Rodrick J. Enns
Petree Stockton, L.L.P.
May 12, 1994
The antitrust and trade regulation issues which can arise in the course of the operations of a modern corporate enterprise are many and varied, and they rarely are delivered to the desk of corporate counsel in a neat package with an identifying label attached. No doubt the majority (perhaps the vast majority) of companies who encounter serious antitrust trouble are caught entirely unawares. Sales and management personnel simply pursue what they see as business as usual, it never occurring to them until well after the fact that their conduct is straying into areas fraught with antitrust risk.
These circumstances make corporate counsels job doubly difficult. Not only is counsel expected to identify the antitrust issues which lurk in almost every business endeavor (no mean feat for any lawyer who is not given the luxury of being able to specialize in our sometimes arcane system of federal and state trade regulation legislation), but often there is no internal vehicle in place for the lawyer to routinely be advised of activities and business developments which might register on the antitrust radar.
In light of the foregoing, the purpose of this paper is not to provide a comprehensive survey of every antitrust prohibition or regulation which may be encountered in the course of business. Any such treatment would necessarily consume volumes, and many excellent treatises are available for the practitioner who simply wishes to have a reliable reference work to consult. Instead, this paper will examine two specific areas of business activity where antitrust issues seem to arise most frequently: pricing and distribution. The effort will be to sensitize, rather than to inform exhaustively; the goal is both to flag the kinds of activities which counsel should regularly monitor and investigate, and to enhance counsels ability to assess the potential antitrust problems which may be presented.
Following the discussion of pricing and distribution issues is a brief summary of current developments and trends in antitrust enforcement under the Clinton administration.
With the possible exception of government-regulated monopolies (and perhaps not even with that exception), every business faces fundamental decisions almost daily about how to price the product or service they sell. It is often surprising how many competent business people seem to believe that the free market system means that a business can quote whatever price it takes to make the sale. The fact is that a business pricing discretion is bounded by a variety of legal restrictions at both the federal and state level. Following is a summary of the various pricing practices which carry significant legal risk, and which therefore warrant careful attention by inside and/or outside counsel.
A. Price Discrimination
Section 2(a) of the Robinson-Patman Act, 15 U.S.C. § 13(a), is generally directed against discrimination in price between different purchasers of the same goods. The statute is technical and awkwardly drafted, which has led to a huge body of case law attempting to interpret and apply the statutory language to a myriad of pricing practices and business environments never anticipated by the drafters. As Justice Frankfurter observed with characteristic understatement, "Precision of expression is not an outstanding characteristic of the Robinson-Patman Act." Automatic Canteen Co. of America v. Federal Trade Commission, 346 U.S. 61, 65 (1953). The courts have divined five essential elements of a price discrimination violation, which are considered in detail below: (1) a difference in price (2) between two different purchasers (3) of commodities (4) of like grade and quality (5) which may substantially injure competition.
a. Difference in Price
i. Price discrimination is "merely a difference in price." Federal Trade Commission v. Anheuser-Busch. Inc., 363 U.S. 536, 549 (1960). The prices which must be compared are the actual net prices to the purchaser, after all discounts, rebates, refunds, and other consideration is deducted. Thus, for example, to arrive at net price, the following kinds of discounts or allowances have been deducted: storage and inventory costs absorbed by the seller, Conoco Inc. v. Inman Oil Co., 774 F.2d 895, 901-02 (8th Cir. 1985); discounts for prompt payment, OConnell v. Citrus Bowl. Inc., 99 F.R.D. 117, 121-22 (E.D.N.Y. 1983); the value of consumer coupons, Indian Coffee Corp. v. Procter & Gamble Co., 752 F.2d 891, 902 (3d Cir.), cert. denied 474 U.S. 863 (1985); favorable terms for rental of facilities, Carsalve Corp. v. Texaco, Inc., 1978-2 Trade Cas. (CCH) ¶ 62,370 (D.C.N.J. 1978); and hauling charges, Edward Sweeney & Sons v. Texaco, Inc., 637 F.2d 105, 118-20 (3d Cir. 1980), cert. denied 451 U.S. 911 (1981).
ii. Some courts have suggested that withdrawal of credit may give rise to a claim for price discrimination, since credit terms have a quantifiable value which is economically equivalent to a discount in price. See, e.g., Robbins Flooring, Inc. v. Federal Floors, Inc., 445 F. Supp. 4, 9 (E.D. Pa. 1977). The consensus appears to be, however, that no Robinson-Patman violation arises when the decisions about whether or not to make credit available to competing buyers are reasonable business judgments based on the same criteria. Thomas J. Kline, Inc. v. Lorillard, Inc., 878 F.2d 791 (4th Cir. 1989), cert. denied, 493 U.S. 1073 (1990).
iii. Delivered pricing systems, where customers are quoted a price which includes delivery at the customers place of business, can pose special problems. If all customers are quoted the same delivered price, then distant customers who have higher freight costs arguably receive a discount. On the other hand, the whole point of a delivered pricing system is that it is often uneconomical to attempt to calculate and pass through delivery costs separately for each customer. Though there was some uncertainty in the early years of Robinson-Patman enforcement, e.g., FTC v. Cement Institute, 333 U.S. 683 (1948) (finding price discrimination from base point pricing system in which individual customers may have paid more or less than their actual costs of delivery), recent authority has tended to find such systems unobjectionable so long as they are a genuine and reasonable effort to achieve business efficiency, and not simply a vehicle to attempt to favor some customers over others. See, e.g., Edward J. Sweeney & Sons v. Texaco, Inc., 637 F.2d 105, 120 (3d Cir. 1980), cert. denied, 451 U.S. 911 (1981).
b. Between two purchasers
i. The sales must be to two purchasers who are separate from each other, and separate from the seller as well. Intra-corporate transfers, including "sales" to separate but wholly-owned subsidiaries, do not constitute sales for purposes of § 2(a). City of Mount Pleasant v. Associated Electric Cooperative, 838 F.2d 268, 278-79 (8th Cir. 1988) (transfer to subsidiary is not a sale); Brown v. Hansen Publications, 556 F.2d 969 (9th Cir. 1977) (transfer between sister corporations not treated as a sale). Where the subsidiary is not wholly-owned, is not controlled by the parent, or in fact manages its business separately, some courts have suggested that it is a factual question whether a transfer to such a subsidiary constitutes a sale or not. See, e.g., Zoslaw v. MCA Distributing Corp., 693 F.2d 870 (9th Cir. 1982), cert. denied, 460 U.S. 1085 (1983) .
ii. Practitioners should not lose sight of the fact that § 2 (a) only applies to completed sales (or at least enforceable contracts to sell). It does not apply to quotations or offers to sell which were not accepted, or to refusals to sell. Thus, one strategic option for a company which wants to provide a discounted price to most of its customers but not to a few of its smallest ones is to simply cease selling to the small customers at all. Similarly, when two or more companies are competing for a single bid contract, a supplier who provides quotes for components to both bidders need not be concerned with discrimination between them, since by definition only one of the competitors will obtain the contract, so there will only be one completed sale.
iii. Note that due to the constitutional "in commerce" requirement, at least one of the sales must cross state lines; intrastate sales that merely affect interstate commerce do not meet the standard. McCallum v. City of Athens, 976 F.2d 649, 657 (11th Cir. 1992) .
c. Involving commodities
The "commodities" requirement is fairly self-explanatory. It means that the prohibitions of the Robinson-Patman Act apply only to the sale of tangible goods, and not to services or other intangible items. Examples of items which have held to be intangible and therefore not within the prohibitions of the Act include medical services, Ball Memorial Hospital v. Mutual Hospital Insurance, 784 F.2d 1325, 1340 (7th Cir. 1986); transportation, Alliance Shippers v. Southern Pacific Transportation Co., 673 F. Supp. 1005, 1008 (C.D. Cal. 1986), affd. 858 F.2d 567 (9th Cir. 1988); securities and securities brokerage services, Gordon v. New York Stock Exchange, 498 F.2d 1303, 1305 n.7 (2d Cir. 1974), affd. 422 U.S. 659 (1975); insurance, Freeman v. Chicago Title & Trust Co., 505 F.2d 527 (7th Cir. 1974); travelers checks, American Bankers Club v. American Express Co., 1977-1 Trade Cas. (CCH) ¶ 61,247 at 70,741 (D.C.D.C. 1977); coupon books, Rowe v. Hamrah, 1984-2 Trade Cas. (CCH) ¶ 66,119 at 66,261 (E.D. Cal. 1984); television signal transmissions, AT&T v. Delta Communications Corp.. 408 F. Supp. 1075, 1114 (S.D. Miss. 1976), affd. 579 F.2d 972 (5th Cir. 1978), cert. denied, 444 U.S. 926 (1979); and advertising, Ambook Enterprises v. Time, Inc., 612 F.2d 604 (2d Cir. 1979), cert. dismissed, 448 U.S. 914
(1980). The status of the sale of electrical power is still unsettled. Compare City of Kirkwood v. Union Electric Co., 671 F.2d 1173, 1181-82 (8th Cir. 1982), cert. denied, 459 U.S. 1170 (1983) (electricity is a commodity), with City of Groton v. Connecticut Light &Power Co., 497 F. Supp. 1040, 1052 n. 14 (D.C. Conn. 1980), affd in part and revd in part on other grounds, 662 F.2d 921 (2d Cir. 1981) (electricity is not a commodity).
d. Like grade and quality
i. This requirement embodies the common sense concept that differences in the price of two products are justified if they reflect differences in the quality or desirability of the products themselves. Generally, physical differences in the products which give rise to differences in consumer preference or salability are usually sufficient to render the products of different grade and quality. See, e.g.. Checker Motors Corp. v. Chrysler Corp.. 283 F. Supp. 876, 888-89 (S.D.N.Y. 1968), affd. 405 F.2d 319 (2d Cir.), cert. denied, 394 U.S. 999 (1969).
ii. This concept is easily stated in the abstract, but may lead to some difficult line drawing in marginal cases. See, e.g., Universal-Rundel Corp., 65 FTC 924 (1964), set aside on other grounds, 352 F.2d 831 (7th Cir. 1965) , revd and remanded, 387 U.S. 244 (1967) (bathtubs of virtually identical design but with one inch difference in height were not of like grade and quality).
iii. More interesting are the cases where defendants have attempted to argue that products are not of like grade and quality despite the absence of any physical difference. Though there is much persuasive force to the argument that a consumer who buys a product with a lifetime warranty reasonably should expect to pay more than one who buys an unwarranted product, or that a heavily advertised premium brand name product should reasonably be priced higher than a physically identical private label product, it has nonetheless been established that the "like grade and quality" requirement under § 2 (a) is to be determined solely "by the characteristics of the product itself." Federal Trade Commission v. Borden Co., 383 U.S. 637, 641 (1966).
iv. The Supreme Court in Borden held that Bordens lower-priced private label evaporated milk was of like grade and quality with its premium-branded evaporated milk because the two products were "physically and chemically identical." Id. at 638. Having handed down such a seemingly definitive rule, however, the Court proceeded to undercut it somewhat, by explaining, "Tangible consumer preferences as between branded and unbranded commodities should receive due legal recognition in the more flexible injury and cost justification provisions of the statute." Id. at 646. Indeed, on remand, the Fifth Circuit found a lack of evidence to support the FTCs finding of anticompetitive effect because the price differential between Bordens private label and premium branded products reflected "no more than a consumer preference for the premium brand," so that the price difference "creates no competitive advantage to the recipient of the cheaper, private brand product on which injury could be predicated." Borden Co. v. Federal Trade Commission, 381 F.2d 175, 181 (5th Cir. 1967).
v. In subsequent cases, the FTC has exhibited more flexibility in evaluating branded versus private label pricing. See, e.g., ITT, 104 FTC 280, 418-19 (1984); Beatrice Foods Co., 76 FTC 719, 808-09 (1969), affd sub nom. Kroger Co. v. FTC, 438 F.2d 1372 (6th Cir.), cert. denied, 404 U.S. 871 (1971).
vi. Note that the Robinson-Patman Act imposes no restrictions on pricing of goods which are found not to be of like grade and quality; there is no requirement that lower grade goods be priced lower, or proportionally lower, than their higher quality counterparts.
e. Substantial injury to competition
i. Once the other elements of price discrimination are established, § 2(a) only requires proof that the effect of such discrimination "may be" substantially to lessen competition or tend to create a monopoly. Due to the tenuous nature of this language in comparison with other parts of the Sherman Act, the courts have concluded that the plaintiff in a price discrimination case need only demonstrate a "reasonable possibility" of substantial competitive injury. Falls City Industries v. Vanco Beverage, Inc., 460 U.S. 428, 435 (1983) .
ii. The manner in which such competitive injury must be proved differs depending on the level at which competition is alleged to be injured. If the plaintiff is a direct competitor of the defendant seller (a so-called "primary line" case), then mere injury to the plaintiff, standing alone, is insufficient. Stitt Spark Plug Co. v. Champion Spark Plug Co., 840 F.2d 1253 (5th Cir.), cert. denied, 488 U.S. 890 (1988). Injury to competition in such a case must be shown through proof that (1) the prices complained of were below an appropriate measure of the sellers cost, and (2) the seller had a reasonable prospect of recouping its investment in such below-cost prices. Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., __ U.S. __, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993).
iii. While recognizing some potential differences between a primary line discrimination claim under § 2(a) and a predatory pricing claim under § 2 of the Sherman Act, the Court in Brooke Group confirmed that "the essence of the claim under either statute is the same," and that either claim requires proof of the two elements stated above. 125 L.Ed.2d at 185. To the extent that the Courts venerable opinion in Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967), had been interpreted to allow an inference of competitive injury in a primary line case solely from evidence of the defendants predatory intent, any such interpretation was expressly disavowed. See 125 L.Ed.2d at 184.
iii. "Secondary line" cases (where the plaintiff is a disfavored customer of the defendant) apply a much more relaxed standard for proof of competitive injury. Under Federal Trade Commission v. Morton Salt Co., 334 U.S. 37, 50-51 (1948), if the favored and disfavored customers are in competition with each other, evidence of a substantial price difference over a sustained period of time is sufficient by itself to support an inference of injury to competition. The Supreme Court reaffirmed this rule in Falls City Industries v. Vanco Beverage, Inc., 460 U.S. 428, 436 (1983).
iv. Proof that the plaintiff lost specific sales or profits because of the discrimination is also sufficient to satisfy the injury requirement in a "secondary line" case. Id., 460 U.S. at 434-35; J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1535-38 (3d Cir. 1990), cert. denied, __ U.S. __, 111 S.Ct. 1313 (1991).
v. The inference of anticompetitive injury is not conclusive; the Supreme Court in Falls City recognized that the presumption "may be overcome by evidence breaking the causal connection between a price difference and lost sales or profits." 460 U.S. at 435. The inference would at least be sufficient in most cases to take the question to the jury, however, which is hardly a position that any antitrust defendant covets.
2. Defenses to liability under 2(a)
a. Meeting competition
i. The statute creates a defense to liability if the seller acts "in good faith to meet an equally low price of a competitor." When proved, meeting competition provides an absolute defense to liability. Standard Oil Co. v. Federal Trade Commission, 340 U.S. 231, 251 (1951).
ii. The defense only allows a sale at a discriminatory price to meet a competitive offer, but not to beat it. While the defense may have some utility in allowing businesses to preserve existing customer relationships which may be threatened by selective price aggression from competitors, it is rarely of use as an offensive business strategy, since it is difficult to imagine taking business away from a competitor by offering only to meet a price that the competitor has already offered.
iii. The defense is not based on whether an equally low competitive price had in fact been offered by a competitor, but rather on whether the defendant reasonably and genuinely believed that it had been. Thus, it is the defendants burden to "show the existence of facts which would lead a reasonable and prudent person to believe that the granting of a lower price would, in fact, meet the equally low price of a competitor." United States v. United States Gypsum Co., 438 U.S. 422, 451 (1978). See also Falls City Industries v. Vanco Beverage, Inc., 460 U.S. 428, 441 (1983) (standard "is simply that standard of the prudent businessman responding fairly to what he reasonably believes is a situation of competitive necessity").
iv. Note that the need to verify the price offered by a competitor does not justify direct communications with that competitor, nor does such a motive provide a defense to allegations of price fixing arising from such communications. United States v. United States Gypsum Co., supra.
v. The "meeting competition" defense does not authorize a seller to meet a competitive price which is itself illegal, though proof of such a fact is the burden of the plaintiff. Falls City, supra, 460 U.S. at 442 n.9. Presumably, the sellers remedy in such a case is not in the marketplace but in the courts, assuming it wishes to itself don the heavy mantle of plaintiff in a primary line price discrimination lawsuit.
vi. Once the meeting competition defense is established, there is no requirement that the lower price be offered to all customers who have received the lower competitive price. At that point, a seller may pick and choose to which of its customers and potential customers it will offer the lower price, so long as all the customers who do receive the lower price had also received the competitors lower price. That is not to say, however, that the "meeting competition" price must necessarily be offered on a customer-by-customer basis; in Falls City, the Court affirmed the availability of the defense for a seller which lowered its prices statewide. The Court found this appropriate so long as the seller had "good reason to believe that a competitor or competitors are charging lower prices throughout" the region involved. 460 U.S. at 449.
b. Cost justification
i. Section 2(a) expressly permits price differences that "make only due allowance for differences in the cost of manufacture, sale or delivery" which result from "differing methods or quantities" of sale or delivery. While this language may sound inviting, in fact the defense embodies "rigorous requirements," Texaco Inc. v. Hasbrouck, supra, 110 S.Ct. at 2545, which can be very difficult to meet.
ii. The defendant must show actual cost savings equal to or greater than the price discount given; it is insufficient merely to identify functions which the seller did not have to perform, and which therefore probably saved it money, without quantifying the actual cost savings realized. See, e.g., Texaco Inc. v. Hasbrouck, 830 F.2d 1513, 1518 (9th Cir.), affd. 110 S.Ct. 2535 (1990).
iii. There remains some question whether a cost justification defense may be based on savings of brokerage allowances or sales commissions. Compare Thomasville Chair Co. v. Federal Trade Commission, 306 F.2d 541 (5th Cir. 1962)(reduced brokerage commission can be a cost saving cognizable under §2(a)) with Thomasville Chair Co., 63 FTC 1048, 1049 (1963) (acceding to the Fifth Circuits order, but cautioning that the FTC does not "acquiesce in the opinion of the Court of Appeals as such.").
iv. The FTC and the courts tend to be much less forgiving if the cost justification study offered by the defendant is an after-the-fact analysis, where no actual cost study was prepared or relied on when the decision to offer the price discount was made. See, e.g., Great Atlantic & Pacific Tea Co., 87 FTC 962, 1063-65 (1976), affd, 557 F.2d 971 (2d Cir. 1977), revd on other grounds, 440 U.S. 69 (1979); Philadelphia Carpet Co., 64 FTC 762, 776 (1964), affd, 342 F.2d 994 (3d Cir. 1965) ("When, as here, the cost justification defense is constructed post-complaint, . . . [the defendant] must be held to a relatively high standard of proof."). Obviously, then, a company is far better off to identify this issue early on and conduct a contemporaneous cost-savings study which reflects actual savings equivalent to or greater than the price discount.
c. Changing conditions defense
i. The statute also provides a defense for price differences based on a "response to changing conditions affecting the market for or marketability of the goods concerned, such as but not limited to actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales in good faith in discontinuance of business in the goods concerned."
ii. Were this language absent from the statute, the same result might be obtained through a finding that goods whose marketability had been impaired by changing market conditions were no longer of "like grade and quality," or perhaps on the theory that sales after the changed market conditions were not reasonably contemporaneous with prior sales.
iii. In any event, under this language, it is clear that most market events which genuinely reduce the market value of the goods provide a defense. See, e.g., Comcoa, Inc. v. NEC Telephone, 931 F.2d 655 (10th Cir. 1991) (price differences in telephone systems justified by "technological obsolescence"); A. A. Poultry Farms v. Rose Acre Farms, 683 F. Supp. 680, 691 (S.D. Ind. 1988), affd on other grounds, 881 F.2d 1396 (7th Cir. 1989), cert. denied, __ U.S. __, 110 S.Ct. 1326 (1990) (perishability of eggs justifies discounted price depending upon age) .
3. Frequently-raised issues
a. Functional availability
i. Even where there have been two or more sales at different net prices to different customers, the courts will sometimes decline to find a price discrimination violation if the lower price was made available to all buyers on equal terms, and the disfavored purchaser simply elected not to take advantage of it. See, e.g., Shreve Equipment, Inc. v. Clay Equipment Corp., 650 F.2d 101, 105 (6th Cir.), cert. denied, 454 U.S. 897 (1981).
ii. Though this is sometimes referred to as the "functional availability" defense, in reality it is not an affirmative defense at all. Rather, the courts tend to hold either that the availability of the lower price to all buyers negates the element of price discrimination, e.g., Edward J. Sweeney & Sons v. Texaco, Inc., supra, 637 F.2d at 120-21, or that the availability of the lower price to the disfavored buyer precludes any possibility of competitive injury. See, e.g., Hanson v. Pittsburgh Plate Glass Industries, 482 F.2d 220, 227 (5th Cir. 1973), cert. denied, 414 U.S. 1136 (1974) .
iii. This analysis has not been universally accepted. See, e.g., Boise Cascade Corp., 107 FTC 76, 216 (1986), revd on other grounds, 837 F.2d 1127 (D.C. Cir. 1988) (describing the reasoning of Hanson as "irrational"); Continental Baking Co. v. Old Homestead Bread Co., 476 F.2d 97, 107 (10th Cir.), cert. denied, 414 U.S. 975 (1973) (functional availability defense is "peculiarly inappropriate" in a primary line case).
b. Volume discounts
i. Volume discounts are so commonplace that businesspeople are often shocked to learn that they enjoy no blanket exemption from the Robinson-Patman Act. The drafters of the statute apparently contemplated that the cost justification defense (discussed above) would provide the primary basis for defending volume discounts.
ii. Even if a seller is successful in carrying the rather onerous evidentiary burden imposed by the cost justification defense, however, the most that it can do is justify a discount equal to the actual cost savings realized from a larger volume of sales. This almost never satisfies the marketing needs of modern businesses, which typically wish to offer volume discounts in order to generate volume and drive sales, not simply to pass on cost savings.
iii. Because of the above considerations, in practice volume discount pricing is most commonly justified based on functional availability (discussed above). This requires, however, that the volume schedule be such that the highest volume (and therefore the greatest discount) is realistically within the reach of most if not all customers. If, as a practical matter, only a few customers are able to achieve the volume requirements to receive the greatest discount, the plan will likely be held to be discriminatory. See, e.g., Federal Trade Commission v. Morton Salt Co., 334 U.S. 37 (1948) (where salt manufacturers price schedule was such that only its five largest purchasers nationwide were able to qualify for the largest savings in price, plan was discriminatory). Where the most favorable price is realistically available to at least "the great majority of customers," however, the Act is not violated. Standard Brands. Inc. v. Federal Trade Commission, 189 F.2d 510 (2d Cir. 1951).
iv. Some manufacturers have been known to adopt a volume discount schedule which meets their marketing needs, with a conscious but unpublished policy of offering the lower price to any smaller purchasers who complain that they are unable to make the larger volume requirements. While such a policy does not necessarily provide a defense should the plan be the subject of government investigation, it should at least serve to remove any such complaining customers as potential private litigants. See, e.g., Bouldis v. US Suzuki Motor Corp., 711 F.2d 1319 (6th Cir. 1983) (dealer to whom manufacturers volume rebates were "practically and realistically available" could not complain of alleged price discrimination)).
v. In theory, of course, alleged price discrimination resulting from volume discount pricing may also be subject to any other defense discussed above, such as the absence of anticompetitive effect or the meeting competition defense. See, e.g., Callaway Mills Co. v. Federal Trade Commission, 362 F.2d 435 (5th Cir. 1966) (carpet manufacturers quantity discount system qualified for meeting competition defense, despite the fact that its qualifying volume levels were lower than that of its competitors; defendants line was smaller and less expensive, so it had to use lower qualifying volumes for a customer to receive the same percentage discount as was available from high volume competitors).
c. Functional discounts
i. Most businesses take it for granted that they are permitted to charge different prices to purchasers who occupy different roles in the distribution system, such as wholesalers versus retailers. In fact, however, there is no blanket exemption under the Robinson-Patman Act for such functional discounts. Texaco Inc. v. Hasbrouck, __ U.S. __, 110 S.Ct. 2535, 2543-44 (1990). Instead, differing prices to wholesalers versus retailers will be analyzed as a price discrimination under the Robinson-Patman Act, and whether a violation ensues will generally depend on whether a cost justification defense can be established, or whether any of the other elements of a violation are absent.
ii. The Hasbrouck court imposed liability on Texaco for its lower price to "wholesale" customers, in part because the evidence was that those customers actually resold most of the discounted product directly to consumers in the retail market. The Court suggested, however, that, even absent a cost justification, it would still be open to a seller to prove that its wholesale discount was "reasonable," which would mean that it "did not cause any substantial lessening of competition between a wholesalers customers and the suppliers direct customers." 110 S.Ct. at 2545.
iii. "Reasonableness" of a functional discount is established either by showing that the discount is proportionate to the cost to the wholesaler of performing services that retailers do not, Doubleday & Co., 52 FTC 169, 209 (1955), or by showing that the discount reflects the value to the seller of such services rendered by the wholesaler. Mueller Co., 60 FTC 120, 127-28 (1962), aff d. 323 F.2d 44 (7th Cir. 1963), cert. denied, 377 U.S. 923 (1964). In Hasbrouck, the Supreme Court did not resolve the conflict between these two rules, but instead simply found that there were no substantial services performed by the wholesalers for which they were not separately compensated, which disqualified the case under either rule.
B. Below-Cost Pricing
Price reductions by competitors can be so ruinous to a business interests that businesspeople often assume that such low pricing must be actionable. Such a perspective ignores the reality that competition is based on the survival of the efficient, which means the company able to offer a quality product at the lowest price. At least on the federal level, these policy considerations have resulted in laws which make it extremely difficult to make out an actionable claim based on an allegation that a competitors prices are unacceptably low. There may be somewhat greater room to play under various state laws.
1. Federal law
a. Predatory pricing can be actionable either as attempted monopolization in violation of Sherman Act § 2, or as price discrimination in violation of § 2(a) of the Robinson-Patman Act (discussed above). Under either statutory vehicle, the chain of logic by which a competitors low pricing can be found to violate the antitrust laws is rather convoluted.
b. In general, and from a public policy point of view, low prices are hardly a thing to be discouraged. "[C]utting prices in order to increase business often is the very essence of competition." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 585 n.9 (1986). Price cutting becomes objectionable only when it "has as its aim the elimination of competition." Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 118 (1986). As a result, a plaintiff asserting a predatory pricing claim must prove (1) that defendants prices are below some relevant measure of the defendants cost, and (2) that there is a reasonable prospect that the defendants low prices will eliminate one or more competitors from the market, following which the defendant will be able to recoup the losses it sustained through its below-cost pricing with supra-competitive prices. See generally Matsushita, supra; Brooke Group, supra.
c. The Supreme Court has never stated definitively what cost measures should be used to determine whether defendants prices are below cost. In theory, the correct measure probably ought to be reasonably anticipated marginal cost, which is what a businessperson making pricing decisions reasonably expects will be the additional cost incurred for an additional unit of output. The logic is that a reasonable businessperson would under no circumstances make a legitimate decision to price a product below this measure, since additional sales generated by such a price would cost more to fill than the revenue generated.
d. "Reasonably anticipated marginal cost" is extremely difficult to measure, however, so most courts tend to use some more reliable and easily-defined cost measure as a surrogate, the most common being average variable cost. See, e.g., McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1504 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989); Kelco Disposal, Inc. v. Browning-Ferris Industries, Inc., 845 F.2d 404 (2d Cir. 1988), affd on other grounds, 492 U.S. 257 (1989). The various federal circuits differ widely over exactly which cost measure should be used, and over whether the resulting presumption that a price below that cost measure is predatory should be conclusive. A full discussion of the details of cost-price analysis is beyond the scope of this manuscript. For a more in-depth treatment, see Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harvard Law Review 697 (1975); ABA Antitrust Section, Antitrust Law Developments 227-34 (3d ed. 1992).
e. In the past, a minority of the federal circuits have held that a defendants subjective predatory intent is relevant to a predatory pricing claim. See, e.g., Indian Coffee Corp. v. Procter & Gamble Co., 752 F.2d 891 (3d Cir.), cert. denied, 474 U.S. 863 (1985); William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982). It is open to serious question whether and to what extent such a rule will survive Matsushita and Brooke Group. If subjective intent does continue to play a role, it certainly will not supplant the need for proof of below-cost pricing and likelihood of recoupment, but in all likelihood will simply serve to help reinforce or rebut the presumptions which arise from pricing above or below relevant cost measures. See, e.g., McGahee v. Northern Propane Gas Co., 858 F.2d 1487 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989).
f. As a practical matter, liability under federal law for predatory pricing is unlikely to be a factor unless the defendant possesses at least enough market share to give rise to a dangerous probability of monopolization, usually 35% or more. Absent such market power, the requisite anticompetitive effect and likelihood of recoupment will almost certainly be absent. See, e.g., Brooke Group, supra (holding that defendant which never accounted for more than 12% of the market could not rationally expect to recoup its investment in price predation); A.A. Poultry Farms v. Rose Acre Farms, 881 F.2d 1396, 1404 (7th Cir. 1989), cert. denied, 494 U.S. 1019 (1990) (because defendants share was 2% in a market with few barriers to entry, "no rational jury could have found that recoupment took place, could have taken place, or conceivably could take place in the future.").
2. State law
a. Sales below cost statutes
i. Companies concerned with the prospect of liability for setting their prices too low face their most serious threat not under federal law, but under the law of various states. At least 22 states have enacted laws, which, in various ways and subject to various conditions, make it unlawful to sell "below cost."
ii. Even those states which do not have a general below cost pricing statute may well have statutes tailored to specific industries. In North Carolina, for example, N.C.G.S. § 75-82 makes it unlawful to sell gasoline or motor fuel below cost where the intent is to injure competition. The statute establishes defenses for meeting competition, introductory prices, or close-out of discontinued product. Section 75-86 creates a private right of action in any person or business which is "directly or indirectly" injured by a violation of the statute, and authorizes recovery of actual and punitive damages and attorneys fees.
iii. It was Arkansas sales below cost law, Ark. Code. Ann. §§ 4-75-201-211, which was the basis for the well-publicized jury verdict against Wal-Mart last fall for below-cost pricing in its pharmacies. American Drugs, Inc. v. Wal-Mart Stores, Inc., 1993-2 Trade Cas. (CCH) ¶ 70,382 (Ark. Ch. 1993). The court entered judgment on a verdict for treble damages in the amount of almost $300,000 for below-cost pricing, on facts which admittedly would never have given rise to liability under federal antitrust law.
iv. The state statutes vary widely in terms of how, and even whether, they define "cost" or "below cost." The Arkansas statute at issue in the Wal-Mart case defines cost simply as the "invoice or replacement cost of the article to the distributor or vendor plus the cost of doing business." 4-75-209(b)(1). The North Carolina Motor Fuel Marketing Act defines cost as the "invoice or replacement cost," plus freight and taxes. Such measures are substantially higher than the reasonably expected marginal cost or the average variable cost usually used under federal law.
v. Most significantly, these state statutes generally do not include any requirement of market power or anticompetitive effect; they typically require at most a subjective intent on the part of the defendant to injure competition or competitors. Statutes which have not included at least such a predatory intent requirement have been held to be unconstitutional. See, e.g., State ex rel. Galanos v. Mapco Petroleum, Inc., 519 So.2d 1275 (Ala. 1987); Blue Flame Gas Association v. McCook Public Power Dist., 186 N.W.2d 498 (Neb. 1971).
vi. Statutes which include these minimum elements, however, will not be overturned simply because they may be contrary, to the pro-competitive principles of the Sherman Act. See, e.g., Safeway Stores, Inc. v. Oklahoma Retail Grocers Association, 360 U.S. 334, 341 (1959) (upholding state statute which prohibited "loss-leaders selling," saying that the Court "will not impose its own economic views or guesses when the State has made its choice"); So-Lo Oil Co. v. Total Petroleum, Inc., 832 P.2d 14, 18 (Okla. 1992) (upholding Oklahoma statute recognized to be "clearly anticompetitive," though interpreting it narrowly).
III. Distribution and Distributor Relations
A. Vertical price-fixing
1. Federal law
a. Agreements between suppliers and purchasers as to the price at which goods purchased will be resold are per se illegal. Business Electronics Corp. v. Sharp Electronics, Inc., 485 U.S. 717 (1988).
b. Restraints on pricing discretion which fall short of an express agreement on minimum or maximum resale prices do not fall within the per se rule, however. In U.S. Pioneer Electronics Corp., 5 Trade Reg. Rep. (CCH) ¶ 23,172 (FTC 1992), the FTC modified a consent order which had been entered against Pioneer in 1975 prohibiting it from, among other things, imposing restrictions on its dealers advertised prices or from terminating dealers who did not comply with Pioneers suggested advertised prices. The Commission agreed that the rules had changed since 1975, relying on Business Electronics, supra, Continental T.V., Inc. v. GTE Sylvania. Inc., 433 U.S. 36 (1977), and Monsanto Co. v. Spray-Rite Services Corp., 465 U.S. 752 (1984). Noting that minimum advertised price requirements were still per se illegal if they were part of a broader resale price agreement, the FTC nonetheless modified the decree to permit Pioneer to impose advertising restrictions since otherwise it would be at a competitive disadvantage. Id. The Commission subsequently also permitted Pioneer to unilaterally terminate dealers who sold products at a price different than that approved by Pioneer, but without obtaining any agreement from dealers to maintain prices. U.S. Pioneer Electronics Corp., 5 Trade Reg. Rep. (CCH) ¶ 23,201 (FTC 1992).
c. The upshot is that a manufacturer is permitted under federal law to announce that it has minimum (or maximum) resale prices, and that any dealer which does not comply with the pricing policy will be terminated, and further permitted to follow through and terminate such non-complying dealers. Such conduct will be unlawful only if it is shown to have a substantial anticompetitive effect in the market under the rule of reason, or if it is accompanied by an express agreement between the manufacturer and one or more of its distributors to maintain resale prices.
d. The decisions of the federal courts are not altogether consistent, but generally may be read to provide that a manufacturer is permitted to engage in "exposition, persuasion, argument or pressure" to attempt to induce dealers to adhere to suggested prices, Yentsch v. Texaco. Inc.. 630 F.2d 46, 53 (2d Cir. 1980), but cannot cross the line into "coercion." Bender v. Southland Corp., 749 F.2d 1205, 1213-14 (6th Cir. 1984). Threats of termination for failure to maintain resale prices may (e.g., Yentsch, supra) or may not (e.g., Jeanery, Inc. v. James Jeans, Inc., 849 F.2d 1148, 1158-59 (9th Cir. 1988)) constitute coercion.
e. Though there is some contra earlier authority, e.g., Pearl Brewing Co. v. Anheuser-Busch, Inc., 339 F. Supp. 945 (S.D. Tex. 1972), recent cases hold that a supplier is entitled to require a retailer to "pass through" a wholesale price break to its retail customers. AAA Liquors Inc. v. Joseph E. Seagram & Sons, 705 F.2d 1203, 1206 (10th Cir. 1982), cert. denied, 461 U.S. 919 (1983) (supplier "has a legitimate interest in making sure the retailer receiving the discount is not pocketing the price support instead of passing it on to consumers").
f. As the FTC recognized in Pioneer, courts have also been willing to uphold restrictions on the ability of dealers to advertise prices other than the manufacturers suggested resale price, so long as there is no restriction on the resale price actually charged. See, e.g., In re Nissan Antitrust Litigation, 577 F.2d 910 (5th Cir. 1978).
g. Vertical restrictions not involving an agreement on resale price, such as exclusive distributorships, territorial restrictions, customer restrictions, and other restraints on the location and nature of the dealers resale activities, are not illegal per se, and therefore will give rise to liability only if they are shown to have a substantial anticompetitive effect under the rule of reason. Business Electronics Corp., supra, 485 U.S. at 724.
2. State law
a. The lack of serious federal enforcement against vertical price fixing during the 1980s prompted a number of state attorneys general to become much more vigorous in their enforcement activities. The result was the formation of the Multi-State Antitrust Task Force of the National Association of Attorneys General, which has been and continues to be very active in the area of resale price maintenance. See, e.g., In re Minolta Camera Products Antitrust Litigation, 668 F. Supp. 456 (D.C. Md. 1987); State of Maryland v. Mitsubishi Electronics of America. Inc., 1992-1 Trade Cas. (CCH) ¶ 69,743-44 (D.C. Md. 1992); State of New York v. Nintendo of America, Inc., 1991-2 Trade Cas. (CCH) ¶ 69,614 (S.D.N.Y. 1991); State of Connecticut v. Keds Corp., No. 93 CIV 6718 (S.D.N.Y.
b. The NAAG also promulgated Vertical Restraints Guidelines in 1985, 4 Trade Reg. Rep. (CCH) ¶ 13,400, which were in response to the Vertical Restraints Guidelines adopted earlier that year by the Department of Justice under the Reagan administration. The NAAG Guidelines stop short of declaring vertical non-price restraints per se illegal (unless accompanied by a resale price maintenance agreement), but nonetheless evidence a willingness to scrutinize such restraints much more closely for indications of anticompetitive effects.
c. While federal enforcement policy with respect to vertical restraints has become more aggressive since the Reagan administration (as discussed below), the most serious enforcement threat faced by those who impose such restrictions is still at the state level.
B. Dealer Termination
1. Federal law
a. In Monsanto Co. v. Spray-Rite Services Corp., 465 U.S. 752 (1984), the Supreme Court held definitively that evidence of complaints from other dealers about a discount dealers low prices, followed by the manufacturers termination of that dealer, standing alone, is insufficient to permit a finding of a vertical price-fixing agreement between the manufacturer and the complaining dealers. The Court has since reaffirmed that a claim will not survive summary judgment unless there is evidence of "some agreement on price or price levels," not just an agreement to terminate a discounting dealer. Business Electronics, supra, 485 U.S. at 735-36.
b. As a result, unless and until Congress passes some form of the "anti-Monsanto" legislation which has received serious consideration in recent sessions, dealer termination can incur liability under federal law only if (1) the termination is pursuant to some explicit agreement with another dealer which also includes an agreement to maintain resale prices, or (2) the terminating supplier is a monopolist, or market conditions otherwise establish that the termination has a significant anticompetitive effect.
2. State law
As in many other areas, there is a variety of state legislation which may restrict a suppliers discretion to terminate dealers much more severely than does federal law. A detailed state-by-state survey of the provisions of these various statutes is beyond the scope of this manuscript, but a summary of many of the common terms should help to flag potential issues. Needless to say, consultation of the statutes of each state in which a company has dealer relationships would be a wise precaution.
a. Dealer protection acts
i. Several states have laws of general applicability which govern almost any arrangement by which someone agrees to purchase a suppliers products for resale. Many more states have statutes of similar import which are limited to specific industries (automobile dealers and gasoline dealers being typical examples).
ii. Common provisions of these acts include a requirement that the dealership may not be terminated except for good cause, a requirement that termination requires advanced notice (typically 60 or 90 days), a requirement that the dealer must have an opportunity to cure any defaults specified in the notice before the termination takes effect, a requirement that the supplier repurchase any unsold inventory in the possession of the dealer at the time of termination, and provisions for damages and injunctive relief in the event of a termination in violation of the statute.
b. Franchise laws
i. Approximately 20 states have laws which regulate dealings with and restrict the ability to terminate a "franchise".
ii. Most such laws define a "franchise" as a license or other agreement by which the dealer obtains the right to sell goods pursuant to a prescribed marketing plan of some kind, and most also include a requirement that the goods be resold under the franchisors trademark or service mark. Some are much broader, however, defining "franchise" in a way which can encompass many traditional dealer relationships. See, e.g., Delaware Code Ann. § 2551 et seq. (applying protections of franchise law to any person who purchases products bearing the trademark or trade name of the manufacturer for the primary purpose of selling such products to, in or through retail outlets).
iii. Like the dealer protection laws discussed above, franchise laws can be expected to include provisions restricting termination except for good cause, requiring notice of termination, and providing for damages and/or injunctive relief for violations.
c. Sales representative laws
i. Even if your company deals only with commissioned sales representatives, rather than dealers or franchisees who take title to the inventory, you will not necessarily escape some state law restrictions on your termination rights. Twenty-nine states have enacted laws which govern relationships with sales representatives.
ii. Most such laws are limited only to attempting to insure that a supplier which terminates a commissioned sales representative pays that representative the commissions due within a reasonable time after the termination. See, e.g., N.C.G.S. § 66-191 et seq. (requiring that a terminated sales representative be paid commissions due within 45 days).
iii. Depending on the state, however, more restrictive measures can be encountered, including requirements that any contract with a sales representative be in writing and set forth the method of compensation, territory and exclusivity of the relationship; requirements that a signed copy of the contract be given to the representative; requirements that commissions due be paid at the time of termination (instead of within a reasonable time thereafter); and even a requirement that commissioned sales representatives not be terminated without good cause, or not be terminated in bad faith. A few states impose treble damages for violations.
e. Unfair trade practice laws
i. Virtually all states have enacted some form of statute protecting against unfair trade practices, most patterned after §5(a) of the Federal Trade Commission Act. Many of these state laws have various kinds of limitations which would make them inapplicable to disputes with or terminations of distributors. More than a few, however, are broad enough to impose liability in such situations.
ii. The North Carolina statute, N.C.G.S. § 75-1.1, is an example of the very broadest of these statutes. Containing an unrestricted prohibition of "unfair methods of competition" and "unfair or deceptive acts or practices," the law has been interpreted to proscribe any conduct which is "immoral, unethical, oppressive, [or] unscrupulous," or which "offends established public policy." Marshall v. Miller, 302 N.C. 539, 276 S.E.2d 397 (1981). Moreover, it is well established that the statute applies to dealings between "buyers and sellers at all levels of commerce." United Virginia Bank v. Air-Lift Associates, 79 N.C. App. 315, 339 S.E.2d 90 (1986). The section clearly applies to distributor or dealer relationships and terminations. See, e.g., Olivetti Corp. v. Ames Business Systems, Inc., 319 N.C. 534, 356 S.E.2d 578 (1987). Remedies include treble damages and recovery of attorneys fees. N.C.G.S. §§75-16, 16.1.
C. Promotional Payments, Programs and Facilities
1. Sections 2(d) and (e) of the Robinson-Patman Act, 15 U.S.C. §§13(d) and (e), prohibit the payment of any advertising or promotional allowances, or the granting of promotional facilities or services, unless they are available to all competing customers on proportionally equal terms.
2. In general, most of the elements and defenses applicable in a price discrimination case under § 2(a), discussed above, will also apply to the provision of promotional allowances or services under §2(d) and (e), with two important exceptions: the latter require no showing of competitive injury, and do not permit a cost justification defense. Federal Trade Commission v. Simplicity Pattern Co., 360 U.S. 55 (1959).
3. "Available. . .on proportionally equal terms" does not require that the exact same allowance or service be universally available to all. Reasonable latitude is allowed for the supplier to tailor services offered to different classes of customers. Federal Trade Commission v. Simplicity Pattern Co., supra, 360 U.S. at 61 n. 4.
4. The best guide for compliance with §§2(d) and (e) is the FTCs "Guides for Advertising Allowances and Other Merchandising Payments and Services," originally promulgated in 1969 and most recently revised in 1990. See 16 CFR §240. The Guides provide detailed guidance as to the FTCs position on requirements which must be met for a promotional program to comply with the law.
IV. Antitrust Policy Under the Clinton Administration
Though it received relatively little notice, federal antitrust enforcement policy began to move away from the extreme "deregulation" attitude of the Reagan era during the Bush administration. That trend toward more aggressive antitrust enforcement has certainly accelerated under President Clinton, though there are still no indications of a return to the zealous policing of the 1970s. The new administration has given clear signals that several specific areas can be expected to receive increased attention.
A. Vertical Restraints
The Vertical Restraints Guidelines promulgated by the Department of Justice in 1985 were roundly criticized in many quarters for virtually abandoning any meaningful federal antitrust scrutiny of vertical relationships. One of the first actions by Assistant Attorney General Anne Bingaman upon assuming leadership of the Antitrust Division in 1993 was to repeal those Guidelines, an action which was accompanied by a number of public pronouncements expressing an intention to bring vertical restraints under closer scrutiny once again.
B. Technology and Innovation
Because of the emphasis of the Clinton administration on the importance of technological development, it is widely expected that the Antitrust Division will pay particular attention to antitrust issues affecting technological innovation and intellectual property. The well-publicized, but thus far fruitless, investigation of Microsoft Corporation is an early example.
C. Civil Litigation
1. Prior to the Clinton administration, the Antitrust Division had five litigation sections. The new administration has done some reorganization, which gives an indication of where its priorities will lie.
2. The five existing sections have remained intact, but three of the five (Communications and Finance; Transportation, Energy and Agriculture; and Professions and Intellectual Property) have been reorganized to focus exclusively on civil litigation. (The two other sections focus on criminal and merger enforcement, and the field offices will continue to focus on criminal enforcement as well.)
3. In addition, there has been created a new civil litigation task force, in effect a sixth litigating section, which is charged with concentrating on civil litigation which does not fall within the substantive jurisdiction of the three sections described above. The clear message is a renewed emphasis on civil litigation across the board.
E. Diminished Reliance on Theoretical Economics
1. Much of the Reagan-era dismantling of antitrust enforcement had as its theoretical foundation the "Chicago school" of economic thought, which tended to regard regulation as unnecessary unless conduct could be shown to have the theoretical ability to impede the efficiency of markets.
2. There is now a discernible rebellion against at least the more extreme implications of such an analytical approach. The administration has gone out of its way to emphasize on many occasions that, while it is retaining its staff of economists, their primary activity will be factual investigation, and arguments about the defensibility of conduct which are based solely on economic theory, without fact-based support to demonstrate that the theory translates into real world behavior, will receive short shrift.
3. This attitude received substantial encouragement from the Supreme Courts decision in Eastman Kodak Co. v. Image Technical Services. Inc.. __ U.S. __, 112 S.Ct. 2072 (1992), in which the Supreme Court took a decidedly skeptical view of Kodaks defenses based on economic theory.
F. "Facilitating" Conduct
1. Among other areas, the Federal Trade Commission has in the past year demonstrated a particular interest in what it has come to refer to as "facilitating" conduct, meaning conduct which may or may not necessarily rise to the level of a restraint of trade in violation of Sherman Act §1 or attempted monopolization in violation of §2, but which nonetheless has no redeeming or pro-competitive effects, and tends to "facilitate" the possibility of such a violation. Examples include unaccepted invitations to fix prices, and price reductions which are not below cost but are undertaken to discourage competitive entry.
2. The primary statutory vehicle relied on by the FTC in these cases is §5(a) of the Federal Trade Commission Act, which has long been held to confer "broad power" to reach "trade practices which conflict with the basic policies of the Sherman and Clayton Acts even though such practices may not actually violate these laws." Federal Trade Commission v. Brown Shoe Co., 384 U.S. 316, 321 (1966).