United States: 6th Circuit Breathes New Life Into R-P Act Case Against Cigarette Maker

On January 15, the U.S. Court of Appeals for the 6th Circuit cleared the way for owners and operators of cigarette vending machines to pursue Robinson-Patman Act claims against a cigarette manufacturer that excluded them from certain promotional programs offered to convenience stores, mini-marts and gas stations. Lewis v. Philip Morris Inc., 355 F.3d 515 (2004). The challenged promotional programs included manufacturer's reimbursements of discounts passed on to consumers, replenishments of packs given freely to consumers, and gifts for the stores to give consumers. In reversing the trial court's dismissal of all claims, a majority of the threejudge panel, in different and sometimes conflicting opinions, held that: (1) two vendors that purchased some cigarettes directly from the manufacturer had standing to allege price discrimination in violation of Section 2(a) of the Act (which prohibits price discrimination in the original sale to the purchaser), and (2) all of the vendors - including those who bought from wholesalers rather than directly from Philip Morris - could pursue their claims under Sections 2(d) and (e) of the Act (which outlaw discrimination in the provision of promotional services made available to purchasers who buy for resale).

The vendors alleged that Philip Morris price discriminated in violation of Section 2(a) by offering rebates and promotional allowances to convenience stores but not to vendors. In order to bring a private enforcement action under the Robinson-Patman Act, the plaintiff must be a "purchaser" or a "customer" as those terms are used in the Act. A majority of the panel ruled that the two vendors who purchased some cigarettes directly from Philip Morris (rather than a wholesaler) had standing to allege price discrimination under Section 2(a), but that the remaining eight vendors - who bought all inventory from wholesalers - lacked standing. While one of the three judges refused to apply Section 2(a) to any of the plaintiffs’ claims, a second judge ruled that all of the plaintiffs had standing under Section 2(a). This made the decision turn on the third judge, who decided that standing under Section 2(a) was confined to direct purchasers of goods from the supplier alleged to have engaged in discriminatory pricing.

Under the "indirect purchaser" doctrine, retailers who purchase through wholesalers may have standing under Section 2(a) if they show that the supplier "sets or controls" the resale prices paid by the plaintiff. However, the plaintiffs made no showing that Philip Morris set or controlled the prices paid by plaintiffs to wholesalers for Philip Morris cigarettes. The court also indicated that it might have found standing had the convenience stores purchased their cigarettes directly from Philip Morris, rather than through a wholesaler. However, this too was not the case. The vendors argued that the indirect purchaser theory (typically used to show that the disfavored retailer is a "purchaser" under Section 2(a)) may be used to show that the favored retailer (in this case the convenience stores) is a "purchaser". In support, the vendors relied on the seminal RP-Act case, FTC v. Fred Meyer, Inc., 390 U.S. 341 (1968). There, the court ruled that Section 2(d) prohibited a supplier failing to give sales promotional allowances to retailers that purchased through a wholesaler but competed directly with the purchaser who received the allowances. In refusing to apply Fred Meyer in the Section 2(a) context, the 6th Circuit emphasized that the focus of Section 2(a) is the discrimination in the price to the purchasers, not a discrimination in helping purchasers to sell to others. Thus, "vendors can only bring Section 2(a) claims if vendors can show that Philip Morris controlled the sale by wholesalers to the vendors." But this was something that the plaintiffs could not show. The court added that the purpose of the indirect purchaser doctrine is to prevent a manufacturer from insulating itself under the Robinson Patman Act by using a dummy wholesaler to make sales at terms actually controlled by the manufacturer. Absent any indication that the manufacturer actually controlled the terms of sale by wholesalers to vendors, there could be no claim under Section 2(a).

Two of the three judges ruled that all of the vendors - including those that purchased cigarettes through wholesalers, had standing under Sections 2(d) and (e) to challenge Philip Morris' failure to offer to vendors the same promotional programs available to convenience stores. Section 2(d) makes it "unlawful for any person...to pay...anything of value to or for the benefit of a customer of such person...for any services or facilities furnished by...such customer...in connection with the processing, handling, sale, or offering for sale of any products...unless such payment or consideration is available on proportionally equal terms to all other customers competing in the distribution of such products..." (Section 2(e) is similar but relates to the "furnishing" of such promotional services.) In Fred Meyer, the Court held that the third use of "customer" in Section 2(d) includes customers who purchase through a wholesaler. In Philip Morris the 6th Circuit judge who wrote for the majority reasoned that this construction applied to every use of the word "customer" in Section 2(d), and not merely the third use. The judge explained that given the clear holding in Fred Meyer that the third use of "customer" in Section 2(d) includes customers who purchase through a wholesaler, it would take an extremely strong showing of Congressional intent to defeat the conclusion that the first use of the word "customer" in the same sentence carries the same meaning.

A plaintiff alleging a violation of Sections 2(d) or (e) of the Act must show it competes with the favored purchaser, and the competition must be in the same geographic area. The 6th Circuit found that the vendors had met their initial burden of showing that they compete with convenience stores in the sale of cigarettes.

The court rejected the manufacturer's claim that the vendors needed to provide a cross elasticity study to show competition among vendors and stores, and credited a study of 315 adult smokers which supported the plaintiffs' assertion that smokers buy cigarettes from both convenience stores and vending machines, and that a lower price may prompt consumers to favor a convenience store over a more accessible vending machine. The court similarly made it clear that "vendors do not need to show that smokers switched from vending machines to convenience store purchases on the basis of promotional programs. Such a requirement goes to injury, and the element at issue on this appeal is the existence, not the amount of damage to, competition. Vendors are also not required to show ... ‘at what point an increase in the price of [vending machine] cigarettes will compel patrons of an establishment to forego the convenience of purchasing from a vending machine on site and cause them to leave this site in order to purchase their cigarettes elsewhere.’"

The 6th Circuit's ruling seems consistent with Congressional intent behind the Robinson- Patman Act, which was enacted to curb devices by which large buyers gain discriminatory preferences over smaller ones by virtue of their greater purchasing power. Assuming that the vendors can establish that they in fact compete with convenience stores, it certainly seems plausible that large convenience store chains wield considerable purchasing power in contrast to the vending machine owners and operators.

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