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.

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.

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 A recent article in The Economist magazine asks whether the Obama Administration will back up its “tough talk” on antitrust enforcement (“Return of the Trustbusters,” August 27 print edition). “Companies are likely to find themselves scrutinised at least as intensively as they were under the administration of Bill Clinton, when many senior antitrust officials in the justice department and Federal Trade Commission (FTC) cut their teeth on a celebrated anti-monopoly lawsuit against Microsoft.” While new antitrust chief Christine Varney believes that the Bush Administration’s lax antitrust enforcement contributed directly to the economic crisis, that view is “debatable, to say the least,” according to the article. The Bush Administration did pursue cartel activity enthusiastically, obtaining record convictions, jail sentences, and fines, the story contends. Varney’s efforts to ramp up enforcement will face several obstacles, including the U.S. Supreme Court (which has issued several decisions narrowing trustbusters’ room to maneuver) and the “possible disagreement within Mr. Obama’s cabinet.” Given the “wretched state of the economy,” some administration officials are questioning whether to “risk upsetting the few bits that are growing strongly with gratuitous antitrust cases.” Text of the article appears here.

 On August 17, the American Antitrust Institute filed an amicus brief, urging the U. S. Court of Appeals in New Orleans to adopt a presumption of illegality for resale price maintenance agreements and to overturn the lower court's dismissal of the amended complaint filed in PSKS, Inc. v. Leegin Creative Leather Products, Inc. The brief, which appears here, also argues that the lower court erred in requiring the plaintiff to meet a strict test of market definition. In 2007, the Supreme Court reversed the Court of Appeals’ decision (PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2006-1 Trade Cases ¶75,166), applying the per se rule to uphold an award of $3,975,000 to a retailer that was terminated by its manufacturer for discounting. The high court declared that vertical price restraints are no longer per se illegal, but instead should be evaluated under the rule of reason standard (2007-1 CCH Trade Cases ¶ 75,753).

 Maine’s new privacy law—which prohibits the collection of personal information for marketing purposes from a minor without parental consent and bans “predatory marketing” to minors—is being challenged in a lawsuit brought by media and online companies, including AOL, eBay, and Yahoo. The lawsuit, filed August 26 in the federal district court in Maine, claims that the law violates the First Amendment rights of adults, as well as minors and online operators. The Maine statute (“An Act to Prevent Predatory Marketing Practices Against Minors,” Public Law 230) was signed by the Governor on June 2, 2009, and will take effect on September 12, 2009. Text of the law appears here on the Maine State Legislature’s website. Further details about the law appear in an August 12, 2009 posting on Trade Regulation Talk.

Congressional Subcommittees Hear Testimony on Vertical Price Fixing, Railroad Exemption

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

Subcommittees of the U.S. Senate and House Judiciary Committees held hearings May 19 on bills that would, respectively, reinstate the per se rule for resale price maintenance and repeal the antitrust exemption for railroads.

Restoration of Per Se Rule

The Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing entitled "The Discount Pricing Consumer Protection Act: Do We Need to Restore the Ban on Vertical Price Fixing?"

The hearing considered the impact of the U.S. Supreme Court decision in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), which requires that resale price maintenance be scrutinized under a rule of reason standard rather than declared per se illegal under federal antitrust.

Senator Herb Kohl (D-Wis.) said in a prepared statement that manufacturers have begun to set minimum retail prices resulting in higher prices for consumers, as a result of Leegin. Kohl introduced the "Discount Pricing Consumer Protection Act" (S. 148) in January 2009 to overturn the decision.

Among the witnesses was FTC Commissioner Pamela Jones Harbour, who reiterated earlier testimony before a House subcommittee on the same issue. Harbour said that Leegin had the effect of legitimizing minimum resale price fixing, which was "contrary to good economic and legal policy" because it subordinated consumer preferences to the interests of manufacturers and merchants of branded consumer goods.

Jim Wilson, the current Chair of the Section of Antitrust Law of the American Bar Association (ABA), also testified. Wilson said that the "[b]ecause the intention and likely impact of the Discount Pricing Consumer Protection Act would be to effectively overturn the Leegin decision and reestablish a rule of per se illegality, the ABA respectful urges Congress not to enact this legislation."

The rule of reason is the proper standard because minimum resale price maintenance “can stimulate interbrand competition and is not so inevitably pernicious as to warrant per se illegality,” he noted.

Todd Cohen, vice president and deputy counsel, government relations, for eBay, observed that the Leegin decision “is beginning to undermine many of the consumer benefits delivered by innovators using the openness of the Internet. Leegin empowers those who want to curtail the ability of small and mid-size online retailers to communicate and offer lower prices to consumers.” Since the decision was issued, there appears to have been an increase in RPM programs that restrict intrabrand price competition, he said.

“For example, a recent report in the Wall Street Journal details how some businesses limit price competition through continually scanning the eBay platform to identify sellers offering their prices at a lower price,” according to Cohen. “They then use a plethora of tools to identify the seller and enforce their minimum prices.”

Stacy John Haigney, attorney for Burlington Coat Factory, testified that off-price retailers like Burlington would never have gotten off the ground in the 1970s if the Leegin rule had been in effect. During that time, department stores “could not legally coerce their suppliers to impose high-pricing structures through the industry . . . However, post-Leegin, there is no practical way to stop such retailer-imposed price-fixing schemes from being put in place.”

Further details on the hearing—including written testimony and a webcast of proceedings—appear here at the Senate Judiciary Committee website.

Repeal of Railroad Antitrust Exemption

Adversaries and supporters of the proposed "Railroad Antitrust Enforcement Act of 2009" squared off at a Congressional hearing regarding the legislation in Washington D.C. The bill, introduced in both the House of Representatives (H.R. 233) and Senate (S. 146), would repeal railroads' antitrust exemption and provide for numerous means to halt "anticompetitive rail conduct."

Speaking to the House Judiciary Committee's Subcommittee on Courts and Competition Policy, Association of American Railroads officials said that the measure would have harmful impacts on railroad customers—and American consumers in general—by severely distorting the relationship between regulation and antitrust laws.

Union Pacific executive J. Michael Hemmer observed that the bill's potential granting of regulatory authority to the FTC created a glaring conflict with the Surface Transportation Board and that the bill’s proposed retroactive effect could lead to antitrust attacks on the continuing operation of every federally approved transaction in rail history. Hemmer added that the legislation should not be considered in isolation.

"If Congress wants to address rail transportation policies," he said, "it should work with colleagues in other committees of jurisdiction to craft a coherent, national rail policy that integrates regulation with antitrust jurisprudence."

In response, the Consumer Federation of America asserted that the legislation was sorely needed because "rampant consolidation" and a lack of regulatory oversight have "allowed railroads to abuse their monopoly pricing power and overcharge consumers and shippers $3 billion per year."

Shippers without rail-competitive options pay 75 percent to 100 percent more for rail shipments compared with similar movements in competitive markets, the CFA reported. Captive shippers' costs have been rising substantially over the past five years.

Speaking on behalf of the ABA Section of Antitrust Law, M. Howard Morse referred to the group’s frequent opposition to industry-specific exemptions from the antitrust laws. This opposition is based on the belief that “antitrust laws are sufficiently flexible to account for particular market circumstances.”

Accordingly, the Antitrust Section encourages Congress to dismantle the exemption for the railroad industry and to consider additional legislation to eliminate antitrust exemptions in other industries.

Written testimony and a webcast of the hearing appear here on the House Judiciary Committee’s website.

Resale Price Fixing Claims Fail After Remand from High Court

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

A leather goods and accessories manufacturer did not engage in unlawful vertical price fixing by terminating a retailer for pricing the manufacturer’s goods below the suggested retail price, the federal district court in Marshall, Texas, has ruled.

The retailer’s suit, which initially succeeded at trial and ultimately led to a U.S. Supreme Court decision removing resale price maintenance from among the types of anticompetitive conduct subject to a per se illegality standard (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753) was dismissed.

Relevant Markets

With vertical price fixing no longer deemed per se illegal, the retailer’s claims had to be assessed under the rule of reason, the court explained. However, the retailer failed to surmount the first obstacle in a rule of reason antitrust claim: alleging a valid relevant market.

Neither the “retail market for Brighton women’s accessories” (the manufacturer’s brand) nor the “wholesale sale of brand-name women’s accessories to independent retailers constituted a valid product market. A single brand, no matter how distinctive or unique, could not be its own market, and the retailer’s broader market definition suffered from its own shortcomings.

“Wholesale sale was inappropriate because it did not focus on how any agreement impacted consumers, and inclusion of “brand name in the product market definition was unsupported by any allegations explaining why brand names were important to product interchangeability in the case.

In addition, “women’s accessories grouped together products that were not interchangeable with each other, and “independent retailers improperly limited the relevant market to a subset of retailers without explaining why there was a lack of interchangeability between that subset and other retailers selling exactly the same products, according to the court.

Horizontal Restraint Pleadings

Attempts by the retailer to reattach the per se illegality standard to the claim by asserting a horizontal restraint were inadequate, the court also found. The retailer was barred from claiming that the manufacturer engaged in a per se illegal horizontal price fixing agreement based on the fact that it was also a distributor of its own products.

The retailer failed to raise the theory in the original trial in the case, even though nothing prevented it from doing so. In reversing the trial outcome on the vertical restraint claims, the U.S. Supreme Court had not specifically allowed the retailer to replead allegations it had previously abandoned.

Even if such a claim were permissible, restraints in dual distribution systems—including price fixing agreements—were still analyzed under the rule of reason, rather than held to the per se illegality standard.

“Hub and Spoke” Retailer Cartel

An alternative theory that the manufacturer engaged in per se illegal horizontal price fixing in furtherance of a “hub and spoke retailer cartel also failed as a matter of law, the court determined.

The complaining retailer contended that it would prove that there was a series of agreements between the manufacturer and independent retailers to fix prices of its goods; that the independent retailers formed a cartel with each other and with the manufacturer as a retailer to prevent discounting and price competition; that, in response to pressure from retailers involved in the cartel, the manufacturer enforced its price fixing agreements against discounters to stamp out price competition; and that retailers discussed and came to agreements as to the terms of the price fixing agreements and exceptions.

These allegations were insufficient to plead a hub and spoke conspiracy. No claim was made that retailers agreed to the alleged resale price maintenance among themselves. Without such an allegation, the complaining retailer was missing the requisite wheel in the classic hub and spoke arrangement, the court concluded.

The decision is PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2009-1 Trade Cases ¶76,592.

Maryland Amends Antitrust Law to Make Resale Price Maintenance Per Se Illegal

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

Legislation clarifying that resale price maintenance (RPM), also known as vertical price fixing, remains per se illegal in the State of Maryland was signed into law on April 14 by Governor Martin O’Malley. The measure—Laws of 2009, Chapters 43 and 44—will take effect on October 1, 2009.

Response to Leegin Decision

The amendment to the Maryland Antitrust Act signifies the first legislative action taken to reverse the U.S. Supreme Court's ruling, in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), that RPM should be held to a rule of reason standard rather than declared per se illegal under federal antitrust law.

For Maryland and other states that are statutorily-required to interpret their own antitrust laws in accordance with the prevailing judicial interpretations of federal antitrust law, the High Court’s ruling effectively changed state law as well.

During a Maryland Senate Judiciary Committee hearing on February 25, American Antitrust Institute President Albert Foer argued that the decision to apply the per se rule rather than the rule of reason standard “generally determines who wins an RPM case, and indeed determines whether legitimate cases are even initiated."

Foer contended that use of the rule of reason standard for RPM increases retail prices, primarily victimizing two groups—average retailers and end-use consumers—while protecting profit margins of manufacturers and mass merchandisers. Since the Leegin ruling was delivered, he noted, the practice of setting minimum prices has become far more commonplace.

Federal Legislative Efforts

The Maryland law is not the only initiative being taken to address or even undo the Supreme Court decision. A proposal to restore the rule of per se illegality for vertical agreements to fix minimum prices has been introduced by Sen. Herb Kohl (D-Wis.) in each of the last two sessions of Congress. Hearings on the current “Discount Pricing Consumer Protection Act” (S. 148) will be held in May.

At a meeting of retailers, online merchants, consumer advocates, and antitrust experts in Washington, D.C. last December, representatives from the House Judiciary Committee stated their intention to hold hearings to address the RPM issue this spring.

In February, the FTC began a series of workshops to address the problems of RPM by exploring how to best distinguish between uses of RPM that benefit consumers and those that do not. The next two workshops will be held in Washington, D.C. on May 20 and 21. At these workshops, panels will focus on the history of the practice, empirical evidence on the effects of RPM, and how it should be analyzed under the antitrust laws. Further information regarding these workshops can be found here on the FTC website.

While no other state has considered legislation similar to Maryland’s, more than 30 states took the position that RPM should remain per se illegal, in briefs with the Supreme Court during its consideration of the Leegin case. It is expected that the legislative action by the State of Maryland will prompt at least a few other states to follow its lead.