On October 21, 2019, a jury empaneled by the United States District Court for the Central District of California found that the makers of 5-Hour Energy “shots” did not violate the Robinson-Patman Act (“RPA”) by providing more favorable pricing to Costco, compared to smaller wholesalers that supply convenience stores. The jury’s verdict suggests that price-discrimination claims under the Robinson-Patman Act remain difficult to prove, particularly where a defendant challenges a plaintiff to show that the alleged price discrimination resulted in lost sales in head-to-head competition between resellers.
In February 2018, a group of small wholesalers that supply convenience stores brought suit against Living Essentials LLC, the makers of 5-Hour Energy. One of their principal claims was that Living Essentials had for years provided Costco with a $.10 per bottle price advantage, compared to the wholesale group, and that it also provided Costco with a range of other discounts, rebates, and promotional payments. The group claimed that because these incentives were offered to Costco, but not to smaller wholesalers, Living Essentials violated both Section 2(a) and Section 2(d) of the RPA, a federal law that prohibits unlawful price discrimination.
Informally labeled the “anti-chain store law,” the RPA passed in 1936 as an amendment to the Clayton Antitrust Act.1 It prohibits sellers from charging competing resellers different prices for the same product, i.e., price discrimination. When it enacted the RPA, Congress intended “to target the perceived harm to competition occasioned by powerful buyers, rather than sellers,” in response to the advent of large chain stores wielding enough buy-side clout to obtain lower prices at wholesale than smaller buyers.2
Section 2(a) creates antitrust liability when (1) there is a reasonably contemporaneous difference in price offered to competing resellers (factoring in incentives like rebates and discounts), (2) occurring in interstate commerce, (3) and involving commodities (i.e., tangible products, not services or other intangibles like intellectual property) (4) of like grade and quality (5) that are sold (i.e., not leased, consigned, swapped, or licensed) (6) in a manner that causes injury to competition.
Section 2(d) and 2(e) of the RPA prohibit a seller from providing advertising and promotional allowances or services to resellers, unless such allowances are available to all competing resellers on proportionally equal terms.3 Sections 2(d) and (e) were enacted to prevent sellers from circumventing section 2(a) by discriminating between buyers in respects other than price.
RPA cases are divided between “primary line” cases involving alleged injury to a seller’s competitors (i.e., predatory pricing) and “secondary-line” cases involving injury to disfavored resellers that pay greater wholesale prices than favored resellers.4 Importantly, the RPA does not prohibit all price discrimination; only price discrimination that harms competition.5
Living Essentials Litigation
A jury trial of the claims against Living Essentials began on October 2, 2019, with Plaintiffs asserting unlawful secondary-line price discrimination and arguing that they steadily lost customers as Living Essentials provided 5-Hour Energy to Costco at lower prices. Plaintiffs presented evidence that Living Essentials charged Costco 15-20 percent less for 5-Hour Energy.
Living Essentials defended the claims by arguing, among other things, that the smaller wholesalers failed to prove that they compete with Costco for the same customers or that the alleged price discrimination injured competition. In particular, Living Essentials argued that it employs a multi-level marketing strategy aimed at different distribution channels, with a separate focus on club stores like Costco and convenience stores like the ones served by plaintiffs. Living Essentials further argued that it issued instant rebate coupons administered by club-store retailers to encourage new customers to try its products, and such discounts would not work in other channels (including for small wholesalers that sell primarily to convenience stores), because those types of resellers could not be expected to pass the discount on to customers.
Ultimately, the jury appears to have been persuaded that Costco operates in a different segment of the market than the plaintiffs, and thus did not compete with them. By returning a defense verdict, the jury reinforced an emerging trend in price discrimination cases. First, RPA claims are rarely litigated to a successful result on the merits (and are almost never initiated by federal enforcement agencies). Second, the standard to show that discriminatory pricing caused injury to a disfavored reseller is exacting. To show competitive injury, courts typically require plaintiffs to come forward with evidence that the disfavored resellers lost customers in head-to-head competition with favored resellers, and such evidence is difficult to obtain.
Nevertheless, it is important to have RPA compliance procedures in place to protect and justify pricing strategies. Implementing such guardrails allows companies to ensure that their RPA defenses are well established before their pricing decisions are ever challenged.