California Ex Rel. Harris v. Safeway, Inc. ( 2011 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
STATE OF CALIFORNIA, ex rel. 
Kamala D. Harris,*
Plaintiff-Appellant,
v.
SAFEWAY, INC., a Safeway No. 08-55671
Company doing business as Vons;
ALBERTSONS, INC.; RALPHS GROCERY  D.C. No.
2:04-cv-00687-
COMPANY, a division of the Kroger
Company; FOOD 4 LESS FOOD AG-SS
COMPANY, a division of the Kroger
Company; VONS COMPANIES INC.,
an indirect, wholly owned
subsidiary of Safeway, Inc.,
Defendants-Appellees.

*Kamala D. Harris is substituted for her predecessor, Edmund G.
Brown, as Attorney General of the State of California, pursuant to Federal
Rule of Appellate Procedure 43(c)(2).
9279
9280 CALIFORNIA v. SAFEWAY, INC.
STATE OF CALIFORNIA, ex rel. 
Kamala D. Harris,
Plaintiff-Appellee,
v.
SAFEWAY INC. a Safeway Company No. 08-55708
doing business as Vons; D.C. No.
ALBERTSONS, INC.; RALPHS GROCERY  2:04-cv-00687-
COMPANY, a division of the Kroger AG-SS
Company; FOOD 4 LESS FOOD
OPINION
COMPANY, a division of the Kroger
Company; VONS COMPANIES INC.
an indirect, wholly owned
subsidiary of Safeway, Inc.
Defendants-Appellants.

Appeal from the United States District Court
for the Central District of California
Andrew J. Guilford, District Judge, Presiding
Argued and Submitted
March 22, 2011—San Francisco, California
Filed July 12, 2011
Before: Alex Kozinski, Chief Judge, Mary M. Schroeder,
Stephen Reinhardt, Susan P. Graber, M. Margaret McKeown,
Raymond C. Fisher, Ronald M. Gould, Richard C. Tallman,
Johnnie B. Rawlinson, Richard R. Clifton, and
N. Randy Smith, Circuit Judges.
Opinion by Judge Gould;
Concurrence by Judge Fisher;
Partial Dissent by Chief Judge Kozinski;
Partial Concurrence and Partial Dissent by Judge Reinhardt
9284 CALIFORNIA v. SAFEWAY, INC.
COUNSEL
Kamala D. Harris, Attorney General for the State of Califor-
nia; Kathleen E. Foote, Senior Assistant Attorney General;
Barbara M. Motz, Supervising Deputy Attorney General;
Patricia L. Nagler, Deputy Attorney General; Cheryl L. John-
son, Deputy Attorney General; and Jonathan M. Eisenberg
(argued), Deputy Attorney General, Los Angeles, California,
for the plaintiff-appellant/cross-appellee.
Alan B. Clark, Peter K. Huston, Latham & Watkins LLP, Los
Angeles, California, and Jeremy P. Sherman, Seyfarth Shaw
LLP, Chicago, Illinois, for respondents-appellees/cross-
appellants Safeway, Inc. and The Vons Companies, Inc.
CALIFORNIA v. SAFEWAY, INC. 9285
Jeffrey A. LeVee, Craig E. Stewart (argued), and Kate P.
Wallace, Jones Day, Los Angeles, California, for respondent-
appellee/cross-appellant Albertson’s, Inc.
Robert B. Pringle, Winston & Strawn, San Francisco, Califor-
nia, for respondents-appellees/cross-appellants Ralphs Gro-
cery Company and Food 4 Less Company.
Robin S. Conrad, Shane B. Kawka, Washington, District of
Columbia, for amicus curiae Chamber of Commerce of the
United States.
Charles I. Cohen, Jonathan C. Fritts and David R. Broderdorf,
Washington, District of Columbia, for amici curiae Chamber
of Commerce of the United States and Council on Labor Law
Equality.
Jeffrey A. Berman, Los Angeles, California, for amicus curiae
Employers Group.
Robert M. McKenna, Attorney General of Washington and
Mark O. Brevard, Assistant Attorney General, Seattle, Wash-
ington; and Nancy H. Rogers, Attorney General of Ohio and
Jennifer L. Pratt, Chief, Antitrust Section, Columbus,
Ohio, for amici curiae Arizona, Connecticut, Delaware,
Maryland, Massachusetts, Mississippi, Missouri, Montana,
Nevada, Ohio, Oklahoma, Oregon, Tennessee, Washington,
and West Virginia.
Nicholas W. Clark, Washington, District of Columbia, for
amicus curiae United Food and Commercial Workers Interna-
tional Union.
Michael D. Four, Los Angeles, California, for amici curiae
UFCW Local Unions 135, 324, 770, 1036, 1167, 1428, and
1442.
Andrew D. Roth, Washington, District of Columbia, for amici
curiae United Food and Commercial Workers International
9286 CALIFORNIA v. SAFEWAY, INC.
Union, UFCW Local Unions 135, 324, 770, 1036, 1167,
1428, and 1442, Change to Win, and AFL-CIO.
Richard M. Brunell, Washington, District of Columbia, for
amicus curiae American Antitrust Institute.
OPINION
GOULD, Circuit Judge:
We must decide whether an agreement among competitors
to share revenues during the term of a labor dispute is exempt
from the antitrust laws under the non-statutory labor exemp-
tion, and if not, whether the agreement should be condemned
as a per se violation of the antitrust laws or on a truncated
“quick look,” or whether more detailed scrutiny is required.
We conclude that the agreement is not immune from the anti-
trust laws, but that summary condemnation, whether as a per
se violation or on a “quick look,” is improper. We affirm the
district court.
I. Factual and Procedural History
In the fall of 2003, the collective-bargaining agreement
between several local chapters of the United Food and Com-
mercial Workers (“UFCW”) and three large supermarket
chains operating in Southern California (Albertson’s, Ralphs,
and Vons, a subsidiary of Safeway, Inc.) was set to expire.
Another grocery chain, Food 4 Less,1 had a separate contract
with UFCW that was set to expire several months later, in
February 2004. Before the contracts expired and with the con-
sent of the union, Albertson’s, Ralphs, and Vons formed a
multi-employer bargaining unit in the summer of 2003 for
negotiation of a successor labor contract.
1
Food 4 Less is an unincorporated operating division of Ralphs; it is a
fictitious name under which Ralphs does business in Southern California.
CALIFORNIA v. SAFEWAY, INC. 9287
Albertson’s, Ralphs, Vons, and Food 4 Less (“Defendants”
or “grocers”) entered into a Mutual Strike Assistance Agree-
ment2 (“MSAA”) in September 2003, in anticipation of the
potential use of “whipsaw” tactics, where unions exert pres-
sure on one employer within a multi-employer bargaining unit
through, for example, selective strikes or picketing. Among
other things, the MSAA provided that if one party to the
agreement was struck by the union, the other grocers (with the
exception of Food 4 Less) would lock out all their union
employees within 48 hours.
Pertinent to the antitrust claims that we assess, the MSAA
also included a revenue-sharing provision (“RSP”), providing
that in the event of a strike/lockout, any grocer that earned
revenues above its historical share relative to the other chains
during the strike period would pay 15% of those excess reve-
nues as reimbursement to the other grocers to restore their
pre-strike shares.3 The MSAA specified that the strike/lockout
period would begin at the start of the week in which the
strike/lockout commenced and continue for two weeks fol-
lowing the end of the strike/lockout.4 According to a responsi-
ble grocer executive, the 15% figure was designed to estimate
2
There were in fact two agreements with identical terms, one pertaining
to UFCW Local No. 770 and the other to UFCW Locals No. 135, 324,
1036, 1167, 1428, and 1442. We will refer to them as one agreement for
simplicity.
3
To implement this arrangement, the grocers agreed to submit their
weekly sales data for an eight-week period before the strike and for the
strike period to a certified public accountant. The CPA would use the data
to determine the grocers’ historical percentage shares of the market (rela-
tive to one another) prior to the strike, and to calculate the aggregate
increase or decrease in each grocer’s average weekly sales during the
strike. The CPA would then multiply the total amount of disparity for each
grocer by 15% and those grocers earning revenues above their historical
share would pay that amount in compensation to the lower performing
grocer to return all grocers to their relative pre-strike positions. Food 4
Less and Ralphs were treated as one unit for purposes of this calculation.
4
The parties refer to this as the “two-week tail.”
9288 CALIFORNIA v. SAFEWAY, INC.
the incremental profit the grocers earned on each additional
dollar of revenue.
On October 11, 2003, after union contract negotiations
broke down, the unions began a strike against Vons stores in
the region. Albertson’s and Ralphs locked out their union
employees the next day pursuant to the terms of the MSAA.
The unions at first picketed Albertson’s, Ralphs, and Vons
stores, but soon elected to pull their pickets from Ralphs
stores and focus their picketing efforts on Albertson’s and
Vons only. About four-and-a-half months after the strike
began, at the end of February 2004, the grocers and the unions
reached an agreement and the strike/lockout ended. In accord
with the revenue-sharing provision of the MSAA, Ralphs paid
about $83.5 million to Vons, and it paid about $62.5 million
to Albertson’s.
While the strike was in progress, the State of California
brought an action against the grocers alleging that the RSP
violated Section 1 of the Sherman Act, which prohibits any
contract, combination, or conspiracy in restraint of trade or com-
merce.5 15 U.S.C. § 1. After limited discovery, the grocers
moved for summary judgment on the ground that the RSP was
immune from antitrust scrutiny under the non-statutory labor
exemption. The district court denied the motion, holding that
the exemption was inapplicable. California then moved for
summary judgment, contending that the RSP was a per se vio-
lation of § 1, or in the alternative that it was unlawful under
an abbreviated rule of reason or “quick look” antitrust analy-
sis. The district court denied that motion as well. The grocers
renewed their motion for summary judgment on the non-
statutory labor exemption, and the district court again denied
their motion.
While preserving their right to appeal the district court’s
rulings, the parties stipulated to the entry of final judgment for
5
California sought a permanent injunction and attorneys’ fees.
CALIFORNIA v. SAFEWAY, INC. 9289
the grocers after California agreed not to pursue the theory
that the RSP violated § 1 of the Sherman Act under a full rule
of reason analysis, and the grocers agreed not to pursue the
various affirmative defenses they had pleaded, with the
exception of the non-statutory labor exemption. The district
court entered judgment in accordance with the parties’ stipu-
lations.
California timely appealed the final judgment, arguing that
the RSP should be condemned as a per se violation or on a
“quick look,” and the grocers timely cross-appealed, arguing
that the non-statutory labor exemption should apply. We
issued an opinion affirming in part, reversing in part, and
remanding. California ex rel. Brown v. Safeway, Inc., 615
F.3d 1171 (9th Cir. 2010). A majority of non-recused active
judges voted to rehear this case en banc pursuant to Circuit
Rule 35-3. California ex rel. Brown v. Safeway, Inc., 633 F.3d
1210 (9th Cir. 2011).
II. Jurisdiction and Standard of Review
We have jurisdiction under 28 U.S.C. § 1291. We review
de novo a district court’s denial of summary judgment on the
basis of the non-statutory labor exemption. Clarett v. Nat’l
Football League, 369 F.3d 124, 130 (2d Cir. 2004). The
selection of the proper mode of antitrust analysis is a question
of law, which we review de novo. United States v. Brown,
936 F.2d 1042, 1045 (9th Cir. 1991); see also Craftsmen Lim-
ousine, Inc. v. Ford Motor Co., 363 F.3d 761, 772 (8th Cir.
2004); XI Phillip Areeda & Herbert Hovenkamp, Antitrust
Law ¶ 1909b, at 279 (2d ed. 2005) (hereinafter Areeda &
Hovenkamp).
III. Non-Statutory Labor Exemption
On cross-appeal, the grocers contend that the district court
erred in holding that the RSP is not immune from the Sher-
man Act under the non-statutory labor exemption, and they
9290 CALIFORNIA v. SAFEWAY, INC.
urge that summary judgment should have been entered in
their favor on the basis of the exemption.
A. Background
Court have recognized both “statutory” and “non-statutory”
labor exemptions to the antitrust laws. Phoenix Elec. Co. v.
Nat’l Electric Contractors Ass’n, 81 F.3d 858, 860 (9th Cir.
1996). The statutory exemption, which is not invoked here,
establishes that labor unions are not combinations or conspira-
cies in restraint of trade and exempts certain union activities
from scrutiny under the antitrust laws. Connell Constr. Co. v.
Plumbers & Steamfitters Local Union No. 100, 421 U.S. 616,
621-22 (1975). However, the statutory exemption does “not
exempt concerted action or agreements between unions and
nonlabor parties.” Id. at 622.
[1] The non-statutory labor exemption, invoked by the gro-
cers as a defense in this case, has been inferred from federal
labor statutes. These “set forth a national labor policy favor-
ing free and private collective bargaining,” “require good-
faith bargaining over wages, hours, and working conditions,”
and “delegate related rulemaking and interpretive authority to
the National Labor Relations Board.” Brown v. Pro Football,
Inc., 518 U.S. 231, 236 (1996). The implicit exemption “inter-
prets the labor statutes . . . as limiting an antitrust court’s
authority to determine, in the area of industrial conflict, what
is or is not a ‘reasonable’ practice” and “substitutes legislative
and administrative labor-related determinations for judicial
antitrust-related determinations” in that area. Id. at 236-37.
“[S]ome restraints on competition imposed through the bar-
gaining process must be shielded from antitrust sanctions” to
give effect to federal labor policy and to allow meaningful
collective bargaining to occur. Id. at 237.
“The Supreme Court has never delineated the precise
boundaries of the [non-statutory labor] exemption, and what
guidance it has given as to its application has come mostly in
CALIFORNIA v. SAFEWAY, INC. 9291
cases in which agreements between an employer and a labor
union were alleged to have injured or eliminated a competitor
in the employer’s business or product market.” Clarett, 369
F.3d at 131. The Court first elaborated on the reach of the
non-statutory labor exemption in Allen Bradley Co. v. Local
Union No. 3, International Brotherhood of Electrical Work-
ers, involving a series of agreements between an electrical
workers union and several manufacturers and contractors in
which the manufacturers and contractors agreed to do busi-
ness exclusively with other companies that employed union
workers. 325 U.S. 797 (1945). Those agreements were part of
“a far larger program . . . to monopolize all the business in
New York City, to bar all other business men from that area,
and to charge the public prices above a competitive level” and
created a “situation . . . not included within the [relevant]
exemptions.” Id. at 809. The Court explained that Congress
did not intend to bestow on unions “complete and unreview-
able authority to aid business groups to frustrate [antitrust leg-
islation’s] primary objective.” Id. at 810.
[2] In United Mine Workers of America v. Pennington, the
Supreme Court similarly declined to apply the exemption to
insulate a wage agreement between a union of mine workers
and large coal companies. 381 U.S. 657 (1965). The union
and the large companies, to eliminate smaller coal companies
and permit the larger companies to control the market, agreed
to a series of terms, including increased wages for union
workers. Id. at 660. A smaller coal mine operator, unable to
pay the increased wages demanded by the union under the
terms of their agreement with the larger companies, filed suit
claiming that the agreement violated the Sherman Act. Id. at
659. In exploring the boundaries of the exemption, the Court
observed that, had the union and employers entered into an
agreement in which they collectively set prices for coal, they
could not defend that agreement from antitrust attack, because
“the restraint on the product market is direct and immediate,
is of the type characteristically deemed unreasonable under
the Sherman Act and the union gets from the promise nothing
9292 CALIFORNIA v. SAFEWAY, INC.
more concrete than a hope for better wages to come.” Id. at
663. The Court rejected the argument that, simply because the
agreement related to wages—a subject at the heart of
bargaining—rather than prices, the exemption should apply.
Id. at 664-69. Though “a union may conclude a wage agree-
ment with the multi-employer bargaining unit without violat-
ing the antitrust laws,” the Court explained, “there are limits
to what a union or an employer may offer or extract in the
name of wages.” Id. at 664-65. “[A] union forfeits its exemp-
tion from the antitrust laws when it is clearly shown that it has
agreed with one set of employers to impose a certain wage
scale on other bargaining units.” Id. at 665 (emphasis added).
The Court held that the wage agreement was not exempt from
the antitrust laws. Id. at 669.
The exemption was applied in a fractured decision in Local
Union No. 189, Amalgamated Meat Cutters & Butcher Work-
men of North America v. Jewel Tea Co., 381 U.S. 676 (1965),
which the Supreme Court issued together with its opinion in
Pennington. The union representing butchers in Chicago
reached a collective-bargaining agreement with a multi-
employer bargaining unit of food retailers that included a
marketing hours restriction, which prohibited the sale of meat
before 9:00 a.m. and after 6:00 p.m., and on Sundays. Id. at
679-80. One member of the bargaining unit, Jewel Tea, ini-
tially rejected the provision limiting hours, but eventually
decided to sign a contract including such a provision under
threat of a strike. Id. at 680-81. Jewel Tea brought suit against
the union, claiming that the marketing hours restriction in the
contract violated the Sherman Act as it was the product of a
conspiracy to prevent the retail sale of fresh meat during the
evening hours. Id. at 681-82. The plurality opinion explained
that “the marketing-hours restriction, like wages, and unlike
prices, is so intimately related to wages, hours and working
conditions that the unions’ successful attempt to obtain that
provision . . . falls within the protection of the national labor
policy and is therefore exempt from the Sherman Act.” Id. at
689-90. Three other justices, concurring in the judgment (but
CALIFORNIA v. SAFEWAY, INC. 9293
dissenting in Pennington) viewed the exemption more
broadly, and would have held that all “collective bargaining
activity concerning mandatory subjects of bargaining under
the Labor Act is not subject to the antitrust laws.” Id. at 710(Goldberg, J., concurring).
The Court declined to apply the non-statutory exemption to
a labor-employer agreement in Connell Construction Co., 421
U.S. at 621. A union representing workers in the plumbing
and mechanical trades in Dallas entered into a multi-employer
bargaining agreement with a large group of mechanical con-
tractors. Id. at 619. The union asked Connell Construction—
a general building contractor that was outside the bargaining
agreement and whose workers were not represented by the
union—to agree to subcontract mechanical work only to firms
that had a contract with the union. Id. Connell initially refused
to sign the agreement but acquiesced when the unions pick-
eted one of its construction sites. Id. at 620. The Court recog-
nized the importance of the non-statutory exemption for labor
policy, but cautioned that “while the statutory exemption
allows unions to accomplish some restraints by acting unilat-
erally, the nonstatutory exemption offers no similar protection
when a union and a nonlabor party agree to restrain competi-
tion in a business market.” Id. at 622-23 (citation omitted).
The exemption did not shield the agreement from the antitrust
laws because such a “direct restraint on the business market
has substantial anticompetitive effects, both actual and poten-
tial, that would not follow naturally from the elimination of
competition over wages and working conditions.” Id. at 625.
Most recently, in Brown v. Pro Football, Inc., the Supreme
Court for the first time extended the non-statutory labor
exemption to an agreement that was solely among employers.
518 U.S. at 238; see also IB Areeda & Hovenkamp ¶ 257b2,
at 141 (3d ed. 2006) (explaining that “historically the courts
were reluctant to extend the exemption . . . to an agreement
among employers that did not involve any employee group as
9294 CALIFORNIA v. SAFEWAY, INC.
a participant” but that the Supreme Court did extend the
exemption to that situation in Brown); id. at 151-52.
Brown involved an agreement among National Football
League teams to restrain the salaries of certain classes of play-
ers. Brown, 518 U.S. at 234-35. The collective-bargaining
agreement between the players’ union and the league expired,
and bargaining began for a new contract. Id. at 234. During
the negotiations, the NFL adopted a plan that would permit
each team to create a developmental squad of rookies who
would play in practice games with the team and sometimes in
regular games as substitutes for injured players, and provided
that the developmental squad players would be paid $1000
per week. Id. The players’ union disagreed with these terms
and insisted that developmental squad players get benefits and
protections similar to those offered to regular players and that
they be free to negotiate their own salaries rather than be paid
the fixed rate. Id. Two months later, bargaining reached an
impasse, and the NFL unilaterally implemented the develop-
mental squad program under its proposed terms. Id. at 235.
The developmental squad players brought an antitrust action
against the league and the individual teams, claiming that the
agreement to pay them $1000 per week violated the Sherman
Act. Id.The Court began by examining the “history and logic” of
the exemption, observing that it “interprets the labor statutes
in accordance with” the intent of Congress to prevent “judi-
cial use of antitrust law to resolve labor disputes” and limits
antitrust courts’ authority to determine what qualifies as a rea-
sonable practice in industrial conflict. Id. at 236-37. With cita-
tion to the leading cases Connell, Jewel Tea, and Pennington,
the Court explained that the exemption is essential to give
effect to federal labor policy and allow meaningful collective
bargaining because “it would be difficult, if not impossible, to
require groups of employers and employees to bargain
together, but at the same time to forbid them to make among
themselves or with each other any of the competition-
CALIFORNIA v. SAFEWAY, INC. 9295
restricting agreements potentially necessary to make the pro-
cess work.” Id. at 237.
The Court then identified the question presented as one of
scope: whether the exemption applies to an agreement among
several employers bargaining together to implement after
impasse the terms of their last best good-faith wage offer. Id.
at 238. The Court recognized at the outset that labor law “reg-
ulates directly, and considerably, the kind of behavior here at
issue—the postimpasse imposition of a proposed employment
term concerning a mandatory subject of bargaining.” Id.Labor regulations “reflect the fact that impasse and an accom-
panying implementation of proposals constitute an integral
part of the bargaining process,” and case law demonstrates
that implementation of terms after impasse is a familiar prac-
tice in multi-employer bargaining. Id. at 239-40. Under these
circumstances, “to subject the practice to antitrust law is to
require antitrust courts to answer a host of important practical
questions about how collective bargaining over wages, hours,
and working conditions is to proceed—the very result that the
implicit labor exemption seeks to avoid.” Id. at 240-41.
The Court addressed and rejected several proposed limita-
tions or boundaries to the exemption that were suggested by
the parties and amici. Id. at 243-50. The Court first rejected
the argument that the exemption should be limited to existing
labor-management agreements. Id. at 243-44. The Court
emphasized that, for the immunity to be effective, it must
apply not just to the completed bargain but also to the process
by which the bargain is made, including the process before an
initial collective-bargaining agreement is approved and the
period after the agreement has expired. Id.; see also IB
Areeda & Hovenkamp ¶ 257b2. The Court rejected the sug-
gestion that the exemption should terminate when collective-
bargaining negotiations reach impasse or a reasonable time
thereafter and another suggestion that the exemption permit
employers to make post-impasse agreements about bargaining
tactics but not the terms of any policy directed at employees.
9296 CALIFORNIA v. SAFEWAY, INC.
Brown, 518 U.S. at 244-48. The Court also declined to hold
that the arena of professional sports is “special” and should be
viewed differently than other industries with respect to the
antitrust exemption. Id. at 248-49.
The Court described its decision to apply the exemption to
the football teams’ conduct in this way:
That conduct took place during and immediately
after a collective- bargaining negotiation. It grew out
of, and was directly related to, the lawful operation
of the bargaining process. It involved a matter that
the parties were required to negotiate collectively.
And it concerned only the parties to the collective-
bargaining relationship.
Id. at 250. The Court then clarified that its “holding is not
intended to insulate from antitrust review every joint imposi-
tion of terms by employers, for an agreement among employ-
ers could be sufficiently distant in time and in circumstances
from the collective-bargaining process that a rule permitting
antitrust intervention would not significantly interfere with
that process.” Id.B. Positions of the Parties
The grocers contend that Brown immunizes employer
agreements related in time and circumstance to the collective-
bargaining process, and that the economic weapons parties
use to advance their positions in a labor dispute—like an
agreement to share revenue to weaken the effects of a whip-
saw strike—are “as much a part of the collective bargaining
process as are negotiations over terms.” The grocers stress
that labor policy approves the use of economic weapons, and
that economic weapons are “part and parcel” of the collective-
bargaining process that should be exercised free from govern-
mental regulation. NLRB v. Ins. Agents’ Int’l Union, 361 U.S.
477, 489 (1960).
CALIFORNIA v. SAFEWAY, INC. 9297
By contrast, California urges a narrower reading of Brown,
one that would permit an exemption for agreements among
employers only where “needed to make the collective bar-
gaining process work,” relying on the Court’s words in
Brown. California contends that Brown imposes a multi-factor
analysis that takes into account whether the alleged anticom-
petitive conduct is anchored in the collective-bargaining pro-
cess, concerns only the parties to the collective-bargaining
process, and relates to wages, hours, and conditions of
employment or other mandatory subjects of collective bar-
gaining. In California’s view, the RSP was not necessary to
allow meaningful collective bargaining to take place and col-
lective bargaining should not be defined so broadly as to
include financial weapons like the RSP. The RSP helped the
employers to gain advantage in negotiations, but was not inte-
gral to the bargaining process. Further, California argues, the
RSP does not relate to the core subjects of collective bargain-
ing (wages, hours, and working conditions) and primarily
affects a “product market” not a “labor market.” California
also notes, as did the district court, that the RSP included an
entity that was not a party to the collective-bargaining agree-
ment (Food 4 Less), and that the RSP remained in effect for
two weeks after bargaining ended.
C. Exemption Inapplicable
We reject the grocers’ broad reading of the exemption and
hold that, under the totality of circumstances here, and in light
of the history and logic of the exemption as well as the
Supreme Court’s guidance in Brown, application of the
exemption to shield the RSP from antitrust scrutiny is not
warranted.
[3] The Court in Brown stated, as a premise of its reason-
ing, that the practice under examination—the unilateral impo-
sition of terms by employers after impasse—was
“unobjectionable as a matter of labor law and policy” and that
it was regulated “directly, and considerably,” by labor laws.
9298 CALIFORNIA v. SAFEWAY, INC.
Brown, 518 U.S. at 238. In other words, post-impasse imposi-
tion of terms is not only an accepted practice in labor negotia-
tion, but one that has been extensively regulated and
“carefully circumscribed.” Id. By contrast, the use of revenue
sharing as an economic weapon during a labor dispute does
not enjoy any such endorsement, much less a history of care-
ful regulation, from the realm of labor law and policy. Neither
party points to a body of regulatory or judicial decisions that
establishes revenue sharing among employers in a bargaining
unit as an accepted economic weapon during a labor dispute.6
From the outset of our analysis, therefore, the RSP is on dif-
ferent footing than the agreement between the NFL club own-
ers in Brown.
[4] Addressing the practice of revenue sharing in the con-
text of multi-employer bargaining, we conclude that the
salient concerns underlying Brown and central to the history
and logic of the exemption are not present here. The agree-
ment to share revenues during and shortly after a labor dispute
does not play a significant role in collective bargaining, nor
is it necessary to permit meaningful collective bargaining to
take place. The RSP does not relate to any core subject matter
of bargaining, namely wages, hours, and working conditions,
6
The grocers rely on a decision from the Denver region of the NLRB,
suggesting that a similar revenue sharing provision was a permissible
practice, see Supp. Excerpts of Record (Vol. 3) 429-32, and on two courts
of appeals decisions, Air Line Pilots Ass’n International v. Civil Aeronau-
tics Board, 502 F.2d 453, 456-57 (D.C. Cir. 1974) (holding that revenue
sharing among airline employers did not violate the Railway Labor Act)
and Kennedy v. Long Island Rail Road Co., 319 F.2d 366, 368 (2d Cir.
1963) (holding that a joint strike insurance plan among leading railroads
did not violate the Railway Labor Act, the Interstate Commerce Act, or the
Sherman Act), for the proposition that revenue sharing is an accepted eco-
nomic weapon. But a decision of a regional NLRB tribunal and the two
appellate cases implicating, respectively, a different statutory regime and
a different type of arrangement, are not sufficiently prevalent authority to
demonstrate the acceptability of the practice. To the contrary, these few
cases show that revenue sharing in this context is sufficiently rare that it
has not been widely examined by agencies and courts as a labor practice.
CALIFORNIA v. SAFEWAY, INC. 9299
but rather relates principally to the relative revenues of the
grocers in the market and the temporary, artificial mainte-
nance of those revenues.
Although it is not an easy question, in our view the grocers
cannot succeed in exempting their agreement merely by
asserting its value to them and purpose as an economic
weapon in the labor dispute over core bargaining subjects. If
this were so, a group of employers could claim that fixing
prices made them stronger and was useful as an economic
weapon in a strike. Quite obviously, that could not be suffi-
cient to gain exemption. It would be like saying “anything
goes in a strike context,” and we cannot read Brown so
broadly. The RSP was designed to strengthen the grocers’
position in negotiations with the union, but that fact alone
does not entitle the agreement to antitrust immunity. Employ-
ers might undertake any number of activities to strengthen
their bargaining posture and force unions to accept their
terms, but the law does not necessarily exempt all such activi-
ties.
Our decision not to expand the law of non-statutory labor
exemption to shield the grocers from antitrust liability in these
circumstances does not place them in an untenable position or
“introduce instability and uncertainty into the collective-
bargaining process.” Brown, 518 U.S. at 242. The inability of
grocers to enter into an RSP for fear of possible antitrust lia-
bility does not hinder the functioning of the collective-
bargaining process. Grocers may continue to negotiate terms
with the union without an RSP in place and may bring other
potent and well-established forms of economic pressure to
bear to enhance their bargaining position, including lockouts
and the use of replacement workers.
[5] Further, the RSP concerned the “business” or “product”
market, rather than the labor market. “The case for the appli-
cability of the non-statutory exemption is strongest where the
alleged restraint operates primarily in the labor market and
9300 CALIFORNIA v. SAFEWAY, INC.
has only tangential effects on the business market.” Am. Steel
Erectors, Inc. v. Local Union No. 7, Int’l Ass’n of Bridge,
Structural, Ornamental & Reinforcing Iron Workers, 536
F.3d 68, 79 (1st Cir. 2008) (citing Clarett, 369 F.3d at 134
n.14). Stated another way, and relying on the insights of a per-
ceptive antitrust law commentator, in general, “an agreement
among employers restraining a product or nonlabor service
market enjoys no labor immunity.”7 IB Areeda & Hovenkamp
¶ 257a, at 131; see also Barnett Pontiac-Datsun, Inc. v. FTC
(In re Detroit Auto Dealers Ass’n), 955 F.2d 457, 468 (6th
Cir. 1992). The RSP, although intended to strengthen the gro-
cers’ position in bargaining for terms related to wages, hours,
and working conditions, does not primarily affect the labor
market. The fact that the grocers were sharing profits did not
have direct consequences for the labor market. This aspect of
the RSP lends further support to the view that application of
the antitrust laws would not interfere with the bargaining pro-
cess. While we stop short of endorsing the concept that as a
strict rule the non-statutory labor exemption can only arise in
a case involving restraint of terms directly relating to labor,
7
The grocers argue that the distinction between agreements affecting
business or product markets and those affecting labor markets is no longer
relevant to the non-statutory labor exemption analysis following Brown.
The Court did not expressly address the significance of the distinction in
deciding Brown. The D.C. Circuit below had held that the exemption
waives antitrust liability for restraints on competition that “operate primar-
ily in a labor market characterized by collective bargaining,” but the
Supreme Court chose to interpret the exemption more narrowly. Brown,
518 U.S. at 235 (quoting Brown v. Pro Football, Inc., 50 F.3d 1041, 1056
(D.C. Cir. 1995)). At no point did it explicitly reject the product mar-
ket/labor market distinction or question its earlier cases that relied in part
on the distinction. Id. at 236, 237 (citing Pennington, 381 U.S. at 657).
Brown suggests that the distinction may not be central to the analysis in
all cases, but we conclude that it remains a relevant consideration in deter-
mining whether a restraint “plays a significant role in a collective-
bargaining process that itself constitutes an important part of the Nation’s
industrial relations system.” Brown, 518 U.S. at 240. Other circuits are in
accord. E.g., Am. Steel Erectors, 536 F.3d at 79; Clarett, 369 F.3d at 134
n.14.
CALIFORNIA v. SAFEWAY, INC. 9301
that the restraint here is primarily a product market restraint
does not encourage application of the non-statutory labor
exemption.
Finally, the inclusion of a non-member of the collective-
bargaining unit, Food 4 Less, in the agreement to share reve-
nue during the terms of the strike counsels against application
of the exemption. The fact that the unilateral post-impasse
imposition of terms in Brown “concerned only the parties to
the collective-bargaining relationship” appears to have been a
significant factor supporting the application of the exemption
in that case. Brown, 518 U.S. at 250. This is logical in light
of the purposes of the exemption: the inclusion of non-
bargaining employers in an agreement suggests that the con-
duct is not anchored in the collective-bargaining process and
should instead be subject to scrutiny by antitrust laws
designed to prevent unreasonable restraints. Here, the grocers
offer us the explanation that, as an unincorporated division of
Ralphs that was doing business under another name, Food 4
Less needed to be bound by the RSP to make its terms effec-
tive. While it may be true that the inclusion of Food 4 Less
helped to effectuate the purposes of the agreement, Food 4
Less had a separate contract with the unions that was set to
expire at a later date; negotiations for a new agreement were
months away. Food 4 Less was not part of the collective bar-
gaining unit, and its inclusion in the RSP, even if helpful to
the grocers, suggests that the revenue sharing was not integral
to the collective-bargaining process.
[6] The restraint here differs from that in Brown along vir-
tually every dimension that the Court there found significant
in addressing the applicability of the exemption: The revenue-
sharing provision has not been approved or regulated by labor
law, it was not directly related to the collective-bargaining
process, it did not concern a matter that the parties were
required to negotiate collectively, and it involved a party that
was not a member of the collective-bargaining relationship.
The RSP is sufficiently “distant . . . in circumstances from the
9302 CALIFORNIA v. SAFEWAY, INC.
collective-bargaining process that a rule permitting antitrust
intervention would not significantly interfere with that pro-
cess.” Brown, 518 U.S. at 250. We decline to read the
Supreme Court’s rejection of various limiting principles for
the exemption in Brown as an invitation to apply the exemp-
tion broadly to any agreement loosely associated in time with
bargaining, as the grocers advocate. To protect the employer
agreement from antitrust scrutiny in this case would represent
a major extension of the non-statutory labor exemption as
described in Brown and, in our view, would run contrary to
the history and logic of the exemption. An agreement among
employers (some of which are members of a multi-employer
bargaining unit and one of which is not) to re-allocate their
revenues on a temporary basis to maintain market share while
their workers are striking or locked out is not within the core
concerns of labor law. Although the arguments advanced by
the grocers may be relevant to their position that there was no
unreasonable restraint of trade, they are not sufficient to
require application of a non-statutory labor exemption.8 The
district court correctly concluded that the grocers’ revenue-
sharing agreement is not immune from antitrust scrutiny, and
we affirm that conclusion.
We proceed to consider the merits of California’s claim
under the Sherman Act.9
8
We are reluctant to expand the non-statutory exemption beyond the
scope of Brown without further guidance from the Supreme Court. See
Brown, 518 U.S. at 250 (noting that its holding was “not intended to insu-
late from antitrust review every joint imposition of terms by employers,”
but that it “need not decide in this case whether, or where, within these
extreme outer boundaries to draw that line”).
9
Chief Judge Kozinski’s partial dissent contends that, in light of the
stipulations of the parties, our ruling on the non-statutory labor exemption
is “very likely” an advisory opinion and beyond the scope of our jurisdic-
tion. That position does not present a correct view of our Article III juris-
diction, and would seem to foreclose ruling on many issues squarely
presented. The issue of whether the RSP is exempt from antitrust scrutiny
—which was expressly ruled on by the district court and preserved for
CALIFORNIA v. SAFEWAY, INC. 9303
IV. Antitrust Liability
A. Methods of Antitrust Analysis
[7] Section 1 of the Sherman Act prohibits “[e]very con-
tract, combination in the form of trust or otherwise, or con-
spiracy, in restraint of trade or commerce among the several
States.” 15 U.S.C. § 1. “Congress designed the Sherman Act
as a consumer welfare prescription.” Reiter v. Sonotone
Corp., 442 U.S. 330, 343 (1979) (internal quotation marks
omitted). “Consumer welfare is maximized when economic
resources are allocated to their best use” and when “consum-
ers are assured competitive price and quality.” Rebel Oil Co.
v. Atl. Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995). “A
restraint that has the effect of reducing the importance of con-
sumer preference in setting price and output is not consistent
with this fundamental goal of antitrust law.” Nat’l Collegiate
Athletic Ass’n v. Bd. of Regents of Univ. of Okla., 468 U.S.
85, 107 (1984). Congress sought to ensure that competitors
not cut deals aimed at stifling competition and at permitting
higher prices to be charged to consumers than would be
expected in a competitive environment, or permitting lower
prices to be paid to those from whom competitors bought
materials than a fair market rate. The touchstone is consumer
good. Agreements of competitors, whether express or
implicit, whether by formal agreement or otherwise, in
restraint of trade are outlawed.
[8] The Supreme Court has repeatedly recognized that by
the language of the Sherman Act, “ ‘Congress intended to out-
appeal by the parties—is a threshold question that logically precedes our
examination of the antitrust issues. If in addressing the exemption we
determined that the RSP should be insulated from antitrust review, there
would be no need to consider whether the RSP could be condemned with
a per se rule or under “quick look” analysis. We properly may determine
whether the antitrust regime applies at all before we rule on the merits of
the antitrust claim.
9304 CALIFORNIA v. SAFEWAY, INC.
law only unreasonable restraints.’ ” Texaco Inc. v. Dagher,
547 U.S. 1, 5 (2006) (quoting State Oil Co. v. Khan, 522 U.S.
3, 10 (1997)). “[M]ost antitrust claims are analyzed under a
‘rule of reason,’ according to which the finder of fact must
decide whether the questioned practice imposes an unreason-
able restraint on competition, taking into account a variety of
factors . . . .” State Oil, 522 U.S. at 10. The rule of reason is
the presumptive or default standard, and it requires the anti-
trust plaintiff to “demonstrate that a particular contract or
combination is in fact unreasonable and anticompetitive.”
Dagher, 547 U.S. at 5.10
“Some types of restraints, however, have such predictable
and pernicious anticompetitive effect, and such limited poten-
tial for procompetitive benefit, that they are deemed unlawful
per se.” State Oil, 522 U.S. at 10. Such restraints “ ‘are con-
clusively presumed to be unreasonable and therefore illegal
without elaborate inquiry as to the precise harm they have
caused or the business excuse for their use.’ ” Nw. Wholesale
Stationers, 472 U.S. at 289 (quoting N. Pac. Ry. Co. v. United
States, 356 U.S. 1, 5 (1958). Per se treatment is proper only
“[o]nce experience with a particular kind of restraint enables
10
As we have previously explained, “[t]he rule of reason weighs legiti-
mate justifications for a restraint against any anticompetitive effects. We
review all the facts, including the precise harms alleged to the competitive
markets, and the legitimate justifications provided for the challenged prac-
tice, and we determine whether the anticompetitive aspects of the chal-
lenged practice outweigh its procompetitive effects.” Paladin Assocs., Inc.
v. Mont. Power Co., 328 F.3d 1145, 1156 (9th Cir. 2003) (citing Nw.
Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S.
284, 290-93 (1985) (footnote omitted)). The rule of reason is responsible
for a sensible application of the antitrust laws that has guided courts for
almost a century. See Chi. Bd. of Trade v. United States, 246 U.S. 231,
238 (1918) (providing the classic formulation of the rule of reason by Jus-
tice Brandeis: “The true test of legality is whether the restraint imposed
is such as merely regulates and perhaps thereby promotes competition or
whether it is such as may suppress or even destroy competition.”); see also
Nat’l Soc’y of Prof’l Eng’rs, 435 U.S. 679, 687-91 (1978); Cont’l T.V.,
Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49-50 (1977).
CALIFORNIA v. SAFEWAY, INC. 9305
the [c]ourt to predict with confidence that the rule of reason
will condemn it.”11 Arizona v. Maricopa Cnty. Med. Soc’y,
457 U.S. 332, 344 (1982). “[A] ‘departure from the rule-of-
reason standard must be based upon demonstrable economic
effect rather than . . . upon formalistic line drawing.’ ” Leegin
Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 887
(2007) (second alteration in original) (quoting Cont’l T.V.,
Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58-59 (1977)). To jus-
tify per se condemnation, a challenged practice must have
“manifestly anticompetitive” effects and lack “any redeeming
virtue.” Id. at 886 (internal quotation marks omitted). The
Supreme Court has “ ‘expressed reluctance to adopt per se
rules where the economic impact of certain practices is not
immediately obvious.’ ” Dagher, 547 U.S. at 5 (quotation
marks and ellipses omitted) (quoting State Oil, 522 U.S. at
10).
[9] “[A] certain class of restraints, while not unambigu-
ously in the per se category, may require no more than cur-
sory examination to establish that their principal or only effect
is anticompetitive.” XI Areeda & Hovenkamp ¶ 1911a, at
295-96. Stated another way, the rule of reason analysis can
sometimes be applied “ ‘in the twinkling of an eye.’ ” NCAA,
468 U.S. at 109 n.39 (quoting Phillip Areeda, The “Rule of
Reason” in Antitrust Analysis: General Issues 37-38 (Federal
Judicial Center, June 1981)). The Supreme Court explained in
California Dental Ass’n v. FTC that this truncated rule of rea-
son or “quick look” antitrust analysis may be appropriately
used where “an observer with even a rudimentary understand-
ing of economics could conclude that the arrangements in
question would have an anticompetitive effect on customers
and markets.” 526 U.S. 756, 770 (1999). “The object is to see
whether the experience of the market has been so clear, or
necessarily will be, that a confident conclusion about the prin-
11
Practices that have been held per se illegal include geographic division
of markets and horizontal price fixing. See Major League Baseball Props.,
Inc. v. Salvino, Inc., 542 F.3d 290, 315 (2d Cir. 2008) (collecting cases).
9306 CALIFORNIA v. SAFEWAY, INC.
cipal tendency of a restriction will follow from a quick (or at
least quicker) look, in place of a more sedulous one.” Id. at
781. Full rule of reason treatment is unnecessary where the
anticompetitive effects are clear even in the absence of a
detailed market analysis. See NCAA, 468 U.S. at 110. But if
an arrangement “might plausibly be thought to have a net pro-
competitive effect, or possibly no effect at all on competi-
tion,” then a “quick look” form of analysis is inappropriate.
Cal. Dental Ass’n, 526 U.S. at 771.
“[T]here is generally no categorical line to be drawn
between restraints that give rise to an intuitively obvious
inference of anticompetitive effect and those that call for
more detailed treatment.” Id. at 780-81. Instead, to borrow
Justice Souter’s phrase, there should be “an enquiry meet for
the case” that looks to “the circumstances, details, and logic
of a restraint.” Id. at 781. “[I]n any rule of reason case the
amount and type of evidence necessary to prove illegality var-
ies with the amount of power that is apparent, with the nature
and plausibility of proffered defenses, and with the judge’s
evaluation of the degree of harm posed by the restraint.” XI
Areeda & Hovenkamp ¶ 1911a, at 296.
B. Per Se Treatment
California characterizes the RSP as (1) a profit-pooling
agreement and (2) a market-allocation agreement, and urges
that prior judicial experience with these categories of
restraints requires per se condemnation of the RSP. We dis-
agree. Given its distinguishing attributes, the RSP cannot be
placed in either category of per se illegal restraints.
1. Profit-Pooling
California first argues that the RSP is “nearly identical” to
the profit-pooling arrangement invalidated in Citizen Publish-
ing Co. v. United States, 394 U.S. 131 (1969). In that case, the
two daily newspapers operating in Tucson, Arizona, entered
CALIFORNIA v. SAFEWAY, INC. 9307
into an agreement designed to “end any business or commer-
cial competition” between them. Id. at 134. The newspapers
agreed to consolidate their production, distribution, advertis-
ing, and most management operations in a jointly-held entity,
to fix prices, and to refrain from engaging in any competing
businesses. Id. The agreement also provided that all profits
realized by the papers would be pooled and distributed pursu-
ant to an agreed ratio. Id. The agreement was to continue in
force for twenty-five years and was later extended to fifty
years. Id. at 133. The Court held that the § 1 violations of the
agreement were “plain beyond peradventure,” and that
“[p]ooling of profits pursuant to an inflexible ratio at least
reduces incentives to compete for circulation and advertising
revenues and runs afoul of the Sherman Act.” Id. at 135.
[10] Contrary to California’s assertions, the RSP differs
from the profit-pooling arrangement condemned in Citizen
Publishing in significant ways, precluding per se treatment of
the RSP. First, the agreement among the grocers stated that
sharing of revenues would occur during the period of the
labor dispute and for two weeks thereafter. The RSP, by its
design, was of both limited and unknown duration. The reve-
nue sharing would terminate two weeks after the resolution of
any labor dispute, and this “triggering” event for the expira-
tion of the agreement could occur at any time. While the
agreement in Citizen Publishing was scheduled to last for fifty
years and could be terminated only by mutual consent of the
parties, id. at 133, the RSP could end at any time—as soon as
the labor dispute was resolved.12 Indeed, the parties to the
agreement could not know in advance how long the labor dis-
pute would continue. The RSP lasted about five months.
[11] This temporary and short-term feature of the RSP dis-
12
While labor disputes are capable of dragging on for months or years,
it does not appear that anyone realistically expected the RSP to continue
for anywhere near the extended period of time at issue in Citizen Publish-
ing.
9308 CALIFORNIA v. SAFEWAY, INC.
tinguishes the grocers’ agreement from the profit-pooling
condemned in Citizen Publishing in a way that is relevant to
the key question of whether the RSP is a per se unreasonable
restraint on trade, with a “predictable and pernicious anticom-
petitive effect.” State Oil, 522 U.S. at 10; see also Freeman
v. San Diego Ass’n of Realtors, 322 F.3d 1133, 1150-51 (9th
Cir. 2003) (observing that per se rules are inappropriate in
novel contexts and rejecting an argument against application
of a per se rule because alleged novelty in the restraint was
not relevant to issue of competitiveness). Because the RSP
was of indefinite but temporary duration, the grocers retained
incentives to compete during the labor dispute period. See XI
Areeda & Hovenkamp ¶ 1906a, at 236, 238-39 (observing
that, in most cases, courts assess “likely” effects to determine
if a restraint is “naked” and subject to per se condemnation).
Unlike the Citizen Publishing arrangement, which insulated
the newspapers from competition by pooling profits for dec-
ades and left no reason to compete for customers, the
unknown duration of the RSP, the strike-induced nature of the
agreement, and the fact that it could end at any moment sug-
gest that the grocers had a continued interest in maintaining
and growing their customer bases. Temporary revenue sharing
likely did not blunt the grocers’ incentives to advertise, dis-
count, and provide quality service. Grocers retained incen-
tives to prevent the loss of customers during the strike, who
might not return after switching to a competitor, and they also
had incentive to win new customers that might return as regu-
lar customers after the strike ended.13 Because the RSP was of
a necessarily limited duration, the grocers’ interest in preserv-
ing customer loyalty and maintaining or expanding market
share likely persisted during the revenue-sharing period.14
13
The Supreme Court has recognized that “[t]he retail food industry is
very competitive and repetitive patronage is highly important.” NLRB v.
Brown, 380 U.S. 278, 284 (1965).
14
An agreement of limited and/or indefinite duration could have obvious
anticompetitive effects and violate Section 1, for example, an agreement
of competitors controlling most of the market to fix prices for a month to
the detriment of consumers. But here, the limited and unknown length of
the RSP separates it from a category of restraints with which we are suffi-
ciently experienced to condemn without inquiry into actual competitive
harms.
CALIFORNIA v. SAFEWAY, INC. 9309
[12] Second, the RSP differs from the profit-pooling
arrangement condemned in Citizen Publishing in that it did
not include all of the grocers operating in the region. In Citi-
zen Publishing, the only two daily newspapers in Tucson
agreed to pool profits pursuant to an inflexible ratio. 394 U.S.
at 134-35. As California concedes, the combined sales of the
grocers that were party to the RSP accounted for between
54.4% and 65.1% of the grocery market in the Los Angeles-
Long Beach metropolitan area, and between 67.1% and
76.0% of the grocery market in the San Diego metropolitan
area. While their collective market share was significant, the
grocers still faced competition from other retailers such as
Stater Brothers, Trader Joe’s, Costco, and Whole Foods.
Given the presence of these competitors in the market, there
is a significant probability that the grocers retained incentives
to continue—or even to increase—discounting and advertis-
ing of grocery products to prevent the loss of customers and
profits during the strike period, to gain new customers if pos-
sible, and to maximize profitability and market share after the
strike.
[13] Because the RSP was an agreement among some, but
not all, of the competitors in the relevant market, and because
by its terms the RSP had a limited and indefinite duration, it
evades any “easy label” of “profit-pooling” and cannot sensi-
bly be grouped together with or analogized to the very differ-
ent arrangement condemned in Citizen Publishing.15 See
15
California offers a series of cases in addition to Citizen Publishing in
an effort to demonstrate that profit-pooling arrangements have long been
condemned as per se illegal. See, e.g., United States v. Paramount Pic-
tures, Inc., 334 U.S. 131, 149 (1948) (holding that an agreement among
five producers of motion pictures and their affiliates to share profits
according to prearranged percentages was anticompetitive); N. Sec. Co. v.
United States, 193 U.S. 197 (1904) (invalidating an agreement among
stockholders in competing interstate railway companies to form one cor-
poration with a controlling interest in the stock of each railway); Chi., M.
& St. P. Ry. Co. v. Wabash, St. L. & P. Ry. Co., 61 F. 993 (8th Cir. 1894)
(invalidating an agreement among seven competing railroad companies to,
9310 CALIFORNIA v. SAFEWAY, INC.
Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1,
8-10 (1979); United States v. Topco Assocs., 405 U.S. 596,
607-08 (1972) (“It is only after considerable experience with
certain business relationships that courts classify them as per
se violations of the Sherman Act.”). A restraint of this nature
has not undergone the kind of careful judicial scrutiny that
would support the application of a per se rule. See Topco
Assocs., Inc., 405 U.S. at 607-08; Metro Indus., Inc. v. Sammi
Corp., 82 F.3d 839, 844 (9th Cir. 1996). Quite apart from the
lack of judicial experience with a restraint of this nature, we
conclude that the application of a per se rule is not warranted
in this case because the practice of temporary revenue sharing
during the duration of a labor dispute among some competi-
tors within a market does not “facially appear[ ] to be one that
would always or almost always tend to restrict competition
and decrease output.” Broad. Music, 441 U.S. at 19-20. In
light of its particular features and context, the RSP is “ ‘not
a naked restraint of trade with no purpose except stifling of
competition.’ ” Id. at 20 (brackets omitted) (quoting White
Motor Co. v. United States, 372 U.S. 253, 263 (1963)).
2. Market Allocation
We also reject California’s attempt to characterize the RSP
as a market-allocation agreement. California correctly notes
that market-allocation agreements among competitors at the
same market level are per se antitrust violations. See United
States v. Brown, 936 F.2d 1042, 1045 (9th Cir. 1991). “Clas-
among other things, pool gross earnings for a period of twenty-five years);
Anderson v. Jett, 12 S.W. 670 (Ky. 1889) (voiding a multi-year arrange-
ment between rival steamboat owners to end their rivalry by sharing prof-
its according to fixed percentages). None of these cases, alone or in
combination, establishes sufficient judicial experience with a revenue
sharing agreement of limited duration, among some competitors in a mar-
ket, so as to permit per se treatment of the RSP. The fundamental econom-
ics of the firms and the public interest do not require per se prohibitory
treatment of the challenged practice during a labor dispute.
CALIFORNIA v. SAFEWAY, INC. 9311
sic” horizontal market division agreements are ones in which
“competitors at the same level agree to divide up the market
for a given product.” Metro Indus., 82 F.3d at 844. But where,
as here, “the conduct at issue is not a garden-variety horizon-
tal division of a market, we have eschewed a per se rule and
instead have utilized rule of reason analysis.” Id. California
argues that the RSP “mirrors” market-allocation agreements
because it divides up the Southern California market accord-
ing to the participants’ relative market shares. But California
concedes that the RSP did not “prevent any Defendant from
actually making sales” to consumers. California does not
assert that the RSP restricted customers from patronizing cer-
tain grocers. Moreover, the agreement did not prevent the gro-
cers from selling any particular products, or limit the grocers
to a particular set of customers or geographic regions. The
RSP cannot be characterized as a per se illegal market-
allocation agreement.
C. “Quick Look”
We next address whether summary condemnation of the
RSP on a truncated rule of reason or “quick look” is or is not
correct. We conclude that a “quick look” conclusion of anti-
trust illegality is here inappropriate. This is so for many of the
same reasons that per se treatment is not correct. The unique
features of the arrangement among the grocers—its limited
duration and the existence of other significant external com-
petitors in the market—and the uncertain effect these features
had on the grocers’ competitive behavior and incentives dur-
ing the revenue-sharing period render any anticompetitive
effects of the RSP not obvious.
To reach a confident conclusion on the anticompetitive
effects of the RSP, further development of the record is
required. One might want to permit expert testimony and
examine facts about the degree to which the challenged
revenue-sharing agreement may have suppressed incentives of
the grocers to discount and otherwise compete for customers.
9312 CALIFORNIA v. SAFEWAY, INC.
One might want to have an understanding of the market
impact of other competitors, not in the defendant group,
whose pricing and terms of sale would have to be taken into
account in a competitive market. It might be helpful to have
an understanding whether other competitors were waiting in
the wings to exploit any anticompetitive market by their entry,
whether these potential new competitors were overseas, or in
other regions of the United States, or were skilled in the
developing concept of internet marketing of groceries or other
novel techniques that might impose market pressures. Any of
these inquiries might inform an evaluation whether, during
the relevant period of its operation, the revenue-sharing provi-
sion had any anticompetitive effect. On a “quick look,” none
of this can be ascertained with reliability.16
The features of the RSP described in connection with the
per se mode of analysis not only separate it from traditional
per se illegal categories of restraints and prevent characteriza-
tion as a “naked” restraint on price or output, but they also
raise sufficient doubt about the anticompetitive nature of the
agreement such that detailed scrutiny is required to under-
stand its effects. Because “empirical analysis is required to
determine [the] challenged restraint’s net competitive effect,
neither a per se nor a quick-look approach is appropriate
because those methods of analysis are reserved for practices
that facially appear to be ones that would always or almost
always tend to restrict competition and decrease output.”
Salvino, Inc., 542 F.3d at 340 n.10. (Sotomayor, J., concur-
ring) (internal quotation marks and brackets omitted).
[14] To use the “quick look” approach, we must first deter-
mine whether “an observer with even a rudimentary under-
standing of economics could conclude that the arrangements
in question would have an anticompetitive effect on custom-
16
Also, if experts gave conflicting views on these subjects, and they
were material to resolution, then the decision of the trier of fact might con-
trol the outcome.
CALIFORNIA v. SAFEWAY, INC. 9313
ers and markets.” Cal. Dental Ass’n, 526 U.S. at 770. Once
it is established that the restraint is inherently suspect and the
anticompetitive effects are easily ascertained, id., then the
burden shifts to the grocers to produce evidence of procompe-
titive justification or effects and thus demonstrate the need for
more extensive market inquiry, id. at 775; see also XI Areeda
& Hovenkamp ¶ 1914d, at 354-55. The features of the RSP—
its limited, indefinite duration and the presence of other com-
petitive firms in the market—strongly suggest that the agree-
ment “might plausibly be thought to have a net
procompetitive effect, or possibly no effect at all on competi-
tion.”17 Cal. Dental Ass’n, 526 U.S. at 771.
[15] “Where, as here, the circumstances of the restriction
are somewhat complex, assumption alone will not do.” Id. at
775 n.12. The particular features and context of the RSP are
more than mere idiosyncracies: they warrant further develop-
ment of evidence and more rigorous review. See XI Areeda
& Hovenkamp ¶ 1911a, at 295. Because we cannot reach a
confident conclusion that the principal tendency of the RSP is
to restrict competition, truncated review is inappropriate.
Can it be successfully argued, to the contrary, that because
the RSP reduces the monetary risks of lost sales to participat-
ing grocers during a whipsaw strike, it is irretrievably anti-
competitive in effect? We conclude that such an argument
fails. If a competitor finds itself the target of a strike, which
would cause it to lose sales to other competitors, then revenue
sharing provides some cushion from the damaging monetary
impact of the strike. But it is by no means “obvious” that the
grocers that entered into the RSP would be motivated to
reduce their competition on price. Although the immediate
17
The grocers argue that the RSP has procompetitive benefits in the
form of lower prices for consumers as a result of the grocers’ ability to
negotiate a more favorable contract on labor costs. Because California has
not met its burden to show that the RSP is obviously anticompetitive, we
need not address the grocers’ procompetitive justifications.
9314 CALIFORNIA v. SAFEWAY, INC.
monetary risk of losing sales to competitors during a labor
strike is reduced by revenue sharing, the remaining risks are
still such that a rational competitor would be expected to con-
tinue to compete vigorously. While it is true that the arrange-
ment provides a cushion that may arguably affect incentives
to compete, that alone, absent evidence of actual anticompeti-
tive impact on pricing, is not sufficient for us to resolve the
RSP issue on a “per se” or “quick look” or any other abbrevi-
ated basis.
[16] In light of the novel circumstances and uncertain eco-
nomic effects of the RSP, we conclude that the district court
correctly determined that it should follow the presumptive
rule of reason. See Cal. Dental Ass’n, 526 U.S. at 781. Before
the challenged revenue-sharing agreement technique is out-
lawed for use during a labor dispute, there should be open dis-
covery and fair consideration of all factors relevant under the
traditional rule of reason test, so as to determine if there are
significant anticompetitive impacts and if so whether they
outweigh any legitimate justifications. Application of the tra-
ditional rule of reason is not a simple matter, but it does per-
mit the type of fundamental analysis appropriate for antitrust
law evaluation, and it has stood the test of time.
V. Conclusion
We hold that the agreement between the grocers to share
revenues for the duration of the strike period is not exempt
from scrutiny under the Sherman Act, and that more than a
“quick look” is required to ascertain its impact on competition
in the Southern California grocery market. Given the limited
judicial experience with revenue sharing for several months
pending a labor dispute, we cannot say that the restraint’s
anticompetitive effects are “obvious” under a per se or quick-
look approach. Although we conclude that summary condem-
CALIFORNIA v. SAFEWAY, INC. 9315
nation is improper, we express no opinion on the legality of
the arrangement under the rule of reason.18 AFFIRMED.
FISHER, Circuit Judge, specially concurring:
I join Parts I-IV.A and V of the majority opinion, and con-
cur in the outcome of Parts IV.B-C. I have strong doubts that
the grocers’ profit sharing agreement left them with an undi-
minished incentive to compete. Judge Reinhardt’s dissent
raises serious economic concerns about the effects of even a
limited profit sharing agreement that the majority has not
entirely refuted. Nonetheless, I am not confident that under
the novel circumstances here an “enquiry meet for the case”
can be something less than the presumptive standard — the
rule of reason. Cal. Dental Ass’n v. FTC, 526 U.S. 756, 770
(1999); see Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006).
Because I do not find that a “great likelihood of anticompeti-
tive effects can easily be ascertained” on a quick look at the
record before us, Cal. Dental, 526 U.S. at 770 (emphasis
added), and because we lack the “considerable experience”
necessary for per se analysis to say the economic impact of
the grocers’ agreement is “immediately obvious,” Leegin Cre-
ative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886-87
(2007) (emphasis added) (quotation marks omitted), I align
myself with the rule of reason outcome of the majority opin-
ion.
18
The ultimate competitive question may not be determined in this case
because the State of California, to gain a final judgment that could be
appealed at this time, has stipulated to foregoing its challenge to the RSP
under the traditional rule of reason, contending instead that the RSP is
invalid per se or on a “quick look.”
9316 CALIFORNIA v. SAFEWAY, INC.
Chief Judge KOZINSKI, with whom Judges TALLMAN and
RAWLINSON join, dissenting in part:
By going out of its way to rule on the non-statutory labor
exemption, the majority decides an important legal question
that will have absolutely no effect on anyone involved in this
case. We hold that there’s no categorical antitrust violation
under the quick look doctrine; nor can such a violation be
established on remand, because California stipulated to dis-
missal if it didn’t prevail under quick look. Since no antitrust
violation can ever be established in this case, we have no
occasion to decide whether any exemption from antitrust lia-
bility would apply. The majority’s groundbreaking ruling on
the labor exemption is thus very likely an advisory opinion
and beyond the scope of our Article III jurisdiction. See
Thomas v. Anchorage Equal Rights Comm’n, 220 F.3d 1134,
1138 (9th Cir. 2000) (en banc). Such dicta are particularly
unwise when they are effectively insulated from Supreme
Court review, as the grocers probably will have neither incen-
tive nor standing to petition for certiorari.
Worse, I seriously doubt the majority decides the labor
exemption issue correctly because it fails to grapple with the
complex dynamics of this case. Had it done so, it would have
realized that each and every factor the Supreme Court found
relevant in Brown v. Pro Football, Inc., 518 U.S. 231 (1996),
supports finding the revenue-sharing provision (RSP) pro-
tected by the labor exemption. Contra maj. op. at 9301.
First, the RSP was inextricably intertwined with the collec-
tive bargaining process. See Brown, 518 U.S. at 250. Contra
maj. op. at 9300-01. The grocers’ agreement was a direct
response to the union’s anticipated use of whipsaw tactics. As
courts have long recognized, whipsaw tactics are particularly
devastating for employers, because
the union strikes against one member of a multiem-
ployer bargaining unit, but allows the other employ-
CALIFORNIA v. SAFEWAY, INC. 9317
ers to continue operating in order to maximize the
competitive pressure brought to bear upon the struck
member . . . ; the idea is thereby to force each
employer individually to capitulate through a series
of such strikes, thus defeating their attempt to stand
together.
Int’l Bhd. of Boilermakers v. NLRB, 858 F.2d 756, 760 (D.C.
Cir. 1988).
The grocers here were legitimately concerned that the
union would selectively strike and picket only one chain,
diverting their customers to the others. The unions would
thereby upset the prevailing competitive balance, crippling the
target and ruining any chance of bargaining as a group. The
grocers sought to blunt the disproportionate losses borne by
the targeted chain by redistributing some of the windfall prof-
its reaped by the others as a result of the union’s tactics. The
agreement was limited to the duration of the strike plus two
weeks and became operative only if, and only to the extent,
the union succeeded in redirecting consumers from the tar-
geted store to other stores in the bargaining group. The RSP
was thus narrowly tailored to counter the union’s divide-and-
conquer strategy. Its effect, moreover, was entirely pro-
competitive: It helped keep all competitors in the market
rather than letting one be wiped out by the strike.
As it turns out, the grocers were right to be concerned. Less
than a week after their contracts expired, the unions struck,
and Vons was the exclusive target. Per the grocers’ Mutual
Strike Assurance Agreement, Albertson’s and Ralphs locked
out their workers. The unions then picketed all three stores,
but soon pulled pickets from Ralphs to zero in on the other
chains. The unions’ strategy was highly effective: Vons and
Albertson’s lost market share to Ralphs, as customers
switched stores to avoid the picket lines. Some of these losses
were offset by payments from Ralphs under the RSP, but
many—such as the loss of long-time customers—were perma-
9318 CALIFORNIA v. SAFEWAY, INC.
nent. The RSP was thus a limited, defensive tool that was
directly related to the collective bargaining process.
The second Brown factor—that the practice is “unobjec-
tionable as a matter of labor law and policy”—also points in
favor of exemption. Brown, 518 U.S. at 238. Contra maj. op.
at 9297-98. Although the NLRB has not had occasion to rule
on the specific RSP at issue here, both the Supreme Court and
the NLRB have generally sanctioned the use of economic
weapons to combat whipsaw tactics. See, e.g., NLRB v.
Brown (Brown Food), 380 U.S. 278 (1965). The Supreme
Court has recognized a particularly strong interest in “preserv-
ing the integrity of the multiemployer bargaining unit” against
targeted attacks. Brown, 518 U.S. at 245 (quoting Brown
Food, 380 U.S. at 289) (internal quotation mark omitted).
Accordingly, the Court has approved many practices employ-
ers use to maintain a common front: They may, for example,
agree to lock out all workers if any one of them is struck, see
NLRB v. Truck Drivers Local Union No. 449, 353 U.S. 87,
89, 97 (1957), or hire temporary replacement workers, see
Brown Food, 380 U.S. at 279-80. Revenue-sharing provisions
that are designed to maintain cohesiveness in the teeth of
union efforts to disrupt the bargaining group fit squarely
within this category of accepted labor practices.
On the handful of occasions that courts have evaluated the
legitimacy of revenue-sharing provisions, they have been
upheld. In Kennedy v. Long Island R.R., 319 F.2d 366 (2d Cir.
1963), the Second Circuit upheld the use of a strike insurance
plan. Like the grocers here, the railroads were concerned that
the union would engage in whipsaw tactics and wanted to
spread the losses among employers. Id. at 368-69. The rail-
roads contributed to an insurance fund that would pay out in
the event of a strike. Id. As the proceeds were distributed, the
fund was supplemented by further deposits from non-struck
railroads. Id. The union sued, claiming the strike insurance
fund violated both antitrust law and the railroad’s duty to bar-
gain in good faith. Id. at 368. The Second Circuit rejected
CALIFORNIA v. SAFEWAY, INC. 9319
both claims, reasoning that “the strike insurance plan, far
from constituting a violation of the railroad’s duty to bargain
in good faith, was an instrument of self-help properly
employed in the process of collective bargaining.” Id. at 371.
The D.C. Circuit reached a similar conclusion in Air Line
Pilots Ass’n Int’l v. Civil Aeronautics Bd., 502 F.2d 453 (D.C.
Cir. 1974). There, six airlines entered into a “Mutual Aid
Pact” to “soften the impact of strikes against individual com-
panies.” Id. at 455. The Mutual Aid Pact contained a provi-
sion, almost identical to the RSP, under which a “strikebound
company received payments from other Pact members equal
to their increase in revenues resulting from the strike.” Id. As
in Kennedy, the union claimed the revenue-sharing provision
violated antitrust law and national labor policy. Id. The D.C.
Circuit likewise rejected these claims, explaining that “[t]he
national labor policy rests on the principle that parties should
be free to marshall [sic] the economic resources at their dis-
posal in the resolution of a labor dispute.” Id. at 456.
Although both of these cases were decided under the Railway
Labor Act, their analysis was based on national labor policy
and relied heavily on National Labor Relations Act cases. See,
e.g., id. at 456 n.3 (relying on NLRB v. Ins. Agents’ Int’l
Union, 361 U.S. 477, 490 (1960)); Kennedy, 319 F.2d at 371
n.4 (relying on Truck Drivers, 353 U.S. 87). The majority dis-
misses these cases in a footnote, but they fatally undermine
the majority’s claim that the precaution adopted by the
employers here is too novel and exotic to fall within the labor
exemption.
Courts have also approved other strategies that redistribute
the financial pain wrought by a strike. When unions engage
in selective striking, for example, striking employees are often
paid benefits to compensate for lost wages. See Kennedy, 319
F.2d at 372. Unions do this because it would be unfair to force
one set of employees to bear the entire burden when the even-
tual benefit will inure to everyone. Strike benefits also
strengthen the union’s bargaining position by ensuring all
9320 CALIFORNIA v. SAFEWAY, INC.
employees share the same incentives, and none will be driven
by personal hardship to undermine the strike. Strike benefits
are thus considered a legitimate economic weapon. See Int’l
Bhd. of Boilermakers, 858 F.2d at 767. RSPs serve precisely
the same purposes for employers bargaining as a group: Why
should one employer alone bear the heavy cost of selective
striking or picketing, when the eventual contract will bind the
entire group? And why should unions be able to spread the
burdens of a strike to reinforce their bargaining position,
while employers can’t?
When unions pay benefits to striking workers, their collu-
sive actions are protected by statute. See H. A. Artists &
Assocs., Inc. v. Actors’ Equity Ass’n, 451 U.S. 704, 713-14
(1981). To protect the collective bargaining process, employ-
ers too must be allowed to share losses without fear of anti-
trust liability, which is the very point of the non-statutory
labor exemption. See Brown, 518 U.S. at 237.
My colleagues reach the wrong conclusion because they
misread Brown. The majority looks for some affirmative
approval in labor law for the RSP, maj. op. at 9297-98, but
that is far more than Brown calls for. Brown requires only that
the conduct be “unobjectionable as a matter of labor law and
policy.” 518 U.S. at 238 (emphasis added). The very fact that
the union did not challenge the RSP as an unfair labor prac-
tice, despite having raised a procedural dispute before the
NLRB, itself is proof that the RSP is unobjectionable as a
matter of labor policy. The second Brown factor is clearly sat-
isfied.
The third Brown factor similarly favors exemption because
the RSP concerned only parties with a direct stake in the out-
come of the collective bargaining agreement. See Brown, 518
U.S. at 250. Contra maj. op. at 9301. Vons, Albertson’s and
Ralphs were part of the same multi-employer bargaining unit,
and Food 4 Less’s own contracts were set to expire just
months later. Food 4 Less, standing alone, had no hope of
CALIFORNIA v. SAFEWAY, INC. 9321
doing better against the union than Vons, Ralphs and Albert-
son’s had done by working together. In all likelihood, the con-
tract the union wrung from them would set the bar for Food
4 Less’s own negotiations. Food 4 Less thus had a strong
labor-related interest in standing shoulder-to-shoulder with
the three other chains.
Equally important, Food 4 Less was required by its existing
contract to contribute to employee benefits at a rate tied to
that of Ralphs. As Ralphs’s Vice President of Human
Resources and Labor Relations explained, “the rate . . . for
Food4Less employees’ health and welfare [was] directly con-
nected to the contract we . . . bargained.” If the unions man-
aged to extract more favorable benefits from Ralphs and the
other chains as a result of the strike, Food 4 Less would be
forced to provide more benefits for its own workers. It thus
had a direct and immediate financial stake in the contract
negotiations. The majority’s claim that “the inclusion of
[Food 4 Less] suggests that the conduct is not anchored in the
collective-bargaining process,” id. at 9301, is belied by the
record.
The fourth factor—whether the conduct involved subject
matter that the parties were required to negotiate collectively
—simply doesn’t apply to this case. See Brown at 250. In
Brown, the Court had to decide whether the NFL’s unilateral
imposition of its last good faith salary offer was exempt from
antitrust review. In such a case, it’s relevant whether these
substantive terms relate to “wages, hours, and working condi-
tions,” or whether the terms are unrelated to collective bar-
gaining. Id. at 241; compare id. at 234 (agreement to set
salaries is exempt), with United Mine Workers v. Pennington,
381 U.S. 657, 663 (1965) (agreement to set prices of goods
is not exempt). Where the employer action at issue involves
a procedural bargaining tactic, rather than a substantive term
of the contract, it makes no sense to ask whether the tactic
relates to “wages, hours, and working conditions.” It never
does. Yet procedural tactics go to the heart of the exemption’s
9322 CALIFORNIA v. SAFEWAY, INC.
purpose—to free from antitrust scrutiny employer actions that
are “needed to make the collective-bargaining process work.”
Brown, 518 U.S. at 234 (emphasis added); see also id. at 247.
A lockout, for example, is a bargaining tactic that has nothing
to do with “wages, hours, and working conditions” yet is
exempt from antitrust review. See id. at 245; see also id. at
254 (Stevens, J., dissenting); maj. op. at 9300. That the
revenue-sharing provision—which is a procedural tactic
designed to put pressure on the union during the course of
negotiations—doesn’t relate to a mandatory subject of collec-
tive bargaining is simply beside the point and cannot count
against application of the labor exemption. Contra maj. op. at
9298-99.
Fifth, and finally, the conduct indisputably “took place dur-
ing and immediately after a collective-bargaining negotia-
tion.” Brown, 518 U.S. at 250. The revenue-sharing provision
clearly centered on the time period of the labor dispute, as it
lasted only for the duration of the strike plus an additional two
weeks. In its haste to condemn the RSP, the majority omits
this factor from its discussion.
A fair reading of the RSP can leave no doubt that all the
relevant Brown factors weigh heavily in favor of exempting
the RSP from antitrust review. We are not dealing with
employers who were using a labor dispute as a pretext to
engage in price-fixing; it’s perfectly clear that the employers
were responding to union tactics in the course of a strike, and
only to the degree the tactics were effectively deployed by the
union. The majority’s contrary dicta have no basis in the
record, common sense or precedent.
Worst of all, we may never be able to correct this error.
Strikes are costly endeavors for everyone involved, and intro-
ducing the additional threat of antitrust liability—with its pro-
tracted litigation, unpredictable rule of reason analysis and
treble damages—will no doubt force employers to think twice
before entering into a revenue-sharing agreement in the
CALIFORNIA v. SAFEWAY, INC. 9323
future. Today’s gratuitous decision thus has the unfortunate
consequence of “forcing [employers] to choose their
collective-bargaining responses in light of what they predict
or fear antitrust courts, not labor law administrators, will
eventually decide.” Brown, 518 U.S. at 247. Should this fear
prevent employers from entering into an RSP, we will have
effectively usurped the role of the NLRB by dictating the
tools that can and cannot be used in labor disputes. Because
I find this result irreconcilable with Brown, inimical to sound
labor policy, completely unnecessary to the resolution of this
case and outside the scope of our constitutional authority, I
dissent from Part III of the majority opinion.
REINHARDT, Circuit Judge, dissenting in part and concur-
ring in part, joined by Judges SCHROEDER and GRABER:
Our antitrust law reflects Congress’s judgment that, with
rare and specific exceptions, free competition for customers
among firms protects and benefits the public by increasing
efficiency and output, lowering prices, and improving the
quality of the products and services available.1 No court has
1
See Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940) (“The end
sought [by Congress in passing the Sherman Act] was the prevention of
restraints to free competition in business and commercial transactions
which tended to restrict production, raise prices or otherwise control the
market to the detriment of purchasers or consumers of goods and services,
all of which had come to be regarded as a special form of public injury.”);
see also Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993)
(“The purpose of the [Sherman] Act is not to protect businesses from the
working of the market; it is to protect the public from the failure of the
market. The law directs itself not against conduct which is competitive,
even severely so, but against conduct which unfairly tends to destroy com-
petition itself. It does so not out of solicitude for private concerns but out
of concern for the public interest.”); City of Lafayette v. La. Power &
Light Co., 435 U.S. 389, 398 (1978) (In passing the Sherman Act, Con-
gress “sought to establish a regime of competition as the fundamental
principle governing commerce in this country.”).
9324 CALIFORNIA v. SAFEWAY, INC.
ever upheld an agreement among multiple employers to set
prices or share profits.
In this case, the four largest supermarket chains in Southern
California, controlling 60-70% of the market, entered into a
profit sharing agreement according to a predetermined for-
mula for the indeterminate period of an anticipated labor dis-
pute and for a short period afterwards. The supermarkets
contend that it is lawful for them to do so because, although
profit sharing agreements are by their nature anticompetitive
and thus constitute a restraint of trade, their particular profit
sharing agreement differs in two respects from profit sharing
agreements that have been held to violate the antitrust laws:
first, the agreement was to last for only the limited duration
of the strike, however long that might be; and, second, the
four supermarkets control only a substantial majority but not
100% of the market.
The majority agrees with the supermarkets that these two
factors make their profit sharing agreement sufficiently differ-
ent from those in all the previously decided cases that, in
order to determine whether their agreement has an anticompe-
titive effect, it is necessary to apply not just the fact-sensitive
intermediate test that the Supreme Court has endorsed for
assessing less complex restraints of trade, but the most rigor-
ous and exhaustive “rule of reason” analysis that requires a
full-scale duel of economic experts over complicated and
sophisticated market issues. I disagree.
The profit sharing agreement’s indeterminate duration and
less-than-total domination of the market are immaterial to an
analysis of an agreement that inherently violates the antitrust
laws. The correct method of analysis of a profit sharing agree-
ment is either the simple per se rule or another intermediate
standard such as quick look, by which we examine the anti-
competitive effects of an agreement according to its particular
circumstances, details, and logic, in light of the generally
applicable antitrust law, fundamental principles of economics,
CALIFORNIA v. SAFEWAY, INC. 9325
and clear experience of the market. See Cal. Dental Ass’n v.
FTC, 526 U.S. 756, 780-81 (1999). Because a battle royale of
economic experts in the courts is unnecessary and because
defendants’ profit sharing agreement can readily be deter-
mined to violate the antitrust laws under the intermediate
standard, I would reverse the district court’s denial of sum-
mary judgment to plaintiff and hold that the profit sharing
agreement violates section 1 of the Sherman Act. Accord-
ingly, I dissent in part.2
I.
Section 1 of the Sherman Act bans agreements or combina-
tions that act as unreasonable restraints on interstate com-
merce. See State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
Defendants entered into an agreement to share profits. Such
agreements have traditionally been held to be anticompetitive
because they remove the incentive to engage in competitive
behavior. Defendants have two principal contentions as to
why their profit sharing agreement is different: first, that their
profit sharing is for a limited, if indefinite period; and, sec-
ond, that their agreement does not include 100% of the partic-
ipants in the market. They also contend, by way of response
to plaintiff’s prima facie case, that their profit sharing agree-
ment helps them to prevail in the labor dispute and thereby to
achieve their goal of lowering wages and benefits paid to their
employees. Doing so, defendants allege, aids competition in
the Southern California market.
It is evident from a rudimentary knowledge of economics,
as well as from a reading of the case law, that neither the
agreement’s limited duration nor its failure to include the
2
Defendants also contend that their profit sharing agreement is exempt
from the antitrust laws because they employ it as a bargaining tactic in an
anticipated labor dispute. The majority concludes that the profit sharing
agreement does not qualify for the nonstatutory labor exemption and I
agree. See Maj. Op. at 9289-9302.
9326 CALIFORNIA v. SAFEWAY, INC.
fragmented group of other firms operating in the market could
do more than reduce the ordinary anticompetitive effects of
such agreements. Certainly these factors would not eliminate
such effects. An analysis of the details, logic, and circum-
stances of the particular profit sharing agreement, including
its relationship to the anticipated strike, confirms that conclu-
sion. The agreement’s effect is necessarily anticompetitive
and, like any other profit sharing agreement of limited dura-
tion among firms that control well over a majority, but less
than 100% of the market, the anticompetitive effects might be
reduced to some extent but they certainly would not be elimi-
nated.
A.
The “presumptive or default,” Maj. Op. at 9304, method of
analysis for determining whether an agreement is an unrea-
sonable restraint on trade such as violates section 1 of the
Sherman Act is rule of reason review. In conducting that
review, courts fully examine factors such as “specific infor-
mation about the relevant business,” “the restraint’s history,
nature, and effect,” and “[w]hether the businesses involved
have market power,” with the purpose of “distinguish[ing]
between restraints with anticompetitive effect that are harmful
to the consumer and restraints stimulating competition that are
in the consumer’s best interest.” Leegin Creative Leather
Prods., Inc. v. PSKS, Inc, 551 U.S. 877, 885-86 (2007) (inter-
nal quotation marks omitted).
Rule of reason review is data-intensive and, consequently,
expensive for litigants; also, it consumes large amounts of
court time and other resources. See Arizona v. Maricopa Cnty.
Med. Soc’y, 457 U.S. 332, 343-44 & n.14 (1982). For these
reasons, as well as to provide guidance to the business com-
munity, see Cont’l T.V., Inc., v. GTE Sylvania Inc., 433 U.S.
36, 50 n.16 (1977), courts have developed summary methods
of identifying section 1 violations in circumstances in which
such violations are discernible without a full rule of reason
CALIFORNIA v. SAFEWAY, INC. 9327
analysis: namely, per se review and quick look review. Per se
analysis examines whether prior judicial experience with the
type of restraint at issue is sufficient to allow a determination
that it would always or almost always tend to restrict competi-
tion and decrease output. See Leegin, 551 U.S. at 886. The
focus of the inquiry is on accumulated data from prior deci-
sions: an agreement may be declared unlawful with no further
analysis, simply by virtue of its being of a type that courts
have previously determined to have “manifestly anticompeti-
tive effects,” but no “redeeming virtue.” Id. (internal quota-
tion marks omitted).
In contrast, an arrangement violates section 1 under a quick
look approach when “an observer with even a rudimentary
understanding of economics could conclude that the arrange-
ments in question would have an anticompetitive effect on
customers and markets.” Cal. Dental Ass’n v. FTC, 526 U.S.
at 770. Quick look review is not necessarily based on a his-
tory of rule of reason adjudications; rather, it asks whether a
“great likelihood of anticompetitive effects can easily be
ascertained” by examining the restraint and considering the
defendants’ justifications for it. See id.; see also XI Phillip E.
Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1911a, at
296-97 (2d. ed. 2004 Supp.) (Quick look review “is usually
best reserved for circumstances where the restraint is suffi-
ciently threatening to place it presumptively in the per se
class, but lack of judicial experience requires at least some
consideration of proffered defenses or justifications.” (foot-
note omitted)).3
3
Inherent in the summary nature of quick look and per se analysis is the
possibility that a restraint that would survive a full rule of reason analysis
in a particular case will nonetheless be invalidated: “For the sake of busi-
ness certainty and litigation efficiency, we have tolerated the invalidation
of some agreements that a fullblown inquiry might have proved to be rea-
sonable.” Maricopa Cnty. Med., 457 U.S. at 344. The ultimate inquiry in
both analyses is establishing a sufficiently high likelihood of anticompeti-
tive effect to justify foreclosing, in the name of certainty and efficiency
9328 CALIFORNIA v. SAFEWAY, INC.
California contends that defendants’ profit sharing arrange-
ment violates section 1 under either the per se rule or quick
look review. Its assertion that the agreement strongly resem-
bles arrangements that prior cases have found violative of sec-
tion 1 is correct, although the particular circumstances of the
restraint in question do differ from the circumstances relating
to the profit sharing arrangements examined in those earlier
cases. It is unnecessary, however, to determine whether such
differences are sufficiently material that we should refrain
from concluding that defendants’ profit sharing agreement
was illegal under a strict per se analysis, because the agree-
ment was plainly illegal under a quick look or, more accu-
rately, a combined or mixed form of intermediate review.
“[A] great likelihood” that defendants’ profit sharing arrange-
ment produced “anticompetitive effects” is manifest, Cal.
Dental Ass’n, 526 U.S. at 770, and defendants offer no plausi-
ble procompetitive benefits that would overcome or neutralize
those effects so as to require full rule of reason analysis.
Although the parties briefed the case on the traditional view
that the two summary forms of review are separate and unre-
lated, and the questions they posed are here discussed sepa-
rately to some extent, the lawfulness of the agreement is best
analyzed in light of the Supreme Court’s recent explanation
that “our categories of analysis of anticompetitive effect are
less fixed than terms like ‘per se,’ ‘quick look,’ and ‘rule of
reason’ tend to make them appear.” Id. at 779. According to
Justice Souter, writing for the Court, “[w]hat is required . . .
is an enquiry meet for the case, looking to the circumstances,
goals, the possibility that a more in depth review would reveal that a
restraint was on balance benign or even beneficial. See Major League
Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 340 n.10 (2d Cir.
2008) (Sotomayor, J., concurring in the judgment) (quick look and per se
“methods of analysis are reserved for practices that ‘facially appear [ ] to
be one[s] that would always or almost always tend to restrict competition
and decrease output.’ ” (alterations in original) (quoting Broad. Music,
Inc. v. CBS, 441 U.S. 1, 19-20 (1979)).
CALIFORNIA v. SAFEWAY, INC. 9329
details, and logic of a restraint,” with the object of determin-
ing “whether the experience of the market has been so clear,
or necessarily will be, that a confident conclusion” can be
drawn that the “principal tendency” of an agreement is anti-
competitive. Id. at 780. I would follow the Court’s suggestion
and would apply a mixed or blended approach, engaging in an
analysis “meet for the case” — here, an analysis that compels
the confident conclusion that the principal tendency of defen-
dants’ agreement is anticompetitive and that the agreement
thus violates section 1 of the Sherman Act. On the basis of
that intermediate analysis, I would reverse the district court
and hold that defendants’ profit sharing arrangement is unlaw-
ful.
B.
I first discuss the applicability of strict per se analysis. “The
rationale of the rule of per se illegality depends on the prem-
ise[ ] that . . . judicial experience with a particular class of
restraints shows that virtually all restraints in that class oper-
ate so as to reduce output or increase price.” XI Areeda &
Hovenkamp ¶ 1911a, at 295. Accordingly, application of the
per se rule is limited to restraints of a type that courts’ “con-
siderable experience” has revealed to have “manifestly anti-
competitive effects,” and no “redeeming virtue,” such that
judges can “predict with confidence that it would be invali-
dated in all or almost all instances under the rule of reason.”
Leegin, 551 U.S. at 886-87. Thus, the question for per se anal-
ysis is whether defendants’ agreement is of a type that courts
have previously determined to have such pernicious effects.
California argues that defendants’ profit sharing arrangement
was both a profit pooling agreement and a market allocation
agreement, each of which courts have determined to be sub-
ject to per se invalidation. As I explain below, the contention
that defendants’ agreement was a market allocation agreement
is without merit. The question whether it was a profit sharing
agreement sufficiently similar to the profit sharing agreements
that courts have previously examined and invalidated is much
9330 CALIFORNIA v. SAFEWAY, INC.
closer. Below, I discuss the relationship between defendants’
profit sharing agreement and profit sharing agreements invali-
dated in prior cases but, ultimately, do not determine whether
defendants’ agreement constituted a per se violation of the
Sherman Act. Rather, as I explain below, in determining that
it was unlawful, I would apply a per se-plus or a quick look-
minus analysis, a combined or mixed approach, somewhere
between pure per se and pure quick look, along the meet-for-
the-case lines suggested by the Court in California Dental
Association.
1.
California contends that defendants’ profit sharing agree-
ment is essentially identical to those profit pooling and shar-
ing schemes that the Supreme Court has found to be per se
violations of section 1. See Citizen Publ’g Co. v. United
States, 394 U.S. 131, 135 (1969) (“Pooling of profits pursuant
to an inflexible ratio at least reduces incentives to compete for
circulation and advertising revenues and runs afoul of the
Sherman Act.”); see also United States v. Paramount Pictures
Inc., 334 U.S. 131, 149 (1948) (profit sharing agreement a
“bald effort[ ] to substitute monopoly for competition”); N.
Sec. Co. v. United States, 193 U.S. 197 (1904); Chicago, M
& St. P. Ry. Co. v. Wabash, St. L. & P. Ry. Co., 61 F. 993 (8th
Cir. 1894); Anderson v. Jett, 12 S.W. 670 (Ky. 1889).
Profit pooling or profit sharing arrangements eliminate
incentives to compete for customers along every dimension:
there is little purpose in attempting to attract another firm’s
customers by lowering prices, improving quality, or taking
any other measure if the profits earned from those new cus-
tomers would be placed in a common pool in which the other
firm is a participant, and the proceeds distributed in the same
way no matter which participant in the profit pool generated
the underlying sales, or if transfer payments are made
between firms to achieve the same effect. See N. Sec. Co., 193
U.S. at 328 (pooling profits “destroy[s] every motive for com-
CALIFORNIA v. SAFEWAY, INC. 9331
petition between . . . natural competitors.”); Chicago, M. & St.
P. Ry. Co., 61 F. at 997 (a profit sharing agreement by which
railroads that carried less than a predetermined share of
freight were compensated by other railroads such that their
share of total revenues remained constant had “[t]he necessary
and inevitable result of . . . foster[ing] and creat[ing] poorer
service and higher rates”). The Sherman Act was intended to
curb just such restraints on competition.
Defendants contend that there are three ways in which their
scheme differs from the profit pooling or sharing that was
held unlawful in prior cases. The first of these contentions is
meritless. Defendants argue that, unlike the agreements in
prior cases, which provided that the parties would share all
profits, their agreement provides that any party that experi-
ences an increase in relative market share would share with
the others only 15% of its increase in relative revenue, and
that the sums to be redistributed are less than all of the profits
earned on those increased revenues. There is no question,
however, that the 15% figure was defendants’ estimate of the
total additional profits to be earned as a result of any increase
in relative market share while the profit sharing agreement
was in effect. This plan to share all the additional profits
earned is what is relevant. Richard Cox, a vice president of
Safeway who helped to draft the agreement, stated in his
deposition that the 15% was meant to represent accurately the
profit that a chain would collect on increased revenues that
were earned without an increase in fixed costs. Defendants do
not dispute the accuracy of his testimony. Their proffer is the
statement of their expert witness, who conjectured that it was
“plausible” and “likely” that incremental profits were greater
than 15% of revenues, but admitted that he had done no anal-
ysis of incremental profitability from the data.4 Defendants
4
I note that the district court should not have accorded the expert’s state-
ment any weight given its explicitly speculative nature. “An expert’s opin-
ions that are without factual basis and are based on speculation or
conjecture” are inadmissible at trial and are “inappropriate material for
consideration on a motion for summary judgment.” Major League Base-
ball, 542 F.3d at 311.
9332 CALIFORNIA v. SAFEWAY, INC.
cannot force the expense of full rule-of-reason litigation on
courts and opposing parties simply by speculating that they
may have gotten their arithmetic wrong when they were set-
ting up their scheme to share profits; their plan to share profits
is sufficient, whether or not the scheme as implemented
achieved that objective to perfection.
Defendants’ other two contentions, however, raise suffi-
cient question as to whether their profit sharing scheme
should be invalidated under a strict per se approach or
whether additional analysis of the agreement and its likely
effects would be beneficial, and whether the court should pro-
ceed to a quick look approach or, more accurately, to a mix-
ture or combination of the two approaches.
First, while profit sharing agreements in previous cases
were to last for decades or permanently, defendants’ scheme
is scheduled to last only for the period of the labor dispute,
plus two additional weeks. See Citizen Publ’g, 394 U.S. at
133 (fifty-year agreement); Paramount Pictures, 334 U.S. at
131 (considering apparently permanent profit sharing agree-
ments); N. Sec. Co., 193 U.S. at 197 (finding illegal an appar-
ently permanent profit pooling arrangement); Chicago, M. &
St. P. Ry. Co., 61 F. at 996 (“The contract was to continue for
25 years.”). That the term of the scheme could expire in a rel-
atively short period — anywhere from a few weeks to a year
or more, depending on the length of the strike — is no
defense if the scheme is anticompetitive. Section 1 of the
Sherman Act proscribes all anticompetitive agreements,
regardless of their duration: neither the text of the statute nor
the case law contains an exception for anticompetitive agree-
ments that last for less than a fixed period of substantial
length. However, defendants’ contention is that no anticompe-
titive effects could result from their arrangement, because the
potentially short term of the profit sharing leaves them with
sufficient incentive to compete for customers, whose alle-
giance might be retained after the end of the strike. Because
courts have not previously considered profit sharing arrange-
CALIFORNIA v. SAFEWAY, INC. 9333
ments of a potentially very short duration, the court probably
should not simply apply a pure per se analysis to defendants’
arrangement.
Second, unlike firms in most of the prior profit sharing
cases, which were the only firms of their kind operating in the
relevant market, defendants were not the only supermarkets in
the affected areas. See, e.g., Citizen Publ’g, 394 U.S. at 133(the defendants were the only general distribution newspapers
in Tucson). California is correct that a profit sharing plan
need not cover the entire market in order to affect competi-
tion. However, it is incorrect that the distinction between a
profit sharing plan that covers the entire market and one that
does not is unworthy of any consideration before we make a
determination whether anticompetitive effects will result from
an agreement. As with the previous distinction, courts have
not explored the question sufficiently to allow certitude with
the application of a strict per se approach here.
2.
California next contends that the profit sharing agreement
was a market allocation agreement that allocated the Southern
California grocery market according to defendants’ historic
shares of that market. Market allocation agreements are “clas-
sic per se antitrust violation[s].” See United States v. Brown,
936 F.2d 1042, 1045 (9th Cir. 1991). Courts have treated as
unlawful market allocation agreements assigning particular
territories to particular vendors, see Palmer v. BRG of Ga.,
Inc., 498 U.S. 46, 49-50 (1990) (per curiam); United States v.
Topco Assocs., Inc., 405 U.S. 596 (1972), assigning certain
customers to certain vendors, see White Motor Co. v. United
States., 372 U.S. 253 (1963), and capping total sales volume
of the market and assigning participants fixed shares of that
total volume, see United States v. Andreas, 216 F.3d 645,
666-68 (7th Cir. 2000). The common thread to these decisions
is that in allocating the market, firms ensure that customers
9334 CALIFORNIA v. SAFEWAY, INC.
attempting to purchase products in the relevant market will
have fewer firms competing for their business.
In contrast to the agreements at issue in the market alloca-
tion cases, however, defendants’ agreement is not alleged to
have decreased the number of supermarkets available to cus-
tomers. Rather, California alleged that the agreement simply
reduced the competition for customers among the defendant
businesses. Thus, it does not allege a market allocation claim
appropriate for either strict per se analysis or a mixed or
blended approach, and we need proceed no further with that
question. In view of the above, I would decline to hold that
California prevails on a strict per se theory.
C.
Turning from a strict per se to a quick look, or rather, in
this case, to a combined or mixed approach, fair analysis
requires careful inquiry. An agreement violates section 1 of
the Sherman Act under a quick look analysis when “an
observer with even a rudimentary understanding of economics
could conclude that the arrangements in question would have
an anticompetitive effect on customers and markets.” Cal.
Dental Ass’n, 526 U.S. at 770. If so, the burden of proof shifts
to the defendant “to show empirical evidence of procompeti-
tive effects.” See id. at 775 n.12; XI Areeda & Hovenkamp
¶ 1914d(1) at 355. Accordingly, a court seeking to determine
on a “quick look” whether an arrangement violates section 1
must first determine whether it can “easily . . . ascertain[ ]”
a “great likelihood of anticompetitive effects,” Cal. Dental
Ass’n, 526 U.S. at 770, and, if so, whether any such effects
are neutralized or outweighed by procompetitive benefits.
Taking into account the Supreme Court’s recent explana-
tion that the “categories of analysis of anticompetitive effect
are less fixed than terms like ‘per se,’ ‘quick look,’ and ‘rule
of reason’ tend to make them appear,” and that rather than
drawing “categorical line[s]” between restraints, a court
CALIFORNIA v. SAFEWAY, INC. 9335
reviewing an agreement that is alleged to violate section 1
must conduct “an enquiry meet for the case,” see id. at 779-
81, a court in a case like that before us should look to the his-
tory of judicial experience with profit sharing agreements,
apply rudimentary economic principles to the meaning and
effects of the particular agreement in question, and carefully
analyze the circumstances, details, and logic of the agreement
in order to determine the likelihood of anticompetitive effects.
Then it must consider the purported procompetitive effects
that the defendants suggest are sufficient to overcome any
anticompetitive effects of the agreement. The question, then,
under the combined or mixed approach is whether, after con-
ducting the requisite review and analysis the court can reach
a “confident conclusion [that] the principal tendency” of the
agreement is to restrict competition. See id. at 781.
Significantly, a “confident conclusion” does not always
prove ultimately correct. See supra note 3. Rather, it repre-
sents a tool of judicial economy designed to save the litigants
and the courts a considerable investment of time and money,
which in the balance is to the benefit of all. That occasionally
we might be wrong is a price that it is long established that
society is willing to pay. In fact, some of the conclusions of
which our leading economic experts have been confident have
turned out to be incorrect. For example, Alan Greenspan,
appointed and then reappointed Chairman of the Federal
Reserve for five terms by four different Presidents, recently
admitted to a significant flaw in the ideology that caused him
to support and implement policies of financial deregulation:
“We made a mistake in presuming that the self-interest of
organizations, specifically banks and others, were such that
they were best capable of protecting their own shareholders.”
See Paul M. Barrett, While Regulators Slept, N.Y. Times,
Aug. 6, 2009, at BR 10. And Judge Richard Posner, a highly
respected jurist and a leading economics expert, has recently
expressed his admiration for Keynesian economics, reversing
a lifetime of reliance on the Chicago School’s approach. See
John Cassidy, Letter from Chicago, The New Yorker, Jan. 11,
9336 CALIFORNIA v. SAFEWAY, INC.
2010, at 28. Thus, a “confident conclusion” for purposes of
quick look and other limited approaches means, at most, a
reasonably confident conclusion a court may reach that, on
some occasions, may prove to be incorrect. Equally incorrect,
however, may be a conclusion reached by a body of econom-
ics experts after years of study or even a verdict reached by
a jury following a full-scale trial with the most careful and
thorough development of a full evidentiary record with the aid
of the most experienced antitrust lawyers and expert wit-
nesses.
Here, I am confident in my conclusion that defendants’
profit sharing agreement creates a “great likelihood of anti-
competitive effects,” and that such effects are not outweighed
or neutralized by any plausible procompetitive benefits. I am
confident that neither the duration of the agreement nor the
fact that defendants have less than a 100% share of the market
significantly affects the anticompetitive “principal tendency”
of the profit sharing agreement. In reaching this conclusion,
I have considered whether, because the objective of the agree-
ment was to affect the outcome of a labor dispute and to bring
about a reduction in labor costs, my conclusion should be
altered. My answer is a definite and unqualified “No.”
Finally, although the parties introduced some evidence to sup-
port their respective positions, I do not rely on such empirical
proof in reaching this conclusion; I note, however, that to the
extent that it is relevant, the evidence appears either to sup-
port the conclusion that I would reach or, alternatively, to add
little or nothing of any significance to my analysis. Finally,
although some confident conclusions may ultimately prove to
be incorrect, I am confident that this one will not.
1.
a.
Defendants entered into an agreement under which they
shared profits with one another according to their historic
CALIFORNIA v. SAFEWAY, INC. 9337
shares of the market. As discussed above, the only factors dis-
tinguishing defendants’ arrangement from a profit sharing
agreement that would have constituted a per se violation of
section 1 of the Sherman Act are (1) the presence in Southern
California of a fragmented cluster of smaller markets with a
residual minority of the market share, and (2) the indefinite,
if limited, term of the agreement. Absent those features,
defendants’ scheme would simply constitute a profit pooling
or sharing arrangement akin to the ones held violative of sec-
tion 1 in earlier cases, and there would be no question that the
agreement creates a “great likelihood of anticompetitive
effects.” This is apparent from the fact that when firms shar-
ing profits are the only firms in a market, each will receive the
same portion of the total profits whether it cuts prices, invests
in improving its products or services, or does nothing to win
customers from the other firms; the result of this lack of com-
petitive pressure is the high likelihood that prices rise towards
monopoly levels or fail to fall with the same effect. It is for
these reasons that the Supreme Court has said that “[p]ooling
of profits pursuant to an inflexible ratio” is a “§ 1 violation[ ]”
that is “plain beyond peradventure.” Citizen Publ’g, 394 U.S.
at 135-36.5
5
This effect has been well understood for many years, and was ably
explained well over a hundred years ago by the Kentucky Court of
Appeal, then the highest court in that state, in the following discussion of
a profit sharing arrangement between two steamboat companies:
There was a strong stimulation to increase the net profits by
means other than that of popular favor springing out of efficient
steamboat facilities and close attention to the business of ship-
ping for reasonable charges and courteous attention to passengers
at reasonable fare. . . . It is the competition, or fear of competi-
tion, that makes these carriers efficient, attentive, polite, and rea-
sonable in charges. Remove competition, or the fear of it, and
they become extortionate, inattentive, impolite, and negligent.
. . . It is said that neither was bound to charge the same as the
other. That is true; but either could extort with impunity, and the
other would be an equal recipient of the fruit of the extortion. .
. . It is true that their contract did not, in so many words, bind
9338 CALIFORNIA v. SAFEWAY, INC.
The well-recognized effects of profit sharing set forth
above help to guide the discussion in the case before us: that
discussion starts from the premise that the sharing of profits
among competitors ordinarily has substantial adverse effects
on competition. Next is the consideration whether either of
the aspects of the agreement before us that defendants assert
materially distinguish it from ordinary profit sharing arrange-
ments would, in light of the “circumstances, logic, and details
of the restraint,” preclude that agreement from having the
anticompetitive effect that would otherwise occur.
In an ordinary period in which no profit sharing arrange-
ment is in effect, defendants compete with one another, and
with a smaller set of other unrelated grocers, for customers
and sales. The fruits of successful competition might accrue
both in the present, as a supermarket makes sales in the cur-
rent period, and in the future, as customers won or retained
through such competition return to the store to make more
purchases. Defendants contend that a profit sharing agreement
of limited duration, restricted to the dominant market partici-
pants, does nothing to alter the ordinary incentive structure,
and that the competitive pressure while such a profit sharing
agreement is in effect is no less than the competitive pressure
that would occur in the absence of such an agreement. Having
them to any given charges; but it made it to the interest of each,
not only to charge, but to encourage and sustain the other in
charges that would amount to confiscation. . . . This combination
was more than that of a combination not to take freight or passen-
gers at less than certain prices. In such case, the combiners have
to furnish adequate means of transportation, and efficient and
polite officers, and confine themselves as nearly as possible to
the sum agreed upon, in order to secure the trade, or a reasonable
portion of it; but here, by reason of the agreement, . . . .
[i]nefficient means of transportation [and] unskilled or inattentive
officials[ ] are no drawback to either boat. Its share of the profits
come[s] notwithstanding.
Anderson v. Jett, 12 S.W. 670, 671 (Ky. 1889).
CALIFORNIA v. SAFEWAY, INC. 9339
reviewed their contentions and analyzed all the plausible
effects of the agreement, I disagree. I am confident in the con-
clusion that defendants’ profit sharing arrangement removes,
or at the least significantly reduces, a key source of competi-
tive pressure—competition among defendants for sales to be
made during the agreement period—without there being any
countervailing pressure sufficient to neutralize or overcome
the overwhelming likelihood of anticompetitive effects.
Although it is plausible that the two differences on which
defendants rely will serve to reduce the competitive pressures
to a lesser extent than would a long-term agreement among
competitors who control 100% of the market, it is evident that
the lessening of the reduction in competitive pressure will be
one of degree only, and that there is no likelihood whatsoever
that the anticompetitive effects of a profit sharing agreement
will be eliminated.
As already stated, when an arrangement redistributes all
profits on current sales among a group of competitors accord-
ing to a predetermined ratio, as defendants’ arrangement does,
there is little reason for the individual firms within the group
to compete with one another for those sales. Thus, the analy-
sis begins with the determination that there is a high likeli-
hood that defendants’ agreement has a substantial negative
effect on their incentive to compete with one another for cus-
tomers in order to make sales during the period in which the
agreement is in effect. Defendants nonetheless contend that
there is an incentive to compete with one another for custom-
ers during the profit sharing period, pointing to the indefinite
duration of the agreement and to the possibility that customers
who are won or retained through competition during that
period will remain as customers after the agreement ends.
Additionally, they contend that the other firms in the market
will exert competitive pressure on them sufficient to make up
for any loss of competitive pressure among themselves. These
contentions must be examined for their validity during the
period of limited duration in general, and then in light of
9340 CALIFORNIA v. SAFEWAY, INC.
whether the particular circumstance of the agreement — an
impending labor strike — alters that general analysis.
First, for a profit sharing agreement of limited but indefi-
nite duration, the incentive to compete for sales and profits
that would occur at some future time would necessarily be
less than the ordinary incentive to compete by seeking to
attract customers who will patronize the stores starting imme-
diately and will continue to patronize them in the future as
well. The supermarkets assert that the profit sharing arrange-
ment does not reduce their incentive to engage in competitive
behavior because customers might buy goods at some indefi-
nite point in the future in which profits would not be shared.
Any such future incentives are at best speculative and must be
heavily discounted. The sales that would produce those future
profits might not be made for six months, or a year, or more.
By paying money now for sales that would occur, if at all,
only in the indefinite future, the defendants would incur the
ordinary costs of obtaining customers without receiving the
ordinary benefits that would accrue. Whatever incentive
might remain, with the agreement in place, for the supermar-
kets to compete for customer purchases in the future is con-
siderably outweighed by the incentives that the agreement
reduces to compete for purchases today. Viewing matters
most favorably to defendants, the anticompetitive effects
resulting from an agreement of limited, if indefinite, duration
might be diminished, but certainly would not be eliminated.
There can be no question whatsoever that the profit sharing
agreement of indefinite duration would at least to some
degree reduce defendants’ incentive to compete.
With defendants exerting reduced competitive pressure on
one another during the profit sharing period, competition from
firms not included in the profit sharing agreement would have
to result in an extraordinary amount of increased competitive
pressure to make up for the loss of the paramount pressure
that defendants ordinarily exert on each other. This too is
CALIFORNIA v. SAFEWAY, INC. 9341
highly unlikely.6 During the profit sharing period, defendants
controlled at least 60% of the Los Angeles-Long Beach por-
tion of the Southern California market and at least 70% of the
San Diego portion, and between them operated more than 950
stores in the areas affected by the agreement, a combined
presence sufficient to suggest an ability to significantly affect
prices and other outcomes in the Southern California market.7
6
IIA Areeda & Hovenkamp ¶ 391b(1) at 323 (“[W]hether a price-
fixing conspiracy among sellers involves everyone or only a dominant
group, this business practice leads to overcharges that constitute antitrust
injury. The same can be said for business practices that are economically
equivalent — for example, agreements on market division, product qual-
ity, credit terms, and the like.”).
7
No precise standard exists for determining when a firm or a group of
firms controls enough of a market that its actions might cause anticompeti-
tive effects. However, the uncontested facts about defendants’ share of the
market and the fragmented nature of the rest of the market together appear
to be sufficient to establish the monopoly power over the market required
for a violation of section 2 of the Sherman Act, a higher standard than is
required to find that a firm or firms had sufficient power in the market that
their actions could violate section 1. See Am. Tobacco Co. v. United
States, 328 U.S. 781, 797 (1946) (a firm with over two-thirds of the mar-
ket is a monopoly); Syufy Enters. v. Am. Multicinema, Inc., 793 F.2d 990,
995-1000 (9th Cir. 1986) (60-69% market share accompanied by a frag-
mentation of competition sufficient to show “monopoly power” over a
market as required for violations of section 2 of the Sherman Act); Pac.
Coast Agric. Exp. Ass’n v. Sunkist Growers, Inc., 526 F.2d 1196, 1204
(9th Cir. 1975) (45-70% share of the market sufficient to show monopoly
power where no other competitor had more than a 12% share); Eastman
Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 481 (1992)
(“Monopoly power under § 2 requires, of course, something greater than
market power under § 1.”); cf. FTC v. Staples, 970 F. Supp 1066 (1997)
(applying 1982 Merger Guidelines); Costco Wholesale Corp. v. Maleng,
522 F.3d 874, 896 (9th Cir. 2008) (“When firms in a market are able to
coordinate their pricing and production activities, they can increase their
collective profits and reduce consumer welfare by raising price and reduc-
ing output.”) (citing George Stigler, A Theory of Oligopoly, 72 J. Pol.
Econ. 44 (1964) (arguing that successful collusion requires firms to over-
come particular market uncertainties; one of the key uncertainties is
whether another firm will “cheat” its rivals by offering a lower price));
United States Energy Information Administration, World Crude Oil Pro-
duction, 1960-2008, http://www.eia.doe.gov/aer/txt/ptb1105.html (last vis-
ited June 13, 2009) (during the 1970s OPEC never controlled more than
56% of the world oil market).
9342 CALIFORNIA v. SAFEWAY, INC.
Defendants would be at least partially insulated from competi-
tion from other vendors by virtue of the many and varied
locations of their stores, which for numerous customers would
be far more convenient to patronize than the markets operated
by the other vendors. Defendants also would be partially insu-
lated from such competition by the inability of the other ven-
dors to compete effectively as a result of brand recognition
(and, indeed, customer awareness of their existence), limited
facilities, contracts with suppliers and staffing commensurate
with their limited historical role in the market; factors that
would substantially curtail the ability of the other vendors to
serve additional customers.8 Those other vendors would no
more be able to increase their capacity, staff, supplies, and
brand recognition overnight than they could immediately
open new locations convenient for defendants’ customers.
Nor would they be inclined to spend money to do so, knowing
that the profit sharing agreement was of limited duration and,
in fact, could end at any time. Finally, those other vendors are
mainly independent of each other, consist of various types of
markets, and would have neither the inclination nor the ability
to agree on a uniform marketing policy that would signifi-
cantly increase whatever competitive pressure the totality of
those vendors ordinarily exerts on defendants. The over-
whelming likelihood appears to be that, on the whole, smaller
vendors would do little if anything to alter their marketing
practices but rather would continue on their ordinary course,
which would not serve to increase their economic pressure on
defendants beyond what they ordinarily exert, or attract any
8
Another consideration is that many alleged competitors’ product offer-
ings differ substantially from those of defendants, including box stores
selling goods in bulk, such as Costco; retailers selling a limited selection
of products and brands, such as Trader Joe’s; and stores specializing in
organic foods, such as Whole Foods. These markets are by their nature
incapable of competing for much of the business of traditional supermar-
kets such as those operated by defendants. Notwithstanding these obvious
facts, Costco, Trader Joe’s, and Whole Foods were each alleged by defen-
dants to have placed competitive pressure on them during the labor dis-
pute.
CALIFORNIA v. SAFEWAY, INC. 9343
large number of the customers that ordinarily patronize defen-
dants.9
No one would dispute that the supermarkets’ agreement
had anticompetitive effects if they had simply agreed to fix
equal prices and wages in order to eliminate competitive risk.
The agreement in this case generated no less irreducibly anti-
competitive effects, because the supermarkets’ arrangement,
like any other naked restraint on trade, reduced incentives to
compete and yielded no plausible off-setting procompetitive
or competition-neutralizing effects. A rudimentary knowledge
of antitrust law dictates the conclusion that, if defendants in
this case agreed to share profits for a limited period for their
mutual economic benefit, there would be a violation of sec-
tion 1 of the Sherman Act — at least in the absence of some
extraordinary circumstance.
9
Interestingly, economic theory suggests an even stronger negative
effect on competition: it would appear to predict that, at least in the short
run, in a market in which large, dominant firms have an agreement limit-
ing competition amongst themselves, such an agreement will tend to
increase the prices charged by those large firms, and that smaller firms,
rather than increasing whatever economic pressure they ordinarily exert on
those larger firms by charging the lower prices that would obtain under
competitive conditions in order to attract the larger firms’ customers, but
will instead charge higher prices close to those being charged by the larger
firms. See Herbert Hovenkamp, Federal Antitrust Policy § 4.1b (1994).
Firms that pool profits are acting as a kind of cartel, and cartels that do
not contain all the firms in the market are still able to raise prices above
the prices that would be observed in a competitive marketplace, especially
in a short term situation like that present here, in which the fixed costs of
starting a supermarket (leases, employment and product purchasing con-
tracts, signage, etc.) make it unlikely that new firms would enter the mar-
ket to take advantage of the prices that are artificially high due to the
cartel’s collusive behavior. See Dennis W. Carlton & Jeffrey M. Perloff,
Modern Industrial Organization 107-15, 122 (3d ed. 2000). Additionally,
fixing market shares at precartel levels, as defendants essentially did here,
is an “effective technique” for preventing cheating (in the form of compet-
itive behavior) among members of the cartel. See id. at 139-40.
9344 CALIFORNIA v. SAFEWAY, INC.
This brings us to defendants’ contention that the threat of
a strike, or a strike itself, constitutes such a circumstance.
First, then, we must consider whether the profit sharing agree-
ment loses its anticompetitive effects when it becomes opera-
tive during the course of a strike or labor dispute. There
should be little difficulty in answering that question: the fact
that defendants’ agreement provides for profits to be shared
only during a labor dispute and a brief ensuing period does
not alter its inherently anticompetitive nature. Even during a
strike period, a profit sharing agreement generates a “great
likelihood of anticompetitive effects.” For a vendor, the prin-
cipal features of an employee strike are diminished consumer
demand, as some customers choose not to cross the picket
lines; a reduced workforce, because some workers at least are
on strike; and a more urgent financial condition, as fixed costs
remain at nonstrike levels, and revenues go down. While
diminished demand, a reduced workforce, and a more urgent
financial condition might affect defendants’ competitive
behavior during the strike, these potential effects would occur
independent of the existence of a profit sharing agreement.
None of these effects changes the basic impact of the agree-
ment: defendants had little incentive to compete with one
another while it was in effect because any profits earned on
sales to another defendant’s former customers would simply
be redistributed back to the other defendants.10
10
A more urgent financial condition would appear, if anything, to make
it less likely that defendants would commit resources to competing with
each other for customers from whom they would receive profits, if at all,
only at some future date. To any extent that lower demand, lower supply,
or strike-caused financial woes would prompt a defendant to try to win
customers from vendors external to the agreement, the profit sharing
agreement would, as in a nonstrike period, reduce its incentive for doing
so: while the defendant would pay the entire cost (in advertising, improved
quality, or discounting) of luring such customers, it would retain only a
fraction of the benefit generated equal to its prestrike share of the market,
and a substantial number of the new customers might well, for reasons dis-
cussed earlier, be lost by the time the labor dispute and profit sharing
ended.
CALIFORNIA v. SAFEWAY, INC. 9345
The profit sharing agreement itself would have an addi-
tional effect; it would cause defendants to compete even less
during the strike period than they would were there no profit
sharing agreement in effect at that time. Whatever the base-
line circumstance as to competition in any given period,
including a strike period, the existence of the profit sharing
agreement results in a greater likelihood of reduced competi-
tion than there would otherwise be. That is the simple lesson
that is apparent from a rudimentary knowledge of economics.
Profit sharing necessarily serves to diminish the incentives to
compete below whatever the level of competition would be in
the absence of such an agreement; it is inherently, or as some
courts have said, intuitively, anticompetitive and has the
same, or a similar, effect on competition during a strike as it
would have before the strike and after it ends. See Cal. Dental
Ass’n, 526 U.S. at 780-81. The ultimate impact that the agree-
ment has on pricing or output might be lower or higher
depending on other circumstances, such as the existence of
the anticipated labor dispute; however, whether greater or
lesser, the net effect in all circumstances would be anticompe-
titive.
For the reasons explained above, I conclude that a “great
likelihood of anticompetitive effects can easily be ascer-
tained” by examining the agreement in light of prior cases, in
light of its circumstances and details, as well as in light of
logic and rudimentary principles of economics. Here, those
anticompetitive effects are not only substantial, but they result
from an agreement that removes fundamental incentives to
engage in competition for an indefinite period. In short, nei-
ther the fact that there are a number of smaller companies in
the market, the fact that the agreement is of an indefinite
though limited duration, nor the fact that the agreement takes
effect during a strike, warrants a departure from the well-
established rule that profit sharing agreements are anticompe-
titive and violate section 1 of the Sherman Act.
9346 CALIFORNIA v. SAFEWAY, INC.
b.
Defendants’ fallback position is that the state lacks empiri-
cal evidence to demonstrate that the effects of the agreement
were anticompetitive in practice. However, neither per se nor
quick look review ordinarily requires empirical evidence of
anticompetitive effects, nor is it required for the combined or
mixed per se/quick look approach that should be applied here.
As Professors Areeda and Hovenkamp explain, “[t]he main
difference between . . . the ‘quick look’ approach and the rule
of reason is that under the former the plaintiff’s case does not
ordinarily include proof of [market] power or anticompetitive
effects.” XI Areeda & Hovenkamp ¶ 1914d(1), at 355; see
also Cal. Dental Ass’n, 526 U.S. at 779-80 (explaining that
the “quality of proof required should vary with the circum-
stances;” that “naked restraint[s] on price and output need not
be supported by a detailed market analysis in order to” move
to the second step of the quick look analysis and “require”
defendants to produce “some competitive justification”; and
that not “every case attacking a less obviously anticompetitive
restraint . . . is a candidate for plenary market examination”)
(internal quotation marks omitted)). So long as the anticompe-
titive nature of the likely effects of an agreement is, as a theo-
retical matter, “obvious,” it is not necessary for a plaintiff to
provide empirical evidence demonstrating anticompetitive
consequences. See Cal. Dental Ass’n, 526 U.S. at 770-71; see
also NCAA v. Bd. of Regents of Univ. of Oklahoma, 468 U.S.
85, 109-10 (1984). Such a rule is necessary in antitrust cases,
where “reliable proof” of such effects might be “impossible
to produce.” XI Areeda & Hovenkamp ¶ 1901d at 207 (also
noting that “in most [antitrust] cases . . . the impact on out-
put,” which in this case would be diminished sales at higher
prices, “is assessed by inference from the nature of the agree-
ment and surrounding circumstances rather than by actual
empirical measurement”).
This is a case in which reliable proof of anticompetitive
effects or their absence through empirical evidence might be
CALIFORNIA v. SAFEWAY, INC. 9347
difficult to obtain. Defendants’ own expert explained that,
because the profit sharing agreement took effect only during
the labor dispute and both the agreement and the labor dispute
might affect defendants’ pricing decisions, the data required
to best distinguish between the effects of the strike and those
of the agreement and determine whether and how the agree-
ment affected competition between defendants do not exist.
See Declaration of Thomas R. McCarthy ¶ 47.
This is, more important, a case in which the anticompetitive
nature of the restraint is obvious. As discussed above, by the
terms of the agreement any defendant that earns profits above
its historic market share is required to give those additional
profits to the other defendants. Because a defendant may not
retain any profits that it made from competing with the other
defendants and receives a proportionate share of whatever
profits those other defendants make from competing with it,
the profit sharing agreement plainly reduces the competitive
pressure among defendants for sales whenever it is in effect,
during the strike or otherwise. To justify their conduct, defen-
dants rely not on the neutral or positive effect on competition
arising out of their agreement, but on other sources of com-
petitive pressure—increased competition from other vendors
and competition with one another for post-strike business. As
explained above, it is wholly implausible that those factors
would be sufficient to overcome the reduction in competitive
pressure that necessarily results from the profit sharing agree-
ment. Defendants’ agreement plainly removes a significant
source of competitive pressure without giving rise to any
comparable counter-source to replace it.11 Accordingly, Cali-
11
The obviously anticompetitive nature of defendants’ profit sharing
agreement in a traditional market setting distinguishes it from the restraint
in California Dental Association. Here, there is a long history of adjudg-
ing profit sharing agreements to be anticompetitive and of demonstrating
the validity of that conclusion. The unique limits on price and quality
advertising by dentists that were at issue in California Dental Association
might have been thought by some to reduce incentives to compete over
9348 CALIFORNIA v. SAFEWAY, INC.
fornia has carried its burden by demonstrating the existence
of a great likelihood of anticompetitive effects.
Although California was not required to adduce empirical
evidence of anticompetitive effects, given the nature of the
restraint at issue in the case, the empirical evidence before us
supports its contentions or is, at the least, of no substantial
consequence. Defendants acknowledge diminished competi-
tive behavior, such as discounting and advertising, during the
period in which the profit sharing agreement was in effect.
This, in all likelihood, resulted in at least some increase in, or
some failure to reduce, the prices charged to the consumers.
price or quality, because without such advertising it would be difficult for
a dentist to inform potential customers about his advantages over his com-
petitors and, thus, lowering his prices or expending resources to improve
his quality might simply have reduced his profits from existing customers.
However, the Court reasoned that the nature of the market for “profes-
sional services” such as dental care was unique and that the circumstances
made it difficult to compare services across providers and to verify price
and service information, meaning that price and quality advertising might
have been misleading, and misleading advertising itself poses dangers to
competition. See Cal. Dental Ass’n, 526 U.S. at 771-72. Accordingly, the
Court concluded, that because of the “professional context,” it was not
implausible that, as a theoretical matter, the restriction on price advertising
had either a positive effect or no effect on competition. See id. at 774-75.
The Court emphasized that theoretical claims of anticompetitive effects
that are not evident or established in antitrust law must be carefully con-
sidered and clearly explained in order to justify shifting the burden to
defendants to show some procompetitive effect. See id. at 775 n.12. Here,
the subjective factors that the Court found were critical to the sale of pro-
fessional services do not exist. Economic theory as well as a practical
analysis of the factual circumstances make it clear that there is a high like-
lihood that the profit sharing agreement had anticompetitive effects.
Unlike California Dental Association, there is a clear theoretical basis for
concluding that a profit sharing agreement would have anticompetitive
effects, and, again unlike California Dental Association, there is no plausi-
ble basis, theoretical or otherwise, for concluding that the profit sharing
agreement had procompetitive effects, see infra section IV.2. Accordingly,
the burden to demonstrate evidence of the restraints’ procompetitive
effects falls on defendants, who do not meet it in any way.
CALIFORNIA v. SAFEWAY, INC. 9349
See Declaration of Thomas R. McCarthy, Backup to ex. 7A;
Declaration of Steven Lawler at ¶ 8; Declaration of Carla
Simpson ¶¶ 6-7; Declaration of Charles Ackerman ¶¶ 15-19.
Defendants explain this change in behavior by attributing it to
the lack of personnel created by the strike, rather than to the
profit sharing agreement. However, their expert, who relied
on this explanation, performed no regression or other statisti-
cal analyses, which are typical means of determining the
effects of multiple variables, such as the labor dispute and the
profit sharing agreement, on a single dependent variable, such
as competitive behavior by defendants. See, e.g., Hemmings
v. Tidyman’s Inc., 285 F.3d 1174, 1183-84 & n. 9 (9th Cir.
2002). Instead, he simply looked at limited data from Albert-
sons and declared that Albertsons “did a lot of discounting
during the strike” and that it increased its use of certain dis-
counting methods. See Declaration of Thomas R. McCarthy
¶¶ 51-53. Because his analysis lacks a discussion of how
much discounting Albertsons would have done absent the
profit sharing agreement, it is beside the point. California’s
expert, who did perform regressions, asserted in his deposi-
tion that those regressions revealed that competition between
defendants during the strike was harmed by the profit sharing
agreement. He further noted that Vons raised its prices despite
suffering a dramatic drop in demand for its products, exactly
the opposite of the lower prices that are expected when
demand drops in a competitive marketplace.12
12
Defendants’ evidence purporting to show that employees charged with
pricing during the dispute did not know about the profit sharing agreement
and took no action because of it, which was relied upon by the district
court, also fails to provide support for their contentions. Their evidence on
this point is both skeletal and somewhat dubious. Defendants do not come
close to demonstrating that all employees with power over pricing were
ignorant of the agreement or took no action because of it. See, e.g., Decla-
ration of Bryan Davis ¶ 3 (Albertsons employee describing himself as
responsible only for the prices in a discreet category of groceries); Decla-
ration of Carla Simpson ¶ 2 (Safeway employee describing herself as hav-
ing responsibility only for implementing pricing established by another
department). Moreover, early in the strike the Los Angeles Times pub-
lished a front-page article revealing that the chains had agreed to share the
9350 CALIFORNIA v. SAFEWAY, INC.
Given the obviously anticompetitive nature of defendants’
profit sharing agreement, no empirical data about the effects
of the agreement are necessary for “an enquiry meet for [this]
case.” Nonetheless, a review of the empirical evidence in the
record only increases the certainty that defendants’ agreement
generated a great likelihood of anticompetitive effects, that it
is implausible that such effects could be overcome or neutral-
ized by the conduct of defendants or others during the term
of the agreement, and that requiring a full rule of reason
inquiry would be contrary to the efficient and effective imple-
mentation of our antitrust laws.
2.
Where, as here, a “great likelihood of anticompetitive
effects can easily be ascertained,” the burden of proof is
shifted to the defendant to “to show empirical evidence of
procompetitive effects.” Cal. Dental Ass’n, 526 U.S. at 770,
775 n.12; XI Areeda & Hovenkamp ¶ 1914d(1) at 355 (when
financial burden of the strike. See Nancy Cleeland & Melinda Fulmer, In
Tactical Move, Union Pulls Pickets From Ralphs, L.A. Times, Nov. 1,
2003, at A1. More important, it would defeat entirely the efficiency goals
underlying the existence of per se, quick look, and “meet for the case”
analysis if defendants could preclude a summary finding, and proceed to
full rule of reason analysis, simply by asserting that the employees in
charge of pricing did not know about the profit sharing. Such assertions
are easy to make, while proving or disproving who knew what, and
whether the knowledge of a particular individual had any effect on
whether the company acted in a competitive manner, would require
exactly the sort of onerous and costly production of evidence that sum-
mary review is meant to avoid. In any case, as noted above, the quick look
inquiry is a probabilistic one: in order to place the burden on defendants
to demonstrate that the agreement had a procompetitive effect, California
need prove only that defendants’ agreement to share profits created a great
likelihood of anticompetitive effects. Accordingly, even if the anticompe-
titive effects had not come to pass because certain employees did not learn
of the agreement or did not correctly calculate where the company’s inter-
ests lay in light of the agreement, that fact would be immaterial to the
result of our inquiry.
CALIFORNIA v. SAFEWAY, INC. 9351
“the restraint is of such a character that an anticompetitive
effect may be presumed,” then “the only tolerance permitted
to the defendant is to show” procompetitive effects). Procom-
petitive effects include efficiency gains, the development or
improvement of products, and other benefits to consumers
and society. See XI Areeda & Hovenkamp ¶ 1912c(2) at 320.
In California Dental Association, for instance, the Supreme
Court saw a plausible procompetitive justification for the den-
tist association’s restrictions limiting price and quality adver-
tising in the potential of such restrictions to improve
consumer information by eliminating false and misleading
advertising. See 526 U.S. at 771-72.
At this point comes defendants’ actual and least justifiable
contention. The supermarkets assert that conduct that serves
to reduce the cost of labor serves a procompetitive purpose,
such as may excuse otherwise anticompetitive behavior. They
contend that the procompetitive benefit of their agreement is
that it increased their chances of winning the labor dispute
and reducing the wages and benefits they would be required
to pay to their employees, which in turn would increase their
ability to lower prices and compete more effectively with
other companies. See Declaration of Thomas R. McCarthy
¶ 10. Defendants’ proffered justification for their profit shar-
ing arrangement is, in essence, a countervailing power
defense that the restraint of trade is necessary in order to give
them sufficient bargaining power to counteract the market
power exercised by their striking workers and thereby to
allow them to purchase their workers’ labor at a lower price.
As California points out, however, the chain of contingen-
cies linking defendants’ exercise of bargaining power to
reduced prices for consumer purchases renders any such pro-
competitive benefits of their profit sharing agreement purely
speculative. Rule of reason examination of defendants’ coun-
tervailing power defense is accordingly unnecessary. “Suffice
it to say that the theoretical literature suggests that counter-
vailing cartels seldom improve the welfare of consumers.”
9352 CALIFORNIA v. SAFEWAY, INC.
XII Hovencamp, Antitrust Law: An Analysis of Antitrust Prin-
ciples and Their Application, ¶ 2015b at 158 (2d ed. 2000).
More important, driving down compensation to workers in
this way is not a benefit to consumers cognizable under our
laws as a “procompetitive” benefit. Defendants do not pretend
that they agreed to bargain in such a way that there will be a
greater overall amount of labor purchased, for example
because the transaction costs to purchase each unit of labor
are lower when the supermarkets work together. Defendants’
argument for why their profit sharing agreement is procompe-
titive is instead, essentially, that it increases their bargaining
power relative to striking workers in order to buy their labor
at a lower price. In this way, the profit sharing arrangement
resembles a cartel on the buyer side of the market.
The Supreme Court has made clear, however, that because
antitrust law operates to correct all distortions of competition,
it condemns market actors who distort competition, whether
on the buyer side or seller side. See Weyerhaeuser Co. v.
Ross-Simmons Hardwood, 549 U.S. 312, 322 (2007)
(“Predatory-pricing and predatory-bidding claims are analyti-
cally similar. . . . This similarity results from the close theo-
retical connection between monopoly and monopsony.”).
Accordingly, the Court has long understood the Sherman Act
to condemn buyer side cartels. See, e.g., American Tobacco
Co. v. United States, 328 U.S. 781 (1946); Mandeville Island
Farms v. American Crystal Sugar Co., 334 U.S. 219 (1948);
and certain exercises of single-firm buyer power. See Klor’s,
Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959). A
central problem with allowing a countervailing power defense
to justify buyer collusion is that such defense would be raised
“in almost any case where the selling market is not perfectly
competitive,” such that all “[n]on-immune employers would
claim the right to collude on wages because their employees
are organized into unions and thus have significant power.”
XII Hovencamp ¶ 2015b at 156.
CALIFORNIA v. SAFEWAY, INC. 9353
In any event, defendants’ argument is wholly unpersuasive
in light of our nation’s labor laws and policies. It is a primary
objective of these laws to protect the rights and interests of
working persons, and to enable them to obtain a fair and
decent wage through collective action.13 Reducing workers’
wages and benefits is hardly an objective that would justify a
violation of our antitrust laws or constitute a benefit to the
public so substantial as to overcome the deleterious conse-
quences of anticompetitive conduct. There is no reason, even
if we had the authority to do so, to set aside the ordinary prin-
ciples governing antitrust law in order to unbalance the care-
fully developed legal structures relating to our laws governing
collective bargaining; nor is there any reason or justification
for assuming the function of increasing the economic power
of employers to the disadvantage of their employees. To the
extent that anticompetitive conduct is exempted from the
application of our antitrust laws in order to facilitate the oper-
ation of labor/management processes, even the majority holds
that it does not provide an escape device for the employers’
conduct in this case. Defendants have not offered, much less
demonstrated, any way in which their agreement generates
procompetitive effects.
13
“One of the important social advantages of competition mandated by
the antitrust laws is that it rewards the most efficient producer and thus
ensures the optimum use of our economic resources. This result, as Con-
gress [has] recognized, is not achieved by creating a situation in which
manufacturers compete on the basis of who pays the lowest wages.”
United Mine Workers of Am. v. Pennington, 381 U.S. 676, 724 (1965)
(Goldberg, J., dissenting and concurring); see also 15 U.S.C. § 17 (“The
labor of a human being is not a commodity or article of commerce.”);
Polygram Holding, Inc. v. FTC, 416 F.3d 29, 38 (D.C. Cir. 2005) (“A
restraint cannot be justified solely on the ground that it increases the prof-
itability of the enterprise . . . .”); Law v. NCAA, 134 F.3d 1010, 1023 (10th
Cir. 1998) (“[M]ere profitability or cost savings have not qualified as a
defense under the antitrust laws.”). Depressing wages is not of societal
benefit; it simply harms working people and their families, a significant
part of the group that has come to be known as “the middle class,” and
which is experiencing enough economic travail without the added unlaw-
ful actions of those conspiring to violate the antitrust laws.
9354 CALIFORNIA v. SAFEWAY, INC.
It is little wonder that the majority expressly declines to
address the “grocers[’] argu[ment] that the RSP has procom-
petitive benefits in the form of lower prices for consumers as
a result of the grocers’ ability to negotiate a more favorable
contract on labor costs.” Maj. Op. at 9313 n.17. Were defen-
dants’ proffered justification accepted as a ground for requir-
ing full-blown rule of reason inquiry, colluding firms could
evade quick look condemnation, without in any way increas-
ing real efficiency or reducing costs to the consumer. Firms
like the supermarkets that participate in markets for both buy-
ing (labor) and selling (groceries), and engage in a restraint of
trade that has distorting effects in both, cannot avoid quick
look review of anticompetitive conduct simply by positing
that they could conceivably pass on to consumers in the sell-
ing market any private gains such firms may achieve by
restraining competition in the buying market. Allowing them
to do so would lead to the absurd result that conduct which
restrains more competition, in the sense that it distorts compe-
tition in both the buying and selling markets, would be subject
to less demanding scrutiny than would be a comparable
restraint that distorted just one market.
3.
Defendants have put forward no plausible procompetitive
effects to overcome or neutralize the great likelihood of anti-
competitive effects that would result from the implementation
of their profit sharing agreement. That likelihood is evident
from a plain reading of the agreement’s terms, an examination
of the ample case law regarding profit sharing agreements, a
rudimentary knowledge of economics, and an analysis of the
“circumstances, details, and logic” of the agreement. In the
absence of a procompetitive justification that outweighs the
likelihood of substantial anticompetitive effects, I conclude
with confidence and even with certainty that the profit sharing
agreement violates § 1 of the Sherman Act. I also conclude
with the same measure of confidence and certainty that deny-
ing California the injunction to which it is entitled, simply
CALIFORNIA v. SAFEWAY, INC. 9355
because the parties did not engage in an extremely costly, bur-
densome, and utterly unnecessary battle of economic experts
under rule of reason review, is contrary to the fundamental
policies underlying our antitrust law, and encourages future
antitrust violations by these defendants and others who may
seek to suppress the rights of their employees.
Accordingly, I dissent in part.