Uncertainty

Customer loyalty discount programs, where manufacturers offer customers rebates and/or discounts to encourage larger purchases of their products, are both commonplace and generally viewed as competition-enhancing. With the recent refusal of the US Supreme Court to review a decision by the Third Circuit in ZF Meritor, LLC v. Eaton Corp., however, manufacturers face uncertainty about when they can use customer loyalty discount programs as a competitive tool. The Third Circuit, unlike courts of appeal in other circuits that have held that above-cost loyalty discount programs are pro-competitive and permissible, has held instead that such above-cost programs, offered by a manufacturer with market power, can violate the antitrust laws.

The Meritor case involved supply agreements between Eaton, a manufacturer of heavy duty transmissions, and all of its customers, manufacturers of heavy duty trucks. Eaton had been the dominant supplier of heavy duty transmissions until Meritor entered the market and took about 17% of the sales of such heavy duty transmissions.

Eaton, in response to Meritor’s increasing sales, introduced long-term supply agreements that included rebate provisions based on the percentage of volume of a customer’s purchase of heavy duty transmissions from Eaton. The prices for Eaton’s transmissions were always above cost. Eaton’s loyalty discounts were successful at stopping and then reversing the growth of Meritor’s share of sales. In fact, Meritor ultimately exited the market after suing Eaton for various antitrust violations.

The Third Circuit decision which the Supreme Court declined to review found that Eaton’s loyalty discount program amounted to de facto exclusive dealing and was meant “not to meet customer demand [for lower prices], but to take preemptive steps to block potential competition.”

This decision by the Third Circuit and the refusal by the Supreme Court to review that decision, undercuts “the general principle that above-cost pricing practices are not anticompetitive.” The position of the Third Circuit here is contrary to decisions in a number of other circuits, but is internally consistent with its previous holding in LePage’s concerning bundled discounts.

Practical Advice

Because of the unresolved split in the circuits about how to consider long-term supply contracts with loyalty discounts or other purchase inducements (like bundled discounts), manufacturers are in a difficult position when developing sales and marketing incentives to compete. What is a manufacturer to do given this uncertainty?

  • First, given that most manufacturers sell products in the Third Circuit (which includes the states of Delaware, New Jersey and Pennsylvania), the law in this circuit must be viewed as the lowest common denominator.
  • Second, if the manufacturer has more than a 30% to 40% market share, it needs to be very cautious about implementing long-term supply agreements based on loyalty discounts or bundled discounts.
  • Third, even if the manufacturer does not have significant market share, it is important to make certain that its pricing, taking into account all discounts and rebates, is above cost.
  • Fourth, counsel should review and discuss with the manufacturer any customer loyalty discount program prior to its implementation, especially where the manufacturer has a market share of more than 30% to 40%.