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THE LATEST: California Jury Rejects Robinson-Patman Act Claim Against 5-hour Energy Maker

Family-owned wholesalers brought a Robinson-Patman claim against the maker of 5-hour Energy alleging discounts given to Costco amounted to illegal price discrimination. A jury in California rejected the claim after a fact-intensive analysis of competition and potential antitrust injury.

WHAT HAPPENED:

  • After seven hours of deliberations, a California jury decided that Living Essentials LLC, the maker of 5-hour Energy, did not engage in illegal price discrimination under the Robinson-Patman Act. U.S. Wholesale Outlet & Distribution, Inc. v. Innovation Ventures, LLC et al., No. 2:18-cv-01077 (C.D.Ca. Oct. 21, 2019).
  • Plaintiff wholesalers argued that the rebates and discounts Living Essentials offered to Costco on the list price for 5-hour Energy amounted to price discrimination.
    • The family-owned wholesalers have endured a steady decline since 2012 in their sales of 5-hour Energy, a decline they claimed accounted for hundreds of thousands of dollars in lost sales for a product with annual retail sales of more than $1 billion.
    • They attribute this decline to unfair price discrimination that provided a competitive advantage to Costco, allowing the membership-only warehouse club to offer the product for less than its competitors. According to plaintiffs, Costco received as much as a 26-cent discount on each 5-hour Energy bottle compared to the wholesalers. The 26-cent discount resulted from a combination of spoilage allowances, early payment discounts and indirect advertisement discounts (including promotion in Costco mailers and at fences and endcaps). The wholesalers alleged this unfair price discrimination created a reasonable possibility of harm to competition.
  • Living Essentials countered that the wholesale distributors are not competitors with Costco and that there was no competitive injury.
    • Living Essentials argued the plaintiff wholesalers did not provide the economic analysis necessary to show actual competition between Costco and the wholesalers, despite having access to the kind of data necessary for such an analysis. Instead, the wholesalers relied on hearsay testimony from customers claiming they purchased 5-hour Energy from both the wholesalers and Costco.
    • Living Essentials pointed to the different products and services available from Costco compared to the wholesalers and argued that it did not view Costco as a vehicle for getting its product into convenience stores—a particularly important method of distribution. Living Essentials offered discounts to wholesalers who purchased 5-hour Energy displays and racks to encourage those wholesalers to resell these products to convenience store customers who would place the displays and racks on their counters. Living Essentials never sold these displays and racks to Costco.
    • Any loss of customers for 5-hour Energy, defendants argued, could be due to store cleanliness, professionalism, free shipping, rewards programs or a number of other reasons beyond the discounts and rebates Living Essentials offered to Costco.
    • Without proof of diverted customers, there was no way to know whether customers lost by these wholesalers went to Costco rather than other competitors in the area, such as Sam’s Club, McLane, or other wholesalers.
  • The jury sided with Living Essentials and found that it had not engaged in illegal price discrimination.

WHAT [...]

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FTC Alleges Another Price Discrimination Market – Seeks to Block Wilhelmsen’s Acquisition of Drew Marine

The Federal Trade Commission (FTC) recently announced that it has challenged a merger between Wilhelmsen Maritime Services (Wilhelmsen) and Drew Marine Group (Drew) because of an overlap in service to “global fleet customers,” a narrow customer segment that purchases marine water treatment chemicals and services.

WHAT HAPPENED:
  • The FTC issued an administrative complaint and filed a complaint in federal court seeking a temporary restraining order and preliminary injunction, asserting that Wilhelmsen’s proposed $400 million acquisition of Drew would significantly reduce competition in the market for marine water treatment chemicals and services used by global fleets.
  • The FTC enforcement action focuses on a narrow sub-segment of customers, global fleet customers, that buys marine water treatment chemicals and services.
  • The FTC distinguished global fleet customers from other marine water treatment chemical customers on the basis that:
  • (1) global fleets have specialized needs that only a few suppliers can meet
    (turn-key global sales, service and delivery capabilities, as well as consistent and reliable product supply); and
  • (2) these customers seek out suppliers via requests for proposal and direct negotiation and therefore potential suppliers can price discriminate to that subset of customers.
  • Because of the specific needs of global fleet customers and because global fleet suppliers can identify which customers are seeking service for global fleets, suppliers are able to price discriminate to the global fleet customer set.
  • The FTC alleged a harm to competition because their investigation showed Wilhelmsen and Drew are each other’s closest competitors based on company documents, statements by the business personnel, and bid data showing that the companies are most frequently the first and second choice for global fleet customers. In addition, the FTC noted that Wilhelmsen and Drew would control at least 60 percent of the market with the next largest competitor having less than a 5 percent share.
  • The FTC complaint disparaged the remaining market participants as unable to practicably compete with Wilhelmsen and Drew to service global fleets because they are perceived as offering lower quality products with less reliability, having more limited service capabilities, and failing to price competitively.
WHAT THIS MEANS:
  • The FTC’s enforcement action continues a trend of applying price discrimination markets. These markets are characterized by: (1) buyers with special requirements that only select suppliers can service; and (2) sellers who can identify the buyers with those special requirements and selectively price based upon the knowledge of those special needs.
  • Antitrust enforcement of price discrimination markets lead to narrower product market definitions. Therefore, applying price discrimination markets may result in antitrust enforcers challenging mergers that appear lawful when viewed as a broader market.
  • There is increased risk of price discrimination markets being applied by antitrust enforcers in industries in which:
    • The customers’ end uses differ for the same product;
    • Merging companies’ documents recognize distinctions among customer groups; and
    • Groups of customers require unique product characteristics.



Local Wholesaler-Retailer Dispute Has Federal Implications

On August 14, the U.S. District Court for the Southern District of Mississippi issued an opinion finding that state regulations bolstered one antitrust claim and hindered another in an ongoing dispute between a northern Mississippi convenience store chain, Major Mart, and an Anheuser-Busch InBev (ABI, a/k/a “Red Network”) distributor, Mitchell Distributing Company.

In Mississippi, by statute, like those of many other states, beer manufacturers must designate exclusive sales territories for each brand.  Mitchell holds the exclusive right to sell ABI brands to retailers in the counties in which Major Mart operates its 11 convenience stores.

The relationship between Mitchell and Major Mart started to break down in 2010, when Major Mart claimed that it was receiving inaccurate and confusing price information from Mitchell.  Major Mart asked Mitchell for compensation of lost profits due to the incorrect pricing information.  Mitchell denied the request, and Major Mart decided later to remove ABI displays and signs, lower the prices of competitors’ products, and reduce the cooler space allocated to ABI in some of its stores.  According to Major Mart’s complaint, Mitchell retaliated by (1) demanding shelving allocation that represented ABI’s market share of approximately 70 percent, (2) demanding price parity with competing products of ABI, (3) changing its deliveries to Major Mart stores to once a week so as to fill up Major Mart’s coolers and storerooms, leaving no room for competitor products and (4) delivering on Fridays so that Major Mart stores would not have cold beer on the “best selling day of the week.”

After litigation was first initiated, the parties reached a settlement in 2011, agreeing that Mitchell would increase its deliveries to at least twice per week and Major Mart would reconsider shelf space allocation and increase prices on competing brands of beers to the same price as ABI products.  This temporary resolution, however, failed when Major Mart did not reallocate its shelf space.  In response, Mitchell once again cut deliveries to one day per week and thereafter began to provide sales coupons and promotional giveaways exclusively to Major Mart’s competitors.  Major Mart also claimed that Mitchell delivered beer that was close to the end of its shelf-life, replaced fresher beer Major Mart had with older beer and missed deliveries during key dates, including July 4 and just as students were returning to college.  Eventually, Major Mart sued.

Major Mart alleged that Mitchell engaged in monopolization and attempted monopolization in violation of the Sherman Act and price discrimination in violation of the Robinson-Patman Act.  In response, Mitchell filed a motion for summary judgment asserting that the Sherman Act did not apply, as (1) Mitchell’s actions were immunized by the State Action Doctrine—the principle that the Sherman Act does not apply to states acting in their capacities as sovereigns—and (2) Mitchell’s actions, which occurred solely in Mississippi, did not affect interstate commerce—as required for Sherman Act jurisdiction.

Quickly discarding the State Action Doctrine assertion, the court noted that to qualify as a state’s action, conduct must be “undertaken pursuant to [...]

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District Court Pares Down Price Discrimination Suit Against Chrysler

On July 11, 2014, the Northern District of California dismissed one of two federal antitrust claims brought against Chrysler Group LLC under the Robinson-Patman Act, 15 U.S. C. § 13, as well as several state statutory and common law claims.  Matthew Enterprise, Inc. v. Chrysler Group LLC, No. 13-cv-04236-BLF (N.D. Cal. July 11, 2014).  The plaintiff, a franchise car dealer and direct customer of the defendant, alleged that Chrysler committed anticompetitive price discrimination by offering volume discounts to new dealers on more favorable terms than those offered to established dealers like the plaintiff and by selectively offering the plaintiff’s competitors disguised price discounts in the form of below-market rent.  The court allowed the former claim to go forward but dismissed the latter for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

The court began by recounting the purposes behind the Robinson-Patman Act, as described by the Supreme Court in FTC v. Sun Oil Co., 371 U.S. 505, 520 (1963): “to curb the use by financially powerful corporations of localized price-cutting tactics which had gravely impaired the competitive position of other sellers . . . and to ensure that businessmen at the same functional level . . . start out on equal competitive footing so far as price is concerned.”  Matthew Enterprise, slip op. at 6 (internal quotation marks omitted).  It explained that in order to state a “secondary-line case” involving competition among customers of a common seller, a plaintiff must plead facts showing that “(1) the relevant sales were made in interstate commerce; (2) the products were of like grade and quality; (3) the seller discriminated in price between the Plaintiff and another purchaser of the same products; and (4) that the effect of that price discrimination was to injure, destroy, or prevent competition to the advantage of a favored purchaser.”  Id., slip op. at 7.

The plaintiff in Matthew Enterprise alleged that Chrysler offered volume discounts to established car dealers based on a formula that took into account the dealer’s prior year sales.  Because new dealers, by definition, did not have prior  year sales, Chrysler used different criteria to determine the volume at which new dealers would receive a discount, which the plaintiff alleged was substantially lower than the volume the plaintiff needed to sell in order to qualify for the discount.  For example, the plaintiff alleged that “this inequality of treatment led to [one new competitor] receiving vehicle subsidies during July 2012, despite selling only sixty vehicles, while Plaintiff failed to receive incentives, despite selling 130 vehicles.”  Id., slip op. at 8.  These allegations, taken as true for purposes of the motion to dismiss, allowed the court ultimately to conclude “that Chrysler ha[d] set up its newly opened dealers as a class of ‘favored purchasers’” in violation of the Robinson-Patman Act.  Id., slip op. at 9.

Regarding the second price discrimination claim, the court noted that it was not aware of any Ninth Circuit case law holding that the Robinson-Patman Act applies to real [...]

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China’s Latest Enforcement of the Anti-Monopoly Law and Price Supervision/Regulation

by John Z.L. Huang,  Alex An, Bryan Fu and Cook Xu

China’s National Development and Reform Commission (NDRC) recently outlined its latest efforts in the enforcement of the Anti-Monopoly Law and price supervision.  This newsletter summarizes the noteworthy information NDRC disclosed.

Click here to read the full article.




6th Circuit Limits Applicability of the Filed-Rate Doctrine and Holds that Electricity is a “Commodity” under Robinson-Patman

by Nick GrimmerGregory E. Heltzer and Shauna A. Barnes

On June 6, 2012, in Williams v. Duke Energy Int’l, Inc., the U.S. Court of Appeals for the 6th Circuit reversed a dismissal of Robinson-Patman Act (price discrimination) claims, amongst others.  In the district court, a class of electricity purchaser plaintiffs alleged that defendant electricity providers gave an unfair competitive advantage to several of the defendants’ largest customers by paying them undisclosed rebates in side agreements, such that the favored customers paid effective rates below those approved by the governing agency, while the plaintiffs still had to pay higher agency-approved rates.  The plaintiffs alleged that while the favored customers initially objected to the defendants’ proposed rate plan, they withdrew their objections in exchange for the undisclosed rebates.  The district court dismissed the plaintiffs’ claims under the filed-rate doctrine, which bars challenges to the reasonableness of a “filed rate” (i.e., a rate approved by the governing regulatory agency).

The 6th Circuit reversed, holding that while the “filed-rate doctrine bars challenges to the reasonableness of a filed-rate,” the plaintiffs were not challenging the filed (i.e., approved) rate.  Instead, the court explained that the plaintiffs challenged “the lawfulness and purpose of payments made . . .  pursuant to various side agreements” that were “made outside of the [approved] rate scheme” – that is, these side agreements “were not filed with any agency, including the [governing agency].”  The court held that the plaintiffs properly stated a cause of action by alleging that via rebate payments, the defendants charged certain favored customers less than the actual filed rate, thereby harming the plaintiffs by giving the favored customers an unfair competitive advantage.

The extent to which other circuits will follow Williams is not clear, particularly if award of damages would have the effect of altering the filed rate (a point argued by the Williams defendants, but unaddressed by the 6th Circuit).  In the 8th Circuit (FirstCom, Inc. v. Qwest Corp.), for instance, “to the extent [a plaintiff] seeks recovery for a price discount it was allegedly entitled to, its claims are barred by the filed rate doctrine.”  And in the 11th Circuit (Hill v. BellSouth Telecomms., Inc.), the filed-rate doctrine bars claims where “an award of damages to the customer-plaintiff would, effectively, change the rate paid by the customer to one below the filed rate paid by other customers.”  However, these cases (and similar cases, for instance, the 2nd Circuitin Marcus v. AT & T Corp.) did not involve allegations that side deals caused the effective rates to vary from the filed rates.

Another noteworthy holding of Williams is that electricity is a commodity for purposes of the Robinson-Patman Act – a statute that makes it unlawful to price discriminate between purchasers of commodities of like grade and quality.”  This holding is in conflict with district courts in other circuits (Delaware, for instance, in City of Newark v. Delmarva Power & Light Co.) holding that under the Robinson-Patman Act, electricity is not a commodity.  The [...]

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