A revenue-sharing agreement among grocery stores, designed to help the stores weather targeted strikes by employees during labor strife, is not shielded from antitrust scrutiny by virtue of the non-statutory labor exemption, but neither is it so obviously anticompetitive to merit condemnation under a "quick-look" analysis, an en banc panel of the U.S. Ninth Circuit Court recently held. California ex rel. Harris v. Safeway, Inc., No. 08-55671 (9th Cir. July 12, 2011).
The case stems from labor negotiations in 2003 involving three
large supermarket chains in Southern California (Albertson's,
Ralphs and Vons). These three supermarkets had collective
bargaining agreements with a union that were set to expire, and
formed a multi-employer bargaining unit to negotiate. A fourth
chain, Food 4 Less, had a separate contract with the same union
that was due to expire several months later, and also joined the
employers' group.
In anticipation of "whipsaw" tactics, by which a union
exerts pressure on one employer in a multi-employer bargaining unit
through selective strikes or picketing, Albertson's, Ralphs,
Vons and Food 4 Less (hereafter "Defendants" or
"Grocers") entered into a Mutual Strike Assistance
Agreement ("MSAA"). The MSAA provided that, if one party
to the agreement was struck by the union, the other Grocers (minus
Food 4 Less) would lock out their employees within 48 hours.
The MSAA also included a revenue-sharing provision, providing that
in the event of a strike or lockout, any grocer that earned
revenues above its historical share relative to the other chains
during the strike period would pay 15 percent of those excess
revenues to the other Grocers. The 15 percent figure was designed
to estimate the grocers' incremental profit. Slip Op. at 9288.
The MSAA dictated that the revenue-sharing period would end two
weeks following the end of the strike or lockout.
Negotiations broke down, and the unions began to strike. The union
ultimately focused its picketing efforts on Albertson's and
Vons only.
During the strike, the state of California sued, alleging that the
MSAA's revenue-sharing provision violated Section One of the
Sherman Act. Both sides moved for summary judgment. California
claimed the revenue-sharing provision was a per se violation of
Section One. The Grocers claimed the MSAA was immune from antitrust
scrutiny under the non-statutory labor exemption, which limits an
antitrust court's authority to pass judgment on trade
restraints in a labor context. When the District Court denied both
motions, the parties stipulated to an entry of final judgment for
Defendants, and both sides appealed. California agreed not to
pursue the theory that the MSAA violated Section One under a
full-blown rule-of-reason analysis, and Defendants agreed not to
pursue the various affirmative defenses they had pleaded, except
the non-statutory labor exemption.
The original three-judge panel held that the agreement need not be
tested under a rigorous "rule of reason" analysis.
California ex rel. Brown v. Safeway, Inc., 615 F.3d 1171
(9th Cir. 2010). The panel instead subjected the MSAA to a new
"quick-look-plus" analysis, under which the court
considered the history of judicial experience with profit-sharing
arrangements, along with the circumstances and details of the MSAA,
and applied "rudimentary economic principles" to
determine its likely anticompetitive effects. The panel concluded
that the MSAA was indeed likely to have an anticompetitive effect.
The court also rejected the Grocers' argument that any
reduction in competition would be outweighed by the reduced cost of
labor that would result from its enhanced bargaining position. The
panel held that "driving down compensation to workers is not a
benefit to consumers cognizable under our laws as a
'pro-competitive' benefit." Id. at 1192. The
Court further held that the MSAA was not shielded from antitrust
analysis by the non-statutory labor exemption.
The Ninth Circuit voted to rehear the case en banc. The
resulting opinion, authored by Judge Ronald M. Gould, first affirms
the district court's finding that the MSAA is not exempt from
antitrust analysis under the non-statutory labor exemption. The
Court analyzes the argument under Brown v. Pro Football,
Inc., 518 U.S. 231 (1996), in which the U.S. Supreme Court
held for the first time that the non-statutory labor exemption may
extend to an agreement solely among employers. The Brown
court held that an agreement among a group of NFL teams, following
an impasse in bargaining with the players' association, to
unilaterally impose terms and conditions from the lapsed collective
bargaining agreement, was a well-recognized procedure in the
collective bargaining process and thus exempt from antitrust
review.
The en banc panel finds that the Grocers' revenue-sharing
agreement was fundamentally different from the NFL teams'
post-impasse agreement exempted in Brown, in every way
that matters. Revenue-sharing is not an accepted practice in labor
negotiations, with a history of regulation from the realm of labor
law, the Ninth Circuit held. Slip Op. at 9298. The revenue-sharing
agreement does not play a significant role in collective
bargaining, nor is it necessary to permit meaningful collective
bargaining. It does not relate to the "core subject matter of
bargaining," like wages, hours and working conditions, the
court held. The revenue-sharing agreement did not restrict a labor
market, but rather a "business" or "product"
market. Notably, the en banc court backs away from the
more categorical statements made by the original three-judge panel
on this point, and expressly stops short of announcing "a
strict rule [that] the non-statutory labor exemption can only arise
in a case involving restraint of terms directly relating to labor
...." Id. at 9300.
In short, the Ninth Circuit rejects the Grocers' contention
that Brown immunizes employers' use of "economic
weapons" to advance their position in a labor dispute. Such a
holding, the court said, would also immunize blatant price-fixing
agreements, as long as the resulting profits were useful to
employers during a strike, the court said. Id. at
9299.
The Court then proceeds to analyze the merits of California's
Sherman Act claim, focusing initially on the state's claim that
the challenged restraint is per-se illegal. The Court quickly
dismisses California's attempt to characterize the
revenue-sharing agreement as a market-allocation agreement, and
instead focuses on the state's claim that the MSAA is a
profit-pooling agreement, identical to those previously condemned
by the U.S. Supreme Court as per-se illegal.
Defendants offered two defenses for their revenue-sharing
agreement. First, they argued that the agreement was, by its terms,
effective only for a limited and unknown duration. As a result,
Defendants argued, the Grocers retained incentives to compete
during the revenue-sharing period, in order to retain customers and
best position themselves for the inevitable, post-strike return to
competition as usual. Second, Defendants argued that the
revenue-sharing agreement did not include all participants in the
relevant markets, and a sufficient number of groceries remained
outside the agreement to impose competitive discipline. The en
banc majority found that these factors sufficiently
distinguished the MSAA from other profit-pooling agreements
described in the cited case law, such that per-se treatment would
be inappropriate. Id. at 9311.
The en banc court also held that these same concerns
precluded the "quick look" analysis endorsed by the
original three-judge panel. Id. Given its limited duration
and the existence of significant, external competitors in the
market, it is unclear what competitive effects the MSAA would have,
the Ninth Circuit said. While the revenue-sharing provisions might
arguably lessen the Grocers' incentives to compete, the limited
duration of the agreement and the presence of other competitors
made it far from obvious that the grocers actually would refrain
from competing, rendering the "quick look" mode of
analysis inapplicable.
In so holding, the en banc panel again backed away from a
broad holding from the original three-judge panel. Defendants had
argued that their revenue-sharing agreement had pro-competitive
benefits in the form of lower prices for consumers, which resulted
from the grocers' ability to negotiate lower labor costs. The
original panel rejected this argument categorically: "driving
down compensation to workers is not a benefit to consumers
cognizable under our laws as a pro-competitive benefit." The
en banc panel did not endorse this view, but rather found
that the issue need not be resolved, given its finding that
California failed to meet its burden to show that the
revenue-sharing was obviously anticompetitive. Slip Op. at 9313
n.17.
Chief Judge Alex Kozinski dissented in part from the majority
opinion, joined by judges Richard C. Tallman and Johnnie B.
Rawlinson. Kozinski states the court need not have ruled on the
nonstatutory labor exemption, and thus the court's
"groundbreaking" ruling on that issue is an advisory
opinion beyond the scope of its jurisdiction. Further, Judge
Kozinski writes that the majority likely reached the wrong
conclusion on the labor issue, through an overly restrictive
reading of Brown.
Judge Stephen Reinhardt also dissented in part, joined by judges
Mary M. Schroeder and Graber. Judge Reinhardt, author of the Ninth
Circuit's original opinion, disagreed with the majority's
conclusion that the dispute required a full-blown rule of reason
analysis. Rudimentary economics dictate that the revenue-sharing
agreement can have only anticompetitive effects, Reinhardt writes.
The agreement's limited duration and the presence of other
competitors might reduce that anticompetitive effect, but cannot
eliminate it altogether.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.