August 20, 2019

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August 19, 2019

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Second Circuit Rejects Total Wine Challenge of Connecticut Pricing Laws

Last week, in Connecticut Fine Wine and Spirits LLC v. Seagull, the US Court of Appeals for the Second Circuit affirmed a lower court’s motion to dismiss a lawsuit from Total Wine & More challenging parts of Connecticut’s Liquor Control Act and related regulations. Though the decision represents a victory for state alcohol regulatory regimes, the Second Circuit’s ruling was decided on the basis of established antitrust law and did not raise or rely on state regulatory authority under the 21st Amendment. Nonetheless, state alcoholic beverages regulators will embrace the court’s ruling.

In Connecticut Fine Wine, Total Wine challenged three sets of provisions in Connecticut’s alcohol laws. First, Total Wine challenged “post-and-hold” provisions. Under the post-and-hold provisions, state-licensed wholesalers are required to post a “bottle price” and “case price” each month with the Connecticut Department of Consumer Protection. Those prices are then made available to industry participants. During the four days after prices are posted, wholesalers may “amend” their posted prices to match—but not drop below—lower prices offered by competitors. Wholesalers are then obligated to “hold” their prices for a month.

Second, Total Wine challenged the state’s minimum-retail-price provisions. The minimum-retail-price provisions require retailers to sell alcohol beverages to customers at or above a statutorily defined “cost,” which is determined by adding the posted bottle price and a markup for shipping and delivery. Combined with the post-and-hold provisions, the minimum-retail-price provisions bind retailer prices to wholesaler prices.

Third, Total Wine challenged the state’s price discrimination and volume discount provisions. The price discrimination/volume discount provisions preclude wholesalers from offering a given product to different retailers at different prices and from offering discounts to retailers who are high-volume purchasers.

Total Wine alleged that these provisions violate § 1 of the Sherman Act, which prohibits contracts, combinations and conspiracies in restraint of trade or commerce. Total Wine claimed that the three sets of provisions effectively fix prices and reduce competition, leading to higher prices for consumers. Price fixing is a per se violation of the Sherman Act. Under the US Constitution’s Supremacy Clause, a state law that creates an “irreconcilable conflict” with a federal law by “mandat[ing]” violations of the federal law is preempted by the federal law.  Therefore, if the challenged Connecticut provisions necessarily force wholesalers and retailers to violate the Sherman Act, they would be invalid.

The Second Circuit held that Connecticut’s alcohol laws do not necessarily force alcohol beverage wholesalers and retailers to conspire in violation of the Sherman Act and, therefore, that the laws are not preempted by the Sherman Act. In upholding the minimum-retail-price provisions and the price discrimination/volume discount provisions, the Second Circuit relied on two Sherman Act preemptions tests from the Supreme Court’s Rice v. Norman Williams Co. (1982) and Fisher v. City of Berkeley, California (1986) cases. Under the first test, the court determines if the challenged restraints are “unilateral,” meaning imposed exclusively by the state law with no private discretion, or “hybrid,” meaning imposed by the state law but allowing private actors a degree of discretion. Because a violation of § 1 of the Sherman Act requires an agreement or conspiracy between private actors, a state law can only be preempted by the Sherman Act if it is a hybrid law that grants the regulated parties discretion to enter into anticompetitive agreements.

Under the second test, the court determines whether the state law causes a per se violation of the Sherman Act or whether the conduct it causes is subject to the “rule of reason.” Only certain, defined anticompetitive conduct constitutes a per se violation of the Sherman Act; all other conduct is analyzed under the rule of reason, a test that balances the anticompetitive and procompetitive effects of the challenged conduct. A state law is only preempted if it requires conduct that amounts to a per se violation of the Sherman Act; if the conduct required by the state law is subject to the rule of reason, it is not preempted.

In Connecticut Fine Wine, the Second Circuit held that neither the minimum-retail-price provisions nor the price discrimination/volume discount provisions cause per se violations of the Sherman Act and, therefore, that neither is preempted by the Sherman Act. The court cited to Supreme Court precedent, Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007), which established that minimum-retail-price and price discrimination restraints like those challenged by Total Wine are analyzed under the rule of the reason.

In upholding the post-and-hold provisions, the court examined whether Battipaglia v. New York State Liquor Authority (1984)—a case in which the Second Circuit upheld New York provisions similar to those in Connecticut—is controlling. Following an extensive analysis of Battipagliaand related precedent, the court determined that Battipaglia is controlling, and that the post-and-hold provisions are not preempted by the Sherman Act.

Though the Second Circuit upheld Connecticut’s post-and-hold provisions, its holding appears to be at odds with those of other federal circuit courts. Both the Fourth and Ninth Circuits have heard cases involving state alcohol post-and-hold laws, and both held that the laws were preempted by the Sherman Act. See Costco Wholesale Corp. v. Maleng (9th Cir. 2008); TFWS, Inc. v. Schaefer (4th Cir. 2001). The Second Circuit’s holding may have created a circuit split, which may later require resolution from the Supreme Court.

© 2019 McDermott Will & Emery

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About this Author

William Diaz, McDermott Will Emery Law firm, Antitrust and Competition Lawyer
Partner

William Diaz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Orange County office. He is a member of the Firm’s Antitrust & Competition practice group. His antitrust practice is focused on mergers and acquisitions, complex litigation, government investigations, and counseling on pricing, distribution, and consumer protection issues. 

949-757-7129
Marc E. Sorini Alcohol Distribution Attorney McDermott Will law firm
Partner

Marc E. Sorini is a partner in the law firm of McDermott Will & Emery LLP and is based in the Washington, D.C. office.  He heads the Firm’s Alcohol Regulatory & Distribution Group, where he focuses on regulatory and litigation issues facing the alcohol beverage industry and non-beverage alcohol users.

Marc's alcohol beverage practice covers licensing, labeling, advertising, trade practices, distribution, import-export, formulation and excise taxation.  He has represented alcohol beverage suppliers before federal and state courts, the Alcohol & Tobacco Tax & Trade Bureau (TTB), (formerly the Bureau of Alcohol, Tobacco & Firearms or ATF), the Federal Trade Commission (FTC) and state alcohol beverage control agencies, and he advises clients on compliance with the regulations and policies of TTB, FTC, the Food & Drug Administration and U.S. Customs and Border Protection (CBP).  Chambers USA ranks McDermott’s Alcohol Practice in its first tier and Marc is the only lawyer listed as a “Star Individual” in this field.  

His work also spans a number of traditional areas of legal practice that affect beverage companies, including the following:

  • Corporate, such as drafting and negotiating distribution and co-pack agreements and handling the alcohol regulatory and due diligence aspects of industry transactions
  • Food and beverage, such as counseling on product formulation matters and representing companies in potential product recall situations
  • Government affairs, such as testifying at legislative hearings, preparing legislative and regulatory proposals, and participating in rulemaking proceedings
  • Litigation, such as handling investigations by government alcohol regulatory authorities and representing companies in disputes with distributors
  • Intellectual property, such as reviewing and clearing advertising and labeling under alcohol beverage laws, voluntary industry codes, and false advertising principles
  • Tax, specifically federal and state excise tax matters

Marc has represented alcohol beverage suppliers before federal and state courts, the US Alcohol and Tobacco Tax and Trade Bureau (TTB, formerly the Bureau of Alcohol, Tobacco and Firearms, or ATF) and Federal Trade Commission (FTC) and state alcohol beverage control agencies. He advises clients on compliance with the regulations and policies of the TTB, FTC, Food and Drug Administration (FDA) and Customs and Border Protection (CBP). Marc also advises companies in the chemical, flavor and extract, energy, health care supply, soft drink and other industries on federal and state regulation of non-beverage alcohol. Marc often brings his in-depth knowledge to bear in legal projects involving many other practitioners, working with transactional deal teams from McDermott and other firms, litigation teams in commercial disputes or government investigations, subject matter specialists in food, agriculture, international trade and other areas, and a network of local lawyers and professionals skilled at handling the state and local zoning and licensing issues that arise in this industry.

202-756-8284
Jonathan Ende, attorney
Attorney

Jonathan Ende focuses his practice on antitrust and competition, with particular strength in regulatory matters. He has a great deal of experience in internal investigations, and has a keen insight on the manufacturing and biomedical industries in particular.

202-756-8768