Extraterritorial Application of State Antitrust Law Rejected in Texas

In late October 2006, the Supreme Court of Texas handed down a decision with important antitrust and federalism implications. In Coca-Cola Co. v Harmar Bottling Co.,¹ the court, by a narrow 5-4 margin, reversed a decision of the Texas Court of Appeals at Texarkana that was discussed in the February 2004 issue of State Court Docket Watch.² In so doing, the Texas Supreme Court aligned the treatment of so-called Calendar Marketing Agreements (CMAs) under the Texas antitrust statute with the prevailing treatment of such agreements in other courts. The court also limited the remedial scope of the Texas statute, holding that it “will not support extraterritorial relief in the absence of a showing that such relief promotes competition in Texas or benefits Texas consumers.”³

The underlying lawsuit concerned CMAs which Coca-Cola bottlers had entered into with retailers in Texas, Oklahoma, Arkansas, and Louisiana. In exchange for promotional payments, the retailers provided a variety of time-bound advertising, product placement, and sale pricing that favored Coca-Cola products. Five Royal Crown Cola franchisees, whose products competed with Coca-Cola and Pepsi products in the carbonated soft drink market, sued the Coca-Cola Company and several distributors of Coca-Cola and Dr. Pepper alleging that their use of CMAs constituted an unlawful monopoly, attempt to monopolize, conspiracy to monopolize, and tortious interference with a business relationship.⁴ The Royal Crown franchisees based their claims on the Texas Free Enterprise and Antitrust Act of 1983 (TFEAA),⁵ but included the entirety of the territory of the CocaCola bottlers within their claims. That area included not only eleven counties in Texas, but also three counties in Oklahoma, twenty-one counties in Arkansas, and five parishes in Louisiana.

After a jury trial that lasted several weeks, the district court in Morris County, Texas, entered judgment in favor of the RCC franchises, awarding monetary damages of some $13.8 million, plus an award of $500,000 in attorney fees and injunctive relief. The damages award was meant to compensate the RCC franchisees for lost profits, future lost profits, and lost franchise value. The Texas trial court’s injunction prohibited certain activities of the Coca-Cola entities throughout the relevant territory, including portions of Arkansas, Oklahoma, and Louisiana.

The Texas Court of Appeals reversed the award of attorney fees and remanded that issue for further proceedings, but otherwise affirmed the judgment.⁶ It rejected the contention that, by entering an injunction that applied to portions of Arkansas, Oklahoma, and Louisiana, the trial court had exceeded its authority under the Texas antitrust statute. It reasoned that all of the conduct had a connection to Texas and, in the absence of contention to the contrary, presumed that the antitrust laws of those neighboring states would likewise view the CMAs with disfavor.⁷ The court also rejected the Coca-Cola entities’ attack on the adequacy, both legal and factual, of the showing of antitrust injury.

In an October 20, 2006 decision, the Texas Supreme Court reversed the judgment of the Court of Appeals. It held that the TFEAA “will not support extraterritorial relief in the absence of a showing that such relief promotes competition in Texas or benefits Texas consumers.”⁸ The court explained that the TFEAA could not be enforced “as it has been here—that is, by awarding damages and injunctive relief for injury that occurred in other states.”⁹ Nor could the Texas courts adjudicate the validity of the CMAs under the law of Arkansas, Oklahoma, or Louisiana. The court held: “Texas courts, as a matter of interstate comity, will not decide how another state’s antitrust laws and policies apply to injuries confined to that state.”¹⁰ Finally, the court held that the RCC franchisees’ showing of antitrust injury was legally insufficient to sustain the judgment under Texas law. Accordingly, the court dismissed the RCC franchisees’ claims of injury occurring in other states and ruled that they should take nothing on their claims of injury in Texas.

Antitrust

The majority explained, “Generally speaking, a CMA provides that during stated periods of time a retailer will promote a wholesaler’s products in preference to competing products in exchange for payments and price discounts from the wholesaler.”¹¹ Retailers and wholesalers do not generally compete, so CMAs operate as vertical restraints on trade, not horizontal restraints.¹² This characterization is legally significant because, while horizontal restraints are presumptively illegal, nearly all vertical restraints, including CMAs, are not. Rather, vertical restraints are generally analyzed using a rule of reason approach, “according to which the trier of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.”¹³ As the majority noted, “CMAs are used throughout the country and have repeatedly withstood antitrust challenges, and . . . CMAs, including CMAs previously used by Coke, are not in themselves anti-competitive.”¹⁴

The majority concluded that the RCC franchisees did not make a sufficient showing of market harm to prove their TFEAA claims. It recognized that, while the CMAs in Coke’s hands could have had an anticompetitive effect, the fact of injury could not be inferred. Rather, the RCC franchisees had to show that Coke’s CMAs foreclosed a substantial portion of the competition in a relevant market. This required more than proof of isolated instances of higher prices. The RCC franchisees had to show a general adverse effect on consumers throughout a territory or the region. Their failure to present evidence that “any relevant market claimed by the RCC franchisees was harmed by Coke’s CMAs”¹⁵ meant that the RCC franchisees could not prevail.

The Coke entities’ use of CMAs was not invalid, either per se or because they violated the rule of reason, even though Coke was the dominant player in the market. The evidence showed that Coke held some 75-80% of the market for nationally branded carbonated soft drinks, Pepsi held some 13-15%, and the RCC franchisees held the rest. Coke contended, however, that competition in the market was vigorous, and the RCC franchisees were suffering from too much legitimate competition. The RCC franchisees’ failure to show a general adverse effect on consumers meant that they did not overcome the presumption that Coke’s use of CMAs was lawful. Put differently, the majority’s decision means that even dominant market players can compete on the basis of efficiency, including price, product superiority, or both. 

The dissenters would have affirmed the jury’s verdict on the TFEAA claims in part. In their view, “There is a line between competing and bullying, and the jury found that Coke crossed it.”¹⁶ The dissenters recognized that “much” of what the bottlers complained about, the discounts Coke offered for favorable shelf and display placement, was legal. While the jury was entitled to determine whether Coke’s CMAs were predatory, it could not award damages, and thereby punish Coke, for legal conduct. The dissent would have remanded for a recalculation of damages.¹⁷

The majority’s treatment of the TFEAA claims resolves one aspect of the lower court’s decision. In the 2004 discussion of the court of appeals’ decision in State Court Docket Watch, it was pointed out that the decision “appears to revive the notion . . . that the antitrust laws exist to protect even less efficient rivals from the competition by larger, and more efficient, market players.”¹⁸ That lower court had rejected the argument of the Coca-Cola entities that the CMAs did not work in an unlawful anticompetitive way because they produced lower prices for consumers. As the court of appeals put it, although the TFEAA’s purpose of promoting economic competition “would often include lower prices, we believe public policy logically would encourage maintenance of more then one real supplier of a type of product.”¹⁹ In other words, the TFEAA protects competitors from some forms of vigorous competition. By contrast, the Texas Supreme Court majority started from the premise that it “must . . . construe the TFEAA in harmony with federal antitrust caselaw to promote competition for consumers’ benefit.”²⁰

Extraterritorial Effect

The RCC franchisees sought to pursue claims for injuries incurred outside Texas in two ways. First, they contended that the TFEAA has extraterritorial application. Second, they contended that the state courts of Texas could apply the antitrust laws of Arkansas, Oklahoma, and Louisiana to the portions of their claims that related to injuries incurred in those states. The Texas Supreme Court rejected both contentions. 

With respect to the extraterritorial reach of the TFEAA, the majority concluded that the law would not support an award of damages and injunctive relief based on injuries incurred in other states. The majority drew on the United States Supreme Court’s decision in F. Hoffman-LaRoche Ltd. v. Empagran, S.A.,²¹ in which the Court held that federal antitrust law does not provide a remedy for injuries incurred in foreign countries where those injuries are independent of any domestic injury and the foreign effect caused the foreign injury. As the Harmar majority observed, “[W]ithin our federal system one may ask: why should Texas law supplant Arkansas, Louisiana, or Oklahoma law about how best to protect consumers from anti-competitive conduct and injury in those states?”²² It explained that refraining from making law for another state was particularly appropriate where the anti-competitive conduct at issue was not illegal per se.

The majority further held, “The TFEAA does not, in clear language afford a cause of action for injury outside the state, and we will not imply one.”²³ The majority pointed to § 15.04 of the TFEAA, which provides, in part, that the Act is intended “to maintain and promote economic competition in trade and commerce occurring wholly or partly within the State of Texas and to provide the benefit of that competition to consumers in the state.”²⁴ Granting relief to the RCC franchisees for injuries incurred in the neighboring states did not promote or maintain competition in Texas or provide benefits to Texas consumers.

With respect to the ability of the Texas state courts to entertain claims based on the laws of the states in which the injury was incurred, the majority invoked considerations of interstate comity. Unlike the court of appeals, which had presumed that the laws of Arkansas, Louisiana, and Oklahoma were the same as the law in Texas, because the Coca-Cola defendants did not contend otherwise, the majority declined to do so. It stated, “For a court or one state to undertake to determine what would benefit competition and consumers in another state would pose a significant affront to the interstate comity sister states should accord each other in our federal system.”²⁵ Instead, the courts of the neighboring states should consider the claims arising from the injuries incurred there. Again, those injuries were independent of any injury to competition or consumers in Texas, so splitting them apart should not be considered inappropriate.

The majority rejected the view of the dissent, which asserted that the issue was not jurisdictional at all, but one of choice of law or of forum non conveniens. As to choice of law, the issue was not which state’s law should be applied but, rather, “whether a Texas court can or should enforce law that is so policy-laden as to affect the economy of another state.”²⁶ Similarly, with respect to forum non coveniens, the question was whether Texas courts should speak to the issue. Interstate comity considerations said they should not.

Conclusion

Given that CMAs are both widely used and generally viewed as legal, the court’s reversal of a judgment that brought their use into question may be seen as aligning Texas law more closely with the general rule. The answer for the RCC franchisees may not be an antitrust claim, but more vigorous promotional efforts on their part, including CMAs of their own. Declining to apply the TFEAA extraterritorially, the majority held it was honoring the interest of interstate comity, refusing to let the Texas state courts determine and apply the laws of neighboring states to injuries that occurred outside Texas. That view is, like all things, bound to divide opinion.

 

Endnotes

1 __ S.W. 3d __, 2006 WL 2997436 (Tex. Oct. 20, 2006). 

2 “Extraterritorial Application of State Antitrust Law (Texas), State Court Docket Watch (February 2004), 4. 

3 __ S.W. 3d at __, 2006 WL 2997436 at * 1. 

4 The RCC franchisees also sued the manufacturer of Pepsi, the PepsiCola Company, Pepsico, Inc., its corporate parent, and two Pepsi bottlers, but the Pepsi parties settled before trial. The Coca-Cola parties received a credit against the monetary portion of the judgment against them for the amount of the Pepsi settlement. 

5 Tex. Bus. & Com. Code §§ 15.01-.26 (Act of May 26, 1983, 68th R.S., ch. § 19, 1983 Tex. Gen. laws 3009, as amended). 

6 111 S.W. 3d 287 (Tex. App. 2003). 

7 111 S.W. 3d at 296. 

8 __ S.W. 3d at __, 2006 WL 2997436 at *1. 

9 __ S.W. 3d at __, 2006 WL 2997436 at *6. 

10 __ S.W. 3d at __, 2006 WL 2997436 at *2. 

11 Id.

12 See, e.g. Business Electronics Corp. v. Sharp Electronic Corp., 485 U.S. 717, 729, 108 S. Ct. 1515, 1522-23 (1988) (“Restraints imposed by agreement between competitors have traditionally been denominated as horizontal restrains, and those imposed by agreement between firms at different levels of distribution as vertical restraints.”) 

13 State Oil Co., v. Khan, 522 U.S. 3, 10, 118 S. Ct. 275, 279 (1997) (Vertical maximum price fixing is not a per se violation of the Sherman Act.) 

14 __ S.W. 3d at __, 2006 WL 2997436 at * 2 (footnote omitted). In the omitted footnote, which the majority repeated later in its opinion, the majority noted six cases in which attacks on CMAs had been rejected, and one in which a claim under section 2 of the Sherman Act succeeded. See __ S.W. 3d at __, fn. 10, __, fn. 69, 2006 WL 2997436 at * 2 fn. 10, 13 fn. 69. 

15 __ S.W. 3d at __, 2006 WL 2997436 at * 13. 

16 __ S.W. 3d at __, 2006 WL 2997436 at * 15. (Brister, J., dissenting). 

17 __ S.W. 3d at __, 2006 WL 2997436 at * 23. (Brister, J., dissenting). 

18 “Extraterritorial Application of State Antitrust Law (Texas),”, at 8. 

19 111 S.W. 3d at 305. 

20 __ S.W. 3d at ___, WL 2997436 at * 11 (emphasis added). 

21 542 U.S. 155, 124 S. Ct. 2359 (2004). 

22 __ S.W. 3d at __, 2006 WL 2997436 at * 6 

23 __ S.W. 3d at __, 2006 WL 2997436 at * 7. 

24 See Tex Bus. & Com. Code § 15.04. 

25 __ S.W. 3d at __, 2006 WL 2997436 at * 8. 

26 __ S.W. 3d at __, 2006 WL 2997436 at * 10.

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