In an opinion that sheds light on the defenses available to a company accused of price discrimination, the Seventh Circuit Court of Appeals has upheld a jury’s defense verdict in favor of tobacco giant R.J. Reynolds Tobacco Co. (“Reynolds”). R.J. Reynolds Tobacco Co. v. Cigarettes Cheaper!, 2006 U.S. App. LEXIS 21590 (7th Cir. Aug. 24, 2006), reh’g denied, 2006 U.S. App. LEXIS 23811 (7th Cir. Sept. 15, 2006). Specifically, the unanimous panel: (1) allowed Reynolds protection under the “general availability” defense even though its generally available discount was conditioned on the retailer’s agreement to provide a certain level of advertising; (2) remarked that evidence of intent in a Robinson-Patman Act trial could only serve to confuse the jury; and (3) held that a generally available discount can qualify for a “meeting competition” defense, if it counters a similar discount from a competitor.

“As its name implies,” Cigarettes Cheaper! sells discount cigarettes. The company charged particularly low prices for cigarettes made by Philip Morris, in exchange for extensive advertising. Reynolds accused the discounter of “reimporting” Reynolds cigarettes, intended for sale outside the United States, back into the country for domestic sale. Reynolds filed suit claiming that the gray-market sales violated the Lanham Act, 15 U.S.C. §§1050 to 1127.

Cigarettes Cheaper! responded with two antitrust counterclaims. The discounter claimed Reynolds conspired to with retail dealers to drive it out of business, in violation of the Sherman Act, 15 U.S.C. §§1 and 2. Cigarettes Cheaper! also claimed Reynolds charged different prices to different retail dealers and refused to give Cigarettes Cheaper! its lowest level of discounts, in violation of the Robinson-Patman Act, 15 U.S.C. §13. Reynolds defended against this latter charge by claiming that these discounts were available to Cigarettes Cheaper! if the company would stop its gray market sales. Alternatively, Reynolds claimed that the discounts were necessary to meet competition. A district court granted summary judgment for Reynolds on the Sherman Act claim; a jury awarded Reynolds approximately $4 million in damages on its Lanham Act claim; and a different jury returned a general verdict in favor of Reynolds on the Robinson-Patman Act claim. Cigarettes Cheaper! appealed all three outcomes.

In an opinion authored by circuit Judge Frank H. Easterbrook, the appeals court affirmed all three. The panel upheld the jury’s finding that Reynolds presented a legitimate “in general availability” defense by showing that its deepest discounts were as available to Cigarettes Cheaper! as to any other retailer, if the discounter would stop selling gray market cigarettes and provide Reynolds with the same level of support it provided Philip Morris.

The appeals court also upheld the trial court’s decision to exclude colorful memos in which Reynolds executives expressed their desire to “shut down” and “kill” Cigarettes Cheaper! “on the beach.” Evidence regarding intent was irrelevant to the Robinson-Patman claim, Easterbrook wrote, and could only serve to confuse the jury. “[A] bad intent is not part of the plaintiff’s prima facie case under §13(a), and a ‘good’ intent (apart from its a bearing on the statutory justifications) does not excuse price discrimination,” Easterbrook wrote.

The panel also found proper a jury in instruction that Reynolds need not establish its meeting competition defense on a customer-by-customer basis, but instead “must simply show that its offer of lower prices or greater allowances was reasonably tailored to the competitive situation that it realistically faced in the marketplace.” While it’s possible that the jury might misread this instruction to require no more than a generally competitive market, Easterbrook wrote, this was unlikely given that a second instruction clearly place a burden on Reynolds to show that it was meeting prices available to customers from another source. “If producer A makes a generally available offer, then a generally available response meets the competition,” Easterbrook wrote.

The appeals court also upheld the grant of summary judgment in favor of Reynolds on the Sherman Act claim. The court found that Cigarettes Cheaper! failed to establish a predatory pricing claim as there is no evidence to suggest that consumers would ultimately be injured by its discounts. “[I]n antitrust litigation, ‘cut-throat competition’ is a term of praise rather than condemnation.” Further, the court found that Cigarettes Cheaper!’s claim that Reynolds organized retail dealers into a cartel to charge a monopoly price for cigarette distribution was both illogical and unsupported by the evidence.