Ninth Circuit Revives Claim That Discounts on 5-Hour Energy Sales to Costco Violate the Robinson-Patman Act

The Ninth Circuit’s July 20, 2023 decision in U.S. Wholesale Outlet & Distribution, Inc. v. Innovation Ventures, LLC may breathe new life into claims alleging price discrimination under the Robinson-Patman Act. While many US businesses offer diverse pricing and discounts to their customers, the Robinson-Patman Act prohibits sellers from “discriminat[ing] in price between different purchasers of commodities of like grade and quality . . . where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly.”

Under the Biden administration, antitrust enforcers have pushed for reinvigorated enforcement of the Robinson-Patman Act, with the Federal Trade Commission pursuing multiple investigations — including of Coca-Cola, PepsiCo, and Southern Glazer’s Wine and Spirits. With the decision in U.S. Wholesale Outlet, the implications for future litigation and enforcement could be significant, as plaintiffs may point to the Ninth Circuit’s reasoning in support of challenges to pricing practices that are common in certain industries. 

Price discrimination under the Robinson-Patman Act involves charging different prices to competing buyers for the same product. The Act permits price differences that account for differences in the cost of different methods or quantities of sale or delivery to different buyers. The Act also permits price differences that are in good faith to meet the equally low price of one of the seller’s competitors.  As we touch on below, sellers who charge different prices to different buyers for the same product should carefully document the reasons for those pricing decisions, such as differences in a seller’s cost to manufacture, sell, or deliver the product to a buyer (e.g., volume discounts) or are the result of a seller’s attempts to meet a competitor’s price.

U.S. Wholesale Outlet & Distribution, Inc. v. Innovation Ventures, LLC

In U.S. Wholesale Outlet, several wholesalers filed a complaint alleging that Living Essentials violated the Robinson-Patman Act by giving Costco preferential prices and discounts on the popular energy drink 5-Hour Energy. The wholesalers sought damages under Section 2(a) of the Robinson-Patman Act and an injunction under Section 2(d) of the Act.

The district court granted summary judgment to the wholesalers on three of the four elements required to make out a “secondary-line discrimination” claim under Section 2(a), finding that (1) the sales were made in interstate commerce, (2) the items sold were of like grade and quality, and (3) Living Essentials discriminated in price between Costco and the wholesalers. On the fourth element of a Section 2(a) claim — whether the discrimination caused competitive harm — a jury returned a verdict in favor of Living Essentials. The district judge then denied the wholesalers’ request for an injunction, reasoning that the jury implicitly found there was no competition between the plaintiff wholesalers and Costco, as required for injunctive relief under Section 2(d).

Ninth Circuit Decision

The Ninth Circuit largely affirmed the judgment for Living Essentials, but vacated and remanded with respect to the injunction claim.

Affirming Jury Instructions on Section 2(a) Claim

The Ninth Circuit reiterated that in a Robinson-Patman case involving “functional discounts” (i.e., compensation from the seller to the purchaser for services provided by the purchaser), a plaintiff must prove that any “functional discounts” paid by the seller to a purchaser were not “reasonable” reimbursement for services performed by the purchaser. The Ninth Circuit highlighted evidence that Costco performed marketing and other functions that the plaintiff wholesalers did not (e.g., promoting the product by giving it prime placement at the store, circulating mailers, and providing delivery and online sales for the product, among other things), and that Living Essentials’ “reimbursement” payments to Costco were “reasonable” compensation for the services Costco performed.  

The Ninth Circuit also observed that the evidence did not show a “particularly precise relationship” between Living Essentials’ payments to Costco and Costco’s marketing and promotional efforts, but nonetheless declined to disturb the jury’s finding that differences in pricing offered to Costco and the plaintiff wholesalers were lawful “functional discounts” to compensate Costco for the services it performed but the wholesalers did not.

Reversing District Court’s Judgment on Section 2(d) Claim

The heart of the Ninth Circuit’s opinion focuses on whether the wholesalers and Costco compete with each other, as required to support a Section 2(d) injunction claim. According to the Ninth Circuit, the district court erred in two respects:

First, the district judge erred in concluding that because the jury found in favor of Living Essentials on the Section 2(a) claim, the jury made an implicit factual finding that there was no competition between Costco and the plaintiff wholesalers, meaning they had failed to establish a necessary element for injunctive relief under Section 2(d). The Ninth Circuit held that the jury could have concluded that Costco and the wholesalers compete, but still found no harm to competition generally (which Section 2(a) requires, but Section 2(d) does not).

Second, the evidence showed that Costco only distributed 5-Hour Energy in its Costco Business Centers (not in ordinary Costco stores), which predominantly sell to convenience stores and grocery stores. Because Costco and the wholesalers each sell 5-Hour Energy to convenience stores and grocery stores, they “compete” at the same “functional levels” for purposes of Section 2(d).

Notably, the Ninth Circuit held that it was immaterial that Costco and the wholesalers had “substantial differences in operations.” The court also brushed aside evidence that the wholesalers had not lost sales to Costco, holding that lost sales goes to competitive harm (not a requirement for a Section 2(d) claim), not to the question of whether companies compete.

The Ninth Circuit vacated the district court’s denial of injunctive relief and remanded for consideration of whether the wholesalers had satisfied the only remaining element of the Section 2(d) — whether Costco and the wholesalers had bought 5-Hour Energy from Living Essentials “within approximately the same period of time.”

Looking Ahead

Businesses should carefully consider their rebating and preferential pricing strategies given the current enforcement and litigation environment.  In particular, the Ninth Circuit’s somewhat broad construction of what it means to “compete” under Section 2(d) may make defending preferential pricing strategies riskier.  If a business offers different pricing to different categories of customers, it should carefully consider whether those two customers compete with each other even if they appear to have significant differences in operations or functional levels of the supply chain.  For example, as in U.S. Wholesale Outlet, a discount department store may compete with a wholesaler store for the distribution of certain consumer goods to small businesses.

In addition, businesses should be mindful that antitrust enforcers and plaintiffs may scrutinize the relationship between any price discounts and the cost savings associated with one’s dealings with a particular buyer (such as the lower manufacturing costs associated with doing business with certain large-volume customers) or costs the buyer takes on (such as marketing or promotional services).

Consistently ranked among the top global antitrust practices, O’Melveny’s Antitrust & Competition team is well-positioned to help companies navigate the complex strategic questions posed by the current aggressive enforcement and litigation environment, particularly with respect to pricing strategies.  If you have any specific questions, please reach out to a member of the team listed below.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Pete Herrick, an O'Melveny partner licensed to practice law in the District of Columbia and New York, Stephen McIntyre, an O'Melveny partner licensed to practice law in California, and Monsura A. Sirajee, an O'Melveny associate licensed to practice law in the District of Columbia and California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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