Meeting competition defense

Overview[]

An affirmative defense to a Robinson-Patman Act claim of illegal differential pricing is the so-called “meeting competition” defense. This defense has at least two levels: a defendant may assert (and must prove) that the lower price charged to a favored buyer was selected in order to permit the seller to meet the price offered by a competing seller ("primary line competition"); or he may assert (and must prove) that the challenged price was necessary in order to enable the buyer to meet the competition of one of the buyer's competitors ("secondary line competition").^[1]

A seller may not, however, knowingly “beat” the prices of a competitor.^[2] A Robinson-Patman Act defendant may also successfully defend his challenged pricing activity if he can show that his price differentials were “cost justified” — i.e., that the price differential made only due allowance for the costs incurred in producing or delivering the goods.^[3]

References[]

↑ “A good-faith belief, rather than absolute certainty, that a price concession is being offered to meet an equally low price offered by a competitor is sufficient to satisfy the ['meeting competition'] defense. While casual reliance on uncorroborated reports of buyers or sales representatives without further investigation may not . . . be sufficient to make the requisite showing of good faith, nothing in the language of [the statute] . . . indicates that direct discussions of price between competitors is required.” United States v. United States Gypsum Co., 438 U.S. 422, 453 (1978) (emphasis added). According to the Gypsum Court, an exchange of price information is unlawful as a violation of the Sherman Act prohibition against agreements or conspiracies in “restraints of trade” (15 U.S.C. §1); it is an agreement having an effect on price or output (i.e., price fixing), and is not saved by an assertion that it was necessitated in order to assure compliance with the Robinson-Patman Act mandate that price breaks generally may be granted to favored buyers only as necessary to meet the competition of another seller.
↑ The Supreme Court has long held that the Robinson-Patman Act permits a seller to meet competition (Federal Trade Comm'n v. A.E. Staley Mfg. Co., 324 U.S. 746, 759-60 (1945): “The test for determining when a seller has a valid meeting-competition defense is whether a seller can ‘show the existence of facts which would lead a reasonable and prudent person to believe that the granting of a lower price would in fact meet the equally low price of a competitor.’”). It is a Robinson-Patman Act violation, however, to knowingly lower prices sufficiently to beat those of a competitor. Further, the Court held in Great Atlantic & Pacific Tea Co. v. Federal Trade Comm'n, 440 U.S. 69 (1979) (the so-called “lying buyer” case) that, if a seller is not guilty of a Robinson-Patman Act violation (because, e.g., his lower price is cost-justified, or he actually believed that he was doing no more than meeting competition), neither is the buyer receiving the lower, but not unlawful price guilty of violating 15 U.S.C. §13(f), which prohibits the knowing inducement or “a discrimination in price which is prohibited [in 15 U.S.C. §13].”
↑ 15 U.S.C. §13(a): “Provided, That nothing herein contained shall prevent differentials which make only due allowances for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered: . . . .” See, e.g., Texaco v. Hasbrouck, 496 U.S. 543 (1990); the Hasbrouck Court cited several commentators who unanimously noted that the “exactitude” of the proof required by the cost justification defense — the need to show that the price reduction(s) did not exceed the seller’s actual cost savings — is generally not possible in actual market situations. A proxy for that defense, however, may be the “functional discount”: “A supplier need not satisfy the rigorous requirements of the cost justification defense in order to prove that a particular functional discount [discount for services rendered by, e.g., a wholesaler] did not cause any substantial lessening of competition between a wholesaler’s customers and the supplier’s direct customers. [But no one] would . . . countenance a functional discount completely untethered to either the supplier’s savings or the wholesaler’s costs.” Id. at 561, 562 (n.18 and accompanying text). Moreover, although the Supreme Court had ruled previously that the phrase “like grade and quality” refers to physical versus perceived identity, it had also noted, obliquely, in the same case, that the cost-justification calculation might include advertising expenses incurred to convince consumers of the superior nature of a branded product: “Borden’s extra expenses in connection with its own milk are more relevant to the cost justification issue than to the [like grade and quality] question we have before us.” Federal Trade Comm'n v. Borden Co., 383 U.S. 637, 644 n.5 (1966).

[1] “A good-faith belief, rather than absolute certainty, that a price concession is being offered to meet an equally low price offered by a competitor is sufficient to satisfy the ['meeting competition'] defense. While casual reliance on uncorroborated reports of buyers or sales representatives without further investigation may not . . . be sufficient to make the requisite showing of good faith, nothing in the language of [the statute] . . . indicates that direct discussions of price between competitors is required.” United States v. United States Gypsum Co., 438 U.S. 422, 453 (1978) (emphasis added). According to the Gypsum Court, an exchange of price information is unlawful as a violation of the Sherman Act prohibition against agreements or conspiracies in “restraints of trade” (15 U.S.C. §1); it is an agreement having an effect on price or output (i.e., price fixing), and is not saved by an assertion that it was necessitated in order to assure compliance with the Robinson-Patman Act mandate that price breaks generally may be granted to favored buyers only as necessary to meet the competition of another seller.

[2] The Supreme Court has long held that the Robinson-Patman Act permits a seller to meet competition (Federal Trade Comm'n v. A.E. Staley Mfg. Co., 324 U.S. 746, 759-60 (1945): “The test for determining when a seller has a valid meeting-competition defense is whether a seller can ‘show the existence of facts which would lead a reasonable and prudent person to believe that the granting of a lower price would in fact meet the equally low price of a competitor.’”). It is a Robinson-Patman Act violation, however, to knowingly lower prices sufficiently to beat those of a competitor. Further, the Court held in Great Atlantic & Pacific Tea Co. v. Federal Trade Comm'n, 440 U.S. 69 (1979) (the so-called “lying buyer” case) that, if a seller is not guilty of a Robinson-Patman Act violation (because, e.g., his lower price is cost-justified, or he actually believed that he was doing no more than meeting competition), neither is the buyer receiving the lower, but not unlawful price guilty of violating 15 U.S.C. §13(f), which prohibits the knowing inducement or “a discrimination in price which is prohibited [in 15 U.S.C. §13].”

[3] 15 U.S.C. §13(a): “Provided, That nothing herein contained shall prevent differentials which make only due allowances for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered: . . . .” See, e.g., Texaco v. Hasbrouck, 496 U.S. 543 (1990); the Hasbrouck Court cited several commentators who unanimously noted that the “exactitude” of the proof required by the cost justification defense — the need to show that the price reduction(s) did not exceed the seller’s actual cost savings — is generally not possible in actual market situations. A proxy for that defense, however, may be the “functional discount”: “A supplier need not satisfy the rigorous requirements of the cost justification defense in order to prove that a particular functional discount [discount for services rendered by, e.g., a wholesaler] did not cause any substantial lessening of competition between a wholesaler’s customers and the supplier’s direct customers. [But no one] would . . . countenance a functional discount completely untethered to either the supplier’s savings or the wholesaler’s costs.” Id. at 561, 562 (n.18 and accompanying text). Moreover, although the Supreme Court had ruled previously that the phrase “like grade and quality” refers to physical versus perceived identity, it had also noted, obliquely, in the same case, that the cost-justification calculation might include advertising expenses incurred to convince consumers of the superior nature of a branded product: “Borden’s extra expenses in connection with its own milk are more relevant to the cost justification issue than to the [like grade and quality] question we have before us.” Federal Trade Comm'n v. Borden Co., 383 U.S. 637, 644 n.5 (1966).

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