Distribution, Competition, and Antitrust / IP Law

Wholesale Grocery Products Case Raises Questions About How and When to Apply Per Se Rule and Rule of Reason

SHOPPING FOR GROCERIES IN A WASHINGTON, DISTRI...

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The Supreme Court today denied review in In re: Wholesale Grocery Products Antitrust Litigation, an action that came up from the District of Minnesota and the Eighth Circuit. Substantively, the case is a useful reminder about the potential dangers of non-compete agreements; procedurally, it raises some troubling questions for future Sherman Act cases.

In brief, two large grocery wholesalers entered into an asset purchase agreement. The New England wholesaler (which did some limited business in the Midwest) acquired the Midwest’s wholesaler’s New England assets. The New England wholesaler – which had acquired the assets of a bankrupt wholesaler’s nationwide assets – also agreed to designate the Midwestern wholesaler as the receiver of the bankrupt firm’s Midwestern assets. As part of the agreement, each wholesaler agreed not to supply the customers of the business it sold for two years and not to solicit those customers for five years. The written terms did not include any express restrictions as to the solicitation or supply of other customers or any geographic market division.

The plaintiff – a small “mom and pop” grocery store – alleged that the non-compete agreement was unlawful, and that it went beyond the written terms of the contract to include not only former customers, but also new and existing customers. The district court granted summary judgment to the wholesalers, but the Eighth Circuit reversed.

On the substance of the issue, the outcome may not be terribly surprising: if there were evidence of a non-compete as to new and existing customers, that evidence might support a judgment that the agreement was an anti-competitive and unlawful market or customer division – at least under the Rule of Reason – although many ancillary non-competes have been found to be perfectly lawful.(*)

The procedural issue is perhaps the more interesting one. The Eighth Circuit held that because there were material issues of fact as to what the wholesalers actually agreed to do, the district court could not resolve on summary judgment the question of whether to apply the per se rule or the Rule of Reason. (Other circuits have concluded that where there are fact issues regarding the exact nature or effects of the restraint, per se treatment is inappropriate.) And so, as the wholesalers told the Supreme Court in their cert. brief, “[t]he holding below creates a twilight zone in which litigants ‘d[o]n’t know what kind of trial to prepare for . . . . A per se trial looks vastly different than a rule-of-reason trial.” “Equally troubling,” the wholesalers wrote, “plaintiffs can easily avoid facing rule-of-reason review at summary judgment by concocting fact issues about a restraint’s ‘terms’: Even if the written agreement triggers the rule of reason . . . plaintiffs need only allege a ‘knowing nod and wink’ . . . that signaled different terms to force defendants into a costly trial or coerced settlement.”

Presumably there are evidentiary and Rule 11 requirements that preclude plaintiffs from “concocting” fact issues about a given restraint’s terms. And if the question were simply whether factual issues about whether the defendants entered into a naked market-allocation agreement precluded summary judgment, the opinion would not be remarkable. But the bigger problem with the Eighth Circuit’s decision is its broad language – e.g., “The district court erred by assuming that because the record did not establish an undisputed per se violation, then the rule of reason necessarily applied.” But if there is no per se violation, then what’s left is the Rule of Reason. By not allowing the district courts to resolve the standard of review question before trial, the Eighth Circuit leaves defendants wondering how they can prepare for a trial without knowing whether the per se rule or the Rule of Reason applies. Wholesale Grocery Products offers no guidance as to how defendants (and plaintiffs) should handle this dilemma.

(*) The Eighth Circuit seemed to think that a geographic market division – even one ancillary to a legitimate sale of assets – would be subject to the per se rule. This blanket conclusion seems questionable. Had the Eighth Circuit rejected the argument that an ancillary geographic division could be per se unlawful, its holding would have avoided the problems caused by deferring resolution of the question whether to apply the per se rule or the Rule of Reason.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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