The attempt by a group of hotel owners to condemn the conduct of their management company as "commercial bribery" in violation of Section 2(c) of the Robinson-Patman Act met an inhospitable result when the U.S. Court of Appeals for the Second Circuit affirmed the trial court's dismissal of the complaint on May 20. The hotel owners successfully persuaded the appellate court that the district court erred in requiring the plaintiffs to show "competitive injury" for their Section 2(c) claim. But this was a pyrrhic victory, as the 2nd Circuit held that the management company's alleged receipt of "kickbacks" from vendors did not constitute "commercial bribery" in violation of 2(c). Blue Tree Hotels Investment (Canada), Ltd., v. Starwood Hotels & Resorts Worldwide, Inc., 2004 WL 1119588. Among other things, the result demonstrates how sound legal theories can be undermined by contemporaneous correspondence that fails to support the legal assertions that are fundamental to the ability of the complaint to withstand judicial scrutiny.
Plaintiffs, a group of companies that own seven Westin Hotels in Canada and the United States ("Blue Tree Hotels"), found themselves bound to management agreements with defendants Starwood Hotels & Resorts and related entities ("Starwood") after Starwood purchased the entire chain of Westin Hotels except for those owned by Blue Tree, and became successor to the management contracts for plaintiffs' hotels. After discovering what they alleged was a scheme by Starwood to receive "kickbacks" from vendors servicing Blue Tree Hotels (and other properties owned or managed by Starwood), plaintiffs sued Starwood in federal district court, alleging that the kickbacks constituted commercial bribery in violation of Section 2(c).
Section 2(c) makes it "unlawful for any person engaged in commerce, in the course of such commerce, to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods, wares, or merchandise, either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or on behalf of is subject to the direct or indirect control, of any party to such transaction other than the person by whom such compensation is so granted or paid." It was enacted primarily to target the practice of "dummy brokerages," whereby large retail buying groups - such as large grocery store chains, which unlike smaller stores, did not need to use intermediary brokers to purchase their merchandise - would require suppliers to pay fees to "dummy brokers," who then passed the fees on to the large retailer, effectively reducing the price the retailer paid for the goods. Some courts applying Section 2(c) to circumstances far removed from the paradigmatic "dummy brokerage" scheme have held that it also proscribes commercial bribery.
Blue Tree Hotels asserted that Starwood engaged in an "unlawful kickback scheme" by seeking and obtaining various rebates and discounts in connection with purchasing goods and services for the Blue Tree Hotels, as well as other hotels owned and/or managed by Starwood. Blue Tree further alleged that as a consequence of the "kickback scheme," Starwood was acting as a "dishonest competitor," because the Blue Tree Hotels compete with the other hotels owned and managed by Starwood, including the Westin and Sheraton brands. It contended that Starwood's conduct: (1) deprived Blue Tree Hotels of the opportunity to obtain advantageous prices and terms that would otherwise be available from vendors who did not participate in the kickback scheme, and (2) increased the cost of goods to Blue Tree Hotels while at the same time reducing the cost of goods and generating profits for Starwood. Blue Tree Hotels sought treble damages, attorneys' fees, and permanent injunctive relief, prohibiting Starwood from continuing to obtain and retain kickbacks.
The federal district court dismissed the complaint, concluding that Blue Tree Hotels lacked standing under Section 2(c) because they did not directly compete with the hotel vendors which allegedly paid commercial bribes to Starwood. On this ground, the Second Circuit disagreed. The court ruled that "competitive injury" is not necessary where there is a prima facie violation of Section 2(c). Unlike Robinson Patman Act Section 2(a), which requires competitive injury, a claim under Section 2(c) does not require a showing that the illicit practice has had an injurious or destructive effect on competition.
However, in concluding that Blue Tree Hotels failed to make out a claim of "commercial bribery," the court criticized the plaintiffs' theory for offering little more than the following tautology: Because "the vendors pay kickbacks to Starwood, they are engaged in commercial bribery, and because the parties are engaged in commercial bribery, the payments made by vendors are kickbacks." The court stressed that substituting the plaintiffs' repeated use in their complaint of the "freighted word 'kickback' with the more benign 'vendor payment' reveals" that Blue Tree Hotels has "not alleged any improper intent or conduct on the part of the vendors who made the payments to Starwood."
The court acknowledged that Starwood's failure to turn vendor payments over to Blue Tree Hotels might constitute a breach of its fiduciary duties under the management agreements, but that commercial bribery cannot be committed unilaterally by an alleged bribe receiver: "one cannot be guilty of receiving a commercial bribe unless someone else is guilty of paying it." The court pointed out that in New York, commercial bribery is defined as conferring, or offering or agreeing to confer, any benefit upon any employee, agent or fiduciary without the consent of the latter's employer or principal, with intent to influence his conduct in relation to his employer's or principal's affairs. N.Y. Penal L. Section 180.00. The essence of bribery is the intent to influence improperly the conduct of another by bestowing a benefit and the essence of bribe receiving is in the agreement or understanding that the recipient's conduct will be influenced by the benefit.
The court emphasized that in the absence of any allegations that the vendor payments were, in fact, bribes - that is, that they were paid by the vendors with the intent to improperly influence or corrupt Starwood's conduct on behalf of Blue Tree Hotels - Starwood's alleged breach of its fiduciary duties was insufficient to establish commercial bribery. Although improper intent on the part of the vendors might be inferred from Blue Tree Hotel's allegation that vendors who were unwilling or unable to make the vendor payments were precluded from competing for the Blue Tree Hotels' business and, as a result, Blue Tree Hotels was unable to negotiate advantageous prices and terms with such vendors, this theory was contradicted by letters attached to Blue Tree Hotels' complaint. Those letters objected to the manner in which Starwood allocated vendor payments, but did not challenge the vendor payments as unlawful or pursuant to illicit agreements between Starwood and the vendors to act contrary to Blue Tree Hotels' interests. Rather, the letters showed that Blue Tree Hotels was aware that Starwood was receiving vendor payments as a result of its volume purchasing power.
Ultimately, while Blue Tree Hotels survived the district court's erroneous conclusion that "competitive injury" was necessary for their Section 2(c) claim, the facts - at least those established by contemporaneous letters of Blue Tree Hotels - could not support the legal theory of "commercial bribery" under Section 2(c).
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