January 08, 2010

Third Circuit Reverses Price Discrimination Judgment in Feesers v. Michael Foods and Sodexho

In a decisive reversal of a district court judgment issued last year, the Third Circuit on January 7 firmly held that Michael Foods and Sodexo are entitled to judgment as a matter of law on Feesers Inc.'s Robinson–Patman Act price discrimination claims.

The appellate court did not contest that Feesers had shown that—on average and over time—Michael Foods sold egg products to Sodexo at lower prices. The court instead focused on the statute's requirement of competitive injury from price discrimination, and in particular on the requirement that two purchasers of products from a single manufacturer be in competition with each other for "the same dollar."

In a bid market, such as that faced by Sodexo and Feesers when seeking the food business of institutional customers, the Third Circuit found that by the time either party purchased from Michael Foods, the competition between them had long ceased, depending on the institution's decision to use a food service management approach, ala Sodexo, or traditional distribution from Feesers.

District Court: Feesers Proved Price Discrimination by Michael Foods

Following a bench trial, a federal judge in Pennsylvania issued a rare plaintiff's judgment in a Robinson–Patman Act (RPA) case last June. The court found that local Harrisburg food distributor Feesers had proved its claim that Michael Foods, the largest producer of liquid eggs in the United States, had discriminated against it in the pricing of egg and potato products sold to both Feesers and the multinational food service management firm, Sodexo. See Feesers v Michael Foods case update.

Feesers' evidence showed that Michael Foods charged it 59 percent higher prices than Sodexo on average on the 11 top-selling Michael Foods products over several years. While the district court identified only three instances of head-to-head competition between Feesers and Sodexo, the court found other informal competition to switch institutional customers between self-operation and food service management. Ultimately the district court enjoined Michael Foods to sell products to Feesers at prices not less than those charged Sodexo.

Food Service Management Firms and Food Distributors Held Not to Compete in Bid Markets

The Third Circuit last summer rapidly stayed the injunction and set the case on for expedited appeal, indicating concern with the conclusions reached by the district court.

In a unanimous ruling—based both on circuit precedent and the Supreme Court's 2006 decision in Volvo Trucks v. Reeder Simco—the Third Circuit has now reversed the judgment in all respects (including the finding that Sodexo had unlawfully solicited discriminatory pricing), and vacated the injunction. Feesers, Inc., v. Michael Foods, Inc., and Sodexho, Inc., No. 09-2548, et al. (3rd Cir. slip op.Jan. 7, 2010).

The Third Circuit held that "Feesers and Sodexo were not competing purchasers, and, therefore, Feesers cannot satisfy the competitive injury requirement of a prima facie case of price discrimination under section 2(a) of the RPA." Expanding this holding into a broader statement about the applicability of the Act to markets characterized by competitive bidding, the court held, "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."

Third Circuit: Companies Were Not Acting at Same Distribution Level

To support this line of reasoning the appellate court looked to the three-tier distribution structure of the food service industry: "manufacturers sell products to distributors, who resell those products to operators, including self-operators (‘self-ops') and food service management companies. . . . Food service management companies perform institutions' dining services for a fee . . . ." (The court also noted group purchasing organizations, or GPOs, as players in the industry.) The district court had found that Feesers and Sodexo competed "when a customer considers switching from self-op to food service management, or vice versa," and that Sodexo "touts its access to discounted foods to its existing customers," although Sodexo itself is not a distributor.

However, the Third Circuit found that the two companies were not "in economic reality acting at the same distribution level;" that any competition between the two had ended after a customer had made the decision to go with an RFP for food management services, or to self-op through a traditional food distributor; and that any purchase and resale of product from Michael would occur after a subsequent decision by the customer as to which food service management company, on the one hand, or distributor, on the other, it would go with. Citing Volvo Trucks, the court explained: "In a bid market, if the competition between the favored and disfavored purchaser occurs before the purchase of the goods from the seller, then the disfavored purchaser cannot show that it and the favored purchaser were competing purchasers."

Feesers Fails Two-Purchaser Requirement

In an extension of the Volvo Trucks court's ruling, the Third Circuit also held that the RPA requirement that there be two sales by a manufacturer to competing resellers—not just a sale and an offer for sale—was not met in this case. The court held that, "the competition between Feesers and Sodexo for institutions' business occurred prior to Michael's sales of food products to Feesers and Sodexo," and that "Sodexo would not yet have secured any products from Michaels for resale to the prospective customer . . . ," even though Sodexo would be offering pricing to the prospective customer based on previously known discounts available to it from suppliers such as Michaels, a point the Third Circuit contended was analogous to the custom truck bidding business at issue in Volvo Trucks.

The Third Circuit insisted that its decision "was not reached by a simple application of the RPA's two-purchaser requirement. It was reached through the combined effect of the RPA's two purchaser and competitive injury requirements—i.e., the competing purchaser requirement." However, it is worth noting that the two purchaser requirement alone would have been sufficient to decide the case against Feesers and would support a conclusion that the RPA does not apply generically to bid markets, something the Supreme Court has not held.

In this regard, the Third Circuit also rejected the applicability of the so-called Morton Salt inference of competitive harm—namely that a sustained price difference over time alone can be sufficient to demonstrate competitive injury. In a bid market, the persistent price difference cannot be the source of statutory harm absent two contemporaneous purchases at different prices. The court did not expand this holding outside the context of bid markets.

The Least-Favored Antitrust Statute

The Third Circuit's decision is replete with references to "the Supreme Court's instructions to narrowly construe the RPA," and to harmonize its provisions with the purposes of the broader antitrust laws. In light of the Volvo Trucks decision only three years ago, and the logical generalization of that decision to bid markets in other industries, Supreme Court review of the Third Circuit's decision in Feesers seems unlikely.

In reversing the judgment of unlawful solicitation of discriminatory pricing against Sodexo under Section 2(f) of the RPA, the Third Circuit held, consistent with established law, that absent a prima facie case of price discrimination under Section 2(a), there cannot be a claim for unlawful solicitation. Barring an unexpected review by the Supreme Court, the Third Circuit's decision will stand as another in the long history of the Robinson–Patman Act as the Rodney Dangerfield of antitrust law.

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