Does a consumer product manufacturer’s failure to offer all sizes of the product to all customers expose it to a claim of discrimination in providing “promotional services or facilities,” under the federal antitrust law known as the Robinson-Patman Act (“RPA”)? No, according to the U.S. Court of Appeals for the Seventh Circuit in Woodman’s Food Market, Inc. v. Clorox Co.1 The case arose from a common fact pattern in grocery retailing: a supermarket operator notices that a “big box” retail competitor down the street is offering a particular product in a larger size than has been available to the supermarket, and asks the manufacturer to supply it with the same. The manufacturer refuses, explaining that the larger size is available only to the “club store” class of trade. The supermarket operator is miffed, because the “club size” appears to be flying off its rival’s shelves. Woodman’s, a supermarket operator, sued consumer products maker Clorox under a section of the RPA which prohibits discrimination in the furnishing of promotional services or facilities to competing customers.2 The district court denied Clorox’s motion to dismiss, and the Seventh Circuit reversed, holding that differences in package size, taken alone, do not state a claim under the RPA’s promotional services provision.
Discrimination in Promotional Services or Facilities Under the Robinson-Patman Act
The RPA was enacted in 1936 as an amendment to the Clayton Act in response to perceived purchasing preferences enjoyed by large “chain” buyers, which were said to be threatening the continued existence of independent retailers and wholesalers. Notwithstanding the RPA’s populist underpinnings, the courts and the FTC have repeatedly emphasized that it should be interpreted, where possible, in a manner consistent with the other antitrust laws. Thus, in Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc.,3 the Supreme Court observed that “[i]nterbrand competition is the ‘primary concern of antitrust law’” and “[t]he Robinson-Patman Act signals no large departure from that main concern.”4 In construing the RPA the Court said it “would resist interpretation geared more to the protection of existing competitors than to the stimulation of competition.”5
The RPA’s core provision, section 2(a), prohibits discrimination in the price of products of “like grade and quality” sold to two or more purchasers in reasonably contemporaneous transactions, where the effect may be to harm competition. Two collateral provisions, sections 2(d) and (e), proscribe discriminatory promotional allowances, services, or facilities. Section 2(d) applies where the seller either directly or through an intermediary pays for promotional services or facilities. Section 2(e) applies where the seller furnishes such services or facilities, directly or through an intermediary. The legislative history indicates that these provisions were intended to prevent circumvention of the price-discrimination provision. A violation of section 2(d) or (e), unlike a section 2(a) claim, does not require proof of probable injury to competition; they are “per se” offenses. Thus, proper categorization of an alleged discriminatory preference can be important. In any case, however, a plaintiff seeking damages for an RPA violation must show actual antitrust injury pursuant to section 4 of the Clayton Act.6
In a case under the RPA, the plaintiff must plead and prove a discrimination in price, promotional allowances or services between two different purchasers of products of “like grade and quality” from the same seller. This language establishes elements that are relevant to the discriminatory package-size issue. First, the RPA does not apply to refusals to sell, nor does it apply to discriminatory offers that are not accepted.7 Second, because the RPA applies only to discriminations involving products of “like grade and quality,” there is generally no basis for a claim where a manufacturer has different prices for products that differ in their physical attributes or ingredients. Mere cosmetic differences, however, do not suffice to make products unalike for purposes of the RPA. Thus, it has been held that private label and branded versions of a product were of “like grade and quality” where they were physically identical in everything but the label on the package.8
What Is A Promotional Service or Facility as Distinguished from a Price Concession?
The per se nature of sections 2(d) and (e) requires accurate categorization of an alleged preference as a price concession or a promotional allowance or service. The predominant test for identifying promotional payments or services is the “resale nexus test,” whereby payments or services that relate to or facilitate the customer’s resale or preparation for resale of the manufacturer’s product fall within sections 2(d) or (e), while discounts or other payments in connection with the product’s original sale by the manufacturer must be addressed under section 2(a). Application of this test usually poses no special difficulty. A variety of price and price-related terms, such as rebates and discounts, are readily categorized as falling under section 2(a), while payments that reimburse customers for advertising or other promotional expenses, as well as the manufacturer’s providing various forms of in-store merchandising services (e.g., the seller’s provision of display fixtures, promotional signage, or in-store product demonstrators), come within sections 2(d) or (e).
But some practices are harder to categorize. For example, so-called “slotting allowances”―fees paid for shelf space―have variously been addressed as price concessions under section 2(a) or promotional allowances under section 2(d), depending on whether the payment could be categorized as an ongoing reduction in the customer’s cost of goods or as a payment for preferential display space.9 And free goods have been analyzed under section 2(a), where the effect was to lower the buyer’s cost of goods, but also under section 2(d) where the buyer was required to pass on the free product to consumers.10
Woodman’s Robinson-Patman Act Complaint Against Clorox
Woodman’s operates a small chain of grocery stores in Wisconsin and Illinois. Clorox makes and sells a range of consumer goods, including salad dressing, food storage bags, and cat litter. These products are sold in various sizes, including “large packs,” such as 40-ounce bottles of salad dressing, 460-count plastic food-storage bags, and 42-pound bags of cat litter. As the court of appeals noted, “[t]he large packs tend to have a lower unit price than smaller versions of the same product,” and “[t]hey also provide consumers with the convenience of needing to shop less frequently.”11
At one time, Woodman’s purchased large packs from Clorox, but in 2014 Clorox announced that henceforth it would sell large packs only to discount “club” stores such as Costco and Sam’s Club. Woodman’s sued, alleging price discrimination in violation of section 2(a) and discrimination in the furnishing of promotional allowances or services under sections 2(d) and (e). As the suit progressed, Woodman’s moved away from the section 2(a) claim and focused on its section 2(e) claim, for which it sought injunctive relief.
The district court denied Clorox’s motion to dismiss, holding that product size can be a promotional service under section 2(e). After this ruling, Clorox stopped selling to Woodman’s altogether, and again moved to dismiss, arguing that because Woodman’s was no longer a “purchaser” from Clorox, its claim was moot. Treating this as a motion to dismiss for lack of subject matter jurisdiction, the district court again denied the motion, holding that despite Clorox’s cut off of direct sales, Woodman’s could still purchase Clorox products indirectly through other suppliers, and indeed was doing so.12 The district court certified both orders for interlocutory appeal under 28 U.S.C. § 1292(b).
The district court relied on two long-in-the-tooth FTC consent orders in denying Clorox’s motion to dismiss: (1) Luxor, Ltd.,13 in which the Commission held that a manufacturer violated section 2(e) when it sold “junior-sized” cosmetics to some purchasers but not others; and (2) General Foods Corp.,14 which involved sales of different-sized coffee packages. The district court also cited the FTC’s nonbinding Guides for Advertising Allowances and Other Merchandising Payments and Services (“FTC Guides”),15 which include “[s]pecial packaging, or pack sizes” among the examples of promotional services covered by section 2(e).
Unfortunately for Woodman’s, these were not the FTC’s last words on the topic. In 2014, the Commission published revisions to the FTC Guides.16 “Special packaging, or package sizes” were retained in the list of covered promotional services or facilities, but new examples were added “to underscore that special packaging or package sizes are covered only insofar as they primarily promote a product’s resale.”17 One of the new examples involved a candy manufacturer’s providing retailers with multi-packs of Halloween-themed candy during Halloween season, which was said to fall within section 2(e) because “[t]he primary purpose of the special packaging is to promote customers’ resale of the candy bars.”18 Another example involved a manufacturer of laundry detergent which was normally sold in round containers but that, in response to a particular retailer’s request, was provided to that retailer in square containers to facilitate the retailer’s warehousing and transshipping of the product. The Commission said that such special packaging would not be covered by sections 2(d) or (e), “[b]ecause the purpose of the special packaging is primarily to promote the original sale of the detergent to the customer and not its resale by the customer.”19
The Commission also filed an amicus brief in the court of appeals, in which it disavowed its Luxor and General Foods precedents “in light of intervening Supreme Court decisions and developments in antitrust policy” which counsel that the RPA be “construed narrowly so as to be consistent with the purposes of the Act and antitrust law as a whole.”20
The Seventh Circuit Reverses
Woodman’s made two arguments on appeal for why Clorox’s large packs were promotional “services or facilities” within the scope of section 2(e): first, that the unit discount that accompanied the large packs enhanced their attractiveness to consumers; and second, that the convenience to consumers of buying the larger sizes conveyed a promotional benefit on the retailer. The court of appeals made short work of the first argument, holding that to the extent Woodman’s was challenging Clorox’s bulk packaging as a quantity discount, its claim must be analyzed as a price-discrimination claim under section 2(a). Consistent with other courts, the Seventh Circuit declined the invitation to construe section 2(e) expansively, noting that Congress had intended to target “only a narrow band of conduct that Congress identified as a problem: the provision of advertising-related perks to purchasers as a way around [section 2(a)’s] prohibition on price discrimination.”21
Turning to Woodman’s second argument, the court of appeals held that enhanced consumer convenience was too general a standard, and that “every other circuit to consider the issue has held that the terms ‘services or facilities” in [section 2(e)] refer only to those services or facilities connected with promoting the product, rather than sweeping in any attribute of the product that makes it more desirable to consumers.”22 Section 2(e) was intended to be a “narrow but categorical prohibition,” said the court of appeals, and the balance intended by Congress between that provision and section 2(a)―which requires competitive injury for a violation―would be lost “[i]f any product attribute that made the product more desirable automatically became a promotional ‘service or facility’ by virtue of that fact.”23 The court added that Woodman’s proposed “interpretation of section [2(e)] would wipe out the seller’s discretion to choose which products to sell to whom.”24 The court of appeals did not address the district court’s denial of Clorox’s motion to dismiss for mootness.
Implications for Manufacturers and Retailers
The Seventh Circuit has held that differences in package size, alone, do not state a claim for discriminating in promotional services under section 2(e) of the RPA. This does not mean that differences in packaging, such as in shape or graphics, could never be actionable under 2(e). As the examples added to the FTC Guides in 2014 underscore, special packaging or product design may constitute a promotional service if it is primarily intended to promote the product’s resale at the favored retailer’s stores. Thus, packaging that has been customized by the manufacturer for the benefit of a particular retailer might support a claim under the RPA. The FTC’s amicus brief gave the example of “football shaped packages offered just before the Superbowl” as a service or facility that would fit under section 2(e).25
Moreover, while refusals to deal are not covered by the RPA, a manufacturer’s refusal to offer a particular product size to a retailer might support a claim under section 1 of the Sherman Act. Indeed, Woodman’s has moved to amend its complaint to add a section 1 claim, and this motion presumably will be taken up on remand.
Of course, the antitrust laws give sellers broad latitude in deciding with whom to do business, and unilateral refusals to deal are routinely upheld in the absence proof of substantial harm to interbrand competition.26 But different considerations come into play if a manufacturer refuses to sell a product to a particular retailer at the behest of, and in agreement with, competing retailers. Such an agreement may be characterized as “horizontal” and is more likely to be condemned.27 Similarly, an unlawful “hub and spokes” conspiracy might be found where a retailer secures agreements with multiple manufacturers not to supply a particular type of product to competing retailers.28
1 No. 15-3001 (7th Cir. Aug. 12, 2016). Opinion available at http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2016/D08-12/C:15-3001:J:Wood:aut:T:fnOp:N:1810276:S:0.
2 15 U.S.C. § 13(e).
3 546 U.S. 164 (2006).
4 Id. at 180 (quoting Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51-52 (1977)).
5 Id. at 180-81 (emphasis in original).
6 See J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557 (1981) (§ 2(a) claim requires actual injury); Rutman Wine Co. v. E & J Gallo Winery, 829 F.2d 729 (9th Cir. 1987) (§§ 2(d) and (e) claims require actual injury).
7 See, e.g., Crossroads Cogeneration Corp. v. Orange & Rockland Util., 159 F.3d 129, 149 (3d Cir. 1998) (sale compared with offer to sell not covered by RPA); L&L Oil v. Murphy Oil, 674 F.2d 1113, 1120 (5th Cir. 1982) (sale compared with refusal to sell was not subject to RPA).
8 FTC v. Borden Co., 383 U.S. 637 (1966); see also DeLong Equip. Co. v. Wash. Mills Abrasive Co., 887 F.2d 1499, 1517 (11th Cir. 1989) (“stock” and “special” versions of product were of “like grade and quality” because they were physically identical, notwithstanding consumers’ willingness to pay more for the “special” version).
9 See Hygrade Milk & Cream Co. v. Tropicana Prods., Inc., 1996 WL 257581 (S.D.N.Y. 1996).
10 Lewis v. Philip Morris Inc., 355 F.3d 515, 530-33 (6th Cir. 2004).
11 Slip Op. at 2.
12 Id. at 4.
13 31 F.T.C. 658, 664 (1940).
14 52 F.T.C. 798, 826 (1956).
15 16 C.F.R. §§ 240.1-240.15.
16 79 Fed. Reg. 58245 (Sept. 29, 2014).
17 Id. at 58249.
20 Slip Op. at 12.
21 Id. at 7.
22 Id. at 8.
23 Id. at 11.
25 Slip Op. at 13.
26 See, e.g., Capital Imaging Assocs. v. Mohawk Valley Med. Assocs., 996 F.2d 537, 547 (2d Cir. 1993).
27 See, e.g., United States v. Gen. Motors Corp., 384 U.S. 127, 145 (1966) (agreement among auto maker and dealers to terminate discounting dealers was per se unlawful under § 1).
28 See, e.g., Toys “R” Us, Inc. v. FTC, 221 F.3d 928 (7th Cir. 2000).