Tobacco Firms in Master Settlement Agreement Were Immune from Competitor’s Antitrust Claims

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals in Cincinnati has rejected antitrust claims arising out of the 1998 Master Settlement Agreement (MSA)—the multi-billion dollar national tobacco settlement—on Noerr-Pennington and state action immunity grounds. Dismissal of the antitrust claims (2009-1 Trade Cases ¶76,462) was affirmed.

This latest challenge to the implementation of the MSA was brought by a tobacco company that entered the market in 2000, two years after the MSA’s execution. The company originally operated without joining the MSA. In 2004, it joined the MSA by negotiating its agreement with the state attorneys general. Dissatisfied with the agreement, the company attempted to renegotiate its position under the MSA.

In its suit, the company alleged that tobacco manufacturers engaged in a boycott that caused the attorneys general to reject the complaining company’s renegotiation efforts.

Noerr-Pennington Doctrine

The Noerr-Pennington doctrine protects private actors from liability arising from the antitrust injuries caused by their petitioning for government action. Noerr-Pennington immunity applied in this case, according to the court, because the state governments’ actions were the actual cause of the alleged antitrust violations, regardless of the explicit or implicit encouragement of the defending manufacturers.

Moreover, the defending manufacturers did not lose their immunity under the doctrine’s “sham exception.” The sham exception to the Noerr-Pennington doctrine prevented the application of immunity where a defendant’s act of “petitioning” was a mere sham. However, the defending manufacturers petitioned for a specific outcome from the government and succeeded. This was the precise situation that fell outside of the sham exception, the court explained.

State Action Doctrine

Alternatively, the defending cigarette manufacturers were shielded under the state action doctrine from the antitrust claims, the court ruled. The state attorneys general had acted in their sovereign capacities, and not their market participant capacities, in enacting and enforcing the MSA and in deciding to forgo renegotiating with the complaining company.

Although the complaining company did not raise its antitrust claims against the state attorneys general, they were protected by state-action immunity. Thus, the immunity extended to the private entities—the defending manufacturers—involved in the same course of dealing.

The decision is VIBO Corporation, Inc. v. Conway, 2012-1 Trade Cases ¶77,796.

City Not Immune from Electrical Cooperative's Antitrust Claims

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The City of Newkirk, Oklahoma was not shielded under the state action doctrine from a rural electrical cooperative's claims that the city engaged in unlawful tying and attempted monopolization, the U.S. Court of Appeals in Denver has decided. The challenged conduct was not a foreseeable result of state legislation authorizing anticompetitive conduct.

Dismissal of the cooperative's antitrust claims (2010-2 Trade Cases ¶77,138) was reversed, and the case was remanded for further proceedings on the allegations of unlawful tying and attempted monopolization of electricity services.

Thwarting Cooperative’s Ability to Compete

When a new jail was proposed outside the city limits in an area traditionally serviced by the complaining cooperative, the city annexed the area, allegedly thwarting the cooperative’s ability to operate there.

Then, the city—the only provider of sewage services in the area—allegedly refused to provide any sewage services to the new jail, unless the jail also bought the city's electricity. The operators of the jail went with the city's package deal over the cooperative's offer.

While the city cited a number of general enabling statutes conferring on the city the authority to do business, none authorized the kind of anticompetitive conduct alleged by the complaining cooperative, the court noted. Moreover, the Oklahoma legislature had expressed a clear preference for competition for electricity services in annexed areas.

Foreseeability

Oklahoma's Rural Electric Cooperative Act foreseeably sought to preserve competition after annexation by constraining municipalities from using their considerable regulatory powers to harm rival rural electricity providers.

In addition, Oklahoma's Electric Restructuring Act expressed an unmistakable policy preference for competition in the provision of electricity, according to the court.

The decision is Kay Electric Cooperative v. The City of Newkirk, Oklahoma, 2011-2 Trade Cases ¶77,550.

FTC Proceeding Stayed in Georgia Hospital Acquisition Challenge

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

An FTC administrative challenge to Phoebe Putney Health System, Inc.’s proposed acquisition of rival Palmyra Park Hospital, Inc. in Albany, Georgia, was stayed by the Commission on July 15.

The respondents sought the stay pending the outcome of the FTC’s appeal of a federal district court’s dismissal of the agency’s court action. In the court action, the FTC sought preliminary injunctive relief against the acquisition until the administrative trial was resolved.

The FTC staff did not did not oppose the respondents’ motion for stay of the administrative challenge. The administrative law judge had recommended that the Commission grant the stay (CCH Trade Regulation Reporter ¶16,619).

In April, the FTC and the State of Georgia filed suits to block the deal that would allegedly create “a virtual monopoly for inpatient general acute care services sold to commercial health plans and their customers in Albany, Georgia and its surrounding area.”

State Action Immunity

Last month, the federal district court in Albany, Georgia, denied the request for a preliminary injunction and dismissed the suits (2011-1 Trade Cases ¶77,508). (See Trade Regulation Talk, June 30, 2011). The court ruled that the challenged transaction was state action immune from the antitrust laws. The FTC made a motion for an expedited appeal, which was granted by the U.S. Court of Appeals in Atlanta on July 7 (2011-1 Trade Cases ¶77,527).

In granting the stay of the administrative action, the Commission noted the respondents’ argument that “there was no benefit to undergoing the burdens and expense of continuing this administrative proceeding given the pendency of an appeal to the Eleventh Circuit in collateral federal court litigation on the `critical issue’ in the proceedings, namely state action immunity.”

The respondents asserted that the administrative proceeding could “resume with no prejudice” if the appellate court were to rule in the FTC’s favor.”

The administrative proceeding is In the Matter of Phoebe Putney Health System, Inc., Docket No. 9348. The July 15 order granting the respondents’ unopposed motion to stay the proceeding appears here. It will be reported at CCH Trade Regulation Reporter ¶16,620.

FTC, Georgia Denied Preliminary Injunction Blocking Hospital Acquisition

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Earlier this week, the federal district court in Albany, Georgia, denied a request from the Federal Trade Commission (FTC) and the State of Georgia for a preliminary injunction blocking a proposed hospital acquisition pending FTC administrative proceedings. The court ruled that the challenged transaction was state action immune from the antitrust laws.

In April, the FTC issued an administrative complaint challenging Phoebe Putney Health System, Inc.'s proposed acquisition of rival Palmyra Park Hospital, Inc. from HCA Inc. The FTC alleged that the proposed acquisition would create “a virtual monopoly for inpatient general acute care services sold to commercial health plans and their customers in Albany, Georgia and its surrounding area.” According to the FTC, the acquisition would eliminate competition between the only two hospitals in Albany and in Dougherty County.

The FTC and state alleged that the acquisition included three stages: (1) the local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA using Phoebe Putney’s money, (2) the hospital authority’s immediate provision of control of the hospital to Phoebe Putney under a management agreement, and (3) Phoebe Putney’s entry into a lease with the hospital authority to grant the local hospital operator managerial control of Palmyra Park Hospital’s assets for 40 years.

Scope of Transaction

The court began its analysis by defining the scope of the transaction under review. The court rejected the defendants’ contention that only the local hospital authority’s purchase of Palmyra Park Hospital’s assets was at issue. The defendants viewed the breadth of Clayton Act, Section 7 too narrowly. They maintained that the lease and its terms did not yet exist and had not even been negotiated. Moreover, the defendants argued that neither the putative lease nor the management agreement was alleged to have competitive impact beyond the acquisition of the subject hospital itself by the hospital authority. The court decided that the management agreement and lease should constitute a part of the acquisition subject to review.

State Action Immunity

The FTC contended that the private parties used the hospital authority as a “‘strawman’ in an attempt to shield an overtly anticompetitive transaction from antitrust scrutiny.” In order to obtain protection under state action immunity doctrine, the hospital authority had to establish action (1) by a political subdivision of the state, (2) undertaken pursuant to state statutes authorizing the challenged action, (3) the anticompetitive effects of which are reasonably foreseeable to the legislature based on the statutory power granted to the political subdivision.

It was undisputed that the authority was a political subdivision of the State of Georgia. In addition, the Georgia Code authorized the challenged conduct of acquiring and leasing hospital property for purposes of meeting the healthcare needs of the community. The court’s analysis hinged on the third element: whether the alleged suppression of competition was a reasonably foreseeable result of the conduct authorized and the powers granted to the hospital authority under Georgia law.

The court concluded that the conduct was reasonably foreseeable. When the legislature equipped a hospital authority with the broad power to lease a hospital to another (the lessee) and grant the lessee the right to operate said hospital, it contemplated that the lessee could have once been a competitor of the authority’s newly acquired and leased hospital, the court reasoned. Whether the hospital authority authorized the purchase of the hospital without considering, among other factors, the anticompetitive adverse effect of the acquisition on healthcare in the community was irrelevant.

Because the hospital authority was immune for its anticompetitive conduct, any actions taken by the private actors to prompt or engender that conduct was also immune. Phoebe Putney would not be able to exercise control over Palmyra Park Hospital operations independent of the hospital authority. Thus, the Palmyra Park Hospital’s actions in the transaction would be considered those of the hospital authority, which was entitled to immunity, the court concluded.

The June 27, 2011, decision in FTC v. Phoebe Putney Health System, Inc., Case No. 1:11-cv-58 (WLS), will appear at CCH 2011-1 Trade Cases ¶77,508.

New York Law Implementing Tobacco Settlement Not Shown to Violate Federal Antitrust Laws

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Earlier this week, the U.S. Court of Appeals in New York City rejected claims that New York’s Escrow and Contraband Statutes—which were enacted in furtherance of a 1998 Master Settlement Agreement (MSA) between cigarette manufacturers and the states—violated the federal antitrust laws. Judgment in favor of the defendants (2009-1 Trade Cases ¶76,504, 592 F. Supp. 2d 684) was affirmed.

The litigation began in 2002. The putative class action was brought by cigarette importers, who were not participants in the MSA. They contended that the challenged statutes coerced manufacturers who had not joined the MSA to join the alleged market-sharing agreement set up by the MSA. According to the plaintiffs, under the MSA, participating manufacturers fixed and maintained inflated prices and penalized gains in market share.

The Escrow Statute required each cigarette manufacturer either (1) to join the MSA as a participating manufacturer or (2) to make annual payments into a state escrow fund. It required cigarette manufacturers to make per-cigarette payments to the state according to a statutorily specified formula.

The Contraband Statute enforced these payment obligations by requiring cigarette manufacturers to certify their compliance with the Escrow Statute.

At the outset, the appellate court rejected the notion that the Sherman Act preempted the New York statutes. The plaintiffs failed to prove that the challenged statutes granted regulatory power to private parties in violation of the antitrust laws that caused them injury. According to the appellate court, the plaintiffs merely showed that the challenged statutes operated as a flat tax that was imposed on manufacturers who had not joined the MSA and whose only arguably “anti-competitive” effect was to raise cigarette prices.

State Action Immunity

The importers' failure “to prove that New York’s Escrow and Contraband Statutes authorize[d] Sherman Act violations obviate[d] the need for detailed analysis of whether their alleged anti-competitive aspects [we]re clearly articulated, affirmatively expressed, or actively supervised,” according to the court. However, it considered these factors in concluding that any potentially anti-competitive aspects of the statutes were shielded from antitrust attack under the state action doctrine.

The appellate court agreed with an approach taken by a number of its sister circuits—that the MSA and statutes enacted in furtherance of it constitute unilateral state action exempt from the application of the antitrust laws. However, “out of an abundance of caution,” it applied the Midcal test to determine whether the conduct was state action immune from antitrust preemption.

The challenged statutes were clearly articulated and affirmatively expressed as state policy. Moreover, New York’s control and active enforcement of escrow payment obligations satisfied the requirement that the conduct by actively supervised by the state. The legislative enactments of state policy neither mandated nor authorized private parties to exercise unsupervised power to restrain trade, the court held.

The October 18, 2010, decision in Freedom Holdings, Inc. v. Cuomo, Docket No. 09-0547-cv, will appear at 2010-2 Trade Cases ¶77,195.

Ninth Circuit Asked to Rehear Appeal of Antitrust State Action Immunity Decision

This posting was written by John W. Arden.

The American Antitrust Institute has filed an amicus brief, urging the U.S. Court of Appeals in San Francisco to rehear the appeal of a decision “that expands the state action defense to immunize alleged price fixing by car rental companies in California.”

On June 8, the appeals court held that the California Travel and Tourism Commission (CTTC) was shielded by the state action immunity doctrine from consumers’ claims that it conspired with passenger rental car companies to pass on CTTC tourism assessments to consumers (Shames v. California Travel and Tourism Commission, 2010-1 Trade Cases ¶77,044).

As required for state action immunity, the CTTC’s alleged anticompetitive conduct constituted an authorized and reasonably foreseeable result of a statutory authorization, the Ninth Circuit ruled. The California legislature had explicitly authorized tourism assessment fees on passenger car rentals in order to fund the promotion of state tourism. It appeared that the legislature envisioned the fee being uniformly passed on to rental car customers, according to the court.

Consumers had argued that active state supervision was required because the CTTC was industry-controlled. However, the appeals court held that state supervision was irrelevant because the CTTC was a state agency created by statute to promote tourism in California.

The dismissal of the consumers’ horizontal price fixing claims by the federal district court in San Diego (2008-2 Trade Cases ¶76,370) was upheld by the Ninth Circuit.

Amicus Brief

In its amicus brief supporting the plaintiffs’ petition for rehearing, the American Antitrust Institute (AAI) argued that rehearing is necessary because “the panel decision rests on a misunderstanding of both prongs of the `state action’ defense.”

"If left standing, this decision will encourage the misuse of state statutes to immunize unauthorized and unjustified agreements in restraint of trade to the detriment of the economy and in conflict with our fundamental national policy in favor of free and open competitive markets."

Specifically, the panel inferred immunity even the state law could not reasonably be read to authorize or even contemplate the alleged underlying illegal conduct—“namely a price-fixing cartel intended to exploit consumers and defeat the ordinary market process,” the AAI charged.

The panel interpreted a statute that permits an individual passenger car rental company to pass on some or all of the assessment to customers as authorizing competing businesses to agree collectively and with the CTTC to pass on the entire assessment, as well as airport concession fees, according to the amicus brief.

The AAI alleged that the panel exempted the CTTC from any active state supervision requirement, treating it as equivalent to a traditional state agency, even though the CTTC was dominated by private interests.

Supreme Court Standards

These rulings could not be reconciled with U.S. Supreme Court standards for the application of state action defense to private or quasi-governmental action, as set out in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc, 445 U.S. 97, 1980-1 Trade Cases ¶63,201, the brief asserted.

According to the standards, the state must (1) clearly articulate its intention to replace competition with regulation in a sector of the economy and (2) actively supervise the regulatory scheme to ensure that it operates in the public interest.

The AAI argues that the California Tourism Marketing Act neither allows the CTTC or its participants to regulate the prices or pricing policies of car rental firms nor creates standards for reviewing the reasonableness of the pricing or pricing policies.

In addition, the Ninth Circuit panel erroneously conferred the status of state agency on the CTTC, therefore avoiding the requirement of active state supervision, the brief alleged. In reality, the CTTC is controlled by private industry in the very markets that the CTTC purports to regulate. As such, it is not a state agency for the purposes of state action immunity, the AAA argued.

The brief is Shames v. California Travel and Tourism Commission, No. 08-56750, United States Court of Appeals for the Ninth Circuit. Text of the brief appears here.

American Antitrust Institute

The American Antitrust Institute is an independent, non-profit education, research, and advocacy organization based in Washington, D.C. Its stated mission is to “increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy.” Further information about the AAI appears here on the organization’s website.

Airport Commission Shielded from Tenant’s Monopoly Claims

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A Massachusetts municipal airport commission and its officials were shielded from monopoly claims based on the airport commission’s restriction on jet fuel sales, the U.S. Court of Appeals in Boston has ruled. Dismissal of an airport tenant's antitrust claims (2008-1 Trade Cases ¶76,045) was affirmed.

State Action Immunity

The tenant, which operated a hangar at the airport for private jets, claimed that it was prevented by the restrictions from competing with the airport commission in the sale of jet fuel. Municipal entities, such as the airport commission, and municipal officials acting for them could invoke state action immunity if they acted pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition with regulation.

The policy to suppress competition was expressed in a Massachusetts statute governing municipal airports. The statute granted airport commissions the power to adopt rules and regulations for the use of municipal airports and the authority to determine the charges or rentals for the use of any facilities and services. It also permitted airport commissions to lease airport land “under such terms and conditions as it may prescribe, for hangars, shops, storage, industrial purposes, offices and other space rental, and for concessions.”

The fact that the Massachusetts statute specifically prohibited exclusive contracts related to transportation to and from the airport suggested that the legislature perceived that the airport might otherwise employ exclusivity restrictions and chose to ban only this narrow set.

Dubious Claims

Even if the state action doctrine was inapplicable, the airport commission was “mistaken in its notion that its antitrust claim would otherwise face fair sailing.” The appellate court said that the antitrust claim was “dubious on the merits.”

The appellate court also rejected the tenant’s claims under the Racketeer Influenced and Corrupt Organizations Act. The tenant failed to establish that the airport commission engaged in a “pattern of fraudulent acts” in an effort to prevent the tenant from becoming a “fixed base operator” or “FBO” qualified to sell fuel and offer other services.

The June 23 decision is Rectrix Aerodrome Centers, Inc. v. Barnstable Municipal Airport Commission, 2010-1 Trade Cases ¶ 77,068.

FTC Alleges Suppression of Competition for Teeth Whitening Services

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Dentists in North Carolina, acting through the state dental board, colluded to exclude non-dentists from competing in the provision of teeth whitening services, the FTC has alleged in an administrative complaint. The actions of the dental board unreasonably restrained competition and violated Sec. 5 of the FTC Act, according to the complaint.

The state dental board purportedly decided that the provision of teeth whitening services by nondentists constituted the unauthorized practice of dentistry.

The board allegedly engaged in extra-judicial activities aimed at preventing non-dentists from providing teeth whitening services in North Carolina, unilaterally ordering non-dentists to stop providing whitening services.

State Action Immunity

The agency contended that the board’s conduct was not shielded from FTC challenge by the state action immunity doctrine.

“Without active supervision by a disinterested state authority, a regulatory board whose members have a financial interest in the industry it is charged with regulating cannot exclude its competitors from the marketplace,” said FTC Bureau of Competition Director Richard Feinstein.

“The North Carolina Dental Board does not have authority to decide on its own to limit the whitening services available to North Carolina residents, and its actions have decreased competition and harmed consumers,” according to Feinstein.

The FTC seeks an order prohibiting the board from engaging in the challenged conduct. The Commission vote approving the administrative complaint was 4-0-1, with Commissioner Julie Brill recused.

The case is In the Matter of The North Carolina Board of Dental Examiners, FTC File No. 081 02137, June 17, 2010. Further details, and the text of the administrative complaint, appear here on the FTC website and at CCH Trade Regulation Reporter ¶16,465.

State Action Doctrine Shields California Tourism Commission . . .

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The California Travel and Tourism Commission (CTTC) was shielded by the state action immunity doctrine from consumers' claims that the CTTC conspired with the passenger rental car companies to pass on CTTC tourism assessments to consumers, the U.S. Court of Appeals in San Francisco has decided. Dismissal of the antitrust claims (2008-2 Trade Cases ¶76,370) was affirmed.

The CTTC is a California nonprofit mutual benefit corporation created by a state tourism marketing statute for the benefit of the industry and the state. As required for state action immunity, the CTTC’s alleged anticompetitive conduct constituted an authorized and reasonably foreseeable result of a statutory authorization, the court ruled.

The California legislature had explicitly authorized tourism assessment fees on passenger car rentals for the funding of state tourism. Moreover, it appeared that the legislature envisioned the fee being uniformly passed on to rental car customers.

Because the CTTC was not a private party, but a state agency created by statute to promote tourism in California, adequate state supervision of the challenged conduct was irrelevant. The court rejected the plaintiffs' argument that active supervision was required because the CTTC was industry-controlled.

The June 8 decision is Shames v. California Travel and Tourism Commission, 2010-1 Trade Cases ¶77,044


. . . And Florida County Waste System from Antitrust Liability

A Florida county was immune under the state action doctrine from antitrust claims for establishing a franchise system for waste collection, the U.S. Court of Appeals in Atlanta has decided.

A district court's decision (2009-2 Trade Cases ¶76,695), denying dismissal of the antitrust claims based on “faulty application of the state action immunity framework” was reversed.

Florida law empowered the county to take “exclusive control over the collection and disposal of solid waste” within the county. Pursuant to the law, the county passed an ordinance establishing a franchise system for waste disposal.

Award of Franchises

Under the system, the county awarded franchises within the service area to waste disposal services for both residential and commercial customers. The county's board of commissioners determined the collection charges assessed residential customers; however, it did not set collection rates for commercial entities, leaving those to negotiation between the franchisees and commercial customers.

Hybrid Restraint of Trade

A commercial customer located within the county and a disposal service that was not awarded a franchise by the county filed suit to enjoin application of the ordinance. They alleged a “hybrid restraint” on trade. They contended that the county’s restriction on the size of the competitive market essentially authorized the franchisees to collude and impose fixed prices on their customers.

Preemption by Sherman Act

Challenges to state action that are not preempted by the Sherman Act fail, the court explained. Preemption required an “irreconcilable conflict” between the underlying state statute and the antitrust laws. Assuming that the Sherman Act preempted both the statute on its face and the county’s application of the ordinance, the county—acting in its authorized capacity as regulator of waste collection services—was immune because it acted pursuant to a clearly articulated anticompetitive policy of the state.

The challenged conduct was a “foreseeable result” of the state’s authorizing statute. Because the defendant was a municipality and not a private actor, active state supervision of the regulatory scheme was not required, according to the court.

The June 8 decision is Danner Construction Co. v. Hillsborough County Florida, 2010-1 Trade Cases ¶77,045.

Antitrust Challenge to State Law Implementing Tobacco Master Settlement Fails

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals in St. Louis has rejected a cigarette manufacturer’s claims that an Arkansas law implementing the 1998 Master Settlement Agreement (MSA) between the states and large tobacco companies violated the Sherman Act.

The challenged “Allocable Share Amendment” was neither a per se nor hybrid restraint of trade in violation of the Sherman Act, in the court’s view. Accordingly, dismissal of the antitrust claims (2006-1 Trade Cases ¶75,175) was affirmed.

Under the MSA, the settling tobacco companies agreed to make annual payments for the benefit of the settling states. The amount of each payment is based on the settling tobacco company’s relative national market share. Thus, settling tobacco companies that increase production must increase their proportionate MSA payments.

The MSA allowed settling states to enact statutes requiring nonparticipating manufacturers (NPMs) to make annual payments to an escrow account to settle or pay judgments in potential lawsuits. The State of Arkansas passed such a statute, and later amended it through the Allocable Share Amendment, to ensure that sufficient funds were collected to cover potential liabilities.

The complaining cigarette manufacturer, which was an NPM, challenged the amendment on the ground that it pressured NPMs to charge higher prices to offset escrow payments. It contended that the law was preempted by the Sherman Act because it violated the antitrust laws.

Anticompetitive Effect

Even though the Allocable Share Amendment had an anticompetitive effect, it was not a per se violation of the Sherman Act, the appeals court ruled, because it did not mandate or authorize antitrust conduct in all cases. An anticompetitive effect was insufficient to constitute an antitrust violation. Thus, the “irreconcilable conflict” required for preemption by the Sherman Act was not met.

The higher prices purportedly prevented the complaining tobacco company from competing with other competitors, including those that participated in the MSA. The statutory scheme, however, did not force NPMs to raise prices in all cases. The Allocable Share Amendment did not expressly allow price-fixing or output-fixing or other illegal behavior, nor did it place “irresistible pressure” on the complaining manufacturer to violate the antitrust laws.

The Allocable Share Amendment was also not a hybrid restraint of trade, according to the court. A hybrid restraint of trade occurs when the state passes a law that reinforces a decision by multiple companies to set a pricing scheme in violation of the Sherman Act. The complaining manufacturer alleged that the Allocable Share Amendment imposed on NPMs a parallel cost or pricing structure. However, the Allocable Share Amendment did not mandate a minimum price or cost requirement for NPMs. Moreover, the escrow amount was neither tied to nor authorized by manufacturers participating in the MSA.

State Action Immunity

The court also ruled that the state was immune from Sherman Act liability under the state action doctrine. The MSA was reviewed and approved by Arkansas’s attorney general, properly enacted by the state’s legislation, and duly signed by the governor. Thus, it could be readily characterized as state action.

The challenged Allocable Share Amendment automatically received immunity, pursuant to the U.S. Supreme Court’s 1984 decision in Hoover v. Ronwin (1984-1 Trade Cases ¶65,980).

Dissent

One of the judges on the panel dissented from the majority’s holding that plaintiffs failed to state a cause of action on their Sherman Act claim. The dissenter suggested that the apparent effect of the challenged amendment was to enforce a parallel pricing structure dictated by the tobacco companies that participated in the MSA, which in turn fixed the relative market shares of cigarette manufacturers for the duration of the MSA. The scheme deprived NPMs of the competitive advantage they held based on their choice not to enter into the MSA and interfered with the market forces that establish cigarette prices, the dissent maintained.

In any event, the issue of whether the statute created a hybrid restraint would not be reached because the state action immunity doctrine shielded the state from Sherman Act liability.

The August 4 decision in Grand Rivers Enterprises Six Nations, Ltd. v. Beebe will appear at 2009-2 Trade Cases ¶76,694.

Convention Authority’s Preferred Promoter Agreement Might Be Anticompetitive

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

A Michigan county convention/arena authority and the private company that managed its facility could have engaged in a conspiracy in violation of federal antitrust law by entering into a preferred promoter agreement (PPA) with a concert/events promoter that included a reciprocal agreement for sharing arena and promoter revenue at the county’s facility as well as those of competitors, the federal district court in Grand Rapids has ruled.

The court denied a motion by the county authority and private management company to dismiss a competing arena’s antitrust claims.

Plausible grounds existed for an inference that the agreement had illegal anticompetitive effect, the court stated. None of a variety of arguments or scenarios advanced by the defendants was fatal to the competitor’s claim as a whole. Until the details of its antitrust theory were fleshed out and the record was further developed, “dismissal would be based on far greater speculation than would permitting this action to proceed to the next stage, said the court.

Immunity from Suit

Neither the county authority nor the management company was protected from the claims by state action immunity, the court found. Regarding the county authority’s protection as a municipality, it could not be assumed at pleading that the authority’s conduct was authorized by a clearly articulated state policy because it was not clear that the challenged conduct was a foreseeable consequence of what the state law authorized. Moreover, its conduct was not regulatory activity, but instead fell into the less-protected category of commercial market activity.

The arena management company, as a private entity, fell even further from the doctrine’s protection. The company failed to show that the contract was formed pursuant to a clearly articulated state policy that authorized anticompetitive conduct. Any relationship between the statutory authorization that governed the county authority and the competitor arena revenue siphoning provision of the PPA was “tenuous at best,” the court said.

Further, the company did not demonstrate that the State of Michigan could—and did—exercise control over the alleged misconduct. The claims could not be dismissed on the basis of the limited immunity available under the Local Government Antitrust Act either, the court added.

Interlocutory Appeal

On March 4, the court subsequently refused to certify its earlier ruling for interlocutory appeal. The defendants sought review of the court’s rulings regarding (1) whether they were entitled to antitrust immunity as a matter of law; (2) whether the plaintiff’s allegations, if true, constituted legally cognizable antitrust injury; and (3) whether the allegations, if true, established a relevant market, market power, and anticompetitive effects.

Immediate appeal was not warranted because there was no matter of controlling law that created substantial grounds for a difference of opinion about either the legal standard applied by the court for deciding the defendants’ immunity or the adequacy of the plaintiff’s complaint, in the court’s view.

The decisions in Delta Turner, Ltd. v. Grand-Rapids-Kent County Convention/Arena Authority appear at 2009-1 Trade Cases ¶ 76,530 and 2009-1 Trade Cases ¶ 76,531.

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.