United States: Court Allows Price Discrimination Lawsuit Over Bulk Sales To Survive

On February 2, 2015, a federal judge denied a motion to dismiss a claim that Clorox's proposed policy of providing only large bulk-size packages of products to warehouse clubs, like Sam's Club and Costco, and not to competing grocery stores violated the Robinson-Patman Act's prohibition on the disproportionate provision of promotional services. 15 U.S.C. § 13(e). The court held that special packaging includes offering certain customers but not others the opportunity to buy unique sizes of products. The court specifically rejected the argument by Clorox that a seller has the right to refuse to sell certain product sizes to some customers. If the plaintiff prevails on this theory after discovery, manufacturers may need to undertake a review of their distribution and channel strategies.

The Lawsuit

Woodman's Food Market, Inc. (Woodman's) brought suit against The Clorox Company and The Clorox Sales Company (Clorox) in the Western District of Wisconsin in October 2014. See Woodman's Food Market, Inc. v. Clorox Co. et al., 3:14-cv-00734-SLC (W.D. Wis. Oct. 28, 2014). The lawsuit alleges that Clorox informed Woodman's it was changing its marketing strategy by placing the grocer into a different "channel" than Costco and Sam's Club, and creating the "right assortment" of sizes and brands for different retailers based on their shoppers. Woodman's claims that it had previously been able to purchase large packages of Clorox products, including items like Glad bags, cleaning products, and kitty litter, at the same discounted rates offered to Sam's Club and Costco. Clorox's new marketing strategy, however, would mean that Woodman's could no longer purchase the bulk packs.

Woodman's argues that the practice would hurt its ability to compete with its nearby wholesale club rivals. According to the lawsuit, Woodman's has the appearance of a wholesale store, with 15 locations in the Midwest, but it does not operate on the same membership model. Woodman's claims that its customers could not afford to purchase memberships at Costco and Sam's Club and, as a result, these customers would have no choice but to pay the higher prices for non-bulk items when shopping at Woodman's. On the other hand, those that could afford the memberships would simply stop shopping at Woodman's and purchase the products at competing stores.

Bulk Packaging as a Promotional Service Under FTC Guidelines

The crux of the dispute hinges on whether the large (and likely cheaper per unit) bulk packages offered only to the warehouse stores can be considered a promotional service under Section 2(e) of the Robinson-Patman Act. If considered a promotional service (a point infrequently litigated), the Act requires that Clorox make the bulk packages available on proportionally equal terms to all competing sellers absent a colorable defense, such as meeting competition.

Woodman's alleged that the large packs constitute "special packaging" that helps Clorox's retail customers, for example, Sam's Club, resell the product to the general public, since it is more convenient for customers to purchase and carry large-pack products, and that these products are often offered at a lower cost per unit than smaller packs of the same product. As a result, Woodman's alleged the large-pack products constitute a promotional service under Section 2(e) of the Robinson-Patman Act. Clorox countered with an argument that the package size is not a service; rather, a 42-pound bag of kitty litter is simply a product. In turn, Clorox sought dismissal of Woodman's complaint, arguing that no Robinson-Patman claim exists against Clorox for its decision to refuse to sell its product to a particular retailer. Woodman's also alleged a price discrimination claim under Section 2(a) of the Robinson-Patman Act, but that claim was not at issue on the motion to dismiss. Slip. Op. at 1 n.1.

Apparently no federal courts have ruled on whether a special-package size — here bulk packaging — constitutes a promotional service under Robinson-Patman, so the court relied on FTC decisions from the 1940s and 1950s, finding that specially-sized packages were promotional services under the Robinson-Patman Act. See In the Matter of Gen'l Foods Corp., 52 F.T.C. 798 (1956) (offering of "institutionalized size" package of coffee to only some customers violated Robinson-Patman Act); In the matter of Luxor, Ltd., 31 F.T.C. 658 (1940) (finding that junior-sized cosmetic products were more convenient to carry, reduced waste, and promoted freshness, such that the special packaging size facilitated the resale of the products and constituted a service under 2(e)).

The court also relied on the FTC's Guides for Advertising Allowances and Other Merchandising Payments and Services, 79 FR 58245-01, 16 C.F.R. Part. 240 (FTC Sept. 29, 2014), commonly referred to as the Fred Meyer Guidelines, which include "special packaging, or package sizes" on the non-exhaustive list of activities that the FTC considers to be promotional services under the Robinson-Patman Act. 16 C.F.R. § 240.7. The court quoted the commentary to the recent 2014 revisions to the Fred Meyer Guidelines, where the FTC explained its decision to keep special packaging and package sizes on its list of promotional services, since the comments provided to the FTC did not "squarely address" the concern raised by some commentators that special packaging could be used to advantage "power buyers" over competing customers in violation of Section 2(e) of the Act. 79 FR at 58248.

The examples provided in the Fred Meyer Guidelines include the use of special seasonal packages of goods (e.g., offering regularly offered multi-packs of individually wrapped candy bars in Halloween-themed packaging) as an example of promotional services. Clorox argued that its bulk-package program is different because its bulk sizes were sold year-round and were not intended to be a temporary promotion to drive up business during a particular season. Ultimately, the Court was persuaded that Woodman's had stated a plausible pricing discrimination claim because Woodman's had alleged that it was more convenient for its customers to purchase and carry home large-pack products, and the large packs are often offered to customers at a lower price per unit, such that the bulk packaging aids the wholesalers in reselling of the product.

Conclusion

The decision allowing Woodman's lawsuit to move forward is noteworthy not only in light of the very few decisions interpreting Section 2(d) and 2(e) of the Robinson-Patman Act, but also because, according to the court's decision, this may be the first court to decide whether packaging size can constitute a "promotional service" subject to the Robinson-Patman Act. As it proceeds, the case will likely put at issue whether these promotional prohibitions of the Robinson-Patman Act can effectively trump a seller's right under Section 1 of the Sherman Act to sell or refuse to sell products to any given potential customer. Businesses who offer different packaging sizes or other types of specialized packaging, some of which are not made available to all customers, will want to follow this Clorox litigation and consider its impact on potential Robinson-Patman claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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