Assam Drug Co., Inc. v. Miller Brewing Co., Inc.

• Court: U.S. Court of Appeals — Eighth Circuit
• Writing for the Court: Before WOLLMAN, Circuit Judge, FLOYD R. GIBSON; WOLLMAN
• Citation: Assam Drug Co., Inc. v. Miller Brewing Co., Inc., 798 F.2d 311 (8th Cir. 1986)
• Decision Date: 12 August 1986
• Docket Number: No. 86-5049,86-5049
• Parties: 1986-2 Trade Cases 67,223 ASSAM DRUG CO., INC., Downtown, Inc., d/b/a Shoppers City Liquor of Mitchell, S.D., Appellants, v. MILLER BREWING CO., INC., Appellee.

Page 311

798 F.2d 311

1986-2 Trade Cases 67,223

ASSAM DRUG CO., INC., Downtown, Inc., d/b/a Shoppers City Liquor of Mitchell, S.D., Appellants, v. MILLER BREWING CO., INC., Appellee.

No. 86-5049.

United States Court of Appeals Eighth Circuit.

Submitted June 10, 1986.

Decided Aug. 12, 1986.

Rick Johnson, Gregory, S.D., for appellants.

Jerome Chapman, Washington, D.C., for appellee.

Before WOLLMAN, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and LARSON, ^* Senior District Judge.

WOLLMAN, Circuit Judge.

Assam Drug Co., Inc., and Downtown, Inc., appeal the district court's ¹ grant of summary judgment in their action against Miller Brewing Company, Inc., seeking damages and injunctive relief for alleged violations of South Dakota antitrust law. Assam and Downtown claimed that Miller restrained trade by its use of a distributor agreement defining exclusive territories where distributors may market Miller products. The district court, in granting Miller's motion for summary judgment, found that Miller had no power in the relevant market. The issue in this appeal is whether summary judgment should be granted in an antitrust case of vertical nonprice restraint where the plaintiff has not shown that the defendant has market power.

I

Assam Drug Co. and Downtown, Inc., are corporations under the common ownership of a single family. Assam is located at Sioux Falls, South Dakota, and Downtown is located at Mitchell, South Dakota. Both corporations are retail sellers of beer and other alcoholic beverages. Miller Brewing Company produces and sells beer, which it distributes through a national network of more than 700 independent distributors.

Beginning in 1976, Assam and Downtown bought their Miller products through Brewster Distributing Company, a Watertown, South Dakota, distributor. Assam and Downtown chose to obtain their Miller products in Watertown because Brewster offered a lower price and an attractive discounting policy. In May 1983 Miller entered into a revised distributor agreement with Brewster and its other distributors. Prior distributor agreements used by Miller had assigned each distributor an area of primary responsibility but did not prohibit sales outside that area. Under the new distributor agreement, Brewster was appointed the sole Miller distributor for a limited geographical area. ² The area assigned to Brewster excluded Sioux Falls and Mitchell, the respective locations of Assam and Downtown. ³ Consequently, Brewster discontinued selling Miller products to Assam and Downtown in order to comply with the distributor agreement.

Assam and Downtown sued Miller in South Dakota state court alleging that the exclusive territory provision of the distributor agreement violated South Dakota antitrust law. Assam and Downtown alleged that, as a result of the distributor agreement, competition in the sale of beer in South Dakota had been reduced and, more specifically, that Assam and Downtown were paying higher prices for beer than they had previously paid to Brewster.

Miller removed the action to the federal district court. After a year of discovery, Miller moved for summary judgment. Miller claimed that Assam and Downtown had failed to establish the threshold legal requirement of Miller's market power. ⁴ The district court agreed with Miller. Assam Drug Co. v. Miller Brewing Co., 624 F.Supp. 411 (D.S.D.1985). The court found that "the market power test is analytically sound and consistent with * * * pro-competitive values," id. at 413, concluded that "it is clear that defendant does not possess market power in the product market relevant to this case," id. at 414, and granted summary judgment for Miller.

II

A

Although Assam and Downtown brought this suit under South Dakota antitrust law, S.D. Codified Laws Sec. 37-1-3.1 (1977), our analysis does not differ significantly from that applied to actions brought under the federal antitrust laws. The South Dakota statutory language governing restraint of trade ⁵ is similar to section one of the Sherman Act, ⁶ and the South Dakota legislature has indicated that federal court interpretations of the federal antitrust laws may be used as a guide in interpreting the state law. S.D. Codified Laws Sec. 37-1-22 (1977). Furthermore, the South Dakota Supreme Court has stated that in construing the state law "great weight should be given to the federal cases interpreting the federal statute." Byre v. City of Chamberlain, 362 N.W.2d 69, 74 (S.D.1985).

B

The central issue in this case is whether we should adopt a threshold requirement of market power for antitrust cases involving vertical nonprice restraints. Our analysis of this issue requires a brief background review of the antitrust treatment of vertical nonprice restraints.

The antitrust laws, both South Dakota and federal, contain broad prohibitions of "restraint of trade." 15 U.S.C. Sec. 1 (1982); S.D. Codified Laws Sec. 37-1-3.1 (1977). But because it might be said that virtually all basic business arrangements restrain trade in some manner, the Supreme Court has confined the scope of the law to activity that unreasonably restrains trade. Standard Oil Co. v. United States, 221 U.S. 1, 60, 31 S.Ct. 502, 515, 55 L.Ed. 619 (1911). These restraints are judged by two standards. First, "there are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use." Northern Pacific Railway v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). Restraints of this type are categorized as per se violations of the law. The per se category is reserved for those activities that are "plainly anticompetitive." National Society of Professional Engineers v. United States, 435 U.S. 679, 692, 98 S.Ct. 1355, 1365, 55 L.Ed.2d 637 (1978). Restraints the effects of which are not so immediately apparent are judged under a second standard, the rule of reason. ⁷ Under the rule of reason "the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 97 S.Ct. 2549, 2557, 53 L.Ed.2d 568 (1977).

The territorial restraint that we evaluate in this case is known as a vertical nonprice restraint. ⁸ Vertical restraints are those imposed by persons or firms that are above the restrained person or firm in the chain of distribution. ⁹ The antitrust treatment of vertical nonprice restraints has a lively past. In White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963), a case that the Supreme Court described as its "first case involving a territorial restriction in a vertical arrangement," id. at 261, 83 S.Ct. at 701 (emphasis omitted), the Court refused to apply a per se rule to vertical nonprice restraints. ¹⁰ Four years later in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967), the Court held that "[o]nce the manufacturer has parted with title and risk, he has parted with dominion over the product, and his effort thereafter to restrict territory or persons to whom the product may be transferred--whether by explicit agreement or by silent combination or understanding with his vendee--is a per se violation of Sec. 1 of the Sherman Act." Id. at 382, 87 S.Ct. at 1867. The per se rule announced in Schwinn was rejected, however, in Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). The Sylvania Court found that the rule of reason was the more appropriate test of the legality of vertical nonprice restraints. Id. at 59, 97 S.Ct. at 2562.

The Sylvania Court undertook a complete reexamination of the per se approach to vertical restraints, basing much of its analysis on the market impact of vertical restrictions. The Court noted that vertical restraints have the "potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition." ¹¹ Id. at 51-52, 97 S.Ct. at 2558. Vertical restraints may reduce intrabrand competition "by limiting the number of sellers of a particular product competing for the business of a given group of buyers." Id. at 54, 97 S.Ct. at 2559. On the other hand, vertical restraints may enhance interbrand competition "by allowing the manufacturer to achieve certain efficiencies in the distribution of his products." Id. Specifically, the Court noted at least three ways that vertical restraints may enhance interbrand competition: (1) new manufacturers and manufacturers entering new markets can use the restrictions to induce retailers to invest in capital and labor to the extent required to distribute products unknown to the consumer, id. at 55, 97 S.Ct. at 2560; (2) manufacturers can use the restrictions to induce retailers to engage in promotional activities or provide service and repair facilities, id.; and (3) manufacturers can use the restrictions to ensure product quality and safety. Id. at 55 n. 23, 97 S.Ct. at 2560 n. 23. Because of their potential for procompetitive effects, Sylvania held that vertical nonprice restraints should be tested by the rule of reason. ¹²

C

The vertical nonprice restraint at issue in this case is plainly subject to evaluation under the rule of reason. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). The rule of reason, however, is a vacuous standard and as such it provides little concrete direction for evaluating the competitive effects of a challenged restraint. ¹³ Some courts have narrowed the unlimited inquiry necessary under the rule of reason by requiring at the threshold that the plaintiff attacking a vertical nonprice restraint prove the defendant's substantial market power...