On April 25, 2008, the Tenth Circuit of the United States Court of Appeals reversed a jury’s judgment in favor of competitors who challenged a grocery store’s practice of offering below-cost discounts on gasoline conditioned on the purchase of a qualifying amount of groceries sold in the store.  Parish Oil Co. v. Dillon Companies, No. 07-1032 (10th Cir. 3-31-2008).


Defendant, Dillon Companies, Inc. (d/b/a "City Market"), operated two of the four full-service grocery stores in Montrose, Colorado.  In December 2003, City Market, launched a new promotion, the "Grocery Discount Program," whereby shoppers who purchased a qualifying amount of groceries in a single transaction received a one-time per-gallon discount on gasoline.  The discount varied according to the amount of groceries purchased, but in 2005, the discount was as high as 20 cents per gallon for grocery purchases over $50.

Plaintiffs, two competitors in the retail gasoline business, brought suit under a special motor-fuel provision of Colorado’s Unfair Practices Act ("UPA"), making it unlawful "to engage in a pattern of selling, offering for sale, or advertising for sale motor fuel for less than the cost thereof to such vendor, when such pattern has the effect of injuring one or more competitors or destroying competition."  Colo. Rev. Stat. § 6-2-105(a)(b) 2002, repealed by Act of April 16, 2007, 2007 Colo. Legis. Serv. Ch. 140, § 2 (West) (effective April 16, 2007).  Plaintiffs claimed City Market’s posted prices were often below City Market’s cost, and that the actual selling prices under the Grocery Discount Program were even lower.  Plaintiffs alleged that this pattern had a dramatic adverse impact on City Market’s competitors, reducing the profits of one competitor by almost 43 percent, and forcing the other competitor out of the gasoline retail business.  Plaintiffs sought treble damages and an injunction to bar further below-cost selling.

Lower Court’s Ruling in Favor of Plaintiffs

After discovery, City Market moved for summary judgment, asserting that its Grocery Discount Program fell into an exception under the UPA for combined sales.  Under Section 113 of the UPA, "in all sales involving more than one item or commodity and in all sales involving the giving of any concession of any kind. . .the vendors’ or distributors’ selling price shall not be below the cost of all articles, products, commodities, and concessions included in such transactions."  Colo. Rev. Stat. § 6-2-113.  City Market argued that Section 113 allowed a vendor to "bundle" products, so that one item may be sold below cost if its sale is tied with another item or items such that the total price is above the combined costs.

City Market kept its grocery and gasoline business accounts separate.  At the end of each four-week accounting period, the gasoline end would bill the grocery end for the total value of the discounts it had honored.  The parties had stipulated that the Grocery Discount Program operated at a total profit, meaning the margin of profit on qualifying grocery sales, when viewed in the aggregate, fully covered the total cost of the discounts given under the program.  Because the Grocery Discount Program operated at a net profit, City Market argued that there could be no pattern of below-cost gasoline sales and it must prevail on summary judgment.

The district court disagreed, finding that although a literal reading of Section 113 would support City Market’s view, the provision was "internally and irreconcilably inconsistent" because allowing below-cost bundled sales would contravene the provision’s stated purpose of "preventing evasion" of the Act.  Instead, the court held that the Section 113 must be read to require consideration of prices and costs item-by-item, thus forbidding a sales scheme like the Grocery Discount Program.  The district court denied summary judgment and the case proceeded to trial, whereupon a jury found in favor of plaintiffs.  After trebling, the district court entered a final judgment against City Market for just over $1.4 million for damages sustained by the two plaintiffs and permanently enjoined City Market from selling motor fuel below cost.

Court of Appeal’s Reversal of Jury’s Verdict

On appeal, City Market again argued for an interpretation of the statute that would permit the bundling of below-cost sales with above-cost sales.  The court of appeals reviewed the district court’s ruling de novo, because the meaning of a statute is a matter of law.  The court first turned to the plain language of the statute, stating that if the statute is unambiguous and does not conflict with other statutory provisions, the court did not need to look further (citing People v. Luther, 58 P.3d 1013, 1015 (Colo. 2002)).  The court agreed with the district court that a literal reading of Section 113 would permit a transaction so long as the price charged accounted for or exceeded the cost of all items included in the transaction.  Unlike the district court, however, the court of appeals concluded that the literal meaning must be given effect, and that the district court erred in denying City Market’s motion for judgment as a matter of law.

The court explained that because City Market’s gasoline sales were bundled with the grocery sales, the statute required a comparison of the costs and prices of the transactions together, not separately.  The court stated that because it was not contested that the aggregate margin on qualifying grocery sales exceeded the aggregate discount on gasoline, City Market was not in violation of the statue, and therefore the judgment against City Market must be reversed.

The court indicated that its decision was consistent with the only other Colorado case interpreting Section 113,  Mastercar, Inc. v. Amoco Oil Co., 835 P.2d 534 (Colo. App. 1992) (finding defendant’s practice of offering a free car wash with the purchase of ten gallons of gasoline was not a violation of the UPA for below-cost sales because the transaction was a combined sale and the price paid for gasoline constituted consideration for both the car wash and the gasoline).

Finally, the court addressed the district court’s concern that a literal reading of Section 113 would contravene one of the underlying purposes of the UPA – to prevent the practice of "loss-leader" selling.  The court explained that loss-leader selling is the practice of selling selected goods at a loss in order to lure customers into the store.  In dismissing this concern, the court noted that the customer attracted to City Market’s gasoline pumps was unlikely to be lured to buy other items in the store on the assumption that they were similarly low-priced.  On the contrary, the structure of the program was such that the ability to buy discounted gas was expressly dependent on the prior purchase of a qualifying amount of groceries.

Authored By:

John S. Whittaker

(415) 774-2938