On October 21, 2019, a California federal jury cleared Living Essentials, LLC and its holding company, Innovation Ventures, LLC (collectively, Living Essentials), the maker of 5-Hour Energy drink, of claims it had violated the Robinson-Patman Act, the California Unfair Practices Act and the California Unfair Competition Law by selling its product to a large retailer at prices below what it has charged other wholesalers, finding that the large retailer and the plaintiff wholesalers were not direct competitors.
The Robinson-Patman Act prohibits sellers from charging competing resellers different prices for the same product (so-called "secondary-line" cases). This decision is a reminder that, in order to prove a Robinson-Patman Act violation, proving existing competition between favored and disfavored purchasers remains a key element.
The Complaint
On February 8, 2018, U.S. Wholesale Outlet & Distribution, Inc. (U.S. Wholesale), a self-described "small, local, community-owned business" that supplies wholesale food and sundry goods to local groceries, convenience stores and gas stations in Southern California, filed its complaint in the United States District Court for the Central District of California.1 The lawsuit was later joined by several other wholesalers.
The complaint alleged that, while U.S. Wholesale received assurance from Living Essentials' broker that all of the broker's customers were receiving the same price for the 5-Hour Energy drink, the large retailer was in fact getting a list price discount of ten cents for each purchased bottle, in addition to a series of other discounts, rebates and promotions that were not also available to U.S. Wholesale. The complaint cited, for example, an internal Living Essentials analysis that determined the large retailer paid an average price of $1.12 for a regular bottle of 5-Hour Energy, while U.S. Wholesale allegedly was required to pay an average of $1.38 for the same bottle. Another email cited in the complaint noted that the large retailer was re-selling the product to its customers at $1.16 per bottle, allegedly less than U.S. Wholesale's wholesale price from Living Essentials.
U.S. Wholesale alleged that Living Essentials' price discrimination gave rise to a secondary-line Robinson-Patman case, where a buyer claims it is disadvantaged in favor of another buyer. Importantly, U.S. Wholesale claimed that it competed directly with a division of the large retailer, as both companies attempt to re-sell products to independent retail convenience stores.
Additionally, U.S. Wholesale alleged that the competitive landscape and its own customers have also been harmed by the higher prices it has been forced to charge to recoup its own higher acquisition costs, as well as the increased prices that its customers have been forced to charge to consumers who patronize its stores.
Previous Cases
U.S. Wholesale's complaint is similar to a prior complaint filed against Living Essentials in April 2015 in the Northern District of California, by two wholesalers alleging secondary-line Robinson-Patman price discrimination against Living Essentials for giving preferential pricing for the energy drink to larger companies such as the large retailer. 2 The Northern District of California denied class certification, holding that the plaintiff wholesalers' class definitions were too vague and that the "individualized proof of harm," required in Robinson-Patman secondary-line claim, created a bar to class certification. Following the denial of class certification, the case was dismissed with prejudice pursuant to a joint stipulation by the parties.
The Trial
The U.S. Wholesale trial focused on the competition between the plaintiffs and the large retailer. "Secondary-line" cases require plaintiffs to show the existence of an injury caused by the contemporaneous greater wholesale prices that disfavored resellers are required to pay compared to favored resellers.
Representatives for the wholesalers testified that their businesses have steadily lost sales of 5-Hour Energy as their customers turn to the large retailer for cheaper prices, because they were never offered a manufacturer rebate or any other discount that would have enabled them to offer the energy drinks at a lower price.
Living Essentials' expert, on the other hand, argued that the wholesalers had not shown they were competing with the large retailer or that they had suffered any kind of competitive injury as a result of price discrimination. The expert testified that the wholesalers and the large retailer operate in different parts of the market and are not competitors. Living Essentials, the expert explained, employs a multi-level marketing strategy aimed at different distribution channels, with a separate focus on stores like the large retailer and convenience stores like the ones served by plaintiffs. In particular, the expert described how instant rebate coupons, issued to retailers like the large retailer and meant to encourage the large retailer's customers to try new products like 5-Hour Energy, would not work with wholesalers "because the convenience stores wouldn't pass on the discount to their customers."
Living Essentials also argued plaintiffs incorrectly calculated the large retailer's and Plaintiffs' net price, and did not present sufficient evidence that the discounts created a price differential of sufficient magnitude to injure competition under the Morton Salt doctrine.3
Living Essentials' expert also argued that there could be any number of reasons the wholesalers lost customers to the large retailer, such as its rewards program, free shipping and the cleanliness and professionalism of the stores.
After two weeks of trial and seven hours of deliberation, the jury found that Living Essentials did not violate the Robinson-Patman Act.
Implications
The jury's verdict indicates that price-discrimination claims under the Robinson-Patman Act remain difficult to prove. A fact-intensive analysis is required to determine whether the disfavored purchaser competes against the allegedly favored purchasers, and also whether the alleged price discrimination resulted in lost sales in head-to-head competition between these resellers. Even when a plaintiff is entitled to an inference of "injury to competition" under the Morton Salt doctrine, this presumption can be overcome by evidence that breaks the causal connection between a discriminatory price and lost sales/profits.
From a practical perspective, rebates and discounts that distinguish customers by channel for potentially different discounts or promotions are not, alone, sufficient to avoid Robinson-Patman Act scrutiny, and an antitrust analysis should be carried out before discounts and rebates are offered.
Footnotes
- Complaint, U.S. Wholesale Outlet & Distribution, Inc. v. Innovation Ventures, LLC et al., No. 2:18-cv-01077 (C.D. Cal. Feb 8, 2018).
- ABC Distributing, Inc. v. Living Essentials LLC, Case No. 15-cv-02064 NC (N.D. Cal.).
- Under that doctrine, a Robinson-Patman Act plaintiff is entitled to an inference of "injury to competition" by showing that (i) two customers compete and (ii) the seller gave one of the customers a substantial discount over a sustained period of time. FTC v. Morton Salt, 334 US 37 (1948).
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