On August 17, the Ninth Circuit Court of Appeals held that a profit-sharing agreement between Vons, Albertson's, Ralphs, and Food 4 Less violated Section 1 of the Sherman Act as an unreasonable restraint of trade.
In 2003, defendant grocery chains were engaged in labor negotiations, and entered into a Mutual Strike Assistance Agreement that required them to share profits with each other in an effort to maintain each defendant's pre-labor dispute market share. The unions selectively picketed the grocery chains, and the stores responded by locking out their union employees and exchanging approximately $146 million under the profit-sharing agreement.
The State of California filed suit against the defendants, and moved for a summary judgment ruling that the profit sharing agreement violated § 1 of the Sherman Act. The trial court denied the motion, but the Ninth Circuit reversed. Using a "quick look" review, the Ninth Circuit determined that an observer with even a rudimentary understanding of economics could conclude that the agreement would have an anticompetitive effect on customers and markets that was not neutralized or outweighed by any procompetitive justifications:
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 customers 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.
The Court rejected defendants' argument that the agreement was not anticompetitive because it was limited in duration and limited to only some of the supermarket chains in the relevant market, as such circumstances could only reduce the anticompetitive effects. The court also found that the purported pro-competitive benefit suggested by defendants – driving down compensation to workers – was not a cognizable procompetitive benefit under the Sherman Act.
California v. Safeway, Inc., __ F.3d __ (9th Cir. 2010).