Monday, May 18, 2009

Food Products Maker Engaged in Price Discrimination

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Michael Foods, Inc., a national food products manufacturer, engaged in price discrimination in favor of Sodexho, Inc., the world’s largest food service management company, and to the detriment of a complaining wholesale food distributor, the federal district court in Harrisburg, Pennsylvania, has ruled.

The court enjoined Michael Foods from discriminating in price for the sale of food in favor of Sodexho over the complaining wholesale food distributor. In addition, Sodexho was enjoined from inducing or receiving discriminatory pricing from Michael Foods.

The complaining food distributor, Feesers, Inc., initiated the Robinson-Patman Act lawsuit in 2004. The company alleged that Michael Foods offered lower prices on its egg and potato products to Sodexho. It contended that it had lost some of its institutional customers to Sodexho as a result of the price discrimination.

In May 2006, the district court found that Feesers had established the first three elements of the prima facie case of price discrimination, but had failed to offer sufficient evidence to establish competitive injury resulting from the conduct (2006-2 Trade Cases ¶ 75,335).

On appeal, the U.S. Court of Appeals in Philadelphia reversed and remanded the case for trial (2007-2 Trade Cases ¶ 75,822). After a three-week trial, the district court concluded that Michael Foods and Sodexho violated the Robinson-Patman Act.

Competitive Injury

Feesers was entitled to an inference of competitive injury resulting from the price discrimination, and the defendants were unable to rebut the presumption, the
court held.

Sodexho and Feesers were in competition, even though Sodexho only sold food to institutional customers in conjunction with its food management services, while Feesers primarily supplied institutional customers that self-operated their dining services programs. Further, Michael Foods’ discount to Sodexho was sufficiently substantial and sustained to cause competitive injury.

The defendants failed to show an absence of a causal link between the discrimination and lost sales or profits to rebut the presumption of competitive injury, the court concluded. They claimed that the lower price that Sodexho received played no role in a customer’s choice between food service management or self-operating its dining services program.

However, the evidence presented at trial demonstrated that food costs constituted a significant portion of institutional food service budgets, and that lower food costs were an important part of a Sodexho’s strategic plans to win and retain customers, and improve its profit margin.

Meeting Competition Defense

Michael Foods failed to demonstrate a good faith effort to meet competition by other suppliers when it offered lower prices to Sodexho to rebut Feesers’s prima facie case of price discrimination, according to the court.

A seller invoking the meeting competition defense must establish that a price concession was granted in order to meet—and not beat—a lower price offered by a competitor, the court explained. In this case, the discounts were made to win the business of a large and powerful buyer, rather than to meet competition.

Michael Foods did not have enough information about competitive offers from competing manufacturers to craft an offer calculated in good faith to meet, and not beat the competition, in the court’s view.

Its main negotiator testified that the discounts were necessary to meet competition, even though the negotiator did not know of a particular competitor’s offer. The negotiator assumed that competitors offered similar prices because Sodexho was such a large and attractive customer.

Accepting such an assumption, however, would be contrary to the primary purpose of the Robinson-Patman Act, which was to prevent large buyers from utilizing their purchasing power to secure lower prices than their smaller competitors. If the meeting competition defense could be satisfied merely by showing that a particular customer was large and therefore likely to receive lower prices from competitors, then the Act’s purpose would be largely thwarted, according to the court.

The April 27, 2009, decision in Feesers, Inc.v. Michael Foods, Inc. and Sodexho, Inc., appears at 2009-1 Trade Cases ¶ 76,609.

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