In a recent speech, Federal Trade Commission (FTC) Commissioner Joshua Wright jumped into the debate over the proper approach for analyzing the potential anticompetitive effects of loyalty discount programs. Commissioner Wright signaled his strong preference for an approach based on exclusive dealing law rather than a framework rooted in a predatory pricing analysis. Wright contended that recent FTC cases appeared to apply such an approach, and he asserted his belief that the Commission should consistently adopt this analytical approach in future cases.
The proper analytical approach to apply in loyalty discount cases has drawn attention recently as a result of the Third Circuit’s opinion in ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Circuit 2012). In that case, ZF Meritor brought a monopolization claim against Eaton related to Eaton’s contracts in the heavy-duty truck transmissions market. In the late 1980s, Meritor first entered the market; Eaton had been the sole supplier for more than 30 years. Within a decade, Meritor had gained approximately 17 percent share and had plans for further expansion tied to a joint venture with a German company that offered a transmission product not previously sold in the North American market. Eaton responded by entering into “long-term agreements” with the four direct purchasers of heavy-duty truck transmissions. These agreements provided loyalty rebates to buyers that were conditioned on obtaining a certain specified share of the buyer’s needs – ranging from 70 to more than 90 percent – from Eaton. ZF Meritor watched its market share drop dramatically following the conclusion of these agreements and ultimately exited the market after concluding that it would be unable to obtain and maintain the minimum market share necessary for viability. The company’s monopolization suit against Eaton claimed that its competitive efforts were undermined by Eaton’s loyalty discount programs.
Eaton characterized ZF Meritor’s claim as one involving discounted pricing and contended that the proper test to assess any potential anticompetitive effect of this activity was the one elaborated by the Supreme Court in Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). According to Eaton, the Brooke Group standard required ZF Meritor to show that Eaton’s prices were below a relevant measure of Eaton’s costs. The Third Circuit surprised many when it refused to apply the Brooke Group test. The court stated that Brooke Group was appropriate where “pricing itself operat[es] as the exclusionary tool,” but it was not the proper standard where, in this case, price was not the predominant exclusionary mechanism. 696 F.3d at 275. The Supreme Court chose not to hear Eaton’s appeal of the Third Circuit’s decision.
Commissioner Wright approved of the Third Circuit’s approach, indicating that he believes an exclusive dealing approach focused on how the challenged activities operate to raise rivals’ costs better accords with current economic research. Not all economists agree. A large group of economists submitted an amicus brief to the Supreme Court urging it to review the Third Circuit’s decision in ZF Meritor. Commissioner Wright said, however, that he believed that the arguments in favor of applying a price-cost test in the loyalty discount setting were either overstated or incorrect: “[T]he choice in this context is between a simple legal test based upon the wrong economic model and a legal test – albeit a more complex rule of reason analysis – based upon a more accurate set of economic models.” According to the Commission, the FTC’s most recent cases in this area demonstrate that the agency is open to pursuing an exclusive dealing approach.
Moving forward, this is an area of the law that bears watching, particularly for companies with especially large market shares. Commissioner Wright’s speech signals this is an area of interest for him and one in which he will urge the FTC to adopt an approach consistent with that employed in the ZF Meritor case. Companies with large market shares may wish to consider carefully how they respond to new market entry, and specifically whether loyalty or rebate programs are a proper response given the particular conditions of the markets in which they operate. If Commissioner Wright finds allies on the Commission on this issue, clients should be warned that the relatively bright-line rule of the price-cost test may eventually give way to a less certain rule-of-reason analysis based on estimated foreclosure effects.
The full text of Commissioner Wright’s speech is available on the FTC website at https://www.ftc.gov/speeches/wright/130603bateswhite.pdf.