NORTHWEST WHOLESALE STATIONERS, INC., PETITIONER V. PACIFIC STATIONERY & PRINTING CO. No. 83-1368 In the Supreme Court of the United States October Term, 1984 On Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit Brief for the United States as Amicus Curiae OPINIONS BELOW The opinion of the court of appeals (Pet. App. 25-55) is reported at 715 F.2d 1393. The oral opinion of the district court granting summary judgment in favor of petitioner (Pet. App. 22-24) is unreported. JURISDICTION The judgment of the court of appeals was entered on September 16, 1983. A petition for rehearing and rehearing en banc was denied on November 18, 1983. The petition for a writ of certiorari was filed on February 15, 1984. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(I). QUESTION PRESENTED Whether the termination of membership in a retailers' purchasing cooperative without a hearing or statement of reasons is so inherently anticompetitive that it may properly be deemed a per se violation of Section 1 of the Sherman Act without any inquiry into its likely effect on competition. This brief is filed in response to the Court's invitation to the Solicitor General to express the views of the United States STATEMENT 1. Petitioner Northwest Wholesaler Stationers (Northwest is an office supply purchasing cooperative organized under Oregon law (Pet. App. 56-58). Its approximately 100 members are retail office supply stores in the northwestern United States. Members may purchase as much or as little as they choose from the cooperative; they benefit from Northwest's year-end rebates, volume purchasing discounts, warehousing facilities, and inventory depth (Pet. App. 26). Respondent Pacific Stationery & Printing Co. (Pacific) operates as a wholesaler and retailer of office supplies in Portland, Oregan, and for twenty years was a member of the cooperative. In late 1978, the cooperative denied Pacific's membership renewal application. It is not clear on this record why Northwest expelled Pacific. Northwest argues that it denied Pacific's renewal application because Pacific failed to comply with a cooperative bylaw requiring members to disclose ownership changes (Pet. 8). Pacific disputes that contention and suggests that it was expelled because of its status as the only wholesaler in the cooperative (Br. in Opp. 11). In any event, when Pacific submitted a membership renewal application in an effort to comply with the bylaw requiring disclosure of ownership changes, its application was rejected without hearing or explanation (Pet. App. 27). The competitive context of the dispute is also unclear. Neither party has attempted to define a relevant market, but it seems that the retail office supply business is "highly fragmented" (Br. in Opp. 9), and that retailers can readily purchase supplies from numerous sources. Excerpt of Record (Exc.) 111-114. Northwest is not a particularly large operation; indeed, Pacific carries a much wider range of products than does the cooperative and it has a larger sales volume. /1/ The retail office supply chain stores in the Portland area do not belong to the cooperative, and some smaller stores also are not members (Exc. 34-35). Non-members -- including Pacific -- may purchase supplies from the cooperative, and at the same invoice price as members. /2/ Accordingly, the only disadvantage Pacific claims to have suffered from its expulsion is the loss of the year-end rebate to which Northwest's members are entitled, based on their individual purchases during the year (see Br. in Opp. 3, 8-9; Exc. 42-43, 111-114). /3/ The record does not permit an accurate judgment of the competitive significance of that loss to Pacific; however, Pacific received less than $10,000 in rebates during its last full year as a member, or slightly more that one-tenth of one percent of its gross wholesale and retail sales (see Exc. 102, 147). 2. In 1980, Pacific brought suit against Northwest in the United States District Court for the District of Oregon, alleging that the cooperative's action violated Section 1 of the Sherman Act (15 U.S.C. 1) and requesting damages and reinstatement as a cooperative member. After minimal discovery, both parties moved for summary judgment. Pacific argued that Northwest's action constituted a per se unlawful group boycott and that it could not be considered protected self-regulation because the cooperative had not afforded Pacific the procedural safeguards allegedly required by Silver v. New York Stock Exchange, 373 U.S. 341 (1963). The district court granted summary judgment for Northwest. In the district court's view, it was "not proper to consider the action by (Northwest) in expelling a member as a group boycott," and there was no showing in the record of a "restraint of competition as distinguished from the allegations and charges of damage to (Pacific)" by being expelled (Pet. App. 22-23). 3. A divided panel of the court of appeals reversed. The court began by observing that not all conduct that could be labelled a "group boycott" is per se unlawful (Pet. App. 30-31). However, the court concluded that Northwest's action "would normally constitute an illegal group boycott" because the cooperative diminished Pacific's ability to compete by depriving it of rebates (id. at 37). The court then considered whether the application of a per se approach here would conflict with Section 4 of the Robinson-Patman Act (15 U.S.C. 13b), which exempts from that statute's prohibition of price discrimination a cooperative's rebates of profits to its members. /4/ Relying on Silver v. New York Stock Exchange, supra, and Denver Rockets v. All-Pro Management, Inc., 325 F. Supp. 1049 (C.D. Cal. 1971), the court discerned an exception to the per se rule against group boycotts where: (1) there is a legislative mandate for self-regulation; (2) the group action is consistent with the policy justifying self-regulation; and (3) the group provides procedural safeguards that assure that its action is not arbitrary and furnish a basis for judicial review (Pet. App. 35-41). Without any discussion of the history or scope of Section 4, the court concluded that the Section's limited Robinson-Patman exemption "evince(s) legislative recognition that self-regulation is appropriate" for cooperatives, just as the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) provided a pervasive scheme for self-regulation by the defendant stock exchange in Silver (Pet. App. 41-42). The absence of any procedural safeguards, however, meant that "Northwest cannot qualify for the narrow rule of reason exception to the usual per se rule against group boycotts" (id. at 44). The court stated that in the absence of a prior hearing, expulsion of a cooperative member is "so likely to be anticompetitive that it can be treated as per se unreasonable" (id. at 43-44). The court ordered that summary judgment be entered for Pacific on the issue of liability. In dissent, Judge Norris argued that the majority's approach "effectively writes into all state laws governing nonprofit cooperatives a federally mandated hearing" (Pet. App. 53). The dissent found Silver to be inapposite because the Court there required a procedural safeguard "to carry out the purposes of the Exchange Act -- purposes peculiar to that Act which appear to have nothing to do with the legislative purposes underlying the express exemption created for cooperatives under the Robinson-Patman Act" (Pet. App. 50-51). Although the dissenting judge agreed that Northwest could be subject to antitrust liability "if it conspired with some members to terminate other members for anticompetitive purposes and thereby achieve anticompetitive results," he saw no reason "for converting the expulsion of Pacific into a per se violation, entitling Pacific to treble damages, simply because Northwest has not adopted a bylaw providing notice and an opportunity to be heard before terminati(on)" (id. at 55). DISCUSSION The court of appeals' reasoning is fundamentally flawed on two counts. First, the decision incorrectly states that purchasing cooperatives may be exempt from per se scrutiny under the Sherman Act on the basis of Section 4 of the Robinson-Patman Act. Second, the court erroneously labels Northwest's conduct a per se unlawful group boycott without an adequate preliminary determination of the competitive consequences of that conduct. Nonetheless, the United States does not believe that review by this Court is warranted. The court of appeals' holding that Section 4 of the Robinson-Patman Act does not afford an exemption from per se liability under the Sherman Act in this case is correct, and other courts are unlikely to adopt its unsupported conclusion that Section 4 was intended to create such an exemption so long as procedural safeguards are available. With respect to the court's group boycott analysis, while clarification of this area of the law is desirable, we do not believe that this case presents an appropriate vehicle for accomplishing that objective. The record is virtually barren of evidence or findings that would support a reasoned judgment one way or the other about the purposes and likely competitive effects of Pacific's exclusion from the cooperative. Moreover, the unusual circumstances presented here -- in which the injury alleged is not due to a classic group boycott but rather is intertwined with the Robinson-Patman issue -- would make it difficult for the Court definitively to clarify the law of group boycotts. Recent decisions have markedly strengthened the trend in this Court's antitrust jurisprudence away from formalistic labelling and toward more discerning recognition of economic realities. In light of these precedents, the decision below is unlikely to have any significant impact on the development of the law. 1. The court of appeals erred in asserting that Section 4 of the Robinson-Patman Act constitutes a congressional mandate for self-regulation by cooperatives that affords them an exemption from per se antitrust liability if procedural safeguards are provided. Nothing in the Robinson-Patman Act's language or legislative history suggests that Congress intended to insulate cooperatives from such liability for anticompetitive actions beyond the express terms of the exemption, which applies only to price discrimination that would otherwise violate the Act. The most that can be said is that in excluding cooperative rebates from the coverage of the Act, Congress intended to allow small competitors to use the cooperative form to attempt to achieve parity with larger competitors. /5/ The fact that cooperatives may pay rebates without running afoul of the prohibition of price discrimination is not a broad mandate for self-regulation by competitors. Although a cooperative may be able to offer specialized justifications for allegedly anticompetitive behavior, neither Section 4 nor anything else in the antitrust laws suggests that Congress intended to confer on cooperatives a special antitrust exemption in order to accommodate self-regulatory powers beyond those available to other groups of potential competitors. /6/ The majority's on Silver v. New York Stock Exchange, supra, is unfounded. In Silver, the Court sought to reconcile a central purpose of the Securities Exchange Act of 1934 -- stock exchange self-regulation -- with the antitrust laws. The Act required exchanges to adopt rules providing "for the expulsion, suspension, or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade * * *." 15 U.S.C. (1970 ed.) 78f(b). Since Congress clearly contemplated and intended that exchanges would expel members for certain practices, the congressional purpose would be frustrated if such expulsions were held without more to violate the Sherman Act. Thus, the critical question in reconciling the two statutes was whether the self-regulatory conduct at issue was necessary to effectuate the purpose of the Exchange Act. /7/ Accordingly, Silver provides no support for the court of appeals' conclusion that Section 4 of the Robinson-Parman Act would have conferred an exemption from per se liability if the cooperative had provided procedural safeguards. /8/ Because the judgment of the court of appeals in favor of plaintiff does not necessarily depend on the court's discussion of the exemption issue, and because the deficiencies of the majority's reasoning should be readily apparent, we do not believe that its error in this regard calls for review by this Court. 2. The court's error in deciding (Pet. App. 34-35) that Pacific's expulsion from the cooperative under the circumstances presented constituted a per se unlawful group boycott is perhaps more troublesome. Its conclusion that the cooperative had unlawfully impaired Pacific's ability to compete by depriving it without a hearing of rebates available to members was too simplistic an approach to the complex problem of sanctions imposed by an association of competitors upon a member that allegedly has violated the association's rules. a. While group boycotts have often been said to be per se unlawful, /9/ most courts -- including the court of appeals here -- recognized that not all conduct that might arguably be labelled a "group boycott" is per se unlawful. /10/ Indeed, this Court has observed that" "'boycotts are not a unitary phenomenon.'" /11/ Several recent decisions of the courts of appeals have sensibly employed the rule of reason to analyze the impact of a cooperative association's conduct on both members and competing non-members in situations where the challenged conduct seemed likely to enhance competition. /12/ The court of appeals here did not adequately consider whether there was any competitive justification for Northwest's purported enforcement of a cooperative rule. Nor did the court consider the relevance of the cooperative's apparent lack of substantial economic power, of the arguably de minimis nature of the competitive disadvantage imposed on Pacific, or of the partly vertical relationship between Pacific (in its wholesale capacity) and the other cooperative members. /13/ In our view, the court of appeals should have taken a quick look at the challenged conduct and applied the per se standard only if it appeared that the predominant motivation and effect of the expulsion of Pacific were to utilize the collective power of the cooperative's members to injure Pacific's ability to compete with them. /14/ Conversely, if a quick look disclosed that the expulsion may have resulted in or been engendered by a desire to obtain efficiencies, then the legality of the cooperative's conduct should have been determined under the rule of reason. /15/ Such a quick look would not have been possible here because of the unsatisfactory state of the record. There is simply not enough in the record to make any sort of reliable judgment of either the purpose or the effect of the cooperative's action. Accordingly, although the court of appeals properly reversed the entry of summary judgment for Northwest, it should have remanded the case to the district court with instructions to make relevant findings upon a more developed factual record, rather than abruptly concluding that Pacific has proven a per se violation on the present record. /16/ The deficient record would make it difficult for this Court definitively to announce and apply any sort of quick-look approach to the group boycott question. Compare NCAA v. Board of Regents, No. 83-271 (June 27, 1984), slip op. 8-10, 17-33 (discussing and relying on district court findings made after trial); Jefferson Parish Hospital District No. 2 v. Hyde, No. 82-1031 (Mar. 27, 1984), slip op. 15-28 (same). b. The case also presents difficulties because Pacific's allegations are not typical of those made in the great majority of suits alleging illegal group boycotts. Pacific's complaint was characterized by the court of appeals as resting not simply on the denial of rebates available to members of Northwest, but also on its expulsion from the cooperative without the procedural safeguards allegedly required by Section 4 of the Robinson-Patman Act (see Pet. App. 28-29; but see id. at 47 & n.1 (Norris, J., dissenting)). /17/ Were the Court to determine (as we believe it would be required to do) that Section 4 has no application to these facts, then Pacific's complaint might be found meritless, without any need for the Court to reach the core of the group boycott issue. Moreover, unlike the usual group boycott case, Pacific has not been denied access to supplies, customers or essential facilities. Rather, it has been denied a share of the profits resulting from the joint activities of competitors, a category of activities that constitutes a concerted restraint of trade and that could, in some circumstances, amount to an unreasonable restraint of trade under Section 1. Quite understandably, neither party has thus far questioned the legality of those activities, although a determination of illegality could affect questions of both liability and damages for the alleged boycott. /18/ Cf. Eastman Kodak v. Southern Photo Materials Co., 273 U.S. 359, 377-378 (1927) (lost profits not measured by profits earned in monopolized market). While these considerations further show the incorrectness of the court of appeals' holding that a per se rule of liability should apply to exclusion of a would-be participant from a concerted restraint of trade, they also caution against review by this Court at the present stage of this case, in which neither the record nor the parties' legal theories have been adequately developed. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. REX E. LEE Solicitor General J. PAUL McGRATH Assistant Attorney General CHARLES F. RULE Deputy Assistant Attorney General CATHERINE G. O'SULLIVAN EDWARD T. HAND Attorneys AUGUST 1984 /1/ See Exc. 66-67, 111-112. In fiscal 1978, Northwest's sales were $5.8 million, while Pacific's sales (wholesale and retail) were $7.6 million (Exc. 66; Plaintiff's Answers to Defendant's First Set of Interrogatories 3). /2/ Exc. 14; see id. at 42-43. Northwest has never refused to sell Pacific any supplies it has ordered, even after the expulsion (Plaintiff's Answers to Defendant's First Set of Interrogatories 2). /3/ The court of appeals stated that as a result of the expulsion, Pacific has been denied the ability to use Northwest's warehousing and expedited order-filling facilities (Pet. App. 29). However, Northwest seems to be correct in arguing (Pet. 35n.11) that the court erred on this point. Pacific does not allege that it has been deprived of such services. /4/ Section 4 provides: Nothing in (the Robinson-Patman Act) shall prevent a cooperative association from returning to its members * * * the whole, or any part of, the net earnings or surplus resulting from its trading operations, in proportion to their purchases * * * from * * * the association. An Oregon statute contains a similar provision. Or. Rev. Stat. Section 646.030 (1981). /5/ See 3 E. Kintner & J. Bauer, Federal Antitrust Laws Section 25.8 (1983). The Federal Trade Commission and the courts have construed Section 4 very narrowly. See American Motor Specialties Co. v. FTC, 278 F.2d 225, 229 (2d Cir.), cert. denied, 364 U.S. 884 (1960) (Section 4 "does not confer upon cooperative associations any blanket exemption from the Robinson-Patman Act. It only protects a cooperative association from charges of violating the Act premised upon the association's methods of distributing earnings."). Accord, Mid-South Distributors v. FTC, 287 F.2d 512, 516 (5th Cir.), cert. denied, 368 U.S. 838 (1961). /6/ The petition does not present the question whether members of a "retailer" cooperative such as Northwest could justifiably exclude wholesalers or wholesaler/retailers in an effort to compete more effectively with larger competitors. /7/ The Silver Court determined that the challenged activity -- expulsion without notice and hearing -- was not necessary to effectuate Congress's regulatory policy. The Court specifically stated that the notice and hearing requirement was imposed not as a matter of antitrust law, but as part of the Exchange Act's duty of self-regulation, at least where the action taken would "otherwise be an antitrust violation" (373 U.S. at 364-365). /8/ Another important distinction between this case and Silver is the economic effect of the alleged boycott. In Silver, the stock exchange wielded enormous economic power and the "boycott" had a crushing effect on the plaintiff's ability to compete; in contrast, Pacific has been denied only a small amount of rebates whose competitive significance is unclear. /9/ See, e.g., Klor's Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212 (1959). /10/ See M & H Tire Co. v. Hoosier Racing Tire Corp., 733 F.2d 973, 980 (1st Cir. 1984); United States Trotting Ass'n. v. Chicago Downs Ass'n., 665 F.2d 781, 788 (7th Cir. 1981) (en banc). /11/ St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 543 (1978) (quoting P. Areeda, Antitrust Analysis 381 (2d ed. 1974)). /12/ See, e.g., Phil Tolkan Datsun, Inc. v. Greater Milwaukee Datsun, Inc. Dealers' Advertising Ass'n., 672 F.2d 1280, 1287 (7th Cir. 1982) ("(M)embership restrictions (imposed) by trade organizations not possessed of significant economic or operational leverage are more appropriately evaluated (under) the rule of reason."); United States v. Realty Multi-List, Inc., 626 F.2d 1351, 1367 (5th Cir. 1980) (realty association's membership criteria subject to rule of reason analysis). /13/ This Court has found group boycotts to be per se unlawful in cases where the defendants possessed great economic power and/or where the effect of the boycott was to destroy the plaintiff's ability to compete effectively. See Fashion Originators' Guild v. FTC, 312 U.S. 457, 462 (1941); Associated Press v. United States, 326 U.S. 1, 13 (1945); Klor's Inc., 359 U.S. at 210. Indeed, the "classic boycott" to which the per se rule has been applied is the effort by "a firm or firms at one level to drive out competitors by either directly denying or persuading or coercing suppliers or customers to deny relationships the competitors need in the competitive struggle." L. Sullivan, Handbook of the Law of Antitrust 261-262 (1977). Accordingly, boycotts with other vertical aspects fall "outside the classic horizontal group boycott paradigm." M & H Tire Co. v. Hoosier Racing Tire Corp., 733 F.2d at 977. /14/ Such a quick look at the economic realities of the situation -- as opposed to an academic reliance on labels divorced from any effort to understand the actual effect on competition of particular conduct -- is consistent with this Court's recent pronouncements in NCAA v. Board of Regents, No. 83-271 (June 27, 1984) (price-fixing), and Jefferson Parish Hospital District No. 2 v. Hyde, No. 82-1031 (Mar. 27, 1984) (tying). Although we believe that the Court should apply these principles to the group boycott context, we do not, for the reasons stated in text, consider this case an appropriate one in which to take this step. /15/ In the particular context presented here, there might be other justifications for Northwest's conduct, since the alleged "boycott" can be viewed as merely a decision by its members to make the restraint of trade inherent in their joint activities -- even if it is not illegal -- more limited than it otherwise would be. See page 12, infra. /16/ It may be that Northwest had pro-competitive reasons for expelling Pacific for failing timely to notify the cooperative of the change in its ownership. On the other hand, it may be that the alleged rule violation was merely pretextual, and that some of Northwest's members sought to place Pacific at a competitive disadvantage that might be more significant than is apparent on this record. /17/ We confess to some uncertainty in ascertaining precisely what are the positions of the parties. /18/ The nature of the damages sought by or to be awarded to Pacific -- whether they are limited to lost rebates or include lost profits due to a loss of sales traceable to Pacific's possibly higher supply costs in the absence of the rebates -- has not yet been clarified at this stage of the proceedings.