Supermarkets’ Profit Share Agreement During Labor Unrest Was Anticompetitive

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

California’s three largest grocery chains violated federal antitrust law by entering into an agreement to share profits amongst themselves and with a fourth chain during, and for a short period after, an anticipated labor dispute, the U.S. Court of Appeals in San Francisco has ruled in a divided opinion.

Denial of summary judgment to the defending grocery chains (2005-1 Trade Cases ¶74,805) was affirmed, while the denial of summary judgment to the plaintiff, the State of California, was reversed and remanded.

The profit-sharing agreement at issue was a provision within a Mutual Strike Assistance Agreement (MSAA) entered into by the defending chains and the fourth chain. In the MSAA, the chains agreed to lock out their union employees within 48 hours of a strike against any one or more of them, a traditional tactic in labor disputes to combat the union’s anticipated use of "whipsaw tactics," in which unions strike or picket only one employer in a multiemployer bargaining unit.

The profit-sharing provision constituted an offensive weapon used by the chains to prevail in the dispute, in the court’s view. It was designed to maintain each defendant’s pre-labor dispute market share. Such a provision, however, was not "needed to make the collective-bargaining process work." Thus, it was not immunized from antitrust review by the nonstatutory labor exemption, the court decided.

Per Se Illegality

The profit-sharing provision was not so obviously anticompetitive to constitute an antitrust violation under a pure per se approach because it was of relatively short duration and because the chains controlled less than a 100 percent share of the relevant market, the court held.

In contrast to previous cases in which profit-sharing agreements were to endure for decades or permanently, the grocery chains’ agreement was written to last only as long as the labor dispute, and to continue for a mere two weeks after the termination of any strike or lockout.

Moreover, unlike firms in most of the prior profit-sharing cases, the defendants were not the only supermarkets in the affected areas. While the State of California was correct that a profit-sharing plan need not cover the entire market in order to affect competition, the distinction in anticompetitive effect between a plan covering the entire market and one that did not was worthy of consideration, the court said.

“Quick Look” Analysis

Under a "quick look" rule of reason analysis, the court concluded that the agreement created a great likelihood of anticompetitive effects, and that those effects were not outweighed or neutralized by any plausible procompetitive benefits. Rejected was a contention by the supermarket chains that the MSAA, and the profit-sharing plan within it, would aid them in achieving lower labor costs, thereby resulting in a procompetitive benefit that more than offset any temporary harm to competition.

Neither the potentially short duration nor the less-than-full market share "significantly affect[ed] the anticompetitive `principal tendency’ of the profit sharing agreement," the court stated.

Given that the great likelihood of anticompetitive effect could easily be ascertained, the burden of proof shifted to the defending grocery chains to show empirical evidence of procompetitive effect, the court determined. The chains failed to meet this burden.

Lowering wages and benefits in order to increase their ability to lower prices and compete more effectively with other companies was not cognizable as a procompetitive benefit. The chain of contingencies rendered such alleged benefits purely speculative.

Dissent

A dissenting opinion argued that, while the majority correctly concluded that the MSAA lay outside the nonstatutory labor exemption, it was premature to conclude that the State of California was entitled to summary judgment on the merits of its Sherman Act Section 1 claim.

There existed genuine issues of material fact regarding whether the effects of the chains’ agreement was anticompetitive or procompetitive or even had an impact on the market as a whole at all. The record was "bereft of market analyses or an explanation of the actual anticompetitive effects of the MSAA," the dissent contended.

The August 17 decision in State of California v. Safeway, Inc. appears at 2010-2 Trade Cases ¶77,134.