The FTC revised its Guides for Advertising Allowances and Other Merchandising Payments and Services under the Robinson-Patman Act (15 U.S.C. §§ 13(d), (e)). These so-called "Fred Meyer Guidelines" deal with advertising and promotional assistance given by suppliers to their reseller customers in connection with resale activities. Accompanying the revised Guides is a lengthy commentary by the FTC describing the reasons for and considerations that underlie the various changes. The Guides appear in 16 C.F.R. 240 and the FTC Commentary to the revised Guides in 55 FR 33651 (August 17, 1990).
The original Guides resulted from the Supreme Court's decision in Fred Meyer, Inc. v. FTC, 390 U.S. 341 (1968), holding that a manufacturer offering promotional benefits to direct-buying retailers was required by sections 2(d) and 2(e) of the Robinson-Patman Act to offer equal or proportionate benefits to competing retailers which purchased through wholesalers. The Court recognized the compliance difficulties created by its ruling and suggested that the FTC issue guidelines to assist manufacturers (390 U.S. at 358). The original Guides were issued in 1969 and have been revised on several occasions.
The new Guides, like their predecessors, deal only with situations where a seller makes payments for promotional services extended to resellers, e.g., the seller makes payments under a cooperative advertising program (section 2(d)), or where the seller itself provides promotional services to its customers, e.g., the seller provides its customers with in-store demonstrators (section 2(e)). The FTC has stated that the "Guides are not binding regulations, but are advisory interpretations providing assistance to businesses seeking to comply" with the Robinson-Patman Act. FTC Comments, p. 2.
In general, sections 2(d) and 2(e) of the Robinson-Patman Act require that a seller offering payments to resellers for promotional services or providing such services is obligated to make the offer to all competing customers on proportionally equal terms. In suing for a violation of section 2(d) or 2(e), the plaintiff need not make any showing that there was competitive injury: The practices, once shown to exist, are regarded as an automatic violation of law irrespective of the competitive circumstances.
This standard is to be contrasted with that applicable to section 2(a) of the Robinson-Patman Act, which is most widely used in price discrimination cases. Section 2(a) makes it unlawful for a seller to charge competing customers different prices where "the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce." Because competitive injury must be shown, section 2(a) presents a more difficult standard for a plaintiff to meet than that applicable to sections 2(d) and 2(e).
The revisions deal with a number of interpretation problems that have come up in implementing sections 2(d) and 2(e). Some of the more important issues are treated briefly in the discussion which follows.
Connection with resale
The revised Guides stress the necessity of finding a close connection between a promotional allowance or service offered by the seller and the buyer's resale of the seller's product. For example, payments to a buyer for a trade show may not violate section 2(d) of the Act if they are not closely connected with the resale of the seller's products. Section 240.2; FTC Comments, p. 4. However, these situations need to be analyzed carefully, because such a payment may be a price discount cognizable under section 2(a) of the Act, the section which deals with direct and indirect price discrimination.
What services are covered?
The former Guides regarded the acceptance of returns from a customer for credit as an example of a service that needs to be made available on a proportionalized basis. The new Guides eliminate this example. Section 240.7. This means that the FTC will no longer view the practice as reachable under section 2(e) of the Act. While this is helpful, the problem still needs to be analyzed carefully, because the Guides may not be accepted by a court as the definitive statement of law in a private treble damage action under section 2(e). Moreover, the acceptance of returns from one customer and not another could probably be reached as price discrimination under section 2(a) of the Act.
Who are customers?
The Guides continue to recognize that both direct and indirect purchasers from the seller are entitled to the same promotional benefits. Section 240.4. For example, a retailer buying the seller's product from a wholesaler is entitled to the same cooperative advertising program received by a competing retailer buying directly from the supplier.
The new Guides deal with the perplexing problem of what the seller's obligations are when the retailer to whom it sells transfers the product to some other retailer. In the normal case, the seller may not even know the identity of the second retailer. Example 1 of section 240.4 suggests that there is seller liability only where the seller has knowledge of the second retailer:
"A manufacturer sells to some retailers directly and to others through wholesalers. Retailer A purchases the manufacturer's product from a wholesaler and resells some of it to Retailer B. Retailer A is a customer of the manufacturer. Retailer B is not a customer unless the fact that it purchases the manufacturer's product is known to the manufacturer."
Cooperatives
Problems concerning cooperatives need close analysis to determine how such organizations are to be classified for the purposes of the Act, e.g., as wholesalers or retailers.
The Guides treat the following as being on the same functional level: wholesalers, the headquarters of a retailer owned cooperative and the headquarters of any other bona fide retailer buying group. Section 240.4, Example 3. All such customers would be entitled to the same allowance program made available by the seller to wholesalers.
Alternative programs.
The new Guides continue to recognize that the seller may offer payment for different kinds of promotional programs. Those payments, however, must be offered on proportionally equal terms to all competing customers. There is little difficulty where the customer is given the option to elect TV advertising, newspaper advertising, handbills or some other suitable form of advertising. Section 240.10, Example 1. As the customer's options are diminished, the issue of proportionality becomes more significant.
The Guides retain the general comment that the customer's entitlement to advertising dollars should normally be based on the dollar volume or the quantity of the product purchased by the customer during a specified period. Section 240.9.
There was considerable debate over whether payment by the seller should be based on the value of the service to the seller or must be based on actual expenditures for promotional activity made by the buyer. The new Guides do not fully resolve this issue. The examples used under section 240.9 of the new Guides are limited to cases where the buyer made actual expenditures on behalf of the seller (see in particular Example 7).
The new Guides also recognize that different customers, e.g., retailers, may have very different kinds of operations and therefore different advertising needs. It is permissible, for example, for one customer to receive payments for advertising services while another customer receives actual services from the seller. Section 240.10(a), Example 2.
Alternative programs, however, must be proportionally equal and the Guides say that the seller "should inform competing customers of the various alternative plans." Section 240.10(a)(1).
Proof of payment
The Guides retain the requirement that the seller should take reasonable precautions to see that the services for which the seller is paying are actually performed and that he is not overpaying for them. Section 240.12.
Unauthorized deductions
The Guides make it clear that a buyer may be liable under section 5 of the Federal Trade Commission Act for knowingly inducing a seller to grant the buyer an advantage, because the services or allowances that the buyer receives were not made available on proportionally equal terms to the buyer's competitors. Section 240.13.
It is a common practice for a buyer to deduct from the seller's invoice the amount of the advertising allowance that the buyer believes it is entitled to receive. Such a practice is normally contrary to the program that the seller has introduced. The buyer, of course, wishes to make a deduction from the invoice so that it receives payment earlier.
If it turns out that the buyer deducted too much from the invoice or was not entitled to make the deduction, the result is to discriminate unlawfully in favor of the buyer who made the deduction. Such a practice may lead to seller liability under section 2(d) for providing an allowance not made available to competing buyers on proportionally equal terms or to buyer liability under section 5 of the Federal Trade Commission Act or both.
Suggested prices
The former Guides provided that a "seller should not refuse to participate in the cost of ads that feature prices other than the seller's suggested prices." Former section 240.7, Example 8. The new Guides, section 240.9, eliminate this example. This means that a seller's refusal to participate in an ad which features some other price than the seller's suggested price will be evaluated under the rule of reason rather than being automatically regarded by the FTC as resale price maintenance, a per se violation of section 1 of the Sherman Act.
This change must be viewed with caution. There is nothing in the Guides which says that a seller's refusal to participate in an ad of the type discussed is automatically legal. FTC Comments, p. 57. Moreover, such a refusal may carry an implication of vertical price fixing which the courts continue to view as illegal.
Shelf space
The FTC Comments (p. 62 et seq.) note that there is great controversy over the growing practice of making payments for a retailer's shelf space. The Guides do not analyze the issue other than to indicate that there is a significant problem. A footnote to new Guide 9 (section 240.9) provides:
"The discriminatory purchase of display or shelf space, whether directly or by means of so-called allowances, may violate the [Robinson-Patman] Act, and may be considered an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act." Emphasis added.
The evident intent of the footnote is to sound a warning. Accordingly, any proposed payment for shelf space needs to be carefully analyzed to make sure that antitrust risk is manageable.
Meeting competition
Cost justification is not a defense to a claimed violation of section 2(d) or 2(e) of the Act. On the other hand, meeting in good faith the equally high payments or equivalent services offered by a competitor is an appropriate defense.The new Guides state the meeting competition rules as follows in section 240.14:
"A seller charged with discrimination in violation of Sections 2(d) and (e) may defend its actions by showing that particular payments were made or services furnished in good faith to meet equally high payments or equivalent services offered or supplied by a competing seller. This defense is available with respect to payments or services offered on an area-wide basis, to those offered to new as well as old customers, and regardless of whether the discrimination has been caused by a decrease or an increase in the payments or services offered. A seller must reasonably believe that its offers are necessary to meet a competitor's offer."
This is in substantial conformity with the Supreme Court's decision in Fall City Industries, Inc. v. Vanco Beverage, Inc., 460 U.S. 428 (1983).
David T. Steffen
1. Section 2(a) can also apply to so-called primary line competition among sellers. There is no parallel application to competing sellers under sections 2(d) and 2(e).