Walker v. Bruno's, Inc.

BROCK, Justice,

dissenting.

I respectfully dissent from the majority opinion.

On or about May 1, 1979, Ansel Harper, who was employed by the Tennessee Department of Agriculture to monitor retail dairy prices in the Chattanooga/Hamilton *368 County area, observed that Bruno’s was selling milk at prices that violated Tennessee’s “Unfair Milk Sales Act,” T.C.A., §§ 52-331-52-334. Harper reported Bruno’s prices to his superiors in the Department. Bruno’s pricing of milk at prices below cost, as computed pursuant to T.C.A., § 52-331(l)(n), resulted in this enforcement action by the Commissioner.

The Chancellor held that the Act conflicted with the Sherman Antitrust Act, 15 U.S.C. § 1 , and was, therefore, proscribed according to the dictates of the supremacy clause in Article VI of the federal constitution. The case reaches us by direct appeal.

The Unfair Milk Sales Act is an anticom-petitive measure first adopted by the legislature in 1955. Ostensibly, the Act was designed to prevent destruction of the small retailer by financially strong competitors who are able to sell below their costs for extended periods of time. Hogue v. Kroger Co., 213 Tenn. 365 , 373 S.W.2d 714 (1963). To achieve that end the Act establishes a “lawful minimum price” and makes it unlawful for a retailer to sell milk below this statutory minimum. The method adopted by the legislature to attain this end was to prohibit retailers from selling milk below their cost. This “cost” is defined as the sum of (1) the retailer’s invoiced price plus (2) their “cost of doing business” which is presumed to be 8% of the invoiced price, in the absence of proof to the contrary. Wholesalers and producers file price schedules with the Department of Agriculture and the 8% markup is applied to those schedules.

The Sherman Act was enacted in 1890 and declared: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations is declared to be illegal.” The Miller-Tydings Act and the McGuire Act were enacted by Congress in 1937 and 1952, respectively, for the purpose of permitting “fair trade” contracts and laws which prescribe minimum resale prices for certain goods, and allowing “non-signer” provisions which make minimum resale prices enforceable against a retailer who has not entered into a “fair trade” contract. The Tennessee legislature enacted the Unfair Milk Sales Act in 1955.

In 1975, the U.S. Congress enacted the “Consumer Goods Pricing Act” which effectively repealed Miller-Tydings and McGuire. The result has been a restoration of the Sherman Act’s ban on resale price maintenance unless the industry or program enjoys a special antitrust immunity.

In Parker v. Brown, 317 U.S. 341 , 63 S.Ct. 307 , 87 L.Ed. 315 (1943), the Supreme Court acknowledged that a state may engage in anti-competitive conduct and not run afoul of the Sherman Act. The court’s ratio deci-dendi is revealed in its conclusion that, “[t]here is no suggestion of a purpose to restrain state action in the [Sherman] Act’s legislative history.” 317 U.S. at 351 , 63 S.Ct. at 313 . This so-called “state action exemption” is limited, however, to those situations in which a state exercises its legislative authority in promulgating regulations and in prescribing the conditions of their application. In effect, Parker holds that the Sherman Act does not forbid the State itself to fix non-competitive prices, but that a state statute which purports to permit private parties to engage in noncompetitive price fixing is in violation of the Sherman Act. The anticompetitive conduct, therefore, requires more than mere state approval before it is granted immunity. Cantor v. Detroit Edison Co., 428 U.S. 579 , 96 S.Ct. 3110 , 49 L.Ed.2d 1141 (1976); Goldfarb v. Virginia State Bar, 421 U.S. 773 , 95 S.Ct. 2004 , 44 L.Ed.2d 572 (1975).

Recently in California Retail Liquor Dealers Asso. v. Midcal Aluminum, Inc., 445 U.S. 97 , 100 S.Ct. 937 , 63 L.Ed.2d 233 (1980), the Supreme Court once again addressed the issue of antitrust immunity, and articulated the following standards based on Parker v. Brown and its progeny:

“These decisions establish two standards for antitrust immunity under Parker v. Brown. First, the challenged restraint must be ‘one clearly articulated and affirmatively expressed as state policy’; second, the policy must be ‘actively super *369 vised’ by the State itself. City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 410 , 98 S.Ct. 1123, 1135 , 55 L.Ed.2d 364 (1978).” 445 U.S. at 105 , 100 S.Ct. at 943 .

The Unfair Milk Sales Act, as interpreted in Hogue v. Kroger Company, supra, comports with the first standard set forth in Midcal requiring that state policy of non-competition be clearly articulated. The second requirement, active supervision and promotion of that policy by designated state authorities, however, is not present in the Act; and, the evidence reveals that in practice the supervisory activity of the Department of Agriculture is so minimal as to disqualify the Act from the qualified antitrust immunity allowed to the states in Parker v. Brown.

The regulatory scheme challenged in Parker permitted the organization of local cooperatives to develop marketing policies for the California raisin crop. The program was administered under the auspices of the State Agricultural Prorate Advisory Commission. The Advisory Commission, which was appointed by the Governor, was empowered to disallow the implementation of any cooperative policies if those policies were deemed to be in derogation of the objectives of the program. Owing to the high degree of direct involvement and supervision by state authorities, the Supreme Court held in Parker that the Sherman Act did not apply. In Midcal the court was attempting to further define the parameters of the state action exemption, and referring to the Parker decision stated, “Without such (state) oversight, the result could have been different.”

The testimony of an employee of the Tennessee Department of Agriculture, whose duties include checking the prices of milk at retail stores, reveals the extent to which the state is involved in administering the Unfair Milk Sales Act. The employee testified as follows:

“Q. I’m talking about the price filings that are made by your department from Mayfield and Flav-o-rich, as to what they are selling at wholesale; you accept those at face value, do you not?

“A. That’s right.

“Q. You don’t go behind those numbers. So really, all you are doing is you are administering a statute, the minimum prices of which are fixed by Mayfield Dairies and Flav-o-rich, are you not?

“A. That’s right.”

The activity described above does not rise to the level of state involvement required to immunize anticompetitive conduct from the strictures of the Sherman Act. Indeed, it more closely resembles the wine pricing scheme that was condemned by the Supreme Court in Midcal, the court saying:

“The State simply authorizes price-setting and enforces the prices established by private parties. The State neither establishes nor reviews the reasonableness of the price schedules; nor does it regulate the terms of fair trade contracts. The State does not monitor market conditions or engage in any ‘pointed reexamination’ of the program. The national policy in favor of competition cannot be thwarted by casting such a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement.” 445 U.S. at 105-106 , 100 S.Ct. at 943 .

The learned Chancellor analyzed the Tennessee Unfair Milk Sales Act in the context of the affirmative responsibilities that state authorities must undertake to avoid application of the Sherman Act. In a thorough and well reasoned opinion he found as follows:

“Under the terms of the Tennessee Unfair Milk Sales Act, the state has no power to undertake investigations to determine what minimum price will best serve the public interest and best achieve the purposes of the Act. The state cannot vary the privately established minimum prices even if it determines that the prices are contrary to the purposes of the Act. In fact, the small retailer which the Act purports to protect is placed at a competitive disadvantage by volume dis *370 counts afforded by wholesalers and producers to the large retailers.”

This anomaly is the result of rebates included in the price schedules filed by wholesalers. The quoted testimony that follows is that of Mr. Kelsey Jones, staff attorney with the Tennessee Department of Agriculture and administrator of the “milk law,” and it demonstrates the effect of these rebates. Mr. Jones testified as follows:

“Q. When you get these wholesale reports that are filed, they are required to be filed is that true, sir?

“A. That’s correct.

“Q. And where they file these discounts, rebates, I think they call them— those rebates are based on volume; is that correct?

“A. Correct.

“Q. So, therefore, the larger the purchaser, the bigger the purchase, the larger the volume of purchase, the cheaper they got the milk; is that true.

“A. Yes.

“Q. And then, I think, as you answered to Mr. Harris, when it comes to the small Mom and Pop operation, they don’t get the discount and therefore their cost is higher, is that correct?

“A. That’s correct.

“Q. And I think you indicated their only alternative, other than to sell at what it costs them is to cut their price down to supermarket level; is that right?

“A. Cut their price down, correct.

“Q. And then, over an extended period of time, they are constantly losing money on the sale of their milk; is that correct?

“A. That’s correct.”

This testimony substantiates the Chancellor’s conclusion that, “In fact, the small retailer which the Act purports to protect is placed at a competitive disadvantage by volume discounts afforded by wholesalers and producers to the large retailers.”

The California appellate court based its ruling in Midcal on a prior decision by the California Supreme Court in which similar pricing restrictions were invalidated because of passive state involvement. That case was Rice v. Alcoholic Beverage Control Appeals Bd., 21 Cal.3d 431 , 146 Cal.Rptr. 585 , 579 P.2d 476 (1978), wherein the court described a situation very similar to that in the case at bar.

“In the price maintenance program before us, the state plays no role whatever in setting the retail prices. The prices are established by the producers according to their own economic interests, without regard to any actual or potential anti-competitive effect; the state’s role is restricted to enforcing the prices specified by the producers.” 579 P.2d at 486 .

The point was made in Rice that the vertical control exerted over wine prices by producers resulted in effectively destroying horizontal competition. I conclude, after reviewing the record evidence, that the Tennessee Unfair Milk Sales Act has the same effect in this regard. Mr. Kelsey Jones, an attorney with the Tennessee Department of Agriculture, whose testimony was quoted supra, further testified as follows:

“Q. All right, sir. When you contacted the defendants who have been named in this suit after the administrative hearing and told them what you thought the legal price of milk was, did they all establish the same price after your contact, sir?

“A. They all established a price above those lawful, what I considered to be the lawful minimum prices.

“Q. That is the same price for like items?

“A. I believe that they did arrive at the same prices.”

It is obvious on the face of the record that horizontal competition is substantially impeded by enforcement of the Unfair Milk Sales Act and, since the Sherman Act forbids the kind of price fixing shown here, the Tennessee enactment should yield under the supremacy clause of the Constitution of the United States.

*371 I would affirm the decree of the Chancellor.