5-Hour Energy Drink Maker Allowed to Charge Higher Prices to Costco’s Competitors

ArentFox Schiff

Arent Fox

Last week, a California federal jury concluded that the maker of 5-Hour Energy Drink did not violate federal antitrust law by selling the energy shots to Costco for less than the price charged to its family-owned rivals. Though the plaintiffs in US Wholesale Outlet & Distribution Inc. et al. v. Living Essentials LLC et al., No. 2:18-cv-01077 (C.D. Cal.) ultimately did not succeed, the case provides a reminder to businesses of the importance of reevaluating pricing policies on a regular basis.

In February 2018, several small, privately-owned wholesalers filed suit against the energy drink maker, Living Essentials LLC, claiming that it offered Costco preferential pricing, discounts, and rebates for its 5-Hour Energy product that were not offered to the big-box chain’s competitors. The wholesalers alleged that they paid as much as 15 to 20% more for the energy drink than was paid by Costco, and claimed that the favorable pricing arrangement violated the Robinson-Patman Act, 15 U.S.C § 13 et seq., which generally prohibits manufacturers from charging different prices to different customers for the same product (a practice known as price discrimination). According to the plaintiff wholesalers, they have been unable to compete with Costco, and have lost hundreds of thousands of dollars in sales of the energy drink to the retail giant due to Living Essentials’ discriminatory pricing. At trial, however, Living Essentials argued that the wholesalers failed to prove that they lost customers because of higher prices, and pointed to other reasons for the lost sales, such as the cleanliness of Costco’s stores, its rewards program, and free shipping. Following a nearly two-week trial, the jury sided with Living Essentials, concluding that the energy drink maker’s pricing policies did not illegally discriminate in favor of Costco and against the competing wholesalers.

Though the rationale underlying the jury’s verdict is unknown at this time, the case offers an opportunity to remind manufacturers about the potential risks of offering price discounts to certain customers, but not others. The sale of identical goods at different prices does not always raise an antitrust issue, but could if certain safeguards are not met. For instance, price differences should generally be tied to a seller’s costs savings in dealing with a particular buyer, such as the lower manufacturing or delivery costs associated with doing business with certain large-volume customers (known as the cost justification defense). Problems could also arise if a price discount is not offered in response to a competitor’s low price (known as the meeting competition defense). These issues are often quite complex, and businesses should proceed with caution when implementing differential pricing policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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