Tuesday, March 03, 2009

Wisconsin Unfair Sales Act’s Fuel Markup Requirement Is Unconstitutional

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

The motor vehicle fuel provisions of the Wisconsin Unfair Sales Act—mandating a minimum markup above an average terminal price or certain actual costs—were unconstitutional for violating the Sherman Act’s prohibition against restraints of trade, the federal district court in Milwaukee has ruled. An order enjoining the state from enforcing the provisions was therefore warranted.

Price Maintenance Among Competitors

By permitting retailers to match—but not undercut—competitors’ prices and forbidding sales below cost, the Act authorized and enforced resale price maintenance among competitors, “a per se violation of Sec. 1 of the Sherman Act since the early years of national antitrust enforcement.”

The minimum markup percentage created a range in which competitors could engage in collusive parallel pricing, which was exacerbated as the wholesale price of gasoline fluctuated, the court reasoned.

An argument that the restraint of trade amounted merely to a unilateral act of the state’s legislature was rejected. The restraint was not subject to consideration under the rule of reason because it was horizontal, in that it affected competing gasoline retailers in Wisconsin. Data suggested that the law kept gasoline prices higher than would otherwise be the case, thereby benefiting gas station owners at the expense of consumers, the court found.

State Action Immunity

The statutory provisions could not be saved from Sherman Act preemption on the basis of state action immunity, the court added. While the purposes of the restraint—namely, to regulate the sale of merchandise below cost in order to prevent deceptive advertising and unfair methods of competition—were “clearly articulated and affirmatively expressed as state policy,” evidence indicated that the pricing restraint was not actively supervised.

The markup percentage decreed by the statute was changed by the state legislature only once in the Act’s long history, and there was no program or effort to determine whether the “average posted terminal price” referenced by the provisions bore any relationship to the actual price paid by retailers.

A state could not simply authorize price setting and enforce the prices established by private parties, in the court’s view. The state’s purported enforcement efforts to ensure compliance with the Act did nothing to ensure the reasonableness of gas prices in Wisconsin. Through the Unfair Sales Act, the state had essentially displaced competition among gasoline retailers without substituting an adequate system of regulation, the court concluded.

The decision is Flying J, Inc. v. Van Hollen, 2009-1 Trade Cases ¶76,505.

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