Court Rules that Limited Profit-Pooling Agreements Are Not Subject to the Truncated Rule of Reason

The U.S. Court of Appeals, Ninth Circuit, recently ruled (California ex rel. Harris v. Safeway, Inc.) that a limited profit-pooling agreement is neither per se illegal nor actionable under the truncated rule of reason (the “quick look” standard). The decision by an en banc panel overturned a prior ruling of a three-judge panel of that Circuit.

The challenged profit-pooling agreement was entered into by the four largest supermarket chains in Southern California prior to an anticipated labor strike. Under the agreement, a supermarket chain that lost sales disproportionately would be compensated for lost profits. More than $140 million was transferred among the competing supermarket chains. Defendants alleged that the agreement was efficient because it would counter “whipsawing,” a labor tactic by which unions selectively target a single employer with strikes. The court never reached the efficiencies defense and ruled against the Defendants on a labor exemption claim.

The dissenting judges argued that “[profit-pooling] agreements have traditionally been held to be anticompetitive because they remove the incentive to engage in competitive behavior.” But the majority held that the agreement “evades any ‘easy label’ of ‘profit-pooling’ . . .” because it was “among some, but not all” of the competitors and because it had a “limited and unknown duration.”

It is appropriate to disqualify a case from the per se and quick-look standards when the fact pattern separates the case from those involving behavior that has predictable and pernicious anticompetitive effects. But the Ninth Circuit’s decision disqualifies cases whose only fault is that the behavior involved has relatively limited harmful effects on consumers.

Limitations on the duration of anticompetitive agreements can reduce the economic harm they cause but do not eliminate it. Similarly, when a conspiracy falls just short of a complete monopoly, consumer injury likely will occur but will be somewhat less than that created by a conspiracy of all competitors.

The two exceptions created by the Ninth Circuit may act to create safe harbors for limited but otherwise per se violations of the antitrust laws. A primary efficiency of abbreviated standards of evidence is that they lower the costs of prosecution thus making it practical to challenge certain egregious violations. Accordingly, the Ninth Circuit’s decision might act to protect anticompetitive behavior that will not attract the considerable prosecutorial resources required by a full rule-of-reason analysis.

J. Stephen Stockum was the economic expert witness for the State of California in the case discussed. He previously worked at the FTC as a Staff Economist, Economic Advisor to the Director of the Bureau of Competition, and Economic Advisor to Commissioner Starek.