In the past few months, we have seen a number of decisions involving non-compete issues in the grocery industry— from appellate courts, no less. That trend continues. This case comes out of the Eighth Circuit and involves some of my former colleagues from Boies, Schiller & Flexner.
C&S and SuperValu are the two largest grocery wholesalers in the United States. Grocery wholesalers buy thousands of products directly from the manufacturers and then distribute them to retailers. Partial-line wholesalers distribute a specialty line of products, whereas full-line wholesalers – like C&S or SuperValu – distribute every product imaginable. Many smaller retailers use both full-line and partial line suppliers to fill all of their product needs.
As of June 2002, C&S was the primary wholesaler in New England and SuperValu was its biggest rival. SuperValu dominated the Midwest while C&S had virtually no presence there. Then, in June 2002, C&S acquired a distribution center in Ohio and began targeting opportunities to expand into the broader Midwest market. Roughly a year later, Fleming Companies, SuperValu’s biggest rival in the Midwest, filed for bankruptcy. Immediately, both SuperValu and C&S undertook efforts to acquire Fleming. When word got out that C&S was making a hard play to acquire Fleming, SuperValu’s stock tumbled based on fears of stronger competition in the wholesale grocery market.
From here, things got interesting. C&S purchased Fleming’s Midwest operations with the right to assign those operations to a third party. That third party, of course, was SuperValu. C&S assigned Fleming’s assets to SuperValu. In exchange, SuperValue sold all of its New England assets to C&S. We can see where this is headed: C&S was the biggest player in New England and just acquired its biggest rival in the region. SuperValu was the biggest player in the Midwest and just prevented a national rival from gaining a foothold in the region by acquiring a major regional player. And just to be safe, C&S and SuperValu agreed to a variety of non-compete restrictions in connection with the sale: For two years after the transaction: C&S agreed not to sell to certain former Fleming customers in the Midwest and SuperValu agreed not to sell to any of its former customers in New England. Basically, we have the two biggest grocery wholesalers in the country carving up the market and agreeing not to compete in each other’s back yard.
Although the agreements, as written, only pertained to former customers, and theoretically allowed competition for new customers, C&S and SuperValu – in practice – adhered to a strict non-compete regime. SuperValu did not compete for any customers in New England whatsoever and in the Midwest C&S supplied exactly two customers. As a result of the deal, SuperValu’s market share in the Midwest increased from 40% to 65%. And as SuperValu increased its market share, it also increased both its profits and its prices. In 2008, D&G, Inc., owner of small grocery store in Iowa and a SuperValu customer, filed a class action against SuperValu and C&S alleging that the market carve-up and non-compete agreement amounted to antitrust.
After years of litigation, both sides moved for summary judgment. The plaintiffs moved for summary judgment arguing that the wholesalers’ conduct amounted to a per se antitrust violation. C&S and SuperValu moved for summary judgment arguing that their conduct was not per se antitrust, and that when evaluated under a rule of reason analysis, their conduct was not actionable.
Let’s flesh this out a bit further for those readers who are not antitrust lawyers: Depending on the type of restraint at issue, an antitrust claim is evaluated under either the per se rule or the rule of reason. The per se rule conclusively presumes that the restraint at issue has no redeeming value and almost always tends to restrict competition. These types of restraints are presumed illegal (i.e. in violation of the Sherman Act) without any inquiry into the particular market or market power. Classic examples include price fixing and exclusive division of markets. In this case, the Plaintiff alleged that C&S and SuperValu agreed to exclusive geographic territories to avoid competition. In my book, this sounds like a per se violation.
The wholesalers countered by arguing that the per se rule should not apply because this was not a naked market division. C&S and SuperValu claimed that although they divided up the market (i.e. one took the Midwest and one took New England), the written terms of the deal only prohibited competition for current and former customers. Theoretically, under the terms of the deal, C&S could compete for new customers in New England and SuperValu could compete for new customers in the Midwest. Apparently, the district court bought the argument and moved the case out of the per se category and into rule of reason territory. Under a rule of reason analysis, the plaintiffs had a much heavier burden. The district court concluded that the plaintiff’s had failed to define the relevant market and failed to establish antitrust injury, then granted summary judgment to the defendants.
On appeal, the Eighth Circuit disagreed, reversing and remanding the case for further proceedings. At its core, the Eighth Circuit’s decision was pretty simple (and in my view, entirely correct): Whether or not the per se rule or the rule of reason applies is a question of law. But that legal question depends on the specific facts at issue. Here, the district court erred by assuming that the rule of reason applied because the record did not establish an undisputed per se violation. Yes, the terms of the written agreement did not eliminate all competition by C&S and SuperValu in each other’s territory — the written terms left open the possibility of competition for new customers. But, as the Eighth Circuit pointed out,
“The crucial factual question here: What are the terms of the allegedly anticompetitive agreement? Perhaps there are aspiring monopolists foolish enough to reduce their entire anticompetitive agreement to writing, which would make the answer easy. But most would-be monopolists probably can be expected to display a bit more guile, jotting down only a few seemingly common terms while sealing their true anticompetitive agreement with a knowing nod and wink. If D & G’s evidence is accepted, that is what happened here. It is true, as the district court correctly noted, that the written non-compete agreement applied to former customers, theoretically permitting the wholesalers to compete for the existing and future customers. But this is not a contracts case in which the scope of the alleged anticompetitive agreement is cabined by the four corners of the written document. Not confined by the parol evidence rule, D & G could use all manner of extrinsic evidence to persuade a jury that what the wholesalers actually agreed to was a naked division of territory and customers. And the record contains enough evidence, viewed in the light most favorable to D & G, potentially to convince a reasonable jury of this fact.”
The Eighth Circuit went on to note that, in spite of the written terms of the non-compete agreement leaving open the possibility of competition in the restricted territories, neither C&S nor SuperValu actually engaged in any such competition. Instead, they treated the agreement as a naked division of exclusive territories. Bottom line: Where the question of which standard applies – per se rule or rule of reason – implicates issues of fact that remain disputed, a court cannot apply a rule of reason analysis and grant summary judgment.
The Eighth Circuit made quick work of the remaining issues, reversing the district court’s other holds on market definition and antitrust injury. Again, similar to its analysis of which standard applied, the Court of Appeals held that summary judgment was improper because both the relevant market and the antitrust injury were questions of fact.
The decision is a significant one. For the past several years – some would say for the past few decades – courts slowly have been shipping away at the antitrust laws, making it harder and harder for plaintiffs to establish a violation of the Sherman Act. A violation of Section 1 of the Sherman Act – regarding horizontal restraints of trade – has long been considered the most viable type of antitrust claim. Had the Eighth Circuit agreed with the district court and affirmed the grant of summary judgment, the consequences for antitrust plaintiffs would have been disastrous. The Eighth Circuit would have established a new rule that where an antitrust plaintiff cannot conclusively establish a per se violation, a rule of reason analysis is automatically applied at summary judgment. And a corollary rule: Where a rule of reason analysis applies, if the plaintiff cannot conclusively establish all elements of its antitrust claim at summary judgment (including market definition and antitrust injury), then summary judgment must be granted for the defendant. In a matter of weeks, every antitrust defense lawyer in the country would have been talking about the SuperValu case— it would have been the next big thing, the go to move in defending antitrust claims, the death knell for Section 1 claims (and effectively, for all antitrust claims). I know– I exaggerate slightly. Suffice to say it would have been very bad news for antitrust plaintiffs (in addition to bad ,unprincipled law). But thanks to a thoughtful, well-reasoned opinion from Judge Riley, that didn’t happen.
The case is In re Wholesale Grocery Products Antitrust Litig., 13-1297, 2014 WL 2109122 (8th Cir. May 21, 2014).