324 LIQUOR CORP., D/B/A YORKSHIRE WINE & SPIRITS, APPELLANT, V. THOMAS DUFFY, ET AL. 84-2022 In the Supreme Court of the United States October Term, 1985 On Appeal from the Court of Appeals of New York Brief for the United States as Amicus Curiae Supporting Appellant TABLE OF CONTENTS Questions Presented Interest of the United States Statement Summary of argument Argument: I. New York's statutory price maintenance scheme is inconsistent with the Sherman Act II. The court of appeals correctly held that the state action doctrine is inapplicable to New York's pricing scheme III. The New York court erred in concluding that the New York statute is shielded by the Twenty-first Amendment A. Where state liquor regulation falls outside the "core" of Twenty-first Amendment concerns, the state interest may have to yield to the federal commerce power B. New York's interest in maintaining retail prices cannot prevail against the federal interest in a competitive economy Conclusion QUESTIONS PRESENTED 1. Whether New York State's Alcoholic Beverage Control Law Section 101-bb (McKinney 1970 & Supp. 1986) is inconsistent with the Sherman Act. 2. Whether the state action doctrine immunizes the statutory scheme from Sherman Act challenge. 3. Whether Section 2 of the Twenty-first Amendment immunizes the statutory scheme from Sherman Act challenge. INTEREST OF THE UNITED STATES The United States has primary responsibility for enforcement of the federal antitrust laws and therefore has a substantial interest in assuring that those laws are construed in a manner that advances their objectives. At the Court's invitation, the United States filed a brief at the jurisdiction stage of this case. STATEMENT 1. Section 101-b(3) of the New York Alcoholic Beverage Control Law (ABC Law) (N.Y. Alco. Bev. Cont. Law (McKinney 1970 & Supp. 1986)) (hereinafter all references are to 1970 & Supp. 1986) regulates wholesale liquor pricing (J.S. App. 67A). It requires manufacturers and wholesalers of liquor to file monthly schedules containing their prices, per case and per bottle, for every item sold to retailers (ibid.). /1/ The statute does not prescribe wholesale prices; it simply requires that prices be posted monthly and adhered to during the following month (id. at 6A-7A). The statute does not itself require the wholesaler's bottle price to bear any direct relation to the wholesaler's case price. However, the State Liquor Authority (SLA) has promulgated Rule 16.4(e), which provides a formula for computing a bottle price (N.Y. Admin. Code tit. IX, Section 65.4(e) (Supp. 1986); J.S. App. 70A). For cases of 48 bottles or less, the formula requires the posted bottle price, multiplied by the number of bottles per case, to exceed the case price by a breakage charge of $1.92 (ibid.). ABC Law Section 101-bb(2) governs retail liquor prices (J.S. App. 64A-65A). It prohibits retailers from selling any item at less than "cost." "Cost" is defined not as the retailer's actual cost but as the wholesaler's posted "bottle price" in effect at the time the retail sale is made (which may be higher or lower than the price in effect when the retailer purchased), plus a 12% markup (ibid.). The wholesaler's posted "legal" prices are ceiling prices (J.S. App. 7A). Once a schedule of "legal" prices is filed, the statute prohibits a wholesaler from raising any price above the posted legal price in succeeding months, except to reflect increases in its suppliers' prices, and requires prices to be reduced to reflect any reductions in a wholesaler's costs. /2/ Wholesalers may, however, reduce -- or "post-off" -- prices as a temporary sale (ibid.). "Post-off" prices must appear on the monthly price schedules and become the effective prices charged to all customers during that month (see J.S. App. 87A, 88A; see also id. at 7A). When a wholesaler temporarily posts-off the case price of an item, it is not required to reduce the bottle price for that item as well. Under New York SLA Bulletin 471 (June 29, 1983) (J.S. App. 71A), a wholesaler offering a post-off case price has the option of (1) not reducing the bottle price at all (in which case the "legal" bottle price remains the basis for the 12% markup), (2) reducing the bottle price to correspond to the reduced case price, or (3) reducing the bottle price by a lesser amount. /3/ The effect of these various requirements is to permit a wholesaler to fix its retailers' "costs," below which they are not permitted to sell, at an amount substantially and arbitrarily higher than the price the retailers actually pay plus the statutory markup. First, the wholesaler's case price (at which retailers generally buy) may be lower when the retailers stock up than at the later time when the retailers sell. Second, and more important, Bulletin 471 permits wholesalers to reduce case prices to retailers without reducing posted bottle prices and thus to prevent retailers from reflecting some or all of their savings in reduced retail prices (see J.S. App. 5A). /4/ 2. Appellant, a retail liquor store in New York, sold liquor to state investigators at prices more than 12% above the wholesale case price then in effect (J.S. 7-8 & nn. 8-9), but was nevertheless found guilty by the SLA of violating ABC Law Section 101-bb by selling liquor at a price lower than its statutorily defined cost based on the posted bottle price (J.S. App. 4A, 77A-79A). Appellant sought to annul the determination on the ground, inter alia, that Section 101-bb constitutes a resale price maintenance scheme inconsistent with the federal antitrust laws (J.A. 12). /5/ The SLA argued that the statutory scheme does not violate the Sherman Act because the minimum markup price provisions do not compel concerted anticompetitive activity. It further argued that the statute is immune from Sherman Act challenge under the "state action" doctrine (see Parker v. Brown, 317 U.S. 341 (1943)) and under the Twenty-first Amendment (J.S. App. 5A). 3. The New York Court of Appeals rejected the SLA's claims that the statute is immune from Sherman Act challenge under the state action doctrine of Parker v. Brown, supra, finding that here, as in California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), there was insufficient active state supervision of the resale price maintenance system for it to constitute state action (J.S. App. 9A-10A). The court concluded, however, that the statute was shielded from antitrust challenge by the Twenty-first Amendment, because "the state interest in protecting retailers which underlies (the ABC Law) is of sufficient magnitude to override the federal policy expressed in the antitrust laws" (J.A. App. 17A). The court also concluded that, in any event, the statute did not violate the Sherman Act because "the state policy of regulating prices to protect consumers and maintain extensive retail outlets is consistent with the federal statutes" (ibid.). Judge Jasen filed a separate opinion, concurring in the majority's conclusions that the New York statute is consistent with the federal antitrust laws and that it is shielded by the Twenty-first Amendment, but disagreeing with the majority's holding that the statute does not qualify for the state action defense (J.S. App. 19A). One judge dissented. Judge Kaye would have rejected the Twenty-first Amendment defense on the ground that the state policy asserted in defense of the liquor regulation -- maintenance of an orderly market for alcoholic beverages -- lacked a substantial basis (J.S. App. 27A). Judge Kaye also would have invalidated the statute as violative of the Sherman Act. He reasoned that "(e)ven if the pricing scheme could be upheld as furthering a State policy to protect small retailers against unfair competition, it goes well beyond, and by fixing minimum resale prices effectively and unnecessarily forecloses all competition" (ibid. (emphasis in original)). SUMMARY OF ARGUMENT The New York statute creates a resale price maintenance scheme: it permits wholesalers, by posting bottle prices, to set prices below which retailers may not lawfully sell. The New York scheme cannot be meaningfully distinguished from the statutory pricing scheme that this Court held invalid under the Sherman Act in California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., supra. Contrary to the view of the state court, the New York scheme cannot be justified, as an antitrust matter, on the ground that it shelters small retailers from price competition. The purpose of the antitrust laws is "the protection of competition, not competitors." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (emphasis in original). A policy of "stabilizing the retail market and protecting the economic position of small liquor retailers" (J.S. App. 15A) is "nothing less than a frontal assault on the basic policy of the Sherman Act." National Society of Professional Engineers v. United States, 435 U.S. 679, 695 (1978). The New York Court of Appeals correctly applied the two-part Midcal test and rejected the state action defense. That test requires both an unambiguous state policy and active supervision by the state (445 U.S. at 105). Although the first part of the test is satisfied here because the State has a clearly articulated intention to displace competition with regulation of retail liquor pricing, the statute fails the second part of the test: since the lawful retail price depends on the wholesaler's "bottle" price, which need not bear any relation to the case price at which the wholesaler actually sells, the statute gives liquor wholesalers broad, unsupervised discretion to determine minimum retail prices and profit margins. The New York court erred in concluding that the Twenty-first Amendment shields the state statute. The state interests asserted here are plainly not "core" interests protected by that Amendment and will not withstand the "careful scrutiny" required by Midcal, 445 U.S. at 110. The suggestion of a state interest in protecting small retailers against predatory pricing is unsupported by evidence, implausible, and in any event cannot justify a scheme that enables wholesalers to dictate retail prices substantially above the retailer's cost. The state's interest in protecting small retailers from lawful competition is directly contrary to, and cannot prevail against, the strong federal interest in competition embodied in the antitrust laws. ARGUMENT I. NEW YORK'S STATUTORY PRICE MAINTENANCE SCHEME IS INCONSISTENT WITH THE SHERMAN ACT The "threshold question" is whether New York's pricing plan for liquor conflicts with the Sherman Act (California Liquor Dealers Ass'n v. Midcal Aluminum, 445 U.S. at 102). The court of appeals asserted that "the state policy of regulating prices to protect consumers and maintain extensive retail outlets is consistent with the federal (antitrust) statutes" (J.S. App. 17A). The court did not offer any legal analysis or support for this position, but it apparently believed that "stabilizing the retail market and protecting the economic position of small liquor retailers" (id. at 15A) are procompetitive goals. As this Court has emphasized, however, the purpose of the antitrust laws is "the protection of competition, not competitors." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (citation omitted; emphasis in original). /6/ The antitrust laws seek to enhance the welfare of consumers (Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979)), whose interests are served by competition, not by protecting small retailers against its effects. An industry-wide system of resale price maintenance mandated by statute is inherently anticompetitive. The New York scheme of resale price maintenance precludes all manufacturers and wholesalers from pursuing a strategy involving price competition among their dealers. /7/ It therefore denies consumers the benefits of competition among manufacturers and wholesalers free to formulate their marketing strategies in light of their perceptions of consumer needs and preferences. /8/ It protects only the interests of retailers preferring to avoid vigorous price competition -- to the detriment of consumers. Moreover, as this Court has observed, imposition of resale price maintenance on an industrywide basis may facilitate cartelization. Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 51 n.18 (1977). The state court's conclusion that New York's "system of price maintenance" (J.S. App. 10A) is consistent with the Sherman Act ignores the clear holdings of this Court to the contrary. Although commentators have debated the merits of a rule outlawing all resale price maintenance agreements, /9/ this Court has not departed from the view that vertical price-fixing is illegal per se under the federal antitrust laws. Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373, 408-409 (1911); see Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. at 761 & n.7. In Midcal, the Court ruled that a statutory scheme requiring wine producers and wholesalers to file fair trade contracts or schedules that establish binding resale prices "plainly constitutes resale price maintenance in violation of the Sherman Act" (445 U.S. at 99, 103). New York's retail liquor pricing scheme is not materially different from the system condemned in Midcal: New York wholesalers post prices that determine their customers' minimum resale prices. As the responsible New York legislative committee explained when Section 101-bb(2) of New York's ABC Law was amended in 1971, the amendment established a system of "resale price maintenance * * * enforced by the States." N.Y. Senate Excise Comm., Final Report 16-17 (1971) (hereinafter cited as Final Report). Indeed, the state court acknowledged that New York's statute provides for "minimum pricing" (J.S. App. 6A; cf. id. at 10A), and the court did not suggest that the statutory scheme was materially different from the resale pricing scheme in Midcal (see, e.g., J.S. App. 12A-13A (relying on differences in legislative history)). Appellees assert that New York's statute merely imposes a minimum percentage markup. They say that wholesalers set their own prices, which have "no impact on retail prices except as flow from the operation of the statutorily mandated minimum 12 percent mark-up on retail prices" (Mot. to Dis. or Aff. 9). /10/ But appellees are simply ignoring the fact that the New York scheme empowers wholesalers to dictate retail prices essentially without regard to what the wholesalers charge for a case of liquor. /11/ Under the regulatory scheme upheld by the New York court, wholesalers may, as in this case, charge a "post-off" case price lower than the "legal" case price but may decide in their own discretion the extent to which that reduction in actual case price will be reflected in the bottle price on which the retail price is based. /12/ While offering a post-off case price lower than the legal price, wholesalers can give their retailers the protected cushion of a statutorily mandated 12% markup above a bottle price significantly higher than the retailers' actual cost. /13/ Thus, New York does not have a simple percentage markup statute, as appellees contend. /14/ Like the producers and wholesalers in Midcal, New York liquor wholesalers dictate the prices that retailers must charge. See Midcal, 445 U.S. at 103. /15/ Nor does the State's role here mean that there is no "combination" in restraint of trade. In Midcal, where the private parties acted under state compulsion similar to that present here (cf. Mot. to Dis. or Aff. 7-9), /16/ the Court found vertical dictation plus state compulsion sufficient to create a combination. In Fisher v. City of Berkeley, No. 84-1538 (Feb. 26, 1986), slip op. 7, the Court recently explained that although the restraint in Midcal was "'hybrid,' in that nonmarket mechanisms merely enforce(d) private marketing decisions * * * (, when) private actors are thus granted 'a degree of private regulatory power' * * * the regulatory scheme may be attacked under Section 1 (of the Sherman Act)." /17/ The pricing scheme in Midcal "entailed a * * * degree of free participation by private economic actors," and so "the mere existence of legal compulsion did not turn (the) scheme into unilateral action by the State" (Fisher, slip op. 8). /18/ Similarly, New York's "minimum pricing" arrangement (J.S. App. 6A), which affords private economic actors substantial discretion over minimum retail prices, necessarily conflicts with the federal antitrust laws. II. THE COURT OF APPEALS CORRECTLY HELD THAT THE STATE ACTION DOCTRINE IS INAPPLICABLE TO NEW YORK'S PRICING SCHEME The Court of Appeals of New York properly concluded that the resale price maintenance scheme required by Section 101-bb does not constitute state action under the doctrine of Parker v. Brown, supra. In Midcal this Court enunciated two standards for antitrust immunity under the state action doctrine. "First, the challenged restraint must be 'one clearly articulated and affirmatively expressed as state policy'; second, the policy must be 'actively supervised' by the State itself" (445 U.S. at 105 (citation omitted)). /19/ The Court concluded that the first test was satisfied because the California statute clearly indicated a purpose to permit resale price maintenance (ibid.). The second standard was not met, however, because "(t)he State simply authorizes price setting and enforces the prices established by private parties. The State neither establishes prices nor reviews the reasonableness of the price schedules * * * . The State does not monitor market conditions or engage in any 'pointed reexamination' of the program" (id. at 105-106 (footnote omitted)). The New York statute in this case is indistinguishable from the California statute for purposes of state action analysis. The New York statute meets the first Midcal test because it plainly evidences a legislative policy to impose resale price maintenance (J.S. App. 10A). But the second test is not satisfied for, as the state court observed, "(l)iquor prices are set by the wholesalers and the State has no power to change the prices or review their reasonableness" (ibid.). /20/ As we have noted (see pages 11-12, supra), the wholesaler has unsupervised discretion to determine whether the retailer's cost shall be computed on the basis of a "post-off" price at which the wholesaler actually sells to the retailer, the higher "legal" price, or a price in between, as well as unfettered discretion to set its legal price initially and to adjust it thereafter within certain limits. Thus, wholesalers can elect to guarantee retailers profit margins significantly in excess of 12%. /21/ When a state chooses to displace competition, it must replace it with adequate regulation. See City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 413 (1978) (opinion of Brennan, J.); Town of Hallie v. City of Eau Claire, No. 82-1832 (Mar. 27, 1985), slip op. 4, 9. New York's decision to allow wholesalers broad, unsupervised discretion over retail prices removes this scheme from the realm of state action. III. THE NEW YORK COURT ERRED IN CONCLUDING THAT THE NEW YORK STATUTE IS SHIELDED BY THE TWENTY-FIRST AMENDMENT A. Where State Liquor Regulation Falls Outside The "Core" Of Twenty-first Amendment Concerns, The State Interest May Have To Yield To The Federal Commerce Power Section 1 of the Twenty-first Amendment repealed prohibition; Section 2 gave the states power to regulate or prohibit entirely "transportation or importation", and hence the use, of intoxicating liquor within their borders. Section 2 did not entirely repeal the Commerce Clause with respect to state liquor regulation; it merely created an exception to the normal operation of that clause by reserving to the states power to impose certain burdens on interstate commerce in intoxicating liquor. Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 711-713 (1984); Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324, 330-332 (1964). "Both the Twenty-first Amendment and the Commerce Clause are parts of the same Constitution. Like other provisions of the Constitution, each must be considered in the light of the other, and in the context of the issues and interests at stake in any concrete case" (Midcal Aluminum, 445 U.S. at 109 (quoting Hostetter, 377 U.S. at 332)); cf. Larkin v. Grendel's Den, Inc., 459 U.S. 116 (1982) (states may not exercise powers under the Twenty-first Amendment in a way that impinges upon the Establishment Clause of the First Amendment). When state regulation of the liquor industry conflicts with federal law grounded in the commerce power, the question is "whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies." Capital Cities, 467 U.S. at 714; accord, Bacchus Imports, Ltd. v. Dias, No. 82-1565 (June 29, 1984), slip op. 11-12. The Twenty-first Amendment "grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system" (Midcal, 445 U.S. at 110). Although it grants the states "substantial discretion to establish other liquor regulations, those controls may be subject to the federal commerce power in appropriate situations" (ibid.). Accordingly, in Midcal, the Court carefully scrutinized the State's interest in maintaining resale prices of alcoholic beverages as against the "familiar and substantial" federal interest reflected in the Sherman Act. It concluded that California's interests in promoting temperance and protecting small retailers against predatory pricing by large retailers did not outweigh the substantial federal interest embodied in the antitrust laws (445 U.S. at 110-114). /22/ B. New York's Interest In Maintaining Retail Prices Cannot Prevail Against the Federal Interest In A Competitive Economy In Midcal the Court said, "We need not consider whether the legitimate state interests in temperance and the protection of small retailers ever could prevail against the undoubted federal interest in a competitive economy" (445 U.S. at 113-114). Here, the state court concluded that the State's interest in protecting small retailers outweighed the federal interest in promoting competition. The state court emphasized that in Midcal this Court relied on the California courts' conclusion that the State's interest in protecting small retailers was not advanced by the resale price maintenance program (id. at 112-113). On the other hand, it believed, the history of New York's provision "demonstrates New York's commitment to protect its small retailers and the investigative determinations upon which the statutes intended to do so are premised" (J.S. App. 15A). /23/ The court below did not, however, make any finding that Section 101-bb effectively serves the purpose of protecting either small retailers or consumers. /24/ Nor would the history upon which the court relied justify such a conclusion. The court cited the report of the state Senate Excise Committee, which found that between 1964 and 1971 (when the statute simply prohibited sales "below cost") the number of retail stores declined. That same report also noted, however, that during that period many "small retailers" gained substantially in sales volume and market share to become "large" retailers (Final Report 3, 12-13). And although the Excise Committee concluded that action was required to preserve small retailers, the court below cited nothing in the report to indicate that the current system would be likely to accomplish that purpose. In light of the evidence cited by the California Supreme Court and this Court in Midcal concerning the adverse correlation between the growth of small retail stores and "fair trade" laws, /25/ it cannot be assumed that a system of resale price maintenance would have such an effect. The state court suggested that the resale price maintenance scheme was adopted to prevent "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" (J.S. App. 15A). If the state court was referring to predatory (below cost) pricing, its conclusion has several fundamental flaws. First, the legislative history on which it is based contains no finding of a likelihood of predation as distinct from vigorous competition. See J.S. App. 14A-15A. Second, any fear of successful retailer predation in this industry is far-fetched, see Matsushita Electric Industrial Co. v. Zenith Radio Corp., No. 83-2004 (Mar. 26, 1986), slip op. 13-15, especially since New York liquor retailers are limited to one outlet (ABC Law Section 63). Third, and most important, the New York statutory scheme goes far beyond anything reasonably necessary to preclude predatory pricing. Section 101-bb on its face prohibits a retailer from pricing "below cost," but the statute defines "cost" in an artificial manner. It bases the retailer's "cost" on a bottle price that may have no relation to the case price that the retailer actually pays. The wholesaler need not reduce the "legal" bottle price to reflect a "post-off" case price, and the resale price must be based on the wholesale price at the time of the retail sale -- a price that may differ from the price in effect at the time of the retailer's purchase from the wholesaler (see pages 2-4, supra). /26/ Thus, the scheme goes far beyond the prohibition of actual below cost pricing, and precludes competitive nonpredatory pricing as well. The State may have an interest in protecting small retailers against the lawful competition of their more efficient competitors, but, first, that interest is plainly not among the core state interests protected by the Twenty-first Amendment. Indeed, the New York statute does not (directly or indirectly) prohibit, or regulate, or tax the "transportation or importation" or use of intoxicating liquors at all (Amend. XXI, Section 2); any small effect on those activities is an incidental result of a scheme to insulate from competition the merchants who deal in that commodity. In any event, any such state interest is not merely in conflict with, but a "frontal assault" upon, the interest embodied in the Sherman Act (National Society of Professional Engineers v. United States, 435 U.S. 679, 695 (1978)), and simply cannot "prevail against the undoubted federal interest in a competitive economy" (Midcal, 445 U.S. at 114). CONCLUSION The judgment of the New York Court of Appeals should be reversed. Respectfully submitted. CHARLES FRIED Solicitor General DOUGLAS H. GINSBURG Assistant Attorney General LOUIS R. COHEN Deputy Solicitor General W. STEPHEN CANNON Deputy Assistant Attorney General HARRIET S. SHAPIRO Assistant to the Solicitor General CATHERINE G. O'SULLIVAN ANDREA LIMMER Attorneys MAY 1986 /1/ The schedule must be filed with the State Liquor Authority (SLA) by the fifth day of the month preceding the month in which the schedule is to take effect (ABC Law Section 101-b(4); J.S. App. 68A). The SLA must make all schedules available for inspection by other wholesalers as well as the general public (id. at 68A-69A). Wholesalers have three days after inspection to amend their schedules to meet (but not beat) the prices of competing wholesalers (id. at 68A). /2/ ABC Law Section 101-b(3); J.S. App. 68A. /3/ Rule 16.4(e) states that "(v)ariations (from the bottle price formula) will not be permitted without approval of the (State Liquor) (A)uthority." N.Y. Admin. Code tit. IX, Section 65.4(e) (Supp. 1986). J.S. App. 70A. Bulletin 471, which authorizes bottle prices that have no direct relationship to the case price, may be viewed as the requisite SLA "approval" for deviations from Rule 16.4. See R.71. The New York Court of Appeals did not discuss Rule 16.4 or its relationship to Bulletin 471. The court did conclude, however, that Bulletin 471 is consistent with the statute since Section 101-b(3) does not "mandate any price ratio between scheduled case and bottle prices" (J.S. App. 18A). That interpretation of the statute by the highest state court is binding on this Court. California Retail Liquors Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 111-112 (1980); Memorial Hospital v. Maricopa County, 415 U.S. 250, 256 (1974); Kingsley International Pictures Corp. v. Regents, 360 U.S. 684, 688 (1959). /4/ The sample schedules in the record (J.A. 16-17, 36-37) indicate that the bottle prices for some post-off items are reduced to the full extent permitted by the Rule 16.4 formula. For many other items, however, the wholesaler has posted a bottle price that reflects none or only part of the reduction in the case price. /5/ Appellant also contended that the SLA exceeded its authority in promulgating Rule 16.4 and in issuing Bulletin 471 (J.A. 11-12). /6/ The appellees assert that Section 101-bb does not conflict with the Sherman Act because its aim is to "preserve competition" by "protect(ing) the retail liquor market from the predatory practices of large retailers" (Mot. to Dis. or Aff. 4). This is incorrect. See pages 22-23, infra; J.S. App. 27A (Judge Kaye dissenting). /7/ In contrast, a vertical restraint unilaterally imposed by a manufacturer or wholesaler may be part of a marketing strategy intended to make it a more effective competitor. It leaves other manufacturers or wholesalers free to make their own judgments about how best to compete for the favor of consumers -- either adopting or not adopting their own vertical restraints. See Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 762-763 (1984); Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 54-56 (1977). /8/ See R. Bork, The Antitrust Paradox 289-290 (1978); Marvel & McCafferty, The Welfare Effects of Resale Price Maintenance, 28 J.L. & Econ. 363, 374, 377 (1985). /9/ See, e.g., Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & Econ. 86 (1960); R. Posner, Antitrust Law, an Economic Perspective 147ff, 165-166 (1976); R. Bork, supra, at 290-298; Goldberg, The Free Rider Problem, Imperfect Pricing, and The Economics of Retailing Services, 79 Nw. U.L. Rev. 736 (1984); Marvel & McCafferty, The Welfare Effects of Resale Price Maintenance, supra; Comanor, Vertical Price-fixing, Vertical Market Restrictions, and the New Antitrust Policy, 98 Harv. L. Rev. 983 (1985); Phillips & Mahoney, Unreasonable Rules and Rules of Reason: Economic Aspects of Vertical Price-fixing, 30 Antitrust Bull. 99 (1985); Ornstein, Resale Price Maintenance and Cartels, 30 Antitrust Bull. 401 (1985). /10/ Appellees also attempt to distinguish this case from Midcal on the ground that the California price posting scheme had a horizontal price effect at the wholesale level while the New York system does not (Mot. to Dis. or Aff. 8-9). Under the California statute, all wholesalers in a trading area were bound by a price schedule filed by one wholesaler (see Midcal, 445 U.S. at 99-100). But in Midcal the Court found a Sherman Act violation based on the resale price maintenance portion of the statute alone, emphasizing that the wine producer dictated its customers' minimum resale prices (id. at 102-103). /11/ Even if appellees' characterization of the scheme were accurate, there would still be resale price maintenance, because retailers would be precluded from setting their prices independently. The scheme might then constitute "state action" (see pages 14-17, infra). /12/ Wholesalers that charge post-off prices can thus set their legal prices solely for their effect on retail prices. Wholesalers do not enjoy that freedom under pure minimum markup statutes, which allow wholesalers to affect retail prices only by changing their own wholesale prices. /13/ Indeed, wholesalers apparently compete for sales to retailers by advertising guaranteed extra profit margins achieved in this manner (J.A. 32-35). /14/ Compare Morgan v. Division of Liquor Control, 664 F.2d 353 (2d Cir.), aff'g Serlin Wine & Spirit Merchants, Inc. v. Healy, 512 F. Supp. 936 (D. Conn. 1981), on which appellees rely (see Mot. to Dis. or Aff. 8, 10). Morgan involved a Connecticut liquor pricing statute that prescribed specific minimum markups, based on "actual cost(s)" (or "bottle price(s)" that are statutorily defined to reflect actual costs (see 664 F.2d at 355); Conn. Gen. Stat. Ann. Section 30-1 (7) (West Supp. 1985)), at both the wholesale and retail levels. The statute did not authorize wholesalers to set resale prices; the state legislature itself performed this activity through specific statutory formulae. Compare also Fisher v. City of Berkeley, No. 84-1538 (Feb. 26, 1986), discussed pages 13-14, infra. /15/ Battipaglia v. New York State Liquor Authority, 745 F.2d 166 (2d Cir. 1984), cert. denied, No. 84-974 (Mar. 4, 1985), on which appellees rely (Mot. to Dis. or Aff. 7-9), is thus readily distinguishable. Battipaglia involved a challenge to New York's wine pricing provisions -- ABC Law Section 101-bbb -- which parallel the liquor pricing provisions in Section 102-bb. The Second Circuit upheld the wine price posting provisions in Battipaglia because the New York Court of Appeals previously had invalidated -- solely on the authority of Midcal -- that portion of Section 101-bbb that prohibited retail wine sales below the prices established in the retail price schedule. Battipaglia, 745 F.2d at 172; William J. Mezzetti Associates v. State Liquor Authority, 51 N.Y.2d 761, 411 N.E.2d 791, 432 N.Y.S.2d 372 (1980). Thus, when the Second Circuit decided Battipaglia, Section 102-bbb did not provide for resale price maintenance for wine; all that it requires was that wholesalers post and adhere to their (unilaterally set) wine prices (745 F.2d at 172). The New York Court of Appeals refused to follow Mezzetti in this case, however, on the ground that New York "has historically regulated traffic in distilled spirits (more) strictly (than wine)" (J.S. App. 16A-17A). /16/ The California statute permitted wine producers to set prices through a fair trade contract but required wholesalers to post a resale price schedule if the producer failed to do so (Midcal, 445 U.S. at 99). See also Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982) (Midcal involved a "statute (that facially) conflicted with the Sherman Act because it mandated resale price maintenance" (emphasis in original)). /17/ See also Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951), where a Louisiana statute authorizing liquor distributors to enforce minimum retail prices against all retailers, whether or not the retailer had "agreed to the price restrictions," was struck down because "both the selection of minimum price levels and the exclusive power to enforce those levels were left to the discretion of distributors" (Fisher, slip op. 7-8). "While the petitioner-retailer in that case may have been legally required to adhere to the levels so selected, the involvement of his suppliers in setting those prices made it impossible to characterize the regulation as unilateral action by the State of Louisiana" (id. at 8). /18/ The city ordinance establishing rent ceilings for all residential property at issue in Fisher, on the other hand, was not "the product of an illegal 'contract, combination . . . , or conspiracy'" (slip op. 4 (citation omitted)) because "(n)ot just the controls themselves but also the rent ceilings they mandate have been unilaterally imposed on the landlords by the city" (id. at 9). /19/ In recent decisions, the Court has reaffirmed the applicability of the Midcal standard to cases involving private conduct authorized or compelled by the State. In Southern Motor Carriers Rate Conference, Inc. v. United States, No. 82-1922 (Mar. 27, 1985), slip op. 8, the Court noted, "(t)he circumstances in which Parker immunity is available to private parties, and to state agencies or officials regulating the conduct of private parties, are defined most specifically by our decision in (Midcal)." See also Town of Hallie v. City of Eau Claire, No. 82-1832 (Mar. 27, 1985), slip op. 4 n.3 (although Midcal involved an action against a state agency, it required the same analysis as cases involving state regulation of private anticompetitive acts). Fisher, slip op. 9 (Midcal has force where "what appears to be a state- * * * administered price stabilization scheme is really a private price-fixing conspiracy, concealed under a 'gauzy cloak of state involvement'" (citation omitted)). /20/ Appellees refer (Mot. to Dis. or Aff. 10 n.*) to Judge Jasen's concurrence, which emphasized the SLA's issuance of Bulletin 471 and its ability to authorize wholesale price increases in special cases as indications that the SLA "monitor(s) market conditions" (J.S. App. 24A-25A). The concurrence also relief on periodic legislative debates on liquor pricing to demonstrate the necessary "pointed reexamination" of the State's policies (J.S. App. 24A, 25A). But even if these sporadic activities constituted monitoring or "pointed reexamination" of the operation of the resale price maintenance program, that alone would not suffice to immunize a statutory scheme that delegates to private parties the authority to make pricing decisions without supervision (see Midcal, 445 U.S. at 105-106, noting that the State "neither establishes prices nor reviews the reasonableness of the price schedules; nor does it regulate the terms of fair trade contracts"). /21/ Thus appellees' reliance (Mot to Dis. or Aff. 9-10) on Hoover v. Ronwin, No. 82-1474 (May 14, 1984), is misplaced. In Ronwin, this Court reaffirmed that when the anticompetitive activity being challenged is that of the State itself, acting as sovereign, it is immune from Sherman Act challenge (Ronwin, slip op. 14 & n.24; Parker v. Brown, 317 U.S. at 350-351; Community Communications Co. v. City of Boulder, 455 U.S. 40, 52-56 (1982)). In Ronwin, as in Bates V. State Bar, 433 U.S. 350 (1977), an unsuccessful bar applicant challenged the denial of his admission as anticompetitive. This Court concluded that, since the Arizona Supreme Court itself made the ultimate decision whether to grant or deny bar admission to a candidate, the conduct was that of the State itself (Ronwin, slip op. 20-21 n.33; see also Bates, 433 U.S. at 359-361). Ronwin reemphasized, however, that the Midcal test governs private conduct undertaken pursuant to state authorization or discretion (slip op. 9, 20-21 n.33). Appellees claim (Mot. to Dis. or Aff. 9-10) that Ronwin is controlling here because, they assert, the challenged anticompetitive activity is that of the State itself, rather than the acts of private parties. But that assertion is simply incorrect. It is not the State, but private parties (i.e., the wholesalers), that determine retail prices and retail profits (see pages 2-4, supra). /22/ Similarly, in Capital Cities Cable, Inc. V. Crisp, supra, the Court held invalid an Oklahoma statute requiring cable broadcasters to delete liquor advertisements from out-of-state programs transmitted to Oklahoma subscribers. The Court acknowledged Oklahoma's legitimate interest in promoting temperance and accepted its judgment that restrictions on liquor advertising promoted that interest, but concluded that the State's interest was less substantial than the federal interest in the availability of cable services (467 U.S. at 714-716). Thus, the Court held that "when, as here, a state regulation squarely conflicts with the accomplishment and execution of the full purposes of federal law, and the state's central power under the Twenty-first Amendment of regulating the times, places, and manner under which liquor may be imported and sold is not directly implicated, the balance between state and federal power tips decisively in favor of the federal law, and enforcement of the state statute is barred by the Supremacy Clause" (id. at 716 (footnote omitted)). /23/ In recommending the 12% markup amendment to Section 101-bb in 1971, the Senate Excise Committee identified a central purpose of the legislation of "promoting temperance" (Final Report 18, 35; ABC Law Section 101-bb(1)). The court below did not rely on that state interest in this case: the court noted (J.S. App. 16A n.2) that when Section 101-bb was first enacted in 1964 as a simple prohibition of below-cost pricing, the Moreland Commission had concluded that the assumed correlation between high liquor prices and temperance did not exist. In 1971, when Section 101-bb was amended, the Senate Excise Committee did voice concern that per capita consumption of liquor had increased substantially since 1964, as liquor prices had decreased. The Committee did not conclude that low prices necessarily led to increased consumption, but it did conclude that "even if (state policies) do not serve to arrest the rising tide of consumption of alcohol, at least (they should) make no contribution thereto," and that "(an) all out emphasis on low liquor prices" would not "assist in influencing drinking habits" (Final Report 15). The Committee's report did not suggest that a resale price maintenance scheme would promote temperance, however. Rather, as the court below implicitly found, it was retailer protection alone that prompted the legislation, particularly the 12% markup amendment in 1971 (Final Report 30, 37). /24/ The court concluded generally that if consumers are "to be protected from inflated prices and to enjoy the benefits to be derived from market competition, then the regulatory provisions in section 101-bb and related sections best serve that purpose" (J.S. App. 15A-16A (emphasis added; footnote omitted)). The "consumer protection" goal of eliminating the price discrimination suffered by New York residents emphasized by the appellate court is not served by the price-posting section, however, but by ABC Law Section 101-b(3)(d), requiring the manufacturer to affirm that its wholesale prices are no higher than those it charges in other states (J.S. App. 6A). Neither that section nor other "related" sections of New York's ABC Law are at issue in this case. Cf. Brown-Forman Distillers Corp. V. New York Liquor Authority, No. 84-2030 (argued Mar. 3, 1986). /25/ The Court noted in Midcal that "states with fair trade laws had a 55 percent higher rate of firm failures than free trade states, and the rate of growth of small retail stores in free trade states between 1956 and 1972 was 32 per cent higher than in states with fair trade laws" (445 U.S. at 113; citing S. Rep. 94-466, 94th Cong., 1st Sess. 3 (1975)). /26/ For example, retailers can stock up on items during post-off (i.e., "sale") periods and then hold the items and resell them when bottle prices rise.