The world of transparent and invisible adhesive tape — what most of us call Scotch tape — is not a happy place right now. At the centre of the malaise is 3M Co., the Minnesota-based conglomerate that makes everything from touch screens and fuel-cell components to Post-it notes and, yes, Scotch tape, which a company engineer invented back in 1930. This spring and summer, 3M finds itself in court facing three class-action lawsuits launched by consumers and retailers of sticky tape. The suits — Conroy et al. v. 3M et al., Bradburn Parent Teacher Store Inc. v. 3M and Meijer Inc. v. 3M — all argue that the company has unlawfully bullied its way into a monopoly position in the tape market and that, as a result, we have been deprived of our rightful amount of choice and often paid up to 40% too much for our tape.
One player that is paying especially close attention to 3M's legal battles is LePage's Inc. (not to be confused with Ohio-based Henkel's LePage line of glues). The company, based in North York, Ont., is 3M's only significant competitor in the home and office adhesive tape market, manufacturing products for stores like Kmart and Office Depot. LePage's has everything to gain from court penalties against 3M's selling practices, namely greater access to the North American market, which was worth about US$305 million in 2003. In fact, the Canadian company started 3M's legal troubles in the first place: all the current class-action suits use a precedent-setting LePage's court case as their starting point.
Back in 1997, LePage's, then based in Pittsburgh, filed a complaint in the Pennsylvania District Court against 3M's practice of selling its various tape products using “bundled rebates.” LePage's argued that it violated the Sherman Act, the century-old U.S. legislation that limits monopolies. 3M's bundled rebate program offered significant kickbacks — sometimes in the millions of dollars — to retailers as a reward for selling targeted amounts of six product lines. LePage's alleged that these selling targets were so large that retailers could only meet them by excluding competing products — in this case LePage's tape — from store shelves. For example, LePage's alleged that Kmart, which had constituted 10% of LePage's sales, dropped the account when 3M started offering the discount chain US$1 million in rebates in return for selling more than US$15 million worth of 3M products in one year. And LePage's offered its own conspiracy theory: that 3M introduced rebates not simply to grow its sales, but to eliminate LePage's, its only significant competitor.
3M was succeeding. Since the U.S. giant had introduced the rebate program, in 1993, the market share of LePage's had dropped from 12% to between 6% and 7%. The lawsuit was shuffled from one court to another for six years before the U.S. Court of Appeals for the Third Circuit finally agreed with LePage's argument and request for damages, granting the company US$68.5 million that a jury had previously awarded. (A total of US$96.5 million, for “judgment, interest and attorney's fees,” went to an insurance company that had owned LePage's.)
Three years earlier, amid the legal manoeuvring, LePage's was bought by a Canadian company, Conros Corp. Its president, Navin Chandaria, says the acquisition was entirely motivated by the court case. “The lawsuit was the only attraction,” Chandaria says. That's because it pointed to a market where competition was being suppressed, the centrepiece of Conros's business strategy. “We look at a company which is dying or is being killed by a giant who controls more than 90% of market share, and this one little guy who has never been allowed to grow or has been slashed all the time,” he explains. “And we go and buy those [little] companies and pick a fight against the giant.”
Chandaria boasts that this strategy turned Conros, a private family-owned company, into the dominant player in the firelog industry. Conros, he says, now controls more than 90% of the Canadian firelog market and over 60% of the U.S. market. Upon closing the deal to buy LePage's in May 2000, Chandaria made his intentions clear. “It's just like a war, a war against 3M,” he told the Gloucester Daily Times, the Massachusetts town where LePage's sole plant was located.
While other groups take up the fight against 3M's bundled rebate practices in court, Chandaria is going head-to-head with the company in a battle for market share based on innovation. “Tape is [one industry] where there has been no technology innovations because it was controlled by a monopolist,” he says. “We come into the industry and, within no time, we have so many innovations which give consumers a better tape, a safer tape and a higher quality.” He cites tape dispensers with palm guards (to address military complaints that tape guns were cutting and infecting soldiers' palms) and a brake system as two examples of recent LePage's patented innovations. But Chandaria's greatest hope is for the Bandit, a new ergonomic tape gun that LePage's launched last year to make inroads into the fastest-growing sector of the North American adhesive industry, the packaging tape sector, worth more than US$1 billion.
On the legal front, 3M has settled Conroy et al. and Meijer Inc., with final court approval pending this spring. Though 3M makes no admission of liability in either case, it has agreed to donate US$41 million worth of 3M tape and other products to U.S. charities to settle the Conroy suit, and to pay Meijer Inc. US$28.9 million in cash. As of press time, no settlement has been reached with Bradburn Parent Teacher Store; a trial is scheduled for May. Unlike the other court cases (including LePage's) that only sought damages, the Bradburn suit seeks a flat-out injunction against 3M ever using bundled rebate programs again.
3M has declined to comment on the class-action suits other than to confirm their existence. A company filing indicates that the bundled rebate programs have been discontinued. Meanwhile, analysts who cover 3M seem unconcerned by its adhesive tape woes; most of those contacted were either unaware of the current suits or dismissed them as insignificant. “The company generates a billion dollars a quarter in free cash flow,” says analyst Dmitry Silversteyn at Ohio-based Longbow Research, who thinks the settlements — and 3M's home and office tape division — represent a drop in the ocean for the Minnesota moneybags.
The Pressure Sensitive Tape Council, the Illinois-based industry organization that includes 3M as a member, was also unaware of the class-action suits. Executive vice-president Glen Anderson suggests the small place of retail tape in the overall industry may explain why. “We don't think the retail market is really a driving market,” he says. “The industrial side has always driven our markets.”
Neither does LePage's show up on the industry organization's radar screen as a significant player. But Anderson cautions that in 25 years of working at the organization, he has never seen publically available revenue and sales numbers, and so there is no accurate picture of what is going on in the pressure-sensitive tape industry. “Because it's so secretive and a low-profit industry, people don't want to talk about reporting numbers and letting everybody in,” Anderson says. He does agree that there is not a lot of competition in the tape industry. “They [3M] are the giant kahuna.”