Third Circuit Continues Trend of Limiting Price Discrimination Claims in Food Industry Case

19 January 2010 Publication
Authors: H. Holden Brooks Richard H. Casper

Legal News Alert: Antitrust

Introduction

On January 7, 2010, the United States Court of Appeals for the Third Circuit issued its decision in Feesers, Inc. v. Michael Foods, Inc. and Sodexho, Inc., Case No. 09-2548 (3d Cir. Slip op., Jan. 7, 2010), which addresses the “competing purchaser” requirement of price discrimination claims under the Robinson-Patman Act of 1936 (RPA), 14 U.S.C. § 13(2). In its decision, the Third Circuit held that Feesers’ RPA claims failed as a matter of law. It found that because the competition between Feesers and Sodexho occurred before the purchase of goods from Michael Foods, they were not “competing purchasers” for purposes of the RPA. The court also reiterated its recent holding in Toledo Mack Sales & Services, Inc. v. Mack Trucks, Inc, 530 F.3d 204, 227-28 (3d Cir. 2008), that evidence of a party’s “merely offering lower prices to a customer does not give rise to a price discrimination claim.” The decision, which concludes nearly six years of litigation, not only has implications for the food distribution and food-service management industries, but also provides guidance on how courts interpret and apply the RPA.

Background

Feesers is a regional food distributor that sells and delivers food to entities such as hospitals, schools, nursing homes, colleges, and businesses that manage their own food-service operations. Sodexho (now known as Sodexo) is the world’s largest food-service corporation and the largest private purchaser of food. Sodexho contracts with the same types of entities to which Feesers sells food, but its contracts cover all aspects of managing a customer’s food services, not just the purchase of food. Michael Foods is a national manufacturer of egg and refrigerated potato products.

In 2004, Feesers sued both Michael Foods and Sodexho, alleging that Michael Foods gave discounts on egg and potato products to Sodexho that were not available to Feesers and that these discounts constituted unlawful price discrimination under Section 2 of the RPA. The district court originally granted summary judgment for the defendants, finding that Feesers had failed to show that the discrimination had a prohibited effect on competition, which is a required element of an RPA claim. The Third Circuit reversed that decision in 2007, finding that the district court had applied the wrong competitive injury standard. The Third Circuit defined the central question in the case as being whether Feesers and Sodexho were “in economic reality acting on the same distribution level” such that they were “in direct competition for the same dollar” from the same customers.

After a three-week bench trial in the summer of 2009, the district court found in favor of Feesers. The district court held that Feesers was entitled to an inference of competitive injury because the evidence demonstrated that (1) Feesers competed with Sodexho for “the same dollar in the sale of Michael Foods products to institutional customers” and (2) there had been substantial and sustained price discrimination. The district court found that while Feesers and Sodexho do not offer the same mix of products and services to institutional customers (Feesers merely sells and delivers food, while Sodexho provides broad food-management services), the two were in competition because institutional customers regularly switch from self-operated to managed food services. The district court ultimately enjoined Michael Foods from engaging in unlawful price discrimination. When Michael Foods subsequently suspended all sales to Feesers, the district court found it in contempt and enjoined Michael Foods from refusing to sell products to Feesers on the same terms as they were sold to Sodexho.

Resolution by the Third Circuit

The Third Circuit vacated the district court’s decision and instructed it to enter judgment as a matter of law for Michael Foods and Sodexho, finding that the defendants “were not competing purchasers, and therefore, Feesers cannot satisfy the competitive injury requirement of a prima facie case of price discrimination” under the RPA. More broadly, the Third Circuit held that “in a secondary-line price discrimination case, parties competing in a bid market cannot be competing purchasers where the competition for sales to prospective customers occurs before the sale of the product for which the RPA violation is alleged.”

In support of its decision, the Third Circuit pointed to the fact that Feesers and Sodexho offered different products, and customers only compared the two if they were deciding whether to manage their own food-service operations or contract out their food-management services management to a third party. Once that decision was made, competition between Feesers and Sodexho was over and “[o]nly after that process [was] completed would the customer then actually purchase food from Michael Foods through the winning distributor or food-service management company.” Thus, Michael Foods would only make a sale to Feesers or Sodexho after their customers selected one or the other, such that “[t]he relevant market at the time of the sale of Michael’s products will have already been narrowed to one — the company that won the institution’s business.”

In reaching its decision, the Third Circuit relied on its prior decision in Toledo Mack Sales & Services, Inc. v. Mack Trucks, Inc., 530 F.3d 204 (3d Cir. 2008), and the U.S. Supreme Court’s decision in Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006), both of which rejected RPA claims. The Third Circuit explained that those decisions “emphasized that proving ‘substantial price discrimination between competing purchasers over time’ … requires accounting for the timing of the alleged competition and the nature of the market.” The Third Circuit repeatedly stressed that its decision in Toledo Mack and the Supreme Court’s decision in Volvo Trucks indicated that the RPA’s reach should be “limited” and that the statute must be construed “consistently with the broader policies of the antitrust laws.” This is because the “RPA often has anticompetitive effects that ‘promote rather than … prevent monopolistic pricing practices.’” And the Third Circuit noted that, just as in Volvo Trucks and Toledo Mack, “the price discrimination identified by Feesers bears ‘little resemblance to [the] large independent department stores and chain operations’ the statute was originally intended to target.”

Conclusion

By vacating the permanent injunction against Michael Foods, the Feesers decision has an immediate impact on the food distribution and management industries. It also provides a clear indication that courts are likely to continue construing the RPA narrowly and that they find substantial support in the Supreme Court’s decision in Volvo Trucks for doing so.


Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Rebecca Wickhem House
Milwaukee, Wisconsin
414.297.5681
rwickhemhouse@foley.com

Holden Brooks
Milwaukee, Wisconsin
414.297.5711
hbrooks@foley.com

Richard H. Casper
Milwaukee, Wisconsin
414.297.5612
rcasper@foley.com

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