Minimum markup law violates Supremacy Clause

Listen to this article

Wisconsin’s minimum markup law for gasoline is unconstitutional, U.S. Magistrate Judge William E. Callahan, Jr., held on Oct 12.

Although the statute does not violate the Dormant Commerce Clause (or the Equal Protection Clause or retailers’ substantive due process rights), Judge Callahan concluded that it was inconsistent with the Sherman Act and thus ran afoul of the Supremacy Clause.

In 1939, the state enacted the Unfair Sales Act, sec. 100.30, creating a floor on the price of motor fuel, ostensibly to protect competition.

In 1997, the Legislature amended the markup formula to its current state, requiring a 6 percent markup above certain actual costs or a 9.18 percent markup above the “average terminal price,” whichever is greater.

Since 1998, however, gasoline prices have increased more than 200 percent, while inflation has only been approximately 27 percent.

In 2006, Lotus Business Group LLC filed suit in state court, alleging that Flying J Inc. violated the Unfair Sales Act (the parties are both foreign corporations owning gas stations in Wisconsin). Flying J removed the case to federal court and challenged the constitutionality of the statute.

Judge Callahan concluded that the failure to adjust the markup over the past nine years, despite changes in economic conditions, conflicts with federal antitrust law.

Before reaching the antitrust issue, Judge Callahan first held that the statute does not violate the Dormant Commerce Clause, citing Seventh Circuit precedent in Eby-Brown Co. v. Wis. Dep’t. of Agric., 295 F.3d 749 (7th Cir. 2002).

Turning to the Supremacy Clause, however, the court concluded that, at least with respect to motor vehicle fuel, the Unfair Sales Act fails to qualify for “state action” immunity from the Sherman Act, and thus, is unenforceable.

As a general matter, minimum markup laws are a per se violation of the Sherman Act.

However, in Parker v. Brown, 317 U.S. 341 (1943), the U.S. Supreme Court held that the Sherman Act does not apply to the anticompetitive conduct of a State acting through its legislature (“state action” immunity).

To qualify for state action immunity, however, the restraint on trade must be both affirmatively expressed as state policy, and be “actively supervised” by the State.

The court concluded that the markup law meets the first requirement, because subsec. (1) of sec. 100.30 plainly states that the purpose of the statute is to prevent unfair competition.

However, the court concluded it fails the second requirement — active supervision.

At the time the markup was last adjusted, the average price of unleaded gasoline was $1.03 per gallon, but is now more than $3.00 per gallon.

Callahan observed, “Given that a markup of 9 cents per gallon was deemed an accurate estimate of the ‘costs of doing business’ in 1998, it seems curious that a markup of 25 to 30 cents per gallon, which is approximately 200 [percent] greater than the markup in 1998, is an accurate estimate of the ‘costs of doing business’ in 2007. Mar-ket conditions have no doubt changed drastically since 1998, but there have been no changes to the provisions of the minimum markup statute to reflect these changed conditions.”

Quoting Flying J’s characterization of the state’s monitoring as “akin to placing the scheme on autopilot,” Callahan called the description “apt.”

Because the state does not actively supervise the statute to reflect current market conditions, Callahan concluded that the statute is not entitled to state action antitrust immunity under Parker, and accordingly, granted summary judgment in favor of Flying J.

The case is Lotus Business Group LLC v. Flying J Inc., 07-C-0144.