Antitrust Alert: FTC Advocates Narrowing Robinson-Patman Act
The ongoing Woodman's Food Market litigation has drawn enormous attention. The district court's interpretation of the Robinson-Patman Act calls into question not only manufacturers' ability to offer different package sizes of their products to different outlets, but also the long-established Colgate doctrine that sellers may choose with whom they do business.
The case is now on appeal in the U.S. Circuit Court of Appeals for the Seventh Circuit. The Federal Trade Commission has filed an amicus brief urging reversal and advocating a narrow view of Section 2(e) of the Robinson-Patman Act. The FTC argues that the practice of offering different package sizes to different retail channels is not a "promotional service" and therefore cannot alone support a price discrimination claim. In its brief filed in support of appellant Clorox, the Commission argued that the lower court wrongly relied on ancient FTC decisions that are no longer good law and "should have granted Clorox's motion to dismiss." The case is Woodman's Food Market, Inc. v. The Clorox Co., No. 15-3001 (7th. Cir.). The Robinson-Patman Act is the now-little-used, 1936 federal price discrimination law that prohibits giving better prices or other benefits to some customers over their competitors.
Defendant Clorox formerly sold a variety of consumer goods (lighter fluid, bleach, salad dressing) in "large packs" to Woodman's Food Market, a small chain of grocery stores in Wisconsin and Illinois. Following a change in sales strategy, Clorox decided to sell large pack versions of its products only to club retailers such as Sam's Club and Costco, and it stopped selling them to Woodman's.
Woodman's lawsuit alleged that Clorox's refusal to sell products in large sizes caused it to pay higher wholesale per-unit prices. Woodman's claimed violations of Sections 2(d) and 2(e) of the Robinson-Patman Act, which categorically forbid indirect "price discrimination" in the guise of promotional services or facilities provided by sellers. Clorox moved to dismiss, arguing that the allegations failed to state a claim, as its sale of packages in given sizes is not a "promotional service."
The district court disagreed, denied the motion, and held that package size is a promotional service. The court relied on the FTC's 1940 administrative decision in Luxor Ltd. and its 1956 decision in General Foods Corp., both of which found that sellers had violated Section 2(e) by refusing to supply certain buyers with certain product sizes. The district court found further support in the FTC's 2014 revision of its price discrimination guidelines, the so-called "Fred Meyer Guides," which state that "special packaging or package sizes" could fall within Section 2(e) in some circumstances.
Clorox was granted an interlocutory appeal of the denial of its motion to the Seventh Circuit.
FTC's Amicus Brief
The FTC's amicus brief argues that Section 2(e) should be construed narrowly and that Clorox's offering different package sizes to different buyers should not violate the Robinson-Patman Act. Woodman's did not allege "promotion" by Clorox within the meaning of the Act, only different package sizes. However, the FTC explained, promotion (like advertising or similar support) is critical to stating a claim under Section 2(d) or 2(e). In short, "Section 2(e) does not generally require manufacturers to sell the same package sizes to all buyers who demand them; instead, it prohibits discrimination only in genuinely promotional services or facilities distinct from the product itself."
The FTC disavowed its decisions in Luxor and General Foods, which it "does not consider … good law." In the Commission's view, following Luxor would require manufacturers to sell all types, styles, and sizes of products to every buyer on proportionally equal terms – a position at odds with the long-established Colgate principle that, absent monopoly, a seller may choose the parties with which it deals.
The FTC also offered a gloss on the recent revisions to the Fred Meyer Guides. While the recent Guides do list "special packaging, or packaging sizes" as services potentially within the reach of Section 2(e), the brief asserts that the packaging must have some promotional message to consumers (like a free sample or a holiday-themed package) rather than just offer a lower unit price or higher quantity. This is a fact-dependent inquiry, the Commission cautioned.
To the extent Woodman's injury comes from higher unit costs driven by discrimination, the FTC observed, it does not arise from advertising or similar services. Thus, Woodman's proper claim is one for price discrimination under Section 2(a), with its requirement to show that the challenged practice would substantially lessen competition, as opposed to 2(e)'s categorical ban on discriminatory promotional activities.
Although the FTC's amicus brief does not carry the weight of court or FTC precedent, nor formally overturn Luxor and General Foods, it is a clear disavowal of decisions from the earliest days of the Robinson-Patman Act, which bear no resemblance to modern antitrust policy.
The FTC's brief also effectively supplements the 2014 Fred Meyer Guides and clarifies what the FTC believes to be the scope of Section 2(e). The ubiquitous practice of offering different package sizes for different distribution channels is not in itself a violation of the statute, and only those limited cases involving actual promotional packaging, such as free samples given alongside other product, may violate this Section on the basis of packaging.
It has been nearly thirty years since the FTC last brought an action to enforce Section 2(e) of the Act. Although the Commission's amicus brief reaffirms that there are still practices that constitute promotional services and violations, it takes pains to limit the reach of this section of the Robinson-Patman Act. Section 2(e) is cast as a disfavored special case and contrasted with the more general balancing approach and competitive harm test used in other parts of the statute.
Additional background on the district court's denial of Clorox's motion to dismiss can be found in the February 2015 Jones Day Antitrust Alert, Are Club Packs a Promotional Service? Allegation Upheld in Price Discrimination Case, available here.
A copy of the FTC's November 2, 2015, amicus brief can be found here.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Kathryn M. Fenton
Alex P. Middleton, an associate in the Chicago Office, assisted in the preparation of this Alert.
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