All Eyes on Woodman’s: Bulk Packaging as Promotional Services Under the RPA

Manufacturers of goods and their attorneys are keeping close watch on the case developing between Woodman's Markets and Clorox.¹  At issue is a manufacturer's ability to use large-packaged goods to work around the price discrimination provisions of the Robinson-Patman Act (RPA).

Section 2(a) of the RPA

Section 2(a) requires that competing customers have the ability to purchase goods of like grade and quality at equal prices.² There is evidence that this section—and the exception for lower prices that are "functionally available" to smaller buyers—spawned the existence of the bulk packaging used by warehouse stores, allowing them to use their purchasing leverage to buy products in larger package sizes that might not be practical in a traditional retail environment. (Think 42-pound bags of kitty litter and double-pack boxes of breakfast cereal.)

Sections 2(d) and (e)

Sections 2(d) and (e) prohibit a manufacturer from discriminating against competing customers when providing services or paying allowances. While this appears straightforward, case law on these sections provides even less practical guidance for manufacturers than does the law on Section 2(a).

The potential incongruities of the RPA

If section 2(a) gave life to larger packages, sections 2(d) and (e) might now act as the fodder to kill them. At least, that is what is at stake in Woodman's. For manufacturers who differ the packaging they offer customers, heeding the case's initial and future rulings will remain an important tactic for managing RPA risks.

The basics behind Woodman's

In the case, plaintiff Woodman's—a regional grocery store chain—argued that the defendant Clorox violated sections of the RPA pertaining to price discrimination. At issue was Clorox's decision to discontinue sales of "large pack" products to Woodman's. Instead, Clorox sold the large-pack products only to what it called "club retailers," including Costco and Sam's Club. Woodman's had the ability to continue purchasing Clorox products in smaller packages. The result, however, was that Woodman's often had to pay a higher cost per unit than the large-pack items.

Woodman's sued, claiming that Clorox's decision was a violation of sections 2(d) and (e) of the RPA. It argued that its customers benefit in multiple ways from the larger packs. First, it is more convenient to buy those goods and transport them home less frequently. Woodman's  also argued the packaging itself provides an incentive for consumers to buy the larger products. Additionally, the larger packages offered a price incentive, as they cost less per unit.

Clorox responded, stating a larger-packaged item is a different product from its smaller version. It does not see the package as a promotional service to help the retailer sell to the general public. Instead, the packaging is a means to define the product itself. Clorox then moved for dismissal for failure to state a claim under Fed. R. Civ. P. 12(b)(6). It argued that its refusal to sell was akin to a unilateral refusal to deal, which is permissible under Colgate and its progeny. The court rejected the motion.

Then, in a move that the court characterized as a "zig zag," Clorox refused to sell to Woodman's at all and filed a motion under Rule 12(b)(1) to dismiss for lack of subject-matter jurisdiction. Clorox reasoned that, if it did not sell directly to Woodman's, Woodman's was not a "purchaser" within the meaning of RPA and thus would not have standing to sue under the Act. Woodman's countered that, even after Clorox's refusal to deal, it was an indirect "purchaser" because it bought Clorox products through wholesalers. The court agreed, ruling that, in contrast to other federal antitrust statutes, a "purchaser" under Sections 2(d) and 2(e) of the RPA need not purchase directly.³

In a later "zig zag", the court denied Woodman's motion for a preliminary injunction, concluding that Woodman's had not shown that it would suffer irreparable harm from Clorox's refusal to supply it, and that monetary damages would be adequate to compensate it for any losses due to Clorox's decision.⁴ The court's preliminary-injunction decision did not comment on the merits. The court's denial of the injunction determined that the dispute between Woodman's and Clorox will be one over damages.

The parties' stances on packaging as promotional service

The substantive dispute between Woodman's and Clorox turns on whether packaging size fits within the boundaries of "promotional services." But neither "services" nor "facilities" have clear definitions in the RPA or in court decisions interpreting the Act. And FTC guidelines provide limited assistance.

Thus far, Woodman's has supported its legal position with FTC decisions from 1940 and 1956. The administrative decisions involved a smaller package of cosmetics and an institutionalized sized package of coffee. Both decisions stated that selling the differently sized packages to some customers, but not others, violated section 2(e).

Clorox has argued that the FTC decisions are antiquated and nonbinding. It also put forth an FTC case along with several U.S. Supreme Court cases to support its arguments.

The court's analysis

In its decision on the first motion to dismiss, the court focused its analysis on whether large-packaged goods fit within the terms of "promotional services." It turned to the FTC's published "Fred Meyer" Guides, which specifically list activities it deems promotional services. That list includes "special packaging, or package sizes." The court also reviewed the facts at issue in the FTC cases put forth by Woodman's. It stated that the cases "seem dispositive." It also found that the cases and FTC decision that the defense relied upon were not on point. Therefore, it held that Woodman's allegations are sufficient to state a claim under the RPA.

The court found the Fred Meyer precedent as persuasive in its denial of Clorox's later motion to dismiss for lack of subject-matter jurisdiction.

A note for legal counsel of manufacturers

Most counselors may find themselves challenged by the lack of recent case law interpreting Sections 2(d) and 2(e). If so, then know this: Woodman's shows that legal counsel cannot disregard pre-Chicago-School authority when advising clients. Additionally, the court may have reaffirmed the relevance of the FTC's Fred Meyer Guides. Moreover, manufacturers should think carefully about where their products end up when designing distribution and pricing policies to comply with RPA.

Too early to tell, but not too soon to prepare

The court's merits decisions in Woodman's were at the early procedural stage of a Rule 12(b)(6) motion. It is unclear if and how the court's disposition may change after the parties develop the factual record. Its denial of the injunction, however, indicates that courts remain hesitant to force parties to do business together against the wishes of one party.

Manufacturers will need to consider the idiosyncrasies of the RPA when making packaging decisions if the court's analysis remains the same. This may lead to having to choose between one of three options:

• Embracing less-than-desirable packaging that will potentially frustrate large customers
• Making bulk-packaged goods available to all retailers and wholesalers, losing the potential advantages of package-size differentiation
• Risking an RPA violation

Conclusion

Woodman's is only in its initial stages, which means manufacturers have some time yet to consider its many implications. To best handle whatever may come from this case, manufacturers should reach out to knowledgeable legal counsel. An experienced attorney can keep you current on legal developments and assist you in adapting your packaging practices to avoid future litigation.