11).

         Under the E-Waste Law, each manufacturer must register with DEEP and participate in the program to implement and finance the collection, transportation, and recycling of CEDs. The administration of the E-Waste program is funded by registration fees. The initial registration fee for every manufacturer is at least $5, 000. Television manufacturers, such as VIZIO, must then pay subsequent annual registration fees that are based on a sliding scale that is representative of the manufacturer's current share of sales in the national television market (“National Market Share”).

         The E-Waste Law uses a “market share” approach to calculate each television manufacturer's costs under the E-Waste program. Under this approach, the manufacturer's costs are based on a percentage of the total weight of all televisions that are recycled in a given period, regardless of brand, multiplied by a specified price per pound. The percentage of the total weight of all televisions that each manufacturer is responsible for is based on its current National Market Share (“National Market Share provision”).

         According to DEEP, VIZIO's billable national market share is currently 17.16%. Amend. Compl. ¶ 34. DEEP previously determined VIZIO's billable market share to be 14.33% in 2013, 14.52% in 2014, and 16.088% in 2015. Id. VIZIO was, therefore, charged $414, 823.54 in 2013, $585, 669.23 in 2014, and $647, 141.72 in 2015 under the E-Waste Law. As of December 31, 2015, VIZIO has spent over $2.5 million to comply with Connecticut's E-Waste program. Id.

         Almost all of VIZIO's sales are to large retailers, and these sales generally take place in states where the retailers have distribution operations, such as New York. Amend. Compl. ¶ 33. After the retailers purchase the televisions, they distribute them, at their own discretion, to various locations throughout the country for resale to individual customers. Id. VIZIO claims that it does not sell to any distribution centers in Connecticut. Id. ¶ 34.

         A. E-Waste Law and Interstate Television Prices

         Plaintiff's Amended Complaint brings the following new factual allegations that it claims will support the dormant commerce clause extraterritoriality claim and the allegation that the National Market Share provision of the E-Waste law directly “has controlled and will continue to control interstate television prices.” Amend. Compl. ¶ 47.

         First, Plaintiff alleges that the E-Waste Law imposes substantial and disproportionate costs on low average-cost television producers, like VIZIO, because the National Market Share provision “most severely penalizes manufacturers that have the highest National Market Shares.” Amend. Compl. ¶ 49. Plaintiff alleges that the E-Waste law directly forces low average-cost producers to raise their television prices, using the theory described below. Id.

         According to VIZIO, the television industry is a highly competitive market. Amend. Compl. ¶ 50. The largest competitors in that market, therefore, must be able to “implement and sustain aggressive pricing strategies.” Id. VIZIO alleges that, in this competitive market, “low average cost producers drive down and establish minimum prices” because such producers “can produce their products at the lowest cost given competitive advantages such as economies of scale or technological capabilities. Id. ¶ 51. Low-average cost producers' prices allegedly are “directly correlated to the minimum of their average costs.” Id. ¶ 52.

         VIZIO then advances certain economic theories, arguing that “[t]here will always be at least one low average-cost producer in a competitive market that drives the overall minimum market price” because “[o]ther firms with higher average costs cannot consistently undercut the low average-cost producers' prices” without incurring losses and risking going out of business. Amend. Compl. ¶ 53. Firms with higher average costs generally choose to charge higher prices “to avoid losses and stay in business, ” which “inevitably” allows a low average-cost producer to set the overall minimum market price. Id.

         VIZIO further alleges that, because of their “competitive advantages, ” i.e. low costs of production and therefore low price, low average-cost producers will have the highest National Market Shares. Amend. Compl. ¶ 54. When a large manufacturer, like VIZIO, increases their prices, their National Market Share declines. Id. According to VIZIO, this means that there is a “direct relationship between National Market Share and price.” Id.

         By setting each manufacturer's costs based on its National Market Share, the National Market Share provision allegedly puts a “grossly disproportionate” share of the Connecticut E-Waste program's costs on to low-average cost producers, like VIZIO, because of the large National Market Shares they obtain through their low prices. Amend. Compl. ¶ 55. Because the costs imposed on television manufacturers are based on National Market Share, the E-Waste law may impose costs that are disproportionate to a manufacturer's in-state market share. Id. ¶ 56. VIZIO's National Market Share in 2013 was, for instance, 25% to 50% higher than it's Connecticut state market share. Id.

         VIZIO alleges that the E-Waste Law's imposition of disproportionate costs on low-average cost producers - producers with a high national market share because of low prices due to having low-average costs - is the mechanism by which the E-Waste Law “has controlled” VIZIO's pricing in the national marketplace. Amend. Compl. ¶¶ 56-57. VIZIO then argues that when low-average cost producers raise their prices, the “minimum price floor for televisions nationwide” is then driven up because when low-average cost producers have increased their prices, other manufacturers have followed suit. Id. ¶ 57.

         Connecticut is, allegedly, one of at least 11 states that have enacted a National Market Share-based approach for allocating e-waste recycling costs. Amend. Compl. ¶ 58.

         B. Connecticut Legislature and the Alleged Control of Interstate Television Prices

         Plaintiff further alleges that the legislative history behind the E-Waste Law shows that the Connecticut General Assembly “intended to control national television prices to maintain pricing parity with neighboring states, ” and intended to “shift the costs of the E-Waste Law to out-of-state consumers.” Amend. Compl. ¶ 59.

         According to VIZIO, when Connecticut legislators were debating the E-Waste Law, some allegedly expressed concern that manufacturers could pass on the costs of the E-Waste Law to Connecticut consumers by charging higher prices. Amend. Compl. ¶¶ 59-60. As some legislators noted, if manufacturers passed on the costs to Connecticut consumers, customers would go to other states, such as Massachusetts, to purchase electronics. Id. ¶ 60. Thus, some legislators noted that one main goal of the e-waste recycling program was to have it be “free of cost” to Connecticut consumers. Id. ¶ 61. VIZIO alleges that when the legislature enacted the E-Waste Law, they did so knowing that there would be “costs somewhere” that “someone will pay.” Id. ¶ 62.

         VIZIO's Amended Complaint does not state exactly how the E-Waste Law was intended to accomplish any of the above goals, whether to (a) prevent manufacturers from passing on the costs to Connecticut consumers specifically, (b) ensure that the program was actually free of costs to Connecticut consumers, or (c) pass the costs “somewhere” to “someone.” The Amended Complaint instead points to two theories of how the E-Waste Law may accomplish these goals. Amend. Compl. ¶¶ 63-64.

         First, VIZIO claims that the Connecticut legislature “attempted to minimize price increases in Connecticut by restricting access to the E-Waste Program to in-state residents.” Amend. Comp. ¶ 63. The program only covers ...


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