United States: Uncertainty Makes a Comeback under the Robinson-Patman Act

Originally published 10 December 2009

Keywords: antitrust, competition, price discrimination, Volvo decision, Robinson-Patman Act,

Just when it looked as though the US Supreme Court's 2006 Volvo¹decision would discourage more price discrimination cases, along comes a court that not only finds a violation but holds a seller in contempt for ceasing sales to a disfavored purchaser. 

In Feesers, Inc. v. Michael Foods, Inc., a food manufacturer charged lower prices to a foodservice operator — which served meals at schools, hospitals and other institutions — than it charged to a food distributor — which resold pre-packed food products to customers that ran their own dining operations.  The manufacturer did not view these two customers as competitors but the US District Court for the Middle District of Pennsylvania disagreed, finding that institutional customers chose either to hire a foodservice operator or to buy food and operate dining services themselves, but not both.  The court also did not believe that customers never considered switching between the two options.  On this basis, the court found that the foodservice operator and the food distributor were in competition after all.  Accordingly, a sustained difference in the prices they were charged proved a violation against both the manufacturer for discriminating, and against the foodservice operator for inducing discrimination.

The manufacturer argued that, in any event, it had satisfied the requirements of the meeting competition defense.  The court disagreed again.  Applying some interesting reasoning, the court found that because the manufacturer never learned the details of competitive offers, it was more likely to be beating those offers than just meeting them. 

The court enjoined the manufacturer from discriminating between the foodservice operator and the food distributor, and enjoined the foodservice operator from inducing or receiving a discriminatory price.  Faced with the choice of lowering its price to the distributor or raising its price to the foodservice operator (and risking the loss of a much larger volume of business), the manufacturer halted sales to the food distributor altogether.  The court promptly found the manufacturer in contempt.²  

Strikingly, the court gave little weight to the testimony of 10 witnesses from various institutions who insisted that they did not perceive the distributor to be a competitor of the foodservice operator.  The court discounted the testimony of these witnesses by pointing out that the defendants did not call any witnesses who were considering switching from one model to the other, and only presented witnesses who substantiated the defendants' position.  The court refused to infer from the testimony of these 10 witnesses that no customer ever considers making a switch, and consequently gave "no weight " to their testimony at all.

The court also rejected the manufacturer's argument that it had satisfied the requirements of the meeting competition defense.  While sympathetic to the lengths to which the manufacturer's representative had gone to obtain information from the foodservice operator about competing bids it had received, the court held that the representative had not done enough. 

The record showed that in negotiations with the foodservice operator, the manufacturer's representative was told that she had to charge less in order to meet the price offered by a major competitor.  The representative knew that this competitor routinely charged lower prices and  knew of instances in which she previously had lost business to that competitor; she therefore considered the foodservice operator's representations to be credible and asked how close she needed to be to meet competition.  However, the fact that she never obtained the details of the competitor's offer, including the precise prices and the duration, did not satisfy the court.  Instead, the court held that the manufacturer was not entitled to the protection of the meeting competition defense because the foodservice operator could be expected to be seeking an even lower price than the competitor was offering, the manufacturer did not demand enough verification, and the manufacturer never told the foodservice operator that it was meeting competition when it quoted its own price.

The court's holding stands in contrast to earlier cases.  It had been settled by the Supreme Court in the Gypsum case that the meeting competition defense only "requires the seller, who has knowingly discriminated in price, to show the existence of facts which would lead a reasonable and prudent person to believe that the granting of a lower price would in fact meet the equally low price of a competitor."³  Most courts have taken a "pragmatic" approach to this test, requiring a seller to demonstrate that its price was a good-faith response to a competitor's lower price. ⁴  "The good-faith standard" was "the benchmark against which the seller's conduct is to be evaluated."⁵  The factors considered to determine good faith have been: "whether the seller made efforts to corroborate the reported discount by seeking documentary evidence or by appraising its reasonableness in terms of available market data"; "whether the seller had received reports of similar discounts from other customers"; "whether the seller had past experience with the buyer"; and "whether the seller was threatened with a termination of purchases if the discount were not met."⁶

In Beatrice Foods Co.,⁷ for example, the Federal Trade Commission held, 3-2, that the competition defense is applicable in competitive bidding contests where the seller exercises good faith to calculate a bid that would approximately meet bids that competitors are expected to submit.   The Commission stated, "Precisely meeting the exact prices of competitive bids can have no realistic meaning" in this context.  The Commission continued, "To require that Beatrice adhere to a precise 'Meet but not beat' criterion under these circumstances, where the Beatrice representatives otherwise exhibited every element of good faith, is not reasonable.  To hold otherwise would be effectively to outlaw such bidding situations by insisting upon an artificial and rigid test."⁸

Beatrice won the bidding to supply the customer, Kroger, by predicting who the low bidder would be among its competitors, approximating what that bidder's bid would be based on Beatrice's knowledge of that bidder's habits and its pricing to other accounts, and coming up with a bid that would undercut the other bidder by a small amount.  Beatrice was able to demonstrate that it was trying to meet competition, albeit with a slightly better bid that would win the business.  Kroger browbeat Beatrice somewhat by insisting that Beatrice had to do even better in order to win, and Beatrice was permitted to lower its bid further as long as it believed in good faith that it was meeting a competitive bid.  (It turned out that Kroger was misleading Beatrice, but that was not Beatrice's problem as long as it acted in good faith.)

Other cases similarly have applied a flexible and pragmatic approach to evaluate meeting competition in the context of competitive bidding.⁹  This approach has recognized the fact that if a bidder could only meet, but not beat, competing offers, every bidding contest among sellers would end in a tie, or else the winning bid would have to become the seller's price to all of its customers.  While some might favor applying the Robinson-Patman Act in this way,the "flexible and pragmatic" approach announced by the Supreme Court in Gypsum¹⁰ provides a more practical defense.

But not for the defendants in Feesers.  In contrast to the approach adopted in Gypsum and Beatrice, the Feesers court seems to be demanding a degree of certainty that, if followed by other courts in the future, would depart from the prevailing approach.

There are many other wrinkles in the court's opinion — too many to recount them all — and there reportedly will be an appeal which might bring some clarification.  Meanwhile, the chief takeaways are: (i) customers that may not appear to be competitors nevertheless may be considered competitors if they ever lose business to one another, and (ii) sellers should not be shy about asking customers to "show me the offer" if they are being asked to meet competition. 

Ironically, the district court in Feesers had earlier granted summary judgment in favor of the defendants but was reversed by the Third Circuit Court of Appeals.  (This litigation has been going on for more than five years.)  Apparently, Volvo may not take sellers very far in the Third Circuit today, and unhappy customers across the country may begin taking encouragement from the Feesers odyssey.  Although the government has not brought a price discrimination case in years, it is clear that the appetite of private plaintiffs for cases of this kind persists, and at least some courts may be rolling out the welcome mat.

Footnotes

1. Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 126 S.Ct. 860 (2006).

2. No. 1: CV-04-0576, 2009 U.S. Dist. LEXIS 44094 (M.D. Pa. May 26, 2009).

3. Falls City Indus., Inc. v. Vanco Beverage, Inc., 460 U.S. 428, 438 (1983) (quoting United States v. U.S. Gypsum Co., 438 U.S. 422, 451 (1978)).

4. Falls City, 460 U.S. at 451.

5. United States Gypsum, at 454.

6. Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37, 42 (7th Cir. 1992) (citing U.S Gypsum, 438 U.S. at 454–55).

7. 76 F.T.C. 719, 811 (1969).

8. A dissent by Commissioner Dixon summed up the decision as follows:   "The opinion, as I read it, stands for the proposition that a large buyer can use his purchasing power to induce a supplier to discriminate in price regardless of the anticompetitive consequences of such discrimination, and that the supplier can with impunity succumb to such inducement under the protection of the Section 2(b) proviso without regard to whether the lower price he is meeting may be unlawful."  Commissioner Dixon asserted:  "It is . . . clear that Congress did not intend that Section 2(b) should be used to permit a large buyer to negotiate lower prices by having suppliers bid against one another for his business without regard to the legality of such discriminatory offers."  Commissioner MacIntyre also filed a dissent, opining that Beatrice failed to "display[] the diligence of inquiry into alleged competitor' offers required by the precedents . . . ."

9. See e.g. Water Craft Mgmt., LLC v. Mercury Marine, 361 F. Supp. 2d 518 (M.D. La. 2004) (meeting competition established through common, though speculative, knowledge of other seller's offer); Reserve Supply, 971 F.2d at 45–46 ("necessarily attendant with [the customer]'s report of the [competitor's discount] is the message that if the discount is not met, business will shift to the competitor"); Walker v. Hallmark Cards, Inc., 992 F. Supp. 1335, 1341 (M.D. Fla. 1997) (meeting competition defense based on defendant tracking and verifying reports of competing offers).  A seller need not know the details of the competing offers.  See Great Atlantic & Pacific Tea Co. v. F.T.C., 440 U.S. 69, 82-84 (1979) ("Since good faith, rather than absolute certainty, is the touchstone of the meeting competition defense, a seller can assert the defense even if it has unknowingly made a bid that in fact not only met but beat his competition.").

10. 438 U.S. at 454.

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