In two companion cases concerning the Robinson-Patman Act's prohibition of price discrimination, the Sixth Circuit holds that a loyalty program that is functionally available to competing purchasers does not violate the RPA. Smith Wholesale Co., Inc. v. R.J. Reynolds Tobacco Co., 6th Cir. No. 05-6053, 2/27/07; M-K Grocery Co. v. Philip Morris USA, Inc., 6th Cir., No. 05-6481, 2/27/07 (unpublished). Unlike other RPA decisions that have applied the functional availability doctrine to volume-based loyalty programs, these cases stand-out as one of the first occasions where a court has discussed in detail the circumstances in which a market share based loyalty program may or may not be functionally available and discriminatory. The decisions reveal that a loyalty (or other discount) program that requires a purchaser to alter its business strategy or marketing decisions to obtain the best price does not render the discount functionally unavailable.
In the two cases, distributors claimed that the two leading cigarette manufacturers in the country, RJ Reynold's and Philip Morris' market-share discount programs constituted price discrimination in violation of Section 2(a) of the RPA. The programs offered financial incentives to distributors who focused on defendants' "savings" brands. "Savings" brands are second and third tier products priced lower than first-tier, premium products like Philip Morris' Marlboro and RJ Reynolds' Camel, Winston and Salem cigarettes. RJ Reynolds' second and third tier cigarettes are sold under the brand names "Doral", "Monoarch", "Best Choice", "Citation" and "Cardinal." Plaintiffs sold a high volume of fourth-tier cigarettes, the lowest priced cigarette on the market. Neither defendant makes or sells fourth-tier cigarettes.
RJ Reynold's "Wholesale Partners Program" and Philip Morris' "Wholesale Leaders Program" offered three discount/rebate levels. All distributors qualified for the first and lowest level discount, although that discount diminished over time. A distributor would be eligible for the second and third level discounts and rebates if its share of defendants' savings brand cigarettes, in comparison to its share of other makers' savings brands, was high enough. The exact share varied by geographic area. Defendants made the discount levels known to all competing purchasers.
The crux of plaintiffs' arguments in the two cases was that the higher level discounts were not functionally available because they were not realistically or practically achievable. Plaintiffs claimed it was impossible to meet the higher market share percentages because they sold to retailers in lower income, rural areas that have a uniquely high demand for fourth-tier cigarettes, the cheapest available. They alleged they could not reach the higher market share percentages without limiting their sales of fourth tier brands, and that it was not realistic or practical for them to do so because they are full-service distributors and retailers will take their business elsewhere if plaintiffs stopped selling fourth-tier cigarettes. RJ Reynolds countered that it was possible for plaintiffs to obtain the best pricing: plaintiffs could choose to curtail their sales of fourth-tier cigarettes and attempt to attain the higher discount/rebate levels or they could continue to promote fourth-tier cigarettes and receive a lower discount.
The Sixth Circuit affirmed summary judgment in favor of defendants. To avoid redundancy, the court adopted and incorporated its legal conclusions in the Reynolds case to the M-K Grocery case. The court first observed that market share discounts differ from volume based discounts because they "theoretically level the playing field by allowing competing purchasers of like commodities to participate on equal terms, regardless of size, because such discounts depend not on volume purchases, but on the percentage of purchases of a particular category of products." Reynolds at 10. Nevertheless, the court said, market share discounts may be administered in such a way that the incentives "cross the fine line from pro-competitive incentives to exclusionary, anti-competitive price discrimination". Id. The court offered additional guidance on market share discount programs. Quoting from the Supreme Court's decision in Volvo Trucks, the court noted that price discrimination claims concerning market share discount programs should be evaluated on a case-by-case basis like all antitrust claims. Reynolds at 10, quoting Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006). The court referred to the Supreme Court's suggestion in Volvo that the Court would not interpret discrimination where the allegedly favored purchasers were not power buyers, but also pointed out that the RPA's "applicability is not limited to big-buyer/small buyer cases, ..it is one of general applicability and prohibits discriminations generally". Reynolds at 10, quoting Alan's of Atlanta, Inc. v. Minolta Corp., 903 F.2d 1414, 1422 (11th Cir. 1990).
Taking up the key issue in the case, whether RJ Reynold's discount program was functionally available, the court quoted Krist Oil where the plaintiff faced a choice that was "not an inequity imposed by the pricing structure but a fundamental economic conundrum faced by all sellers,", i.e., "purchasers are left with a choice between selling more bottles at a lower price per bottle profit or selling fewer bottles at a higher profit for each." Krist Oil Co., Inc. v. Bernick's Pepsi-Cola of Duluth, Inc, 34 F. Supp. 2d 852, 856 (W.D. Wis. 2005). Considering its own decision in Bouldis v. U.S. Suzuki Motor Corp., 71 F.2d 1319, (6th Cir. 1983) the court noted that manufacturers may expect that not every dealer will participate in every incentive program. A dealer may determine in the exercise of its business judgment whether to take advantage of a promotion. In Bouldis, the plaintiff's inability to participate was due to its own cash flow and inventory problems. There was no causal link between the defendant's program and plaintiff's alleged injuries. Thus, plaintiffs had not established price discrimination.
Returning to this case, the court observed that plaintiffs provided no statistical evidence or expert testimony to support the allegation that they could not increase their share of defendants' second and third tier brands because their customers served poorer areas with a uniquely high demand for fourth-tier cigarettes. By contrast, RJ Reynolds presented evidence that showed that the average per capita income in the counties served by plaintiffs' customers exceeded that of the counties not served for most plaintiffs. Two plaintiffs sold to customers in the same areas as other distributors who earned the highest level discounts available. There was no evidence that anything other than the fact that plaintiffs' marketing decisions impacted their ability to obtain the best prices. As in Krist Oil, the court said, this was not an inequity imposed by the pricing structure but a fundamental economic conundrum faced by all sellers. Thus, the court accepted RJ Reynold's argument that attaining the higher discount levels was within plaintiffs' control; a distributor qualify for the higher discount levels by altering its sales mix at any time. If it were otherwise, a distributor could claim that a discount is discriminatory because it requires the distributor to alter its business in some fashion. In that case, manufacturers would have to customize discounts for its distributors and this would violate the RPA. Here, "the capacity of plaintiffs to qualify for the best pricing was a matter of marketing strategy and brand prioritization, a choice inherent and unavoidable in multi-brand incentive programs". This does not, the court held, give rise to price discrimination. Plaintiffs' failure to qualify for the higher discounts was the result of their own marketing decisions. While there may be some risk in focusing on second and third tier cigarettes instead of fourth tier cigarettes, all of the distributors participating in the higher discounts would have to take the same risk. The discounts were available to all customers, based on a nondiscriminatory formula, evenly administered and functionally available. Therefore plaintiffs failed to establish price discrimination.
In addition to their RPA claim against Philip Morris, plaintiffs in the M-K Grocery case alleged Philip Morris' discount program constituted an attempt to monopolize and violated Section 2 of the Sherman Act. The Sixth Circuit, in its unpublished opinion, upheld summary judgment of this claim. Although Philip Morris's market share based on units sold was 49.6%, plaintiffs failed to show that Philip-Morris had monopoly power. Each time Philip-Morris lost market share, it responded by lowering prices. The average price of its premium cigarettes was lower than its competitors' premium brands. Likewise, there was no evidence that Philip-Morris had the power or could control other firms' output. Unable to establish this element of a Section 2 violation, plaintiffs' attempted monopolization claim failed as a matter of law.