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Still crazy after all these years: Understanding the Robinson-Patman Act today

Business Law Today, American Bar Association
Sept/Oct 2004, Volume 14, Number 1

I recently received a call from a client who manufactures a number of components that are incorporated into a wide variety of consumer goods. This client had just reactivated a long-dormant product line and was trying to develop a pricing strategy. The question was simple, or so it seemed: "We already have a price list. Can we offer one particularly large customer a discount off the list price?"

This pithy question was really just the beginning of a long discussion about price discrimination under the Robinson-Patman Act. How did that discussion turn out? Stay tuned.

If you represent clients that buy or sell virtually any physical product, it’s important that you understand Robinson-Patman basics. Consider the following additional situations that may be affected by the law:

  • A client wants to reward its more aggressive distributors with discounts tied to each distributor’s prior sales.
  • A client sells a branded product at a premium price, but also wants to sell a physically identical product "off-label" at a discount.
  • A client wants to offer volume discounts at price breaks in quantities larger than some of its customers typically buy.

These and hundreds of other business scenarios require business lawyers to have at least a working knowledge of the act. In fact, Robinson-Patman is often more important to daily business life than any other antitrust law. Vendors make countless pricing decisions daily. Robinson-Patman affects a substantial percentage of them.

That doesn’t mean it’s a good law. Although Robinson- Patman has its supporters, a number of lawyers, academics, and judges have been trying to eliminate the act for generations. The critics claim that the law produces perverse, counterintuitive economic incentives. But their efforts have been unsuccessful. Nearly 70 years after its passage, Robinson-Patman still strikes unsuspecting businesses across America, exposing them to embarrassing publicity, costly litigation and potentially enormous treble damage awards.

Robinson-Patman is deceptively complex and largely counterintuitive; no short magazine article can address its every subtlety or idiosyncrasy. Accordingly, antitrust lawyers should be a part of any business team. But every business lawyer can and should have a basic understanding of what the act is and how it works.

Congress passed the Robinson-Patman Act in 1936, in response to claims that large chain stores like the Great Atlantic and Pacific Tea Co. (A&P) were injuring smaller stores by forcing suppliers to sell to the large chains at lower prices. Conventional wisdom held that A&P and other chains could then sell to consumers at lower prices than the mom-’n’-pops, eventually driving smaller stores out of business.

The act aimed to eliminate this "evil" by outlawing most forms of price discrimination. Unfortunately, the statute is hardly a model of clarity. The basic violation is set out in a single 138-word, 12- comma sentence. Here are the more relevant clauses — I’ll discuss each italicized phrase in turn:

It shall be unlawful … to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases… are in commerce… and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with the customers of either of them

"To discriminate in price" — The concept of "price discrimination" is fairly straightforward — it’s essentially any difference in price besides those subject to the defenses discussed below. And it is difficult to avoid the price discrimination label through creative accounting — the act is concerned with function, not form. Price discrimination is any price difference of fees, discounts, allowances, etc.

Clients can’t avoid the law by offering different credit terms, paying dummy brokerage fees, or furnishing services to one customer without offering the same services to all customers on proportionally equal terms. In other words, price discrimination looks at the reality behind pricing. Any net difference in price is price discrimination. Whether it’s an illegal discrimination depends on a variety of other factors.

"Commodities" — Robinson-Patman applies only to sales of commodities. It does not apply to sales of services. For "hybrid" products, some federal courts employ a "dominant nature" test, which requires courts or fact finders to determine whether a transaction’s "commodity" characteristics predominate over its noncommodity characteristics.

For example, a computer software transaction may be subject to Robinson-Patman if its dominant characteristic is the physical sale of computer code. But if it is predominantly a licensing transaction conveying only the right to use that computer code, it probably will not be subject to the act.

As of this writing, there is no clear judicial consensus regarding whether software is a "commodity" — courts have noted that many software transactions have strong "commodity" characteristics in addition to their "services" or "license" aspects. The "dominant nature" determination can be fairly difficult, and wise lawyers avoid blanket pronouncements on what is really a fact-specific analysis.

The Robinson-Patman "dominant nature" test closely resembles tests used by some courts to determine whether transactions are subject to the Uniform Commercial Code. But no court has expressly equated the two, and at least one Robinson-Patman decision expressly rejects a UCC analogy.

"Of like grade and quality" — It’s perfectly acceptable to sell different products at different prices. But as with everything Robinson-Patman, the devil is in the details.

The "like grade and quality" requirement is a tempting siren for many would-be price discriminators. After all, doesn’t different packaging or an extended warranty make otherwise identical products legally different? In a word, no. Courts generally reject "like grade and quality" defenses based on window dressing alone. As one court put it in finding that physically identical "premium" and cheaper-brand liquor were of like grade and quality, "Four Roses by any other name would still swill the same."

In order to avoid liability on "like grade and quality" grounds, sellers generally need to demonstrate bona fide differences that are recognized by the marketplace. There are exceptions to this general rule, but if you find yourself wondering if they apply, it’s time to call an antitrust lawyer.

"Purchases" — A Robinson-Patman claim must be based on two or more roughly contemporaneous actual sales to different customers at different prices. Merely reflecting potentially discriminatory prices in offers, price lists or proposals is not illegal.

"In commerce" Robinson- Patman only applies when at least one of the purchases crossed a state line. But many states have "baby Robinson-Patman acts" designed to address intrastate conduct, so the rare "purely intrastate" business can still face liability.

"Substantially to lessen competition" — Most Robinson-Patman claims involve either "primary line" or "secondary line" price discrimination. Primary line price discriminators typically price differentially in an attempt to injure direct competitors. In other words, Seller A cuts his prices to Seller B’s customers hoping that Seller B will lose market share and go out of business.

Primary line (or "predatory pricing") violations have been extremely difficult to prove since a 1993 U.S. Supreme Court decision that requires primary line plaintiffs to demonstrate that defendants priced below cost and could reasonably expect to recoup its losses in the future primary line. Robinson-Patman claims are practically identical to predatory pricing claims under the Sherman Act, which makes attempts to monopolize illegal only if they entail a "dangerous probability of success." Few primary line claims meet the current standard.

By contrast, secondary line discrimination affects the customers of the price discriminating seller. Secondary line claims typically involve a "disfavored" purchaser bringing suit against a seller or the seller’s "favored" purchaser(s) for giving the favored purchaser a better deal.

Courts remain relatively friendly toward secondary line claims, and generally refuse to require plaintiffs to demonstrate actual harm to competition as a whole. Instead, courts infer competitive effects from the very fact of a sustained price difference.

To prevail on secondary line claims, plaintiffs first must prove direct or indirect competition between the "favored" and the "disfavored" purchasers. If the purchasers do not compete, there is no violation.

Second, they must "prove" competitive injury by (a) direct evidence of lost sales, (b) direct evidence of lost profits resulting from the discrimination, or, in most jurisdictions, (c) by inference. Under the "Morton Salt test," the existence of a substantial price difference over a substantial time period in an otherwise competitive market creates a rebuttable inference of injury to competition. Injury to even a single competitor may constitute "competitive injury." If a plaintiff paid a significantly higher price than a competitor for the same product over time, it can usually satisfy the requirement.

The Morton Salt test seems to violate a modern antitrust article of faith: that antitrust laws were designed to protect competition, not individual competitors. Many business clients argue that the Morton Salt rule tends to protect inefficient competitors, to prevent suppliers from rewarding their more successful and enthusiastic customers, and generally to produce perverse incentives that in many cases decrease rather than increase competition.

Although business lawyers should know the black letter law, it’s also important to understand why many business owners think it irrational. Even the most competitive, law-abiding clients run into secondary line problems, usually because the law itself seems counterintuitive and arguably anticompetitive.

Competitive businesses are interested in selling more, rather than less, of their products, and accordingly try to maximize distribution efficiency. No rational price- discriminating producer would intentionally weaken its distribution system through its pricing policies.

In fact, price discrimination may actually strengthen intrabrand distribution in certain circumstances. For example, a producer may want to offer discounts to one of two dealers because that dealer competes more aggressively against other brands. This practice would actually facilitate competition as a whole, by providing incentives for the seller’s dealers to compete harder against other brands. But under current law, the less aggressive dealer may have a Robinson-Patman claim if it paid more for the seller’s product than the more aggressive dealer.

Robinson-Patman can be confusing, but if the first part of this article has you worried, take heart. There are many defenses to Robinson-Patman liability.

Meeting competition. It’s fine to offer different prices to different customers, so long as the seller is acting "in good faith to meet the equally low price of a competitor." But there are a couple of catches.

First, it’s an affirmative defense, so the burden is on the defendant to prove facts that reasonably establish that its lower price simply meets the equally low price of a competitor. As a practical matter, this means you need something more than heartfelt promises from a sales rep that the buyer had a better offer in hand. A copy of that better offer would be nice, and sellers must make "reasonable inquiry." (An important aside: Please do not suggest that your sales force contact the competing seller directly. The Sherman Act doesn’t think too highly of that particular verification method.)

Second, "meet" doesn’t mean "beat." Prices lower that a competitor’s do not qualify for the "meeting competition" defense — this defense is available only for matching prices.

That is particularly important in light of the current popularity of "Most Favored Nations" (MFN) clauses in supply contracts. If an MFN clause simply entitles the purchaser to the lowest price the supplier offers to any customer, it will not violate the act. But Robinson-Patman is a potential concern if an MFN clause entitles a beneficiary to lower prices than any other customer.

Cost justification. Robinson-Patman explicitly authorizes price differentials reflecting differences in a seller’s costs. Price differentials are lawful if they "make only due allowance" for the seller’s manufacturing, sales or delivery costs resulting from "differing methods or quantities" of production or delivery. But the cost justification defense emphasizes function over form. The seller bears the burden of proving the cost difference, and can only discount in proportion to real cost savings. The cost justification defense imposes a heavy burden on sellers, and can often be difficult to sustain in practice.

Availability.It’s also acceptable to offer discounts if they are "functionally available" to all customers. But before your clients print out revised "volume discount" price lists, consider this: If an average customer buys 100 units per quarter, and Wal-Mart buys 1 million, setting the one and only price break at 1 million units is probably not "functionally available" to that average customer. Instead, the lower price must be realistically available to the allegedly disfavored customer. If your clients are interested in volume discounting, it’s probably time to have your friendly neighborhood antitrust lawyer give the discount schedule a once- over.

Functional discounting. Functional discounting is a judicially created hybrid of the cost justification and availability defenses. Simply put, it’s not a violation of the act to provide discounts corresponding to a particular customer’s distributional function. So it’s generally acceptable to charge wholesalers less than retailers. It may also be permissible to offer a large-volume retailer a special discount if it, for example, stores inventory for the seller. But customers receiving functional discounts must actually provide valuable services.

Changing conditions.It boils down to this: Your clients can sell their remaining stock of "I’m ready for Y2K — are you?" T-shirts for somewhat less than their December 1999 price. Ditto for "Santa flying into a tree" novelty displays on Dec. 26, and other out-of-date seasonal merchandise. It’s also permissible to sell perishable commodities for less as they reach the end of their shelf life. But again, "changing conditions" defenses must be based on changes that actually decreased (or increased) the value of the goods between the time of the sales at issue.

Private suit damages issues.Although it’s not technically a "defense," private Robinson- Patman plaintiffs must also prove that they suffered an "antitrust injury" (a concept confusingly different from the "competitive injury" requirement discussed above). It is not enough to prove only a price difference. Instead, a plaintiff must establish injury reflecting "the anticompetitive effect of either the violation or the anticompetitive acts made possible by the violation." Even if every other defense fails, your clients can avoid liability if the plaintiff cannot prove lost sales or lost profits attributable to the discrimination.

Customer liability.Robinson-Patman allows disfavored purchasers to sue sellers, allegedly favored purchasers, or both. Remember, Robinson-Patman’s drafters wanted to prevent large purchasers from extracting "excessive" discounts from suppliers. Regardless, clients may face liability for simply receiving a discriminatory price. Moreover, purchasers typically will not be well- positioned to defend a claim — most of the available defenses depend on the market realities facing the seller. Purchasers should always try to get the best price possible, but should be aware that they can sometimes face risk for sellers’ activities over which they have little or no control.

Of course, virtually every client is also a potential victim of illegal price discrimination. Although it can be relatively difficult to determine whether a particular transaction is discriminatory, lawyers should instruct their clients to report instances where they believe that a competitor has "unfairly" received a better deal from a common supplier. After all, there’s a good side and a bad side to treble damages.

After my client asked its seemingly simple question, we spent the next hour or so discussing both the elements of and defenses to Robinson-Patman claims. We quickly determined that a "disfavored" purchaser paying list price would be able to make out a prima facie claim. By that time, there would have been two separate sales of the same "commodity" to different customers at different prices, and at least one of the sales would have crossed state lines. We assumed a plaintiff could prove "competitive injury" by demonstrating a significant price difference over a significant period of time.

So we turned to the defenses. Did the discount price meet the equally low price of a competitor? No, not really. Was the discount justifiable on cost grounds? No, the cost of producing the product for the favored purchaser was identical to the cost of producing it for list price customers.

The client wasn’t interested in making the discount functionally available to all customers, nor could we identify any services provided by the favored purchaser that might entitle it to a functional discount. Neither was the product subject to a "changing conditions" defense.

But at the end of the conversation, we still concluded that the proposed discount was not particularly risky. Why? Because the product my client is selling is a tiny component of its purchasers’ finished products, constituting 1 percent or less of the purchasers’ total cost of production for the finished consumer good.

Even though the proposed discrimination may well constitute a technical violation of the Robinson-Patman Act, we concluded that it would be almost impossible for a disgruntled purchaser to prove that the discrimination resulted in lost sales or lost profits.

The Robinson-Patman Act is tricky. It makes little sense to many lawyers, and even less to the business people who actually buy and sell products. It is arguably anticompetitive, which puts it at odds with the very goals of the antitrust laws. And it’s an extremely complex piece of legislation with an arcane and sometimes counterintuitive body of surrounding case law. But it remains the law of the land nearly 70 years after its passage, and business lawyers owe their clients a duty to keep them informed and aware of the implications of the law.

When in doubt, call an antitrust lawyer. We’re here to help.

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