March 30, 2011

The Nonstatutory Labor Exemption as an Employer Defense to Strikes

Full Ninth Circuit Reviews Whether Grocers Violated Antitrust Law With Revenue Sharing Pact
Holland & Knight Alert
Howard Sokol

Ensconced in a corner of federal labor policy is the labor exemption from federal antitrust law. Every so often, it takes center stage, as it did last fall when the U.S. Court of Appeals for the 9th Circuit decided California ex rel. Brown v. Safeway Inc., 615 F.3d 1171 (9th Cir. 2010), order for reh'g en banc (Feb. 11, 2011), which ruled that a group of large grocery stores committed an antitrust violation by their collaborative efforts to resist a union strike in Los Angeles in 2003. The full court has just recently ordered en banc rehearing, scheduled for March 21, and that may present an occasion to correct what in the authors' view was a misapplication of the labor antitrust exemption.

There is a fundamental conceptual conflict between federal labor and antitrust law. After all, unions are fundamentally a cartel of workers whose very purpose is to restrain competition — namely, competition over wages in a particular industry or geographic locale. Recognizing this, Congress early on limited the Sherman Act, 15 U.S.C. 1 et seq., to exempt from its reach the concerted actions of union members (read: "strikes"), which would otherwise be a classic group boycott. See United Mine Workers v. Pennington, 381 U.S. 657, 668 (1965).

The U.S. Supreme Court went further. It added to this statutory exemption for unions a "limited nonstatutory labor exemption" to protect agreements between unions and employers that would otherwise be subject to challenge under the Sherman Act as agreements in restraint of trade; it did so as necessary to properly accommodate the congressional policy favoring collective bargaining. See Connell Construction Co. v. Plumbers & Steamfitters Local 100, 421 U.S. 616, 621-22 (1975). Thus, for example, an agreement to limit the hours of operation of various supermarkets that were all bargaining with the same retail clerks' union falls within the nonstatutory exemption, even though the agreement limits competition in the product market. See Meat Cutters v. Jewel Tea Co., 381 U.S. 676 (1965).

In 1996, in Brown v. Pro Football Inc., 518 U.S. 231 (1996), the Supreme Court expanded the nonstatutory exemption to include agreements among employers themselves, aimed at resisting union pressure in collective bargaining. In Brown, the teams of the National Football League had bargained to impasse with the players' union over, among other things, rules for assigning new players to what were called "developmental squads." After the labor contract expired, the owners jointly agreed to implement without union consent their new player rules. This agreement of competitors was, the court noted, "an integral part of the bargaining process," and thus immune from antitrust scrutiny by virtue of nonstatutory labor exemption. 518 U.S. at 239.

A Selective Strike

The fundamental issue in Safeway was the applicability of Brown to agreements among competitors to blunt the force of an anticipated union strike. In Safeway, four supermarket chains were all negotiating with the same union to replace labor contracts that were about to expire simultaneously. The grocers anticipated that the union would attempt a selective or "whipsaw" strike — a common divide-and-conquer tactic of unions. The union strikes only one employer of a group, forces a settlement with the targeted employer (which is weakened by being shut down by the work stoppage while its competitors are not) and, then, uses that settlement to exact the same concessions from all other employers in the group — one at a time.

To counter this union tactic, the employers in Safeway agreed in advance that those who continued to operate would share a portion of their own revenues with the target of a "whipsaw" strike so as to bolster the target's ability to resist the union's economic pressure. The portion of revenue shared was intended to capture profits earned by the nonstruck employers during the strike that were attributable to increases in their revenue from prestrike levels. It was this agreement that the 9th Circuit panel found to be violative of the antitrust law. In reaching this conclusion, the panel erred in two key ways.

First, it chose to rule on the anti-competitive nature of the employers' agreement before it considered the applicability of the antitrust exemption. But virtually all other courts do the opposite because the very purpose of the exemption is to shield from judicial scrutiny agreements that would otherwise be antitrust violations.

By criticizing the employers' agreement to share revenues during the strike because there was no showing that "they could not reach an agreement [with the union] without violating the antitrust laws," 615 F.2d at 1199, the 9th Circuit panel fundamentally misconstrued the nonstatutory exemption. If the nonstatutory exemption were operative only for bargaining tactics that did not "violat[e] the antitrust laws," then it would apply only when it was not necessary. Rather, the applicability or not of the nonstatutory exemption should depend on the principles of federal labor policy, not on how egregiously noncompetitive the practice appears to be from an antitrust perspective. In fact, a key purpose of the exemption is to spare labor and management from having to defend against antitrust challenge agreements made in connection with collective bargaining.

Second, the panel's decision denigrated the employers' objective of resisting the union's whipsaw strike. The court said that the companies' collaborative efforts had "nothing whatsoever to do" with the "procedures" of collective bargaining. 615 F.3d at 1198. This reasoning was a non sequitur, as the issue of Safeway was whether Brown was limited to collective-bargaining "procedures." The court further observed with a tone of disparagement that the agreement had "no purpose…beyond strengthening [the employers'] hand in a labor dispute." Id. at 1199. That, though, is hardly a criticism. Courts have long recognized that the "national labor policy rests on the principle that parties should be free to marshall the economic resources at their disposal in the resolution of a labor dispute" and that "either side" was free to resort to economic self-help "in an attempt to force a settlement most favorable to it." Air Line Pilots Ass'n v. C.A.B., 502 F.2d 453, 456 (D.C. Cir. 1974) (approving strike-based revenue sharing among airlines).

Strengthening its hand in a labor dispute in an effort to force a settlement most favorable to itself was exactly what the retail clerks' union was doing by its whipsaw strike and what the supermarkets were doing with their revenue-sharing agreement. Both are sanctioned by national labor policy, and equally so.

The panel further decried that, if the revenue-sharing agreement were immunized by the antitrust exemption, it "would go completely unregulated." Id. at 1197. But this, too, is a non sequitur because use of economic self-help to force resolution of a labor dispute is something Congress actually intended to be unregulated — certainly unregulated by the courts. See Machinists Lodge 76 v. Wisconsin Employment Relations Comm'n, 427 U.S. 132, 149 (1976).

Judicial attempts to regulate the economic weapons of either labor or management through antitrust scrutiny override Congress' intent that the free play of economic forces — and nothing else — should determine the outcome of collective-bargaining disputes. Ignoring this is where the Safeway panel decision went awry.

Reprinted in full (with the exception of the title which has been modified) with permission from the March 14, 2011 issue of The National Law Journal © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

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