The Ninth Circuit recently revived a portion of a price discrimination claim brought by wholesalers of the popular 5-Hour Energy drink against its manufacturer, which provided more favorable promotional terms to a mass merchandiser, while at the same time affirming a defense jury verdict on so-called “functional” discounts. In line with other recent Federal Trade Commission (“FTC”) attention on price discrimination, the case is evidence of renewed interest in and attention to U.S. price discrimination law, but in confirming the availability of the functional discount defense provides some comfort to manufacturers and large resellers and militates in favor of appropriately documenting functional discounts.
In a recent decision, the Ninth Circuit reversed a ruling against wholesalers of 5-Hour Energy that alleged that the drink’s manufacturer had violated the Robinson-Patman Act (the “Act”) by, among other things, providing promotional allowances to a mass merchandiser but not to the wholesalers. U.S. Wholesale Outlet & Distribution, Inc. v. Innovation Ventures, LLC, Case No. 21-55397 (9th Cir. July 20, 2023). The case and the ruling are consistent with an emerging trend of revived interest in enforcement of the Act (following several decades of relative somnolence). Because, however, the Ninth Circuit also affirmed a jury verdict in favor of the defendant on functional discounts, the case is generally favorable to manufacturers and large retailers so long as they appropriately document such functional discounts.
Basics of the Act
The Act, 15 U.S.C. §§ 13-13b, 21a, prohibits certain forms of price “discrimination” (i.e., differences in prices to different buyers). Unlike other basic components of federal antitrust law, including the Sherman Act, the Act is not directly concerned with harm to inter-brand competition. Instead, it was enacted in the 1930s during the Great Depression to protect “mom and pop” stores from perceived unfair practices of large retail chains.1 Because the Act focuses on intra-brand competition, it fell out of favor in and after the 1980s given U.S. antitrust law’s focus on inter-brand competition and the need typically to prove consumer harm. The FTC has recently expressed interest in enforcing the Act.2 The FTC has reportedly launched investigations into potential price discrimination in the soda industry.3
The Act contains several provisions, including Section 2(a) and Section 2(d). As stated in U.S. Wholesale, Section 2(a) bars a seller from discriminating in price between competing purchasers of commodities of like grade and quality. Section 2(a) does not ban all price differences but instead proscribes price discrimination only to the extent that it threatens to injure competition. Volvo Trucks N. Am., Inc., 546 U.S. at 176-77. And as stated in U.S. Wholesale, Section 2(d) makes it unlawful for a manufacturer to discriminate in favor of one purchaser by making payments to that purchaser in connection with the sale or offering for sale of any products unless such payment or consideration is available on proportionally equal terms to all other customers competing in the distribution of such products. According to the Ninth Circuit, to prevail on a Section 2(d) injunctive relief claim, the plaintiff must establish that it is in competition with the favored buyer, but, unlike under Section 2(a), it need not establish an injurious or destructive effect on competition.4
Wholesalers’ Complaints in U.S. Wholesale
In U.S. Wholesale, the manufacturer of the caffeinated 5-hour Energy drink, sold 5-hour Energy to Costco (which resold the product to retailers) as well as to seven California wholesale businesses that resold the drink to convenience and grocery stores. Living Essentials extended a lower list price to Costco and it also provided different and apparently more favorable rebates, allowances and discounts to Costco.5 On summary judgment, the district court found that the wholesalers had proved that the products at issue were distributed in interstate commerce, of like grade and quality, and sold at different prices to Costco and to the wholesalers. There followed a jury trial on the effect of the discrimination (i.e., whether there was a competitive injury) and a bench trial on the Section 2(d) claim for injunctive relief.6
On the Section 2(a) claim, the jury returned a verdict—in favor of the manufacturer. It did so after the district court instructed that Section 2(a) required a showing of “reasonably contemporaneous” sales to the wholesalers and Costco at different prices and that the wholesalers had to prove that any difference in prices could not be justified as functional discounts to compensate Costco for marketing or promotional functions that it performed.7 (As the Ninth Circuit stated, a functional discount compensates a reseller for marketing or promotional functions that it performs.) The wholesalers did not argue that these instructions misstated the law, but instead contended that they so clearly carried their burden on the first point that the court should have found the element satisfied rather than asking the jury to decide it, and that the functional discount doctrine did not apply as between favored and disfavored wholesalers and because the discounts bore no relationship to costs.8 The district court then denied the request for injunctive relief under Section 2(d), reasoning that the jury implicitly found no competition between the wholesalers and Costco.
The Ninth Circuit’s Ruling
The Ninth Circuit affirmed and reversed in part. On the Section 2(a) claim, it held that the district court had not abused its “wide discretion” in finding that there was foundation for giving the instructions above, and reaffirmed that purchasers at the same level of the distribution system may receive different functional discounts if they perform different functions.9 The Ninth Circuit related some of the evidence that Costco performed a number of marketing and other functions not performed by any of the wholesalers.10 It also noted evidence of an adequate relationship between the lower prices to Costco and Living Essentials’ savings or Costco’s costs.11 Such a relationship does not need to be “particularly precise,” and the Ninth Circuit held that it was the jury’s role, not the appellate court’s, to decide which party had the better interpretation of the evidence.12
The Ninth Circuit, however, reversed on the Section 2(d) claim for injunctive relief. The court interpreted Section 2(d)’s language regarding competition consistent with what it characterized as the FTC’s approach, i.e., that customers are in competition with each other when they compete in the resale of the seller’s products of like grade and quality at the same functional level of distribution.13 Direct customers who are in functional competition in the same geographic area, and who buy products of like grade and quality within approximately the same period of time, may be in actual competition with each other.14 Potential operating differences, the Ninth Circuit held, are generally not relevant to determining whether two customers compete for resales to the same group of buyers.15 However, if customers are selling to “two separate and discrete groups” of buyers, there may be no competition between them.16
Applying these principles, the Ninth Circuit determined that there was evidence that Costco and the wholesalers were competing. They purchased products of like grade and quality from Living Essentials. Moreover, the wholesalers’ businesses were in geographic proximity to Costco centers. Finally, the Ninth Circuit determined that the district court abused its discretion in finding that the wholesalers and Costco operated at different functional levels of the distribution system and therefore competed for different customers. According to the circuit court, the district court’s rejection of the Section 2(a) claim did not necessarily determine that there was an absence of competition; instead, the jury could have simply determined that the wholesalers and Costco were competing, but there was no potential harm to competition.17 Moreover, the evidence supported the conclusion that Costco sold 5-hour Energy to retailers, not to consumers.18 The Ninth Circuit therefore vacated the district court’s holding as to Section 2(d) and remanded the case for consideration of whether Costco and the wholesalers purchased 5-hour Energy in competition.
Conclusion
The Ninth Circuit articulated a fairly low standard to prove competition between competing purchasers under Section 2(d) of the Act. According to the Court, purchasers in “functional competition” in the same geographic area are likely in competition with each other for purposes of Section 2(d), even if their operations are distinct, unless they are selling to separate and discrete groups of buyers. The court noted that for competing purchasers, under Section 2(d) promotional allowances must typically be made on proportionally equal terms to all other customers competing in the distribution of such products, unless some other Section 2(d) defense applies.
Perhaps more importantly, however, the Ninth Circuit affirmed the Section 2(a) jury instructions—including those the wholesalers did not challenge as a matter of law, but instead argued were entirely unsupported by the facts. And the Ninth Circuit affirmed the verdict in light of evidence that Costco was entitled to functional discounts under Section 2(a), noting that such discounts do not need to have a "particularly precise" relationship to the parties’ savings or costs. The case is thus generally favorable to manufacturers and large retailers so long as they appropriately document functional discounts afforded to resellers that perform additional functions. Manufacturers and retailers should consider whether such additional documentation would be prudent.
[1] Volvo Trucks N. Am., Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164, 175 (2006).
[2] Lina M. Khan, Chair, Fed. Trade Comm’n, Remarks of Chair Lina M. Khan Regarding Policy Statement on Rebates and Fees in Exchange for Excluding Lower-Cost Drug Products (June 16, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/Remarks-Chair-Lina-Khan-Regarding-Policy-Statement-Rebates-Fees.pdf
[3] Josh Sisco, Pepsi, Coke Soda Pricing Targeted in New Federal Probe, POLITICO (Jan. 9, 2023), available at https://www.politico.com/news/2023/01/09/pepsi-coke-soda-federal-probe-00077126.
[4] U.S. Wholesale, Slip Op. at 9, citing FTC v. Simplicity Pattern Co., 360 U.S. 55, 65 (1959).
[5] Slip Op. at 6-7.
[6] Id. at 9.
[7] Id. at 9-11.
[8] Id. at 11-12, 18.
[9] Id. at 12, 18-19.
[10] Id. at 18-19.
[11] Id. at 20.
[12] Id. at 20-21.
[13] Id. at 22, citing 16 C.F.R. § 240.5.
[14] Slip Op. at 23.
[15] Id. at 25.
[16] Id. at 27-28.
[17] Id. at 29.
[18] Id. at 28-31.
