Seventh Circuit pours cold water on price discrimination party

August 15 2016. By Richard Vanderford.

Clorox didn’t violate price discrimination law when it stopped selling big packages of its consumer products to a grocer, an appeals court has said. The decision should quell concern that discrimination lawsuits might gain traction.

Price discrimination law doesn’t require companies to offer products in all sizes to all retailers, the US Court of Appeals for the Seventh Circuit said in a decision published Friday.

The court’s decision reverses last year’s upset win for grocery chain Woodman’s Food Market. The chain argued that Clorox had violated the Robinson-Patman Act when it decided that only club stores, such as Costco, could sell the biggest packages of its consumer goods.

A district court was wrong not to throw those claims out, the appeals court said.

“No court has ever held that the Robinson-Patman Act goes that far, and we have no inclination to be the first,” US Circuit Judge Diane Wood wrote on behalf of a three-judge panel.

The decision squares with other appeals courts’ rulings, and should sink any hopes among antitrust lawyers that the relatively uncommon claim of price discrimination that Woodman’s pursued might see a revival.

Clorox, perhaps best known for its bleach and other cleaning products, makes a range of consumer goods from charcoal briquettes to salad dressing.

The company decided in 2014 to split its distribution chain. Big club stores, including Costco and Walmart-owned Sam’s Club, would get products in its big package sizes — for example an 80-ounce container of salad dressing. Grocery stores, like Wisconsin-based Woodman’s would get thesmaller versions.

Woodman’s sued under the 1936 Robinson-Patman Act, or RPA, a law meant to protect smaller businesses from unfair treatment compared with their bigger rivals.

The act prohibits illegal price discrimination — offering a can of coffee to a national chain for $8 but $10 to a local merchant, for example — but only when it hurts competition.

The RPA also prohibits companies from offering unfair promotional treatment to larger chains, a provision that stops consumer goods manufacturers from paying a backdoor subsidy in the form of marketing materials, for example. A business suing under this section of the law doesn’t need to show that competition was hurt, making it easier to prove.

Woodman’s, which ultimately didn’t allege the first type of price discrimination, sued under this relatively rarely invoked provision. The bigger packages were more appealing to consumers, the company argued, so denying them to Woodman’s amounted to illegal discrimination.

In an unexpected decision, a Wisconsin federal court said that Woodman’s suit could go forward, finding that package size could be a promotional consideration. The judge relied on US Federal Trade Commission administrative decisions dating back to the 1940s and 1950s that had never been upheld in court.

The ruling prompted an outpouring of surprise and concern. The court had endorsed an approach that would give small retailers a powerful legal tool that could let them reshape consumer goods makers’ carefully rendered supply chains.

“The district court has thrown into question the legality of commonplace distribution policies employed by countless manufacturers across the nation,” Clorox complained in an appellate brief.

Any revolution, though, was short lived. The FTC itself disavowed its earlier positions, saying that they “contradict modern antitrust doctrine and should no longer be followed.”

Companies might run afoul of the law if they offered free sample packages to one retailer and not another, but the RPA doesn’t make offering different package sizes to different retailers generally illegal, the commission said.

The broad interpretation of the law endorsed by the district court could “subvert efficient manufacturer-retailer relationships throughout the economy,” the FTC said.

The Seventh Circuit agreed, saying viewing package size as a promotional element could let the RPA snowball into something unmanageable.

“If the convenience of a large pack were 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,’ ” Wood wrote.

That interpretation would “wipe out the seller’s discretion to choose which products to sell to whom,” she said.

Clorox ultimately chose to cut Woodman’s off entirely, not selling the grocer anything. That’s a decision antitrust law allows.

The company argued that this move alone should have killed the suit, since Woodman’s no longer bought any of Clorox’s products and only “purchasers” can bring claims. The position is one that the Seventh Circuit said warrants consideration.

For observers hoping for legal drama in a relatively sleepy era of antitrust law, the decision might be a disappointment. Sellers, though, can drop worries that small retailers might gain new power to dictate terms.

	Eliot Gao

Receive MLex Editor's Picks in Your Inbox

Complete this form to receive emails from MLex with selected highlights from our global coverage of regulatory risk and opportunity, as well as upcoming events, special reports and exclusive interviews.