FTC Targets Price Discrimination With New Robinson-Patman Act Lawsuit

THE COMPLAINT

The FTC’s complaint set out to establish the basic elements of RPA violations, alleging that Southern Glazer’s sold the same products at different prices to customers in competition with one another downstream, causing harm to retailers paying higher prices. The FTC also alleged that the usual range of defenses available to sellers under the RPA do not apply.

Discriminatory Pricing

The FTC alleged discrimination in several standard pricing and discounting mechanisms, including:

• “High-volume quantity discounts”
• “Cumulative quantity discounts”
• “Scan rebates”
• Other forms of price consideration that were redacted from the complaint.

The FTC also alleged that Southern Glazer’s accepts discounts in return for providing discriminatory pricing to its own retailer customers. Additionally, the FTC alleged that the discounting involved is problematic because it is “not associated with any efficiency derived from the differing method or quantities in which the wine or spirits are manufactured, sold, or delivered to the favored large chains.”

Defenses

The FTC’s complaint sought to head off the most common defenses available to companies accused of violating the RPA: the functional availability defense, justification by cost savings, and changing conditions.

The FTC alleged that Southern Glazer’s discounting could not be justified under the functional availability defense (i.e., that the discounts were made available to customers who allegedly paid the higher price) because “the deepest available discounts” require “purchase levels that only a few specific large chain customers can attain,” or that could be earned only by “combining purchases across many stores or by utilizing [customer-owned] warehouses.” The FTC further sought to forestall the functional availability defense, alleging that independent retailers were often unaware and “not informed about” the available discounts “even when it may be logistically feasible for the independent retailer to participate in the deal.”

The FTC also alleged that Southern Glazer’s lower cost to serve the allegedly favored retailers did not justify the price differences because “the pricing differentials between favored and disfavored retailers exceed any cost savings achieved” by Southern Glazer’s when selling to “favored national chains.”

In boilerplate language, the FTC further alleged that price differences were not justified by attempts by Southern Glazer’s to meet competition from other distributors nor as a response to changing conditions or marketability, such as discounting for older, seasonal, or discontinued merchandise.

Harm to Competition

The FTC goes on to allege that the price differences were sufficient to enable favored chain purchasers to sell beverage products at lower retail prices than their smaller retail competitors paid to acquire the products from Southern Glazer’s at wholesale, costing smaller retailers sales and profits.

IMPLICATIONS OF THE LITIGATION

Significant compliance concerns were raised two years ago when it first became known that the FTC was investigating multiple companies and industries regarding pricing practices and was seeking to reinvigorate pricing discrimination enforcement under the RPA. Two years later, the filing of this complaint went off like a firecracker (but may end up a damp squib).

Incoming FTC Republican Majority Disfavors the Approach

The complaint drew sharp rebukes from current-minority Republican Commissioners Ferguson and Holyoak.

Commissioner Ferguson, recently tapped to be the next FTC chair, took issue both with the FTC’s decades-long decision not to enforce the RPA on policy grounds and on its decision to attempt to enforce the RPA in this case. He argued that “Southern [Glazer’s] appears likely to succeed on a cost-justification defense” and laid out a broad vision of the cost justification defense, anticipating that:

• In many price discrimination cases “the differences in costs associated with serving large chain stores rather than independents” are the source of price differentials, which should therefore be justified and
• “[I]solated instances of unjustified price discrimination do not violate the [RPA].”

Commissioner Ferguson also argued that the FTC will struggle to prove that Southern Glazer’s conduct caused competitive injury stating, “[c]onsumers may purchase spirits from large retail chains rather than in small liquor stores because of lower prices. But they may also do it because of some other feature of the favored retailers’ business – for example, the convenience of buying alcohol alongside other household goods and groceries.” He argued that the FTC’s approach to competitive injury is inconsistent with the plain text of the RPA and how courts interpret nearly identical language in other federal antitrust laws.

Commissioner Holyoak’s dissent, which was 88 pages compared to the complaint’s 25 pages, reads as an omnibus of objections to this application of the RPA. Along with objections like those in Commissioner Ferguson’s dissent, she argues that the FTC’s complaint does not sufficiently allege competitive harm for two reasons:

• The RPA’s history and early enforcement indicates that the RPA should be interpreted only to prohibit price discrimination resulting in harm to competition (i.e., consumers) rather than competitors.
• Competitive harm cannot be inferred from differential pricing alone (essentially rejecting the proposition that such price differences are sufficient to support such an inference, as decided in the Supreme Court of the United States’ Morton Salt case discussed further below).

Commissioner Holyoak’s dissent emphasized that RPA enforcement harms consumers and small businesses and results in reduced discounting and higher prices.

Further, Commissioner Holyoak took the position that RPA enforcement in the alcohol industry is particularly troublesome. According to her dissent, heavy state regulation of alcohol and its strong influence on pricing, along with the prohibition of vertical integration under the three-tier system, mean that in-state sales by an independent distributor like Southern Glazer’s “are not ‘in commerce,’” so they are not subject to the RPA.

The FTC’s approach to the RPA is uncertain, in part because of President-elect Donald Trump’s announcement of Mark Meador, who has been an outspoke advocate of RPA enforcement, as the future third Republican commissioner. Meador’s nomination makes it difficult to predict whether the FTC will continue to pursue RPA enforcement, regardless of the positions set out by Commissioners Ferguson and Holyoak. Whether Meador applies his previous statements on RPA enforcement in practice remains to be seen, but he has made clear statements contrary to the themes in Commissioners Ferguson and Holyoak’s dissents, including vehemently disagreeing with the assertion that the RPA should not be enforced by the FTC on the basis that its commissioners believe it is bad policy.

KEY TAKEAWAYS

With the change in administration imminent, there is uncertainty as to the future of the case against Southern Glazer’s. As catalogued in the two dissents, Commissioners Holyoak and Ferguson, who will sit in the FTC’s Republican majority, are unlikely to continue to support the case in its current form. However, it is much less certain as to how future-Commissioner Meador will approach the case, meaning we may not know how the case will proceed for at least a few months after Meador is confirmed (he will need to be briefed on the factual record). Regardless of the outcome, the case offers valuable insights into future RPA enforcement. It highlights how state government enforcers and private plaintiffs could seek to bring new price discrimination suits, even in the absence of federal action. Consequently, this litigation is important for companies engaged in some form of differential pricing (as many are) in several ways:

A Roadmap for RPA Claims

The complaint closely resembles many traditional RPA complaints and provides a solid roadmap for the architecture of a lawsuit based on a price discrimination theory. Companies may find it useful for visualizing how a plaintiff or regulator may allege the elements of price discrimination, how pleadings allege that potential defenses do not apply, and as an illustrative tool to evaluate and strengthen current pricing programs.

Viable Defenses in Future Enforcement

Commissioners Holyoak and Ferguson identified several potential defenses not frequently used today that could be advanced to defend future suits. Given judicial hostility to RPA cases generally and the possibility that these defenses will be more persuasive to regulators in the future, companies should consider preparing for future RPA cases by developing evidence supporting such defenses, including:

• Cost Justification
  • This defense has fallen out of favor because it has been interpreted to require precise accounting for specific differences in a seller’s costs to serve a favored account. Commissioners Holyoak and Ferguson, however, suggest this specificity may not be required. As Commissioner Ferguson put it, “many . . . price differentials . . . are due to the differences in costs associated with serving large chain stores rather than independents. Large orders, infrequently delivered in bulk to loading docks at central distribution centers, are less costly per unit to deliver than small orders, frequently delivered to individual stores.”
  • Companies may consider identifying what broad savings are associated with accounts to which they offer favorable pricing and potential sources of information that might support a cost justification in a future RPA investigation or suit, even if they are not able to quantify these savings with absolute precision with respect to a specific account.
  • For distributors, Commissioners Holyoak and Ferguson argue that volume discounts manufacturers offer to distributors on sales intended for resale to large accounts are cognizable cost savings for the purpose of a cost justification defense. Distributors may identify systematic ways to track savings they receive from manufacturers that are “earned” by a resale customer’s purchase volume or other characteristics to bolster such a defense.
• Meeting Competition
  • The meeting competition defense is most often used when a seller has concrete evidence that lower pricing was granted to “meet but not beat” a specific lower competitive offer to a customer.
  • Commissioner Holyoak suggests that simple evidence that discounting resulted from fear of customer switching may suffice: “Southern Glazer’s has presented substantial evidence that both suppliers and retailers routinely threaten to switch – and do actually switch – to rival distributors. Efforts to defend against pricing challenges from Southern Glazer’s competitor distributors appears to have animated Southern Glazer’s pricing strategy.”
  • Companies may develop ordinary-course evidence that fear of customer switching and loss of sales drive discounting decisions – even where it is not possible to document a response to a specific competitive offer – to improve the prospects of a meeting competition defense

The RPA’s Jurisdictional Limits May Place Intrastate Sellers in Regulated Industries Outside of the RPA’s Reach

Commissioners Holyoak and Ferguson take the position that Sothern Glazer’s sales to retailers do not take place “in commerce” (across state lines). Although this defense may be of limited use to manufacturers and in industries in which resales routinely cross state lines, independent alcohol distributors (i.e., those not “vertically integrated” with manufacturers) may be able to reduce RPA risk by establishing that their sales are “in-state” and do not take place in interstate commerce.

Competitive Harm May Require a Showing Beyond Differentiated Pricing

Although liability under the RPA depends on a showing of “competitive harm,” traditional RPA analysis permitted plaintiffs to make that showing via a shortcut: the “Morton Salt inference.” In those cases, adequate harm could be inferred by showing a sustained difference in prices over time, which required defendants to mount complex factual defenses demonstrating that plaintiffs did not, in fact, lose sales to favored purchasers.

Both Commissioners Ferguson and Holyoak contend that this analysis is incorrect and that mere inferences of harm to disfavored competitors are not the kind of “competitive harm” the RPA means to prevent. Both commissioners would instead require evidence showing broader harm to competition (i.e., harm to consumers from differential pricing). Under this interpretation, the RPA would only condemn price discrimination that is “predatory” – intended to destroy a competitor so that the discriminator could later raise prices unchecked.

This suggests that companies may defend themselves from RPA claims by marshaling evidence that demonstrates that their discounting is procompetitive – intended to lower consumer pricing and increase sales rather than to drive a competitor out of business.

CONCLUSION

The FTC’s lawsuit against Southern Glazer’s – and the full-throated dissents filed by Commissioners Ferguson and Holyoak – suggest a turning point in RPA defense strategy. Although the FTC’s complaint was intended to reinvigorate federal RPA enforcement, based on traditional interpretations of the RPA from the 1960s and 1970s, the dissents more likely point the way forward in price discrimination law as they are consistent with decades of judicial skepticism of RPA claims.

Many companies have thrown up their hands in despair at the idea of legal risk under the RPA. They are unable to charge all their customers identical prices because of competitive conditions and the economic realities of economies of scale, but the “letter of the law” established in long-dormant RPA jurisprudence suggest they are at constant risk of being investigated or sued for these rational pricing practices.

Now those companies may have a more promising path to enable their businesses to compete while pursuing strategies to curb ever-present RPA risk. They can (1) document generalized evidence justifying discounting to serve some customers, (2) ensure that communications and other documents reflect that discounting is driven by the need to compete vigorously with aggressive competitors, and (3) show that discounting drives competition and lower prices to the benefit of consumers (rather than being intended to curtail competition by harming competitors). Some companies may also be able to show that their businesses are essentially local and were never intended to be within the scope of the RPA – particularly in regulated industries like alcohol, where state and local rules proscribe true interstate commerce.