August 27, 2013

The Robinson-Patman Act

Ross E. Elfand

I.                    Introduction

The Robinson-Patman Act (the “RPA”) prohibits certain forms of price discrimination in sales transactions.   15 U.S.C. § 13 et seq.  Congress enacted the RPA in 1936 to protect small businesses from larger businesses using their size advantages to extract more favorable prices and terms from small businesses.  While the Sherman and Clayton Acts are very broad statutes with open-ended language – the practical meaning of which is brought to life only through court interpretation – the RPA, on the other hand, contains very specific language.  Thus, the starting point in any RPA analysis should always be the language and structure of the statute.

The RPA was enacted as an amendment to Section 2 of the Clayton Act.  Six subsections make up the RPA:

·         Section 2(a) prohibits certain forms of price discrimination by a seller;

·         Section 2(b) provides an affirmative defense to discrimination intended to meet competition;

·         Section 2(c) prohibits certain brokerage fees and commissions;

·         Sections 2(d) and (e) prohibit sellers from discrimination in providing allowances or services to competing customers for promoting the resale of the seller’s products; and

·         Section 2(f) prohibits buyers from inducing a seller to violate the RPA.

II.                  Price Discrimination by a Seller

A violation of Section 2(a) occurs when a seller sells two of the same or similar products at different prices to different buyers within a brief period of time and those sales cause injury to competition.

A.                  Elements of a Section 2(a) Claim

Difference in Price.  Under the RPA, discrimination occurs only when there is an actual difference in net prices after taking into account all factors affecting price, such as discounts and rebates.  Texaco, Inc. v. Hasbrouck, 496 U.S. 543 (1990).  Any factors not affecting price are irrelevant, including a buyer’s higher or lower costs, a seller’s absorption of its own higher costs for preferred customers, favorable return policies, or differences in delivery times.  Courts have found that some influences on price do not yield “different” prices so long as the seller applies the same objective standard for calculating price for each buyer.  For example, buyers with different credit ratings may receive different credit terms so long as the differences are based on legitimate business reasons or uniform standards.

Multiple Sales Transactions.  Section 2(a) requires two or more sales transactions.  Although this requirement seems straightforward, courts have found that certain transactions do not qualify as “sales transactions,” including:  offers to sell, refusals to sell, licenses, leases, and agency arrangements.  On the other hand, an enforceable contract may constitute a sales transaction.  In addition, the sales transactions being compared must involve the same seller.  Finally, indirect purchasers cannot sue the seller for discrimination unless the seller effectively controls the reseller that sold to the indirect purchaser.  See, e.g., FLM Collision Parts, Inc. v. Ford Motor Co., 543 F.2d 1019 (2d Cir. 1976), cert. denied, 429 U.S. 1097 (1977).  This is because indirect purchasers are the customers of the direct purchaser, or the customers of the customers (and so on) of the direct purchaser, in resale transactions.  Indirect-purchasers include consumers, retailers, wholesalers, and even manufacturers, which may be the end-user of certain goods sold by other manufacturers or dealers.

Reasonably Contemporaneous.  Plaintiffs must establish that the favored and disfavored sales transactions are reasonably contemporaneous.  Courts do not consider the time lapse between sales transactions in a vacuum, but rather do so in the context of general market conditions and the specific terms and conditions of sale. 

Commodities of Like Grade and Quality.  Section 2(a) applies only to sales transactions transferring commodities of like grade and quality.  Thus, Section 2(a) does not apply to services, including health services, media services, or advertising services, among others.  Moreover, although the RPA does not include a definition of commodities, courts have limited Section 2(a) to tangible products.  Accordingly, Section 2(a) does not apply to intangible products such as securities, insurance, or advertisements. 

The question of whether goods are of “like grade and quality” hinges on the characteristics of the product itself, not the brand or label.  FTC v. Borden Co., 383 U.S. 637 (1966).  The most important characteristics are physical ones affecting consumer use or marketability.  For example, products with differences limited only to packaging still are likely to be deemed of like grade and quality. 

Interstate Commerce Requirement.  The goods at issue must be sold in commerce for “use, consumption, or resale within the” U.S.  15 U.S.C. § 13(a).  At least one of the sales transactions at issue must involve goods that crossed a state line.  Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186 (1974).  Sales made to a U.S. purchaser for direct export are outside the RPA’s jurisdiction.  General Chems., Inc. v. Exxon Chem. Co., USA, 625 F.2d 1231 (5th Cir. 1980).

Competitive Injury.  Plaintiffs must prove there is a reasonable possibility that price discrimination may substantially lessen competition or tend to create a monopoly.  In private litigation, the type of injury that must be proven will depend on whether the lawsuit is brought by the seller’s competitor or its customer.  When the Government is the plaintiff, it is likely to try to prove secondary line injury, which is defined below.

·         Primary Line Injury.  A competitor-plaintiff must prove primary line injury, which is a reduction in competition in the marketplace where sellers compete.  Courts rarely find primary line injuries.  The Supreme Court has held that establishing primary line injury requires the same proof of predatory pricing that is required under Section 2 of the Sherman Act.  Brooke Group Ltd. V. Brown & Williamson Corp., 509 U.S. 209 (1993).  Predatory pricing occurs only when a seller sets its price below cost (i.e., at a loss) and has a reasonable prospect of recouping the losses incurred by its below-cost pricing.  Claims of predatory pricing are extremely difficult to prove and usually are defeated on motions to dismiss or for summary judgment.

·         Secondary Line Injury.  A customer-plaintiff must prove secondary line injury, which is a reduction in competition in the marketplace where the seller’s customers compete.  This requires that the buyers at issue compete with each other in the same geographic market.  Falls City Indus. v. Vanco Beverage, Inc., 460 U.S. 428 (1983).  Many courts have held that proof of injury to a single customer – rather than to competition in general – can establish the element of injury to competition.  But others have held that injury to a specific customer, without more, is insufficient to establish injury to competition.  Although direct evidence of a purchaser’s lost sales or profits may show injury to competition, plaintiffs often seek to infer secondary line injury.  Courts will infer injury to competition when a significant price difference has continued for a substantial period of time (usually a year or more) in a market where competition among resellers is “keen.”  FTC v. Morton Salt Co., 334 U.S. 37 (1948).  To permit the inference, or find any actual injury to competition, the disfavored reseller plaintiff must be in actual competition with a favored reseller for the same customers.  Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164, 177 (2006).  Courts continue to analyze the practical significance of the Supreme Court’s dicta in Volvo Trucks regarding how the Court would “resist [an] interpretation [of the RPA] geared more to the protection of existing competitors than to the stimulation of competition.”  Id. at 181 (emphasis in original).

·         Tertiary Line Injury and Beyond.  The Supreme Court has found injury to competition where a direct-buying plaintiff competes with the favored buyer’s customers, or even the buyer’s customers’ customers.  Texaco, 496 U.S. at 566 (finding tertiary injury); Perkins v. Standard Oil Co., 395 U.S. 642 (1969) (finding fourth line injury).

B.                  Defenses to Section 2(a) Liability

Functional Availability Defense.  Courts will not find a Section 2(a) violation when the lower price in fact was made available to the disfavored buyer.  The functional availability defense applies when defendants establish that most buyers knew the lower price was available and were able to obtain the lower price.  Metro Ford Truck Sales v. Ford Motor Co., 145 F.3d 320 (5th Cir. 1998).  For example, if a manufacturer offers a discount to a distributor with which it establishes an exclusive relationship, another distributor that declined to enter into a similar exclusive relationship cannot later complain about paying a higher price:  It was offered – and declined – the better deal.  A volume discount policy, however, may violate the RPA even when the discounts are available to all customers if smaller customers cannot afford to qualify.  See Morton Salt Co., 334 U.S. at 42-43.

This “defense” has also been treated as negating proof of either the difference in price or competitive injury elements.

Cost Justification.  Section 2(a) explicitly allows sellers to engage in price discrimination that reflects any variance in their manufacturing or delivery costs.  15 U.S.C. § 13(a).  Sellers should analyze their costs and explicitly link costs to their prices before setting the price; post hoc cost justifications almost never excuse price discrimination.  Indeed, this is a difficult defense to establish and sellers rarely assert it successfully, even if they memorialize their cost justifications before setting their prices.

Changing Conditions.  Section 2(a) explicitly allows price differences that respond to changing conditions in the market, including “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.”  15 U.S.C. § 13(a).  Courts are split on whether changes not specified in the statute can justify discrimination.

Sellers’ Section 2(b) Affirmative Defense for “Meeting Competition.”  Section 2(b) provides sellers an affirmative defense to a discrimination claim if they set a low price for a buyer in good faith to meet an equally low price of a competitor.  When buyers inform sellers that a competing seller offered a lower price to the buyer, sellers should not communicate with competitors to confirm the lower offer; such communications may lead to a finding of price fixing under the Sherman Act.  U.S. v. United States Gypsum Co., 438 U.S. 422 (1978).  Sellers can rely on the facts available to them in deciding whether to believe the buyer’s representation; the standard is what a reasonable seller would believe under the circumstances.  Sellers should ask the buyer for documentation establishing the competitive offer, or, if the customer refuses, at least document its efforts to substantiate the buyer’s claims.

Functional Discounting.  Functional discounting occurs when wholesalers or distributors receive a lower price than the seller’s retail customers in return for performing non-promotional services (e.g., distribution or warehousing) for the seller.  The Supreme Court has indicated that it would approve of certain functional discounting that could not meet the usual cost justification or meeting competition defenses where the discount is “reasonable” and “did not cause any substantial lessening of competition between a wholesaler’s customers and the supplier’s direct customers.”  Texaco, 496 U.S. at 561.  However, this defense may not be available where the favored distributor also sells directly to the disfavored retailer’s customers, and the distributor receives the discount on all of its purchases.  Id.

III.                Discrimination Through Promotional Allowances or Services

Sections 2(d) and (e) require sellers to provide allowances and services promoting resale on a proportionally equivalent basis to all competing customers.  Only allowances/services intended to promote resale are relevant; promotions in connection with the original sale rather than the buyer’s resale are irrelevant for purposes of Sections 2(d) and (e) (e.g., delivery services, returning unsold inventory, technical support, etc.). 

·         Promotional allowances are payments, discounts, rebates, credits, or any other effective reduction in price that sellers make available to direct purchasers that indirectly or directly promote the resale of the product.  An example is a cooperative advertising fund.

·         Promotional services include non-cash and non-credit services such as product demonstrations, advertisements, or point-of-sale services.

Liability.  Failure to provide promotional allowances or services on a proportionally equal basis is a violation of the RPA.  When a claim under Section 2(d) or (e) is brought by the Government, injury to competition need not be proven.  FTC v. Simplicity, 360 U.S. 55, 70-71 (1959).  Private plaintiffs, on the other hand, must prove injury.  The good faith meeting competition defense under Section 2(b) is the only defense available to discriminatory promotional allowances/services; none of the other defenses applicable to Section 2(a) are available under Sections 2(d) and (e).  The reasonably contemporaneous requirement under Section 2(a) also applies here.

Indirect-Purchasers Are Protected.  Unlike under Section 2(a), which compares only the prices for direct buyers, sellers must make promotional allowances/services available to indirect purchasers (i.e., the direct buyers’ customers) who compete with any reseller receiving the seller’s promotional allowances/services.  FTC v. Fred Meyer, Inc., 390 U.S. 341 (1968).

Promotional Allowances/Services Must Be Available on Proportionally Equal Terms.  Sellers must notify both direct and indirect competing buyers of its promotional allowances and services, and make them functionally available on proportionally equal terms.  Proportionality need only be based on some common, objective standard.  The easiest, but not the only, way to achieve proportionality is basing allowances/services on revenue or quantity of sales.  In addition to being proportional, allowances and services must be made available to all competing customers.  Where allowances/services are not available in a “practical sense” to some customers, the FTC suggests, in its guidelines known as The Fred Meyer Guides, that proportionally equal alternatives be made available.  16 C.F.R. § 240.10.

IV.                Section 2(c):  Brokerage Fees and Commissions

Section 2(c) prohibits commissions or brokerage fees except for actual services rendered.  15 U.S.C. § 13(c).  The defenses available in other sections generally are not available to entities charged with a Section 2(c) violation.  Private plaintiffs, however, still must prove they were injured and paid higher prices than their competitors as a result of the fees or commissions.  The purpose of Section 2(c) was to end the practice of sham brokerages that operate to facilitate price discrimination.  Section 2(c) applies only to payments made “to the other party” to a transaction (i.e., payments made from buyer to seller or vice versa) or to an agent that is acting for the other party.  When a seller discounts the price in return for a corresponding discount in a legitimate brokerage fee, courts have held this to be an unlawful “discount in lieu” of brokerage.  Section 2(c) exempts payments made “for services rendered.”

V.                  Section 2(f):  Buyer Liability

Section 2(f) prohibits buyers from knowingly inducing or receiving a discriminatory price prohibited by the other provisions of the RPA.  15 U.S.C. § 13(f).  A buyer’s liability claim is purely derivative of the seller’s liability.

VI.                Exemptions

Some sales involving non-profits organizations, the Government, and cooperative associations are exempt from liability under the RPA.

VII.              Conclusion:  The RPA Is Still Alive, But With Declining Relevance

Since its introduction in 1936, the application of the RPA has significantly narrowed in the following ways:

·         No Criminal Enforcement.  The RPA includes a provision imposing criminal sanctions for some forms of price discrimination, but the Government has not enforced that provision in decades.  15 U.S.C. § 13a.

·         Rare Federal Agency Civil Enforcement.  Up until the 1980s, the FTC brought numerous civil actions under the RPA.  Since that time, however, the FTC rarely has brought RPA actions.  See, e.g., In re McCormick & Co., Docket No. C-3939, Decision and Order (Apr. 27, 2000).  Thus, almost all RPA cases in recent decades have been brought by private plaintiffs. 

·         Supreme Court Narrowing.  The Supreme Court has narrowed the scope of the RPA by expanding the defenses and allowing functional discounting; focusing on “interbrand competition”; limiting the type of primary line injuries protected by the RPA; focusing the RPA protections on competition rather than competitors; and interpreting the meeting competition defense as broadly as possible.  See Feesers, Inc. v. Michael Foods, Inc., 591 F. 3d 191, 198 (3d Cir. 2010) (discussing recent Supreme Court jurisprudence).

·         Some Have Recommended its Repeal.  The Antitrust Modernization Commission (“AMC”) convened by Congress advocated the repeal of the RPA.  Antitrust Modernization Commission, Report and Recommendations, April 2007, at 313.  But Congress has left the RPA in place and is unlikely to repeal it in the near future.

The RPA still is the law of the land.  The RPA should be taken seriously as liability can be expensive; successful plaintiffs are awarded treble damages.  15 U.S.C. § 15(a).  The FTC still may be willing to enforce the RPA through oversight and by seeking injunctions.  See, e.g., In re McCormick & Co., Docket No. C-3939.  The FTC guidelines on promotional allowance/services should be consulted before providing such promotions.  See 16 C.F.R. § 240 et seq

Lastly, antitrust practitioners should be aware that state and foreign antitrust laws may include stricter non-discrimination provisions than the RPA.


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