Third Circuit Says Rule Of Reason Applies To Price-Fixing Conspiracies With Horizontal And Vertical Components
10/11/2023On August 28, 2023, a panel of the United States Court of Appeals for the Third Circuit affirmed the United States District Court for the Eastern District of Pennsylvania’s application of the rule of reason to evaluate a complex price-fixing conspiracy involving both horizontal and vertical relationships between defendants. Winn-Dixie Stores, Inc., et al. v. Eastern Mushroom Marketing Cooperative, Inc., et al., Case No. 22-2289, 2023 WL 5521221 (3d. Cir. Aug. 28, 2023).
In 2015, Winn-Dixie, a supermarket chain, brought Sherman Act Section 1 claims against Eastern Mushroom Marketing Cooperative (“EMMC”), its individual mushroom farming members and certain downstream distributors, alleging that a minimum pricing policy imposed by EMMC upon its members was an illegal price-fixing conspiracy. The minimum pricing policy required all member companies to charge uniform prices to all customers. The minimum price was not “the price at which growers sold the product but instead the price which EMMC members hoped to coerce downstream distributors to go to market.” Op. at 4. Many EMMC members partnered with specific distributors and some members even owned distributors. However, the distributors were not bound by EMMC’s minimum pricing policy. In other words, there was “agreement by EMMC members to set the prices they themselves charged to vertically oriented distributors—some of which were integrated with EMMC members and some of which were not—in an effort to boost the prices those distributors charged to retailers.” Op. at 5. However, evidence at trial proved that EMMC members routinely did not follow the minimum pricing policy and efforts to stabilize prices were unsuccessful. Op. at 5.
Prior to trial, the parties briefed the relevant legal standard for plaintiffs’ price-fixing claim. Plaintiffs sought the more favorable quick-look standard, where a court “presumes the plaintiff has met her initial burden” of showing that the “challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market.” Op. at 8-9 (citing Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018)). However, the district court applied the rule of reason framework, “because the effects of the minimum pricing policy [were] not obviously or facially anticompetitive.” Op. at 7. After trial, the jury entered a verdict for defendants, finding that (i) a conspiracy existed, (ii) EMMC participated in the conspiracy (and that the individual farmers or distributors did not) and (iii) but plaintiffs did not prove anticompetitive effects from the conspiracy. Plaintiffs appealed on multiple grounds, including that the rule of reason was the incorrect legal standard to analyze defendants’ alleged conduct.
On review, the Third Circuit noted that appellant-plaintiffs’ desired quick-look framework was an intermediate standard that requires the court to have “amassed considerable experience with the type of restraint at issue such that we can predict with confidence that it would be invalidated in all or almost all instances.” Op. at 9 (citing Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2156 (2021)). The Court then looked to circuit law for guidance, determining that the “tailored set of interrelated vertical and horizontal agreements among growers and distributors” was not subject to quick look review, since it “did not closely resemble” a recent quick look case that involved a hub-and-spoke conspiracy with horizontally situated spokes and a vertical hub. Op. at 13 (citing In re Insurance Brokerage Antitrust Litigation, 618 F.3d 300 (3d Cir. 2010)). The Court noted that because the downstream mushroom distributors lacked a “unity of interest” with other distributors and growers, there was “no set of horizontal spokes and nothing akin to a unilateral vertical conduit.” Id.
Instead, defendants’ minimum pricing policy was closer to “a vertical agreement setting minimum resale prices” or a vertical agreement “between a manufacturer and its dealers [designed] to support illegal horizontal agreements between multiple dealers.” Op. at 13 (citing Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. at 398; Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc., 530 F.3d 204, 225 (3d Cir. 2008)). Since the Leegin and Toledo courts both determined that a rule of reason analysis was appropriate in those cases, the panel determined the same here. The Court noted that the jury’s failure to find anticompetitive harm at trial was an important post-hoc indicator that the quick-look framework was ill-suited for this case.
This decision serves as useful guidance to the application of quick-look and rule of reason analysis. As this case shows, the application of quick look will only arise where existing law suggests that the restraint would be “invalidated in all or almost all instances.” Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. at 2156 (2021). Otherwise—if not a case involving per se conduct—courts will continue to default to the rule of reason in evaluating alleged anticompetitive restraints.