Recent developments in the U.S. District Court for the Western District of Wisconsin call to mind the immortal words of Huey Long, a diehard supporter of the enactment of the Robinson-Patman Act eight decades ago, that he “would rather have thieves and gangsters than chain stores in Louisiana.” In October of last year, Woodman’s Food Market, Inc., an employee-owned chain of 15 retail grocery stores in Wisconsin and Illinois, filed a complaint against The Clorox Company challenging a new Clorox policy of restricting the availability of “large pack” sizes of its products to national “club” chains, particularly Sam’s Club and Costco, thereby cutting off Woodman’s access to those sizes. On Monday of last week, the court denied a Clorox motion to dismiss, holding that “Woodman’s allegations are sufficient to state a claim under the Robinson-Patman Act.”
This is not a story about garden-variety “price” discrimination under Section 2(a) of the Robinson-Patman Act. Price discrimination under that section is unlawful only under circumstances presenting a likelihood of an adverse effect on competition and subject to many affirmative defenses. Rather, the district court’s opinion of last week upheld the sufficiency of allegations that selling large sizes of Clorox products to the club chains while denying those sizes to smaller competitors like Woodman’s is a per se violation of Section 2(e) of the Robinson-Patman Act. That section prohibits a seller from furnishing “services or facilities” that promote the resale of its products unless they are offered “to all competing customers on proportionally equal terms.” The court flatly rejected Clorox’s argument that large package sizes do not qualify as “services or facilities” under this part of the statute. As the court noted, FTC decisions as far back as 1940 and 1956 clearly held special packaging and package sizes to be covered by the Section 2(e) prohibition;and “the FTC has made clear in its recently revised guidelines that even though Clorox may refuse to deal with a particular retailer, Clorox cannot use special packaging and package sizes to benefit only certain customers.”
That last point is a reference to the Federal Trade Commission’s (FTC) issuance in September of last year of an amended set of “Guides for Advertising Allowances and Other Merchandising Payments and Services.” Guide § 240.7 in this new version lists examples of “services or facilities” as those terms are used in both Section 2(d) and Section 2(e) of the Robinson-Patman Act. The list expressly includes “Special packaging, or package sizes.” Indeed, this guide has included that example since its original issuance in 1969. The FTC invited comments on proposed amendments to the whole set of these guides in the late 1980s, received comments urging deletion of the packaging example, but ended up deciding to retain it in the revised guides adopted in 1990. In 2012, the FTC invited comments on proposed amendments again and received comments again urging the deletion of this example. The September 2014 promulgation of final revised guides addressed those comments and explained once again the FTC’s determination to retain the packaging example. This history makes all the more compelling the district court’s holding in the Woodman’s/Clorox suit that discrimination regarding special package sizes is a violation of Section 2(e).
There is, however, a more fundamental issue discussed in the September 2014 promulgation that affects far more than the special packaging/package size example in Guide 240.7. In its 2012 request for a new round of comments on these guides generally, the FTC asked whether and how the guides should be revised “to take into account new methods of commerce associated with the growth of the Internet since 1990.” As the FTC reported, “[e]very commenter that addressed this question agreed that the growth of Internet commerce is an important development, and that the Guides should be understood to apply to Internet commerce.” In response, the FTC in its adoption of the new final set of these guides has now added references to the Internet to the lists of promotional media dispersed throughout them.
More generally speaking, the FTC expressed its agreement with the observation that “retailers, whether operating through brick-and-mortar stores, online, or through other formats, may be competing customers of a seller under the Act, and might therefore be entitled to proportionally equal promotional allowances and services.” The FTC went on to advise that, in determining whether retailers using different retail formats should be deemed competing customers, “it will be relevant to consider the particular characteristics of the retailers’ formats, the location and characteristics of the retailers’ target and actual customers, and other factors;” and to the extent retailers are competing customers, they may be entitled to proportionally equal treatment. Acknowledging that neither existing law nor comments on these guides provided any detailed guidance as to how sellers might achieve the required equality of treatment “across reseller formats, such as brick-and-mortar and online sales,” the FTC advised that “no single means of doing so is required,” and “a seller’s application of common sense and good faith will be relevant in assaying efforts to proportionalize promotional allowances and services across different sales formats.”
It is difficult to contest or even to criticize those observations as applied to the rapidly evolving competitive interaction between brick-and-mortar retailers and Internet sellers in many markets throughout the economy. Indeed, this phenomenon is now affecting agency enforcement decisions about proposed mergers in the direction of ultimately supporting clearance of transactions likely to have been challenged in the “old” world. One unavoidable consequence, however, is increased complexity and mischievous uncertainty surrounding the business judgments to be made in structuring promotional allowance and service programs that minimize risk of liability under either Section 2(d) or Section 2(e) of the Robinson-Patman Act while still achieving the seller’s legitimate business interests. As a practical matter, the problem is not any potential for rogue or unreasonable FTC action in this area; the FTC stopped devoting significant enforcement resources to this area more than three decades ago. The problem is that customers and competitors can exploit these new complexities and uncertainties in private litigation that includes the potential for treble damage awards.
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Fifty-five years ago, a prominent antitrust practitioner complained that Robinson-Patman case law was “bogged in a dense undergrowth of confusion, ambiguity, controversy and babel.” Thirty-seven years ago, a prominent antitrust scholar complained that the Robinson-Patman Act was “the misshapen progeny of intolerable draftsmanship coupled to wholly mistaken economic theory.” These critiques are now at least a bit quaint as Robinson-Patman case law over the past 30 years has addressed and removed many of the rough edges of the statue as conceived during Huey Long’s hey-day. But, as discussed hereinabove, rough edges remain under new and difficult market environments.