In California v. Safeway, Inc. et al., the Ninth Circuit examined the antitrust implications of a profit sharing agreement among several Southern California supermarket chains during a labor dispute. The court applied a mixed or blended rule of reason approach rather that per se analysis in determining whether such profit sharing had sufficient procompetitive effects to overcome the anticompetitive effects the court presumed to be traditionally associated with such arrangements. The Ninth Circuit concluded that the alleged procompetitive effects of the arrangement were too speculative and thus insufficient to counter what the Panel believed were obvious anticompetitive effects. This was the court’s view despite the fact that the profit sharing agreement only covered a limited period of time and only included some of the participants in the relevant market. The court also rejected the chains’ claim that the profit sharing arrangement was exempted from federal antitrust laws under the nonstatutory labor exemption.
Three of the largest supermarket chains operating in Southern California had a collective bargaining agreement with labor unions that was set to expire in October of 2003. The three supermarket chains and the unions agreed that that the chains would act as a multiemployer bargaining unit for the purpose of negotiating a successor to their expiring contract. Anticipating that the labor unions would strike or picket one of the supermarket chains as part of so called whipsaw tactics designed to exert economic pressure on the employers, the three supermarket chains and one smaller chain entered into a Mutual Strike Assistance Agreement (MSAA). Under the MSAA, if a strike or picketing took place at any of the chains, the others would lockout all their union employees within 48 hours. The MSAA also contained a revenue sharing provision which stated that in the event that the unions used whipsaw tactics, any chain that earned revenue above its historic amount would redistribute 15 percent of its surplus revenue to the other chains. The profit sharing would continue for two weeks after the end of any strike or lockout.
On October 11, 2003, the unions went on strike at one of the supermarket chains. The next day, the other chains locked out their union employees. The unions picketed until February of 2004, when the chains and the unions entered into a new labor contract. As a result of the revenue sharing provision of the MSAA, two of the supermarket chains paid the other chains approximately $144 million. The California Attorney General filed suit against the supermarket chains, claiming that the revenue sharing provision was an unlawful combination and conspiracy in violation of Section 1 of the Sherman Act.
The supermarket chains moved for summary judgment based on the nonstatutory labor exemption affirmative defense. The district court denied the defendants’ motion. California then moved for summary judgment claiming the profit sharing provision was either a per se violation of Section 1 of the Sherman Act, or unlawful under a quick look analysis. The district court denied California’s motion as well. The court then entered final judgment following a stipulation by the parties under which California would not seek judgment by full rule of reason and the chains would drop all affirmative defenses except the nonstatutory labor exemption.
The Ninth Circuit Opinion
The Ninth Circuit first considered the level of antitrust analysis under which the legality of the chains’ profit sharing agreement should be analyzed. The State argued that the chains’ conduct should be evaluated and found illegal under a per se antitrust analysis, which is premised on the theory that “judicial experience with a particular class of restraints shows that virtually all restraints in that class operate so as to reduce output or increase price.” The State contended that the chains’ profit sharing agreement was virtually identical to profit sharing and pooling schemes that the Supreme Court in the past had ruled were per se violations of Section 1 of the Sherman Act. The supermarket chains presented three reasons why their agreement was distinguishable from previously challenged arrangements. First, they argued that they were required to share only a portion of their increased revenue rather than sharing all profits as required in traditional profit pooling arrangements. The Ninth Circuit, however, concluded that the 15 percent figure represented the chains’ estimates as to additional profits that would be earned as a result of the unions striking at certain supermarkets. The court rejected the chains’ expert testimony that profits would likely be higher than 15 percent, concluding that “their intent to share profits is sufficient, whether or not the scheme as implemented achieved that objective to perfection.”
Second, the supermarket chains contended that per se analysis was inappropriate because unlike traditional profit sharing schemes, the chains’ agreement lasted only for the period of the labor dispute. The court determined that additional analysis was required to evaluate the chains’ view that the “short term of the profit sharing leaves them with sufficient incentive to compete for customers, whose allegiance might be retained after the end of the strike.” Third, the chains argued that their arrangement was distinguishable from the facts in other profit sharing cases because they were not the only participants in the relevant market. The court recognized that distinction, determining that it required a more detailed analysis than the per se rule. Accordingly, it decided to use a combined or mixed analysis under which it would consider “the history of judicial experience with profit sharing agreements, applying rudimentary economic principles to the meaning and effects of the particular agreement in question, and thoroughly analyze the circumstances, details and logic of the agreement in order to determine the likelihood of anticompetitive effects.” To find a violation under this analysis, the court declared that it must “reach a ‘confident conclusion [that] the principal tendency’ of the agreement is to restrict competition.”
The Ninth Circuit began its mixed analysis with the understanding that a traditional profit sharing scheme reduces the incentive to compete for customers and “the result of this lack of competitive pressure is the high likelihood that prices rise towards monopoly levels or fail to fall with the same effect.” The court then sought to determine whether the unique aspects of the chains’ agreement eliminated the traditional anticompetitive effects associated with such profit sharing agreements. The chains had contended that the profit sharing clause did not eliminate the need for them to compete with one another because the short duration of the agreement meant that “customers who are won or retained through competition during that period will remain as customers after the agreement ends.” The Ninth Circuit concluded, however, that the “incentive to compete for sales and profits that would occur at some future time would be substantially less than the ordinary incentive to compete . . .” because the “defendants would incur the ordinary costs of obtaining customers without receiving the ordinary benefits that would accrue.” As a result, the anticompetitive effect of a profit sharing arrangement of limited “duration might be diminished to some degree but would certainly not be eliminated.”
To compensate for the reduced competition from the chains that participated in the profit sharing, the increase in competition by those members outside the agreement would need to be proportionally higher. However, the court determined that such increased competition would be highly unlikely because the participating chains represented 60 to 70 percent of the relevant market. The remaining market participants were largely independent from one another and would have neither the motivation nor the ability to enter into a uniform marketing policy that would significantly increase the competitive pressure normally exerted on the participating chains. In addition, the defendants “would be at least partially insulated from competition from other vendors by virtue of the many and varied locations of their stores, which for numerous customers would be far more convenient to patronize than the markets operated by the other vendors.” According to the court, smaller retailers would also lack the means of competing with the larger retail chains as a result of lack of brand recognition and limited facilities, suppliers and staffing; nor would they be inclined to invest significant amounts of money on increased competition given the short duration of the profit sharing agreement. Therefore, the Ninth Circuit concluded that neither the limited duration of the contract nor the fact that the supermarket chains represented less than 100 percent of the market diminished the anticompetitive nature of the arrangements.
The Ninth Circuit next analyzed “whether the profit sharing agreement loses its anticompetitive effects when it becomes operative during the course of a strike or labor dispute.” During a strike, revenues might drop because customers are less likely to frequent a store where a labor dispute is taking place. As a result, the retailers involved would experience greater financial pressure even though fixed costs remained the same. However, these effects would not be diminished by the profit sharing agreement. Rather, the profit sharing agreement “would cause defendants to compete even less during the strike period than they would were there no profit sharing agreement in effect at that time.” Indeed, “[w]hatever the baseline circumstance as to competition in any give period, including a strike period, the existence of the profit sharing agreement results in a greater likelihood of less competition that there would otherwise be.”
The supermarket chains argued in the alternative that the State had failed to present sufficient empirical evidence demonstrating that the profit sharing arrangement had an anticompetitive effect. The court rejected this argument, declaring that “[s]o long as the anticompetitive nature of the likely effects of an agreement is, as a theoretical matter, ‘obvious,’ it is not necessary for a plaintiff to provide empirical evidence demonstrating anticompetitive consequences.”
Having determined that the chains’ profit sharing agreement likely had anticompetitive effects, “the burden of proof is shifted to the defendant ‘to show empirical evidence of procompetitive effects.’” The chains argued that the procompetitive effect of the profit sharing agreement was “that it increased their chances of winning the labor dispute and reducing the wages and benefits they would be required to pay to their employees, which in turn would increase their ability to lower prices and compete more effectively with other companies.” The court disagreed on the ground that such a chain of events was purely speculative. In addition, the court declared that driving down employee wages was not a recognized procompetitive benefit as “it simply harms working people and their families . . .” As a result, the Panel concluded that there was no reason “to set aside the ordinary principles governing antitrust law in order to unbalance the carefully developed legal structures relating to our laws governing collective bargaining . . .”
Finally, the Ninth Circuit addressed the chains’ contention that because they entered into the profit sharing arrangement as a means of dealing with a labor dispute, they were excused from the antirust laws by the nonstatutory labor exemption. Although the statutory labor exemption from the antitrust laws is broad, it does not apply to all activities involving labor organizations. Accordingly, a nonstatuory exemption has been recognized by the courts. In Brown v. Pro Football, Inc., the Supreme Court identified two aspects of employer agreements that justify application of this additional antitrust protection. First, the nonstatutory labor exemption is appropriate when “[l]abor law itself regulated directly, and considerably, the kind of behavior at issue . . .” Second, the conduct at issue must be “a familiar practice in the context of multiemployer bargaining.” The Ninth Circuit declared that arrangements such as the chains’ profit sharing agreement at issue in the case before it have “not traditionally been regulated under labor law principles, nor does it raise issues . . . that are suitable for resolution as a matter of labor law.” In addition, profit sharing has “no history in connection with multiemployer bargaining and has proved necessary neither to the development of that process nor to the collective bargaining process in general.” Accordingly, the nonstatatory labor exemption did not apply, and the Ninth Circuit affirmed the denial of summary judgment for the supermarket chains, holding that the chains’ profit sharing agreement violated Section 1 of the Sherman Act.
While not concluding that the supermarket chains’ profit sharing arrangement at issue were per se illegal under Section 1 of the Sherman Act, the Ninth Circuit’s Safeway decision signals that even profit sharing arrangements of limited duration and involving fewer than all market participants need significant, and easy to identify, procompetitive effects to overcome the strong presumption of anticompetitive effects traditionally associated with such arrangements. The use of profit sharing during labor disputes is insufficient alone to provide protection from antitrust law.