Has the Price Posting Bunny Run Down?

Lee Pender | July 21, 2009

For the fourth time in the same case, TFWS, Inc. v. Franchot, a federal Court of Appeals has told the state of Maryland and its wholesaler-package store cohort that their price posting system conflicts with the Sherman Act, the nation’s premier antitrust law. As a federal enactment, the Sherman Act preempts inconsistent state law, pursuant to the Supremacy Clause of the federal constitution, absent a specific exception.

Maryland had indefatigably marched on, beating the drum for a 21st Amendment exception to federal antitrust law since 1999, when the suit began as TFWS, Inc. v. Schaefer. The latest rebuff, on 15 July 2009, repeats the teaching of the previous three appeals: “Not proved.” That ruling does not change the status of price posting in Maryland, because an earlier district court ruling to the same effect was not stayed on appeal. Presumably, the qualified abandonment of posting announced by the state in a 2007 bulletin continues in force.

TFWS is, however, more than a simple failure of proof. Deeper issues remain unresolved, at least one of which might, in theory, support an attempt by the unsuccessful appellants to obtain Supreme Court review.

To understand what is at stake, one has to consider three aspects of antitrust challenges to state restraints of trade in general and to the particular alcoholic beverage regulatory restraint known as “post and hold.”

First, it is basic antitrust law that a group of manufacturers or wholesalers who agreed among themselves to publish their price lists, to sell at no other prices, and to keep the list unchanged for 30 days would be violating the federal Sherman Act if they had any effect on interstate commerce. (Almost all wine business meets the interstate commerce requirement, and most states have “little Sherman Acts” without that requirement, so we can ignore the commerce issue.)

Second, it has been accepted antitrust law since the 1940s that states, acting in their sovereign capacities, are immune from federal antitrust law, on the rationale that our federal system could not operate if the central government could enjoin state exercise of governmental functions.

Thus, federal antitrust law allows a state to mandate conduct that, if done by individuals without involvement of the state, would land them in the federal pen. Maryland could, if it wanted, specify the prices at which wine is to be sold and require those prices to be posted and held in force for any period. That is “sovereign immunity,” and its failure as a defense in TFWS is an important aspect of the ruling to which we will return in a moment.

Third, if sovereign immunity is unavailable, the TFWS court recognized an independent potential defense, viz., that § 2 of the 21st Amendment (forbidding importation of wine contrary to the laws of the state) would have allowed the state to admit wine on the condition that it be sold in a manner contrary to federal antitrust law, if the state had proven certain preconditions. Its recognition of a 21st Amendment defense is, technically, dicta –i.e., commentary that is not required to support the decision, and therefore not binding as precedent on other courts. In other words, the outcome would have been the same if there were no 21st Amendment defense: the state lost.

So if price posting was state law, why did Maryland not have a good sovereign immunity defense?

Price posting laws are not pure state action because the parties setting the posted prices are private actors, not the state. If wholesalers set the price, and the state merely enforces adherence to it, the TFWS court, like courts that have looked at other price posting laws, classifies it not as state action, but rather as a “hybrid” of state and private action. Hybrid restraints of trade are subject to special rules in Sherman Act cases, as established by the Midcal decision in 1980.

The 4th Circuit applied the familiar two-prong Midcal test to Maryland’s system. One prong asks whether the substitution of regulating pricing in place of competition is an articulated state policy. The other asks if the state adequately supervises the prices posted to assure that the system does not deteriorate into simple private price-fixing. If the answer is no to either, it’s not state action, and no immunity applies. Like most cases applying Midcal to posting systems, TFWS found inadequate supervision and didn’t have to consider the policy articulation prong.

I have great fondness for the Sherman Act and cheer when it sweeps away restraints on trade in wine. Still, I have to admit uneasiness about the lack of post-Midcal explication by the Supreme Court on the boundaries of hybrid status. In the Midcal case itself, the state law required the private actors to engage in conduct that was necessarily an independent violation of the Sherman Act (resale price-fixing, at the time considered always illegal). It is not obvious that a posting system that requires each private actor only to select a price and post it is requiring an always-illegal act. On the other hand, that factor may not be necessary, as Midcal’s reasoning does not expressly limit the decision to systems that inevitably produce an independent Sherman Act violation on the part of the private actors.

Other courts, notably in the Miller case from Oregon, have bridged the gap by noting the opportunity for collusion, citing anticompetitive effects on the market, or (perhaps metaphysically) joining unilateral private acts with the known coercive power of the state to form the equivalent of a conspiracy. The recent Costco case in Washington State followed TFWS in picking up that approach, which seems reasonably well established, but thus far hasn’t been given a Supreme Court imprimatur.

A risk in an appeal in TFWS would be frontal attack on the Miller-Costco line of cases, with the objective of narrowing the prevailing understanding of Midcal and reviving the validity of posting laws like Maryland’s under the sovereign immunity doctrine. There is language in one post-Midcal decision supportive of that line of argument. Litigating the point would invite the long shot countermeasure of questioning the breadth of sovereign immunity itself, whose logical underpinnings in the Supreme Court’s 1943 Parker decision are of imperfect clarity, but which is deeply settled law, if for no other reason than age. It would be an intellectually stimulating debate, but one I’d readily forego for the sake of leaving the antitrust approach of Miller, Costco and TFWS undisturbed.

Entirely separate is the question of a 21st Amendment antitrust defense. As conceived by parties defending price posting, the defense would allow a state that failed to achieve sovereign immunity because of lack of active supervision nevertheless to maintain a hybrid system that turns private parties loose to violate antitrust law if the purpose is a recognized objective of liquor regulation, such as promotion of temperance.

One of the Midcal Court’s famous statements is that it was not deciding when “if ever” the states’ rights policy behind the 21st Amendment could outweigh the federal policy for competition expressed in the Sherman Act, which the Court has termed the Magna Carta of our economic liberties. It could duck that question because the state’s factual support for the law on those grounds had already been found wanting in a related case.

Thus, Midcal marks the beginning of a judicial snipe hunt for a defense that may not exist. To say that no 21st Amendment interest could be sufficient to justify direct contravention of fundamental competition policy embodied in the Sherman Act would be a profoundly controversial development in Supremacy Clause jurisprudence. It’s much less daring to rule repeatedly that the defense requires proof that is missing in the case at bar.

One of the unfortunate consequences of the Fourth Circuit’s recurring tutelage of the Maryland district court on the standard of proof is that prolonged disinclination to address the more fundamental question tends to lodge the idea that there must be a defense more firmly in the judicial mind. Formulation of the evidentiary requirements in TFWS has produced a kind of standard incantation for use by judges before invalidating a pricing law on Sherman Act grounds –wholeheartedly adopted, for example, in Costco.

As expressed in TFWS dicta, a 21st Amendment defense can be established if the evidence shows:
1) The state’s purpose is one of those protected by the Amendment.
2) The challenged law is effective in carrying out that purpose.
3) The state’s interest in the law, to the extent it is effective in carrying out the purpose, outweighs the federal interest in promoting competition.

Maryland maintained that the purpose of price posting was to make liquor more expensive, thereby promoting the objective of temperance. The court agreed that temperance is a legitimate 21st Amendment objective, and checked off item 1.

Most of TFWS was about item 2, effectiveness, and concerned how to measure relative prices between Maryland and neighboring states that did not use posting. Ten years of litigation failed to produce a sustainable finding that post and hold had a significant effect on temperance. Thus, the TFWS court did not have to reach the unwieldy issue of whether a temperance issue outweighed the policy of the Sherman Act (an area into which one may assume it had no wish to venture). The implication is that if the law had been effective, the district court would have had to receive and weigh some kind of evidence of the social importance of reduced liquor sales versus the public’s Sherman Act right to competitively determined pricing, a nightmarish prospect for all but the most fearless lower court judges.

One should not ignore opportunities to compliment one’s adversaries. In that spirit, I express continuing admiration of defenders of price posting for their ability to maintain a straight face while asserting that its purpose is temperance. Post and hold requirements are simply another method of reducing competition and thereby padding private profits, primarily in the middle tier. If a state wished to reduce problematic alcohol consumption by raising prices, it would increase its excise tax on frequently abused products, not throw a prize to industry members by attempting to grant them a spurious exemption from antitrust law. None of the states whose price posting laws have been invalidated has attempted to replace the stricken law with a system providing sufficient state supervision to meet the Midcal test or to return to court with proof of effectiveness under the TFWS test, and none has reported a resulting surge of intemperance.

If the “21st Amendment defense” to Sherman Act challenge remains in the realm of dicta, with its underlying factual requirements never proven, it may devolve to the status of mythical animal, doing no harm to protection of competition. Even so, however, the chimera would muddy analysis of our most important antitrust law and invite protracted judicial charades like TFWS. It would be a service if some judge somewhere would switch the bunny off for good.

by R. Corbin Houchins, CorbinCounsel.com