We know that many of you not only deal with advertising but are also proud to count yourself as among the elite few who wrestle with the intricacies of the Robinson-Patman Act. If that sounds like you, read on as our own Rob Davis analyzes a recent 7th Circuit decision. If not, then stand at ease and remain blissfully ignorant of price discrimination, “like grade and quality,” promotional allowances and other such terms.
The Seventh Circuit’s Robinson-Patman Decision: What Does “Promote” Really Mean?
It might surprise many in the “real world” (which for these purposes means everyone other than antitrust/competition lawyers), but to the antitrust bar, the Robinson-Patman Act is the red-headed stepchild of competition law. Whereas competition law is now focused entirely on consumer welfare and the preservation of competition rather than the profits of competitors—even the small ones—the Robinson-Patman Act is almost obstinately about protecting the little guy. Thus, for years antitrust lawyers and the FTC have been tying themselves into knots to make the Act play well with the other antitrust laws, to varying levels of success.
Enter Clorox Bleach and the Seventh Circuit’s awkward decision in Woodman’s Food Market v. Clorox Company and Clorox Sales Company.
In Woodman’s, the Clorox Company had decided to no longer sell “large packs” of its products, like massive bottles of salad dressing, to grocery stores including Woodman’s, and to limit sales of that packaging option to only wholesale discount clubs. Woodman’s, presumably because it perceived that decision hindered its ability to compete against the wholesale discount clubs, disagreed with the decision and ended up suing Clorox under the Robinson-Patman Act for injunctive relief. Woodman’s initially alleged that the decision was discriminatory under 13(a) of the Act as well as 13(d) and 13(e) of the Act. During the litigation, it abandoned its claim under 13(a) and focused its attentions on 13(d) and (e).
At this point it might be useful to know what these different provisions are. Simply put, 13(a) relates to unjustified differences in prices charged by suppliers to retailers or distributors that cause competitive injury to the retailers or distributors that are getting the higher prices. What the other two provisions are about is a little less clear: 13(d) makes it unlawful for suppliers “to pay or contact for the payment of anything of value to or for the benefit of a customer of such person in the course of such commerce as compensation or in consideration for any services or facilities furnished by or through such customer in connection with the processing, handling, sale, or offering for sale of any products or commodities manufactured, sold, or offered for sale by such person….” Section 13(e) prohibits discrimination “in favor of one purchaser against another purchaser or purchasers of a commodity bought for resale, with or without processing, by contracting to furnish or furnishing, or by contributing to the furnishing of, any services or facilities connected with the processing, handling, sale, or offering for sale of such commodity so purchased.”
Obviously, this particular red-headed stepchild is a little bit prolix. But the FTC came to the rescue here – in an amicus to the Seventh Circuit the FTC argued that these two provisions relate only to discrimination relating to product promotion – that 13(d) relates to promotion by the customer that is subsidized by the supplier and that 13(e) relates to the direct provision of promotion for the benefit of the customer. How the FTC, and eventually the Seventh Circuit, got there demonstrates how hard it can be to get the Robinson-Patman Act to act like a law to protect consumers rather than just competitors.
We can leave it as an exercise for the reader to figure out how all those words in 13(d) and (e) turn into “promotion” (and also why Congress was unable to say “promotion” when it passed phrases like “any services or facilities connected with the processing, handling, sale, or offering for sale of such commodity so purchased”). But the FTC’s interpretation also ran into a bit of trouble with old precedent, both at the FTC and in the Seventh Circuit itself. At one time, the Commission had actually believed that conduct like this was a violation of the Act, and found so in two cases. First, way back in 1940 in its Luxor decision, the Commission had found that a supplier that sold cosmetics in “junior” sized packages to novelty and variety stores but not to competing drug stores violated 13(e) because the smaller packages were more convenient to consumers, and “promote[d] convenience in display and sale of” the products – in other words it made those sales easier for the reseller. Nearly twenty years later in General Foods, the Commission followed Luxor and ruled that 13(e) was violated when a supplier failed to sell coffee in “institution” size packaging on equal terms to competing wholesalers, who were able to buy only smaller, “grocery” size packages. The FTC amicus disavowed those cases as being out of step with the current trends in antitrust law and with the Commission’s current interpretation of those sections of the law as only applying to promotional advantages – where promotion meant marketing or advertising advantages. In other words, the FTC used to think that 13(d) and (e) related to services or facilities that promoted resale (i.e., made resale easier) and now they think that those provisions only relate to “promotion” (i.e., marketing or advertising related facilities). Just say the word “promote” with a British accent in the former case. Maybe that will help make this all clearer.
For its part, back in 1971, in Centex-Winston v. Edward Hines Lumber, the Seventh Circuit had its own adventures with “promote.” In that case, the Seventh Circuit looked at the possibility that discrimination in delivery times by the supplier could be a violation of 13(e) (in that case, the complaining customer got its products late from the supplier, while a competitor routinely got the products on time). In Centex, the defendant got the complaint dismissed in district court arguing, among other things, that delivery services are not “promotional services.” The Seventh Circuit rejected that argument and reversed, noting that “Section [13(e)] should not be confined to the conventional type of promotional services such as window displays, demonstrators, exhibits and prizes, for [it] was ‘made intentionally broader than this one sphere [payments for advertising and promotional services] in order to prevent evasion in resort to others [nonadvertising and nonpromotional services] by which the same purpose might be accomplished.'” In other words, in that part of the decision the Seventh Circuit rejected precisely the argument in the FTC amicus. Unfortunately, rather than simply noting that the interpretation was out of step with the rest of the antitrust laws and possibly in contradiction to them, the Woodman’s Seventh Circuit decided that part of the decision was an “unnecessary aside,” and that the real reason that the Centex Seventh Circuit found for the plaintiff was the statement in Centex that “consistently faster deliveries by defendant to plaintiff’s competitors would obviously promote and facilitate their resales of lumber.”
At this point, you’d be forgiven for thinking that trying to figure out what “promote” means is starting to feel like figuring out an especially devious magic trick. In any event, holding that 13(d) and 13(e) relate only to promotion (whatever that means) didn’t really end the case. Woodman’s argued that bulk packaging was a “service or facility” under 13(d) and (e) for two reasons: first, because selling the product at bulk led to lower unit prices for the wholesale discount clubs than for Woodman’s; and second, that for some consumers the larger sizes were more convenient. The court was able to dispense with the first claim relatively easily by noting that the argument was really just that the big stores were getting lower prices than Woodman’s was, which is covered by 13(a). If a claim like this were also able to come under 13(d) or (e) as well that would allow plaintiffs to avoid the requirement of 13(a) that the discrimination cause competitive injury (since neither 13(d) nor (e) have that requirement).
A more difficult problem for the court was the second argument – that the larger size was preferred by some consumers for convenience. In other words, that it “promoted” resale. The FTC had argued in its amicus that using consumer preference to view the facility (in this case the package size) as “promotional” would allow 13(d) and 13(e) to become an instrument that would prohibit suppliers from deciding who to sell their products to for resale. That was one of the reasons the FTC viewed “promote” as relating solely to marketing or advertising rather than anything that would make resale easier. Interestingly, even though the Seventh Circuit had adopted just the opposite holding in dealing with Centex (where it held that the real holding of Centex was that the discrimination promoted the sales of the underlying product – remember that?), the court agreed here with the FTC – “If any product attribute that made the product more desirable automatically became a promotional ‘service or facility’ by virtue of that fact, then subsection 13(e) would cover all products…. [S]uch an interpretation of section 13(e) would wipe out the seller’s discretion to choose which products to sell to whom.”
So what does this all mean other than that courts (and really the FTC as well – keep reading) are willing to engage in pretzel logic to limit the application of the Robinson-Patman Act? Unfortunately not much – while the court was able to hold that large package sizes, on their own were not a “service or facility,” it had to acknowledge that the FTC itself in its guidance regarding the Act had included “special packaging, or package sizes” as a potential promotional service or facility under 13(d) and (e). Problematically, in its examples applying the guidance, the FTC had made a distinction between package size changes that “promote[d] customers’ resale of the” product (which would be promotional under the guidance) from package size changes that “promote the original sale of the detergent to the customer and not its resale by the customer” (which would not be promotional under the guidance). In other words, the FTC’s guidance could have been read to say that “promote” just meant “to make easier or more likely” rather than for marketing or advertising purposes. In its brief, the Commission “clarified” that guidance to ensure that product sizing should not be considered a potential promotional service or facility under 13(d) and (e) unless the size of a package conveys an advertising or other promotional message or it relieves the customer of promotional costs it otherwise would otherwise have incurred. But the Seventh Circuit didn’t exactly follow the FTC here – the Seventh Circuit instead ruled that product size could be promotional only when “combined with other promotional content” – thus leaving the door open to the possibility that it will have to wrestle with the term in the next case.
So although it appears that the red-headed stepchild has been tamed for now and the world (or at least the Seventh Circuit) has been made safe for manufacturers to decide who to sell what to, it still isn’t entirely clear when a seller’s decision to limit its sales of certain package sizes to certain customers only will cause it to run afoul of the Robinson-Patman Act when one customer claims that it is harder for it to sell the package size it is allowed to buy.