us-ftc-advocacy-filings-dbedd6ef5c516721713cbcc62e53cc2b•FTC Comment to the Hon. Strom Thurmond Concerning S. 397, the Foreign Trade Antitrust Improvements Act of 1985
FTC Comment to the Hon. Strom Thurmond Concerning S. 397, the Foreign Trade Antitrust Improvements Act of 1985
us-ftc-advocacy-filings-dbedd6ef5c516721713cbcc62e53cc2bFTC Comment to the Hon. Strom Thurmond Concerning S. 397, the Foreign Trade Antitrust Improvements Act of 1985Advocacy Filing
,,- - \- .• . t ~.' . -L-IQ>/-r~-o(, ." COMMISSION APPROVED IN THE UNITED STATES DISTRICT COURT FOR '!'HE NORTHERN DISTRICT OF OKLAHOMA . - v. Defendan,t. Plaintiffs, WAL-MART'STORES, INC., a Delaware corporation, d/b/a WAL-MART PHARMACY, Pawhuska, No. 84-C-436-E JOHN E. SNIDER d/b/a HOMINY REXALL DRUG; ROBERT SLAMANS d/b/a/ CORNER HEALTH MART; WILBUR CAVE d/b/a/ FAIRFAX DRUG; LEO BERKENBILE d/b/a B & B REXALL DRUG; and JIM WElGANT d/b/a/ WElGANT' S HEALTH MAR'!', ) ) ) ) ) ) ) , ) ) ) ) ) ) ) ) ) ) , ) ) ) -----------------) BRIEF OF THE FEDERAL TRADE COMMISSION AS AMICUS CURIAE IN SUPPORT OF WAL-MART STORES, INC.'S MOTION TO DISMISS John H. Carley Gener al Couns el Nolan E. Clark Deputy Assistant Director -. for .Planning Peter P. Metrinko James F. Mongoven Attorneys Timothy J. Huris Director, Bureau of Competition Winston S. Moore Assistant Director for Planning Federal Trade Commission 6th Street and Pennsylvania Avenue, N.W. Washington, D.C. 20580
I' • TABLE OF CONTENTS ••••••••••••••••••••••••••••••••••••••••••••••• i TABLE OF CASES AND AUTHORITIES ••••••••••••••••••••••••••••••••• ii INTRODUcrION •••• '••••••••••••••••••••••••••••••,••••••• '••••••••••• 1 I. THE OKLAHOMA ACT IS INVALID IF IT IRRECONCILABLY CONFLICTS WITH THE SHERMAN ACT BY PRECLUDING COMPETITORS FROM ENGAGING IN FULLY COMPETITIVE PRICING ••••• 2 A. The Oklahoma Act Is Invalid if It Prevents the . Accomplishment of the Full Purposes o~ the Sherman Act ••••••••••• ·•••••••••••••••••• ~ ••••••••••••• 2 B. Central to the Purposes of the Sherman Act Is Its Ban on Priv.ate Agreements that Restrain Fully Competitive Pricing ••••••••••••••••••••••••••••• 6 C. State Statutes that Preclude Competitors from Engaging in Fully Competitive Pricing Are Unconstitutional and Unenforceable •••••••••••••••••••• 8 II. THE OKLAHOMA ACT IS INVALID BECAUSE IT IRRECONCILABLY CONFLICTS WITH THE SHERMAN ACT BY PRECLUDING COMPETI'l'ORS FROM ENGAGING IN FULLY COMPETITIVE PRICING •••••••••••••••• 14 A. The Minimum Markup Required by the Act Would Constitute Per Se Illegal Price Fixing if Agreed Upon by Competitors ••••••••••••••••••••••••••• 14 B. The Act's Requirement that No Product Be Sold Below Cost Would Constitute Per Se Illegal Price Fixing if Agreed Upon by Competitors ••••••••••• 17 C. Because It Precludes Competitors from Engaging in Fully Competitive Pricing, the Oklahoma Act Is Unconstitutional and Unenforceable ••• 19 III. "STATE ACTION" IMMUNITY DOES NOT PRECLUDE PREEMPTION WHEN A STATE STATUTE IRRECONCILABLY CONFLICTS WITH THE SHERl-SA.N ACT •••••••••••••••••••••••••. _ ••••••••••••••••••••• 20 IV. THE OKLAHOMA ACT CANNOT BE JUSTIFIED AS NECESSARY TO PROTECT CONSUMERS AGAINST SUCH MARKET BEHAVIOR AS DECEPTIVE OR PREDATORY ACTS ••••••••••••••••••••••••••••••• 24 V. PREEMPTION OF STATE STATUTES THAT IRRECONCILABLY CONFLICT WITH THE SHERMAN ACT DOES NOT PRECLUDE STATE . REGULATION THAT IS CONSISTENT WITH THE PUBLIC INTEREST •••• 26 ~ CONCLUSION ••••••••••••••••••••••••••••••••••••••••••••••••••• ~ .29 CERTIFICATION OF MAILING ••••••••••••••••••••••••••••••••••••••• 30
CASES TABLE OF CASES AND AUTHORITIES Page - Battipaglia v. New York State Liquor Authority, No. 84-7168, slip Ope at 6432, 6437 (2d Cir., September 21,1984) •••••••••••••••••••••••••••• ·••••••••••• 22 Berman v. Parker, 348 U.S. 26 (1954).~ ••••••••••••••••••••••••• 26 California Retail Liquor Dealers' Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980) ••••• 9,11, 13, 14, 20, 22 Cantor v. Detroit Edison Co., 428 U.S. 579 (1976) •••••••••••••• 27 Catalano, Inc. v. Target Sales, Inc., 446 0.5.643 (1980) •••••••••••••••••••••••.•••••••••••••••••• ~ ••••• •• 7, 16 Community Communications Co. v. Boulder, 455 0.5. 40 (1982) •..••.....•••..•.••..••.•.•..•.•••••••.••...• 21, 22, 23 Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U .5. 36 (1977) •••••..••..•.•••••••••••••••••••••••••••• 10 Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) •••••••••••••••••••••••••••••••••••• 9, 13 Gibbons v. Ogden, 22 U.S. (9 Wheat) 1 (1824) •••••••••••••••••••• 3 Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) ••••••••• 7, 21 Hines v. Davidowitz, 312 U.S. 52 (1941) •••••••••••••• 3, 5, 20, 28 Hoover v. Ronwin, 104 S. Ct. 1989 (1984) ••••••••••••••••••••••• 21 Janich Bros. Inc. v. American Distilling Co., 570 F.2d 848 9th Cir. 1977), cert. denied, 439 U.S. 829 (1978) ••••••••••••••••••••••••••••••••••••••• 18 Kiefer-Stewart Co. v. Joseph E. Seagrams & Sons, 340 U.S. 211 (1951) ••••••••••••••••••••••••••••••••••••••• 17 Lewis-Westco v. Alcoholic Beverage Control Appeals Bd., 186 Cal Rptr. 552 (1982), cer~. denied, 439 U.S. 829 (1978) ••••••••••••••••••••••••••••••••••••••••••••••.• 12 Lormar, Inc. v. Kroger Co., 1979-1 Trade Case. (CCB) . 162,498 (S.D. Ohio 1979) •••••••••••••••••••••••••••••••••• 18 McCulloch v. Maryland, 17 U.S. 316 (1819) ••••••••••••••••••••••• 3 Miller v. Hedlund, 579 F. Supp. 116 (D. Ore. 1984) ••••••••••••• 12 New Motor Vehicle Bd. of Cal. v. Orrin W. Fox Co., 439 U.S. 96 (1978) •••••••••••••••••••••••••••••••••••• 21, 22
Northeastern Telephone Co. v. American Telephone' Telegraph Co., 651 F.2d 76 (2d Cir. 1981) ••••••••••••••••• 25 No~thern Pac. Ry. v. United States, 356 U.S. 1 (1958) •••••••••••••••••••••••••••••••••••••••••••••• 2, 6, 27 ~cific Engineering' Prod. Co. v. Kerr-McGee Corp., 551 F.2d 790 (10th Cir.), cert denied, 434 U.S. 879 (1977) ••••••••••••••••••••••• ~ •••••••••••••••••••••••• 25 Parker v. Brown, 317 u.S. 341 (1943) •••••••••••••••••••••••• 9, 22 Perington Wholesale, Inc. v. Burger King Corp., 631 F.2d 1369 (10th Cir. 1979) ••••••••••••••••••••••••••••••••••••• 25 Ray v. Atlantic Richfield Corp., 435 U.S. 151 (1978) •••••••••••• 3 Rice v. A1choho1ic Beverage Control Appeals Bd., 146 Cal. Rptr. 585 (1978) ••••••••••••••••••••••••••••••••• 12 Rice v. Norman Williams Co., 458 U.S. 654 (1982) ••••••••• ~ •••••••••••••••••••• 4, 5, 9,11, 12, 22, 23, Schwegmann Bros. v. Calvert Corp., 341 u.s. 384 (1951) •• ~ ••••••••••••••••••• ~ ••••••••• 8, 12, 13, 14, 20, Sinnot v. Davenport, 63 u.s. (22 How.) 227 (1859) •••••••• ~ •••••• 3 - .Telex Corp. v. IBM, 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. 802 ·(1975) •••••••••••••••••••••• 25 United States v. American Radiator' Standard Sanitary Corp., 433 F.2d 174 (3d Cir. 1970), cert. denied, 401 u.s. 948 (1971) •••••••••••••••••••••••••• 7 United States v. General Motors.Corp., 384 U.S. 127 (1966) •••••••••••••••• ·•••••••••••••••••.••••••••••••••• 6 United States v. Paramount Pictures, Corp., 334 u.s. 131 (1948 .•••••••••••••••••••••••••••••••••••••••••.• 17 United States v. Socony-Vacuum Oil, 310 u.S. 150 (1940) ••••••••• 6 United States v. Trenton Potteries Co., 273 U.S. 392 (1927) .•••••••.•••..•.•••••••••...••••••••••••.••••••••. 6,17 United States v. United Liquor Corp., 149 F. Supp. . 609 (W.O. Tenn. 1956), aff'd per curiam, 352 u.s. 991 (1957) •. •.••••••••••••••••••••••••••••••• • "•••••••••...•. 8 United States Brewers Ass'n, Inc. v. Healey, 532 F. Supp. 1312 (D. Conn.), rev'd on other grounds, 692 F.2d 275 (2d Cir. 1982), aff'd, 104 S. Ct. 265 (1983) •••••••••••••••••••••••••••• ~ •••••••• 12 -iii-
.' FEDERAL STATUTES Clayton Act, 15 U.S.C. 5 12 ••••••••••••••••••••••••••••• 4, 24, 25 Consumer Goods Pricing Act of 1975, Pub. L. 94-145, 5 2, • 89 Stat. 801 ••••.•••..•.•••....••.••••••••••••••••••••.•... 8 Federal Trade Commission Act, 15 U.S.C. 544 ••••••••••••••••• 4, 24 Miller-Tydings Act •••••••••••••••.••••••.••••••••••••••••••••••• 8 Sherman Act, 15 U.S.C. 51 ••••••••••••••••••••••••••••••• 2, 24, 25 STATE STATUTES Oklahoma Unfair Sales Act, 15 0.5. 5 598.1-598.11 ••••••• 1, 15, 17 63 Oklahoma Statutes S 1-1101 et seg ••••••••••••••••••••••••••• 28 63 Oklahoma Statutes S 1-1401 et seg ••••••••••••••••••••••••••• 28 CONSTITUTIONS u.s. Const. ait. VI, cl. 2 ......•..••••••.••••.••••...••••••...• 3 BOOKS P. Areeda & D. Turner, Antitrus~ Law (1978) •••••••••••••••• 13, 19 E. Mansfield, Microeconomics (3d ed. 1979) ••••••••••••••••••••• 27 L. Sullivan, Antitrust (1977) ••••••••••••••••••••••••••••••••••• 6 ARTICLES Handler, "Antitrust-1978,· 78 Colum. L. Rev. 1363 (1978) .•.••• ~ ••••.•••••••••••••••••••••••••••••••••••••••• 22 Note, "Sales Below Cost Prohibitions: Private Price Fixing Under State Law,· 57 Yale L.J. 391 (1948) •••••••••• 15 Page, "Antitrust, Federalism, and the Regulatory Process: A Reconstruction and Critique of the State Act Exemption After Midca1 Aluminum,· 61 B.U.L. Rev. 1099 (1981) •• ~ •••••••••••••••••••••••••••••••• 22 -iv-
.,
·' .
IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA
v.
Defendant.
Plaintiffs,
WAL-MART STORES, INC., a
Delaware corporation, d/b/a
WAL-MART PHARMACY, Pawhuska,
No. 84-C-436-E
.lOHN E. SNIDER d/b/a HOMINY
REXALL DRUG: ROBERT SLAMANS
d/b/ a/ CORNER HEALTH MART 1
WILBUR CAVE d/b/a/ FAIRFAX
DRUG: LEO BERKENBILE d/b/a
B & B REXALL DRUG: and JIM
WEIGANT d/b/a/ WElGANT'S
HEALTH MART,
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BRIEF OF THE FEDERAL TRADE COMMISSION
AS AMICUS CURIAE
IN SUPPORT OF WAL-MART STORES, INC.iS MOTION TO DISMISS
The Federal Trade Commission files this brief to provide the
Court with its views regarding conflicts between the Oklahoma
Unfair Sales Act, 15 Okla. St. Ann. 55598.1-598.11 (1981) ("the
~ ..
f ,:," klahoma Act" or "the Act") ,and the federal antitrust laws. The
Federal Trade Commission is one of two agencies charged by
Congress with enforcement of the federal antitrust laws. The
Commission has a long history of concern with promoting
competition in interstate commerce and has developed substantial
expert~se in analyzing impediments to competition.
The Federal Trade Commission supports Wal-Mart Stores,
Inc.'s motion to dismiss on the grounds that the Oklahoma Act is
unconstitutional because it impermissibly conflicts with federal antitrust law. The Sherman Antitrust Act, 15 U.S.C. 51, ~~., prohibits agreements that restrain fully competitive pricing ~hereas the Oklahoma Act limits the ability of retailers and wholesalers to engage in such competitiye pricing. Among other things, the Oklahoma Act, with specified exceptions, makes it prima facie illegal for a retailer to price below cost. with cost defined to include a six percent.markup. The doctrine of federal legislative preemption under the Supremacy Clause of Article VI of the United S~ates Constitution authorizes federal courts to invalidate any state or local law that conflicts with the federal antitrust laws. Because of its irreconcilable conflict with the federal antitrust laws, the Oklahoma Act is unconstitutional and unenforceable. I. THE OKLAHOMA ACT IS INVALID IF IT IRRECONCILABLY CONFLICTS WITH THE SHERMAN ACT BY PRECLUDING COMPETITORS FROM ENGAGING IN FULLY COMPETITIVE PRICING A. The Oklahoma Act Is Invalid if It Prevents the Accomplishment of the Full Purposes of the Sherman Act Congress and the Supreme Court have emphasized the primacy of the federal antitrust policy of free competition. As Justice Black noted: -The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.- Northern Pac. Ry. v. United States, 356 U.S. 1, 4 (1958). -2-
Under the Supremacy Clause of Article VI of the United States Constitution, a state law that conflicts with federal law is-preempted: This Constitution, and the Laws of the United States which shall be made in Pursuance thereof1 and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land1 and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstand~n9. U.S. Const. art. VI, cl. 2. As early as 1819, the Supreme Court interpreted the Supremacy Clause to deprive the states of all power ·to retard, impede, burden, or in any manner control, the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the general government.- McCulloch v. Maryland, 17 U.S. (4 Wheat) 316, 436 (1819). Whenever a clear conflict between state regulation and federal policy arises, the Supreme Court has consistently emphasized the primacy of federal policy.l In Hines v. Oavidowitz, 312 U.S. 52, 67 (1941), the Supreme Court stated that the test was whether a state statute ·stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." This same language appears in more recent Supreme Court opinions. For example, in Ray v. Atlantic Richfield Corp., 435 U.S. 151, 158 (1978), the Court stated: 1 For example, in early cases such as Gibbons v. Ogden, 22 U.S. (9 Wheat) 1 (1824) and Sinnot v. Davenrart, 63 U.S. (22 How.) 227, 243 (185'9), the Supreme Court he~ that state laws "repugnant, to and inconsistent with- federal legislation must be struck down. -3-
Even if Congress has not completely foreclosed state legislation in a particular area, a state statute is void to the extent that it actually conflicts with a valid federal statute. A conflict will be found "where compliance with both federal or state regulations is a physical impossibility· ••• or where the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The federal antitrust laws 2 are nonexclusive and do not preclude most kinds of state economic regulation. 3 Indeed, state regulation is normally consistent with federal antitrust pOlicy.4 Although Congress' enactment of the Sherman Act has not foreclosed state economic regulation in most areas, a state statute is nevertheless unenforceable whenever it irreconcilably conflicts with the Sherman Act. In Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982), the Supreme Court expressly recognized the applicability of. this standard to conflicts with the Sherman Act, declaring that a state statute is preempted whenever there is an irreconcilable conflict between the statute and the Sherman Act: 2 3 4 Section 1 of the Clayton Act, 15 U.S.C. 512, and Section 4 of the Federal Trade Commission Act, 15 U.S.C. 544, define the federal "antitrust laws.- In other words, the Sherman Act does not ·occupy the field." Thus, state statutes regUlating commerce can coexist with the. Sherman Act. For example, two categories of state regulation that are consistent with the goals and policies of the federal antitrust laws or whose purpose and intent are to accommodate coequal or superior public policy goals with a minimum of competitive disruption are the regUlation of natural monopolies and various laws and regulations designed to promote the pUblic health and safety. As such, these regUlations are not 'repugnant to the antitrust laws. See Section V., infra. ---- -4-
In determining whether the Sherman Act pre-empts a state statute, we apply principles similar to those which we employ in considering whether any state statute is pre-empted by a federal statute pursuant to the Supremacy Clause. As in the typical pre-emption case, the inquiry is whether there exists an irreconcilable conflict between the federal and state regulator~.schemes. Rice contains an extensive discussion of the principles underlying federal antitrust law preemption of state statutes: A state 'statute is not pre-empted by the federal antitrust laws simply because the , state scheme might have an anticompetitive ef feet. • • • A party may successfully enjoin the enforcement of a state statute only if the statute on its face irreconcilably conflicts with federal antitrust policy •••• [A] state statute, when considered in the abstract, may be condemned under the antitrust laws only if it mandates or authorizes conduct that necessarily constitutes a violati~n of the antitrust laws in all cases, or if it places irresistible pressure, on a private party to violate the antitrust laws in order to comply with the statute. Such condemnation will follow under 51 of the Sherman Act when the conduct contemplated by the statute is in all cases a ~ g violation. Rice, 458 u.S. at 659-661. Thus, the Sherman Act preempts the Oklahoma Act if the two statutes stand in irreconcilable conflict such that the Oklahoma Act is "an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 u.S. at 67. Such a conflict occurs if the Oklahoma Act on its face mandates conduct inconsistent wi th the Ellll standards of the Sherman Act. Rice, 458 U.S. at 661. -5-
B. Central to the Purposes of the Sherman Act Is Its Ban on Private Agreements that Restrain Fully Competitive Pricing - Section 1 of the Sherman Act prohibits agreements in restraint of trade. The central thrust of Section 1 of the Sherman Act is to prohibit cartelization. 5 Agreements among competitors whose only effect is to eliminate or reduce price competition among themselves are essentially cartel agreements and are treated as ~~ violations of the Sherman Act. Northern Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958). The "protection of price competition from conspiratorial restraint is an object of special solicitude under the antitrust laws,- United States v. General Motors Corp., 384 U.S. 127, 148 (1966), because any restriction on free and open price competition poses a "threat to the central nervous system of the economy." United States v. Socony-Vacuum Oil, 310 U.S. 150, 224-26 n.59 (1940). This sensitivity to open price competition has led the Supreme Court to declare ~~ unlawful a variety of agreements among competitors designed to raise, lower, or stabilize prices. In United States v. Trenton Potteries Co., 273 U.S. 392 (1927) the Supreme Court first declared direct price-fixing agreements unlawful regardless of the "reasonableness" of the prices agreed upon: 5 See, e.a., L. Sullivan, Antitrust S61 at 161 (1977). -To discuss Section 1 of the Sherman Act is to deal with the law's response to the cartel and to various modes of concerted conduct among competitors which, if not amounting to full blown cartels, nevertheless have the same effect." -6-
The aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices~ The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow ••• Agreements which create such potential power may well be held to be in themselves unreasonable or unlawful restraints, wi thout the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed and without placing on the government in enforcing the Sherman 'Law the burden of ascertaining from day to day whether it has become unreasonable through the mere variation of economic conditions. 273 u.S. at 397-398 (emphasis added). To constitute ~~ unlawful price-fixing, an agreement need not fix the ultimate price. An agreement among competitors to fix any specific element of a sales transaction is also ~~ unlawful. For example, the Supreme Court has held that an agreement among competing wholesalers to eliminate credit terms offered to purchasers is as plainly anticompetitive as a direct agreement to raise prices. Catalano Inc. v. Target Sales, Inc., 446 u.S. 643, 648 (1980). An agreement to set minimum fee . ~~hedules that established a rigid price floor was declared ~ 'se unlawful in Goldfarb v. Virginia State Bar, 421 u.S. 773 (1975). Of direct relevance to the Oklahoma statute are cases expressly holding that agreements limiting discounts or establishing uniform costs and markups constitute .E!!:.!!. unlawful price fixing. See e.g. , Catalano, 446 U.S. at 648 (per curiam); United States v. American Radiator & Standard Sanitary Corp., 433 F.2d 174, 185-188 (3d Cir. 1970), cert. denied, 401 U.S. 948 -7-
(1971); United States v. United Liquor Corp., 149 F. Supp. 609 (w.o. Tenn. 1956), aff'd per curiam, 352 0.5.,991 (1957). C. State Statutes that Preclude Competitors from Engaging in Fully Competitive Pricing Are Unconsti"tutional and Unenforceable When the Supreme Court has found that a state statute precludes competitors from engaging in fully competitive pricing, it has struck the statute down because it conflicts with the federal antitrust laws. In Schwegmann Bros. v." Calvert Corp., 341 U.S. 384 (1951), the Court was faced with a state liquor law that allowed resale price maintenance. Resale price maintenance was legal at that time under the Miller-Tydings Act. 6 However, the state law at issue not only ~uthorized resale price maintenance between a manufacturer and those retailers who voluntarily agreed to be bound by the manufacturer-determined resale price, but also required other non~contracting retailers to abide by the same price. In effect, the state was mandating parallel pricing among all retailers of a particular product. Reversing an injunction against a non-signing retailer fQr selling at less than the official prices, the Supreme Court held that: [T]he Miller-Tydings Act expressly continues the prohibitiOns of the Sherman Act against "horizontal" price fixing by those in competition with each other at the same functional level. Therefore, when a state compels retailers to follow a parallel price 6 Ch. 690, 50 Stat. 693 (1937) (codified at 15 U.S.C. 51). The Miller-Tydings Act was repealed by the Consumer Goods Pricing Act of 1975, Pub. L. 94-145, 52, 89 Stat. 801. -8-
• policy, it demands private conduct which the Sherman Act forbids. See Parker v. Brown, 317 U.S. 341, 350. Elimination of price competition at the retail level may, of course, lawfully result if a distributor successfully negotiates individual ·vertical- agreements with all his retailers. But when retailers are forced to abandon price competition, they are drive~ into a compact in violation of the spirit of the proviso which forbids ·horizontal· price fixing. (footnote omitted) (emphasis in original). 341 U.s. at 389. In California Liquor Dealers v. Midcal Aluminum, 445 U.S. 97 (1980), the Supreme Court struck down a similar California statute that prohibited fully competitive pricing in the wholesale distribution of wine. California required wine producers and wholesalers either to sell wine under fair trade contracts or to post resale prices that would bind all of the wine merchants in the trade area. In striking down the statute, the Supreme Court noted that "such vertical control destroys horizontal competition as effectively as if wholesalers 'formed a combination and endeavored to establish the same restrictions ••• by agreement with each other.'· 445 U.S. at 103, quoting Or. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408 (1911). Because the State had prohibited full pr~ce . competition, in clear conflict with the federal antitrust laws, the law could not be enforced. The Court's holding in Midcal Aluminum was interpreted in Rice v. Norman Williams Co., 458 U.S. 654 (1982). Rice involved a Supremacy Clause challenge to a provision of California's alcoholic beverage laws that prohibited licensed California liquor importers from purchasing or accepting delivery of any -9-
brand of distilled spirits unless the brand owner or his authorized agent had designated the importer, as an authorized importer of the particular brand. This so-called -designation- &tatute was apparently enacted in response to Oklahoma's -open wholesaling" statute, whereby a licens~d California importer who was unable to obtain distilled spirits through the distiller's established distribution system could obtain them from Oklahoma wholesalers. A group of California importers who had been benefitting from the -Oklahoma Connection- sought to enjoin enforcement of the California statute as unconstitutional under the Supremacy Clause because of a claimed conflict with the Sherman Act. In rejecting the importers' claim, the Supreme Court first noted that the California designation statute merely enforced the distiller's decision'to restrain intrabrand competition by permitting the distiller to designate which wholesalers were to be allowed to import the distiller's products into California. The Court emphasized that the statute did not -require the distiller to impose vertical restraints of any kind.- Id. at 662 (emphasis in original). Moreover, the Court observed that in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977), it had held that an attempt by a manufacturer to use such nonprice vertical restraints to limit competition in its own products is not .l2.!!.ll illegal under the Sherman Act but, instead, must be analyzed under the rule of r~ason. As such, the Court concluded that the California statute did not irreconcilably conflict with federal antitrust policy: -10-
Such condemnation will follow under Sl of the Sherman Act when the conduct contemplated by the statute is in all cases a ~~ violation. If the activity addressed by the statute does not fall into that category, and therefore must be analyzed under the rule of reason, the statute cannot be condemned in the abstract. Analysis under the rule of reason requires an examination of -the circumstances underlying a particular economic practice and therefore does not lend itself to a conclusion that a statute is facially inconsistent with federal antitrust laws. g. at 661. The Rice Court contrasted the lack of an irreconcilable conflict between federal antitrust policy and the designation statute before it and the conflict with the statute at issue in California Retail Liquor Dealers' Assn. v. Midca1 Aluminum, Inc. The Court characterized the statute at issue in Midcal as having "required" wine producers to file fair trade contracts or price schedules with the State. Unlike the California designation statute, "the [Midca1] statute facially conflicted with the Sherman Act because it mandated ••• an activity that has long been regarded as a ~~ violation of the Sherman Act." 458 U.S. at 659-60 (emphasis in original). The argument may be made, based on the language in kice,7 7 The language in Rice that could lead to this argument is as follows: [A] state statute, when considered in the abstract, may be condemned under the antitrust laws only if it mandates or authorizes conduct that necessarily constitutes a violation of the antitrust laws in all cases, or if it places irresistible pressure on a private party to violate the antitrust laws in order to comply with the statute. Such condemnation will follow under Sl of the Sherman Act when the conduct contemplated by the statute is in all cases a.J2.!tt ~ violation. 458 U.S. at 659-661.
-12- .
when the statute itself prevents full price competition, no private agreement is required for the statute to be preempted. 8 In Schwegmann, the conflict with the antitrust laws arose from the state imposed requirement that non-contracting retailers abide by -fair trade- prices. A manufacturer's use of a fair trade contract, which by operation of law triggered the non- signer requirement, was not itself illegal and did not conflict with the Sherman Act as amended by the Miller-Tydings Act. The Schwegmann statute was struck down because the statute itself, by imposing a restraint on non-signers, directly prohibited full price competition. Even in the absence of an illegal private agreement, the statute was invalidated. Similarly, in Midcal, producers and wholesalers were required by state law ei ther to sell under fair tra.de contracts or to post and follow a resale price schedule. No private agreement was involved whenever producers or wholesalers posted resale prices. In such cases, state compulsion prohibiting full price competition eliminated the need for a private agreement. As the Supreme Court noted, this vertical control over prices, " ..1cluding the control mandated by the statute, -destroys horizontal competition as effectively as if wholesalers 'formed a combination and endeavored to establish the same restrictions ••• by agreement with each other.'" 445 U.S. at 103, quoting Dr. Miles Medical Co. v. John D. Park & sons Co., 220 U.S. 373, 408 (1911). 8 The leading antitru~t treatise agrees that no illegal private agreement is necessary for a statute to be preempted. I P. Areeda & D. Turner, Antitrust Law, ,209 at 62-64. -13-
Schwegmann and Midcal thus indicate that a state statute presents an irreconcilable conflict with federal antitrust s~atutes when it mandates that private parties desist from ~gaging in fully competitive pricing. II. THE OKLAHOMA ACT IS INVALID BECAUSE IT IRRECONCILABLY CONFLICTS WITH THE SHERMAN ACT BY PRECLUDING COMPETITORS . FROM ENGAGING IN FULLY COMPETITIVE PRICING A. The Minimum Markup Required by The Act Would Constitute ~ Se Illegal Price Fixing if Agreed upon by Competitors With certain specified exceptions, the Oklahoma Act makes it a misdemeanor for a wholesaler or retailer to sell, offer to sell, or advertise at prices below cost. The statute defines "cost" ~ssentially as invoice or replacement cost, less trade discounts, plus freight ~nd cartage charges, taxes, and a markup to cover the cost of doing business (which, for retailers, is set at six percent in the absence of proof of lower cost). One portion of the Act might be read as requiring proof of anticompetitive intent and effeci. 9 Technically, a sale, offer to sell, or advertisement to sell below cost is unlawful only when made "with the intent and purpose of inducing the purchase of other merchandise or of unfairly diverting trade from a competitor or otherwise injuring a competitor, impair and prevent fair competition, injure public welfare ••• where the result of such advertising, offer or sale is to tend to deceive any 9 The Oklahoma Act would not facially conflict with the Sherman Act if. it actually required proof of anticompeti ti ve effect for conduct to be illegal. -14-
purchaser ••• or to substantially lessen competition, or to unreasonably restrain trade, or to tend to cr~ate a monopoly in any line of commerce. wlO However, these. requirements seem to be eliminated by the statute's presumption that ·[e]vidence of advertisement, offering to sell, or sale of merchandise by any retailer or wholesaler at less than cost to him, shall be prima facie evidence of intent to injure competitors and to destroy or substantially lessen competition~wll On its face, then, a retailer in Oklahoma commits a prima facie violation of the Act by, inter alia, merely placing an advertisement in a newspaper advertising a single product for sale at a price that is below the seller's cost (including a six percent markup). The effect of the statute is to frustrate the benefits of free pri'ce competit~on: it inhibits vigorous price competition on all of the seller's merchandise. Accepting a lower profit margin is a classic and effective method of price competition. By declaring pricing with a markup of less than six percent to be prima facie criminal conduct, the act chills discount pricing. 12 10 11 12 15 Okla. St. Ann. 5598.3 (emphasis added). 15 Okla. St. Ann. 15 5598.5 (emphasis added). We infer that the statutory presumption applies to the effect requirement since the "substantially lessen competition" language appears in the effects requirement but not the intent requir ement. Indeed, historically the purpose of sales below cost statutes has been to prevent the free operation of competitive markets. Note, ·Sales Below Cost Prohibitions: Private Price Fixing Under State Law," 57 Yale L.J. 391,392 (1948). -15-
Systematic enforcement of the Oklahoma Act might well eliminate an entire class of retailers, i.e., discounters. The growth of discount retailers in recent years has had a SUbstantial procompetitive effect on many retail industries, including clothing, food, and consumer ~lectronic~. Discounters compete squarely on prices, and they force full-service retailers to become more efficient and more cognizant of the service-price menu that they offer the consumer. 13 Typical reactions of full-service retailers to discount competition are to lower prices, increase quality, or provide some new combination of both. This sort of price competition from discount retailers benefits consumers, and is the kind of innovative, cost cutting activity the antitrust laws are designed to encourage and protect. If retailers in Oklahoma agreed to have a minimum markup of six percent it would be a clear case of ~~ price fixing. The markup is as basic a component of the total price as is the cost of raw materials, the cost of advertising, or the cost of granting credit. An agreement to raise the retailer's minimum markup is "tantamount to an agreement to eliminate discounts, and thus falls squarely within the traditional ~~ rule against price fixing." Catalano, 446 U.S. at 648. Nor could parties defend an agreement to maintain a minimum markup on the basis 13 We are not saying that discounters are necessarily better than full-service retailers, but merely that consumers are better served when discounters are free to operate And consumers can c~oose the kinds of retailers they wish to patronize. -16-
that a six percent markup is a "reasonable" margin that still permits "reasonable" competition. The power, to fix prices, whether reasonably exercised or not, involves power to control t~e market. Accordingly, federal law prohibits such an act • . Kiefer-Stewart Co. v. 30seph E. Seagrams & Sons, 3400.5. 211 (1951): united States v. Paramount Pictures Inc., 334 0.5.131 (1948): United States v. Trenton Potteries Co., 273 u.s. 392 (1927) • B. The Act's Requirement that No Product Be Sold Below Cost Would Constitute .Ell Se Illegal Price Fixing if Agreed upon by Competitors In addition to discount operations that depend on a low margin/high volume method of operation, price competition can take many forms, including seasonal sales and introductory product sales. The federal antitrust laws encourage and protect all forms of non-predatory price competition. In contrast to the federal antitrust laws, the Oklahoma Act forecloses several types of retail price competition, as for example the so-called "loss leader." 14 The use of "loss leaders" is a popular form of promotion whereby a seller takes a loss (or merely breaks even) on one or several items in order to induce customers to frequent his 14 Neither introductory prices nor ·loss leaders· are excluded from the Act's coverage. 15 Okla. St. Ann. 15 S 598.6 (1981) • -17-
store. 15 Advertising "loss leaders" of certain well-known products' is a well-recognized method of attracting customers. 16 So-long as promotional or other "loss leader" offers are ~emporary, demand-inducing, and non-deceptive, their use is pro- competitive. 17 "Loss leaders" may be particularly useful to new entrants in a market who must develop a clientele. By attracting first-time shoppers, a new entrant can build consumer loyalty and take business and market share away from established competitors, thus negating or reducing a traditional incumbent advantage and enhancing competition. 15 16 17 The competitive rationale for "loss leaders" is that promotional outlays or reduced prices may, from the retailer's standpoint, represent a profitable investment in good-will that will increase future patronage. For example, when visiting a store to take advantage of a loss leader, the customer comes to know about the particular store, the goods it carries, and the availability of some bargain prices. Loss leader advertising and other forms of selective discounting are effective, pro-competitive selling devices that benefit both buyers and sellers. Advertising of prices stimulates price comparison by buyers. Once sellers evaluate the results of their initial efforts (or their competitors'), they may be motivated to engage in additional price and service competition. Over time, a variety of selected items may be used as loss-leaders as the seller tries to induce different kinds of buyers with varying tastes into the store. Lormar, Inc. v. Kroger Co., 1979-1 Trade Cas. (CCH) '62,498 (S.D. Ohio 1979). See generally III P. Areeda & D. Turner, Antitrust Law ,716 at 176-77, Supplement ,716' at 157-58. As a general rule, below cost pricing of one product ·would not be likely to drive out or exclude rivals from sales of the product line as a whole, in the absence of predatory pricing in other [products]." Janich Bros. Inc. v. American Distilling Co., 570 F.2d 848,856 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978). -18-
Like any other agreement to restrain price competition, an agreement by competitors not to sell any goods below cost would be a form of horizontal price fixing and would be a ~~ ~iolation of the Sherman Act. l8 C. Because It Precludes Competitors from Engaging in Fully Competitive Pricing, the Oklahoma Act Is Unconstitutional and Unenforceable Since the Oklahoma Act precludes competitors from engaging in fully competitive pricing, it stands in irreconcilable conflict with the Sherman Act. Under controlling Supreme Court precedents, the Oklahoma Act is unenforceable. In Schwegmann the statute was invalid because the "state compel [ed] retailers to follow a parallel price policy . . • [and thereby] demand[edJ private conduct which the Sherman Act forbids." 341 U.S. at '389. The Oklahoma Act conflicts with the Sherman Act in the same manner as did the statute in Schwegmann. It forces retailers and wholesalers to follow a parallel price policy. It requires all retailers to price with a markup of at least 6 percent or stand prepared to rebut the I :~' esumption that its properly apportioned overhead costs are 6 18 See authorities cited in Section I.B., supra. Moreover, the Oklahoma Act impedes competition and harms consumers in other ways. It inhibits pricing near cost, because the seller may fear technical violation of the complex statutory scheme. Moreover, the accounting complexities that attend com~liance make it difficult for a national chain that faces simllar statutes in a number of states to price other than under the most restrictive statutes. See the affidavit attached as Appendix A to Wal-Mart's Motion to Dismiss. Finally, compliance raises the cost of doing business, ultimately raising prices for consumers. -19-
percent or more. Further, with specified exceptions, no retailer may price any product below cost, even when s~ch pricing is temporary, demand-inducing and pro-competitive. In Midcal, the Supreme court struck down a statute that prohibited wine merchants from selling wine at a discount below the producer's or wholesaler's posted resale price. That statute prohibited full price competition and destroyed "horizontal competition as effectively as if wholesalers 'formed a combination and endeavored to establish the same restrictions ••• by agree~ent with each other.'· 445 U.S. at 103. The Oklahoma Act prohibits full price competition among retailers and has the same effect as if all retailers agreed not to sell products with a markup of less than 6 percent. As the Court stated in Schwegmann, "it [the Act] demands private conduct which the Sherman Act forbids." 341 U.S. at 389. The Oklahoma Act demands that retailers refrain from full price competition. Accordingly, the Oklahoma Act ·stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," Hines v. Oavidowitz, 312 U.S. 52, 67 (1941), and is unenforceable. III. "STATE ACTION" IMMUNITY DOES NOT PRECLUDE PREEMPTION WHEN A STATE STATUTE IRRECONCILABLY CONFLICTS WITH THE SHERMAN ACT The "state action" immunity doctrine does not preclude a preemption attack on the Oklahoma Act. Immunity focuses on liability to suit under the antitrust laws. Preemption focuses -20-
on conflict with federal policy and the enforceability of the state law itself. Under the ·state action" doctrine, the Supreme Court has held that official state policy makers, acting on behalf of the •state in making policy for the state, are immune from suit under the federal antitrust laws. Hoover v. Ronwin, 104 S. Ct. 1989, 1998 (1984). State and local officials acting in accordance with official state policy are also immune from antitrust suit. Communi ty Commun i cations Co. v. -Boulder, 455 U.S. -40, 54 (1982); New Motor Vehicle Bd. of Cal. v. Orrin W. Fox Co., 439 U.S. 96, 109-111 (1978). Similarly, private parties are immune from antitrust liability when acting pursuant to state compulsion. Goldfarb v. Virginia State Bar, 421 u.S. 773, 791 (1975). Thus, because of "state action" immunity, Oklahoma state legislators are clearly not subject to suit under the federal -antitrust laws merely because they have enacted a statute (the Oklahoma Unfair Sales Act) that conflicts with the Sherman Act. Nor are retailers or wholesalers doing business in Oklahoma subject to antitrust liability merely because they complied with the Oklahoma Act. However, merely because ·state action" immunity _precludes antitrust suits against Oklahoma officials based solely on their passage of the Oklahoma Act or against wholesalers or retailers based solely upon their individual compliance with the Oklahoma Act, it in no way follows that the statute itself is not subject -21-
to preemption on the basis of its irreconcilable conflict with the federal antitrust laws. 19 Some may argue, based on a footnote in Mr. Justice Rehnquist's opinion in Rice,20 that the state action doctrine saves a statute that is otherwise preempted. 21 Such an assertion ignores Mr. Justice Rehnquist's fuller explication of the relationship between preemption and state action immunity in his 19 20 21 There has been considerable confusion in the ·state action" cases caused by the failure to distinguish between exemption or immunity and preemption. Boulder, 455 u.S. at 61-62 (Rehnquist, J., dissenting); Handler, ·Antitrust - 1978,· 78 Colum. L. Rev. 1363, 1374, 1378 (1978); Page, ·Antitrust, Federalism, and the Regulatory Process: A Reconstruction and Critique of the State Action Exemption After Midcal Aluminum," 61 B.U.L. Rev. 1099, 1101 (1981). For example, the Supreme Court has used the language of antitrust immunity even while striking down a state statute that was preempted by the Sherman Act. Midcal, 445 u.S. at 105- 106. It was not until Rice that the Supreme Court expressly recognized that preemption was the proper basis for its ruling in Midcal. Rice, 458 U.S. at 659. Similarly, the Supreme Court has used ·state action" immunity language when it actually held that there was no irreconcilable conflict between the statute in question and the federal antitrust laws. Orrin Fox, 439 U.S. at 109-111. Subsequent to Rice, we can expect much of this confusion to be clarified. In Rice, for the first time, the Supreme Court majority explicitly recognized and stated that a state statute is preempted when it conflicts irreconcilably with the Sherman Act. Footnote 9 of the Rice decision states: Because of our resolution of the pre-emption issue, it is not necessary for us to consider whether the statute may be saved from invalidation under the doctrine of Parker v. Brown, 317 U.S. 341 (1943), or under the Twen€y-flrst Amendment. Rice, 458 U.S. at 662-63 n.9. For a discussion of the arguments on both sides of this issue see Battipaglia v. New York State Liquor Authority, No. 84-7168, slip Ope at 6432, 6437 (2d Cir., September 21, 1984). -22-
dissenting opinion 22 in Community Communications Co. v. Boulder, 455 u.s. 40 (1982), decided the same year as Rice. In Boulder, Mr. Justice Rehnquist spelled out the necessary consequence of ~eemption: Where pre-emption is found, the state enactment must fall without any effort to accommodate the State's purpose or interests. 455 U.S. at 61 (1982). Distinguishing between immunity and preemption, Mr. Justice Rehnquist. observed: There was no suggestion that a State violates the Sherman Act when it enacts legislation not saved by the Parker doctrine from invalidation under the Sherman Act. Instead, the statute is simply unenforceable because it has been pre-empted by the Sherman Act. Id. at 64 (emphasis in original). In Rice, a par~y seeking to avoid application of the statute challenged its constitutional validity on preemption grounds. The Court concluded that the statute was valid on its face but the Court did not have to reach the question whether a party sued for violating the antitrust laws because of conduct consistent with the state statute at issue in· Rice could properly raise the state action defense. Because no one was being sued for an antitrust violation in Rice, the Court did not have to address the liability issue. In summary, immunity and preemption are separate doctrines. Even if parties are immune from suit because of compliance with a state statute, that statute is nevertheless 22 Mr. Justice Rehnquist's reasons for dissenting in Boulder were not related to the question of the relationship between preemption and state action immunity. -23-
unconstitutional and unenforceable if it irreconcilably conflicts with the federal antitrust laws • • IV. THE OKLAHOMA Ac:r CANNOT BE JUSTIFIED AS NECESSARY TO PROTEcr CONSUMERS AGAINST SUCH MARKET BEHAVIOR AS DECEPTIVE OR PREDATORY Ac:rS Proponents of the Oklahoma Act may argue that it effectively limits the ability of retailers to engage in deceptive advertising and predatory pricing, two matters of concern under the Federal Trade Commission Act, the Sherman Act, and the Clayton Act (as amended by the Robinson-Patman Act). Such assertions would be totally unfounded. First, the Oklahoma Act is not necessary to impede bait-and- switch selling techniques. In bait-and-switch, the seller's offer to sell an item it advertises is deceptive because it lacks sufficient inventory to meet anticipated demand or it misrepresents the quality of the advertised product. Having enticed a buyer into its store, the seller will try to induce buyers to purchase substitutes, frequently at a higher price, through a variety of deceptive sales techniques. Federal law enforced by the Federal Trade Commission prohibits this form of advertising. Oklahoma could also directly prohibit such deceptive sales techniques if it so desires. Second, proponents may argue that, the Oklahoma Act is necessary to protect against predatory pricing. Predatory pricing essentially is a form of below cost pricing engaged in by sellers who hope to drive their rivals out of business; present -24-
losses are recouped during the subsequent period of monopolistic pricing. But since genuine predatory pricing is a violation of 52-of the Sherman Act and 52 of the Clayton Act (as amended by t~e Robinson Patman Act), any Oklahoma wholesaler or retailer already has an adequate remedy if it believes it has been a victim of such pricing. On the other hand, the Oklahoma Act establishes a presumption that may make criminal conduct that is not predatory under any acceptable antitrust standard, and, as such, would impermissibly chill procompetitive pricing behavior. 23 Oklahoma could, of course, ban predatory pricing where the effect is in fact anticompetitive. Quite clearly, the Oklahoma Act conflicts with the federal standards for distinguishing between forms of discounting that are procompetitive (the vast majority) and those few instances in which discounting may have the intent and effect of driving out competitors. As the Second Circuit observed in Northeastern Telephone Co. v.American Telephone' Telegraph Co.: Predatory pricing is difficult to distinguish from vigorous price competition. Inadvertently condemning· such competition as an instance of predation will undoubtedly chill the very behavior the antitrust laws seek to promote. 651 F.2d 76, 88 (2d Cir. 1981) .(emphasis added). 23 The antitrust standard to show predatory pricing in the 10th Circuit necessitates proof of specific intent to harm competition, some element of anticompetitive conduct, and a dangerous probability of success. See Perington Wholesale, Inc. v. Burler Kin9. Corp., 631 F.2d 1369, 1376 (10th Cir. 1979); Paci ic En lneerln & Prod. Co. v. Kerr-McGee Cor ., 551 F.2d , 5- (t Clr.), celt. enle, 434 U.S. 879 (1977); Telex Corp •. v. IBM, 510F.2d 894, 927-28 (10th Cir.), cert. dismissed, 423 U.S. 802 (1975). -25-
The Oklahoma Act prohibits discount pricing, -loss leader" promotions and other forms of price cutting,that have no discernible anticompetitive effects (and are, indeed, procompetitive and beneficial to consumers). The statute thus compels Oklahoma wholesalers and retailers to refrain from engaging in even modest forms of price competition and, as such, is in irreconcilable conflict with federal antitrust policy. V. PREEMPTION OF STATE STATUTES THAT IRRECONCILABLY CONFLICT WITH THE SHERMAN ACT DOES NOT PRECLUDE STATE REGULATION THAT IS CONSISTENT WITH THE PUBLIC INTEREST Under the Tenth Amendment, powers not delegated to the federal government are reserved to the states. These powers have generally been referred to as police powers. Berman v. Parker, 348 U.S. 26, 31-32 (1.954). The police powers include the power to regulate in order to protect health and safety, the power to regulate business entities, like natural monopolies, that have substantial intrastate market power, and the power to correct other market defects. The Sherman Act does not preempt state laws and regulations properly designed to regulate natural monopolies, to deal with health and safety problems or to correct other market defects even if those rules appear anticompetitive in that they restrict business conduct or limit entry. State statutes legitimately designed to regulate natural monopolies, to protect health and safety or to correct other market defects do not pose a genuine conflict with the Sherman Act. Such legislation is designed to -26-
,- correct situations in which consumers are not receiving the benefits that normally flow from a freely competitive market. - See, e.g., Cantor v. Detroit Edison Co., 428 U.S. 579, 595-596 tl976) • Competitive markets are highly va~ued because the ·unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greates~ material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.· Northern Pac. R. Co. v. United States, 356 u.S. 1, 4. So-called market defects, such as externalities and monopoly market power, reduce consumer welfare and misallocate our economic resources. 24 Accordingly, state regulatory schemes properly designed to provide public goods or correct for market defects are, like the antitrust laws, intended to increase consumer welfare. These 24 See, e.g., E. Mansfield, Microeconomics 456-458 (3d ed. 1979). A market defect occurs when normal competitive forces are either suspended or insufficient to guarantee an efficient allocation of society's resources. In the case of an externality, a producer is able to impose some of its production costs on others (~, the victims of pollution). Because the producer is able to shift some of its production costs to others, it can charge an artificially low price. In the case of monopoly, a firm is able to increase profits by holding 'output below the competitive level while raising prices. This obviously impairs consumer welfare. A natural monopoly occurs when the cost structure of a particular market is such that its entire output is most efficiently produced by a single firm. If left unconstrained, the natural monopolist (like any monopolist) will seek to exploit its monopoly power by ralsing prices and reducing output. To avoid thlS result, natural monopolies, are often regulated in an effort to approximate the price and output that would result if competition were feasible. -27-
statutes do not conflict with the goals of the federal antitrust laws. By contrast, state statutes such as this one, designed solely to eliminate an otherwise competitive market, stand in frreconcilable conflict with the goals of the federal antitrust laws. The'Oklahoma Act does not have any plausible justification in terms of curing any real market defect. Retailing is traditionally a highly competitive industry that is not characterized by any natural monopoly market power. The Act's pricing schemes have no effect on the healthfulness or safety of the products sold. Health and safety regulations are covered under other Oklahoma statutes. ~, e.g., 63 Okla. St. Ann. 63, - S 1-1101 et seq.; i d. S 1-1401 et seq. Nor does the Act affect any externalities of production; indeed, none can be identified. The purpose and effect of the Oklahoma Act are to restrain competitive pricing. If the restrictions of the Oklahoma Act had resulted from a private agreement among competitors, the conduct would be ~~ illegal price fixing. No plausible competitive justification exists for the Oklahoma Act. If such a justification existed, the Act would need, to be evaluated under the rule of reason and would not facially conflict with the Sherman Act. But since the Oklahoma Act on its face ·stands as an obstacle to the accomplishment and excution of the full purposes and objectives of Congress,· Hines v. Davidowitz, 312 u.S. at 67, it irreconcilably conflicts with the Sherman Act and is unenforceable. -28-
CONCLUSION For the reasons given above, the Oklahoma Act conflicts rrreconcilably with the Sherman Act and is unenforceable. Date: November 6, 1984 Respectfully submitted, Winston S. Moore Assistant Director for Planning Nolan E. Clark Deputy Assistant Director for Planning Peter P. Metrinko James F. Mongoven Attorneys John H. G~er,l w:Timothy J. Director, Competition Federal Trade Commission 6th Street and Pennsylvania Avenue, N.W. Washington, D.C. 20580 -29-
CERTIFICATE OF MAILING I hereby certify that on this day of November, 1984, I m~iled a true and correct copy of the above and foregoing documents, postage fully prepaid, to: Bradford S. Baker 702 Atlas Life Building 514 South Boston Avenue Tulsa, Oklahoma 74103 Attorneys for Plaintiffs and Charles W. Shipley, Esq. and Stephen E. Schneider, Esq. Suite 1770 One Williams Center Tulsa, Oklahoma 74172 Attorneys for Defendant
DISSENTING STATEMENT OF COMMISSIONER PATRICIA P. BAILEY TO FILING AN AMICUS BRIEF IN SNIDER v. WAL-MART STORES, INC., NO. 84-C-436-E (U. S. "DISTRICT COURT, NOR'.1'HERN DISTRICT OF OKLAHOMA) November 7, 1984 I have voted against the motion to file this amicus brief for one principal reason: the Commission does not now have sufficient information upon which to base preemption arguments and to advance them at this stage is premature. I have no objection to the procompetitive substance of the brief. In particular, I agree heartily with the discussion of the benefits to consumers and competition of 'vigorous price competition and the corresponding perniciousness of conduct which impedes discounters' freedom to set their own prices--indeed, I would welcome such discussion more often at the Commission. Unfortunately, in the last few years, when interfererice with discounter~ has stemmed from private parties, rather than the state, the Commission ~as generally sided with those imposing the "vertical restraints" and against discounters.~/ Thus, I do not disagree with this amicus brief insofar as it reiterates the familiar national policy favoring ~ompetition. However, that is not its real purpose. Instead, its purpose is to a~sert preemption--the federal government's authorIty */ -For example, in Lenox Corporation, Docket 8718, Bu10va Watch Company, Docket C-1887, and Magnavox Co., Docket 8822, a Commission majority voted to allow suppliers -to impose transshipping bans on their dealers: that is, suppliers were given permission to order their dealers not to sell to discounters. I dissented from these orders, finding that the suppliers had not advanced any plausible rationale for such price-inhibiting conduct.
.- 2 - to override and declare unenforceable a state statute. That is an -. extremely serious assertion which requires careful attention to the law and the delicacy of federalism issu~s. In a recent Supreme Court opinion, Justice Powell cautioned that "competing state and federal interests can be reconciled only after careful scrutiny of those concerns in a 'concrete case'." California Retail Liquor Dealers Ass'n. v. Midcal Aluminum, Inc., 445 U.S. 97, 110 (1980.~ Yet the Commi~sion chooses to make this first major statement on Sherman Act preemption in the context of a motion to dismiss in a private action~ and, apparently, absent */ -The state interest in Midcal, which dealt with a California wine pricing plan, was particularly strong as it rested on the Twenty-First Amendment to the Constitution. This, of course,. set up a direct constitutional conflict with the Sherman Act, which is rooted in the Commerce Clause. However, the careful weighing of competing state and federal interests is mandated .also by general principles of federalism, as discussed in most preemption cases. See, e.g., Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 146 (1963); Hines v. Davidowitz, 312 U.S. 52 (1941); Hirsch, Towards a New View of Federal Preemption, 1972 U. Ill. L. Rev. 515. The need for informed, careful weighing of federal against state interests is also routinely emphasized in "state action" cases. See, e.g., Parker v. Brown, 317 U.S. 341, 351 (1943): "In a dual system of government in which, under the Constitution, the states are sovereign, save only as Congress may constitutionally subtract from their authority, an unexpressed purpose to nullify a state's control over its officers and agents is not lightly to be a ttributed to Congress." **/ --It is extremely rare for either the Commission or the Departm~nt of Justice to make an antitrust challenge to a state statute by the backhanded route of intervention in a private litigation. My files show such interventions by the FTC in only two cases, Gonzales v. Dept. of Alcoholic Bev. Control, 3 Civ. No. 22956 (Cal. Ct. App., 3d Dlst) and Harris v. N. Carolina Bd. of Certified Public Accountant Examirrers, Inc., 81 CVS 9349 (N. Car. Sup. Ct. Div., Wake County). In both cases the Commission discussed whether state statutes, variously interpreted, could violate federal antitrust laws, particularly the FTC Act. Neither intervention raised the issue o~ preemption.
- '3 - consultation with the Department of Justice, which has concurrent jurisdiction over Sherman Act enforcement. The Commission has had no hand in developing the facts in this case which, in any event, at this procedural stage are limited to ba~ebones allegations of the pleadings that must be taken as true. The amicus brief does not discuss these allegations and their relevance to the legal theory; nor does it present any information on the actual workings of the statute. We do not know what, if any, state interests support the Oklahoma Unfair Sales Act, and thus cannot even begin the crucial balancing process prescribed by Midcal.~/ Thus, if there is a preemption issue here, the Commission has concluded that a federal victory is proper even though at least half of the story remains to be told. That is not only unwise; it is in direct conflict with a long line of cautious preemption cases and is seriously troubling as a matter of federalism policy. But is there a preemption issue here? The brief is embarrassingly short on facts to support its theories. The controlling and very recent Supreme Court decision on preemption, Rice v. Norman Williams Co., 102 S. Ct. 3294 (1982) holds that a state statute is unenforceable only when it sets up an "irreconcil- able conflict" with federal law. 102 S. Ct. 3299. More specifically, */ -In Midcal both the State Attorney General and the agency adminis- tering the wine pricing system had opportunity to describe state interests advanced .by the scheme, although neither showed much enthusiasm in the task. 445 U.S. 111, N.12.
- 4 -in the same antitrust context as we have her~, the court said: "Cs]uch condemnation will follow under §l of the Sherman Act when the conduct contemplated by the statute is in all cases a per se violation". 102 S. Ct. 3300. The amicus brief repeatedly offers the conclusory assertion that the Oklahoma Unfair Sales Act is in irreconcilable conflict with the Sherman Act, but it nowhere sets forth the offending statute in full or describes how the statute operates in all cases to place "irresistible pressure on a private party to violate the antitrust laws in order to comply with the statute." Rice, supra, 102 S. Ct. 3300 .. Even a cursory glance at the Oklahoma statute reveals that it does not command or authorize agreements concerning price between wholesalers and retailers, either horizontally or vertically. Where such agreements exist the Supreme Court has found a state-mandated pricing scheme to be in irreconcilable conflict with the federal antitrus laws. Midcal, supra,; Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951). The Oklahoma statute, however, simply mandates a retail price floor measured by a statutorily defined cost standard that must be obeyed by individual firms. Where a state law merely authorizes unilateral conduct no preemption issue is raised, even though the conduct clearly retards maximum price competition in the market. Rice, supra.~/ Accord, Battipaglia */ -The state statute which was not preempted in Rice allowed a wholesaler to import li~uor into the state only if it had been designated as an importer by the brand owner. In other words, the statute mandated a non-price (but very likely price-affecting) vertical restraint on distribution. The effects of this statute could be anticompetitive, but that determination was to be reached by "Sherman Act analysis under the Rule of Reason." 102 S. Ct. 3301.
· -5 - v. New York State Liquor Authority, No. 84-7168, 1984 Trade Cases Par. 66, 206 (2d Cir., Sept. 21, 1984). The state must mandate a per se antitrust violation, not merely conduct which could have the same effect, in order to be caught·in the narrow preemption trap.:/ In addition, a premise underlying this amicus brief is problematic: that is, that there is a clear federal standard on predation. There is not; this area of the law is in flux. There is no one rule of law for 'Oklahoma's version to be measured against. An irreconcilable conflict cannot exist when one of the combatants is a will-o'-the- wisp. A second glance at the Oklahoma Unfair Sales Act will show that it sets up a series of defenses, including meetin~ compe- tition, for the retailer accused of selling below cost. By definition, where defenses exist, the violation is not per ~. Consequently, the Rice test that an irreconcilable federal/state conflict be apparent on the face of the statute is not met. In sum, the Oklahoma statute may well be a deplorable block on competition. However, we do not in my view have enough */ -"The existence of a hypothetical or potential conflict is insufficient to warrant the preemption of the state statute. A state regulatory scheme is not preempted by the federal antitrust laws simply because in a hypothetical situation a private party's compliance with the statute might cause him to violate the antitrust laws. A state statute is not preempted by the federal antitrust laws simply because the state scheme might have an anticompetitive effect." Rice, supra, 102 S. Ct. 3299.
- 6 - information now to support that conclusion, much less assert that it is preempted by federal law. The answers necessary for me to reach that conclusion may well develop at trial, and an amicus brief on the preemption issue may become appropriate at some appellate stage. But for now, the Commission majority is rushing in where angels fear to tread, saying too much, too soon.'
38,912 State Laws 44Z ...... SALES BELOW COST Uafair Sales Act nr 33,985] (Oklahoma S~tutes, 1971, Title IS, Chapter 1<4, SectiOlU 598.1-598.11.) [f 33,9&5.01] Short Title Sectica. 59&.1. This Act' shall be lcDoWll and designated, and may be cited u the "UDlair Sales Act." ,'" I. 'S«Uona :l9l.1-:l9lLU oC UtI. Uti •• ) I , ~3f98S ~ 1980, Commerce ClearinC HOUM, In.c:.
Oklahoma 3 8.9 1 3 ) (I 33,9as.02] De5nitions Sec. 5982. (a) When used ia this Act,' the term "cost to the retailer" shall mean the invoice cost of the merchandise to the retailer or the replace' ment cost of the merchUldise to the retailer, whichever is the lower: Ie.. all trade discounts except customary discounts for cash; to which shall be added (1) freicht cha~es not otherwise included in the invoice cost or the replace- ment cost of the met'chandise u herein set forth, and (2) artace to the retail outlet if done or paid for by the retailer, which cartace cost, in the absence of proof of a lesser cost, shall be deemed to be three-fourtbs (~) of one per cent (1~) of the cost to the retailer u bereia defined after addinc thereto freiCht charca but before addinc thereto canace. and taxes, (3) all State and Federal taxes Dot heretofore added to the cost u such, and (4) a markup to c~er a proportionate part of the cost of doiriC business, which markup, in the abseace of proof of a lesser cost, shall be six C6"') per CCDt of the COlt of [to) the retailer u herein set forth after addinc thereto freicht charccs aad c:artace but before addinc thereto a markup. (b) When Dsed in this Act. the term "cost to the wholesaler" shall mean the invoice cost of 'the merchMdise to the wholesaler. or the replacement cost of the merchandise. to the wholesaler, whichever is the lower; less all' trade dis- counts except customary discounts for cash; to which shall be added. (1) freigh t ch~rges, not otherwise includetJ in the in\'oice cost or the replacement cost of the merchandise u herein set forth, and (2) cartage to the retail outlet if done or paid for by the wholesaler, which artace cost. in the absence of proof of a I",er COlt. shan be dttmed to be three-fourthl CJ') of one per ee1It (1.,.) of the cost to the wholesaler u herein set forth after addinc thereto freicht charges but before adding thereto canage. and taxes, and (3) all State and Federal taxes not heretofore added to the COSt as such. Cc) When used in this Act the term "replacement costs" shall melln the cost per nnit at which the merchandise sold or offered for sale could ha.e been bought by the seller at any time within thirty C3O) days prior to the date of sale or the date upon which it is offered for sale by the seller if bought in the same quantity or quantities as the seller's last purchase of said merchandise. Cd) When one or more items are advertised, o/fered for sale, or sold with one or more other items at a combined price. or are advertised. offered as a rift. or given with the sale of one or more other items, each and all of said items shall for the purposes of this Act be deemed to be advertised, offered for we, or sold. and the price of nch item 'named shall be fOvemed by the provisions of paragraphs Ca) or Cb) of Section 2, respectively" Ce) The terms "sell at retail." "sales at retail," and "retail sale" shall mean and include any transfer ior a valnable consideration made in the ordinary course· of tnde or in the usual prosecution of the seller's business of title to tangible personal property 10 the purchaser (or consumption or use other than resale or further proc:essing or manufacturing. The above terms shall include any transfcr of such property whue title is retained by the seller II securily for the payment of the purchase price. • cn The tc:rms "scll at wholesale." "sales at wholesale." and "wholesale salcs" Ihall mean and include any transfer for • valuable consideration made in the ordinary course of tnde or the usual conduct of the seller's business, of title to tangible pcrsonal property' to Ihe purchuer for pUrl)Oses of resale or funhtr proc:essin~ or manufacturing. The above terms Ihall include any transfer of such pro~rty where title is retainrd by the seller·1I security for the payment of the purchase price. Cc) The term "retailer" shall mun and include every person, partnership. COflIOralion or association en~ared in the b"siness of makinJ:: sales at rrtail within Ihis State: provided that. in the case o( a person, partnership. corporation or a!'!'ociation \'nC:llt\'cl .in the bu~inus of making beth sales at retail and salu al wholesale, sllch term shall be applied only to the retail portion of such business. • Thl& ~t1on. • 5«(IOn& Slf8.1-S9I.ll ot 011& tllIe.
\
3 8.9 1 4 Stat. Laws
(h) The term "wholesaler" shall mean and include every persO:l, partner-
ship. cOfl)oration, or association engaged in the business of making sales at
wholesale within this State; provided that, in the case of a person, partDenhip,
corporation or association eDpged in the business of makinc botb sales at
wholesale and sales at retail. such term shall be applied only to the wholesale
('Ortion of such business.
[I 33,985.03) Sal~ Below Cost Prolu'bited in Cdtain Cues
Sec. 598.3. It is hereby declared that any advertising, offer to sell, or sale of
any merchandise, either by retailers or wholesalers, at less than cost as defined
in this Act with the intent and pUfl)Ose of inducing the purchase of other mer-
chandise or of UDfairly diverting trade from a competitor or otherwise injur-
inK a competitor, impair Ind prevent fair competition. injure public welfare, are
unfair competition Ind contrary to public policy and the policy of this Act,' where
_ the result of such Idvertisinc. offer or sale is. to tend to deceive any purchasci or
prospective purchaser. or to subslantially lessen competition. or to unreason-
ably restrain trade. or tQ. tend to create a monopoly in any line of commerce.
en 33,985.0<4] Punishment for Sales Below Cost
Sec. 598.4. Any retailer who shall. in contravention of the policy of this
Act.' advertise. offcr to sell or sell at retail any item of merchandise at less thaD
cost to the retailer as defined in this Act; or any wholesaler who shall in con-
travention of the policy of this Act. advertise. offer to sell, or sell at wholesale
any item of merchandise at less than cost to the wholesaler as defined in this
Act, shall be guilty of a misdemeanor and upon conviction thereof shall be
pur-ished by a fine of not more th~n Five Hundred Dollars ($500.00).
rn 33.985.05] Injunctive Relicf-Damaccs-Prima FI~e Evidence
Sec. 598.5. (a) In. addilion to the penalties provided in this Act, any person
injured by any violation. or who shall suffer injury from any threatened vio-
lation of this Act.' may maintain an action in any court of equitable jurisdiction
to prevent. restrain or enjoin such violation or threatened violation. If in such
action a violalion or thre:ltened violalion of this Act shall be established. the
court shall enjoin and restrain or otherwise prohibit, such violation or threatened
viola lion and. in addilion thereto. shall assess in favor of the plaintiff aDd
against the rldendant the cost of suit. In such action if damages are alleged
and proved. the plainliff in said aClion. in addition to such injunctive relief and
costs of suit. shall be entitled to recover from the defendant Ihe actual damages
sustained by him.
(b) In the event no injunctive retid is . sought or required, any person
injured by a violation of this Act may maintain an action for damages alone
in any court of ceneral jurisdiction. and the measure of damaru in sueh action
shall he Ihe same as prescribed in subsection (a) pf this Section. Provided
this Act sh~1l not authorize suits or actions against newspapers. radio broad-
casters. or other advertisin; Il:encies throu(h which. such advertisements are
published. broadcast or otherwise made..
(c) Evidence of advertisement. offering to sell. or sale of merchandise by
any retailer or wholesaler at less than cost to him. shall be prima facie evidenee
of in lent to injure competitors and to destroy or substantially lessen competition.
[11 33,985.06 J Exempted S.les
Sec. 598.6 The provisions of this Act I shall not appy to sales at mail or
salcs :It wholesale.
(3) where seasonalJle merchandise is sold in bona fide c1c:lrance sales, if
advertised. marked. and sold as such;
I S~clloru 598.1.598.11 or !.hIs title.
Oklczhollla 38.911 ) ... J (b) where perishable merchandise must be sold promptly iD order to fore-- stall loss; (c) where merchandise is imperfect or damaged or is being discontiDued and is advertised, marked and sold as such; (d) where merchandise is sold upon the final liquidation of any business; (e) where merchandise i. sold for charitable purposes or to relief agencies; (f) where merchandise is sold on contract 10 departmenu of the government or governmental institutions; (g) where merchandise is sold by any officer acting nnder the order or direction of any court; (h) where merchandise is sold at any bona fide auction sale. li 33,985.07] McetinC Compegtor's Prices Sec. S~7. ADY retailer or wholesaler may ad...ertisc, offer to sell. or seU merchandise at a price made in good (aith to meet the price of a competitor who is selling the same article or products of comparable quality at cost to him as a wholesaler or retailer. The price of merchandise advertised, offered for sale or sold under the exetl'lptions specified in Section 6.' shall not be considered the price of a competitor and shall not be used as a basis for establishing prices below COSt. nor shall the price ·established at a bankrupt sale be considered the price of a competitor within the purview of the first sentence of this Section. [11 33,985.08] Determination of Cost in Case of Sale Outside Ordinary Channels of Trade Sec. 598.8. In establishing the cost of merchandise to the retailer or whole-- saler. the invoice cost of such merchandise purchaSfd at a forced. bankrupt. close- out sale. or other sale outside of the ordinary channels of trade, may not be used as a basis for justifying a price lower than one based upon the replacement cost of the merchandise to the retailer or wholesaler, within thirty (30) days prior to the date of sale, in the quantity wt purchased through the ordinary channel. of trade. [1133.985.09] Witnesses-Production of Books, Records, Etc:. Sec. 598.9. Any defendant. or any witnesses, in any civil action brought under the provisions of this Act I may be required to testify, and any defendant, or any witness, may, upon proper process, be compelled to produce his books, records, invoices and all other documents of any such defendant or witness into court and the same may be introduced as evidence. but no defendant, or any witness in such civil action shall be prosecuted or subjected to any penalty or forfeiture (or or on account or any transaction, matter or thing concerning which he may thus be required to testify or produce evidence. documentary or otherwise, and no ·testimony thus given or produced shall be received apinst him apon any criminal proceeding or investigation. [1T 33,985.10] Trade Association May Sue • Sec:. 598.10. Any duly orranizcd and existing trade USOCtatson. whether incorpor:lted or not. is hereby authorized to institute and prosecute a suit or suits for injunctive relief and costs, pro-rided for llftder the terms of this Act,' u the real party in interest for and on behalf of one or more or said association's members. when violation of this Act directly or indirectly affects or threatens to affect or injure such member or members. or where violation of this Act thrutens to impair fair competition or otherwise affects such member as herein provided. [1\33.985.11] Partial Invalidity Sec. 508.11. 1£ any subsection, sentence. clause, word, phrase or provision 01 this Act' shall for any reason be held invalid or unconstitutional, the validity • Seellon 598.5 ot thll lItle. • Secllon. S9a.l·:1l~8.U ot this title. Trade Reeulation Reports 11 33.985.11
\ 3 8. 9 1 6 State Laws of the remaining parts hereof shall not be affected thereby and to that end the provisions of this Act are declared to be severable. 1eU'Ce.-llHl Scsalon La_. H01lM BIlJ objectJona which c:feclan4 that the lecta1A- No. 14. approved February 24. 1941. CodJ- ture had violated the due PJ'OCftI ela\1M of Oed In 19011 Statutes. TIUe 15, Q1apter 1.. the ltat. and federal conatJtutJona by 4~ Sections S91·m. c:lartnc that Intent to Injun ,.... DOt aD 1,... .....ucUaut.-1lH. Sftslon La_. essential Incnc11ent ot tbe aUenae ot MJJo Howe BUI No. 488. approved May 18. 19019. Inc below cost. amended the Act to meet col1ltJtutJemaI 1151 C04~Uo._1Z1 Statut., U Sao- tiona ~1·S98.U. approftCl lUI4 GfecUft May 18, 19S1. Cic-u-ettes. Tobac:eo Producu!Dairy Products nr 33.986] [Sales of c:i~rettes and tobacco products below cost are prohibited in Okla- homa Statutes, Title 68, Sections 326 thrqugh 342. Sales of milk and dairY prod- ucts below cost arc prombited by Oklahoma Statutes, 1971, Title 2, Chapter 6A. Section 419.3.] [The nat pace ia 39,001.] )
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