Antitrust Alert: U.S. Appeals Court Says Refusal to Sell Larger Package Sizes to All Customers Not Illegal Discrimination Under Robinson-Patman Act
In a unanimous decision, the Seventh Circuit has held that decision by The Clorox Company to sell larger size packages of its products only to some retailers (like club stores) and not others (like the plaintiff, a regional grocery chain) did not violate the Robinson-Patman Act's (RPA) prohibition on discrimination in providing promotional services. The decision reduces the risk that suppliers will face RPA claims that offering a certain product size to one customer and not another.
Woodman's Food Market Inc. sued Clorox in 2014, alleging that Clorox's decision to sell bulk-sized items to club stores, such as Sam's Club and Costco, but not to Woodman's, violated the non- discrimination provisions of Sections 2(d) and 2(e) of the RPA. These sections prohibit discrimination in promotional allowances and services, but do not require a showing of competitive injury, as is required for price discrimination claims under Section 2(a). Woodman's complaint alleged that the large packs constituted a "promotional service" that aids in resale, as consumers are attracted to large pack products because the unit price on those products is lower and because consumers do not have to buy the products as frequently.
The district court denied Clorox's motion to dismiss, finding that large packs could be considered a promotional service under Section 2(e). In reaching this conclusion, the court relied on two old Federal Trade Commission ("FTC") administrative decisions, which found Section 2(e) liability for special packaging, and on the FTC's Guide for Advertising Allowances and Other Merchandising Payments and Services ("Fred Meyer Guidelines"), which include "special packaging" and "package sizes" on the list of "promotional services." Clorox argued that the FTC decisions on which Woodman's relied were no longer good law, but the district court found them "directly on point." Under the Fred Meyer Guidelines, the district court found, "even though Clorox may refuse to deal with a particular retailer, Clorox cannot use special packaging and package sizes to benefit only certain customers." The Court did not consider any of Clorox's policy arguments for why the RPA's provisions should not be expansively construed in this fashion.
In reversing the district court and finding that Clorox's refusal to sell large packs to Woodman's does not violate Section 2(e) of the RPA, the Seventh Circuit concluded that "size alone is not enough to constitute a promotional service or facility for purposes of [2(e)]; any discount that goes along with size must be analyzed under [2(a)]; and the convenience of the larger size is not a promotional service or facility." In reaching this conclusion, the court found: "If any product attribute that made the product more desirable automatically became a promotional "service or facility" by virtue of that fact, then [2(e)] would cover all products."
The FTC had filed an extensively-cited amicus brief in support of Clorox, arguing that the promotional service provision must be narrowly construed to be consistent with the RPA and the purposes of antitrust law as a whole. The decision emphasizes that such a broad interpretation of 2(e) would render essentially any product attribute that made a product more attractive to consumers a "service or facility" covered by Section 2(e) and thereby effectively eliminate the seller's discretion to choose which products to sell and to whom – a long established principle of antitrust law (the Colgate Doctrine).
Woodman's abandoned its price discrimination claim under 2(a) during the course of litigation. Section 2(a) requires a showing of competitive injury, which courts have construed to require at least likelihood of substantially lessening competition. The court noted that 2(e) was enacted to prevent sellers from using promotional services as a loophole around 2(a) by making per se illegal (without showing competitive injury) promotional services that are in effect concealed price discrimination. To the extent the bulk packaging is viewed as a quantity discount, it must be analyzed under 2(a) and not 2(e). If 2(e) were to be so broadly construed, the requirement of a competitive injury could be avoided in every case that also fits the criteria of 2(d) and 2(e).
As we noted in our prior alert on the district court decision, the district court's broad interpretation of Section 2(e) would have opened the door to challenges to common distribution practices. The Seventh Circuit's interpretation of 2(e) will narrow the path for potential complainants who might otherwise press retailers for access to certain products or product attributes, such as club packs.
However, businesses should remain aware of the potential effects of price discounts (and thus Section 2(a)) associated with special packaging. There remains the possibility that some packaging characteristics besides size could be deemed "promotional" to the extent the packaging includes attributes that arguably may aid in resale. Specifically, the Seventh Circuit noted, it would not be impossible under other facts for package size or design combined with promotional content to be a service or facility under 2(e), referencing the FTC's examples of seasonal packaging of fun-size candy bars and football-shaped packages offered just before the Superbowl. Other examples are not hard to imagine, such as refillable collector's packaging or other specially-packaged seasonal items. Therefore, some caution still is warranted for companies that may choose to supply only certain retailers with such products.
The Seventh Circuit's decision of August 12, 2016, authored by Judge Diane Wood, can be found here.
For more information, please contact your principal Jones Day representative or any/either of the lawyers listed below.
Kathryn M. Fenton
Michelle K. Fischer
Kristiana A. Garcia, an associate in the Washington Office, assisted in the preparation of this Alert.
Jones Day prepares summaries of significant antitrust enforcement, litigation, and policy events as a service to clients and interested readers, to provide timely insight on antitrust and competition law developments relevant to business, but not as legal advice on any specific matter. Please visit our Publication Request form to add your name to our distribution list.