On Sept. 24, 2014, the Federal Trade Commission (FTC) issued revised Guides for Advertising Allowances and Other Merchandising Payments and Services, effective Nov. 10.1  The original Guides were issued in 1969 in response to a Supreme Court recommendation a year earlier inFTC v. Fred Meyer, Inc.2  and are commonly referred to as the “Fred Meyer Guides.” They address most issues faced by sellers in order to comply with the requirements of Sections 2(d) and (e) of the federal Robinson-Patman Act (RPA) – the provisions dealing with discriminations in the offering of advertising allowances and services to customers.

Background

The Fred Meyer Guides were last revised in 1990. Since then, the Commission has instituted only one RPA case of any nature.3  Indeed, it last brought a case involving the provisions addressed by the Guides in 1988 – a suit that it thereafter voluntarily dismissed.4  Because the RPA encourages price rigidity (in contrast to the focus of the Sherman Act on price competition), in 2006, the then FTC Chair recommended repeal of the statute,5  as did a presidentially appointed Commission the following year.6  That recommendation was thereafter endorsed by one of the current FTC Commissioners.7

Of most significance, the Supreme Court continually has stressed that the RPA – not just §2(a), its pricing provision – should be interpreted narrowly in cases involving alleged discriminations among customers –secondary-line discriminations. Such cases involve restraints on competition within a supplier’s own brand – intrabrand competition – rather than the interbrand competition among suppliers which the Court has often declared to be the “primary concern of antitrust law.” Significantly, in its 1996 Volvo decision the Court stressed that the RPA “signals no large departure from that concern.”8  The Supreme Court made three key points in that decision: (i) it would construe the RPA consistently with the broader policies of the Sherman Act that encourage pricing flexibility rather than pricing rigidity; (ii) it would resist interpretations geared to the protection of existing competitors rather than to the stimulation of interbrand competition; and (iii) it would much prefer to see cases that involve discriminations favoring powerful buyers.9

Accordingly, when the FTC announced two years ago that it would consider revising the Fred Meyer Guides for the first time in 22 years, most observers anticipated that it would loosen constructions of the promotional RPA provisions so as to make the Guides more consistent with the Supreme Court’s teachings in Volvo.

Unfortunately, that was not done. As approved 5-0 by the FTC Commissioners, the revised Guides reflect anachronistic views protective of intrabrand competition that were in vogue when the Guides were written 45 years ago, and which disregard a seller’s need to compete effectively against the sellers of other brands. The revisions include only minor changes, largely of a non-substantive nature, and provide little guidance to sellers or their customers. For example, beyond merely acknowledging the hardly controversial proposition that the Internet can be used as an advertising vehicle, the revisions and FTC comments that accompanied them provide no guidance whatsoever as to what constitutes advertising on the Internet, or how a seller should calculate the amount to pay a provider for such advertising. Instead, the FTC’s comments merely advise that “a seller’s application of common sense and good faith will be relevant” in determining the amount to pay for such advertising services.10

For brevity’s sake, highlighted below are just a few examples of the FTC’s refusal to follow the Supreme Court’s recommendations about the need to construe the RPA in a manner that brings it closer to the basic antitrust principles embodied in the Sherman Act.

Competitive Harm

When he was a Judge on the First Circuit Court of Appeals, Supreme Court Justice Stephen Breyer stressed that §2(e), one of the two promotional provisions addressed in the Fred Meyer Guides, “like the rest of the Robinson-Patman Act, is aimed at significant harm to competition . . . .”11  In response to the FTC’s requests for public comments concerning possible revisions to the Guides, most of the seven organizations that filed submissions in 2013 urged adoption of this basic antitrust principle in the Guides. The FTC rejected the approach, declaring instead that the promotional provisions do not require any proof of competitive harm, because they are intended “to prevent evasions” of §2(a), the price discrimination provision. However, since passage of the statute that is no longer the case, because a plaintiff has fewer hurdles to clear in order to establish a violation of the promotional provisions. Today, a defendant would rather defend a suit under the price discrimination provision.

Moreover, ignoring Justice Breyer’s opinion, the FTC erroneously declared that there was no court decision suggesting consideration of competitive harm in the enforcement of the promotional provisions.12  The Commission added that the Supreme Court’s 2006 recommendation in Volvothat the entire “Act” should be interpreted in a manner consistent with the Sherman Act was irrelevant, because that decision involved only §2(a), which addresses price, not promotional, discriminations.

“Proportionalizing” Promotional Offers

Guide 9 states that promotional services and allowances should be made available to competing customers “on proportionally equal terms.” The Commission was urged by commenting parties to revise its prior view that a seller must base its advertising or promotional reimbursement solely on the retailer’s cost for providing the services involved. It was asked to recognize that payments could instead be made based on the value of the services to the seller. The FTC rejected this recommendation because it was concerned that adopting a standard based on the value to the seller of the promotional services involved “might facilitate the concealment of price discrimination, contrary to the intent underlying the Act.”13

However, the Supreme Court specifically adopted a “value” standard in its 1990 Hasbrouckdecision.14  That case involved seller payments for distribution functions provided by a customer, such as warehousing. The Supreme Court declared that such payments do not violate §2(a)  so long as they accord due recognition to the reasonable “value” to the seller of the marketing functions performed by the customer – regardless of the cost involved. The Court responded to the concern that a seller may overpay for such services by requiring that the payments should be based on the “reasonable” value of the services to the seller.

The FTC refused to adopt this approach in the revised Guides, however, because Hasbrouck, likeVolvo, involved price discrimination subject to §2(a), rather than the promotional provisions of the RPA.15  The FTC did not explain why a seller’s reasonable determination of the value of a buyer’s distribution services is sufficient to justify a payment for such services, but insufficient if the services involve advertising or promotion. It cannot be because §§2(d) and 2(e) were intended to prevent evasions of §2(a).

The Commission’s refusal to allow a seller to pay for advertising and promotional services based on their reasonable value to that seller, harms both sellers and the retailers that provide high value services at comparatively low cost. Internet retailers, whose marginal advertising costs are minimal, but get millions of visits to their site would be grossly underpaid for their high value services if a “cost” standard is strictly observed, as would brick and mortar retailers providing display services in high traffic areas, be they a window on Madison Avenue or the checkout counter in a busy supermarket. Certainly, such an outcome determined by a cost standard does not reflect “common sense.”

Buyer Liability

Buyer inducement of discriminatory promotional payments and services are not subject to the RPA. Congress limited §2(f), the provision specifically addressed to buyer liability, to a seller’s price discrimination subject to §2(a). The FTC noted, however, that §5 of the FTC Act, which is enforced solely by the FTC, does apply to customers who knowingly induce discriminatory promotional allowances and services.

Nevertheless, despite refusing to give any credence to Justice Breyer’s view that enforcement of §§2(d) and 2(e) against sellers should be aimed at practices that create significant harm to competition, the FTC states in the Guides that it will enforce §5 against buyers only in instances “where there is likely injury to competition.”16  Ironically, this policy potentially protects the very same power buyers identified by the Supreme Court in Volvo as being its main concern.17

Conclusion

As noted at the outset, this Article has addressed only a few of the failings of the revisions to the FTC’s Fred Meyer Guides published by the Commission in September. There are other portions of the Guides as much or more out-of-step with current law and basic antitrust principles that merit discussion as well (and, some day, perhaps to meaningful revisions by a differently constituted FTC). These failings include: a narrow view of the statutory “meeting competition” defense; a determination that the inclusion of a description of a seller’s advertising program on its website is insufficient to provide the required notice of its availability to customers; a definition of “competing customers” that includes retailers who only occasionally purchase a supplier’s products; refusal to consider the totality of a seller’s combined price and promotional payments to a retailer when evaluating RPA compliance; and a view that  §§2(d) and (e) may apply to advertising payments relating to intrastate sales that are not covered by §2(a).

The Guides do not have the force and effect of law, and are not independently enforceable.  However, lawyers, industry, and, most importantly, the courts have generally relied on them as accurate statements of the law. Sadly, the FTC has refused to limit or reject outdated interpretations of the RPA that go back 40 years or more. At that time there was no interest in moving the statute closer to the overall goal of the antitrust laws to foster interbrand competition, rather than to protect smaller, typically inefficient, competitors. Times have changed, as reflected in the Supreme Court’s 2006 admonitions about the RPA in Volvo. Yet, the revised Guides continue to promote uniformity and rigidity in promotional practices that ultimately hamper interbrand competition without providing any consumer benefits.

While there is not even a suggestion that the FTC will start enforcing the RPA again, the revised Guides may very well encourage unwarranted private litigation under a statute that, as still applied by the FTC, is fundamentally inconsistent with basic antitrust policy.