Connecticut Fine Wine and Spirits, LLC v. Seagull

936 F.3d 119

Opinion

17-2003 Connecticut Fine Wine and Spirits, LLC v. Seagull

17‐2003 Connecticut Fine Wine and Spirits, LLC v. Seagull

United States Court of Appeals FOR THE SECOND CIRCUIT

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 6th day of September, two thousand nineteen.

PRESENT: ROBERT A. KATZMANN, Chief Judge, JOSÉ A. CABRANES, ROSEMARY S. POOLER, PETER W. HALL, DEBRA ANN LIVINGSTON, DENNY CHIN, RAYMOND J. LOHIER, JR., SUSAN L. CARNEY, RICHARD J. SULLIVAN, JOSEPH F. BIANCO, MICHAEL H. PARK, Circuit Judges.

CONNECTICUT FINE WINE AND SPIRITS, LLC, d/b/a, TOTAL WINE & MORE,

Plaintiff‐Appellant,

v. No. 17‐2003

COMMISSIONER MICHELLE H. SEAGULL, DEPARTMENT OF CONSUMER

1 PROTECTION, JOHN SUCHY, DIRECTOR, DIVISION OF LIQUOR CONTROL,

Defendants‐Appellees,

WINE & SPIRITS WHOLESALERS OF CONNECTICUT, INC., CONNECTICUT BEER WHOLESALERS ASSOCIATION, INC., CONNECTICUT RESTAURANT ASSOCIATION, CONNECTICUT PACKAGE STORES ASSOCIATION, INC., BRESCOME BARTON, INC.,

Intervenors‐Defendants‐Appellees.

For Plaintiff‐Appellant: William J. Murphy, John J. Connolly, Adam B. Abelson, Zuckerman Spaeder LLP, Baltimore, MD.

James T. Shearin, Edward B. Lefebvre, Pullman & Comley LLC, Bridgeport, CT.

For Defendants‐Appellees: Clare E. Kindall, Solicitor General, Robert J. Deichert, Assistant Attorney General, for William Tong, Attorney General, Hartford, CT.

For Intervenors‐Defendants‐ David S. Hardy, Damian K. Appellees: Gunningsmith, Carmody Torrance Sandak & Hennessey LLP, New Haven, CT.

Michael J. Spagnola, Siegel, O’Connor, O’Donnell & Beck, P.C., Hartford, CT.

2 Patrick A. Klingman, Klingman Law, LLC, Hartford, CT.

Robert M. Langer, Benjamin H. Diessel, Wiggin and Dana LLP, Hartford, CT.

Deborah Skakel, Craig M. Flanders, Blank Rome LLP, New York, NY.

John F. Droney, Jr., Jeffrey J. Mirman, Hinckley Allen & Snyder, LLP, Hartford, CT.

Following disposition of this appeal on February 20, 2019, an active judge of the Court requested a poll on whether to rehear the case en banc. A poll having been conducted and there being no majority favoring en banc review, rehearing en banc is hereby DENIED.

Richard J. Sullivan, Circuit Judge, joined by José A. Cabranes, Debra Ann Livingston, and Michael H. Park, Circuit Judges, dissents by opinion from the denial of rehearing en banc.

FOR THE COURT: CATHERINE O’HAGAN WOLFE, CLERK

3 RICHARD J. SULLIVAN, Circuit Judge, joined by JOSÉ A. CABRANES, DEBRA ANN LIVINGSTON, and MICHAEL H. PARK, Circuit Judges, dissenting from the denial of rehearing en banc:

Today our Court declines to reconsider en banc the panel’s holding that

Connecticut’s “post‐and‐hold” alcohol pricing statute is consistent with Section 1

of the Sherman Act. Although that holding was clearly compelled by our prior

decision in Battipaglia v. New York State Liquor Authority, 745 F.2d 166 (2d Cir. 1984),

I believe we should have taken this opportunity to join federal courts across the

country in rejecting Battipaglia’s majority opinion in favor of Judge Winter’s

forceful dissent in that case. As a result of this refusal to grant rehearing, we

perpetuate a longstanding circuit split and continue 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. That strikes me as an

unfortunate consequence, particularly when the correct legal analysis has been

staring us in the face for more than thirty‐five years. Accordingly, I respectfully

dissent from the denial of rehearing en banc.

I.

Connecticut’s post‐and‐hold scheme contains three main components. First,

alcohol wholesalers must share their prices with market participants on a monthly basis (the “post”). Conn. Gen. Stat. § 30‐63(c). Second, wholesalers have four days

to adjust their posted prices, except that they cannot go below the lowest posted

price. Id. Third, at the end of the price‐adjustment period, wholesalers must

adhere to their adjusted prices for one month (the “hold”). Id.

A divided panel of our Court upheld New York’s nearly identical post‐and‐

hold scheme in Battipaglia. Writing for the majority, Judge Friendly concluded that

such a scheme did not mandate or authorize conduct that would be per se illegal

had it been the subject of a private agreement. 745 F.2d at 173–75 (citing Rice v.

Norman Williams Co., 458 U.S. 654, 659–61 (1982)). In so concluding, Judge Friendly

focused mainly on the post, observing that “[t]he Supreme Court has never held

that the exchange of price information . . . ‘necessarily constitutes a violation of the

antitrust laws in all cases.’” Id. at 174 (quoting Rice, 458 U.S. at 661).

That reasoning, however, failed to account for the per se illegality of the hold.

As Judge Winter explained in dissent, a “requirement of adherence to announced

prices has been uniformly held illegal without regard to its reasonableness.” Id. at

179 (Winter, J., dissenting) (citing Sugar Inst. v. United States, 297 U.S. 553, 601

(1936) (explaining that “steps . . . to secure adherence, without deviation, to prices

and terms . . . announced” are illegal)); see also Catalano, Inc. v. Target Sales, Inc., 446

2 U.S. 643, 649–50 (1980) (per curiam) (recognizing the “plain distinction between

the lawful right to publish prices . . . on the one hand, and an agreement among

competitors limiting action with respect to the published prices, on the other”).

In the years following our decision in Battipaglia, courts outside our Circuit

have – without exception – rejected Judge Friendly’s position and instead followed

Judge Winter’s dissent in striking down similar post‐and‐hold laws. See Costco

Wholesale Corp. v. Maleng, 522 F.3d 874, 893 n.15, 894–96 (9th Cir. 2008) (noting that

“Judge Friendly’s antitrust analysis strangely failed to account for the New York

requirement that posted prices be adhered to by wholesalers,” and agreeing with

Judge Winter’s “pointed[] observ[ation] in dissent” that a post‐and‐hold

requirement was per se unlawful); TFWS, Inc. v. Schaefer, 242 F.3d 198, 209–10 (4th

Cir. 2001) (noting that “Battipaglia has not been followed elsewhere” and

concluding that it was “obvious” that “agreements to adhere to previously

announced prices are unlawful per se”); Canterbury Liquors & Pantry v. Sullivan, 16

F. Supp. 2d 41, 47 (D. Mass. 1998) (“I am persuaded by the reasoning and

statements of the Supreme Court to concur with . . . Judge Winter in this case.”);

see also Miller v. Hedlund, 813 F.2d 1344, 1348–51 (9th Cir. 1987) (holding Oregon’s

post‐and‐hold law preempted by the Sherman Act); Beer & Pop Warehouse v. Jones,

3 41 F. Supp. 2d 552, 560–62 (M.D. Pa. 1999) (similar). A leading antitrust treatise

has also endorsed Judge Winter’s position. See Phillip E. Areeda & Herbert

Hovenkamp, Antitrust Law ¶ 217b2 (4th ed. 2013) (“Given the great danger that

agreements to post and adhere will facilitate horizontal collusion, the dissent’s

position [in Battipaglia] is more consistent with [Supreme Court precedent].”).

Despite this consensus, the panel opinion doubles down on Battipaglia,

concluding that, “[i]f anything, its reasoning has been fortified by intervening

decisions like Fisher [v. City of Berkeley, 475 U.S. 260 (1986)] and [Bell Atlantic Corp.

v. Twombly, 550 U.S. 544 (2007)].” Conn. Fine Wine & Spirits, LLC v. Seagull, 932 F.3d

22, 39 (2d Cir. 2019) as amended (July 29, 2019). According to the panel, Fisher

permits state post‐and‐hold laws unless they mandate or authorize actual

“concerted action” among alcohol wholesalers. Id. at 38. Similarly, the panel

likens alcohol wholesalers to the telecommunications carriers held to be engaging

in lawful parallel conduct in Twombly. Id. at 38–39.

The panel’s reasoning stretches Fisher and Twombly too far. In Fisher, the

Supreme Court upheld a Berkeley ordinance that – unlike a post‐and‐hold law –

unilaterally imposed rent ceilings upon landlords “to the exclusion of private

control.” 475 U.S. at 266. In doing so, the Court distinguished such “unilateral”

4 restraints, which are not subject to antitrust preemption, from “hybrid” restraints,

which grant private actors “a degree of private regulatory power.” Id. at 267–68.

Although the panel opinion “do[es] not take issue” with the district court’s

classification of Connecticut’s post‐and‐hold law as a hybrid restraint, it cites

Fisher for the proposition that preemption is not warranted unless the statute in

question authorizes or compels actual “concerted action” among private parties.

Conn. Fine Wine & Spirits, LLC, 932 F.3d at 38. But again, Fisher requires no such

thing. As the Supreme Court clarified only a year later in 324 Liquor Corp. v. Duffy,

a hybrid restraint may be attacked under Fisher even when “there is no ‘contract,

combination . . . , or conspiracy, in restraint of trade.’” 479 U.S. 335, 345 n.8 (1987)

(quoting 15 U.S.C. § 1); see also Freedom Holdings, Inc. v. Spitzer, 357 F.3d 205, 223

n.17 (2d Cir. 2004) (“[S]ince our decision in Battipaglia, the Supreme Court has

made it clear that an actual ‘contract, combination or conspiracy’ need not be

shown for a state statute to be preempted by the Sherman Act.” (quoting 324 Liquor

Corp., 479 U.S. at 345 n.8)). Likewise, Twombly did not involve a hybrid restraint

(or any state‐imposed restraint for that matter), and I am aware of no case, other

than the panel opinion in this case, extending Twombly’s antitrust holding to the

special context of hybrid restraints.

5 Moreover, 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 rather that it provides no incentive – or ability – for

wholesalers to compete on price. See Costco Wholesale Corp., 522 F.3d at 896 (citing

George Stigler, A Theory of Oligopoly, 72 J. Pol. Econ. 44 (1964)); Miller, 813 F.2d at

1349 (“Simply ending the analysis because of the lack of concerted activity among

the wholesalers fails to take into account the presence and effect of the state’s

involvement in the matter.”). Connecticut has imposed a scheme whereby

wholesalers are encouraged to pick inflated prices for alcohol, knowing that they

will always be able to match the price of a competitor. By contrast, a market

entrant hoping to gain market share by lowering prices will inevitably be

frustrated by the adjust‐and‐hold provisions of the statute, which will prevent the

entrant from further reducing prices. Since wholesalers will never be punished

for artificially high prices, or rewarded for market‐based low prices, they are likely

to eventually degenerate into a de facto cartel in which wholesalers vie to post the

highest possible prices without fear of market reprisal.

6 As courts across the country have recognized, these are precisely the kinds

of anticompetitive effects that doomed similar liquor laws under the Sherman Act.

See 324 Liquor Corp., 479 U.S. at 342 (striking down liquor laws that were “virtually

certain” to reduce competition and that may have “facilitat[ed] cartelization”);

Costco Wholesale Corp., 522 F.3d at 896 (“State enforcement of adherence to

privately set, supra‐competitive prices is precisely the danger which the Supreme

Court envisioned in crafting the hybrid and active supervision tests.”); TFWS, Inc.,

242 F.3d at 214 (Luttig, J., concurring) (“[T]he Maryland regulations before us are

not materially different from the regulations in 324 Liquor . . . .”). Thus, intervening

Supreme Court case law has undermined, not fortified, Battipaglia’s holding.

II.

Of course, the mere fact that Battipaglia was wrongly decided does not, by

itself, justify en banc review in this case. En banc rehearing is generally warranted

only when (1) necessary to “secure or maintain uniformity of the court’s

decisions,” or (2) the case “involves a question of exceptional importance.” Fed.

R. App. P. 35(a). But the latter condition is easily satisfied here.

First, this case perpetuates a circuit split between our Circuit and the Ninth

and Fourth Circuits, see Costco Wholesale Corp., 522 F.3d at 894–96; TFWS, Inc., 242

7 F.3d at 210; Miller, 813 F.2d at 1348–51, the exact kind of situation that the Federal

Rules of Appellate Procedure contemplate as appropriate for en banc rehearing, see

Fed. R. App. P. 35(b)(1)(B); id., Advisory Committee Notes (1998 Amendments)

(“[A] situation that may be a strong candidate for a rehearing en banc is one in

which the circuit persists in a conflict created by a pre‐existing decision of the same

circuit and no other circuits have joined on that side of the conflict.”). Indeed, the

circuit split in this case is particularly well‐suited for resolution by our en banc

court in light of its longstanding duration (thirty‐two years years since the Ninth

Circuit’s contrary decision in Miller v. Hedlund), developments in Supreme Court

case law since Battipaglia was decided thirty‐five years ago, and the formidable

collection of authorities now rejecting Battipaglia’s holding.1 See supra at 3–4.

Second, post‐and‐hold laws impose serious and well‐recognized harms on

consumers and retailers across all three states in our Circuit. See, e.g., James C.

Cooper & Joshua D. Wright, Alcohol, Antitrust, and the 21st Amendment: An

Empirical Examination of Post and Hold Laws, 32 Int’l Rev. L. & Econ. 379, 390 (2012)

1 Shortly before Battipaglia was decided, two state supreme courts ruled that their states’ post‐and‐hold laws were unilateral restraints not subject to preemption under the Sherman Act. See Intercontinental Packaging Co. v. Novak, 348 N.W.2d 330, 337–38 (Minn. 1984); Wine & Spirits Specialty, Inc. v. Daniel, 666 S.W.2d 416, 418–19 (Mo. 1984). Like Battipaglia, those cases have not been followed elsewhere, and their reasoning has been undermined by the Supreme Court’s subsequent development of the “hybrid restraint” classification in Fisher and 324 Liquor Corp. – a classification that, as the panel opinion acknowledges, applies to Connecticut’s post‐and‐hold law. Conn. Fine Wine & Spirits, LLC, 932 F.3d at 38. 8 (“Our results suggest that constraining antitrust enforcement [against post‐and‐

hold regimes] . . . would result in lower consumer welfare for alcoholic beverage

consumers with no offsetting reduction in social harms.”); see also Christopher T.

Conlon & Nirupama Rao, The Price of Liquor is Too Damn High: Alcohol Taxation and

Market Structure 34 (NYU Wagner Research Paper No. 2610118, 2015),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2610118 (demonstrating

“how [post‐and‐hold] legislation, which governs wholesale alcohol pricing in

many states, acts as a device to facilitate collusion”). Although this case directly

concerns only Connecticut’s post‐and‐hold statute, similar laws also exist in New

York and Vermont. See N.Y. Alco. Bev. Cont. Law § 101‐b(4) (liquor and wine

post‐and‐hold law); 14‐1 Vt. Code R. § 8 (beer post‐and‐hold law).2 Surely the

widespread anticompetitive harms that post‐and‐hold laws inflict across our

Circuit provide sufficient justification to merit revisiting Battipaglia, a case that has

become an outlier over the last three and a half decades.

* * *

2 Unlike Connecticut’s and New York’s post‐and‐hold schemes, Vermont’s scheme does not include an “adjust” provision under which wholesalers have a short period of time to match the lowest posted price before the hold takes effect. Nevertheless, while an adjust provision exacerbates the anti‐competitive effects of post‐and‐hold laws, such laws are sufficiently anticompetitive on their own to violate the Sherman Act. See Costco Wholesale Corp., 522 F.3d at 896 n.18 (“[The absence of an adjust provision] will not save the [post‐and‐hold] scheme from per se condemnation. That firms are not empowered immediately to alter their prices to meet a lower price or to adjust to a higher price does not alter the conclusion that in the long run, prices for beer and wine are more likely to be uniform and stable because of tacit collusion.”). 9 Members of our Court have frequently invoked the “virtues of restraint” –

including judicial economy, collegiality, and “our Circuit’s longstanding tradition

of general deference to panel adjudication” – to counsel against en banc review,

even where a case presents a question of exceptional importance. United States v.

Taylor, 752 F.3d 254, 256 (2d Cir. 2014) (Cabranes, J., dissenting from the denial of

rehearing en banc) (quotation marks and citations omitted). But while the

propriety of assigning these “virtues” such significant weight may be fairly

debated as a general matter, such considerations are hardly implicated under the

unusual circumstances of this case, which turns on a 1984 split decision that has

been undermined by intervening Supreme Court case law and roundly rejected by

courts and commentators alike. Here, it would have been simple enough to grant

en banc rehearing and largely adopt the reasoning of Judge Winter’s prescient

dissent in Battipaglia. Instead, we have chosen to leave in place a longstanding

circuit split and to permit artificially high prices for alcohol consumers and

retailers throughout our Circuit. Needless to say, I consider this a missed

opportunity, and, for the reasons discussed above, I respectfully dissent.