©2008 Haynes and Boone, LLP

Practical Implications of LeeginFor the Alcohol Beverages Industry

National Alcohol Beverage

Control Association

15th Annual Symposium on Alcohol Beverage LawArlington, VirginiaMarch 11, 2008

Theodore Voorhees, Jr.Covington & Burling LLP

1. Three things Leegin did do.

2. Six things Leegin did not do.

3. Key Rule of Reason parameters for alcohol beverages.

4. Some cautionary notes about Leegin’s application in case of alcohol beverages

5. New options and open questions for pricing in open states.

6. New options and open questions for pricing in control states.

7. Closing thoughts on Costco.

Three Things Leegin did do

• Overturned Dr. Miles decision.• Eliminated rule of per se illegality for judging

vertical resale pricing under the federal Sherman Act

• Replaced the per se rule with case-by-case economics-focused analysis under the antitrust “rule of reason”

Six Things Leegin did not do

• Did not make resale price decisions per se lawful.• Did not dictate results in the states under state law

antitrust regimes.• Did not sweep away all of Colgate rule and

jurisprudence.• Did not displace Kahn or nullify the distinct economic

differences between maximum and minimum resale price effects.

• Did not provide much clear guidance for applying rule of reason.

• Did not dislodge the vast web of federal and state law governing many aspects of alcohol beverage regulation affecting pricing.

Key Rule of Reason Parameters for Alcohol Beverages

• Is there horizontal collusion.• Is there market power. • Is the business objective plausibly related

to sales enhancement.• Is the likely effect increased inter-brand

competition.

Some Cautionary Notes About Leegin’s Application In Case of Alcohol Beverages

• What the Leegin majority identified as potential pro-competitive blessings of RPM are not always or necessarily a good fit in the case of alcohol beverages

– consumers’ need for use instructions or other product-related services

– possible development of various price-service combinations

– real free rider problems may be hard to prove in many cases

– RPM as incentive for new market entry through enhanced retailer services seems a difficult challenge given regulatory constraints

Key Distinctions Requiring Separate Analysis in Counseling

• “Franchise” or “Open” States vs. “Control” States

• Three-tier system in most Open States still requires separate analysis for each of the two resale tiers.– wholesaler tier

– retailer tier

Open States – Resale Pricing from the Wholesale Tier

• Desired Wholesale Services Still Seem Significant – Maintain strong inventory

– Frequency of delivery

– Dedicated sales teams

• Assurance of Adequate Service May Indicate Pro-Competitive Justification for Minimum resale price maintenance

New Options At Wholesale Tierin Open States

• More open discussion of resale price

• More open discussion of likely impact of pricing at alternative levels

• More leeway to reach consensus view on optimal pricing to maximize sales

Unresolved Questions At Wholesale Tierin Open States

• Can wholesaler surrender his pricing freedom in the distribution agreement?

• Can supplier freely punish/terminate wholesaler for pricing contrary to supplier’s wishes/expectations?

• Can intrabrand competition be totally eliminated via both territory and pricing so long as supplier faces stiff interbrand competition?

• Note that there has been remarkably little vertical restraint litigation in alcohol industry over last decade (and likely to be even less going forward)

Open States Retail Tier – Services And Pricing?

• Are there any significant services that could be price-incentivized without violating federal and state regulations (e.g., tied house, exclusion, price-posting, etc.)?

• Absent regulatory constraints, a supplier would favor maximum resale price maintenance already beneficial to consumers and protected by Kahn.

“A manufacturer has no incentive to overcompensate retailers with unjustified margins.”

127 S. Ct. at 2919-20.

Control States – Impact of State Role

• State may still exercise monopsony buyer power.

• Distribution and pricing still subject to elaborate legal and regulatory controls.

• State Action and Noerr-Pennington doctrines should still protect suppliers in most situations.

• But will a commercial activity exception gain greater acceptance under Noerr?

Enhanced Leeway for Price Discussions in Control States

• All suppliers have legitimate, pro-competitive interest in minimizing inefficiency (“transaction cost”/”bureaucratic friction”) and unnecessary added costs of state regulatory system

• Each supplier has legitimate reason to discuss and press for consensus on appropriate resale pricing to enhance sales

• 21st Amendment “temperance” policy still a potential restraining factor, but TFWS and Costco show that state may have difficulty sustaining policy based on factual proof

Two Closing Questions Re: Costco

1. Will Leegin cause courts to revisit their “hybrid” finding (rejection of unilateral action) in Costco and TFWS?

• Look again at Judge Luttig’s concurring opinion in TFWS: “Here, as in Fisher, I believe the Maryland statute is unilateral action because

there is no voluntary agreement, independently reached, between private parties that is either authorized or enforced by the state. In fact, there is no ‘agreement’ at all.”

242 F.3d at 214

• … and Judge Luttig’s citation from the Supreme Court’s opinion in Fisher:

“A restraint imposed unilaterally by government does not become concerted action within the meaning of the [Sherman Act] simply because it has a coercive effect upon parties who must obey the law. The ordinary relationship between the government and those who must obey its regulatory commands whether they wish to or not is not enough to establish a conspiracy.”

475 U.S. at 267

Two Closing Questions Re: Costco (cont’d)

2. Will combination of Leegin and Twombly cause courts to revisit their per se finding in Costco and TFWS and require analysis based on demonstrable economic effects rather than untested assumptions:

Twombly

“We think that nothing contained in the complaint invests either the action or inaction alleged with a plausible suggestion of conspiracy. … there is no reason to infer that the companies had agreed among themselves to do what was only natural anyway; so natural, in fact, that if alleging parallel decisions to resist competition were enough to imply an antitrust conspiracy, pleading a § 1 violation against almost any group of competing businesses would be a sure thing.”

127 S. Ct. at 1971

Leegin

“When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers.”

127 S. Ct. at 2719