Is it time to rethink the blanket prohibition on tie-in sales so Black Friday releases can continually be held at the same retailers?
The question in the United States Supreme Court’s 1957 Black vs. Magnolia Liquor Company was a whether it was legal for a wholesaler to engage in tie-in sales? A deceptive issue given that the text of the Federal Alcohol Administration Act prohibited activities like forcing quotas on retailers or demanding exclusivity, but doesn’t directly prohibit tie-in sales. The notion of prohibiting tie-in sales developed as a regulation and enforcement standard from the agency that has morphed several times but has become the modern TTB. A notion which was girded by an antitrust principle from back then which considered tie-in sales per se monopolistic and had no place for today’s nuanced rule of reason analysis. Consider Robert Bork’s perspective:
Every person who sells anything imposes a tying arrangement. This is true because every product or service could be broken down into smaller components capable of being sold separately, and every seller refuses at some point to break the product down any further. . .
In Magnolia Liquor, the facts were “that, during the period in question, Johnny Walker Scotch and Seagram’s V.O. Whiskey were in short supply, while Seagram’s Ancient Bottle Gin and Seagram’s 7-Crown Whiskey were plentiful, Ancient Bottle being a poor seller. [A New Orleans based wholesaler of the products], in order to increase its sales of Ancient Bottle Gin and 7-Crown Whiskey, compelled retailers to buy them, which they did not desire, in order to obtain the other two whiskeys, which they did desire.”
“The agency found that respondent’s sales were ‘quota’ sales within the meaning of the Act, that they affected adversely the sales of competing brands, and ‘excluded, in whole or in part, distilled spirits . . . offered for sale by other persons in interstate commerce’ — all to the end of substantially restraining and preventing commerce. The Court of Appeals concluded that the transactions complained of, although tie-in sales, did not violate § 5 of the Act.” The Government appealed and the Supreme Court unanimously reversed.
The Court’s reasoning was that since the FAAA was based in part on a desire to stanch monopolistic practices in the liquor industry, antitrust principles should control. The Court reiterated that not only that “[t]ying agreements by which the sale of one commodity is conditioned on the purchase of another have been repeatedly condemned under the antitrust laws, since they serve no purpose beyond the suppression of competition. Standard Oil Co. v. United States, 337 U. S. 293, 337 U. S. 305-306; United States v. Paramount Pictures, 334 U. S. 131, 334 U. S. 156-159; International Salt Co. v. United States, 332 U. S. 392; Mercoid Corp. v. Minneapolis Honeywell Regulator Co., 320 U. S. 680.”
But also that historically, “[o]ne aim of Congress by the present legislation [The FAAA] was to prohibit practices that were “analogous to those prohibited by the antitrust laws”
Holding that “[t]he tie-in sales involved here seem to us to run afoul of that policy, since the retailer is coerced into buying distilled spirits he would otherwise not have purchased at that time, and other sellers of the products are, to that extent, excluded from the market that would exist when the demand arose. A wholesaler who compels a retailer to buy an unwanted inventory as a condition to acquisition of needed articles exacts a ‘quota’ from the retailer and excludes sales by competing wholesalers in the statutory sense.”
Thereby resting the decision squarely in the antitrust reasoning of the 1950s, and also finding that a tie-in sale was (as the Government had argued) a form of “quota” which are directly and explicitly prohibited by the FAAA.
The analysis wasn’t steeped in market research or fact. During oral argument, the question was asked of the Government “if they hadn’t taken this man’s gin, would they have taken another man’s gin”? The Government answered in the affirmative and that seemed to be the end of the analysis as to whether such a claim as to a monopoly or exclusionary sales were true. You can listen to the oral argument of the case through the Oyez project here.
The ruling acknowledged that the tie-in sale isn’t specifically addressed by the FAAA and that the action against the wholesaler involved in the case was taken based on the agency interpretation of the FAAA and its regulations, but not the specific language of the statute. This determination that tie-in sales are a “tied house” violation without question, has since been codified in multiple versions of the regs, most notably and currently 27 CFR 6.72 as well as the subject of several circulars, most recently 2012-02 reiterating the Government’s view that such tie-in sales are a per se threat to retailer independence, and is perhaps best known and honored in the breach whereby many wholesalers and manufacturers, only offer select retailers who can meet or exceed sales quotas the exclusive release or access to the limited quantities of scarce beers and spirits.
But here’s the rub… antitrust law has evolved since 1957. The prohibition on tying has come under scrutiny in academia and in legal circles eventually leading to a wholesale rejection of the per se illegality enforced by the courts from the mid-20th century to the rule of reason treatment and analysis now favored. Even the Federal Trade Commission acknowledges that “[t]he law on tying is changing. Although the Supreme Court has treated some tie-ins as per se illegal in the past, lower courts have started to apply the more flexible “rule of reason” to assess the competitive effects of tied sales. Cases turn on particular factual settings, but the general rule is that tying products raises antitrust questions when it restricts competition without providing benefits to consumers.”
Perhaps it’s time to question the practice and legitimacy of a rule derived from antitrust principles that have been rejected in favor of more nuanced approaches. Especially where we seem to accept, and no one questions why it is or how it is that the same retailers are continually offered the benefit of certain limited (scarce) releases on Black Friday for rare beers. Potentially the only way to say that continually offering such retailers exclusive access to limited releases isn’t offering them something of value and a tied-house violation is to acknowledge that tie-in sales are legitimate and that your best retailers (largest sellers) can be rewarded for their success with the exclusive access that the scarcity mandates.