United States: "Individualized Proof Of Harm" Required In Robinson-Patman Secondary-Line Claim Prevents Class Certification

On April 7, 2017, the Northern District of California denied class certification to two proposed classes of wholesalers in ABC Distributing, Inc. v. Living Essentials LLC, Case No. 15-cv-02064 NC (N.D. Cal.), a secondary-line Robinson-Patman price discrimination case. Small wholesalers alleged that Living Essentials LLC (Living Essentials), maker of 5-Hour ENERGY® drinks, was giving preferential pricing for the supplement to larger wholesalers such as Costco. Judge Nathaniel Cousins held that the plaintiff wholesalers' class definitions were too vague and necessarily required proof of individualized harm for the proposed class, rendering class certification inappropriate.

The Lawsuit

ABC Distributing, Inc. (ABC) and Pittsburg Wholesale Grocers, Inc., among others, filed suit against Living Essentials and its holding company Innovation Ventures LLC in April 2015, in the Northern District of California. Each plaintiff is a Californian small wholesale food and sundry goods distribution company that provides products to various California shops, such as grocery stores. One of the many items that plaintiffs acquire for distribution is 5-Hour ENERGY drink, manufactured by Living Essentials. 5-Hour ENERGY drink is a liquid dietary supplement, sold in 1.93-ounce bottles. Living Essentials sells 5-Hour ENERGY drink in either a package of 12 bottles or a master case of 18 12-packs. In California, Living Essentials negotiates its sales of 5-Hour ENERGY drink through its distributor, Paramount.

As set forth in the second amended complaint, the plaintiffs alleged that their prices were being undercut by other wholesalers between 2011 and 2015. Upon request, these plaintiffs received a seven-cent-per-bottle "everyday" discount from Paramount. ABC later learned, in 2013, that Sam's Club (a larger wholesaler) was selling 5-Hour ENERGY drink for less than what ABC could buy it for from Paramount — one of ABC's customers even offered to resell the 5-Hour ENERGY drink to ABC, which it had purchased from Costco, because the customer purchased the product at such a favorable, lower price from Costco. Other wholesalers and retailers followed this trend in selling 5-Hour ENERGY drink for less than what the plaintiff-wholesalers could buy it for from Living Essentials.

The plaintiffs sued in April 2015, alleging that Living Essentials engaged in unlawful price discrimination under the Robinson-Patman Act. They alleged a secondary-line Robinson-Patman claim whereby the defendants discriminated against their competing resellers, the wholesalers, when selling 5-Hour ENERGY drink. Specifically, the bigger wholesalers (i.e., the Costcos of the world) allegedly were "favored" customers, whereas the smaller wholesalers (i.e., the plaintiffs) were "disfavored" customers, who paid more for the same products.

To succeed on a secondary-line Robinson-Patman claim, the plaintiffs needed to prove that (1) the relevant 5-Hour ENERGY drink was sold in interstate commerce, (2) the 5-Hour ENERGY drink sold to both favored and disfavored customers was of "like grade and quality," (3) the defendants "discriminate[d] in price between" the plaintiffs and other purchasers of 5-Hour ENERGY drink, and (4) "the effect of such discrimination may be . . . to injure, destroy, or prevent competition," to the advantage of those wholesalers who "receive[d] the benefit of such discrimination," i.e., the favored purchasers. (See Volvo Trucks N. Am., Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164, 176-77 (2006); 15 U.S.C. § 13(a).)

In response, the defendants moved to dismiss the first complaint, which was denied when the plaintiffs amended the complaint. The defendants then moved to dismiss the amended complaint, which the court denied on January 25, 2016, holding that the plaintiffs' allegations were sufficient to support a claim. Following their successful defense against a motion to dismiss, the plaintiffs sought class certification.

Class Certification

According to Rule 23(a) of the Federal Rules of Civil Procedure, to obtain the sought-after class certification, the plaintiffs needed to show that (1) the class was so numerous that joinder of all members would be impracticable, (2) there were questions of law or fact common to the class, (3) the claims or defenses of the representative parties were typical of the claims or defenses of the class, and (4) the representative parties would fairly and adequately protect the interests of the class.

The plaintiffs sought to certify two classes under Rule 23(b) of the Federal Rules of Civil Procedure, which allows for class certification in instances including where "the party opposing the class has acted or refused to act on grounds that apply generally to the class" (i.e., Rule 23(b)(2)) or when "questions of law or fact common to class members predominate" (i.e., Rule 23(b)(3)). The first class that the plaintiffs sought to certify under Rule 23(b)(3), the CBC Competitor Class, consisted of "All California wholesale businesses that purchased for resale, during the applicable limitations period, 5-Hour ENERGY drink through Living Essentials' broker Paramount Ventures, Inc., where such wholesaler received Living Essentials' $0.07/bottle 'Everyday Discount,' and were located in a zip code to which Costco Business Centers offered delivery." The second class was defined as the Costco Competitor Class, which the plaintiffs tried to certify under Rule 23(b)(2), as "All California wholesale businesses that purchased for re-sale, during the applicable limitations period, 5-Hour ENERGY drink through Living Essentials' broker Paramount Ventures, Inc., where such wholesalers received Living Essentials' $0.07/bottle 'Everyday Discount.'" The plaintiffs' expert estimated 82 and 114 members in each class, respectively.

The court determined that the plaintiffs satisfied only the first element of Rule 23(a): There were enough members of each proposed class to render joinder impracticable. However, the court further held that there could be no questions of law or fact common to the class: "Here, Plaintiffs' proposed classes both suffer from the same fatal flaw — a Robinson-Patman case is not well suited for class certification because its analysis is 'singularly individualistic.'" In reaching this conclusion, the court found analysis from a 2008 Central District of California, Mad Rhino, Inc. v. Best Buy Co., instructive. There, the court noted that a successful Robinson-Patman claim required a plaintiff to show that there was actual competition between favored and disfavored customers and that competition was harmed by the defendant's discriminatory practices. This proof, the Mad Rhino court held, was "singularly individualistic."

Agreeing with the Mad Rhino court's analysis, the ABC court held that class certification in ABC Distributing, Inc. was inappropriate for two reasons. First, the type of individual proof required for the plaintiffs to sustain the Robinson-Patman claims made the class definitions "impermissibly vague and confusing," and one that only the plaintiffs' expert, or "possibly Living Essentials," could identify; it would not be apparent to individual plaintiffs whether they qualified for the class. To be a part of the proposed class, one would have to be (1) disfavored by the defendants and (2) competing with a third-party favored competitor. Though the plaintiffs drew the court's attention to internal emails from Living Essentials, suggesting that Costco did, in fact, receive a pricing advantage on 5-Hour ENERGY drink, this was not enough. Instead, the court would have hoped to see "an internal pricing document where defendants clearly distinguished between two categories of wholesale customers."

Second, to succeed on their Robinson-Patman claims, the plaintiffs would have to show that each class member paid a higher price than Costco during the class period and that class members competed with Costco during that time period. The plaintiffs tried to use a class member's zip code as a sufficient basis to show whether it competed with Costco, but the court thought this was an "oversimplification" of the proof required in a Robinson-Patman case. Moreover, the proof would be individual to each plaintiff, because no plaintiff can be assumed to have competed with Costco based on location alone.

In short, because the plaintiffs' additional claims hinged on their price discrimination claim, the court held class certification was wholly inappropriate and denied the plaintiffs' motion. (The plaintiffs have stated they intend to appeal the decision to the Ninth Circuit.)

Conclusion

In its denial of class certification, the court did not signal that every second-line Robinson-Patman price discrimination claim is incapable of class certification. However, it followed a path that some courts have already taken to deny class certification to plaintiffs for Robinson-Patman claims because of the individualistic nature of proof involved. Worth noting, though, the court specifically stated that an "internal pricing document" indicating different treatment of wholesalers would have been a more convincing document to support the class definition. This suggests that businesses dealing with customers of varying sizes, which arguably compete on the same functional level for the same customers, should be mindful of the antitrust risks associated with their pricing practices for these customers in light of potential price discrimination claims.

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