United States: Seventh Circuit Reverses Package Size Promotional Service Decision Under The Robinson-Patman Act

On August 12, 2016, the Seventh Circuit reversed the district court decision allowing Woodman's Food Market, Inc.'s (Woodman's) price discrimination lawsuit against The Clorox Company and The Clorox Sales Company (Clorox) to survive a motion to dismiss. In the unanimous decision, the Seventh Circuit agreed with Clorox that its refusal to sell bulk-sized packages of certain products to some retailers, like Woodman's, when it sold these bulk-sized items to "big box" retailers, like Costco and Sam's Club, was not a violation of the Robinson-Patman Act's (Act) prohibition on the disproportionate provision of promotional services. 15 U.S.C. § 13(e). The court held that size alone is not enough to constitute a promotional "service or facility" for purposes of subsection 13(e), although it did leave open the possibility that, under different facts, package size or design could constitute a "service or facility" when combined with other promotional content.

The Lawsuit

Woodman's brought suit against Clorox in the Western District of Wisconsin in October 2014. See Woodman's Food Market, Inc. v. Clorox Co. et al., 3:14-cv-00734-SLC (W.D. Wis. Oct. 28, 2014). The lawsuit alleges that Clorox informed Woodman's it was changing its marketing strategy by placing the grocer into a different "channel" than Costco and Sam's Club, and creating the "right assortment" of sizes and brands for different retailers based on their shoppers. Woodman's claims that it had previously been able to purchase large packages of Clorox products, including items such as Glad bags, cleaning products, and kitty litter, at the same discounted rates offered to Sam's Club and Costco. Clorox's new marketing strategy, however, would mean that Woodman's could no longer purchase the bulk packs.

Woodman's argues that the practice would hurt its ability to compete with its nearby wholesale club rivals. According to the lawsuit, Woodman's has the appearance of a wholesale store, with 15 locations in the Midwest, but it does not operate on the same membership model. Woodman's claims that some of its customers could not afford to purchase memberships at Costco and Sam's Club, and as a result, these customers would have no choice but to pay the higher prices for non-bulk items when shopping at Woodman's. On the other hand, those that could afford the memberships would simply stop shopping at Woodman's and purchase the products at competing stores.

The Appeal

As in the district court, the crux of the dispute on appeal hinged on whether the large (and likely cheaper per unit) bulk packages offered only to the "big box" or club stores can be considered a promotional "service or facility" under Section 2(e) of the Robinson-Patman Act, 15 U.S.C. § 13(e). If considered a promotional service, the Act requires that Clorox make the bulk packages available on proportionally equal terms to all competing sellers. Unlike claims under subsection 13(a), Woodman's need not show that the failure to provide the bulk packages on proportionally equal terms substantially lessened competition; the mere provision of promotional services on disproportionate terms can run afoul of the Act absent another defense.¹

On appeal, Woodman's advanced two arguments as to why Clorox's provision of larger packs fell within the scope of the promotional "services or facilities" covered by subsection 13(e): (1) Larger package sizes have a corresponding per unit discounted price; and (2) Shoppers find a larger bulk product more convenient to purchase. The Seventh Circuit disagreed on both fronts.

First, the court held that to the extent that Clorox's bulk packaging is viewed as a quantity discount due to the cheaper per unit price, that discount must be analyzed as a straightforward price discrimination claim under subsection 13(a) and not a promotional services claim under subsection 13(e). If treated otherwise, the requirement of subsection 13(a) that the price discrimination substantially lessens competition could be avoided in every case that might also fit the criteria of subsections 13(d) and (e). The Seventh Circuit makes clear that any discount provided by a manufacturer for uniquely sized packaging will only violate the Robinson-Patman Act if the price discrimination caused by the discount and packaging substantially lessens competition.

Second, the court concluded that the convenience of large packs to consumers did not serve to transform large packs into promotional "services or facilities," since the section was only intended to refer to "those services or facilities connected with promoting the product." Woodman's Food Market, Inc. v. Clorox Co. et al., No. 15-3001, slip op. at 8 (7th Cir. Aug. 12, 2016). Interpreting the Act otherwise would have the undesirable effect of "sweeping in any attribute of the product that makes it more desirable to consumers," which would impermissibly broaden the type of conduct prohibited under the Act. Id.

Indeed, the Federal Trade Commission (FTC) filed an amicus curiae brief in the appeal, urging that package size alone is not a promotional service or facility under subsection 13(e) of the Robinson-Patman Act, and clarifying that its references in the Fred Meyer Guidelines² to "special packaging or package sizes" as examples of promotional services or facilities did not mean that the FTC views package size alone as a "service or facility" within the meaning of subsection 13(e). Notably, the FTC's amicus curiae brief effectively repudiated two FTC decisions from the 1940s and 1950s relied upon by the district court in finding that specially sized packages were promotional services under the Robinson-Patman Act.

The Seventh Circuit agreed that the FTC's position was a logical one, noting that if the convenience of a large pack was a promotional service or facility simply because the size made it more attractive to customers, then nearly all product attributes would be services or facilities covered by subsection 13(e). Since this would undermine the balance between subsection 13(a)'s broad prohibition against price discrimination that harms competition and subsection 13(e)'s narrow, but categorical, prohibition on the disproportionate provision of promotional support, the court refused to broaden the definition of promotional "services or facilities." The Seventh Circuit also made clear that adopting Woodman's interpretation of promotional services or facilities would effectively trump a manufacturer's right under Section 1 of the Sherman Act to sell or refuse to sell products to any given potential customer under United States v. Colgate & Co., 250 U.S. 300 (1919); the court declined to be the first to extend the Robinson-Patman Act in that manner.

Despite finding that size alone is not enough to constitute a promotional "service or facility" for purposes of subsection 13(e) of the Act, the court did not exclude the possibility that, under different facts, package size or design could constitute a "service or facility" under this subsection when combined with other promotional content. It distinguished, for instance, football-shaped packages offered just before the Super Bowl or Halloween-branded "fun-size" individually wrapped candies near Halloween, as examples of promotional services. This leaves open the door for future challenges under the Act to the provision of different sized packages as part of some promotion to assist in the resale of the product.

Conclusion

The Seventh Circuit decision provides some clarity for manufacturers as the district court's interpretation of the Robinson-Patman Act called into question not only manufacturers' ability to offer different package sizes of their products to different outlets, but also a seller's right under Section 1 of the Sherman Act to sell or refuse to sell products to any given potential customer. Nevertheless, businesses who offer different packaging sizes or other types of specialized packaging to different channels or to different resellers should still consider the potential risk for Robinson-Patman claims in light of the guidance provided by the Seventh Circuit.

Footnotes

1 Woodman's claims were narrowed as the litigation progressed, and it abandoned its price discrimination claim under subsection 13(a) of the Act, which prohibits price discrimination where the effect of that discrimination "may be to substantially lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person" who itself or whose customers benefit from the discrimination. 15 U.S.C. § 13(a). The district court ruled that Woodman's promotional service claim arose under subsection 13(e), which relates only to the provision and not the reimbursement of promotional services, which Woodman's accepted and became Woodman's focus on appeal (thereby abandoning any claim under 15 U.S.C. § 13(d)).

2 The Fred Meyer Guidelines are the FTC's Guides for Advertising Allowances and Other Merchandising Payments and Services which provide guidance for interpreting the Act. See 79 Fed. Reg. 58245-01 (FTC Sept. 29, 2014) (codified at 16 C.F.R. Part. 240 (2016)).

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