Grocers' Agreement to Share Profits During Labor Dispute Not Immune, But Not Barred Per Se

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

California's three largest grocery chains were not liable under federal antitrust law for 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 en banc opinion.

The agreement was not exempt from antitrust scrutiny under the non-statutory labor exemption. However, summary condemnation—whether as a per se violation or under a truncated “quick look” standard of analysis—was improper. Therefore, the denial of cross-motions for summary judgment by the defending grocery chains (2005-1 Trade Cases ¶74,805) and the plaintiff, the State of California, was affirmed.

While the lower court's entry of final judgment in the grocers' favor was likewise affirmed, the legality of the agreement under the rule of reason may ultimately not be determined in the case.

The parties had stipulated to the entry of final judgment for appellate purposes by narrowing their arguments. California agreed not to pursue the theory that the profit-sharing agreement violated Sec. 1 of the Sherman Act under a full rule of reason analysis, while the grocers agreed not to pursue various affirmative defenses they had pleaded, with the exception of the non-statutory labor exemption.

Agreement at Issue

The profit-sharing agreement at issue was a provision within a Mutual Strike Assistance Agreement (MSAA) entered into by the three defending chains and a 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.

Antitrust Immunity

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. It did not relate to any core subject matter of bargaining—namely wages, hours, and working conditions--but related principally to the temporary, artificial maintenance of the grocers' revenues. Thus, it was not immunized from antitrust review by the nonstatutory labor exemption, the court decided.

The inclusion of a non-member of the collective-bargaining unit (the fourth grocery chain) in the agreement only further counseled against application of the exemption,
the court said.

Per Se Illegality

Whether characterized as a profit-pooling agreement or a market allocation agreement, the profit-sharing provision was not so obviously anticompetitive to constitute an antitrust violation under a pure per se approach, 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.

Unlike firms in most of the prior profit-sharing cases cited by the plaintiff—including Citizen Publishing Co. v. United States (1969 Trade Cases ¶72,730) and United States v. Paramount Pictures, Inc. (1948-1949 Trade Cases ¶62,244)—the defendants were not the only competitors in the affected areas. Thus, the agreement evaded any “easy label” of profit-pooling and could not sensibly be grouped together with or analogized to the very different arrangements described in those prior cases, the court said.

An attempt by the State of California to characterize the profit-sharing provision as a market allocation agreement was rejected because the pact did not prevent any of the defending grocers from actually making sales to consumers.

Quick Look Analysis

Summary condemnation under a truncated rule of reason or “quick look” analysis was also unwarranted, the court concluded. A quick look conclusion of antitrust illegality was inappropriate for many of the same reasons that per se treatment was incorrect.

The unique features of the agreement and the uncertain effect those features had on the grocers' competitive behavior and incentives during the revenue-sharing period rendered any anticompetitive effects of the agreement not obvious. To reach a confident conclusion on those effects, further development of the record was required, the court noted.

Dissenting Opinions

Several separate opinions filed by members of the court took issue with various aspects of the majority opinion. One such opinion concurred with the outcome but questioned whether the profit sharing agreement left the grocers “with an undiminished incentive to compete.”

A partial dissent contended that because the majority concluded that there was no categorical antitrust violation under the quick look doctrine, the court overstepped its Article III jurisdiction in ruling on the non-statutory labor exemption. Moreover, the partial dissent expressed “doubt that the majority decide[d] the labor exemption issue correctly because it fail[ed] to grapple with the complex dynamics” of the case.

Another partial dissent argued that the defendants' profit-sharing agreement could readily be determined to violate the antitrust laws under the intermediate “quick look” standard.

“[D]enying California the injunction to which it is entitled,” the partial dissent stated, “[was] contrary to the fundamental policies underlying our antitrust review, and encouraged future antitrust violations by these defendants and others who may seek to suppress the rights of their employees.”

The July 12 decision is State of California v. Safeway, Inc., 2011-1 Trade Cases ¶77,522.