Ninth Circuit Gets It Half Right: Brunell Commentary on California v. Safeway

Jul 22 2011
Commentaries

On rehearing en banc, the Ninth Circuit held that an agreement among the major supermarket chains in Southern California to share profits during a strike was not immune from antitrust attack under the non-statutory labor exemption, but that it was also not subject to quick look (or per se) condemnation; rather, the agreement should be evaluated under the rule of reason. Chief Judge Kozinksi and two other judges dissented on the labor-exemption issue, while Judge Reinhardt and two other judges dissented on the quick-look issue. (Reinhardt wrote the panel decision ruling in favor of the State on both issues.) The opinion is available here. . AAI submitted an amicus brief arguing that the profit-sharing agreement should be unlawful under the quick-look rule because it was inherently suspect and lacked any legitimate procompetitive justification. AAI’s brief is available here.

On the non-statutory labor exemption issue, the en banc court properly refused to extend Brown v. Pro Football, Inc. to immunize a product-market restraint that was not necessary to make the collective bargaining process work. On the quick-look issue, the majority of judges didn’t think it was obvious that the supermarkets’ reduced incentives to compete would have any effect on competition in the market given the temporary (albeit indefinite) nature of the agreement and the fact that it did not include all the supermarkets in the local geographic markets (only those accounting for 54 to 76% of the revenues, depending on the market).

In the key paragraph of its decision, the court concluded:

"[I]t is by no means ‘obvious’ that the grocers that entered into the RSP [revenue sharing provision] would be motivated to reduce their competition on price. Although the immediate monetary risk of losing sales to competitors during a labor strike is reduced by revenue sharing, the remaining risks are still such that a rational competitor would be expected to continue to compete vigorously. While it is true that the arrangement provides a cushion that may arguably affect incentives to compete, that alone, absent evidence of actual anticompetitive impact on pricing, is not sufficient for us to resolve the RSP issue on a “per se” or “quick look” or any other abbreviated basis [emphasis added]."

While it is dubious that a rational competitor would “continue to compete vigorously” if it shared its profits with its rivals, even temporarily, the court seemed to be willing to accept the irrefutable point that the profit-sharing agreement reduced the supermarkets’ incentives to compete with one another (and with other rivals) compared to their incentives absent the agreement. As AAI argued in its brief, “While the magnitude of the competitive effect of the revenue sharing agreement may not be clear its direction is plainly negative . . . .” In other words, the supermarkets would be expected to compete more vigorously without the agreement. Judge Fisher, in his concurrence, expressly recognized this, noting, “I have strong doubts that the grocers profit sharing agreement left them with an undiminished incentive to compete.”

Nonetheless, the court said that a truncated analysis was inappropriate. Why? The court did not explain; rather it simply asserted that “evidence of actual anticompetitive impact on pricing” is required. Yet proof of actual anticompetitive impact is not necessarily required even under the rule of reason; market power plus an anticompetitive tendency may be sufficient to establish plaintiff’s prima facie case. See, e.g., RealComp II, Ltd. v. Federal Trade Comm’n, 635 F.3d 815, 834 (6th Cir. 2011). And given that the supermarkets’ collective market share was well in excess of 50%, their market power seems self-evident. Moreover, anticompetitive impact is not limited to price effects.

The supermarkets had argued that a quick-look analysis applied only to restraints that facially limit output or fix prices. That cannot be right because a pure profit-pooling agreement does not directly restrain price or output, but “runs afoul of the Sherman Act” because it “reduces incentives to compete.” Citizen Pub. Co. v. United States, 394 U.S. 131, 135 (1969). Indeed, as Judge Reinhardt pointed out in his partial dissent, a profit-sharing agreement may be more harmful than an agreement fixing prices or output because it diminishes incentives to compete on every dimension.

The only argument offered by the supermarkets as to why their diminished incentives to compete might have had no impact on competition was their assertion that employees responsible for pricing were not aware of the profit-sharing agreement. However, the Court did not rely on this argument and Judge Reinhardt effectively rebutted it in his partial dissent, noting, among other things, its implausibility given that news of the supermarkets’ financial cooperation was on the front page of the Los Angeles Times.

For whatever reason, the Court thought that the profit-sharing agreement would have only an incidental adverse impact on competition. But like a “naked” agreement to restrict price or output, it makes little sense to tolerate a profit-sharing agreement that reduces competitive incentives, regardless of the magnitude of the reduction, absent some procompetitive justification for the practice.

The Court did not reach the question of whether the profit-sharing agreement had a legitimate pro-competitive justification. The supermarkets argued that the agreement was procompetitive because it would permit them to negotiate a more favorable labor contract, which would redound to the benefit of consumers. Judge Reinhardt’s partial dissent pointed out that this argument was not only exceedingly speculative, but that reducing wages through collective action is simply not a legitimate procompetitive justification, regardless of its impact on consumers; otherwise buyer cartels could be justified.

Perhaps the Court’s quick-look ruling was influenced by the fact that the restraint was not adopted for the purpose of reducing competition generally, but to ensure “solidarity” during a labor dispute. In rejecting the supermarkets’ labor immunity arguments, the Court noted that those arguments “may be relevant to their position that there was no unreasonable restraint of trade.” However, it is well-settled that, absent immunity, antitrust law does not countenance exceptions (or justifications under the rule of reason) based on non-competitive or “social policy” concerns. See National Soc’y of Prof. Engineers v. United States, 435 U.S. 679 (1978).

Arguably, the Court’s holding on the labor exemption will have a far greater impact than its ruling on the “quick look.” Perhaps the latter can be chalked up to the peculiar circumstances of the collective bargaining context and the majority’s inability to reach a “confident conclusion” as to the principal tendency of the agreement absent more factual development.

Richard Brunell, AAI Director of Legal Advocacy

The author welcomes comments at rbrunell@antitrustinstitute.org.

Note to readers: AAI has an extensive amicus briefing program. From time to time, we will provide short follow-up commentaries like this one to offer observations on the opinions issued.

 

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