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U.S. Supreme Court Reverses Price Discrimination Ruling

Legislative Issue Update - January 2006

In a 7-2 decision, the U.S. Supreme Court has reversed a federal appeals court decision which could have greatly expanded a seller’s liability exposure under the Robinson-Patman Act (“RPA”), the federal price discrimination law. (Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., Docket No. 04-905). The Court held that a manufacturer or other seller does not violate the RPA in the absence of evidence that the manufacturer discriminated in price between two dealers competing with each other to resell the manufacturer’s products to the same retail customer.

Background:

In the heavy truck industry, units are generally manufactured only after a retail customer (such as a trucking company or fleet operator) solicits competitive bids from dealers such as Reeder for several competing OEM’s (e.g., Mack, Ford, Freightliner). During this bidding process, Volvo dealers seek concessions (discounts) from Volvo for a price below the standard wholesale price, which then allows the dealer to offer a lower price to the retail customer.

Volvo decides on a case-by-case basis whether to offer a discount, which effectively is an offer to sell used by the dealer in preparing its bid. The dealer purchases the trucks from Volvo at the quoted discount only if the retail customer accepts its bid.

In the rare case where a retail customer solicits a bid from more than one Volvo dealer, Volvo’s stated policy was to provide the same discount to each dealer competing head-to-head for the sale.

Rulings Below:

In 2000, Reeder filed a secondary-line injury RPA suit, alleging that its sales and profits declined because Volvo offered other Volvo dealers more favorable discounts. “Secondary-line” injury is injury to competition among the discriminating seller’s customers (here, Volvo dealers). The evidence offered by Reeder to prove its RPA injury fell into three categories:

  • Head-to-Head Comparisons - - There were two instances over the 5-year course of Reeder’s authorized Volvo dealership when Reeder bid against another Volvo dealer for a sale to the same retail customer. In one instance, although Volvo initially offered Reeder a smaller discount, Volvo ultimately matched the discount offered to the other Volvo dealer. Neither Reeder nor the other Volvo dealer won the bid.

    In the second instance, Volvo initially offered Reeder and the other Volvo dealer, Southwest Missouri Truck Center, the same discount on a bid for the purchase of 12 trucks by Hiland Dairy. Hiland selected Southwest Missouri (from which it had purchased trucks before) as the successful bidder, but insisted on the price that Southwest Missouri had bid prior to a general increase in Volvo’s prices. Volvo only then increased the discount to Southwest Missouri by 1% (in dollar terms, $750 for a truck costing $63,000). Had Reeder won the bid, it would have realized a $30,000 gross profit on the sale.

  • Purchase-to-Purchase Comparisons - - On four occasions Reeder sold Volvo trucks to a retail customer, but did not make as much profit on the deal because another “favored” Volvo dealer received a greater discount from Volvo, in another sale, to a different retail customer. For example, Reeder was quoted a 9% discount and successfully bid on the sale of thirty trucks to a Tulsa trucking company. Two months earlier, Volvo granted another Volvo dealer a 12.3% discount on the sale of twelve similar trucks to Texas-based grocery company. Had Reeder also received a 12.3% discount, its profit on the Tulsa trucking company sale would have been greater.
  • Offer-to-Purchase Comparisons - - On several occasions Reeder lost sales to a non-Volvo dealer because Volvo failed to quote Reeder the same discount it gave to another “favored” Volvo dealer, in another sale, to a different retail customer. For example, Reeder was quoted a 24% discount for a bid to sell trucks to Beach Trucking. Beach Trucking elected to buy the trucks from a Volvo competitor. At the same time another Volvo dealer was quoted a 26% discount on a bid to sell similar trucks to another retail customer. Had Reeder received the greater discount it might have won the Beach Trucking bid.

The jury also found evidentiary significance in the “Volvo Vision” announced by Volvo in 1998 at its annual dealer conference. The Vision was a dealer consolidation strategy, with a Volvo executive predicting that the number of Volvo dealers would go from 146 to 75 in two years, under-performing dealers would not be around and the surviving dealers would have larger markets. Reeder suspected that it was one of the dealers destined for elimination.

The jury found that there was a reasonable possibility that discriminatory pricing may harm competition between Reeder and other Volvo dealers and that Reeder was injured by the discriminatory pricing. The jury awarded $1.358 million in damages on Reeder’s RPA claim, which was trebled to $4 million, plus attorneys’ fees.

On appeal, a divided (2-1) Court of Appeals for the 8th Circuit affirmed the jury verdict. Specifically, the appeals court pointed to evidence that (1) Volvo intended to reduce the number of its dealers; (2) Reeder lost the Hiland Dairy contract, for which it competed head to head with another Volvo dealer; (3) Reeder would have earned more profits had it received the discounts other dealers received; and (4) Reeder’s sales had declined over a period of time.

Supreme Court’s Ruling:

On appeal to the Supreme Court, the Court stated the RPA does not prohibit all prices differences charged to different purchasers of a product. Rather, it proscribes price discrimination only to the extent that it threatens to injure competition. In this type of case, the price discrimination must injure competition among the discriminating seller’s customers (i.e., among Volvo dealers). To establish competitive injury, Reeder (the disfavored purchaser) must prove a diversion of sales or profits to another Volvo dealer (the favored purchaser) caused by the discrimination. An inference of competitive injury requires proof that the favored purchaser received a significant price reduction from the seller over a substantial period of time.

Turning to the evidence, the Court held that the purchase-to-purchase and offer-to-purchase comparisons do not constitute a RPA violation. In none of these instances did Reeder compete with a “favored” Volvo dealer for a sale to the same retail customer.

The Court also rejected the head-to-head comparisons as evidence to support a RPA violation. Assuming (without deciding) that the RPA even applies to competitive bidding transactions, this evidence is not of such magnitude as to affect substantially competition between Reeder and the “favored” Volvo dealer. Volvo had urged the Court to find that the RPA does not apply to a competitive bid transaction—where multiple dealers bid for the business of the same customer, and only one dealer wins the business and thereafter purchases the supplier’s product to fulfill the contract. The Court declined to rule on this question.

Finally, there was no evidence in this case that any of the “favored” Volvo dealers possessed market power, i.e., sufficient economic power in the relevant market to raise prices above those that would prevail in a competitive marketplace without inducing customers to turn elsewhere. The supplier’s discounting practices in this case tended to promote interbrand competition (competition among suppliers of different brands) which the Court reiterated is “the primary concern of antitrust law,” including the Robinson-Patman Act.

The Court’s opinion can be accessed at www.supremecourtus.gov/opinions/05slipopinion.html