FTC Files First Two Robinson-Patman Act Suits in Over a Generation

In the final forty days of President Biden’s administration, the Federal Trade Commission (FTC) filed two lawsuits under the Robinson-Patman Act (RPA)¹ for alleged price discrimination—the first, last month, against Southern Glazer’s and the second, this month, against Pepsi.² The FTC’s suits against Southern Glazer’s and Pepsi are its first enforcement actions under the RPA in over a generation.³

The complaint against Southern Glazer’s, the largest liquor distributor in the United States, alleges that it charges “mom and pop” businesses far more than national or regional chains for the same products.⁴ Democratic Commissioner Alvaro Bedoya, joined by the two other Democratic commissioners, including outgoing Chair Lina Khan, issued a statement explaining the history and addressing critiques of the RPA, decrying the past decades of non-enforcement, and explaining the FTC’s reason for bringing an RPA action against Southern Glazer’s. In two lengthy dissenting statements,

Republican Commissioners Andrew Ferguson and Melissa Holyoak characterized the action as futile, contrary to consumers’ interests, and a misuse of agency resources.

The more recent complaint alleges that Pepsi provides an unnamed “big-box retailer” disproportionate promotional payments, allowances, and services that Pepsi does not offer to competing retailers on proportionally equal terms.⁵ Commissioners Ferguson and Holyoak dissented again, accusing the Democratic commissioners of sending their staff to court with zero supporting evidence “like a lamb to the slaughter.”⁶ Commissioner Ferguson, who was more sanguine about the prospect of future bipartisan enforcement of the RPA in his Southern Glazer’s dissent, said that the majority’s decision to sue Pepsi “is the single most brazen assertion of raw political power [he] has witnessed” as an FTC commissioner.⁷

For over two decades, federal antitrust enforcers have considered the RPA a dormant statute. But the Southern Glazer’s and Pepsi complaints, alongside the statements of President Trump’s allies in Congress and nominees for the FTC, signal a renewed bipartisan interest in the Robinson-Patman Act and, potentially, in enacting other industry-specific price discrimination statutes.

Companies concerned about potential RPA liability should pay close attention to the arguments Commissioners Ferguson and Holyoak make in their dissents, which we highlight below. Specifically, sellers can reduce their risk of RPA exposure by (1) ensuring that differential prices to purchasers reflect supplier volume discounts and delivery costs, (2) making all purchasers aware of available pricing discounts and rebates, and (3) showing that the reasons for pricing changes are driven by market competition. And, as now-Chairman Ferguson highlights, companies can argue that disfavored retailers’ lost sales or lost customers are not due to their differential pricing strategy, but due to other market factors besides price. Finally, even if a broad showing of harm to competition is not required to bring an RPA claim, companies may be able to dissuade regulators from bringing suit by underscoring that their pricing strategies have pro-competitive and pro-consumer effects, such as reducing the cost of important consumer goods.

The Background of the Robinson-Patman Act 

Congress enacted the RPA during the Great Depression in response to a growing concern that suppliers were favoring large chains—often under pressure from the chains—at the expense of small, independent retailers. The congressional hearings and FTC investigation preceding the RPA’s passage focused on the way the Great Atlantic and Pacific Tea Company (A&P), the first grocery chain in the United States, leveraged its size to “demand special privileges with suppliers.”⁸ The RPA amended Section 2 of the Clayton Act to regulate the sale of commodities (not services).  It contains six separate provisions that prohibit direct and indirect price discrimination and set forth certain enumerated defenses.  

Direct Price Discrimination Under Robinson-Patman Act Section 2(a)

The first provision of the RPA, Section 2(a), makes it unlawful for companies to charge competing purchasers different prices for the same product—a practice referred to as “direct price discrimination”—and is subject to certain enumerated defenses.⁹ RPA Section 2(a) price-discrimination cases come in two forms: primary-line discrimination and secondary-line discrimination. Primary-line discrimination arises when a dominant seller’s price discrimination injures its direct competitor. For example, a firm might sell its product below cost and force competitors out of the market, a scheme known in the monopolization context as predatory pricing. Under Supreme Court precedent, primary-line discrimination claims generally require the same showing of harm to competition as Sherman Act claims based on a predatory pricing theory: (1) the firm is pricing below some measure of cost, and (2) has “a dangerous probability . . . of recouping its investment in below-cost prices.”¹⁰

Secondary-line discrimination involves harm to competitors of the purchaser. In those cases, a seller’s pricing scheme favors one purchaser over another, giving that purchaser an advantage against its rivals who did not receive the lower price. A secondary-line discrimination claim requires a showing that (1) the “sales were made in interstate commerce”; (2) the goods sold were of “like grade and quality”; (3) the seller “discriminated in price between” two purchasers of the goods; and (4) “the effect of such discrimination may be ... to injure, destroy, or prevent competition to the advantage of a favored purchaser, i.e., one who ‘received the benefit of such discrimination.’”¹¹

As such, not every difference in price amounts to unlawful price discrimination. Additionally, Section 2(a) and (b) allows firms to raise several affirmative defenses, described in more detail below. For example, the RPA expressly excludes from its reach (and therefore permits) price discrimination that is justified by “differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered.”¹² This defense has been construed as justifying different discounts as between purchasers governed by the volume of the purchases.

Indirect Price Discrimination under Robinson-Patman Act Section 2(d) and 2(e)

Sections 2(d) and 2(e) prohibit companies from disguising unlawful price discrimination as promotional payments or services—a practice referred to as “indirect price discrimination.” Unlike direct price discrimination under Section 2(a), which can be justified by various defenses, the prohibition of discriminatory promotional payments or services is “absolute.”¹³

Section 2(d) and 2(e) operate as anticircumvention rules, preventing companies from offering competing purchasers the same sticker price, and then subsidizing favored purchasers with side payments or services. Unlike Section 2(a) cases, Section 2(d) and 2(e) cases do not require a showing of harm to competition. Instead, a company is liable if it (1) provides promotional payments, allowances, or services to a favored retailer (2) in connection with the sale of goods (3) while failing to provide those payments or considerations to retailer’s competitors “on proportionally equal terms.”¹⁴ The lighter burden incentivizes federal law enforcement to frame complaints alleging unlawful price discrimination as Section 2(d) and 2(e) violations, rather than Section 2(a) violations.

The FTC’s Complaint Against Southern Glazer’s 

The FTC’s case against Southern Glazer’s follows Section 2(a)’s secondary-line discrimination theory, alleging that the distributor’s discriminatory pricing practices have harmed local convenience stores and smaller retailers around the country. The complaint challenges the following pricing practices (among other allegations that are redacted):

• Large quantity discounts. Southern Glazer’s allegedly gave the steepest discounts at quantities only large chains can attain and that are not justified by any bona fide cost-savings efficiency.
• Cumulative quantity discounts. Southern Glazer’s allegedly allowed large chains to aggregate purchases across different stores and over time, while independent retailers were unable to do the same.
• Scan rebates to larger chains. Scan rebates are “a price reduction given to a retailer’s customer at the register for each bottle of a certain brand or product purchased,” which is then deducted from the retailer’s wholesale cost by the seller. Southern Glazer’s allegedly made scan rebates available to large chains, but not to independent retailers.

The complaint addresses three primary affirmative defenses that Southern Glazer’s may raise:

• Cost Justification. Section 2 expressly permits price differences related to lower costs stemming from the “manufacture, sale, or delivery” of large quantities of goods or, as Commissioner Bedoya’s statement explains it, “bona fide efficiencies resulting from bulk purchases.”¹⁵ The complaint alleges that differences in prices Southern Glazer’s offered to chains and small retailers are greater than any cost savings Southern Glazer’s achieved by selling in bulk.
• Functional Availability. A firm can justify a price difference if it made the discounts or rebates functionally or proportionally available to the allegedly injured retailer. The complaint alleges that independent firms cannot receive the deepest discounts or, even if they could, they were unaware that the discounts even existed. For example, the complaint points to Southern Glazer’s alleged practice of cumulative discounts, stating that many convenience stores operate only one property and cannot access the multiple-location volume discount.
• Market Competition. The complaint briefly acknowledges the market competition defense, which can be proved in one of two ways. First, price differences are justified if they were a “good faith attempt to meet, but not exceed, the equally low price” of a competitor. Second, price differences are justified if they reflect changing conditions in the broader underlying market.

The complaint alleges that Southern Glazer’s alleged anticompetitive conduct has prevented independent retailers from being price-competitive with big chains, causing them to lose sales and customers, which harms the competitive environment.

The Commissioners’ Statements on Southern Glazer’s

Democratic Commissioner Alvaro Bedoya, joined by the two other Democratic commissioners, including outgoing Chair Lina Khan, issued a statement explaining the history and addressing critiques of the RPA, decrying the past decades of non-enforcement, and explaining the FTC’s reason for bringing an RPA action against Southern Glazer’s. In Commissioner Bedoya’s view, the RPA prevents large chains from driving small retailers out of business and then raising prices when they face less competition. Beyond consumer benefits, Commissioner Bedoya also suggests that the RPA provides economic benefits to small towns by protecting independents that tend to keep dollars in local circulation.

In two lengthy dissenting statements, Republican Commissioners Andrew Ferguson and Melissa Holyoak characterized the action as futile, contrary to consumers’ interest, and a misuse of agency resources. The dissents by Commissioners Ferguson and Holyoak highlight deep disagreements within the FTC over the scope of the RPA and the decision to file a complaint. They also offer what Commissioner Bedoya called “turn-by-turn directions to defeat a Commission complaint.”¹⁶

Commissioner, now-Chairman, Ferguson appears to agree with Commissioner Bedoya, at least in part, that agencies underenforced the RPA over the last two decades. But Commissioner Ferguson disagrees with the Commission’s decision to bring this case because, in his view, Southern Glazer’s has strong affirmative defenses and because there is little evidence of competitive harm or causation. He argues that Southern Glazer’s is “likely to succeed on a cost-justification defense.”¹⁷ Turning to competitive injury, he argues that the Commission has not shown “substantial” diversion of sales from the disfavored purchaser, which a prima facie RPA claim requires, nor that price discrimination caused the diversion of sales. It is possible, he suggests, that consumers simply want to buy alcohol when they shop at large chains for their groceries rather than at small liquor stores.

Commissioner Ferguson agrees that the FTC has a constitutional duty to enforce the RPA. But, he suggests, the FTC’s resources would be better served focusing on large purchasers like A&P who possess market power and demand preferential pricing, rather than large sellers like Southern Glazer’s. Commissioner Ferguson’s statement indicates some bipartisan support for future Section 2(f) actions against large retailers.

The 88-page dissent by Commissioner Holyoak echoes some of the themes of Commissioner Ferguson’s. But Commissioner Holyoak goes a step further than Commissioner Ferguson by criticizing judicial interpretations of the RPA that make it possible to bring a secondary-line RPA case (i.e., a case alleging harm to competitors) without showing the kind of harm to competition that is required under other antitrust statutes. In particular, she takes aim at governing Supreme Court precedent FTC v. Morton Salt (1948), which she says was “legally, factually, and economically unsound.”¹⁸ Morton Salt established an “inference” of competitive harm from significant price differences over a substantial period of time. Like Commissioner Ferguson, she argues that the Morton Salt inference focusing on harm to competitors runs against the grain of all antitrust theory, which focuses on the harm to consumers and competition generally.¹⁹ But unlike Commissioner Ferguson, Commissioner Holyoak suggests that continued reliance on Morton Salt in light of its shortcomings is misguided. Instead, she says the material question under the RPA is whether the price differences had the effect of raising rivals’ per-unit cost—a burden that the FTC could not carry against Southern Glazer’s.²⁰

The FTC’s Complaint Against Pepsi

The FTC’s case against Pepsi relies on Sections 2(d) and 2(e) of the RPA that prohibit indirect price discrimination. The complaint alleges that Pepsi violated Sections 2(d) and 2(e) by offering a big-box retailer promotional payments, allowances, and services that Pepsi did not offer to competing retailers on proportionally equal terms.²¹

The complaint specifically alleges that Pepsi provides the big-box retailer with promotional displays—in the form of dump bins, inline displays, endcap displays, gondola displays, point-of-purchase displays, and other similar promotional displays—that Pepsi does not provide to other retailers on proportionally equal terms.²² According to the complaint, Pepsi’s actions allegedly give the big-box retailer an unfair advantage over other brick-and-mortar competitors.²³ The majority’s Statement also suggests that Pepsi deliberately hides its indirect price discrimination through artful accounting practices that made it difficult to compare prices, which delayed the Commission’s investigation.²⁴

In line with other Section 2(d) and 2(e) cases, the complaint alleges that these types of disproportionate promotional allowances and services are “per se illegal.”²⁵ Even so, the complaint alleges that Pepsi’s actions “ha[ve] resulted in harm to competition.”²⁶ The alleged effect of Pepsi’s favoritism is that disfavored retailers have sold lower amounts of Pepsi products at a smaller profit margin than the favored retailer.²⁷ Pepsi’s alleged unlawful conduct, the complaint concludes, causes “[d]isfavored [r]etailers and the American consumers who are their customers to pay higher prices for Pepsi soft drinks over the course of years.”²⁸ In support, the FTC commissioners’ majority statement added that Pepsi’s alleged conduct “keep[s] the big-box retailers prices down and the market share of Pepsi product sales up relative to its competitors.”²⁹

The Commissioners’ Statements on Pepsi 

Commissioners Ferguson and Holyoak dissented again, accusing the Democratic commissioners of sending their staff to court with zero supporting evidence “like a lamb to the slaughter.”³⁰ Commissioner Ferguson, who was more sanguine about the prospect of future bipartisan enforcement of the RPA in his Southern Glazer’s dissent, said that the majority’s decision to sue Pepsi “is the single most brazen assertion of raw political power [he] has witnessed” as an FTC commissioner.³¹

Like her dissent in Southern Glazer’s, Commissioner Holyoak’s statement provides a roadmap for Pepsi to follow in its attempt to dismiss the case. She argues that Pepsi’s alleged “payments” are really discounts; that Section 2(d) and 2(e) only apply to disproportionate payments that relate to the resale of goods; and that the complaint does not establish that Pepsi did not provide the same payments or services “on proportionally equal terms.”³² Commissioner Ferguson echoed Commissioner Holyoak’s last point about the lack of evidence, saying: “I have seen no evidence that Pepsi denied to any firm the promotions or services it offered to the big-box store. . . . To my knowledge, the Commission has not reviewed a single piece of evidence from the big-box store or obtained any evidence from its putative competitors.”

Takeaways 

The sharp disagreement between the FTC commissioners and the timing of the complaints—filed during a lame duck administration—should curb any bold predictions of the RPA’s resurrection at the FTC. But the complaints may represent more than the last hurrah of an outgoing FTC Chair and administration. Both of President Trump’s designees at the FTC, Chair Ferguson and Commissioner Mark Meador, have signaled their disagreement with the agency’s failure to more vigorously enforce the RPA over the last several decades³³—despite Chair Ferguson’s disagreement with the agency’s decisions to bring these particular cases against Southern Glazer’s and Pepsi.³⁴

O’Melveny has deep experience advising clients in today’s fast-changing enforcement landscape. For any questions related to the RPA, please contact an attorney in O’Melveny’s antitrust practice group.