Adolph Coors Company

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IN THE MATTER OF ADOLPH COORS COMPANY MODIFNG ORDER IN REGARD TO ALGED VIOLATION OF SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT Docket 8845. Orde, Feb. 4, 1975* Modifying Orde, Aug. , 1989 This order reopens the proceeding and modifies the Commission s order issued on Feb. , 1975 (85 FTC 187), by deleting provisions that probibited respondent from imposing certain terrtorial and customer restrictions on its distributors. ORDER GRATING IN PART AND DENYING IN PART PETITION TO REOPEN AND MODIFY ORDER Adolph Coors Company ("Coors ), has fied, on April 3 , 1989 , a Petition to Modify Order Petition ), pursuant to Section 5(b), of the Federal Trade Commission Act, 15 U. C. 45(b), and Section 2. of the Commission s Rules of Practice and Procedure, 16 CFR 2.51. The petition asks the Commission to reopen the proceeding and set aside the modified cease and desist order entered by the Commission on February 4, 1975, in Docket No. 8845 , 85 FTC 187 except insofar as the order prohibits price fixing or resale price maintenance. " Petition at 2. Specifically, Coors requests that the Commission set aside in their entirety paragraphs 4(c), 5, 6, 7, 8 and 11 of the order, which prohibit Coors from, among other things, imposing nonprice vertical restraints on distributors of Coors' beer products. ' In support of its request, Coors argues that the order modification is warranted by changed conditions of law. Petition at 2-3. The petition was placed on the public record for thirty days, pursuant to Section 51(c) of the Commission s Rules, and one comment was received. For the reasons discussed below, the Commission has determined that Coors has not shown a changed condition of law requiring reopening the order but that Coors has shown that granting the request, with one exception, would be in the public interest. The Commission has therefore reopened and modified the order. *Decision issued July 24, 1973 (83 FTC 32). I In addition to prohibiting Coors frm refusing to deliver ber to distributors selling outside their designate terrtory, parph 7 of the order also prohibits Coorn from refusing to deliver ber to distributors who sell ber at prices, markups or profits lower than those approved by Coors. 85 Jo"'C at 189. 192 FEDERAL TRAE COMMISSION DECISIONS Modifyng Order 112 F.

The Commission s complaint, issued on June 7, 1971, 83 FTC 32 alleges that Coors violated Section 5 of the Federal Trade Commission Act by, among other things, fixing wholesale and retail prices imposing terrtorial and customer restrictions on its distributors, and using unfair short-term termination provisions in its contracts with distributors. Following extensive evidentiary hearings, the Administrative Law Judge ("AL") ordered the dismissal of the complaint against Coors. 83 FTC at 174. On appeal from the AU' s Initial Decision, the Commission substituted its findings for those of the AU and issued its order on July 24, 1973. 83 FTC at 211. The Commission condemned Coors' terrtorial restraints as per se unlawful because they were part of an unlawfl resale price maintenance scheme. Coors appealed the Commission s order to the United States Court of Appeals for the Tenth Circuit, which upheld all of the provisions of the Commission s order, except those dealing with the notice and arbitration requirement in the event of a distributor s termination. The court also held that Coors ' terrtorial restraints were themselves per se unlawful under United States v. Arnold, Schwinn Co. , et al. 388 S. 365 (1967). See Adolph Coors Company v. FTC 497 F.2d 1178 (10th Cir. 1974), cert. denied 419 U.S. 1105 (1975). Consequently, the Commission issued its final order on February 4 1975. The order, among other things, prohibits Coors from engaging in wholesale and retail price fixing, imposing certain non-price vertical restrictions on its distributors, including terrtorial restraints, and requiring exclusive draught accounts. 85 FTC 187. II.

Coors requests that the Commission reopen the proceeding and set aside in their entirety paragraphs 4(c), 5 , 6 , 7, 8 and 11 of the order. Paragraph 4(c) of the order prohibits Coors from refusing to sell beer to any Coors distributor or terminating any Coors distributor because the distributor sold Coors beer to another distributor or retailer located outside of the terrtory granted to the Coors distributor. 85 FTC at 188. Paragraph 5 prohibits Coors from restricting "the terrtory in which or the persons to whom a distributor may sell Coors beer. Id. at 189. Paragraph 6 prohibits Coors from allocating Coors 2 A proviso to Dara adh 5 states. however. that the order does not Drohibit Coon; from "f'.nmnlvinD" wit.h t.h.. V.J. VVV.L.'" n.L ru'.L J.iron 191 Modifyng Order beer among its distributors "in times of beer shortage at the Coors brewery," by any means not equitably related to their proportionate purchases of Coors beer during "the last three months before the allocation. . . . Id. Paragraph 7 prohibits Coors from refusing to deliver all of a distributor s order because the distributor made sales outside of his assigned terrtory or because the distributor is sellng Coors beer at "unapproved" prices or markups. Id. Paragraph 8 of the order prohibits Coors from prohibiting its distributors from sellng Coors beer for "central warehouse delivery."" Id. Finally, paragraph 11 generally prohibits Coors from hindering, suppressing or eliminating competition between or among distributors or retailers handling Coors beer. Id. at 189-90.

Coors argues that these provisions of the order, especially in the context of Coors' unique brewing method, and experience with the unauthorized distribution of its products in expansion markets, have placed Coors at a competitive disadvantage and (have J been harmful." Petition at 9. Among other things, Coors beer distributors are required to maintain Coor s ber products in refrigerated warehouses. Additionally, the distributors must monitor the age of their Coors inventory and are responsible for closely monitoring product shelf-life and ensuring that only fresh product is available to consumers. Petition at 5. Coors believes that its abilty to restrict its distributors' terrtories and impose other non- price vertical restraints is necessary because such restrictions would allow Coors to (1) monitor better its distributors' performance, (2) provide incentives to distributors to invest the resources and provide servces necessary to comply with Coors' quality control requirements, and (3) compete better against other beer brewers.

Coors asserts that the relief it seeks is required by a change in law. Specifically, Coors argues that the order provisions it is asking the Commission to set aside were predicated upon the Schwinn doctrine reuirements of any stte law. Id.

S COOl' , however, is not prohibite frm estblishing refrgeration stdars for the centra warhouse which ar substtially similar to those estblished for distributors." 85 FTC at 189. 4 Paraph 1 of the order prohibits Cors frm fixing the prices at which distributors sell Cors ber to retailers or the prices at which retailers sell Cors ber to consumers. Parphs 2 and 3 of the order (prohibiting Cors from Buggstng prices or mark-ups for its distributors) expire by their own terms in 1978. Subpamgrphs 4(a), (b) and (d) prohibit Coors frm terminating any distributor beause the distributor either sold ber or advertise at prices different frm those approved by Coors, or beause the distributor has distrbute the product of another brewer. Paraph 9 prohibits Coorn frm reuiring that retalern serve Corn draught ber as their only light-eolore draught ber. Paraph 10 prohibits Coors frm reuiring its distributors to eliminate or refrin from obtaining and handling rival brands of ber in order to beome or remain a Cors distributor. 85 FTC at 187-90. COOl' doe not sek relief frm these remaining operative order provisions. Petition at 16.

194 FEDERAL TRAE COMMISSION DECISIONS Modifyng Order 112 F.

which the Supreme Court overrled in Continental T. v., Inc. v. GTE- Sylvania, Inc. 433 U.S. 36 (1977). Consequently, according to Coors Coors' non-price vertical restraints "were never put to . . . the 'market power' analysis currently used in vertical, non-price restraint cases. Petition at 12. Coors asserts that it does not have suffcient market power' to raise its prices significantly without materially and adversely affecting its business, and suggests that Coors' non- price vertical restraints would be judged under a rule of reason analysis today.

Section 5(b) of the FTC Act, 15 U. C. 45(b), provides that the Commission shall reopen an order to consider whether it should be modified if the respondent "makes a satisfactory showing that changed conditions of law or fact" require such modification. A satisfactory showing suffcient to require reopening is made when a request to reopen identifies significant changes in circumstances and shows that the changes eliminate the need for the order or make continued application of it inequitable or harmful to competition. Louisiana-Pacfic Cor. Docket No. 2956 Letter to John C. Hart (June 5 , 1986), at 4.

The Commission may also modify an order pursuant to Section 5(b) when, although changed circumstances would not require reopening, the Commission determines that the public interest requires such action. Therefore, Section 2.51 of the Commission s Rules of Practice invites respondents in petitions to reopen to show how the public interest warrants the requested modification. In the case of a request for modification based on this latter ground, a petitioner must demonstrate as a threshold matter some affrmative need to modify the order. Damon Cor. Docket No. 2916 Letter to Joel E. Hoffman, Esq. (March 29, 1983), at 2. For example, it may be in the public interest to modify an order "to relieve any impediment to effective competition that may result from the order. Damon Cor. Docket No. 2916 101 FTC 689 (1983). If the showing of need is made, the Commission will balance the reasons favoring the requested modification against any reasons not to make the modification. Damon Letter at 2. The Commission wil also consider whether the :; Coors' national market share is less than eight percent and it no longer holds the leading position in any 191 Modifyng Order particular modification sought is appropriate to remedy the identified harm.

The language of Section 5(b) plainly anticipates that the burden is on the petitioner to make the requisite satisfactory showing. The petitioner must make a "satisfactory showing" of changed conditions to obtain reopening of the order. The legislative history also makes it clear that the petitioner has the burden of showing, other than by conclusory statements, why an order should be modified. If the Commission determines that the petitioner has made the required showing, the Commission must reopen the order to consider whether modification is required and, if so, the nature and extent of the modification. The Commission is not required to reopen the order however, if the petitioner fails to meet its burden of making the satisfactory showing required by the statute. The petitioner s burden is not a light one given the public interest in the finality of Commission orders. See Federated Department Stores, Inc. v. Moitie 425 U.S. 394 (1981) (strong public interest considerations support repose and finality).

IV.

Based on the information provided by Coors, and other available information, the Commission has determined that Coors has not made a satisfactory showing that changes in law require reopening the proceeding and setting aside the order provisions prohibiting Coors from imposing upon its distributors certain non-price vertical restraints, including terrtorial restrictions. However, the Commission has concluded that Coors has made a satisfactory showing that reopening the order and setting aside the non-price vertical restraints provisions is in the public interest.

The Commission s 1973 decision in this case, aftr finding that Coors engaged in unlawfl resale price maintenance, called the terrtorial restraints "an obvious adjunct to Coors ' efforts to control the prices at which its distributors and their retail accounts dispose of the product". 83 FTC at 192. Consequently, the Commission condemned Coors ' terrtorial restraints as per se unlawfl because they were part of the unlawful RPM scheme, but determined that it 6 The Commilll!ion may properly decline to repen an order if a reuest is "merely conclusory or otherwise fails to set forth speific fac demonstrating in detail the nature of the changed conditions and the reasons why these change conditions reuire the reueste modification of the order. " S. Rep. No. 96-500, 96th Cong., 1st Sess. 9-10 (1979).

.j ..\ 196 FEDERA TRAE COMMISSION DECISIONS Modifyng Order 112 F.

was not necessary to conclude that the restrictions in themselves were unlawfl per se. The court of appeals held the restraints in themselves per se unlawful, citing Schwinn albeit with substantial criticism. 497 F.2d 1178 at 1186-87.

Sylvania which was decided shortly aftr the Commission issued the final order in this case, recognized that exclusive territories and other non-price vertical restraints are not inherently anticompetitive and must thus be judged under the rule of reason. Sylvania replaced the per se test for non-price vertical customer and terrtorial restraints outside RPM with a rule of reason test, but the Court did not change the per se rule for non-price vertical restraints that are part of a RPM scheme. See Monanto Co. v. Spray-Rite Sere Cor. 465 U.S. 752 760 , n. 6 (1984). Sylvania therefore, is not a change in law as to the order in this matter.

Although non-price vertical restraints are stil per se unlawful as part of a RPM scheme, Coors does not request elimination of the order s prohibitions on RPM. Therefore, any terrtorial or other nonprice vertical restrictions imposed as part of a resale price maintenance scheme would be per se unlawful and would violate this order even if modified as Coors requests. The non-price provisions of the order, apart from the RPM provisions, are thus best viewed as fencing-in provisions, intended to prevent the recurrence of resale price fixing. Coors has shown that the benefits of those provisions when viewed under the rule of reason approach in Sylvania are outweighed by the costs they impose, and may now be set aside in the public interest.

Coors has made a threshold showing that the order provisions it requests be set aside impede and deter Coors (in states that do not permit or require terrtorial restrictions) from correcting impaired distribution problems and from adopting effciency-maximizing distribution arrangements that would intensify interbrand competition. 9 7 The Commission noted that " (a)s the court in Schwinn reognize, whatever the status of vertical restrictions unaccompanied by price-fiing, the presence of price-fiing as par and part of a system of terrtorial restrictions rendcl' the entire packag ilega per se." fd. at 194. See Belto Eletronic C0ratio 100 FTC 68 (1982). 9 For example, any steps Coors might tae increas distribuwr emphasis on providing a consistntly fresh, quality product to the consuming public or to improve gegrphic market covera may subject Cors to the risk of being accuse of violating the order and, conseuently. the risk of a civil penalty suit and judgment. By not being able to corrt these distribution problems effectively, Coors is injure in its competition with other brewcrn. In fact, this order may injure Coors more than it would other brewers beause of Coors' unique (4' . . .

A''' n..""H. .v. 191 Modifying Order These arrangements are available to Coors' competitors, and these order provisions therefore injure Coors' ability to compete effectively with other breweries.

Setting aside the non-price vertical restraints provisions of the order would enable Coors to employ distribution methods that likely would be reasonable under the rule of reason standard, because Coors lacks the necessary market power to raise its prices to supracompetitive levels. It would also allow Coors to take advantage of certain effciencies in the distribution of its products, which, in turn, would promote interbrand competition. Sylvania, supra at 54-55. Allowing Coors to use what it considers the most efficient and cost effective distribution of its products, including agreeing with distributors in certain states to dedicate their sales efforts to designated geographic areas, would put Coors on an equal footing with other brewers and should make Coors and its distributors more effective competitors. This is consistent with the recognition that in competitive markets consensual non-price vertical arrangements can benefit both competition and the consumer. Coors' inability to impose non- price vertical restraints that its competitors are using places Coors at a competitive disadvantage. Because of the competitive nature of the beer industry, the costs of the prohibitions on non-price vertical restraints outweigh the continued need for these provisions. That balancing therefore supports modifyng the order in the public interest.

VI.

With respect to Coors' request that the Commission set aside paragraph 11 of the order, the Commission has concluded that that paragraph' s general prohibition against Coors "(hJindering, suppressing or eliminating competition. . . between or among distributors " 85 FTC at 189-90, is overly restrictive and broad. This language may have a chil1ng effect on Coors' abilty to take advantage of certain effciencies in the distribution of its products. Moreover, in view of the current legal framework for analyzing vertical restraints and the retention of the order s resale price maintenance prohibitions, conduct paragraph 11 is no longer necessary to fence-in Coors' concerning non-price vertical restraints it may impose upon its distributors.

brewing and distribution methods. See Bureau of Economics, Federal Trade Commission Th Brew7I Industry at 111 13 (1978).

198 FEDERA TRADE COMMISSION DECISIONS Modifyng Order 112 F.

Finally, the Commission has also concluded that Coors has not made a satisfactory showing that changed conditions of fact or law or the public interest require that the Commission set aside the part paragraph 7 of the order that concerns conduct involving resale price maintenance. Setting aside this part of paragraph 7 would be inconsistent with Coors' request that the Commission set aside "the order. . . except insofar as that order prohibits price fixing or resale price maintenance." Petition at 3. Additionally, retention of the resale price maintenance part of paragraph 7 is consistent with the primary objective of the order.

VII.

Accordingly, it is ordered that this matter be reopened and that the Commission s order in Docket No. 8845, issued on February 4, 1975 , and it hereby is, modified, as of the date of servce of this order, by setting aside paragraphs 4(c), 5 , 6, 8, and 11, and by modifyng paragraph 7 to read:

7. Refusing to deliver all of a distributor s order because the distributor or the distributor s customer is sellng Coors beer at prices markups or profits lower than those approved by respondent. Commissioner Strenio not participating.

I( Coors has not asked to be relieved from Subparagrphs 4(a) and (b), which prohibit Coors frm tl'mlinatimr a distributor beause that distributor or its customers resell! at other than approved prices. 199 Interlocutory Order