United States: Using The Distribution Agreement To Reduce Robinson-Patman Litigation Risk

Well-counseled clients who distribute goods through competing resellers are mindful of the litigation risks inherent in pricing, discount and rebate programs that may favor larger distributors or retailers. That is because the Robinson-Patman Act (the RPA)―a Great Depression era law designed primarily to protect small "mom and pop" retailers―can impose treble damages for commonly used (and often pro-competitive) discounting practices, including volume-based markdowns and annual rebates.

Although experienced antitrust attorneys can help design discount and rebate programs that comply with the RPA,¹ manufacturers and wholesalers should also consult counsel to discuss whether they can reduce the likelihood, cost and potential exposure of federal price discrimination suits by adding a few short paragraphs to their reseller agreements.

The inclusion of a well-drafted arbitration clause can bypass the rigors of federal antitrust litigation to take advantage of the many benefits of private dispute resolution: lower costs, greater efficiency and speed, less expansive discovery, confidentiality, and the ability to choose expert adjudicators with industry experience to resolve disputes.

Not only do courts routinely enforce arbitration clauses in antitrust cases, some courts also compel litigants to adhere to contractual provisions that truncate the four-year statute of limitations period applicable to RPA suits. Since RPA claims tend to be offshoots of unrelated business disputes that may arise years after the alleged price discrimination occurred, clients should discuss with counsel whether distribution agreements with a tighter limitations period could help avoid RPA litigation altogether.

Background

In enacting the RPA during the 1930s, Congress targeted the perceived harm to competition caused by powerful buyers that had the clout (and the order volume) to demand lower prices from suppliers. To the delight of many manufacturers and economists, the RPA has lost favor over the years.² Critics of the RPA―including the Department of Justice―have argued that the law chills manufacturers' and wholesalers' willingness to discount, encourages price rigidity, and rewards less efficient resellers.³ As a result, government enforcement of the Act is virtually nonexistent,⁴ and courts have, to a large extent, been reluctant to interpret the statute too liberally.

Nonetheless, private RPA litigation persists. Over just the last few years, RPA lawsuits have been filed against a number of different manufacturers and consumer product companies by resellers who allege they paid higher prices than their larger rivals.⁵

Price discrimination claims brought by resellers—so-called "secondary line injury" cases—are the most frequently litigated RPA claims. The key provision of the RPA in secondary line cases, section 2(a), prohibits suppliers of goods from charging different prices—including all discounts, rebates and other allowances—to competing resellers if the price discrimination causes the requisite competitive injury. The RPA specifically applies only to goods of "like grade and quality" (not services or custom-ordered goods) and requires two completed sales (not offers or bids) that are reasonably contemporaneous.

Price Discrimination Suits Carry the Risk of Treble Damages and Are Expensive to Litigate

One reason RPA suits pose serious litigation risks is that RPA plaintiffs often win jury verdicts with less evidence of competitive harm than is required in other types of antitrust cases. One of the most frequently quoted axioms in antitrust jurisprudence is that the "antitrust laws were enacted for the protection of competition, not competitors."⁶ Nonetheless, some courts have not applied this standard to RPA cases. Rather, in the view of these courts, a reseller-plaintiff in a RPA suit need show only that a price difference resulted in a significant "diversion" of sales or profits to a single competitor, not actual harm to overall competition or the competitive process.⁷ And courts still generally allow RPA plaintiffs to skip that step entirely and establish a rebuttable presumption of competitive injury through proof that the defendant provided "substantial discounts to a competitor over a significant period of time."⁸

Potential damages in price discrimination cases can also be high. Damage awards can span several years of a plaintiff's lost sales or profits, and those awards are automatically trebled. Although RPA class action certification is uncommon due to the individualized nature of the proof required in RPA cases, RPA suits can multiply if the case is publicized (which often happens, since federal court litigation is inherently public) and other plaintiff-resellers come to believe they also paid discriminatory prices. Moreover, the nature of the parties involved in price discrimination suits is often conducive to the type of "David vs. Goliath" trial theme that plaintiffs' lawyers may use to try to win the sympathy of a jury and potentially generate runaway verdicts.

RPA litigation is also often expensive and time consuming. Decade-long price discrimination cases are not unprecedented. A recent well-known RPA case in the pharmaceutical industry resulted in affirmance of summary judgment for defendant-manufacturers in 2015―taking more than 20 years for the case to wind its way through the court system.⁹ Like antitrust cases in general, discovery in RPA cases litigated in federal district court can require production of many years of data and documents, third-party depositions and document requests, and expensive reports and testimony from economic and damages experts.

Unlike many other types of business-against-business litigation, RPA cases can often be difficult to settle by providing the plaintiff a commercial concession. Frequently, plaintiffs in RPA cases are former distributors that have gone out of business or moved on to a different supplier. As a result, out-of-court settlements based on commercial terms can be difficult, if not impossible, to reach.

Reseller Contracts Provide Opportunity to Reduce the Cost and Uncertainty of Litigation

Businesses that are at potential risk of becoming RPA defendants, i.e., manufacturers and wholesalers, often have detailed distribution agreements or written terms of sale with the customers that are prospective RPA plaintiffs. In those agreements, suppliers may be able to mitigate RPA litigation risk through short and clear statements requiring arbitration pursuant to certain established procedures (e.g., the American Arbitration Association or JAMS rules) in lieu of litigation in federal court.

Years ago, it was common for federal courts to ignore arbitration clauses in antitrust litigation.¹⁰ Antitrust cases, according to the prevailing attitudes, were too important and too complex for resolution without judicial instruction and supervision, and it was of "questionable propriety" to allow arbitrators—who were "frequently men drawn for their business expertise"—to enforce laws meant to regulate the business community.¹¹

In 1985, the Supreme Court rejected that reasoning, holding that federal policy favored arbitration, even in antitrust cases.¹² Today, federal courts routinely grant defendants' motions to compel arbitration in RPA cases, citing the Supreme Court's directive to "rigorously enforce arbitration agreements" even when the case involves antitrust claims.¹³

Manufacturers and other suppliers that face a risk of price discrimination suits should consult with antitrust counsel about the inclusion of an arbitration clause in their distribution agreements, because the benefits can be substantial. Instead of a jury, arbitration allows the parties to appoint adjudicators with industry or business expertise to decide the case; the proceedings, trade secrets, and any damages award in an arbitration can be kept confidential; and, perhaps most importantly, arbitrations usually proceed much more quickly and at less expense than federal court litigation―often due to the streamlined arbitration process, the narrow scope of appellate review and limited mechanisms for discovery.

Nonetheless, there are potential downsides to arbitration that a company should discuss with counsel before invoking arbitration in a particular case or including arbitration clauses in its commercial agreements. The same limitations on appellate review that make arbitration quick and efficient can also be unhelpful if an arbitrator misapplies the law or makes clearly erroneous factual findings. Arbitration is also generally more geared toward fact-finding and may be less conducive to dispositive motions such as motions to dismiss or for summary judgment that sometimes enable companies to defeat litigation without a trial. Nevertheless, many companies that weigh the pros and cons with counsel conclude that on balance, the benefits of arbitration provisions outweigh the detriments.

Manufacturers and wholesalers should also discuss with counsel whether to include provisions in distribution agreements that shorten the Clayton Act's four-year statute of limitations, which governs the RPA and other antitrust statutes. Courts that have considered the issue have generally agreed that the statute of limitations in the Clayton Act is procedural, as Congress added the provision years after the Act's substantive provisions.¹⁴ As a result, the parties can reduce the four-year period by contract, so long as the shortened period is "reasonable."¹⁵ At least two courts have held that truncating the Clayton Act's limitations period to one year was reasonable.¹⁶ Because Robinson-Patman suits are often filed only after a business relationship sours, shortening the limitations period may significantly reduce the risk of Robinson-Patman litigation.

Conclusion

The federal district court is no longer the exclusive forum for litigating antitrust cases. The informal, confidential and expedited procedures available in commercial arbitration are available to companies that have a direct commercial relationship, which is most often the case for the firms who end up as RPA plaintiffs and defendants.

Manufacturers and other suppliers that face the specter of price discrimination litigation should consult antitrust counsel to determine whether inclusion of arbitration clauses and contractually shortened antitrust limitations periods in their reseller agreements would be effective ways to reduce exposure under the RPA―a federal law that is now, for all practical purposes, enforced exclusively through private litigation.

Footnotes

1 There are a number of statutory and judicially created RPA defenses that suppliers may use, including the meeting competition defense, the cost justification defense, changing conditions defense, and the functional availability defense.

2 Indeed, in 2007, the Antitrust Modernization Commission, appointed pursuant to an Act of Congress, recommended repealing the RPA. Antitrust Modernization Commission, Report & Recommendations at 311-32 (Apr. 2, 2007).

3 See, e.g., US Department of Justice, Department of Justice Report on the Robinson-Patman Act 35-37 (1977).

4 The FTC last brought an RPA case in 2000.

5 US Wholesale Outlet & Distribution, Inc. v. Living Essentials, LLC and Innovation Ventures, LLC, C.A. No. 2:18-cv-01077 (C.D. Cal. Feb. 8, 2018); Bedford Nissan, Inc. v. Nissan North America, Inc., 1:16-cv-00423 (N.D. Ohio Feb. 23, 2016); Napleton's Arlington Heights Motors, Inc. v. FCA US, LLC, 1:16-cv-00403 (N.D. Ill. Jan. 12, 2016); Woodman's Food Market, Inc. v. The Clorox Co., 3:14-cv-00734 (W.D. Wis. Oct. 28, 2014).

6 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767 (1984) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (quoting Brown Shoe Co. v. US, 370 U.S. 294, 320 (1962))) (emphasis in original).

7 See, e.g., Cash & Henderson Drugs, Inc. v. Johnson & Johnson, 799 F.3d 202, 210 (2d Cir. 2015) (quoting Volvo, 546 U.S. at 177, 180); Bedford Nissan, Inc., No. 1:16 CV 423, 2016 WL 6395799, at *4 (N.D. Ohio Oct. 28, 2016)(same).

8 Cash & Henderson Drugs, 799 F.3d at 210 (citing FTC v. Morton Salt Co.¸ 334 U.S. 37, 50-51 (1948)). The Morton Salt inference can be overcome with proof that the amount of diverted sales was insubstantial, see id. at 212-214, and there also is a viable argument that liability under the RPA requires proof that the diverted sales harmed competition in general, rather than merely a single competitor. See Volvo, 546 U.S. at 177, 181 (affirming the Morton Salt presumption but stating that the Court will "resist interpretation" of the RPA "geared more to the protection of competitors than the stimulation of competition.").

8 Id. at 207.

9 See, e.g., Cobb v. Lewis, 488 F.2d 41, 47 (5th Cir. 1974).

10 Id. (citing American Safety Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821,826–27 (2d Cir. 1968)).

11 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985).

12 Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013).

13 In re Cotton Yarn Antitrust Litig., 505 F.3d 274, 287 (4th Cir. 2007).

14 Id.

15 Id.; see also Daniels v. NVR, Inc., 56 F. Supp. 3d 737, 743 (D. Md. 2014).

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