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Second Circuit Denies En Banc Review, Entrenches Circuit Split in Liquor Law Challenge

In February 2019, the Second Circuit held that Connecticut’s “post-and-hold” alcohol pricing statute is not preempted by Section 1 of the Sherman Act. In September 2019, following a petition for en banc review, the Second Circuit declined to reconsider the panel’s decision. In a vigorous dissent from the decision declining en banc review, Judge Sullivan – joined by Judges Cabranes, Livingston, and Park – criticized the decision for “perpetuat[ing] a longstanding circuit split and continu[ing] to allow de facto state-sanctioned cartels of alcohol wholesalers to impose artificially high prices on consumers and retailers across all three states in our Circuit.” 

The Claims

The post-and-hold provisions of Connecticut’s Liquor Control Act contain three main components.  First, alcohol manufacturers, wholesalers, and “out-of-state shipper permitees” must share – or “post” – prices with the Connecticut Department of Consumer Protection, which are then shared with market participants.  Second, following the posting of prices, wholesalers then have four days to “amend” their posted prices to match competitors’ lower prices (except that they cannot adjust their prices below the lowest posted price).  Third, at the end of the price-adjustment period, wholesalers must adhere to – or “hold” – their prices at the posted prices (whether adjusted or not) for a month. 

Connecticut Fine Wine and Spirits, d/b/a Total Wine & More (“Total Wine”), challenged Connecticut’s liquor law, claiming that the pricing provisions constitute a per se violation of Section 1 of the Sherman Act and are therefore preempted.  Total Wine also challenged statutory provisions addressing minimum retail prices, price discrimination, and volume discounts.  Total Wine contended that the provisions “eliminate[] incentives for alcoholic beverage wholesalers to compete on the basis of price and invites wholesalers to maintain prices ‘substantially above what fair and ordinary market forces would dictate.’” 

The Second Circuit’s Panel Decision

The District Court dismissed Total Wine’s complaint, and the Second Circuit affirmed.  The Circuit explained that a “party may successfully enjoin the enforcement of a state statute only if the statute on its face irreconcilably conflicts with federal antitrust policy.  In other words, for a state statute to be preempted by [Section 1 of the Sherman Act], the statute must bring about conduct that would require per se condemnation.”  Conduct that would be subject to a “rule of reason” analysis is, in the Circuit’s view, not facially invalid and therefore not preempted.

In rejecting Total Wine’s challenge to the post-and-hold provisions, the panel determined that it was bound by the Second Circuit’s 1984 decision in Battipaglia v. New York State Liquor Authority.  745 F.2d 166 (2d Cir. 1984).  In Battipaglia, the Second Circuit upheld a New York statute with post-and-hold provisions that required wholesalers to file monthly prices with the state liquor authority, and then authorized the wholesalers to amend the filed prices to match competitors.  The Battipaglia court reasoned that the post-and-hold provisions are individual actions that “do not compel any agreement” among alcohol wholesalers.  It further explained that the law “does not place irresistible pressure on a private party to violate the antitrust laws”; rather, “[i]t requires only that, having announced a price independently chosen by him, the wholesaler shall stay with it for a month.”  Accordingly, in Battipaglia, the Second Circuit found that the New York post-and-hold laws are not preempted.

The Second Circuit determined that Connecticut’s post-and-hold law was “substantially identical” to the New York post-and-hold provisions upheld in Battipaglia, and that it was therefore bound to reach the same conclusion.  The panel emphasized that “there is a ‘natural’ explanation – independent of any agreement or coordination among liquor wholesalers – for these competitors to arrive at common monthly product prices” because “the law itself invites and facilitates conscious parallelism in pricing.”  It explained that “[t]he separate, unilateral acts by each wholesaler . . . do[] not implicate the evil against which [Section 1 of the Sherman Act] guards:  an agreement to unreasonably restrain trade.”  Accordingly, the Second Circuit’s panel decision found that the Connecticut post-and-hold statutory provisions are not preempted by the Sherman Act.

Other Circuit Decisions and the Second Circuit’s Denial of En Banc Review

Total Wine challenged the panel’s decision; the Second Circuit denied rehearing en banc.  That decision was far from unanimous, however.  Judge Sullivan dissented (joined by Judges Cabranes, Livingston, and Park), criticizing the panel’s holding as founded upon outdated case law “that has been undermined by intervening Supreme Court case law and roundly rejected by courts and commentators alike.”  The dissent acknowledged that the panel’s decision “was clearly compelled by our prior decision in Battipaglia,” but expressed that the Second Circuit “should have taken this opportunity join federal courts across the country in rejecting Battipaglia’s majority opinion in favor of Judge Winter’s forceful dissent in that case.”  The dissent further argued that “the panel opinion’s overriding focus on concerted action overlooks the economic realities of a post-and-hold pricing scheme.  The problem with Connecticut’s law is not that it affirmatively compels wholesalers to collude in order to fix prices, but that it provides no incentive – or ability – for wholesalers to compete on price.”

As Judge Sullivan also notes, “[i]n the years following . . . Battipaglia,” the Ninth and Fourth Circuits “followed Judge Winter’s dissent in striking down similar post-and-hold laws.”   For example, in Costco Wholesale Corp. v. Maleng, the Ninth Circuit held that Washington’s post-and-hold requirements are preempted by the Sherman Act.  522 F.3d 874, 894-96 (9th Cir. 2008); see also Miller v. Hedlund, 813 F.2d 1344, 1349 (9th Cir. 1986) (holding that Oregon’s post-and-hold scheme violated the Sherman Act).   Similarly, in TFWS, Inc. v. Schaefer, the Fourth Circuit determined that analogous statutory provisions in Maryland are per se violations of the Sherman Act.  242 F.3d 198, 209-10 (4th Cir. 2001). 

This circuit split – with the Second Circuit on one side, and the Fourth and Ninth Circuits on the other – could prompt the Supreme Court to weigh in and resolve the issue in the near future.