Antitrust Advisory: Company’s Internal Documents and Behavior Weighed Heavily in Court’s Determination that the Company Violated the Robinson-Patman Act

5/21/2009

Yet again, the reports of the Robinson-Patman Act’s (“the Act” or “the R-P Act”) demise are premature. Despite continued calls for the pricing statute’s repeal, and despite the evolution of jurisprudence under the Act making plantiffs’ task more difficult, cases are still brought, and sometimes plaintiffs still win. Recently, a district court found both a seller and a favored buyer had each violated the Act.

On April 27, 2009, the U.S. District Court for the Middle District of Pennsylvania held that a food manufacturer violated § 2(a) of the R-P Act, 15 U.S.C. § 13(a), by discriminating among its distributors, and that the distributor receiving the favorable price violated § 2(f) of the Act by inducing the price discrimination. Feesers, Inc. v. Michael Foods, Inc., No. 04-0576 (M.D. Pa. Apr. 27, 2009). Although the manufacturer defendant, Michael Foods, Inc. (“Michael Foods”), argued that its lower price was made in good faith to meet an equally low price of a competitor, the court disagreed, reasoning that the contract negotiator lacked sufficient information to make such a good faith offer. In holding that the distributor defendant, Sodexho, Inc. (“Sodexho”), induced the price discrimination, the court pointed to a most favored nations clause in the contract with Michael Foods, which required Michael Foods to provide Sodexho with the lowest price. The court also relied on Sodexho’s internal documents that demonstrated that Sodexho intended to secure discounts from manufacturers in order to increase its profit margin and gain market share.

This case reiterates two important lessons for your business: firms must pay close attention to the information they document, and, though not prohibited, most favored nations clauses, when combined with certain actions, can be evidence of anticompetitive behavior. It is also interesting to note that the court determined that Sodexho and the plaintiff were competitors because they both compete to sell the same product to the same company, even though they do so under different business models.

Background

Plaintiff, Feesers, Inc. (“Feesers”), a broad-line food distributor, carries thousands of lines of food products which it obtains from several different manufacturers, one of which is Michael Foods, a national manufacturer of egg and refrigerated potato products. Feesers’ customers are institutional food service customers such as hospitals, schools, nursing homes, colleges, and corporations. It is a regional distributor, doing most of its business within 200 miles of its Harrisburg, Pennsylvania headquarters. (The 200-mile radius encompasses parts of Pennsylvania, New Jersey, Maryland, Virginia, and Delaware.) Michael Foods also distributes products to Sodexho, a multinational food service corporation, with headquarters in France, which sells products all over the world, including the five-state area in which Feesers sells its products. Sodexho’s customers are also institutional food service customers, including hospitals, schools, nursing homes, colleges, and corporations.

Feesers brought suit alleging that Michael Foods discriminated against it by offering lower prices on its egg and potato products to Sodexho, and that Sodexho induced the price discrimination. Both claims were brought under the R-P Act. In order to establish a prima facie case for price discrimination under the R-P Act, in the absence of lost sales or profits, the plaintiff must show:

that sales were made to two different purchasers in interstate commerce;
that the product sold was of the same grade and quality;
that defendant discriminated in price as between the two purchasers; and
that the discrimination had a prohibited effect on competition.

In 2006, the district court granted summary judgment in favor of the defendants, reasoning that although Feesers had established the first three elements of a prima facie case of price discrimination under the R-P Act, it had failed to establish competitive injury. Feesers appealed, and the Third Circuit reversed the lower court’s holding that there was no evidence of competitive injury and remanded the case.

Opinion

On remand, the court only addressed the fourth element of a prima facie price discrimination case—competitive injury—per instructions from the Third Circuit that if Feesers could establish a rebuttable inference of competitive injury, the defendants would have to rebut that evidence with proof that the price differential was not the reason that Feesers lost sales or profits.

Inference Of Competitive Injury

Competitive injury is established prima facie by proof that
1) Feesers “was in actual competition for the same dollar with Sodexho for the sale of food to institutional customers; and
2) Michael Foods’ discrimination in price between Sodexho and Feesers was substantial over time. If that burden is met, then Feesers is entitled to an inference of competitive injury.”

Despite the fact that Feesers and Sodexho offered different services (food distribution and food service management), the court held that the two companies were in competition with each other because they both compete to sell Michael Foods’ egg and refrigerated potato products to the same institutional customers. The court did not agree with the defendants’ argument that Feesers only competes with other food distributors, and not with food service management companies like Sodexho, because, according to the court, such an interpretation would allow an end-run around price discrimination sanctions by simply relying on an additional link in the supply chain as a shield.

As to the second factor, the court held that Michael Foods’ discrimination in price between Sodexho and Feesers was sufficient in degree and duration. The court based its reasoning on Feesers’ expert testimony and stated that the price difference was “stunning.” Sodexho received Michael Foods’ lowest discounts and its discounts “dwarfed” those that Feesers received. In holding that the fact that egg and refrigerated potato products are only a small percentage of any one customer’s purchases was not enough to make the price discrimination insubstantial, the court relied on FTC v. Morton Salt, 334 U.S. 37 (1948), which held that firms should be protected from price discrimination regardless of whether the goods constituted a major or minor portion of their stock.

Accordingly, the court found that Feesers was entitled to an inference of competitive injury.

Rebuttal of Competitive Injury Inference

Because the court found that Feesers was entitled to an inference of competitive injury, Michael Foods had to rebut the inference in order to prevail. In order to do so, Michael Foods needed to show the absence of a causal link between discrimination and lost sales or profit. The court held that Michael Foods was unable to meet that burden. Sodexho’s strategic documents showed that lower food costs were an important part of its plans to win and retain customers. Sodexho’s promotional documents “touted” its lower prices. Significantly, the court placed more weight on Sodexho’s strategic documents and promotional materials than it did on customer testimony from ten customers that food cost is not an important factor, and that customers instead focus on labor issues, management expertise, and other factors. The court dismissed the customer testimony in part because most of the witnesses were satisfied Sodexho customers; “Sodexho promised them a low price for food, and delivered on that promise, in part by securing a lower cost for Michael Foods than its competitors.” The court noted that customer testimony that food cost was the reason they switched from Feesers to Sodexho would have been persuasive on the issue of competitive injury, but that testimony such as that presented by the defendants—that price was not significant—“does not carry the same weight, particularly where … there is other evidence suggesting that price is quite important to other customers in the same industry.”

Meeting Competition Defense

A seller can also rebut a prima facie case of price discrimination by showing that its lower price was made in good faith to meet an equally low price of a competitor. To avail itself of this defense, the defendant must establish that the price concession was granted in order to meet, not beat, a lower price offered by a competitor. The seller need not prove that it in fact met a lower price offered by a competitor, but must prove that the lower price was offered in good faith to meet the competitor’s price. If a seller makes a successful showing, there can be no liability for the buyer who induced the discriminatory prices.

Michael Foods based its argument on three contract negotiations and offered the testimony of the main contract negotiator. Although the court found the contract negotiator to be a credible witness, the court did not accept her testimony that the discounts were offered in good faith for the purpose of meeting competition. According to the court, the negotiator “did not have enough information about competitive offers to craft an offer calculated in good faith to meet, and not beat Michael Foods’ competition.” It was not enough for her to assume that competitors could deliver the concessions Sodexho requested based on her own general knowledge of the market (i.e., knowledge that Sodexho would likely receive other offers due to its large purchasing volume) and her negotiations in other contracts. The court noted that the R-P Act’s primary purpose is to prevent large buyers from using their purchasing power to secure lower prices than small competitors, and thus allowing the meeting competition defense to be satisfied by an assumption that a large buyer can probably secure low prices from competitors based on its large purchasing volume would “thwart” the Act’s purpose.

Inducement of Price Discrimination

The court determined that Sodexho knowingly induced the price discrimination from Michael Foods under §2(f) of the R-P Act. In reaching this conclusion, the court relied heavily on the most favored nations clause in the contract between Sodexho and Michael Foods which required Michael Foods to provide Sodexho with the lowest price on Michael Foods products. The clause did not require that the Sodexho price be lower than other customers, but, according to the court, “it [was] clear that the purpose was to secure a price well below the list price received by smaller purchasers such as Feesers.” In reaching that conclusion, the court relied on evidence that Sodexho “vigorously enforced this contractual promise” by, for example, demanding (and receiving) compensation for breach of contract when it learned that a competitor (which Sodexho acquired) had been receiving better pricing. In addition, Sodexho strategic planning documents showed that it intended to secure discounts from manufacturers in order to increase profit margin and gain market share. Its promotional materials also “touted” its ability to secure lower food prices than its competitors.

Conclusion

The court granted an injunction prohibiting Michael Foods from engaging in price discrimination against Feesers and in favor of Sodexho, and prohibiting Sodexho from inducing such discrimination. But the court declined to enjoin Sodexho from inducing or receiving discriminatory pricing from other manufacturers from which both Feesers and Sodexho purchase goods. Despite the fact that the evidence demonstrated that Sodexho does seek lower prices from such manufacturers, those manufacturers were not named in the suit, and so the “details of their pricing arrangements with Sodexho are not before the court. Thus the court is in no position to determine whether Sodexho has knowingly induced or received price discriminatory pricing from other manufacturers.” Thus, the injunctive relief did not extend to manufacturers other than Michael Foods.

It is noteworthy that the court also placed weight on the way Sodexho enforced the most favored nations clause that it was able to negotiate with Michael Foods. Such clauses are not categorically problematic. Nevertheless, the court in this case found that Sodexho’s enforcement of the most favored nations clause was evidence that Sodexho intended to secure prices lower than its competitors. Accordingly, though companies need not steer clear of most favored nations clauses generally, they should remember that a court might consider their behavior involving such a clause even in circumstances where the clause itself is innocuous.

We doubt that this is the last opinion in this case, and would expect one, if not both, defendants to appeal.

For assistance in this area, please contact one of the attorneys listed below or any member of your Mintz Levin client service team.

Bruce D. Sokler
(202) 434-7303
BDSokler@mintz.com

Harvey Saferstein
(310) 586-3203
HSaferstein@mintz.com

Robert P. Taylor
(650) 251-7740
RPTaylor@mintz.com

Robert G. Kidwell
(202) 661-8752
RGKidwell@mintz.com

Jennifer Ellis
(202) 585-3595
JCEllis@Mintz.com