Transcript National Alcoholic Beverage Control Association March 11

©2008 Haynes and Boone, LLP
Practical Implications of Leegin
For the Alcohol Beverages Industry
National Alcohol Beverage
Control Association
15th Annual Symposium
on Alcohol Beverage Law
Arlington, Virginia
March 11, 2008
Theodore Voorhees, Jr.
Covington & Burling LLP
1. Three things Leegin did do.
2. Six things Leegin did not do.
3. Key Rule of Reason parameters for alcohol
beverages.
4. Some cautionary notes about Leegin’s
application in case of alcohol beverages
5. New options and open questions for pricing
in open states.
6. New options and open questions for pricing
in control states.
7. Closing thoughts on Costco.
Three Things Leegin did do
• Overturned Dr. Miles decision.
• Eliminated rule of per se illegality for judging
vertical resale pricing under the federal
Sherman Act
• Replaced the per se rule with case-by-case
economics-focused analysis under the
antitrust “rule of reason”
Six Things Leegin did not do
• Did not make resale price decisions per se lawful.
• Did not dictate results in the states under state law
antitrust regimes.
• Did not sweep away all of Colgate rule and
jurisprudence.
• Did not displace Kahn or nullify the distinct economic
differences between maximum and minimum resale
price effects.
• Did not provide much clear guidance for applying rule
of reason.
• Did not dislodge the vast web of federal and state law
governing many aspects of alcohol beverage
regulation affecting pricing.
Key Rule of Reason Parameters
for Alcohol Beverages
• Is there horizontal collusion.
• Is there market power.
• Is the business objective plausibly related
to sales enhancement.
• Is the likely effect increased inter-brand
competition.
Some Cautionary Notes About
Leegin’s Application In Case of
Alcohol Beverages
• What the Leegin majority identified as potential procompetitive blessings of RPM are not always or
necessarily a good fit in the case of alcohol
beverages
– consumers’ need for use instructions or other product-related
services
– possible development of various price-service combinations
– real free rider problems may be hard to prove in many cases
– RPM as incentive for new market entry through enhanced
retailer services seems a difficult challenge given regulatory
constraints
Key Distinctions Requiring Separate
Analysis in Counseling
• “Franchise” or “Open” States vs. “Control”
States
• Three-tier system in most Open States still
requires separate analysis for each of the two
resale tiers.
– wholesaler tier
– retailer tier
Open States – Resale Pricing
from the Wholesale Tier
• Desired Wholesale Services Still Seem
Significant
– Maintain strong inventory
– Frequency of delivery
– Dedicated sales teams
• Assurance of Adequate Service May
Indicate Pro-Competitive Justification for
Minimum resale price maintenance
New Options At Wholesale Tier
in Open States
• More open discussion of resale price
• More open discussion of likely impact of
pricing at alternative levels
• More leeway to reach consensus view on
optimal pricing to maximize sales
Unresolved Questions At Wholesale Tier
in Open States
• Can wholesaler surrender his pricing freedom in the
distribution agreement?
• Can supplier freely punish/terminate wholesaler for
pricing contrary to supplier’s wishes/expectations?
• Can intrabrand competition be totally eliminated via
both territory and pricing so long as supplier faces
stiff interbrand competition?
• Note that there has been remarkably little vertical
restraint litigation in alcohol industry over last decade
(and likely to be even less going forward)
Open States
Retail Tier – Services And Pricing?
• Are there any significant services that could be
price-incentivized without violating federal and
state regulations (e.g., tied house, exclusion,
price-posting, etc.)?
• Absent regulatory constraints, a supplier would
favor maximum resale price maintenance
already beneficial to consumers and protected
by Kahn.
“A manufacturer has no incentive to
overcompensate retailers with unjustified margins.”
127 S. Ct. at 2919-20.
Control States – Impact of State Role
• State may still exercise monopsony buyer
power.
• Distribution and pricing still subject to
elaborate legal and regulatory controls.
• State Action and Noerr-Pennington doctrines
should still protect suppliers in most
situations.
• But will a commercial activity exception gain
greater acceptance under Noerr?
Enhanced Leeway for Price Discussions
in Control States
• All suppliers have legitimate, pro-competitive interest
in minimizing inefficiency (“transaction
cost”/”bureaucratic friction”) and unnecessary added
costs of state regulatory system
• Each supplier has legitimate reason to discuss and
press for consensus on appropriate resale pricing to
enhance sales
• 21st Amendment “temperance” policy still a potential
restraining factor, but TFWS and Costco show that
state may have difficulty sustaining policy based on
factual proof
Two Closing Questions Re: Costco
1.
Will Leegin cause courts to revisit their “hybrid” finding
(rejection of unilateral action) in Costco and TFWS?
•
Look again at Judge Luttig’s concurring opinion in TFWS:
“Here, as in Fisher, I believe the Maryland statute is unilateral action because
there is no voluntary agreement, independently reached, between private
parties that is either authorized or enforced by the state. In fact, there is no
‘agreement’ at all.”
242 F.3d at 214
•
… and Judge Luttig’s citation from the Supreme Court’s opinion in
Fisher:
“A restraint imposed unilaterally by government does not become concerted
action within the meaning of the [Sherman Act] simply because it has a
coercive effect upon parties who must obey the law. The ordinary relationship
between the government and those who must obey its regulatory commands
whether they wish to or not is not enough to establish a conspiracy.”
475 U.S. at 267
Two Closing Questions Re: Costco (cont’d)
2.
Will combination of Leegin and Twombly cause courts to revisit their
per se finding in Costco and TFWS and require analysis based on
demonstrable economic effects rather than untested assumptions:
Twombly
“We think that nothing contained in the complaint invests either the action or
inaction alleged with a plausible suggestion of conspiracy. … there is no
reason to infer that the companies had agreed among themselves to do what
was only natural anyway; so natural, in fact, that if alleging parallel decisions to
resist competition were enough to imply an antitrust conspiracy, pleading a § 1
violation against almost any group of competing businesses would be a sure
thing.”
127 S. Ct. at 1971
Leegin
“When only a few manufacturers lacking market power adopt the practice,
there is little likelihood it is facilitating a manufacturer cartel, for a cartel then
can be undercut by rival manufacturers.”
127 S. Ct. at 2719