Price Discrimination in a Bid Market: Feesers v. Michael Foods

presents Avoiding Competitive Injury Risks Under Robinson-Patmanpresents

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Today's panel features:Mark J. Botti, Partner, Akin Gump Strauss Hauer & Feld, Washington, D.C.

Robert A. Lipstein, Partner, Crowell & Moring, Washington, D.C.

Wednesday, March 10, 2010

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Feesers: Feesers: The Evolution of The Evolution of RobinsonRobinson--Patman EnforcementPatman Enforcement

Mark J. BottiPartner, Akin Gump Strauss Hauer & Feld LLP

March 8, 2008

© 2010 Akin Gump Strauss Hauer & Feld LLP

TODAY’S PROGRAMTODAY S PROGRAM

The Feesers’ Decision

Doctrinal Implications of Feesers

Practical Lessons from Feesers

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Robinson-Patman Price Discrimination RulesRobinson Patman Price Discrimination Rules

Robinson-Patman Act (1936): a complex statute prohibiting “price discrimination”

Purpose of RP Act: preventing large chain stores fromPurpose of RP Act: preventing large chain stores from extracting huge discounts from suppliers—and thereby squeezing their smaller competitors—e.g., “mom and pop” stores out of businesspop stores—out of business

RP Act very rarely enforced by government; but self-y y y genforcement and private litigation is common

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Robinson-Patman ActRobinson Patman Act

“[I]t shall be unlawful for any person to [I]t shall be unlawful for any person . . . to discriminate in price between different purchasers of commodities of like grade and

lit h th ff t f hquality, . . . where the effect of such discrimination may be substantially to lessen competition . . .”

● Section 2(a) of the Clayton Act

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RP Act: Types of ClaimsRP Act: Types of Claims

Primary Line: Price discrimination allegedly harms the rival of the discriminating manufacturer thus potentially lessening competitiondiscriminating manufacturer thus potentially lessening competition between manufacturers

Secondary Line: Price discrimination allegedly gives one direct Secondary Line: Price discrimination allegedly gives one direct customer of the discriminating manufacturer an advantage over another direct customer thus potentially lessening competition between the direct customers for downstream business

Tertiary Line: Price discrimination by the discriminating manufacturer allegedly flows through the direct customers to their downstream

t t ti ll l i titi th d tcustomers, potentially lessening competition among the downstream customers

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Robinson-Patman Price Discrimination Rules: Feesers C d “S d Li ” P i Di i i iConcerned “Secondary Line” Price Discrimination

Elements of Prima Facie “Secondary Line” Price Discrimination

Two sales to different purchasers . . .

in interstate commerce . . .

“reasonably contemporaneous” in time . . .

involving products that are of “like grade and quality”. . .

at “discriminatory prices” . . .

■ “discrimination” = difference in actual net price

where result may be a substantial lessening of competition

■ Sometimes defined as substantial sales revenues diverted away from disfavored customer

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Robinson-Patman Price Discrimination Rules (cont’d)Robinson Patman Price Discrimination Rules (cont d)

Statutory affirmative defenses

● Meeting competition

■ Lower price offered in good faith to meet (but not beat) a competing seller’s lower iprice

● Cost justification

B d diff t t f f t l d li■ Based on different costs of manufacture, sale, delivery . . .

■ or credit and bad debt concerns

Not today’s topic

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Feesers: Players and ProcedureFeesers: Players and Procedure

Parties● Defendant Michael Foods Inc : Manufacturers food products including● Defendant Michael Foods, Inc.: Manufacturers food products, including

Eggs and Potatoes used at institutional cafeterias

● Plaintiff Feesers, Inc.: Wholesale distributor of Michael Foods’ Eggs and Potatoes, as well as other products to institutional cafeteriasp

● Sodexo, Inc.: Food Service Management Company that manages institutional cafeterias, bundling with that service the provision of Michael Foods Eggs and Potatoes, as well as other products

Procedural Overview● 2004 Complaint filed (M.D. PA)● 2006: District Court judgment for defendants● 2006: District Court judgment for defendants● 2007: Third Circuit reverses and remands● 2009: District Court judgment for plaintiff

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● 01/7/2010: Third Circuit reverses and enters judgment for defendants

Feesers: Market StructureFeesers: Market Structure

MICHAELSManufacturer

MICHAELS FOODS

Food Distributors BFEESERS A

Food Service Management Companies SODEXO

Institutional Cafeterias(Hospitals Schools Etc ) CUSTOMER

“Self Operated”

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(Hospitals, Schools, Etc…)

Feesers: The Primary Issue in the Recent DecisionFeesers: The Primary Issue in the Recent Decision

Third Circuit accepted that all issues except one were decided in f f Ffavor of Feesers● Includes a significant difference in price between that at which Michael

Foods sold to Sodexo distributors and that at which sold to Feesers

Held that the evidence did not establish possibility of a substantial lessening of competition● Requisite Proof: (1) Competed with each other (2) over time● Requisite Proof: (1) Competed with each other (2) over time.

● Doesn’t reach the “over time” question.

Decision addresses whether Feesers and Sodexo competed withDecision addresses whether Feesers and Sodexo competed with each other● Are they “each directly after the same dollar”?

At th ti f th di i i t l

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● At the time of the discriminatory sale

Feesers: Not “Competitors” at the time of the discriminatory sales

Court’s Analysis● Focused first on the competition between Feesers and Sodexo to secure

the business of institutional cafeterias■Competition involved “wooing” of cafeteria to change its fundamental approach,

from a self managed model to an outsourced onefrom a self-managed model to an outsourced one■Once wooing successful, cafeteria uses a RFP to select Food Service

Management Company■ Food prices matter both during the “wooing” and the RFP■ Food prices matter both during the wooing and the RFP

● Feesers and Sodexo not competitors at the time of any discriminatory sale■ Viewed the competition for the institutional cafeteria’s as being completed before

the discriminatory salethe discriminatory sale■ Focused on the concept that after, for example, Sodexo had secured a customer,

its approved distributors would buy the Eggs and Potatoes later sold to that customer

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Feesers: Market StructureFeesers: Market Structure

MICHAELSManufacturer

MICHAELS FOODS

Food Distributors BFEESERS A

Food Service Management Companies SODEXO

Institutional Cafeterias(Hospitals Schools Etc ) CUSTOMER

“Self Operated”

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(Hospitals, Schools, Etc…)

Feesers:Feesers: The Evolution ofThe Evolution ofFeesers: Feesers: The Evolution of The Evolution of RobinsonRobinson--Patman EnforcementPatman Enforcement

March 10, 2010March 10, 2010Robert A. LipsteinRobert A. Lipstein

Crowell & Moring LLPCrowell & Moring LLP

PRIVILEGED & CONFIDENTIAL

Feesers In Context

» Continues lengthy trend of narrowing by federal courts at all levels

Feesers In Context

all levels» Effort to rationalize RPA with broader themes of U.S.

antitrust law– Great Atl. & Pac. Tea Co. v. FTC, 440 U.S. 69 (1979)

(emphasizing meet comp defense as means of harmonizing RPA with general preference for vigorous competition)Falls City Industries v Vanco Beverage Inc 460 U S 428– Falls City Industries v. Vanco Beverage, Inc., 460 U.S. 428 (1983) (permitting rebuttal of the Morton Salt presumption of competitive injury based on the fact of a price discrimination)

– Texaco Inc v Hasbrouck 496 U S 543 (1990) (allowingTexaco, Inc. v. Hasbrouck, 496 U.S. 543 (1990) (allowing functional discount without strict cost justification)

– Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) (conforming application of RPA to cases of primary-

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line injury to the broader standard for predatory pricing cases)

Recent PrecedentRecent Precedent

» Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006), ( )– Application of RPA to competitive bidding situations– Court found there could be no price discrimination where truck

dealers sought and received price concessions specifically tailored to bids they made to end userstailored to bids they made to end users

– Two main rationales for the decision:• “Two sales” rule: ultimately, Volvo sold only to the winning

bidder, so in most cases no price discrimination would be , ppossible

• Competitive injury: Court unimpressed with Reeder’s “mix and match” evidence of discount levels drawn from separate, unrelated transactionsunrelated transactions.

– Strong theme of harmonizing RPA with broader antitrust law: “Interbrand competition . . . is the ‘primary concern of antitrust law.’” Id. at 872-73, quoting Continental T.V., Inc. v. GTE Sylvania Inc (citation omitted)

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Sylvania Inc. (citation omitted).

Toledo Mack Foreshadows FeesersToledo Mack Foreshadows Feesers

» Toledo Mack Sales & Service, Inc. v. Mack Trucks Inc 530 F 3d 204 (3d Cir 2008)Trucks, Inc., 530 F.3d 204 (3d Cir. 2008)– Volvo left open whether systematic evidence that one

dealer was “consistently favored” could support an RPA claim.

– Toledo Mack shut that door, relying heavily on the “two sales” rule to preclude liability even where such p yevidence from different transactions was proffered.

– Quoted Volvo in holding that alleged discrimination in the bid context bore “little resemblance” to the retail-the bid context bore little resemblance to the retail-context discrimination the RPA was designed to address.

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Feesers Ties Things TogetherFeesers Ties Things Together» Third Circuit emphasized in Feesers that it would not limit Toledo

Mack to a simple application of the two sales rule.» Effectively, pulls together the two sales rule and the requirement of

downstream competition into a “competing purchaser requirement,” citing M.C. Mfg. Co. v. Tex. Foundries, Inc., 517 F.2d 1059, 1067 (5th Cir 1975)(5 Cir. 1975).

» The “timing of the competition and the nature of the market compel us to conclude that Feesers and Sodexo were not competing purchasers.”p

» Lower prices cannot “injure competition” in a bid process where competition occurs before bidding process begins and purchases occur only after bid is awarded

» Third Circuit saw itself as fulfilling the Supreme Court’s mandate to “narrowly construe the RPA to address the basic purposes of the statute.”

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Counseling After FeesersCounseling After Feesers

» Key Issues to Consider:– In bid situations understand when the competition for the– In bid situations, understand when the competition for the

downstream business occurs– Custom v. non-custom no longer a relevant issue– Assess whether competition “for the same dollars” existsAssess whether competition for the same dollars exists– Remember more traditional RPA defenses and consider how

they interact with the Feesers competing purchaser requirement. – Consider whether state or other laws restrain pricing C p g

independent of the RPA.

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Feesers: How Far Does It Go?Feesers: How Far Does It Go?

Modern Luggage, Inc.

Modern Luggage, Inc. (“MLI”)

● Works better with modern airport security

● Innovative storage approachg pp

● Warranty and high-end marketing

Distribution

● Uses traditional wholesalers and advertises direction

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● Uses traditional wholesalers and advertises direction

Feesers: How Far Does It Go? MLI (cont’d)Feesers: How Far Does It Go? MLI (cont d)

TravelBags-R-Us

● Category killer retailer focused on luggage

● MLI decides to sell directly through TravelBags-R-Usy g g

■TBRU gives MLI dedicated floor space in its stores

MLI it l t k t i id TBRU■MLI uses its own personnel to market inside TBRU

■ TBRU provides its own wholesaling and inventorying services; thus MLI sells to TBRU which in turn supplies all its storespp

■MLI’s price to TBRU is lower than it charges its own distributors

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Hat TrickHat Trick» Hat Trick, Inc. makes hats for children’s birthday parties. » Pete’s Parties and Fran’s Fiestas are both party supply distributors. Both

Pete’s and Fran’s stock Hat Trick Hats in their areho ses Pete’sPete’s and Fran’s stock Hat Trick Hats in their warehouses. Pete’s frequently sells Hat Trick Hats, but Fran’s does so less often. For party jobs supplied by either Pete’s or Fran’s, hats usually rank low on the list of expensive items – normally, less than 15% of the total customer spend.

» A few times this year Pete and Fran have gotten requests for bids on party» A few times this year, Pete and Fran have gotten requests for bids on party hats for really big parties with 500 guests or more. Neither Pete nor Fran could supply the hats for these parties from their inventories, so in those cases, they went to Hat Trick for job-specific pricing.

» Hat Trick gives Pete’s a 10% “Preferred Distributor” rebate at the end of» Hat Trick gives Pete s a 10% Preferred Distributor rebate at the end of every year.

» Fran called Pete up and said, “The Friendly wedding was the last straw! You always win when I’m up against you – and I know it’s because you use your rebate to undercut me! Ever heard of Section 2(f) of the Robinson-y ( )Patman Act?” (Ed. note – Fran uses the extra time she has from losing install jobs to read up on the more interesting points of antitrust law.)

» Does Feesers fully address the scenario?

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Advanced FeesersAdvanced Feesers

» What if Pete is so much more loyal to Hat Trick that he has the 500 hats in stock to service the bid request, but Fran must seek a quote because she only has 250?because she only has 250?

» Must Hat Trick quote Fran the remaining 250 hats at the same price net of rebate that Petehats at the same price, net of rebate, that Pete is getting?

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