The Ninth Circuit Court of Appeals recently issued an opinion on a rare legal issue: buyer liability for violations of the Robinson-Patman Act. Gorlick Distribution Centers, LLC v. Car Sound Exhaust System, Inc., No. 10-36083 (9th Cir. July 19, 2013). The Gorlick court relied extensively on the Supreme Court’s opinion in Automatic Canteen Co. of America v. Federal Trade Commission, 346 U.S. 61 (1953) (Frankfurter, J.), which will be discussed first in this article, in affirming the grant of summary judgment dismissing plaintiff’s Robinson-Patman Act price discrimination claim. The court of appeals also affirmed dismissal of plaintiff’s Sherman Act section 1 claim, which reframed essentially the same facts as a conspiracy.

Automatic Canteen

Robinson-Patman Act (15 U.S.C. section 13) “secondary line” law imposes liability on buyers who receive discounts for large volume purchases, and on the sellers who provide such discounts, unless one of the affirmative defenses permitted by the Act applies. As the Supreme Court recently stated, a central legislative purpose of this Great Depression era legislation enacted in 1936 was to attack “the perceived harm to competition by powerful buyers” that have “the clout to obtain lower prices for goods than small buyers could command.” Volvo Trucks N. Am., Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164, 175 (2006). An example in the legislative history of the Act of the “perceived harm” is the repeated condemnation of a grocery store chain, A & P, that passed on to consumers the cost savings made possible by the chain’s economies of scale, because that diverted business from “Mom and Pop” stores and other independent businesses.

Although “powerful buyers” with “clout” were the perceived evil that the Act sought to attack, sixty years ago the Supreme Court made it very difficult to sue the powerful buyers successfully for receiving discounts. Automatic Canteen Co. of America v. Federal Trade Commission, 346 U.S. 61 (1953) (Frankfurter, J.). The Court stated that its construction of the Robinson-Patman Act was guided by the need to reconcile that Act “with the broader antitrust policies that have been laid down by Congress.” Id. at 74. The Court was concerned that “sturdy bargaining between buyer and seller” would be curtailed if buyers had to determine whether the seller’s price was lawful every time they negotiated for a lower price, and that the statute should not be construed to require exposure of the seller’s proprietary information to the buyer. Automatic Canteen, supra, at 69, 74.

Section 2(f) of the Act (15 U.S.C. section 13(f)) imposes liability on favored purchasers when they “knowingly induce or receive a discrimination in price which is prohibited” by the Act. To prevail, plaintiff must prove (1) that the favored purchaser knew that it paid lower prices than its competitors, and (2)—this is a major obstacle to liability—that defendant purchaser knew that the seller would have “little likelihood of a defense” (Automatic Canteen, supra, at 79-80 [emphasis added]) for offering that price. The Court held that a favored purchaser could only “knowingly receive … [a] price which is prohibited” if the buyer knew that no affirmative defense was available to the seller. Id. at 74. Defenses include cost justification and meeting competition. Robinson-Patman Act sections 2(a) and (b).

The Court focused on the cost justification affirmative defense, which allows price differentials that are in proportion to the cost savings that dealing with the buyer provides to the seller. Savings can be derived from a variety of areas, such as sales, delivery and marketing. See, Herbert F. Taggart, Cost Justification (U. Mich. 1959).

Costs cannot be determined by looking at the seller’s business records. Expert studies and expert testimony on costs, therefore, have been considered essential to the cost justification defense, and are inevitably subjective. Automatic Canteen, 346 U.S. at 68 (referring to “[t]he elusiveness of cost data, which apparently cannot be ascertained from ordinary business records . . . . a study seems to be required”).

The Federal Trade Commission, for decades, was antagonistic to the cost justification defense, and found fault with almost all studies that defendants used to measure costs. Successful cost justification defenses are only slightly more common than hens’ teeth. In what might be considered a rebuke to the FTC, the Court in Automatic Canteen turned this difficulty of proof against the Commission, questioning how a favored buyer could “knowingly” receive a price that was not cost justified, given that sellers’ costs were extremely difficult even for sellers to measure successfully. Automatic Canteen, 346 U.S. at 79 (“Proof of cost justification being what it is, too often, no one can ascertain whether a price is cost justified”); Automatic Canteen, supra, at 69 (“No doubt the burden placed on [the favored purchaser] to show his seller’s costs, under present Commission standards, is heavy. . . . [T]he data not only are not in the buyer’s hands, but are ordinarily obtainable even by the seller only after detailed investigation of the business”).

It is possible that the absence of any cost savings to the seller that could justify a price differential between buyers could be obvious. It could be that the favored purchaser “is served in the same manner or with the same amount of exertion” as the disfavored purchaser (Automatic Canteen, 346 U.S. at 80), and that “the methods by which he [the favored purchaser] was served and the quantities in which he purchased were the same as in the case of his [disfavored] competitor.” Ibid.

Gorlick Distribution

The Ninth Circuit Court of Appeals quoted extensively from Automatic Canteen in its new opinion, Gorlick Distribution Centers, LLC v. Car Sound Exhaust System, Inc., ___ F.4th ___, No. 10-36083 (9th Cir. July 19, 2013). In Gorlick, the Ninth Circuit affirmed the district court’s grant of summary judgment for defendant Allied on the Section 2(f) claim following discovery and held as a matter of law that the favored purchaser could reasonably believe that the seller had at least the “likelihood of a defense” without requiring the favored purchaser to prove that a defense exculpated the seller.

Both plaintiff Gorlick Distribution and defendant Allied Exhaust Systems purchased automotive aftermarket exhaust systems from defendant Car Sound, which settled out of the case, but they handled their Car Sound business in significantly different ways. Defendant Allied made Car Sound its flagship brand, purchased fifteen times more Car Sound products than plaintiff Gorlick, and provided promotional services that Gorlick did not. Allied promoted only Car Sound products, while plaintiff Gorlick did not promote the products of Car Sound, and instead promoted the products of Car Sound’s rivals. Allied established Car Sound’s business in the Pacific Northwest when Car Sound had previously done no business there, and did “missionary work” on behalf of Car Sound. Allied also developed a computer system to streamline its dealings with Car Sound.

Plaintiff alleged that Car Sound provided Allied with free shipping to the Pacific Northwest, which Gorlick did not receive; lower prices on merchandise; volume discount pricing; and higher year-end rebates than plaintiff Gorlick received.

The Ninth Circuit ruled that there was no evidence that Allied “knowingly” received an unlawful price: “Even if Allied knew it received superior prices and discounts, Gorlick presents no evidence that Allied knew these benefits resulted from anything other than the significant differences in how the two companies did business.” Gorlick, Slip Opinion at 7. The fact that Allied received prices below Car Sound’s schedule of published prices did not make it liable. The court refused to “put[] the buyer at his peril whenever he engages in price bargaining.” Id. at 6, quoting Automatic Canteen, 346 U.S. at 73; Gorlick, supra, at 7-8 (same). It also held that the favored purchaser was not under any duty to inquire whether the seller had an affirmative defense that justified the lower prices it charged the favored buyer. Id., Slip Opinion at 10-11.

Sherman Act Section 1 Claim

Plaintiff also brought a Sherman Act Section 1 claim asserting that Car Sound’s provision of free shipping to Allied for the Pacific Northwest, along with other advantages, while refusing to provide Gorlick with those benefits, constituted an illegal vertical restraint in violation of the rule of reason.

The Ninth Circuit held that plaintiff failed to show that the challenged conduct “concerning a product without market dominance“ caused “harm to competition in the entire automotive exhaust product market.” Gorlick, Slip Opinion at 16. The court stated that Gorlick was complaining about a reduction in intrabrand competition, when interbrand competition, “the primary concern of antitrust law,” Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 52 n. 19 (1977), was healthy. Gorlick, Slip Opinion at 14 (“vibrant interbrand competition will act as a check on any intrabrand advantage that Allied may receive on Car Sound products”). The court also stated that Car Sound providing plaintiff with the same pricing as Allied was not desirable because it could result in free riding by Gorlick, as it could undersell Allied due to services that the latter provided to the seller, such as Allied’s “missionary work.” Id. at 15.