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Attorney General Lockyer Wins Landmark Ruling in Antitrust Case Against Southern California Grocers

Federal District Court Holds Profit-Sharing Agreement Subject To Antitrust Laws
Wednesday, May 25, 2005
Contact: (415) 703-5837

(LOS ANGELES) – Attorney General Bill Lockyer today won a landmark court ruling that holds grocery chains are liable for any antitrust violations arising from a profit-sharing agreement they entered prior to the start of a months-long labor strike in Southern California that ended February 2004.

"This ruling, the first if its kind in history, is a significant legal victory for consumers and law enforcement officials, not just in California but potentially across the country," said Lockyer. "The decision stands for the principle that businesses cannot violate the most basic tenet of antitrust law, conspiring to keep prices artificially high, and then escape accountability just because they broke the law during a labor strike."

The ruling by Judge George H. King, U.S. District Court for the Central District of California, does not find the profit-sharing pact violates federal antitrust laws, as Lockyer alleges in a February 2, 2004 lawsuit he filed against the grocery chains. But King rejected the grocers' contention their agreement was exempt from antitrust enforcement under immunities courts have granted to certain conduct by businesses involved in labor disputes.

The ruling is the first-ever to hold a profit-sharing agreement like the grocers' is not immune from antitrust laws. The decision means Lockyer's lawsuit can proceed to a decision on the merits of his allegation that the profit-sharing agreement is unlawfully anti-competitive.

The labor strike, which idled some 70,000 United Food and Commercial Workers Union workers at 850 stores, began October 11, 2003 and ended February 29, 2004. The affected grocery chains – Albertson's, Ralphs (a subsidiary of Kroger Company) and Vons (a subsidiary of Safeway, Inc.) – entered the profit-sharing agreement on August 4, 2003, in anticipation of the strike.

A second Kroger subsidiary, Food 4 Less, was included in the agreement for purposes of carrying out the profit-sharing plan. Additionally, the profit-sharing provisions extended for two weeks past the end of the strike.

Under the agreement, if any of the stores increased their market share above their pre-strike level, they had to share resulting profits with the other stores, their competitors. The profit-sharing payments were based on a 15 percent profit margin.

So, if a store increased its market share and, in the process, raised prices and increased its profit margin above 15 percent, it could keep the difference between the actual margin and 15 percent. If, on the other hand, a store increased its market share by lowering prices and reducing it profit margin below 15 percent, it would have to pay the difference. The agreement thus rewarded stores that charged consumers more and penalized stores that lowered consumers' prices, Lockyer's lawsuit alleges.

In prior cases, courts have afforded employers immunity from antitrust laws for certain conduct and agreements related to labor disputes. But the exemption must be narrowly construed, the courts have held, and applies to agreements that: concern wages and working conditions; concern conduct regulated by the National Labor Relations Board (NLRB) and national labor policy; and affect the labor market.

The grocers' agreement failed to meet that test, Lockyer argued, because it affected the product market, not the labor market, concerned consumer prices, not wages and working conditions, and concerned conduct not regulated by the NLRB or national labor policy.

King agreed. "Overall, the challenged revenue-sharing provision of the (grocers' agreement) is not sufficiently connected to the subject matter of the collective bargaining process, or to matters required to be negotiated collectively," he concluded in ruling antitrust laws applied to the pact. Citing language from a prior court case, King said, "The incidental benefits that revenue sharing affords to employers in their labor negotiations ‘cannot be utilized as a cat's-paw to pull employers' chestnuts out of the antitrust fires.' "

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