Concerted Action and the Preemption of State Fair Trade Provisions after Leegin


CONCERTED ACTION AND THE
PREEMPTION OF STATE FAIR TRADE

PROVISIONS AFTER LEEGIN

Christopher J. Heck*

I. Introduction ................................................................ 854
II. The Definition of "Concerted Action" In the

Development of the State Action Immunity
D octrin e ...................................................................... 86 1
A. The Origins of State Action Immunity ............... 861
B. The Midcal Decision and the Presumption of

"Concerted Action" .............................................. 864
C. Fisher v. City of Berkeley and the

Reaffirmation of the Need to Prove Concerted
A ction ................................................................... 867

D. The Doctrinal Tension in Current Law on
State Action Im munity ........................................ 871

III. The Doctrine in Practice: Two Recent Decisions
Applying the Doctrine to State Fair Trade Acts ....... 873
A. The Wisconsin Unfair Sales Act Invalidated ..... 874
B. Washington State's Restrictions on Sale of

Beer and Wine Upheld In Part ........................... 881
IV. The Leegin Decision and Its Potential Impact .......... 885

A. Facial Challenges Should Now Require Proof
of Horizontal Conspiracy ..................................... 886

B. Challenges to Vertical Restraints Created by
Fair Trade Acts Should Require Proof of
Anticompetitive Effect and Defendants Should
be Permitted to Introduce Justifications ............ 890

C. Applying Leegin to State Fair Trade Acts May
Obviate the Need to Consider Whether a
Restraint Is "Unilateral" or "Hybrid" ............. 893

* Christopher J. Heck is an attorney in Los Angeles, California, who

specializes in antitrust and unfair competition law and in commercial
litigation.



COL UMBIA BUSINESS LA W RE VIEW

V. How More Rigorous Application of the Concerted
Action Requirement Could Clarify the State Action
Doctrine: Two Alternatives ........................................ 897
A. First Alternative: Uphold Any Restraint

Unless There Is Actual Evidence of
Unregulated Concerted Action Among
Competitors and If Such Evidence Exists,
Consider Whether There Is Adequate
Supervision .......................................................... 898

B. Second Alternative: Expressly Permit
Concerted Action to Be Inferred from Evidence
of Consciously Parallel Conduct or from
Statutes that Expressly Create the Conditions
for Horizontal Restraints .................................... 899

V I. C onclusion .................................................................. 903

I. INTRODUCTION

Few doctrines present more challenging issues, or create
more inconsistent and incoherent results, than the doctrine
of state action immunity. Situated as it is at the intersection
of antitrust law, with its emphasis on vigorous protection of
competition, and constitutional law, which demands due
deference to considerations of state sovereignty, the issue of
whether state fair trade regulations should be preempted by
the Supremacy Clause of the United States Constitution1 due
to a violation of the Sherman Antitrust Act2 has bedeviled
courts ever since the Supreme Court decided Parker v.
Brown3 more than sixty-five years ago. Over the years, few
questions have proved more difficult than the issues of what
Section 1's requirement that there be a conspiracy or
"concerted action" means in the context of challenges to state
statutes, which may mandate some form of uniform pricing
conduct, and what proof of concerted action is required for a
successful challenge to a state statute. This article analyzes

' U.S. CONST. art. VI, cl. 2.
2 15 U.S.C. § 1 (2004).

317 U.S. 341 (1943).

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these questions, among others, in light of the Court's recent
decision in Leegin Creative Leather Products v. PSKS, Inc. 4

The Court has long held that proving unregulated
concerted action (or a "meeting of the minds") between
private parties subject to state fair trade regulations5 is an
essential first step for litigants seeking to challenge them.6

Courts considering whether such statutes are preempted
routinely go through a two-step process; first, they consider
whether a given statute or regulation creates an unlawful
per se restraint of trade and then they ask whether the
restraint is to be immune from preemption, even though it is
otherwise unlawful. If the answer to the first inquiry is that
there is no unlawful restraint created, the regulation is
upheld without further inquiry. Thus, the second question,
whether the restraint meets the requirements for immunity,
is to be considered only if a court first determines that an
unlawful combination or conspiracy involving the state has
been shown.

4 551 U.S. 877 (2007).

Throughout this article, I use the terms "fair trade statutes" or "fair
trade regulations" to refer to various types of state laws designed to
protect wholesalers or retailers. Such fair trade regulations can take
many forms, such as minimum markup provisions, bans on discount sales,
bans on credit sales, price-posting regulations, price "hold" regulations,
licensing of distributors or wholesalers, bans on central warehousing by
retailers, locality restrictions, unfair competition statutes, required
marketing plans, or governing boards. I focus most attention, of course, on
fair trade regulations that purport to govern retail or wholesale pricing.

6 In this article, I use the terms "conspiracy" or "concerted action"
interchangeably to refer to any contract, combination, or conspiracy
between market actors, whether vertical or horizontal, that is unregulated
by the state. "Concerted action" was the term selected by the Supreme
Court in Fisher v. City of Berkeley, 475 U.S. 260 (1986), to describe this
situation. The choice is considered, but hardly non-controversial. As will
be further detailed herein, the Parker Court and others suggested that
state fair trade statutes or regulations are more likely to be struck down if
a state is a "participant" in a conspiracy. But, the later decisions hold that
the state's active participation in what is otherwise a per se restraint
makes it more likely that such a restraint will be upheld. Therefore, it
appears that the best reading of the term "concerted action" is
conspiracies, contracts, or combinations involving market participants
with insufficient or no participation by the state.



COLUMBIA BUSINESS LA W REVIEW

This requirement that litigants must prove some form of
concerted action is, therefore, an important check on the
federal courts' power to review and preempt state statutes
that otherwise violate prevailing federal antitrust doctrine.
The level of deference accorded to state fair trade provisions
has changed drastically over time. Parker, the first case to
recognize the state action doctrine, was decided by a post-
Lochner,7 post-New Deal Court that gave a wide berth to
state regulatory schemes. The case involved a state statute
that allowed competing agricultural producers to set up joint
marketing plans, including pricing mechanisms.' If the
Parker Court had simply applied antitrust doctrine to the
restraints in that case, they would surely have been
preempted. But, the Court upheld the state scheme in
question there, precisely because it found that there was no
conspiracy or concerted action involving the state, and that
the Sherman Act was not intended to apply to the states.'

At the time Parker was decided, of course, vertical resale
price maintenance (the kind of restriction mandated by some
state fair trade acts) was a per se violation of Section 1 of the
Sherman Act.10 State schemes that required vertical price
agreements between manufacturers, distributors, or retailers
would have required what the courts then regarded as
potentially unregulated vertical conspiracies and would have
been subject to preemption. But, also at that time, the
Miller-Tydings Act of 1937 permitted states to authorize
resale price maintenance to protect small retail
establishments."1

Miller-Tydings remained the law until the mid-1970s.
After its repeal, courts were free to apply Dr. Miles and its
per se ban on resale price maintenance to state statutes.
They were far less deferential. In a series of decisions
beginning with California Retail Liquor Dealers Ass'n v.

Lochner v. New York, 198 U.S. 45 (1905).
8 Parker v. Brown, 317 U.S. 341 (1943).
9 Id. at 352, 368.
1o Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 404-

09 (1911).
11 Pub. L. No. 75-314, 50 Stat. 693 (repealed 1975).

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Midcal Aluminum, Inc.,12 the courts began to presume the
necessary conspiracy either from evidence of vertical price
restraints mandated by state regulations or by speculating
as to the likely horizontal effects of such regulations. Midcal
and its progeny had little difficulty finding the necessary per
se violation before moving on to the issue of whether the
restraint was otherwise immune. These cases developed a
two-part test to determine whether a state statute that
otherwise creates a per se restraint of trade should still be
immune from preemption. The focus shifted away from
whether or not there was a violation of Section 1 created by a
state scheme to whether the state either actively supervised
the restraint or left too much authority in the hands of
private actors.

The requirement of proving concerted action to establish
a violation remained, however, and was reaffirmed by the
Court in Fisher v. City of Berkeley, which held that it must
be proven to successfully challenge a state fair trade act or
regulation.13  Fisher articulated a distinction between
"unilateral" and "hybrid" restraints created by state laws,
holding that "unilateral" restraints do not involve a contract,
combination, or conspiracy and should be upheld, while those
that are "hybrid" should be invalidated. As will be further
explained herein, after Fisher, courts were left with two lines
of case law that were in tension with one another. However,
they remained free to presume "concerted action" from
evidence of vertical price restraints.

In 2007, the Court decided Leegin Creative Leather
Products v. PSKS, Inc., 4 which overruled Dr. Miles and
made vertical price restraints subject to the rule of reason.
In this article, I assert that the Leegin decision, along with
the Court's recent decisions regarding the standards for
pleading and proof of horizontal conduct, may profoundly
alter the landscape for litigants challenging state fair trade
acts. If courts are consistent, and apply Leegin to state fair

12 445 U.S. 97 (1980).

13 475 U.S. 260 (1986).
14 551 U.S. 877 (2007).



COLUMBIA BUSINESS LA W REVIEW

trade acts, unlawful concerted action can no longer be
presumed from mere vertical restraints and such restraints,
without some evidence of horizontal conduct between
competitors, should rarely be subject to facial challenges,
regardless of whether they meet the Court's tests for
immunity. It should no longer matter whether statutes that
create such vertical restraints have anticompetitive effects or
are adequately supervised. Rather, the main evil courts
should seek to prevent is unsupervised concerted action
between competitors. Given that the Supreme Court has
been relentlessly raising the standards of pleading and proof
necessary to show conspiracy among private parties, even in
highly concentrated industries, a serious issue is presented
regarding whether the same rigorous standards should be
applied in cases involving challenges to state laws, lest the
courts be accused of inconsistency or selective activism. If
those standards are applied, horizontal conduct will be far
more difficult to prove and more state regulations will be
upheld.

Further, this article postulates that applying Leegin in
this context, and limiting facial challenges to horizontal
conduct, may obviate the need for courts to consider whether
restraints are "unilateral" or "hybrid." It also suggests that,
consistent with existing precedent, courts can choose from a
range of alternatives regarding how to clarify the state
action doctrine post-Leegin and outlines a couple
possibilities. What alternatives the courts pursue will
depend on the choice they make between vigorous protection
of state sovereignty, on the one hand, and aggressive
protection of competition, on the other. Given the recent
economic downturn, states might well be inclined to pass
more legislation extending greater protection to local retail
businesses and courts may be under increasing pressure to
uphold such legislation, particularly if the legislation can be
said to create only vertical restraints, even if doing so
provides less protection in the short-term for competition. If
the courts choose to continue with more aggressive
protection of interbrand competition against state statutes,
they may raise some uncomfortable questions and

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No. 3:853] CONCERTED ACTION AND PREEMPTION AFTER LEEGIN 859

inconsistencies with existing pleading and proof
requirements that need to be addressed.

In Part II of this article, I examine the Court's
development of the state action doctrine from Parker to the
present, with a focus on the requirement that litigants
challenging state statutes or regulations prove some form of
conspiracy or concerted action involving the state and
private parties. This part will show that, due to strong
considerations of state sovereignty, a showing of concerted
action was a requirement for preemption of state statutes at
the outset. Over time, however, the Court, relying on Dr.
Miles, which arguably made any vertical price restraint
imposed by the state per se illegal, deemphasized the
concerted action inquiry. The Court focused instead on
creating and applying a test to determine which statutes or
regulations could be immunized despite creating per se
restraints. The concerted action requirement never went
away, however, and as further explained in Part II, while
Fisher and its progeny reaffirmed the need to prove
concerted action to challenge a state restraint, they created a
distinction between "unilateral" and "hybrid" restraints that
has proven to be quite vexing in practice, often leading to
inconsistent and confusing analyses and outcomes.

Part III provides two recent examples of the state action
doctrine in practice in the lower courts. It shows that these
courts, attempting to follow existing precedent, sometimes
reach inconsistent results, and tend to give inadequate
consideration to the need for proof of conspiracy or concerted
action by litigants challenging statutes. Notably, both of the
cases examined were decided after Leegin and could no
longer rely on any presumption of concerted action arising
from state statutes or regulations creating vertical price
restraints, yet neither seems to have applied Leegin to its
fullest extent, and both arguably give excessive scrutiny to
statutes or regulations that, at most, create vertical price
restraints.

Part IV details the potential impacts on the state action
doctrine from the Leegin decision and the increasingly strict
pleading and proof requirements in horizontal conspiracy



COLUMBIA BUSINESS LA W REVIEW

cases. This part argues that Leegin should make challenges
to price restraints in state fair trade acts much more difficult
because facial challenges require a showing of per se
illegality, vertical restraints are no longer per se illegal, and
proof of horizontal conduct is often sorely lacking in cases
challenging fair trade acts. This part also suggests that,
assuming "as applied" challenges to state statutes creating
vertical price restraints are still possible, litigants must now
prove anticompetitive effects from such restraints and states
(or litigants attempting to argue that state restraints should
be upheld) should be able to introduce procompetitive
justifications for those restraints. Furthermore, this part
argues that applying Leegin in such cases, thereby removing
vertical restraints from the per se category, may obviate the
need for courts to engage in the often vexing and
inconsistent analysis of whether a given restraint is
"unilateral" or "hybrid."

Finally, Part V suggests that an upshot of more rigorous
application of the concerted action requirement following
Leegin could be a needed clarification of the state action
doctrine and the courts' approach to the preemption issue. I
discuss two possible alternatives for applying Leegin in this
context. Both approaches recognize that less scrutiny of
state statutes and regulations is probably warranted in light
of Leegin's holding, and that the main concern for courts
going forward should be to prevent unsupervised concerted
action between competitors. The first alternative reads
existing precedent literally and gives the most deference to
state sovereignty. It would uphold any restraints created by
state law unless there was actual proof of unregulated
concerted action between competitors. The second seems
more in line with current understandings of the concerted
action requirement, which seem to analyze the likely
behavior of competitors in response to a restraint rather
than looking for actual evidence of horizontal conspiracy or
parallel conduct. Expressly adopting and maintaining such
an approach may well give more vigorous protection to
competition, but as Part V explains, it raises some very
uncomfortable questions in light of current precedent on

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proof of conspiracy and conscious parallelism in the context
of private litigation that the courts will need to confront.

II. THE DEFINITION OF "CONCERTED ACTION"
IN THE DEVELOPMENT OF THE STATE ACTION

IMMUNITY DOCTRINE

A. The Origins of State Action Immunity

The doctrine of state action immunity originated in the
Supreme Court's decision in Parker. At issue was
California's Agricultural Prorate Act, which directly involved
competitors in price setting and marketing decisions by
calling for the establishment of marketing plans for
agricultural products so as to restrict competition and
maintain certain prices. At least ten competing producers
within a defined "production zone" were to petition for these
plans.1" Once that petition was given to the Agricultural
Prorate Advisory Commission, the Director of Agriculture
was then required to select a program committee from
among nominees chosen by qualified competing producers
within the production zone.16 Any proposed programs had to
be approved by the Commission and consented to by 65% of
the producers in the zone owning at least 51% of the acreage
devoted to production of a regulated crop. 7 Nevertheless, as
will be explained, because the state "created the machinery
for establishing the pro-rate program," the Court deemed its
actions immune from antitrust scrutiny.18

In upholding the statute, the Court observed that "the
Sherman Act makes no mention of the state as such, and
gives no hint that it was intended to restrain state action or
official action directed by a state,"19 and said it found
"nothing in the language of the Sherman Act or in its history

1 Parker v. Brown, 317 U.S. 341, 346 (1943).
16 Id.

17 Id. at 347.
18 Id. at 352.
19 Id. at 351.



COLUMBIA BUSINESS LA W REVIEW

which suggests that its purpose was to restrain a state or its
officers or agents from activities directed by its legislature."20

The Court later emphasized that point saying, "[tihe state in
adopting and enforcing the prorate program made no
contract or agreement and entered into no conspiracy in
restraint of trade or to establish monopoly but, as sovereign,
imposed the restraint as an act of government which the
Sherman Act did not undertake to prohibit."21 The Court,
thus, based its holding on state sovereignty and on the
absence of a "conspiracy," not on any analysis of whether the
restraint did or did not run afoul of then-prevailing antitrust
doctrine.22 And, out of apparent concern for federalism, it
adopted a highly deferential approach to California's
statutory scheme and chose not to substitute its judgment
for that of the California state legislature, even though the
statutory scheme in question created what could only be
described as a state-facilitated cartel.

The only limits on the state's power in this area that the
Parker Court alluded to were to suggest that "a state does
not give immunity to those who violate[d] the Sherman Act
by authorizing them to violate it, or by declaring that their
action is lawful and we have no question of the state or its
municipality becoming a participant in a private agreement
or combination by others for restraint of trade."23 While the
first point seems difficult to dispute, the second seems
difficult to reconcile with the facts in Parker. After all,
members of a program committee chosen by competing
producers developed the marketing plans, and they had to be
approved by a majority of competing producers as well as the
Commission. Thus, the state plainly "participated" in the
marketing plans developed by the committee and the
producers.

20 Id. at 350-51.
21 Id. at 352 (citations omitted).
22 As a later Court noted, "[t]he Parker decision was premised on the

assumption that Congress, in enacting the Sherman Act, did not intend to
compromise the States' ability to regulate their domestic commerce." S.
Motor Carriers Rate Conf., Inc. v. United States, 471 U.S. 48, 56 (1985).

23 Parker, 317 U.S. at 351-52 (citations omitted).

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In any event, at the time Parker was decided, states were
expressly authorized to permit resale price maintenance
under the Miller-Tydings Act of 1937.24 The purpose of that
statute was to allow states to protect small establishments
that would otherwise have been driven from the marketplace
by large volume discounters.25 Miller-Tydings was the law
until 1975, when the Consumer Goods Pricing Act of 1975
repealed it. 26 While it is possible that the Supreme Court in
Parker was not considering the implications of the Prorate
Act on competition for raisins between different producers,
the Prorate Act itself called for participation by competing
growers in formulating marketing plans,27 so Miller-Tydings
would not have provided any immunity.

During the ensuing thirty-odd years before the repeal of
Miller-Tydings, the Supreme Court had relatively few
decisions dealing with the state action doctrine in the
context of fair trade acts imposing vertical restraints. One
decision was, however, of great importance. In Schwegmann
Bros. v. Seagram Distillers Corp., the Court, purportedly
relying on Parker, struck down a Louisiana statute that not
only authorized a distributor and a retailer to make a
contract fixing a resale price (which would likely have been
permissible under Miller-Tydings), but also authorized the
parties to these price maintenance agreements to enforce the
relevant statute against non-signing competitors through
unfair competition actions." The Court held that, although
Miller-Tydings made vertical price fixing permissible,
"horizontal" price fixing still violated the Sherman Act, and
"when a state compels retailers to follow a parallel price

24 Pub. L. No. 75-314, 50 Stat. 693 (1937) (repealed 1975). While it

was in effect, Miller-Tydings amended Section 1 of the Sherman Act by
adding, inter alia, the following: "[niothing herein contained shall render
illegal, contracts or agreements prescribing minimum prices for the resale
of [specified commodities] when contracts or agreements of that are lawful
as applied to intrastate transactions . .. ." Id.

25 See H.R. Rep. No. 382, at 1-3 (1937); S. Rep. No. 2053, at 1-2 (1936).
26 Pub. L. No. 94-145, 89 Stat. 801 (1975).
27 Parker, 317 U.S. at 346-47.
2 Schwegmann, 341 U.S. at 385-87.



policy, it demands private conduct which the Sherman Act
forbids."29

What seems to have troubled the Schwegmann Court
most was that some power to enforce minimum price levels
was left to the discretion of distributors, and not to the state.
Distributors who entered into resale price maintenance
agreements were also empowered to sue nonparties to such
agreements for unfair competition if they offered goods for
sale in that state at lower than the agreed upon price."
This, the Court held, exceeded the powers given under
Miller-Tydings, and did not allow for state action immunity,
because retailers were forced to abandon price competition
and, by these lawsuits, were "driven into a compact in
violation of the spirit of the proviso which forbids 'horizontal'
price-fixing."'" The Court's later condemnation of "hybrid"
restraints in Fisher is directly rooted in the concerns
expressed by Justice Douglas in Schwegmann."

B. The Midcal Decision and the Presumption of
"Concerted Action"

Scrutiny of state fair trade acts by the courts increased
after the repeal of Miller-Tydings. A remarkable aspect of
the line of cases beginning with Midcal in 1980 is that the
focus was primarily on whether or not the fair trade act in
question was entitled to state action immunity. Seemingly
lost in the analysis in many of these cases were the questions
of whether a state's regulation of its domestic commerce was
truly subject to the Sherman Act or whether there was
evidence of an actual conspiracy, even though these appear
to have been central questions in Parker. Rather, based on

29 Id. at 389 (citing Parker, 317 U.S. at 350). Of course, this concept is

found nowhere in Parker, and has caused some tension with later
precedent. As will be explained below, state compulsion is one of the
required elements a party or state must show to be entitled to immunity
under Midcal and Fisher.

30 Id. at 387-88.
31 Id.

32 Fisher v. City of Berkeley, 475 U.S. 260, 268 (1986) (discussing

Schwegmann, 341 U.S. at 389).

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Dr. Miles' condemnation of resale price maintenance, the
cases had no trouble finding the requisite concerted action
and violation before considering the issue of immunity.

The California statute at issue in Midcal required each
wine producer to post a schedule of selling prices of wine to
retailers or consumers, to make and file a fair trade contract,
and to file a schedule of resale prices (if the producer owned
or controlled a brand of wine resold).3 A single fair trade
contract or schedule for each brand of wine set the terms for
all wholesale transactions within a given trading area, and
state regulations provided that wine prices posted by a single
wholesaler within a trading area were to bind all wholesalers
in that area. 4

The Court condemned this scheme as follows:
"California's system for wine pricing plainly constitutes
resale price maintenance in violation of the Sherman Act,"
because the wine producer "holds the power to prevent price
competition by dictating the prices charged by wholesalers.""
The reason for this conclusion was a straightforward reading
of Dr. Miles: "such vertical control destroys horizontal
competition as effectively as if wholesalers 'formed a
combination and endeavored to establish the same
restrictions ... by agreement with each other."'36

Having found a per se violation, the Court next
considered the issue of immunity. It framed the issue as one
of whether California's "involvement in the price-setting
program is sufficient to establish antitrust immunity" under
Parker.7 Relying on Goldfarb v. Virginia State Bar,3" which

Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S.
97, 99-100 & n.1 (1980).

34 Id.

35 Id. at 103.
36 Id. (quoting Dr. Miles Med. Co. v. John D. Park & Sons Co., 220

U.S. 373, 408 (1911)). Notably, the Midcal court did not find that the
California statute in question created horizontal price fixing, even though
the wholesalers were required to adhere to a single fair trade contract in a
particular geographical area.

3' Id. at 103.
38 421 U.S. 773, 791 (1975).



struck down attorney fee schedules published by a county
bar association and enforced by a state bar association but
not mandated by the state supreme court, the Court held
that anticompetitive conduct must not merely be "prompted"
by state action, but must be "compelled by direction of the
state acting as a sovereign" for there to be immunity. 9 In a
sense, this takes Schwegmann's statement regarding
"demanding private conduct which the Sherman Act forbids"
and stands it on its head.4 ° The only way to harmonize these
two conclusions is to read Schwegmann as saying that the
"private conduct which the Sherman Act forbids" is
insufficiently supervised action by private actors."

The Court held that for there to be antitrust immunity
under Parker, a challenged restraint must be "clearly
articulated and affirmatively expressed as state policy," and
must be "actively supervised by the state itself."42 Because
California did not monitor market conditions or engage in
any pointed reexamination of the program, its statute failed
the second part of this two-part test and was ruled to be
preempted.43

Similarly, in 324 Liquor Corp. v. Duffy, the Court found
that New York's alcoholic beverage control law, which
mandated sales of liquor at 112% of the "posted bottle price"
violated Section 1 of the Sherman Act.4 Again, the Court
does not appear to have closely examined the evidence of
whether there was truly a contract, combination, or
conspiracy in restraint of trade, and it did not concern itself
with whether the state participated in a conspiracy.
Moreover, the Court suggested that, while the facts of
Midcal may have involved horizontal as well as vertical price
fixing (although Midcal made no reference to horizontal
price fixing), the Midcal Court rested its decision on the

" Midcal, 445 U.S. at 104 (quoting Goldfarb, 421 U.S. at 791).
40 Schwegmann Bros. v. Seagram Distillers Corp., 341 U.S. 384, 389

(1951).
41 Id.

42 Midcal, 445 U.S. at 105.
43 Id. at 105-06.
44 479 U.S. 335, 341-45 (1987).

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"vertical control" by wine producers over wholesalers.45

Likewise, the 324 Liquor Court deemed New York's
mandatory markup system unlawful because it was a
vertical restraint imposed by the state that was not "actively
supervised."46 The 324 Liquor Court also suggested that
meeting the two-part Midcal test was the exclusive way for a
state to establish Parker immunity.47

At least some lower courts have read 324 Liquor to mean
that an actual "contract, combination or conspiracy" need not
be shown for a state statute to be preempted by the Sherman
Act.4" 324 Liquor itself made no such holding, however, and
those readings cannot be squared with the Court's decision
in Parker or, as will be discussed next, the decision in Fisher
v. City of Berkeley.49

C. Fisher v. City of Berkeley and the Reaffirmation of
the Need to Prove Concerted Action

Two decisions in the mid-1980's, Hoover v. Ronwin5" and
Fisher, breathed new life into Parker's emphasis on state

Id. at 342 (quoting Midcal, 445 U.S. at 103).

46 Id. at 343-45. Subsequent decisions of the Court have added even

more specificity to the "active supervision" inquiry and, arguably, made it
more intrusive. In Patrick v. Burget, 486 U.S. 94, 100-101 (1988), the
Court held that the active supervision analysis "requires that state
officials have and exercise power to review particular anticompetitive acts
of private parties and disapprove those that fail to accord with state
policy" so that there is a "realistic assurance that a private party's
anticompetitive conduct promotes state policy, rather than merely the
party's individual interests." Subsequently, in F.T.C. v. Ticor Title Ins.
Co., 504 U.S. 621, 638 (1992), the Court went even further, holding that
the party claiming immunity must show that state officials "have
undertaken the necessary steps to determine the specifics of price-fixing or
rate-setting schemes." The "mere potential for state supervision" is not
enough. Id.

4 479 U.S. at 343-44.
48 See, e.g., Costco Wholesale Corp. v. Maleng, 522 F.3d 874, 894 n.16

(9th Cir. 2008); Freedom Holdings, Inc. v. Spitzer, 357 F.3d 205, 223-24
n.17 (2d Cir. 2004).

49 475 U.S. 260, passim (1986).
50 466 U.S. 558 (1984).



sovereignty. Both cases upheld restraints imposed by state
or local entities on the ground that such "unilateral" actions
by the sovereign body lacked the element of concerted action
necessary before they could be characterized as per se
violations of Section 1. In Hoover, Justice Powell, writing for
a closely divided Court, rejected an unsuccessful applicant's
antitrust suit against the attorney members of the Arizona
Supreme Court's Committee on Examinations and
Admissions because the conduct being challenged (compiling
and grading the state's bar exam) was deemed to be that of
the Arizona Supreme Court acting as sovereign.5 Because of
this, the Court held, it did not matter whether the state
supreme court was actually aware of or approved a formula
for grading the bar exam developed by the committee
members that the plaintiff claimed was meant to restrict
competition by limiting the number of lawyers in the state.52

In other words, Midcal did not apply.
The decision in Fisher, which also placed great weight on

state sovereignty, attempted to harmonize that concern with
the Midcal decision. Fisher is most instructive for present
purposes because it involved a government-imposed price
restraint, the City of Berkeley's rent control ordinance, and
because it developed an alternative standard that continues
to guide courts in analyzing fair trade provisions.

The Berkeley ordinance at issue in Fisher established a
base rent ceiling, reflecting the rents in effect on a given
date, and only permitted landlords to raise their rents from
the levels in effect on that date pursuant either to an annual

51 Id. at 572-73.
512 Id. at 574. Justice Stevens, joined by Justices White and Blackmun,

sharply dissented, noting that the only criteria for admission was
competence, that there was no showing that the Arizona Supreme Court
played any part in establishing the grading standards for the bar
examination, and that, accordingly, "no decision of the sovereign, the
Arizona Supreme Court, is attacked; only a conspiracy of petitioners which
was neither compelled nor directed by the sovereign is at stake." He
concluded: "[s]ince there is no claim that the court directed petitioners to
artificially reduce the number of lawyers in Arizona, petitioners cannot
utilize the sovereign's antitrust immunity." Id. at 591-592 (Stevens, J.,
dissenting).

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general adjustment of rent ceilings by a Rent Stabilization
Board of appointed commissioners, or after the landlord
successfully petitioned the Board for an individual
adjustment. Landlords who failed to comply with the
ordinance by registering with the Board faced fines, tenant
lawsuits, withholding of rent, or even criminal penalties. 3

In upholding the ordinance, the Fisher Court recognized
that "the function of government may often be to tamper
with free markets, correcting their failures and aiding their
victims . . ."I It found that "[t]he distinction between
unilateral and concerted action is critical here""5 and it went
on to hold that the restraint created by the ordinance was
unilateral, because control over the maximum rent levels of
any affected residential unit was removed from the owners of
those properties and given entirely to the Rent Stabilization
Board. "A restraint imposed unilaterally by government
does not become concerted-action within the meaning of
[Section 1] simply because it has a coercive effect upon
parties who must obey the law."56 Thus, the Court found "no
meeting of the minds" between owners of residential
property in Berkeley, who had "no more freedom to resist the
city's rent controls than they do to violate any other local
ordinance enforced by substantial sanctions. " "

The Fisher Court attempted to distinguish the restraints
in that case from those condemned in Schwegmann and
Midcal, holding that the latter should be characterized as
"hybrid" restraints, because "non-market mechanisms
merely enforce private marketing decisions."58  The Court
explained that where private actors are granted a degree of
private regulatory power, the scheme can be challenged as a
hybrid restraint under Section 1.19  The restraints in

53 Id. at 262-63.
54 Id. at 264.

5' Id. at 266.

6 Id. at 267.
57 Id.
58 Id. at 267-68 (citing Rice v. Norman Williams Co., 458 U.S. 654,

665 (1982) (Stevens, J., concurring in judgment)).
59 Id. at 268.



COLUMBIA BUSINESS LA W REVIEW

Schwegmann and Midcal mandated resale price
maintenance, at the time a per se offense, and placed control
over the prices to be charged in the hands of private parties
rather than allowing the state direct control or the exclusive
power to enforce price levels.6" Thus, they were condemned.
The rent control ordinance in Fisher, by contrast, ostensibly
allowed no private control over pricing, so it was upheld.

The Court's decision in Fisher can, in most ways, be seen
as a reaffirmation of Parker's notion of state sovereignty6

and of the need for those challenging restraints to prove
concerted action involving the state.2  But Fisher also
further complicated what had already been a complex
analysis. As Justice Brennan, the sole dissenter in the case,
noted, the Berkeley ordinance mandated price fixing with
the force of law and utterly eliminated price competition
more effectively than any private agreement could.63 Thus,
he argued, it plainly "demand[ed] private conduct which the
Sherman Act forbids,"64 which means it should have been
preempted if the Court followed that holding from
Schwegmann.6 5 Moreover, Justice Brennan noted that the
Court's prior decisions did not draw any distinction between
"unilateral" and "hybrid" government restraints, and the

60 Id. at 268-69.
61 Indeed, Justice Powell, in his concurrence, asserted that so long as

the State of California expressly delegated to Berkeley regulatory power
that would foreseeably lead to the anticompetitive effects challenged, the
ordinance could be exempt under the state action doctrine. Id. at 270-71
(Powell, J., concurring). Consistent with his opinion in Hoover, he,
apparently, would have ignored Midcal's "active supervision" requirement
altogether.

62 While there was a "meeting of the minds" between the City of
Berkeley's government and those subject to the ordinance, there was no
such concerted action between competing property owners themselves, and
the Fisher Court required such concerted action. Justice Brennan, in his
dissent, explicitly objected to this requirement, stating, "I do not read our
decisions necessarily to require proof of such concerted action as a
prerequisite to a finding of preemption." Id. at 275.

63 Id. at 276-78.

Id. at 276.
65 Id. at 277 n.2.

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question of state supervision was relevant only to whether
the challenged statutes were immune from antitrust scrutiny
under Parker.66 And, most intriguing for present purposes,
Justice Brennan observed that had the ordinance allowed
the individual landlords to set their own rental prices, he
might understand the Court's conclusion that the resulting
price restraints did not result from collective action. But,
because the ordinance did not permit this but instead
compelled adherence to rent schedules, it did amount to
concerted action and compelled price fixing in violation of
Section 1.67 This view seems more in line with Schwegmann,
but it would plainly be in tension with Midcal and its
progeny. Furthermore, it points to fundamental tensions at
the heart of the "unilateral" versus "hybrid" analysis when
applied to price restraints. As demonstrated below, these
tensions have never been adequately resolved.

D. The Doctrinal Tension in Current Law on State
Action Immunity

At least since the Court's decision in Fisher added a
distinction between "unilateral" and "hybrid" restraints, the
law on state action immunity has been, as one court
explained, "doctrinally confusing" and "extraordinarily
elusive."" On the one hand, there are the Midcal and 324
Liquor precedents and their progeny. They seem to suggest
that proof of conspiracy/concerted action may not be required
for a state statute to be successfully challenged. In addition,
they explicitly require a party seeking to rely on state action
immunity or a state seeking to uphold a fair trade provision
to meet the two part Midcal test for the provision to be
entitled to antitrust immunity under Parker. On the other
hand, we have Fisher, which explicitly requires a finding of
concerted action for a statute to be challenged. Fisher also
seems to hold that if a statute can be characterized as

66 Id.

67 Id. at 278.

68 Costco Wholesale Corp. v. Maleng, 522 F.3d 874, 888 (9th Cir.

2008).



COL UMBIA BUSINESS LA W RE VIE W

creating a "unilateral" as opposed to a "hybrid" restraint,
there is no "concerted action" and the statute will be immune
from scrutiny, even if it compels price fixing. Further
complicating matters is Parker v. Brown itself, which upheld
a restraint that might not pass muster under current
understanding of either standard.69

Lower courts have struggled with the question of whether
a restraint is "unilateral" and therefore likely to be upheld,
or a product of concerted action, "hybrid," and therefore
subject to the Midcal two part test. This has led to some
inconsistent results and a serious conflict between the
circuits, even when analyzing the exact same agreement.
For example, both the Second ° and Third Circuits71 found
that the Master Settlement Agreement (MSA) entered into
between the nation's largest tobacco companies and the
Attorneys General of forty-six states created an illegal
cigarette price fixing cartel. The Sixth and Ninth Circuits
held otherwise, however, ruling that the MSA was a
unilateral action by the states and entitled to immunity. 2

In Costco, the Ninth Circuit recognized the ambiguities in
current law, and attempted to harmonize it as follows:

[O]nce we determined that a restraint is unilaterally
imposed by the state as sovereign, Parker immunity
applies without further inquiry. If the restraint is
not unilaterally imposed, but rather involves "a

69 The prorate marketing plans contemplated in the California
Agricultural Prorate Act would only be established upon the petition of ten
competing producers, and the program would only be instituted if
consented to by a super majority of those competing producers in a
particular geographical zone. Parker v. Brown, 317 U.S. 341, 346-47
(1943). Thus, nonmarket mechanisms were enforcing private marketing
decisions, and the Prorate Act created "hybrid" restraints. Given that the
producers were given the final say on the marketing plans, the
"supervision" of those plans may not have been seen as adequate by later
courts.

70 See Freedom Holdings, Inc. v. Spitzer, 357 F.3d 205 (2d Cir. 2004).
7' A.D. Bedell Wholesale Co. v. Philip Morris, Inc., 263 F.3d 239 (3d

Cir. 2001).
72 See Tritent Int'l Corp. v. Kentucky, 467 F.3d 547 (6th Cir. 2006);

Sanders v. Brown, 504 F.3d 903, 918-19 (9th Cir. 2007).

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state's decision to let producers dictate market
conditions to others," it is a hybrid restraint that is
"illegal per se under the Sherman Act." Parker
immunity applies to the hybrid restraint only if it
satisfies the two part Midcal inquiry.73

While this statement appears to be a reasonably clear
articulation of these competing doctrines, the Costco court
itself recognized a substantial overlap between the active
supervision question and the hybrid inquiry. Namely, if a
restraint is deemed "hybrid," private actions are not likely to
be subject to sufficiently active supervision by the state.
More important, as will be explained below, decisions like
Costco give insufficient consideration to the question of
concerted action. In light of the Court's decision in Leegin,
this is now a far more vexing issue than before.

III. THE DOCTRINE IN PRACTICE: TWO RECENT
DECISIONS APPLYING THE DOCTRINE TO STATE

FAIR TRADE ACTS

Two recent decisions by lower courts illustrate some of
the internal inconsistencies and ongoing tensions in the state
action doctrine. They also highlight the continuing practice
of the courts to assume concerted action among competitors
and inadequately consider the effects of the new rule
allowing vertical restraints to be judged under the rule of
reason. In the first, the Eastern District of Wisconsin struck
down a minimum markup provision, the Motor Vehicle Fuel
Provisions of the Wisconsin Unfair Sales Act, as being a per
se unlawful "hybrid" restraint that was not adequately
supervised.74 In the second, the Ninth Circuit upheld, in
part, restraints on the sale and distribution of beer and wine
in Washington state, including a minimum markup
provision, but struck down a "post-and-hold" requirement in
that scheme.7"

" Costco, 522 F.3d at 887 (citation omitted).
7' Flying J, Inc. v. Van Hollen, 597 F. Supp. 2d 848 (E.D. Wis. 2009).
" Costco, 522 F.3d 874.



COLUMBIA BUSINESS LA W REVIEW

A. The Wisconsin Unfair Sales Act Invalidated

Recently, Judge Rudolph Randa of the Eastern District of
Wisconsin struck down the motor vehicle fuel provisions of
the Wisconsin Unfair Sales Act76 on the ground that they
were preempted by the Supremacy Clause of the United
States Constitution77 and violated Section 1.78 Judge Randa's
opinion, which reaches the same result as a different judge of
the same court in Lotus Business Group LLC v. Flying J,
Inc.," is deceptively straightforward. The court found these
provisions of the act amounted to both a per se horizontal
restraint and violated the rule of reason. In addition, the
court found that they were not saved from preemption under
the Parker doctrine. In particular, the provisions were held
to have failed the two part test set forth in Midcal, ° because
they were not "actively supervised" by the state."1

The Motor Vehicle Provisions of the Wisconsin Unfair
Sales Act prohibited, among other things, retailers of motor
fuel from selling fuel below their cost.82  The statute
explained retailers' cost as follows:

In the case of the retail sale of motor vehicle fuel by a
person other than a refiner or a wholesaler of motor
vehicle fuel at a retail station, the invoice cost of the
motor vehicle fuel to the retailer within ten days
prior to the date of sale, or the replacement cost of
the motor vehicle fuel, whichever is lower, less all
trade discounts except customary discounts for cash,
plus any excise, sales or use taxes imposed on the
motor vehicle fuel or on its sale and any cost incurred
for transportation and any other charges not
otherwise included in the invoice cost or the
replacement cost of the motor vehicle fuel, plus a

76 WIs. STAT. § 100.30 (2009).
71 U.S. CONST. art. VI.
78 Flying J, 597 F. Supp. 2d at 855-60.
7' 532 F. Supp. 2d 1011 (E.D. Wis. 2007).
"0 Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S.

97, 105 (1980).
" Flying J, 597 F. Supp. 2d at 856.
82 WIS. STAT. § 100.30(3).

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markup of 6% of that amount to cover a proportionate
part of the cost of doing business; or the average
posted terminal price at the terminal located closest to
the retailer plus a markup of 9.18% of the average
posted terminal price to cover a proportionate part of
the cost of doing business; whichever is greater.8

The statute defined "average posted terminal price" as:

The average posted rack price, as published by a
petroleum price reporting service, at which motor
vehicle fuel is offered for sale at the close of business
on the determination date by all refiners and
wholesalers of motor vehicle fuel at a terminal plus
any excise, sales or use taxes imposed on the motor
vehicle fuel or on its sale, any cost incurred for
transportation and any other charges that are not
otherwise included in the average posted rack price.
In this paragraph, "average" means the arithmetic
mean.

8 4

Thus, as the Lotus Business Group court found, the 9.18%
markup, which would apply in most circumstances where the
average terminal price exceeded the retailers' actual costs,
was not based on the actual cost to the retailer. Instead, it
was based on the "average price" available to the retailer and
its competitors. 5 As a consequence, the average price might
be significantly higher than the actual cost to the particular
retailer. 6

The Lotus action began as an unfair competition claim
under the statute brought by Lotus Business Group, one of
Flying J's competitors. Flying J removed the case to federal

Id. § 100. 3 0(2 )(am)(lm.c.) (emphasis added).
Id. § 100.30(2)(a).

s Lotus Bus. Group LLC v. Flying J, Inc., 532 F. Supp. 2d 1011, 1022
(E.D. Wis. 2007).

" Id. The purpose of this statute was to restrain the "practice of
selling certain items of merchandise below cost" and to "protect merchants
who fail because of the competition of those who used such methods." WIS.
STAT. § 100.30(1). The specific purported purpose of the 9.18% markup
above average terminal cost was to "cover a proportionate part of the cost
of doing business." Id. § 100.30(2)(1m.c.).



court and raised preemption as an affirmative defense. It is
unclear whether Flying J was making a facial or an "as
applied" challenge to the statute.

The Lotus court granted Flying J's motion for summary
judgment on its preemption defense. The court held that
these provisions of the Wisconsin Unfair Sales Act fixed
resale prices industry-wide in violation of Section 1 of the
Sherman Act and were not immune from antitrust scrutiny
under Parker v. Brown. In particular, the court determined
that the statute failed to meet the Midcal test. The court
found that the Wisconsin statute met the first Midcal
requirement since the legislative policy underlying the
markup system was "forthrightly stated and clear in its
purpose. ' 7  However, the statute failed the second prong,
because the state did not actively supervise either the "cost
to retailers" or the minimum markup percentage."8 As a
result, the court granted summary judgment in favor of
Flying J. On motion for reconsideration, the court held that
even applying the decision of the Supreme Court in Leegin
would not change the result, both because the statute
"facilitate[s] the creation of horizontal price fixing," and
because the plaintiff submitted insufficient procompetitive
justification for the markups. 9

Even after being informed of the ruling in the Lotus
matter, the State of Wisconsin, nevertheless, continued to
require Flying J and other motor fuel retailers to issue
pricing reports to the State Department of Agriculture under
the statute." Flying J, therefore, brought a second action to
enjoin Wisconsin from enforcing the Unfair Sales Act.
Although not specified in the opinion, Flying J's challenge
appears to have been facial, that is, it asserted that the
statute mandated or authorized conduct that necessarily
violated the Sherman Act, was irreconcilable with the federal
scheme, and therefore was preempted.

87 Lotus Bus. Group, 532 F. Supp. 2d at 1019.
88 Id. at 1021-25.
89 Id. at 1027-29.
90 See Flying J, Inc. v. Van Hollen, 597 F. Supp. 2d 848, 853 (2009).

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The Flying J court agreed. It held that the act
"authorizes and enforces resale price maintenance among
competitors, a 'per se' violation of Section 1 of the Sherman
Act since the early years of national antitrust enforcement."91

It reached this conclusion by finding that "the Act allows
motor fuel retailers to match (but not undercut) their
competitors' prices."92 The court went on to hold that the
"minimum markup percentage creates a range in which
competitors may engage in collusive parallel pricing, which
is exacerbated as the wholesale price of gasoline
fluctuates."93 Thus, the court concluded, the Act "authorizes
and enforces a parallel (or horizontal) pricing policy,"94 even
though no evidence of actual parallel pricing was presented.
It likened the policy to that in 324 Liquor Corp., which it
quoted as follows: "mandatory industrywide resale price
fixing is virtually certain to reduce interbrand competition as
well as intrabrand competition, because it prevents
manufacturers and wholesalers from allowing or requiring
retail price competition."95

The State of Wisconsin had argued that the Unfair Sales
Act did not violate the Sherman Act because there was no
concerted action. Relying on Fisher, it characterized the
markup provision as a unilateral act of its legislature. But,
the court held that the Unfair Sales Act price restraints
should be characterized as "hybrid in that nonmarket
mechanisms merely enforce private marketing decisions."96
Concluding, the court stated that because the state
compelled retailers to follow a parallel price policy, it
demanded private conduct forbidden by the Sherman Act.97

"' Id. at 856 (citing 324 Liquor Corp. v. Duffy, 479 U.S. 335, 341
(1987)).

92 Id.

93 Id.

94 Id.

9' Id. at 856-57 (quoting 324 Liquor, 479 U.S. at 342).
96 Id. at 856 (discussing Fisher v. City of Berkeley, 475 U.S. 260, 267-

68 (1986)).
9' Id. at 857 (quoting Fisher, 475 U.S. at 268).



COL UMBIA BUSINESS LA W RE VIEW

The court also rejected the state's argument that the
provisions should be judged under the rule of reason
pursuant to Leegin, stating that the restraint here is "also
horizontal because it effects [sic] competing gasoline retailers
in Wisconsin."98 But, the court went on to hold that the
Unfair Sales Act also violated the rule of reason, basing this
conclusion on a Federal Trade Commission study and a
report from the Wisconsin Policy Research Institute, both of
which concluded that the Unfair Sales Act restricted
competition and harmed consumers in the form of higher gas
prices.99

The court dealt separately with Wisconsin's claim of
antitrust immunity. Like the Lotus court, it held that the
statute met the first part of Midcal test; that the challenged
restraint be clearly articulated and affirmatively expressed
as state policy."' The court then turned to the issue of active
supervision.

The state had argued that the Unfair Sales Act met the
active supervision requirement because it did not delegate
any degree of control over the markup percentage to private
parties. 1' It relied on statements from the Court in 324
Liquor suggesting that a simple minimum markup statute
over wholesale cost may satisfy the "active supervision"
requirement.0 2 However, the court pointed out that, like the
markup in 324 Liquor, this markup was not based on actual
costs. "Instead, it is based on the average posted terminal
price without regard to actual costs.""0 3  As the court
observed, the average posted terminal price may be

98 Id. (citing Lotus Bus. Group LLC v. Flying J, Inc., 532 F. Supp. 2d

1011, 1028 (E.D. Wis. 2007) ("to the extent the provisions of the Wisconsin
statute create vertical price restraints, they also facilitate the creation of
horizontal price fixing")).

" Id. The state apparently did not submit any evidence to rebut these
two studies, and it failed to explain why the Motor Vehicle Provision of the
Unfair Sales Act created a reasonable restraint.

10 Id. at 858 (citing Cal. Retail Liquor Dealers Ass'n v. Midcal
Aluminum, Inc., 445 U.S. 97, 105 (1980)).

101 Id.
102 Id. (citing 324 Liquor Corp. v. Duffy, 479 U.S. 335, 345 n.6 (1987)).
103 Id.

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significantly higher than the actual cost to a particular
retailer.104

Thus, the court required some type of state supervision
with regard to both the markup and the average posted
terminal price. The state's supervision failed in this
instance, the court found, in part because there was no
program or effort to determine whether the average posted
terminal price "bears a close (or any) relationship to the
actual price paid by retailers.""5 It likened Wisconsin's
statute to the arrangement condemned in Mideal, where the
state "simply authorize[d] price setting and enforce[d] the
price established by private parties."'0 6 The court also found
that the Unfair Sales Act's markup percentages were not
adequately supervised. They were changed only once in
their history, and, the court noted, the FTC had said the
percentages appeared to be "completely arbitrary" and did
not reflect a "proportionate part of the cost of doing
business."' '07

Finally, the court rejected the state's arguments that its
supervision was adequate because it "undertakes
enforcement efforts to ensure compliance with the Unfair
Sales Act" and "engages in analysis at the administrative
and legislative level."' Regarding the former, the court
pointed out that the enforcement efforts "do nothing to
ensure the reasonableness of gas prices in Wisconsin," and
that "enforcement matters little when the Act being enforced
creates a horizontal pricing mechanism."0 9  As for the
legislative and administrative debates, the court found,
"[m]ere debate or discussion without the undertaking of any
action, does not satisfy the active supervision

104 Id.

1o' Id. at 859 (quoting Lotus Bus. Group LLC v. Flying J, Inc., 532 F.

Supp. 2d 1011, 1023 (E.D. Wis. 2007)).
106 Id. (quoting Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum,

Inc., 445 U.S. 97, 105 (1980)).
107 Id. at 859 n.2.
108 Id. at 859.
109 Id.



COLUMBIA BUSINESS LA W REVIEW

requirement."'' n Therefore, the court held the motor vehicle
fuel provisions of the Act unconstitutional and permanently
enjoined the state from enforcing them.'

In most respects, the Flying J court's decision seems to be
a faithful application of existing precedent. However, two
things about it stand out. First, the court took a very active
role in scrutinizing the statute. It went so far as to consider
whether it actually achieved its stated goal of preventing
below-cost sales (which it almost surely did) using what was
almost a least-restrictive means test, condemning the
markup because it was based on something other (and
higher) than actual wholesale cost. It required "active
supervision" both of the markup percentage and of the base
"posted terminal price," and condemned the statute for
failing in those respects. This type of scrutiny seems to run
afoul of F.T.C. v. Ticor Title Ins. Co., which stated that "[t]he
question is not how well state regulation works but whether
the anticompetitive scheme is the State's own.""1

Second, and more important for present purposes, the
court seems to have gone out of its way to find a per se
restraint, even though there was, apparently, no evidence of
horizontal agreements and little evidence of parallel pricing.
Such a finding may have been necessary for the court to
sustain a facial challenge, but in reading the opinion, one
cannot escape the feeling that the court was troubled by the
statute and was looking for reasons to invalidate it. To be
sure, there may have been ample evidence of anticompetitive
effects in the FTC study submitted by the plaintiffs, but
mere anticompetitive effect, without more, is not supposed to
be enough. These considerations are discussed in more
detail in the next section. In short, this decision gives too
little attention to the concerted action requirement and the
change in the inquiry that Leegin presents, and, arguably,

110 Id. (quoting Lotus Bus. Group, 532 F. Supp. 2d at 1024 and citing

324 Liquor Corp. v. Duffy, 479 U.S. 335, 345 n.7 (1987) and Patrick v.
Burget, 486 U.S. 94, 101 (1988)).

... Id. at 860.
112 504 U.S. 621, 635 (1992).

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too little deference to a statutory scheme that had been in
place for nearly seventy years. 113

B. Washington State's Restrictions on Sale of Beer and
Wine Upheld In Part

In Costco, the Ninth Circuit considered a challenge to
Washington State's more comprehensive scheme of
regulating beer and wine distribution."4 Costco filed suit
challenging nine specific restraints found in the Revised
Code of Washington and several implementing regulations."1 5

The restraints included a "uniform pricing" rule (banning
price discrimination by requiring every supplier to sell a
particular product at the same price to every distributor and
requiring every distributor to sell those products to every
retailer at the price they post); a price "post-and-hold"
requirement (requiring distributors to file price lists showing
wholesale prices with the Washington Liquor Control Board,
which become publicly available after taking effect, and to
hold those prices for 30 days); a minimum markup provision
(requiring distributors and suppliers to price products at
10% above acquisition cost); a ban on volume discounts; a
ban on sales of beer and wine to retailers on credit; a
requirement that distributors sell beer and wine at the same
delivered price to all retailers; a ban on central warehousing
by retailers, and a ban on selling beer and wine to other
retailers.16

The district court invalidated all of these restraints but
the last one (the ban on retailer to retailer sales).117 The

113 The State of Wisconsin decided not to appeal this decision.

Recently, however, the Seventh Circuit Court of Appeals held that an
association of Wisconsin retail gasoline dealers could intervene in the case
on appeal. Flying J, Inc. v. Van Hollen, No. 09-1883, 2009 WL 2535712
(7th Cir. Aug. 20, 2009).

114 Costco Wholesale Corp. v. Maleng, 522 F.3d 874, 883-85 (9th Cir.
2008).

11 WASH. REV. CODE §§ 66.28.180, 66.28.185, 66.28.070 (2006).
116 Costco, 522 F.3d at 883-85.
117 Costco Wholesale Corp. v. Hoen, No. C04-360P, 2006 WL 1075218,

at *9-11 (W.D. Wash. Apr. 21, 2006).



Ninth Circuit agreed that the ban on retailer to retailer sales
should be upheld, finding that the restraint was unilateral
and, even though the statute had a potential anticompetitive
effect, it was "not the result of private pricing or marketing
decisions, but the logical and intended result of the statute
itself.""'  But, it reversed the district court on the central
warehousing ban, the uniform pricing and anti-price
discrimination requirements, and the minimum markup
requirements, upholding each as "unilateral" restraints. 9

The court deemed the central warehousing ban to be "akin to
a non-price vertical restraint that would be evaluated under
the Rule of Reason."2 ' And, the mere fact that the
regulation may have created an anticompetitive effect
because it rendered Costco unable to "efficiently" buy in
bulk, was, the court found, not the result "of the distributor's
choice or collusion, but of the sovereign's command."'12 That
restraint was, therefore, deemed "unilateral."22

By contrast, the Costco court held that the uniform
pricing provisions, the delivered pricing provisions, the ban
on credit sales, the ban on discounts, and the minimum
markup provisions were all per se violations. 22 It made this
finding in the absence of any evidence of actual collusion
among competitors, holding, for example, that the minimum
markup provision was a per se violation "because if
horizontal competitors were to agree amongst themselves to
mark up their products at least at a level above acquisition
price, it would constitute classic price fixing. '  In other
words, the court found concerted action based on what could
happen if these terms were the product of private agreement,
not on whether there was such an agreement. Moreover, the
court did not consider whether the minimum markup

118 Costco, 522 F.3d at 890 (citing PHILLIP E. AREEDA & HERBERT

HOVENKAMP, ANTITRUST LAW, 221e4 (3d ed. 2009)).
119 Id. at 901.
120 Id. at 891 n.ll.
121 Id. at 891-92.
122 Id. at 901.
123 Id. at 897 n.19.
124 Id. (emphasis added).

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provisions, or the bans on credit sales or discounts, should be
treated as vertical restraints not subject to per se treatment,
even though Leegin would seem to support that result.

Nevertheless, the Costco court held that these provisions
were "unilateral" restraints imposed by the state, severable
from the post-and-hold provisions (which, as will be
discussed later, it struck down), because there was no
"meeting of the minds" to determine, for example, how
substantial the discounts would be, whether territorial
variations in price would be allowed, or whether credit would
be extended, etc. 125 While the Costco court was almost surely
correct that there was, indeed, no meeting of the minds
between competitors, this conclusion seems difficult to
reconcile with the court's earlier conclusion, that these
restraints were per se unlawful, and it renders this aspect of
its opinion incoherent.

Furthermore, unlike the Flying J court, the Costco court
found that the minimum markup provisions and the uniform
price requirement were unilateral restraints, even though
they granted some discretion on the part of wholesalers (to
price above the 10% markup; to set their own "uniform"
price), because these were not grants of discretion that
allowed private parties to manipulate or control the price
decisions of other firms or otherwise facilitate horizontal
price collusion.2 '

On the other hand, the court struck down the post-and-
hold provisions. It held that they were likewise a per se
violation of Section 1 because they are "highly likely to
facilitate horizontal collusion among market competitors."127
But, it also held that they were a "hybrid" restraint because
they were likely to facilitate horizontal collusion due to their
requirement that prices be posted, publicly available to
competitors, and adhered to for 30 days. 28 In that sense, the

125 Id. at 898.
126 Id. at 899-900.
127 Id. 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.").

128 Id. at 895.



COLUMBIA BUSINESS LA W REVIEW

court found, they were similar to the Oregon post-and-hold
scheme condemned by the Ninth Circuit twenty years earlier
in Miller v. Hedlund.129

Most important for the present purposes, the Costco court
also expressly disapproved of Judge Friendly's opinion for
the Second Circuit in Battipaglia v. New York State Liquor
Authority,"' which more closely examined the evidence in
that case of actual concerted action. Judge Friendly had
held that such post-and-hold type restraints were not per se
violations, but should be judged under the rule of reason
because (1) the argument that an agreement among the
wholesalers could have been inferred if the wholesalers had
voluntarily done what they were compelled to do by statute
is "simply too 'iffy';... and (2) such restraints only mandated
the exchange of price information, which has never been held
by the Supreme Court to necessarily constitute a violation of
the antitrust laws in all cases.'32 Such a price fixing
agreement could only be found where defendants, in addition
to agreeing to exchange price information, engaged in
"conscious parallelism" (i.e., identical or nearly identical
pricing), and were in a market that exhibited "plus" factors
like inelastic demand, high market concentration, and lack of
product differentiation.'33

The Ninth Circuit in Costco expressly disapproved of the
above reasoning, and, as in Miller, it suggested an actual
contract, combination, or conspiracy need not be shown.'34

129 Id. at 901; see also Miller v. Hedlund, 813 F.2d 1344, 1349 (9th Cir.

1987).
130 Id. at 893-94 (discussing Battipaglia v. New York State Liquor

Auth., 745 F.2d 166 (2d Cir. 1984), cert. denied, 470 U.S. 1027 (1985)).
131 Battipaglia, 745 F.2d at 173.
132 Id. at 174 (discussing Rice v. Norman Williams Co., 458 U.S. 654

(1982)).
133 Id. at 174-175 (citation omitted).
134 Costco, 522 F.3d at 894 n.16; see also Miller, 813 F.2d at 1349

("While it is true that there is no agreement or concerted activity among
the wholesalers, it can not be ignored that the challenged regulations
facilitate the exchange of price information and require adherence to
publicly posted prices ... Simply ending the analysis because of the lack of

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As discussed above, this conclusion seems to ignore the
holdings of Fisher and Parker, and the decision itself gives
no consideration to Leegin. Overall, however, the Ninth
Circuit's approach does give greater deference to the state's
regulatory scheme than was shown in Flying J.

In sum, while the opinions in Flying J and Costco were
well-reasoned within the rather confusing parameters of
existing state action doctrine, they reach arguably
inconsistent results. Furthermore, they give short-shrift to
the issue of whether there was any real evidence of concerted
action between competitors, and they do not fully consider
the impact of Leegin on their facts. Such oversights as these
lead to some questionable outcomes, and even where the
outcomes reached may be appropriate, the analyses are often
inconsistent, if not incoherent and needlessly complicated.

IV. THE LEEGIN DECISION AND ITS POTENTIAL
IMPACT

The Supreme Court's recent decision in Leegin Creative
Leather Products, Inc. v. PSKS, Inc.,135 coupled with its past
decisions on "conscious parallelism" and the requirements for
pleading and proving conspiracy culminating in Bell Atlantic
Corp. v. Twombly,136 may fundamentally alter what was
already a complex and somewhat inconsistent doctrine. If
these decisions are to be applied to fair trade acts, litigants
challenging such acts can no longer rely on a presumption of
illegality or concerted action arising from evidence of vertical
price fixing. Evidence of such vertical restraints alone will
not be sufficient to sustain a facial challenge, and mere
evidence of parallel conduct among those subject to a
statute's regulation may not be enough to support an
inference of conspiracy. "As applied" challenges to vertical
restraints, to the extent they are permissible, now require
proof of actual competitive harm, and states should be

concerted activity among the wholesalers fails to take into account the
presence and effect of the state's involvement in the matter.").

551 U.S. 877 (2007).
136 550 U.S. 544 (2007).



COLUMBIA BUSINESS LA WREVIEW

permitted to defend themselves with evidence of
procompetitive benefits.

On the other hand, more rigorous application of the
concerted action requirement, in light of existing precedent,
could lead to a cleaner and more predictable set of outcomes
for litigants (including possibly dispensing with the
"unilateral" versus "hybrid" analysis), provided courts are
willing to be consistent and embrace the implications of their
reasoning in other contexts. Because vertical price
restraints are no longer per se unlawful, it should no longer
matter whether they can be characterized as unilateral or
hybrid or whether they are adequately supervised. The main
evil the courts will want to prevent is unsupervised
concerted action between competitors.

A. Facial Challenges Should Now Require Proof of
Horizontal Conspiracy

The most obvious impact of the Leegin decision in this
context is that facial challenges to state fair trade acts can
no longer be based on claims that such acts mandate vertical
price restraints. In Leegin, the Supreme Court overruled Dr.
Miles and held that vertical price restraints were to be
judged under the rule of reason.137 Thus, litigants are now
required to present evidence that vertical price restraints
actually harm competition. But evidence of anticompetitive
vertical restraints, without more, should not be sufficient to
sustain a facial challenge to state fair trade statutes.

While the courts have not yet squarely addressed Leegin's
likely impact on facial challenges, the Supreme Court has
long held 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."13 State
statutes are "not preempted by the federal antitrust laws

137 Leegin, 551 U.S. at 907.
138 Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982) (upholding

a California statute requiring that importers of distilled spirits be
designated as authorized importers by a distiller or its agent, because the
statute did not create a per se violation).

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simply because the state scheme may have an
anticompetitive effect."'39  Rather, the Rice Court found,
preemption is limited to statutes that "mandate[] or
authorize[] conduct that necessarily constitutes a violation of
the antitrust laws in all cases .... "o State statutes will
thus only be condemned if the conduct they mandate "is in
all cases a per se violation.""' A rule of reason analysis,
which requires an examination of the circumstances
underlying a particular practice, "does not lend itself to a
conclusion that a statute is facially inconsistent with federal
antitrust laws."'42 It follows that since vertical resale price
maintenance is no longer a per se offense, a litigant wishing
to challenge a state fair trade act as being facially invalid
should now be required to plead and prove the state's
participation in or authorization of an actual horizontal price
fixing conspiracy, which is still condemned as a per se
violation of Section 1, before a court even considers the issue
of immunity.

This may be easier said than done. In the numerous
Supreme Court cases discussing vertical restraints imposed
by states, there is often little evidence of actual horizontal
conspiratorial conduct, and lower courts seem to ignore or
finesse this issue. To take one recent but by no means
atypical example discussed in the last part, the Flying J
court held that the minimum markup imposed by the
Wisconsin Unfair Sales Act was "horizontal" because it
affected competing gasoline retailers in Wisconsin; it made
no findings of actual horizontal conduct and appears to have
been merely aligning itself with the analyses in Midcal and
324 Liquor.'43 Dealing with facts closer to those in 324

"' Fisher v. City of Berkeley, 475 U.S. 260, 264 (1986) (quoting Rice,
458 U.S. at 659).

140 Rice, 458 U.S. at 661.
141 Id.

142 Id.
143 See Flying J, Inc. v. Van Hollen, 597 F. Supp. 2d 848, 856 (E.D.

Wis. 2009). 324 Liquor, for its part, simply assumed that the facts in
Midcal involved horizontal price fixing, because the state required
wholesalers to adhere to a single fair trade contract in a geographical area.



Liquor than Midcal, the Flying J court seems to have
assumed that because the Unfair Sales Act required a
markup over "average posted terminal price," it enforced a
horizontal pricing policy, even though no evidence was
presented of horizontal agreements, or for that matter,
parallel pricing among competitors, or price-posting."' Even
if there was evidence that retailers were pricing similarly, it
could certainly be argued that those retailers were merely
making pricing decisions in compliance with requirements
imposed unilaterally by state law. A ban on discount sales
also creates a "horizontal" pricing policy in the sense that all
competitors must follow the same practice, and seems to be
analytically indistinguishable from a markup provision, yet
such a ban was upheld by the Costco court. 4 ' Indeed,
confronted with a similar markup provision as in Flying J,
the Costco court reached the opposite result, upholding a
minimum markup provision as "unilateral" even though it
held that such provisions were per se violations. "' Thus,
under existing precedent, whether certain conduct is
"horizontal" and should be unlawful may depend more on
how the issue is framed by the reviewing court than on any
coherent principles. It also seems that it might have been
easier for both of these courts simply to consider whether
there was unsupervised concerted action between
competitors subject to the statute.

Moreover, current law requires litigants suing for
violations of Section 1 in every other context to allege and
prove far more than just some likelihood of parallel conduct.
The Court has long held that a mere showing of parallel
business behavior falls short of conclusively establishing

See 324 Liquor Corp. v. Duffy, 479 U.S. 335, 342 (1987). But, the 324
Liquor Court also held that the violation in its case was purely a matter of
vertical price fixing. Id.

14' See Flying J, 597 F. Supp. 2d at 856.
145 Costco Wholesale Corp. v. Maleng, 522 F.3d 874, 901 (9th Cir.

2008).
146 Id. at 899.

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agreement or itself constituting a Sherman Act offense.47

Even "conscious parallelism" is not unlawful and does not
establish a contract, combination, or conspiracy in violation
of the Sherman Act.4 ' To escape summary judgment, a
plaintiff must include evidence tending to exclude the
possibility of independent action,'49 and that evidence must
tend to rule out the possibility of independent action among
the defendants. 50 In Twombly, of course, the Court applied
the coup de grace, requiring antitrust plaintiffs to plead
allegations of conspiracy supported by enough facts "to raise
a reasonable expectation that discovery will reveal evidence
of illegal agreement." In other words, allegations must be
based on facts plausibly suggesting (not merely consistent
with) an agreement, rather than mere parallel conduct. " '

It hardly seems necessary to point out that the evidence
of horizontal conduct discussed by the Flying J and Costco
courts or, for that matter, the evidence of horizontal
conspiracy in any of the Court's decisions on state fair trade
acts, does not even come close to meeting those standards.
Moreover, one has to wonder whether the claims as pleaded
in these cases or others would survive a consistent
application of the judicially-created Twombly /Iqbal
"plausibility" standard.5 After all, it is certainly plausible
that firms subject to state fair trade regulation may be
engaging in similar or parallel pricing because of unilateral
decisions by each affected firm to follow the sovereign's

... Theatre Enters. Inc. v. Paramount Film Distrib. Corp., 346 U.S.
527, 541 (1954).

14' Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S.

209, 227 (1993).
' See Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768

(1984).
150 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574

(1986).
"' Bell Atl. Corp. v. Twombly, 550 U.S. 544, 553, 556 (2007); see also

Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950-51 (2009). (In all cases, federal
courts must discount conclusory claims and bare assertions and, after
assuming the truth of the remaining allegations, determine whether
complaint states a "plausible" claim for relief).

152 Twombly, 550 U.S. at 556; Iqbal, 129 S. Ct. at 1950.



COLUMBIA BUSINESS LAW REVIEW

command, rather than engaging in horizontal price fixing
agreements. Arguably, without specific allegations of actual
agreements between competitors or pricing communications
among them, challenges to these statutes might fail at the
pleading stage.

Nor is it at all clear that challenges to state statutes
should somehow be subject to a lesser standard of proof than
challenges to private price fixing arrangements. Indeed,
given the high level of concern the Court has long shown for
state sovereignty in this area, the opposite may be true.
Most of the restraints discussed by the Costco court and,
arguably, the restraint in Flying J, are "vertical" in the sense
that they do not require or even facilitate horizontal price
fixing. If such purely vertical restraints imposed by the state
are no longer deemed to create a per se offense, and if the
evidence is that individual market actors subject to that
restraint are merely making unilateral decisions to follow
the law of the state, even if those actions lead to parallel
pricing conduct, it seems that this should not be sufficient, in
and of itself, to find that the state statute is per se unlawful.
Without more, such statutes must be upheld against facial
challenges. Otherwise, state fair trade acts, even those that
reflect the clear policy of a state, are being held up to more
rigorous scrutiny than private arrangements.

B. Challenges to Vertical Restraints Created by Fair
Trade Acts Should Require Proof of Anticompetitive
Effect and Defendants Should be Permitted to
Introduce Justifications

Assuming a statute is challenged as being
unconstitutional as applied in a particular case, and a
litigant cannot prove horizontal conspiracy, that litigant
might be permitted to challenge the vertical restraint
created by the statute under the rule of reason. Again,
however, that litigant will have to deal with Rice and its
progeny, which held that mere anticompetitive effect,
without more, is not enough for preemption.'53  But,

... See Rice v. Norman Williams Co., 458 U.S. 654, 661 (1982).

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assuming a litigant can challenge a statute as applied, it
should bear the burden of proving that the restraint created
by a state fair trade act actually harms competition in a
relevant market. Sometimes, this should be easy, as in
Flying J, where the plaintiff introduced compelling evidence
in the form of two studies concluding that the Wisconsin
Unfair Sales Act led to higher prices for consumers.' In
other cases, it may not be as simple.

Equally intriguing is the inverse, where a state seeks to
uphold its fair trade statutes or a litigant seeks to rely on
them for its defense. Under Leegin, the state or a litigant
arguing for upholding a fair trade act (or relying on it as a
defense) should now be permitted to introduce evidence of
procompetitive effects arising from a particular vertical
restraint. What kind of evidence they can provide is likewise
an interesting question under prevailing doctrine. The
justification for the Miller-Tydings Act was, of course,
protection of smaller retail establishments that would
otherwise be driven from the marketplace by large volume
discounters.15 A similar justification was embraced by the
New York Court of Appeals in J.A.J. Liquor Store, Inc. v.
New York State Liquor Authority,56 which was reversed by
the U.S. Supreme Court in 324 Liquor.5 7 Specifically, the
Court of Appeals suggested that New York's liquor pricing
system prevents "temporary price reductions ... threatening
to drive small retailers out of business and consolidating
control of the market in the hands of a relatively few mass
distributors who could then dictate prices to the ultimate
injury of consumers .... " 5 The 324 Liquor Court rejected
that argument.159 It probably had no choice but to do so,
given that Dr. Miles was good law at the time. And, the

154 Flying J, Inc. v. Van Hollen, 597 F. Supp. 2d 848, 857 (E.D. Wis.

2009).
155 Schwegmann v. Seagram Distillers Corp., 341 U.S. 384, 409 (1951)

(Frankfurter, J., dissenting).
156 479 N.E.2d 779 (N.Y. 1985).
157 324 Liquor Corp. v. Duffy, 479 U.S. 335, 343 (1987).
15. Id. at 343 n.5 (quoting J.A.J. Liquor, 479 N.E.2d at 788).

159 Id.



current incarnation of the Supreme Court has not shown
itself to be amenable to arguments for protecting smaller
retailers from price cutting measures imposed by larger
retailers taking advantage of economies of scale.16°

Nevertheless, it seems that a state, having seen
"intrabrand" competition reduced after smaller retailers are
driven out of business by "big box" national chains, might be
permitted to make a clear statement of its intention to
protect such retailers, to disagree with the Supreme Court's
rote "Chicago school"-type analysis in its predatory pricing
cases, and to try to offer some proof of longer term
"procompetitive" benefits from such protectionist legislation.
Some possible benefits of protectionist legislation (from the
state's standpoint) might be maintaining a greater number
of competitors at the retail level and avoiding eventual
market dominance by large retail entities. The American
Bar Association, in urging Congress not to pass a statute to
overturn Leegin, has expressed precisely this concern for
preserving competition at the retail level, stating that "[t]he
per se prohibition on minimum resale price maintenance in
force for several decades has had the effect of enhancing the
market power of very large retailers that carry a wide
variety of products," enabling them to sell certain products at
"loss leader prices" that smaller retailers cannot match,
which will result in the disappearance of the smaller
retailers. 61 Whether all economists will agree with such an

160 See, e.g., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,

509 U.S. 209, 222-24 (1993) (succeeding on a claim for predatory pricing
requires the plaintiff to prove both below-cost retail pricing and a
"dangerous probability" that the price-cutting retailer will recoup any lost
profits once competitors are eliminated); Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 589 (1986).

161 Letter from James A. Wilson, Chair of the ABA Section of Antitrust
Law, to the Honorable Henry C. Johnson, U.S. House of Representatives,
Chairman Subcomm. on Courts and Competition Policy, Comm. on the
Judiciary, and the Honorable Howard Coble, U.S. House of
Representatives, Ranking Member, Subcomm. on Courts and Competition
Policy, Comm. on the Judiciary, at 3 (May 5, 2009), http://www.abanet.org/
poladv/letters/antitrust/2009may6_leegincasehjl.pdf; Joseph Angland,
American Bar Association, Recommendation (Feb. 12, 2007),

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analysis is an open question, but, ultimately, it may be the
wrong question.

Furthermore, Leegin itself provides other potential
procompetitive justifications for resale price maintenance
that fit well within the Court's current doctrinal focus on
protecting interbrand competition. The Leegin Court noted
that "[a]bsent vertical price restraints, the retail services
that enhance interbrand competition might be
underprovided," because of free-riding discount retailers.162

It also stated that resale price maintenance could increase
interbrand competition "by facilitating market entry for new
firms and brands."163 And, the Court noted that resale price
maintenance might "encourag[e] retailer services that would
not be provided even absent free-riding."'64  Offering a
retailer a guaranteed margin to provide those services "may
be the most efficient way to expand the manufacturer's
market share."1 65 Any state or litigant seeking to uphold fair
trade provisions could be well-advised to advance these and
similar arguments to justify vertical price restraints imposed
by the state's laws.

C. Applying Leegin to State Fair Trade Acts May
Obviate the Need to Consider Whether a Restraint
Is "Unilateral" or "Hybrid"

As the previous two sections suggest, if courts faithfully
apply Leegin when analyzing state fair trade acts, an
inevitable upshot will be to make proof of concerted action
much more difficult. Indeed, given the complexity of

http://www.abanet.org/poladv/letters/antitrust/2009may6jeegincaseh l.pd
f (The ABA "recommends that the Sherman Act, 15 U.S.C. § 1, and
comparable state and territorial laws should not be interpreted to apply a
rule of per se illegality to agreements between a buyer and a seller setting
the price at which the buyer may resell goods or services purchased from
the seller").

162 Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877,
890 (2007).

163 Id. at 891.
'4 Id. at 891-92.
165 Id.



COLUMBIA BUSINESS LAW REVIEW

determining whether an otherwise vertical restraint imposed
by state law creates horizontal concerted action and the
difficulties inherent in applying a rule of reason analysis to a
vertical restraint, courts might be tempted to reverse the
inquiry, that is, to consider first whether the given restraint
is immune under existing doctrine and then, if not, to ask
whether it creates unlawful concerted action. This would be
a mistake because while this approach might be simpler in a
few cases, it will not be so in all situations, and it may not
lead to the correct result in light of Leegin. Furthermore, as
will be explained herein, it misses the opportunity that
Leegin presents to cut through the Gordian Knot that is the
"unilateral" versus "hybrid" inquiry.

To conclude that an otherwise vertical restraint is
immune under Parker and Midcal, one must first determine
whether it is "unilateral" or "hybrid." As indicated supra in
Part lID, the distinction between "unilateral" and "hybrid"
restraints drawn in current law was beset by some
contradictions and in tension with Midcal and its progeny
even before the Leegin decision. After all, the Court had long
held that proof of concerted action was required 66 and that
where a state compels parties to adhere to a parallel pricing
policy, it demanded private conduct which the Sherman Act
forbids.'67 Yet, it made the City of Berkeley's compelling of
landlords to charge rent-controlled prices the touchstone of
its determination that the restraint imposed by its rent-
control ordinances was unilateral and therefore immune
from preemption, despite the fact that it clearly led to
horizontal price coordination.'68

Courts since Fisher have tried to clarify the distinction
between "unilateral" and "hybrid" restraints with varying
degrees of success. 169 The upshot seems to be that a restraint

166 Fisher v. City of Berkeley, 475 U.S. 260, 260-67 (1986); Parker v.

Brown, 317 U.S. 341, 351-52 (1943).
167 Schwegmann Bros. v. Seagram Distillers Corp., 341 U.S. 384, 389

(1951).
168 Fisher, 475 U.S. at 266.
169 Compare Costco Wholesale Corp. v. Maleng, 522 F.3d 574, 589 (9th

Cir. 2008) ("The rule to be taken from these cases is that state statutes or

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will be deemed hybrid if there is some degree of private
power left in the hands of private actors that is not
supervised and suppresses competition.170  As the First
Circuit explained: "What is centrally forbidden is state
licensing of arrangements between private parties that
suppress competition-not state directives that by
themselves limit or reduce competition." '171 Drawing a clear
line between these two types of statutes has, as we have
seen, proven exceedingly difficult.

Before Leegin, of course, it could be presumed that
vertical price restraints suppress competition. Therefore,
many courts understandably gave less attention to the
question of whether an anticompetitive arrangement
between private parties existed, and simply moved on to
consider whether the restraint was unilateral or hybrid.
Most vertical restraints created by state law are, however,
unilateral in the sense that they are commands of the
sovereign (e.g., no discounts, no sales on credit, no central
warehousing by retailers, application of a minimum markup
over wholesale) and do not allow private actors any leeway to
dictate market conditions to others except, perhaps, to follow
the state's command in dealing with vertical counterparties
in contracts, as where a retailer must charge a certain

local ordinances creating unsupervised private power in derogation of
competition are subject to preemption."), with Freedom Holdings Inc. v.
Spitzer, 357 F.3d 205, 223 (2d Cir. 2004) ("Where the anticompetitive
effects of a state statute obviate the need for private parties to act on their
own to create an anticompetitive scheme, the statute may be attacked as a
'hybrid' restraint on trade."). The Costco formulation seems to fall in line
with precedent; the Freedom Holdings definition of a "hybrid" restraint
seems indistinguishable from the restraints upheld as "unilateral" in
Fisher, Sanders, Costco, and other cases.

170 But see Parker v. Brown, 317 U.S. 341, 346-47 (1943). Specifically,

Parker upheld a California law that allowed competing agricultural
producers to establish proration marketing programs in particular
production zones to restrict competition and maintain prices, even though
the program had to be approved by a majority of producers in a particular
zone, and, if approved, the State Director of Agriculture was required to
institute it.

171 Massachusetts Food Ass'n v. Mass. Alcoholic Beverages Control

Comm'n, 197 F.3d 560, 565 (st Cir. 1999) (emphasis omitted).



markup percentage over what it paid to a wholesaler. Given
that anticompetitive effect can no longer be presumed from
such transactions, it should not matter whether they are
"adequately supervised" or can somehow be called "hybrid."
Instead, after Leegin, the only valid question should be
whether they create per se unlawful concerted action, which
should now be limited to unsupervised meetings of the minds
between competitors. In most cases, they do not and should
ordinarily be upheld without any further need to determine
whether they are immune.

Skipping the concerted action step, or assuming it, as
some courts still do, does not make the analysis any easier,
and may lead to the wrong result. While it could be argued
that the "post-and-hold" provisions in Costco created
concerted action or a hybrid restraint,'72 the Wisconsin
minimum markup statute condemned in Flying J presents a
far more difficult question. There was no price-posting
scheme required by the Wisconsin statute, nor anything but
the court's speculation that competing retailers were actually
coordinating parallel pricing policies.'73 Rather, the evidence
appears to have been that they were following a directive
from the state to include a minimum markup over an
"average terminal price" published by a price reporting
service, and to issue price reports to the state, not to their
competitors. 74 The state had authority to enforce those
provisions, and to the extent that the state alone was
enforcing them, it could certainly be argued that this scheme
did not involve an "arrangement between business partners

1.2 See Costco, 522 F.3d at 895-96. The post-and-hold provisions

required beer or wine distributors to file a price posting showing their
wholesale prices with the Washington State Liquor Control Board, made
those prices publicly available, and required the distributors and
manufacturers to hold to those prices for at least 30 days. This assumes,
of course, that no separate actual proof of collusion among competitors is
required.

113 Flying J, Inc. v. Van Hollen, 597 F. Supp. 2d 848, 856-57 (E.D.
Wis. 2009).

114 Id. at 851.

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to suppress competition" and could be seen as "unilateral."175

This seems to be the way the Costco court viewed similar
restraints, upholding minimum markup provisions, uniform
pricing requirements, bans on credit sales and discounts,
etc., even though it held these were per se restraints.

Moreover, although it seems to reach the correct result
under the law, the Costco court's rather peculiar analysis,
holding that a restraint is both per se unlawful (meaning,
under current law, it must involve unsupervised horizontal
conduct among competitors) and "unilateral" is enough to
cause whiplash in the careful reader. The fact that such
seemingly contradictory conclusions are by no means unique
strongly suggests that it would be simpler if these courts
took the concerted action requirement seriously and held
that state statutes that do not expressly call for or foster
collusive conduct do not meet the concerted action
requirement, are not per se unlawful, and should be upheld.

V. HOW MORE RIGOROUS APPLICATION OF THE
CONCERTED ACTION REQUIREMENT COULD

CLARIFY THE STATE ACTION DOCTRINE: TWO
ALTERNATIVES

As the last part demonstrates, what was a problematic
and occasionally inconsistent doctrine may now be
fundamentally altered by the Court's recent decision in
Leegin. But, that very alteration may provide an
opportunity for the doctrine to be clarified for the benefit of
litigants and legislatures alike. Courts could consider the
following alternatives.

175 The Flying J court did not consider the fact that private actors also

had authority to enforce the act through a private action for unfair
competition, as in Schwegmann Bros. See Flying J, 597 F. Supp. 2d at
854.



A. First Alternative: Uphold Any Restraint Unless
There Is Actual Evidence of Unregulated Concerted
Action Among Competitors and If Such Evidence
Exists, Consider Whether There Is Adequate
Supervision

On its face, this approach seems to represent the most
radical shift away from existing antitrust doctrine.
Arguably, however, it might be most compatible with the
Court's existing precedent, which requires a restraint to be
illegal per se before being struck down, requires proof of
horizontal conduct tending to disprove the possibility of
independent action, and now holds that proof of vertical price
restraints is not sufficient for per se illegality.
Unquestionably, such an approach would give the most
weight to state sovereignty, which appears to have been the
original reason for the state-action immunity doctrine and
which remains the animating force behind decisions like Rice
and Fisher. Moreover, a court following this approach might
reach the same result as the Parker Court did on the same
facts.

This alternative would work as follows. First, instead of
asking if a given restraint is "unilateral" or "hybrid," a court
would simply ask whether the statute mandates concerted
action among competitors, or, to use the more aggressive
formulation from Battipaglia, whether there is evidence of a
horizontal conspiracy regarding pricing among competing
firms subject to and complying with the statute.'76 If the
statute does not create these conditions, or there is no
evidence of horizontal conspiracy, it cannot be illegal per se
under existing law, and a facial challenge to it must fail.'77 If
it does, a court can then consider whether such concerted
action is clearly articulated and affirmatively expressed as
state policy. If it is, a court can consider whether there is

176 Battipaglia v. New York State Liquor Auth., 745 F.2d 166, 174-75

(2d Cir. 1984), cert. denied, 470 U.S. 1027 (1985).
117 Although, as discussed supra in Part IV.B, an "as applied"

challenge might still be possible.

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adequate supervision by the state such that section l's
regime is entirely displaced by the regulatory scheme.178 The
thornier question of first trying to define the restraint as
"hybrid" or "unilateral" can thus be disregarded.

This approach may have much to commend it. It seems
simpler and more consistent with precedent, and it would
allow state legislatures great latitude to experiment with fair
trade acts that might protect in-state businesses. But, of
course, that may also be its chief drawback, because there
seems little doubt that many fair trade acts that are viewed
as anticompetitive, such as price posting and holding
provisions, might be upheld if litigants challenging such acts
are forced to prove concerted action with the same level of
confidence as those challenging private restraints.

B. Second Alternative: Expressly Permit Concerted
Action to Be Inferred from Evidence of Consciously
Parallel Conduct or from Statutes that Expressly
Create the Conditions for Horizontal Restraints

This is a variation on what appears to be current practice
for many courts when analyzing state fair trade acts. But,
these courts do not come out and say as much; rather, they
rely on assumptions about the likely behavior of and effects
on competitors in response to a restraint. Thus, for example,
the Flying J court assumed that the motor vehicle fuel
provisions of the Wisconsin Unfair Sales Act were "also
horizontal because [they] effect [sic] competing gasoline
retailers in Wisconsin,"179 while the Costco court condemned
Washington's "post-and-hold" system as a per se violation
because agreements to adhere to posted prices are "highly
likely to facilitate horizontal collusion among market

17 An even more extreme states' rights court could go so far as to

adopt Justice Powell's concurrence in Fisher, upholding a statute so long
as it can be shown that the restraints it creates are clearly intended by the
state. See Fisher v. City of Berkeley, 475 U.S. 260, 273-74 (1986) (Powell,
J., concurring).

179 Flying J, 597 F. Supp. 2d at 857.



COLUMBIA BUSINESS LA W REVIEW

participants.""'° Neither court was presented with evidence
of actual agreements or other concerted action, and the
statutes they condemned did not expressly mandate
horizontal price fixing. Neither court was even presented
with direct evidence of consciously parallel conduct. Yet,
both cases, and many others, paid lip service to the concerted
action requirement while basing their decisions on what they
perceived to be the likely anticompetitive effect of the
statutes, rather than looking for actual evidence of
horizontal agreement or parallel conduct. When competitors
learn of each others' prices and are either required to hold
prices or price in a certain range, both courts reasoned, they
are highly likely to collude.

To be sure, these courts' analyses of the likely competitive
effects of such provisions might often be correct. Post-and-
hold regulations, particularly those that require public
posting of prices, may very well make coordination on price
and output possible by "limit[ing] the domain of rivalry"
thereby "facilitate [ing] tacit collusion, even though they do
not explicitly authorize any kind of collusion."1"' And, they
may result in mandatory industry-wide resale price fixing,
which might also be "virtually certain to reduce interbrand
competition as well as intrabrand competition... ."12 But,
what these courts are condemning is not "concerted action"
between competitors that has been proved or mandated, but,
at most, the likely effects of consciously parallel behavior by
competitors who are acting at the arguably unilateral
direction of a sovereign state. As previously discussed,
anticompetitive effects, in and of themselves, are not

180 Costco Wholesale Corp. v. Maleng, 522 F.3d 874, 895-96 (9th Cir.

2008).
"" Id. at 894-95 (quoting John E. Lopatka & William H. Page, State

Action and the Meaning of Agreement Under the Sherman Act: An
Approach to Hybrid Restraints, 20 YALE J. ON REG. 269, 312 (2003)); see,
e.g., United States v. Container Corp. of Am., 393 U.S. 333, 336-37 (1969)
(result of reciprocal exchange of price information among competitors was
to "stabilize prices though at a downward level"). But see, id. at 338-39
(Fortas, J., concurring) (price information exchange among sellers not a
per se violation of Section 1).

182 324 Liquor Corp. v. Duffy, 479 U.S. 335, 342 (1987).

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No. 3:853] CONCERTED ACTIONAND PREEMPTION AFTER LEEGIN 901

supposed to be enough for a state statute to be preempted,
and the Supreme Court has previously explained "that the
purpose of the active supervision inquiry is not to determine
whether the State has met some normative standard, such
as efficiency, in its regulatory practices."183

Nonetheless, because courts are already either relying on
likely effects from certain types of fair trade acts, like post-
and-hold provisions, to infer concerted action among
competitors, or they are assuming, despite the language in
Parker, Fisher, and subsequent cases, that an actual
contract, combination, or conspiracy need not be shown for a
state statute to be preempted, it may be time to modify the
doctrine to catch up with this practice. Any modification of
the doctrine must, of course, also account for the change in
the law wrought by Leegin and should focus on statutes or
regulations that foster horizontal pricing behavior among
competitors. Expressly permitting horizontal "concerted
action" to be inferred either from evidence of parallel conduct
among competitors, or from state statutes or regulations that
require public posting of price information leading to sharing
of such information and "likely" collusion among competitors,
has the virtues of both intellectual honesty and simplicity.
The touchstone question would be: does the statute call for
some form of price communication or price sharing between
competitors? Statutes that do so, thereby creating conditions
where price collusion among competitors is more likely, could
be deemed to create per se unlawful concerted action and
would be preempted unless the state can meet the Midcal
test by showing adequate active supervision and that no
regulatory power is left in the hands of private actors. On
the other hand, statutes that require retailers or distributors
to do particular acts (e.g., charge a minimum mark-up) or
prohibit them from doing particular acts (e.g., sell on credit)
without requiring public sharing of price or price-related
information would be deemed not to foster concerted action
and would be upheld.

183 FTC v. Ticor Title Ins. Co., 504 U.S. 621, 634 (1992).



Adopting this approach also might obviate the need for
the vexing "hybrid" versus "unilateral" inquiry because any
statute not expressly creating price collusion among
competitors or creating conditions such that tacit collusion is
likely to occur would not create concerted action and would
be automatically immune from a facial challenge regardless
of whether it could be characterized as "unilateral."

Although this approach would likely curtail challenges to
certain statutes that were previously subject to challenge,
that seems to be an inevitable consequence of Leegin. In any
case, it would still allow more robust protection of
competition than would be the case if courts demanded
stricter pleading and proof of actual concerted action.

Adopting this approach would still beg a very important
question: why are state statutes and regulations being
subjected to a higher level of scrutiny than private conduct,
even private conduct in highly-concentrated industries?
Stated differently, why can a litigant not rely primarily on
evidence of parallel-pricing behavior when challenging
private conduct, but instead be forced to provide evidence of
an actual agreement between competitors, while a litigant
challenging a state fair trade act often need not even provide
evidence of actual parallel conduct, much less of horizontal
behavior among those affected by the regulation? One would
expect the opposite to be true, given the regard for state
sovereignty and the fact that states are entitled to at least
qualified immunity.

The only possible answer seems to be that courts are
more concerned about the anticompetitive effects of public
regulations that may affect an entire industry. If so, they
should say as much. But, if so, they probably need to explain
why, in this sense at least, the acts of state legislatures and
of the private parties relying on them receive less protection
from antitrust law than does purely private behavior. If they
cannot, they should revisit the stricter proof and pleading
requirements they have judicially created in the context of
litigation against private parties and extend more robust
protection of competition to cases involving purely private
actions by private parties. Otherwise, they run the risk of

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serious inconsistency and invite accusations of Lochner-style
judicial activism.

VI. CONCLUSION

Before Leegin it was possible for courts to finesse these
issues because pure vertical resale price maintenance was a
per se offense, and courts could simply find the requisite
concerted action from statutes that forced retailers to adhere
to high prices or otherwise attempted to govern contracts
between suppliers, wholesalers, and retailers. Many courts
did just that, skipping past the question of whether
particular state statutes or regulations created per se
unlawful restraints and subjecting them to scrutiny under
the Midcal test. Many are still doing so in spite of Leegin,
and their decisions are often incoherent or erroneous. But
concerted action can no longer be presumed from vertical
price-related restraints created by state action, and the
courts should now adjust the state action immunity doctrine
to this new reality.