Antitrust Alert: Are Club Packs a Promotional Service? Allegation Upheld in Price Discrimination Case

A federal district court in Wisconsin has denied a motion to dismiss an antitrust suit accusing a manufacturer of violating the Robinson-Patman Act by offering "club pack" or "large pack" products only to club stores (like Costco and Sam's Club) and not to "general market" grocery retailers. The case is Woodman's Food Market, Inc. v. The Clorox Company, 14-cv-734-slc (W.D. Wis., Feb. 2, 2015) . This decision means there will be continuing uncertainty on the legal standard for the marketing of large packs under the price discrimination law.

Background

Woodman's Food Market operates 15 grocery stores in Wisconsin and Illinois and purchases 480 different products from the Clorox Company. Historically, Woodman's purchased a number of Clorox "large pack" items, i.e., items that are in larger containers or packages of a product. According to the complaint, Clorox recently began treating Woodman's as a "general market retailer" and refusing to sell it large packs of most Clorox products. Clorox has continued selling large packs to club stores, which Woodman's describes as competitors.

Woodman's lawsuit alleges that Clorox's actions violate the price discrimination provisions of sections 2(d) and 2(e) of the Robinson-Patman Act, which are comparable and deal with "promotional services," services intended to aid in the resale of products. Woodman's complaint alleges that the large packs constitute a "promotional service" that aids in resale, claiming that consumers are attracted to large pack products because the unit price on those products is lower and because consumers do not have to buy the products as frequently. The Robinson-Patman Act requires that promotional benefits be made available to competing customers on proportionally equal terms.

Court Opinion

On February 2, the Magistrate Judge issued an opinion denying Clorox's motion to dismiss Woodman's complaint. His order addressed only the complaint's section 2(d) and 2(e) claims, which were treated together, and did not address the claim under section 2(a).

The court acknowledged that "no federal court has addressed whether a special package size constitutes a promotional service."  There is Seventh Circuit precedent, cited by Clorox, that Section "2(e) does not prohibit seller from choosing its customers and from refusing to deal with prospective purchasers to whom, for whatever reason, it does not wish to sell." (Harper Plastics, Inc. v. Amoco Chemicals Corp., 617 F.2d 468, 470 (7th Cir. 1980)) Nevertheless, the Court found that large packs could be considered a promotional service under Section 2(e). In reaching this conclusion, the Court relied on two old (1940 and 1956), but never revoked, Federal Trade Commission ("FTC") administrative decisions that found Section 2(e) liability for special packaging. The Court also relied on the FTC's recently-revised Guide for Advertising Allowances and Other Merchandising Payments and Services ("Fred Meyer Guidelines"), which include "special packaging, or package sizes" on the list of "promotional services." 16 C.F.R. § 240.7.

The court rejected Clorox's arguments that the FTC decisions relied on by Woodman's were no longer good law, but found them "directly on point in this case." In addition, the court determined that, under the Fred Meyer Guidelines, "even though Clorox may refuse to deal with a particular retailer, Clorox cannot use special packaging and package sizes to benefit only certain customers." The Court was unwilling consider any of Clorox's policy arguments urging that the Act's provisions should not be expansively construed.

Having found that large packs could be considered a "promotional service" under Section 2(e), the court denied Clorox's motion to dismiss, allowing Woodman's lawsuit to proceed.

Implications

The decision appears to be at odds both with the language of section 2(e) and with precedent interpreting that section as applying only where there is a facility promoting resale (such as retail fixtures such as racks or spinners, or cooperative advertising). Woodman's did not plead any such facility. If the Court's position stands, it could open the door to an expansive interpretation of section 2(e).

The decision means that the case will proceed with discovery and pre-trial motion practice. For manufacturers, the decision maintains the state of uncertainty on the applicable standard under the Robinson-Patman Act and is likely to increase the business pressures associated with marketing of club packs. For the moment, the court's decision on the motion to dismiss is not binding on anyone, including Clorox. Yet it may encourage other retailers to press their demands for access to club pack or other large-sized products and encourage additional litigation.

The magistrate judge's February 2 opinion is attached.

Lawyer Contacts

For more information, please contact your principal Jones Day representative or either of the lawyers listed below.

Kathryn M. Fenton
Washington
(T) +1.202.879.3746
kmfenton@jonesday.com

Thomas Demitrack
Cleveland
(T) +1.216.586.7141
tdemitrack@jonesday.com

Rachel H. Zernik, an associate in the Los Angeles Office, assisted in the preparation of this Alert. 

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