Last week the Federal Trade Commission, in an amicus brief before the Seventh Circuit in Woodman’s Food Market, Inc. v. Clorox Co., rejected two decades-old FTC decisions applying Section 2(e) of the Robinson-Patman Act.  (One of us previously discussed the Clorox appeal here.)

The FTC now argues that its prior decisions in In the Matter of Luxor, Ltd.(1940) and In the Matter of General Foods Corp. (1956), which were relied upon by the district court, got Section 2(e) wrong.  The FTC asserts that Section 2(e) does not prohibit manufacturers from selling bulk packages to one retailer and refusing to do so for another because that is not a form of promotional discrimination.  The Commission’s position undermines much of the rationale of the district court in Clorox and should weigh heavily in the Seventh Circuit’s decision whether to reverse the lower court’s refusal to dismiss the complaint.

Woodman’s, a regional grocery chain operating in Wisconsin and Illinois, sued Clorox in the Western District of Wisconsin, asserting that Clorox had violated Section 2(e) by refusing to sell to Woodman’s bulk-packaged products that Clorox was selling to major national club retailers, such as Sam’s Club and Costco.

In its arguments before the district court, Woodman’s relied on Luxor andGeneral Foods, wherein the FTC concluded that manufacturers violated Section 2(e) by selling, respectively, “junior” sized cosmetic products and “institutional”-sized packages of Maxwell House Coffee to some customers but not others.  Woodman’s argued that based on these decisions, Clorox violated Section 2 (e) by selectively selling special package sizes to club stores but not grocery chains.  According to Woodman’s, this amounted to discrimination in providing “promotional service.”

The district court agreed, reasoning that Clorox’s selective sizing violated Section 2(e) because it was “connected to the resale of those products.”  It concluded that Luxor and General Foods were “directly on point” and that Clorox had failed to persuade the court that they were no longer good law.  In particular, the court rejected Clorox’s argument that the two prior decisions were outdated in light of more recent FTC guidance that Section 2(e) should be narrowly interpreted.  Such guidance, the court reasoned, did not bear on whether offering different sizes of the same product violated Section 2 (e).

In its amicus brief on appeal, the FTC sides with Clorox, rejecting Luxor andGeneral Foods as outdated and incorrect.  The FTC observes that Section 2(e) has subsequently been interpreted – most notably in the Supreme Court’s decision in FTC v. Fred Meyer and the Commission’s subsequent Fred MeyerGuides – such that it covers special packaging or package sizes “only insofar as they primarily promote a product’s resale.”  In short, Section 2(e) does not bar non-promotional forms of discrimination.  Otherwise, Section 2(e) would be overly broad because it would reach non-promotional conduct that does not produce an anticompetitive effect.  Where a plaintiff charges non-promotional discrimination, it must rely on Section 2(a), which requires the plaintiff to also show an anticompetitive effect.

Luxor and General Foods, the FTC asserts, are at odds with this modern view and have never been adopted by the Fred Meyer Guides.  Luxor was decided in 1940, before courts restricted Section 2(e) to promotional services.  In its 1956General Foods decision, the Commission simply applied Luxor without explanation – ignoring, the FTC argues, the subsequent court rulings that rendered Luxor inapplicable.  

The FTC asserts that Luxor was premised on the assumptions that (1) there is public demand for different-sized packages, and (2) a retailer could lose sales and customers if it were unable to fill that demand.  By that logic, however, manufacturers would have to sell customers “all popular types, styles, and sizes of a given product to every buyer … without any showing of harm to competition.”  This result, the FTC charges, “would contradict the established antitrust principle that, absent monopoly, a seller may choose the parties with which it will deal.”  The Commission urges that Section 2(e) should be read, contra Luxor, “to require a plaintiff to demonstrate that a seller provided a promotional service distinct from the product itself” – i.e., by conveying a promotional message – and not simply to show that a plaintiff was “deprived of products that customers desire.”

According to the FTC, this should be a fact-intensive inquiry, not a bright-line test.  A candy manufacturer, for example, might violate Section 2(e) by discriminatorily selling specially packaged Super Bowl versions of its chocolates – particularly if they were accompanied by special in-store promotional displays or advertising.  That is very different, the FTC reasons, from the Clorox products at issue here:  “large bags of kitty litter, 120-ounce containers of bleach, and big bottles of salad dressing,” sold with no apparent promotional message whatsoever.

The FTC is right the Section 2(e) inquiry should be fact-intensive, not bright-line.  An enormous bottle of salad dressing is generally non-promotional, but the result is conceivably different if it comes with a label reading, “New!  Giant Economy Size!”  From an antitrust policy perspective, however, this hazy, fact-intensive distinction between a permissible size discrimination and an impermissible promotional discrimination underscores long-standing concerns about the Robinson-Patman Act.  As many commentators have observed, the Act has done little to foster competition or curtail anticompetitive behavior (as one of us has discussed previously).  In decidingClorox, the Seventh Circuit will have an opportunity to determine the appropriate scope of Section 2(e).