Total Wine and More goes down to defeat against Connecticut

 

Introduction

 Total Wine and More (Total) filed a lawsuit against Connecticut bringing a facial challenge to Connecticut’s pricing provisions. Total alleged that the pricing provisions created per se violations of the Sherman Antitrust Act Section 1 and thus were preempted by statute.

Total claims that the Connecticut laws eliminate the need for wholesalers to compete on price and allows them to maintain prices below what the market would dictate. Further, Total claims that Connecticut significantly reduces meaningful price competition at the retail level.

 Total challenged the following Connecticut pricing provisions:

Post and Hold provisions-this law requires manufacturers, wholesalers, and “out-of-state permittees” to post a “bottle price” and “case price” each month for each alcoholic product they intend to sell.

Posted prices are made available to the industry and the industry member can within a four-day period of posting, amend their posted prices to match a competitor’s prices. However, they can not go lower and can only match the price. After the price is matched, it is set for a month and cannot change.

Minimum-retail-price provisions-Connecticut requires retailers sell to customers at or above statutorily defined cost.  Cost is not the retailer’s cost but is the bottle price set by wholesalers with a markup for shipping and delivery.

Total questioned this concept because wholesalers sometimes lower the posted price within a month without lowering the posted bottle price. Additionally, the price remains fixed to the bottle price even though retailers buy exclusively by the case.

Price discrimination/volume discounts-Connecticut bans volume discounts, wholesalers must sell product at the same price to all retailers, and it can’t offer discounts to retailers who are high-volume purchasers.

 

A summary of the 2nd Circuit’s ruling

The 2nd Circuit disagreed with Total’s viewpoint and relied on its own precedent in Battipaglia v. New York State Liquor Authority, 745 F.2d 166. (1984), to hold that the Connecticut provisions were not preempted by Section 1 of the Sherman Antitrust Act.

The Court relied on several legal principles in coming to its decisions which included but not limited to: 1) there were no concerted actions between private parties to fix prices; 2) a unilateral action by a government entity if taken by private parties would constitute a violation of the Sherman Act is not enough to claim preemption; and 3) mandating similar pricing, does not mandate collaboration among competitors.

 

What the experts are saying about this case

“In analyzing various components of Connecticut’s Liquor Control Laws, the Court of Appeals for the Second Circuit has balanced Connecticut’s interest in preventing price wars and excessive consumption and the requirements of Section 1 of the Sherman Act that trade is not unreasonably restrained by commercial actors.  As noted by the Court, ‘The gravamen of [Section] 1 is an agreement among competitors.’  Here, the Court seems to have found that any such agreement is not mandated by Connecticut’s laws, but instead comes as a result of individual decision making by the various market participants within the State.”    

– Christopher Riano, Lecturer in Constitutional Law and Government at Columbia University

 

Total’s complaint
 Post and hold provisions

Total argued that these provisions bring out horizontal price fixing. If a wholesaler wants to drop its price, a competitor has four days to match. If a wholesaler wished to set its price below its competitors, the law requires it to hold its price for a month, which offers it no competitive advantage, because its competitors could be charging the same price.

Minimum-retail-price provisions & Price discrimination/volume discounts

Total argued that Connecticut laws preclude retailers from competing based on cost. The minimum pricing provision is not based on the retailer’s cost but based on the wholesaler’s cost.

These provisions further put Total at a disadvantage because it prevents high volume, lower-average-cost retailers like Total from offering significant discounts based on its lower-cost structure.

Total further claims that the pricing becomes more distorted because wholesalers set higher minimum bottle prices for bottles than for cases and make no corresponding reductions to bottle prices. While retailers like Total purchase by the case and purchase more quantity when the months where the case prices are lower, stores like Total can’t pass the savings along to consumers. With wholesalers fixing the price, Total can not use its business efficiencies to reduce prices for consumers.

Lastly, Total alleges that Connecticut does not actively supervise this pricing scheme and allows the wholesalers to set the prices as they see fit.

 

Discussion of the Law

 Does Section 1 of the Sherman Act which makes it illegal for “every contract, combination or conspiracy, in restraint of trade or commerce, preempt the challenged provisions of Connecticut’s Liquor Control Act?

The Court reviewed the Connecticut provisions in light of the Sherman Act by relying on two precedents and applying these two precedents to the Connecticut provisions. Rice v. Norman Williams, Co., 458 U.S. 654 (1982) and Fisher v. City of Berkeley, California, 475 U.S. 260 (1986). Under a Rice analysis to preempt a state law, the plaintiff must show that the state creates a per-se violation of the Sherman Act. The statute needs to facially conflict with federal antitrust policy.

Under a Fisher analysis, preemption occurs when a collective action creates an unreasonable restraint on trade effected by a contract, combination or a conspiracy between separate entities.

In Fisher, Berkeley imposed rent control. A group of landlords sued stating that it was akin to price fixing by the government. The Supreme Court rejected the argument because the government acting by itself does not become a concerted-action within the Sherman Act.

The Supreme Court limited its holding to a unilateral act by a government entity, but it did recognize that government actions that enforce private pricing decisions create a hybrid restraint that meets the Sherman Act’s “concerted action” requirement.

 

Analysis of Connecticut’s Minimum-Retail Pricing Provisions

 The 2nd Circuit started off its analysis of whether the Sherman Act preempts Connecticut’s minimum pricing laws by looking at a Supreme Court case where a New York minimum pricing liquor statute was at issue. In 324 Liquor v. Duffy Corp., 479 U.S. 335 (1987) a New York statute required New York retailers to charge at least 112% of the wholesaler’s posted bottle price. It classified the New York statute under Fisher as a hybrid restraint. It then applied Rice and found that the New York law was inconsistent with Section 1 of the Sherman Act, because it authorized per se violations under Section 1 of the Sherman Act and thus New York’s statute was preempted.

The Court indicated that the New York statute is substantially similar to the Connecticut statute and that 324 Liquor is still good case law. However, one big factor changes the equation, how the 324 Liquor case applied Rice is no longer relevant as there has been changes in the antitrust laws since the decision.

In a 2007 case the Supreme Court held that a rule of reason and not per se analysis applies to all vertical restraint cases. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007); overruling Dr. Miles Medical v. John D. Park & Sons Co., 220 U.S. 373 (1911). 324 Liquor relied on the legal principles of Dr. Miles Medical to justify its decision. In Leegin the Court stated “it cannot be stated with any degree of confidence that resale price maintenance always or almost always tends to restrict competition and decrease output.”

Based on Leegin, the Court indicated that 324 Liquor’s holding that minimum pricing provisions constitute a per se violation of antitrust laws is no longer good law.

 The Court stated that it must judge by the rule of reason standard and under this standard, it requires the Court to exam the circumstances underlying a particular economic practice and not lend itself to a “conclusion that a statute is facially inconsistent with the federal antitrust laws.”

The Court relying on the rule of reason held that “Connecticut’s minimum-retail pricing provisions, compelling as they do only vertical pricing arrangements among private actors, are not preempted under Section 1 of the Sherman Act.”

 

Analysis of Connecticut’s Provisions Prohibiting Price Discrimination

 Total challenged the provision which required wholesalers to sell alcohol product to every retailer at the same price. The Court rejected this challenge and held these provisions are not preempted.

First, the District Court recognized and the Court agreed that the pricing provisions impose a unilateral restraint on trade (wholesalers are limited in prices they charge). Even though this provision does restrain trade it does not allow any private actor “a degree of regulatory control over competition”. Invoking Fisher, the Court held that similar to the Berkeley rent control, the law is a restraint imposed by the government to exclusion of private companies. This activity does not violate Section 1 of the Sherman Act.

Second, the Court held that the price restraint is vertically operated. It limits a wholesaler that already has charged one price from offering another price to a different retailer. Thus, even if the provision “could be viewed as a hybrid, rather than a unilateral price-fixing provision” after Leegin it no longer remains per se unlawful. While it mandates similar pricing, it does not mandate collaboration among competitors. Thus, based on this, the Court held that under Rice, Connecticut’s provisions are not preempted by Section 1.

 

Analysis of the Post-and Hold-Provisions

 The Court judged Connecticut’s laws by a 2nd Circuit decision which dealt with New York’s post-and-hold provisions. Battipaglia v. New York State Liquor Authority, 745 F.2d 166. (1984) In this decision, which was decided after Rice but before Fisher, the Court upheld New York’s post-and-hold provisions. The Court in Battipaglia held that the New York provisions were not preempted because they did not compel agreement among wholesalers, but only individual action. The plaintiff could not prove that any agreement amongst the wholesaler tier arose because of these laws.

The Court went into an analysis of Battipaglia and reasoned how it is the dispositive law for this case.

The Court reviewed Battipaglia and showed two reasons on why the Sherman Act did not preempt the New York provision. One, the New York system it not a resale maintenance price scheme, akin to the resale price scheme of California wines laws, which was overturned by the U.S. Supreme Court. Two, the Court rejected the notion that the price scheme which forces wholesalers to adhere to them, if done as an agreement among wholesalers would constitute a per se violation of the Sherman Act. The Court held that the law is directed only at joint action and that wholesalers were provided individual choice on how to proceed.

Next the Court examined how Battipaglia looked at “whether, to be preempted by Section 1, the state law must compel an agreement among competitors.” In the Battipaglia Court’s view state compulsion of individuals is the antithesis of an agreement and the argument that if the action were done privately by the individuals would constitute preemption, is not enough for a violation of Section 1 of the Sherman Act. Under the Court’s reading the New York law did not meet Rice’s standard of presumption.

In Rice the Supreme Court opined that “a state regulatory scheme is not pre-empted by the federal antitrust laws simply because in a hypothetical situation a private party’s compliance with the statute might cause him to violate antitrust laws.” Under Rice a state law was preempted by Section 1 only if it mandates a violation of antitrust laws in all cases, or it places pressure on the private party to comply with the statute by violating the law.

The Battipaglia Court ruled that New York’s law did not put pressure on a private party to violate the antitrust law to comply with it, and that New York wholesalers can comply with their obligations without either conspiring to fix prices or engaging in parallel pricing.

In a dissent the Judge noted that the majority opinion did not pay enough attention to the hold component and that if a private agreement was entered into to hold prices for 30 days this would be horizontal price fixing and a per se violation.

Additionally, the 4th and 9th Circuit held onto the view that a statutory requirement of adhering to posted prices were if adopted by private companies would constitute per se illegal price fixing. Costco Wholesale Corp. v. Maleng, 522 F.3d 874 (9th Cir. 2008), Miller v. Hedlund, 813 F.2d 1344 (9th Cir. 1987).

 

Battipaglia controls

 The Court ruled that the precedent from Battipaglia would control in this situation. The Court reasoned that the Connecticut laws were substantially similar to the New York laws in Battipaglia. Total made the same arguments as in Battipaglia, and there has been no precedent that has come since Battipaglia that reversed its precedent.

Total argued that 324 Liquor and Freedom Holdings v. Spitzer, 357 F.3d 205 (2nd Cir 2004) should be precedent. In 324 Liquor a footnote suggested a statute is not required to bring about actual agreement between private parties to be preempted by Section 1 of the Sherman Act. Freedom Holdings picked up this footnote to suggest in its own footnote that “an actual contract, combination, or conspiracy need not be shown for a statute to be preempted by the Sherman Act.” 357 F.3d at 223 n.17.  In Total’s view these precedents negate Battipaglia.

The Court disagreed for three reasons.

First, Freedom Holdings distinguished itself from Battipaglia and treated it as sound precedent. Freedom Holdings recognized that Battipaglia discussed whether the state law must cause an actual agreement for Section 1 preemption, Battipaglia did not rule on the issue, rather it applied Rice to the post-and-hold laws.

Second, the two cases are distinguished factually from Battipaglia, these cases involved an express or readily implied agreements. Freedom Holdings pertained to an express contract between vertical companies (Master Settlement among major tobacco manufacturers) and 324 Liquor pertained to vertical restraints which affected the wholesaler-retailer relationship. The wholesalers and retailer in 324 Liquor entered into an agreement “against the backdrop of the price-fixing term that state law would supply.” In the Court’s view every Supreme Court case which held state liquor laws preempted Section 1 did so because the mandated or authorized per se unlawful vertical price-fixing arrangements between wholesalers and retailers.

Third, the two post-Battipaglia cases at the Supreme Court involve horizontal price-fixing. Both of these cases limited the scope of preemption. Fisher narrowed the scope of state action that could preempt Section 1 and the other case Bell Atlantic Corp. V. Twombly 550 U.S. 544 (2007) limited the scope to private conduct capable of per se violations of Section 1.

Applying precedent to the Connecticut Law

 The Court did not take issue with the District Court view that Connecticut’s law qualifies as a hybrid under Fisher. (A hybrid restraint empowers private party discretion as to the nature or level of consumer injury in a way that is closely akin to an antitrust violation. Given the participation of every wholesaler in the post-and-hold system, the Court concluded this way). However, the Court doubted that the law mandates concerted action between the wholesalers. In particular the hold component, although a negative restraint on commerce, it does not call on activity by private parties, let alone a coordinated and concerted action. Without the lack of concerted action, the Court found no preemption.

Further, the Court found that the pricing provisions were not violative of the Supreme Court’s decision under Twombly. Under the post-and-hold law, there is a natural explanation on how prices are arrived at and the law invites parallel pricing. The system authorizes but does not mandate that a wholesaler match lower prices set by its competitors. There is nothing in this system that mandates collaboration among the competing wholesalers.

Under this system there is little reason to reach out to a competitor on pricing and unilateral and separate acts by each wholesaler are what gives rise to prices.

In the Court’s view a post-and-hold system” is a state-regulated [system where] wholesalers are independently making price decisions within a framework aimed at avoiding price wars that invites them, before being held to a price for a month, to match that of their competitors.” According to this interpretation, the Court further noted that a post-and-hold law “does not implicate the evil against which Section 1 guards: an agreement to unreasonably restrain trade.” Hence, they concluded that it can’t preempt a state statute “which facilitates parallel conduct that parties can legally undertake on their own under Section 1.”

Based on the following, the Court held that Battipaglia is controlling law and under Battipaglia, with its substantial similarities to this specific case, the Connecticut law governing liquor prices is not preempted by Section 1 of the Sherman Act.

Leave a Reply

Your email address will not be published. Required fields are marked *