The Antitrust Attorney Blog
Author: Steven Cernak
When I first started practicing antitrust law in the “80’s, the Robinson-Patman Act was already an object of derision.¹ With Chicago School thinking riding high in academia and the courts and antitrust law’s focus shifting to effects on consumers, not rivals, RP cases seemed to be dwindling down to nothing. My colleagues and I were convinced that RP would soon be dead and we would never again need to deal with its tortured language² and questionable economics.
But not all my colleagues. One insisted that Robinson-Patman would never be repealed—after all, what member of Congress would vote against protecting small business?—and the private right of action would mean that the threat of litigation would always at least affect negotiations even if the federal agencies stopped bring new cases.³ Despite our constant ridicule of his outdated ways, he insisted that I learn the intricacies of the statute and cases, analyze the latest changes to the Fred Meyer Guides, and otherwise prepare to take over from him the counseling of a client that sold goods “of like grade and quality” in at least three overlapping channels.
I’m glad he did. He was right. To this day, suppliers and retailers negotiate in the shadow of RP and require counseling about its sometimes-obscure details. Every year, new private litigation gets filed and generates opinions and even jury verdicts on Robinson-Patman issues.⁴ Fewer than in the “60’s but still greater than zero. So for all the suppliers and the retailers through whom they sell—along with their respective counselors—here is a summary of what you need to know about RP in the 21st Century:
The Basics of the Robinson-Patman Act
There are two kinds of discrimination that RP is meant to prevent and where some litigation is still filed today. Section 2(a) prohibits the sale of the same commodity at different prices to two competing buyers by one seller if the result is harm to competition. It has several elements that must be met and potential defenses, all of which narrow the scope of its application. Sections 2(d) and 2(e) are per se prohibitions of the discriminatory provision of or payment for certain promotional aids meant to assist in resale of a seller’s commodity. Again, several elements must be met to prove a violation. In addition, Robinson-Patman applies only to commodities sold for use or resale in the U.S.
Section 2(a) Price Discrimination – Elements
The elements of a Section 2(a) claim are usually summarized as prohibiting (1) a difference in price (2) in reasonably contemporaneous sales to two buyers purchasing from a single seller, (3) involving commodities, (4) of like grade and quality (5) that may injure competition.
While price discrimination is “merely a price difference”, actual net prices must be compared, after taking into account all discounts, rebates and other factors affecting price. If the lower price is “functionally available” to the plaintiff but plaintiff chooses not to accept it, courts have held that such proof “essentially negates the discrimination element” of plaintiff’s price discrimination claim.⁵
The two sales at different prices must be reasonably contemporaneous, a question of fact that depends on the seasonal quality of the sales and overall market conditions. Also, those two contemporaneous transactions must be “sales”, not something else like leases, licenses or an offer to sell. Finally, two completed sales are required and so at least one court has held that this element is not met in competitive bid situations where the commodity is only purchased if the dealer’s bid is successful.⁶
Section 2(a), as well as sections 2(d) and 2(e), apply only to “commodities”, a term left undefined by the statute. Courts have consistently interpreted the term to mean tangible products. Intangible items that have been held not to be commodities include medical services, cable television programming, and advertising, including online advertising.
The two commodities sold at different prices must be “of like grade and quality” for Section 2(a) to apply. When interpreting that statutory language, lower courts have followed the US Supreme Court’s lead in FTC v. Borden Co. and focused on physical differences in the products that affect consumer marketability.⁷ In that case, the Court found two varieties of the defendant’s evaporated milk to be “of like grade and quality” because the products were physically identical, even though the higher-price branded version had gained consumer preference over the lower-priced private label version.⁸
The final element of a Section 2(a) violation is whether “the effect of such discrimination may be substantially … to lessen competition or tend to create a monopoly …”, which has been interpreted to mean that a plaintiff need not show an actual adverse effect on competition, only a “reasonable possibility” of such an effect.
Injury to competition generally is found at the level of a rival to the discriminating seller (“primary line injury”) or of the disfavored customer (“secondary line injury”). The Supreme Court’s Brooke Group opinion clarified that a successful primary line claim must meet the same difficult test required of predatory pricing plaintiffs.⁹ As a result, secondary line cases now predominate.
Secondary line claims of injury have no explicit multi-step test; instead, the plaintiff must show competition between the favored and disfavored buyers and then show an injury to competition. That injury can be shown by direct evidence of lost sales or profits caused by the discriminatory pricing. In the absence of such direct evidence, plaintiffs may take advantage of the so-called “Morton Salt presumption”. In FTC v. Morton Salt,¹⁰ the Supreme Court found that the existence of a substantial price difference over a substantial period of time in an industry where competition is “keen” creates a rebuttable presumption of competitive injury.
That presumption can be rebutted by evidence breaking the causal connection between a price differential and lost sales or profits. Defendants have successfully rebutted the presumption in many situations, including when the seller was only one of many competing sellers and the discounts were introductory offers to new customers. In the remand of the Borden case, for instance, the lower court found no secondary line injury because the price differential merely reflected customer preferences for branded milk.¹¹
Section 2(a) Price Discrimination – Defenses
Even when all elements of a 2(a) violation are met, defendants can still call on several statutory or court-made defenses. For instance, Section 2(b) provides an affirmative defense to a seller that acts “in good faith to meet an equally low price of a competitor”. To invoke this defense, the seller must show “facts which would lead a reasonable and prudent person to believe that the granting of a lower price would, in fact, meet the equally low price of a competitor.”¹²
Section 2(a) permits price differences that “make only due allowance for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities” in which the commodities are “sold or delivered”. This “cost justification defense” is more than just a “quantity discount defense” and requires evidence or rigorous estimates of manufacturing or other cost savings.
Finally, the Supreme Court has recognized in Texaco, Inc. v. Hasbrouck that the “Morton Salt presumption” can be rebutted where the reseller receiving the lower price is a wholesaler that is performing distribution functions for the manufacturer that the other reseller is not.¹³ Such “functional discounts”, however, must be related to distribution functions actually performed by the favored reseller and for which it is not otherwise compensated.
Sections 2(d)/2(e) Promotional Allowance Discrimination
RP Sections 2(d) and 2(e) prohibit a seller from either paying for or furnishing, respectively, any promotional services to a reselling customer unless such payments or services are available to all competing reselling customers on proportionally equal terms. Violations of these Sections do not require a showing of harm to competition, although a private plaintiff must still show harm to recover any damages. The cost justification defense available under Section 2(a) is not available here, although the meeting competition defense can be used.
These Sections require that the services paid for or furnished be in connection with the resale of the seller’s products, not the initial sale of the seller’s product to the reseller. The FTC has provided guidance on which services are covered, along with other questions under these Sections, in their Fred Meyer Guides.¹⁴ According to courts and the Guides, such services include cooperative advertising; demonstrators; catalogues; cabinets and other displays; and prizes for promotional contests, but not preferential credit arrangements, delivery services, and lease terms.
These Sections apply only to services paid for or provided to reselling customers that compete with one another, which requires an economic analysis, not a mere recitation of the labels applied to the buyers.
The courts and the FTC, both through opinions and the Guides, have spent considerable time explaining how the provisions of such promotional services can be made “proportionally equal”. Although that guidance does not prescribe a particular method for achieving “proportional equality”, it does strongly suggest that it be accomplished through a well-designed plan whose elements are well-communicated to competing customers. It is clear that “proportionally equal” does not mean “identical” and a seller can tailor the plan to meet the special needs of particular classes of customers.
The FTC last modified the Guides in 2014. Most of the changes were an acknowledgement of the growth of the Internet and online sales, including a recognition that resellers who sell online might compete with those who sell through physical stores.
Those recent changes to the Guides were an integral part of a recent Robinson-Patman case that reached the appellate courts. The defendant in Woodman’s Food Market, Inc. v. Clorox Co.¹⁵ sold a wide variety of consumer products through several channels. When it stopped selling to plaintiff the large and multi-pack versions of its products that it sold to warehouse clubs, the plaintiff alleged 2(d) and 2(e) violations. The defendant moved to dismiss, claiming that the different size packages were different products and defendant did not need to sell all products to all customers. Also, defendant claimed that no court had held a special package size constituted a promotional allowance or service. The district court rejected the motion on the basis of two FTC opinions from 1940 and 1956 that explicitly held different size packages to be subject to 2(d) and 2(e). The court also noted that the FTC had explicitly considered but rejected a suggestion in 2014 to delete from the Guides the reference to “special packaging or package sizes” as one of many promotional allowances and services.
In defendant’s appeal to the Seventh Circuit, the FTC filed an amicus brief in which it disavowed its two old opinions but said that packaging could, in limited circumstances, be “promotional allowances” if it conveyed a promotional message. As an example of such packaging, the FTC suggested Halloween-themed packages of candy. The Seventh Circuit reversed the denial of the dismissal, ruling that package size alone was not a promotional allowance subject to Sections 2(d) and 2(e).¹⁶ The court did leave open the possibility that packaging could constitute a promotional allowance if it contained promotional messages, such as Halloween themes on candy or pictures of popular cartoon characters on toys.
The Future of RP
So what lessons have I learned from more than thirty years of Robinson-Patman counseling? The most important one is to quit predicting its demise. Anyone counseling suppliers and retailers still must understand the intricacies of the statute and cases to properly do the job.¹⁷
Now, if you’ll excuse me, there is a retired colleague somewhere near Hilton Head who deserves my apologies.
¹ See, e.g., Bork, The Antitrust Paradox, at 382 (Basic Books, 1978) (“One often hears of the baseball player who, although a weak hitter, was also a poor fielder. Robinson-Patman is a little like that. Although it does not prevent much price discrimination, at least it has stifled a great deal of competition”.).
² See, e.g., Automatic Canteen Co. v. FTC, 346 U.S. 61, 65 (1953) (Frankfurter, J.) (“precision of expression is not an outstanding characteristic of the Robinson-Patman Act”.).
³ The most recent FTC enforcement matter was brought in 2000. See, e.g., McCormick Co., 2000 FTC LEXIS 19 (2000).
⁴ See, e.g., Marjam Supply Co. v. Firestone Bldg. Prods. Co., LLC, 2019 U.S. Dist. LEXIS 56110; see also U.S. Wholesale Outlet & Distrib., Inc. v. Living Essentials, LLC, 2019 U.S. Dist. LEXIS 160232 (C.D. Calif. Aug. 7, 2019) and https://www.law360.com/articles/1211333/5-hour-energy-didn-t-illegally-favor-costco-jury-says
⁵ See, e.g., Mathew Enter. v. Chrysler Grp., 738 Fed. Appx. 569, 571 (9th Cir. 2018) (citing Zivkovic v. Southern Cal. Edison Co., 302 F.3d 1080, 1088 (9th Cir. 2002)).
⁶ Toledo Mack Sales & Service v. Mack Trucks, 530 F.3d 204, 228 (3d Cir. 2008).
⁷ 383 U.S. 637 (1966).
⁸ Id., at 641.
⁹ Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993).
¹⁰ 334 U.S. 37 (1948).
¹¹ Borden Co. v. FTC, 381 F.2d 175, 180 (5th Cir. 1967).
¹² FTC v. A.E. Staley Manufacturing, 324 U.S. 746, 759 (1945).
¹³ 496 U.S. 543 (1990).
¹⁴ 16 C.F.R. §§ 240.1–240.15. (Originally issued in 1969, the Guides were updated in 1972, 1990 and 2014.).
¹⁵ 2015 U.S. Dist. LEXIS 11656 (W.D. Wis. Feb. 2, 2015).
¹⁶ Woodman’s Food Market, Inc. v. Clorox Co., 833 F.3d 743 (7th Cir. 2016).
¹⁷ Traveling to Wisconsin to have your picture taken holding Morton Salt Borden milk containers in a Woodman’s, as some of us have done, probably isn’t necessary.
Image by Bruno /Germany from Pixabay