Harrison (Buzz) Frahn
Simpson Thacher & Bartlett LLP
By enacting statutory provisions governing the distribution and sale of fine wines and spirits, Connecticut created a ferment among vintners operating in the state. The resulting distaste prompted one vintner, Connecticut Fine Wines and Spirits, d/b/a Total Wine & More (“Total Wine”), to file suit against the Connecticut Department of Consumer Protection and the Director of the Connecticut Division of Liquor Control (collectively, “Defendants”). Conn. Fine Wine & Spirits, LLC v. Seagull, 932 F.3d 22 (2d Cir. 2019). Total Wine alleged that certain provisions of the state’s statutory alcoholic beverage scheme resulted in vertical and horizontal price fixing and were therefore preempted by Section 1 of the Sherman Act, 15 U.S.C. § 1. Id. at 24.
The United States District Court for the District of Connecticut disagreed, granting Defendants’ motion to dismiss and holding that none of the challenged provisions were preempted by federal antitrust laws. Id. at 28–29. On appeal, a three-judge panel for the United States Court of Appeals for the Second Circuit unanimously agreed with the district court’s findings and affirmed. Id. at 29–30.
Connecticut’s Complex Scheme
Total Wine challenged three sets of provisions in Connecticut’s Liquor Control Act, Conn. Gen. Stat. § 30-74(a): “post-and-hold” provisions, minimum retail price provisions, and a price discrimination prohibition. Id. at 24.
The “post-and-hold” provisions require that state-licensed wholesalers, among other market participants, post a “bottle price” and a “case price” each month for all alcoholic products to be sold during the following month. Id. at 24. These prices are then made available to industry participants, and wholesalers are given the opportunity to amend their posted prices to match any lower prices listed by competitors. Id. Wholesalers may not, however, undercut competitors’ prices during this process. Id. After the four-day amendment period, wholesalers must “hold” the posted price for one month. Id.
The provisions governing minimum retail price require retailers to “sell to customers at or above a statutorily defined ‘[c]ost.’” Id. at 25 (alteration in original). “Cost” is calculated by adding the posted minimum bottle price—set by the wholesaler—and the retailer’s costs for shipping and delivery. Id. In other words, the bottle prices established by wholesalers pursuant to the post-and-hold provisions—and not the actual price paid by the retailer—largely determine the “cost” at which retailers must sell their products. Id.
Finally, the price discrimination prohibition requires wholesalers to sell at the same price to all retailers. Id. at 26. Accordingly, the provision bans wholesalers from selling to retailers at discounted prices, even when those retailers are high-volume purchasers. Id.
This statutory scheme is not supervised by any Connecticut agency. Id. at 28. Instead, wholesalers are given discretion to post prices as they see fit. Id.
Total Wine’s Full-Bodied Challenge
Total Wine is the largest alcoholic beverage retailer in the United States and runs several stores across Connecticut. Id. at 27. In August 2016, the retailer challenged Connecticut’s statutory scheme on its face, seeking injunctive and declaratory relief. Id. It alleged that the provisions were per se restraints on trade and were thus preempted by the Sherman Act, which “makes illegal ‘[e]very contract, combination . . . or conspiracy, in restraint of trade or commerce.’” Id. at 29 (quoting 15 U.S.C. § 1) (alteration in original). According to Total Wine, the regulatory scheme promotes both vertical and horizontal price fixing and ultimately brings about “prices ‘substantially above what fair and ordinary market forces would dictate.’” Id. at 27 (quoting Compl. ¶ 16).
As to horizontal price fixing, Total Wine alleged that the “post-and-hold” provisions, by allowing wholesalers to match competitors’ prices “with no risk of sparking a price war,” reduce wholesalers’ incentives to be the first mover on lowering price. Id.
Vertical price fixing, according to Total Wine, resulted from the minimum-retail-price provisions. Id. at 27–28. While high-volume purchasers almost exclusively buy at case prices, they are forced to sell to consumers using the bottle prices set by wholesalers under the post-and-hold provisions. Id. at 27. This prevents high-volume purchasers from passing cost savings on to consumers, which in turn prevents large-scale vintners from utilizing efficiencies to compete for customers through discounts. Id. This result is compounded by wholesalers’ practice of setting low case prices relative to high minimum bottle prices. Id. at 27–28. This scheme, Total Wine alleged, allows wholesalers to “effectively control both retail price and retailers’ profit margins.” Id. at 28 (quoting Compl. ¶ 17).
The Panel Finds No Notes of Preemption
The panel began by explaining that two key Supreme Court cases inform the preemption analysis: Rice v. Norman Williams Co., 458 U.S. 654 (1982), and Fisher v. City of Berkeley, 475 U.S. 260 (1986). Together, these cases create a two-step inquiry for determining whether a state law or regulation is preempted by Section 1 of the Sherman Act. Id. at 31–32.
Under step one, courts must determine whether a purported restraint “irreconcilably conflicts with federal antitrust policy” by “mandat[ing] or authoriz[ing] conduct” that constitutes a per se Section 1 violation in all instances. Id. at 30 (quoting Rice, 458 U.S. at 659, 661). If a per se violation would not necessarily result in all cases, then it must be analyzed under the rule of reason and cannot be struck down as a categorical matter. Id. (quoting Rice, 458 U.S. at 661).
As a threshold matter to determining whether a state law irreconcilably conflicts with federal antitrust laws, courts ask whether the law is “unilateral”—that is, whether it is “imposed by the government . . . to the exclusion of private control.” Id. at 31 (quoting Berkeley, 475 U.S. at 266–67). When a restraint is unilateral, there is no “collective action” as required by the Sherman Act, and the statute is not a per se violation and thus is not preempted by federal law. Id. The same cannot be said for “hybrid” restraints, which provide private actors with some degree of control and may be challenged as per se violations under Section 1. Id.
The panel found that the minimum-retail-price provisions were not preempted, even though the provisions compelled vertical price fixing arrangements among competitors. Id. at 33. Following precedent decided on similar facts, the panel classified the minimum-retail-price provision as a hybrid restraint, since it provides some degree of private regulatory control. Id. at 32 (citing 324 Liquor Corp. v. Duffy, 479 U.S. 335 (1987)). The panel, however, departed from 324 Liquor as to whether the statutory scheme mandated a per se violation of Section 1, irreconcilably conflicting with federal antitrust law. Id. In light of an intervening Supreme Court case, Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), which held that all vertical restraints must be analyzed under the rule of reason, the panel found that the minimum-retail-price provisions did not “irreconcilably conflict” with federal antitrust laws. Id. at 32–33. As such, the Connecticut provisions were not preempted. Id.
Price Discrimination Prohibition
The panel similarly found that Connecticut’s provisions requiring wholesalers to sell to retailers at the same price were not preempted by federal antitrust laws. Id. at 33. First, because the provisions were “unilateral” restraints imposed by the state, they did not involve concerted activity. Id. They did not, as is required for a finding of preemption, allow any private actor a “degree of regulatory control.” Id. (quoting Freedom Holdings Inc. v. Cuomo, 624 F.3d 38, 50 (2d Cir. 2010)). Second, as with the minimum-retail-price restraint, the provisions at issue were deemed “purely vertical in operation.” Id. Again applying Leegin’s holding that vertical restraints must be analyzed under the rule of reason, the panel found that the provisions could not be held per se unlawful as a categorical matter and therefore were not preempted. Id.
The primary dispute among the parties with respect to the post-and-hold provisions was whether the district court correctly applied Battipaglia v. New York State Liquor Authority, 745 F.2d 166 (2d Cir. 1984), which held that a New York post-and-hold provision was not preempted. Conn. Fine Wine & Spirits, 932 F.3d 22,33–34.
Battipaglia involved a post-and-hold statute “substantially identical” to Connecticut’s post-and-hold provision. Id. at 34, 36 (citing Battipaglia, 745 F.2d at 168). Applying Rice, the Battipaglia court held that the New York provision was not preempted because it did not compel an agreement among wholesalers. Id. at 34–35. Instead, the only conduct compelled was “the exchange of price information,” which did not constitute a per se Section 1 violation in all cases. Id. at 35 (quoting Battipaglia, 745 F.2d at 174).
Pointing to the similarities between the two sets of provisions, the panel determined that the district court properly applied Battipaglia as controlling authority. Id. at 36. The panel rejected Total Wine’s arguments that subsequent case law had chilled Battipaglia’s applicability. Id. Instead, the panel explained, those subsequent cases emphasized the need for an agreement among competitors—“the gravamen of § 1.” Id. at 38.
The Connecticut post-and-hold provisions, however, authorized or mandated no such agreement. Id. Invoking Twombly, the panel noted that wholesalers’ common product prices had a “natural” explanation deriving from something other than an agreement to price fix: “[T]he law itself invites and facilitates conscious parallelism in pricing,” which is not in itself unlawful. Id. at 38–39 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)). The Second Circuit noted that Connecticut’s statutory regime in fact accomplished the opposite—rather than facilitating an agreement, it left wholesalers with little reason to communicate with competitors. Id. at 39. As such, Connecticut’s post-and-hold provisions did not present an irreconcilable conflict with federal law and were thus not preempted. Id.
The Connecticut Fine Wines & Spirits panel’s decision highlights the high bar that must be met for federal antitrust laws to preempt state statutory or regulatory schemes. Although it acknowledged that Connecticut’s alcoholic beverage statutory scheme “harmonized” retail prices, the panel held that the degree of control that remained in pricing was sufficient to prevent a finding of preemption. The case also highlights Leegin’s effect on preemption: relying on Leegin’s rule that vertical restraints must be decided under the rule of reason, the panel disregarded factually similar precedent that would have likely resulted in portions of Connecticut’s alcohol laws being preempted by federal law.
The second step of the inquiry is invoked when states defend their statutory regimes by asserting state action immunity under the Twenty-first Amendment of the U.S. Constitution. Because Connecticut did not raise this defense during appeal, the panel did not address it.Id. at 31–32 n.11.