Family-owned wholesalers brought a Robinson-Patman claim against the maker of 5-hour Energy alleging discounts given to Costco amounted to illegal price discrimination. A jury in California rejected the claim after a fact-intensive analysis of competition and potential antitrust injury.

WHAT HAPPENED:

• After seven hours of deliberations, a California jury decided that Living Essentials LLC, the maker of 5-hour Energy, did not engage in illegal price discrimination under the Robinson-Patman Act. U.S. Wholesale Outlet & Distribution, Inc. v. Innovation Ventures, LLC et al., No. 2:18-cv-01077 (C.D.Ca. Oct. 21, 2019).

• Plaintiff wholesalers argued that the rebates and discounts Living Essentials offered to Costco on the list price for 5-hour Energy amounted to price discrimination.

  • The family-owned wholesalers have endured a steady decline since 2012 in their sales of 5-hour Energy, a decline they claimed accounted for hundreds of thousands of dollars in lost sales for a product with annual retail sales of more than $1 billion.

  • They attribute this decline to unfair price discrimination that provided a competitive advantage to Costco, allowing the membership-only warehouse club to offer the product for less than its competitors. According to plaintiffs, Costco received as much as a 26-cent discount on each 5-hour Energy bottle compared to the wholesalers. The 26-cent discount resulted from a combination of spoilage allowances, early payment discounts and indirect advertisement discounts (including promotion in Costco mailers and at fences and endcaps). The wholesalers alleged this unfair price discrimination created a reasonable possibility of harm to competition.

• Living Essentials countered that the wholesale distributors are not competitors with Costco and that there was no competitive injury.

  • Living Essentials argued the plaintiff wholesalers did not provide the economic analysis necessary to show actual competition between Costco and the wholesalers, despite having access to the kind of data necessary for such an analysis. Instead, the wholesalers relied on hearsay testimony from customers claiming they purchased 5-hour Energy from both the wholesalers and Costco.

  • Living Essentials pointed to the different products and services available from Costco compared to the wholesalers and argued that it did not view Costco as a vehicle for getting its product into convenience stores—a particularly important method of distribution. Living Essentials offered discounts to wholesalers who purchased 5-hour Energy displays and racks to encourage those wholesalers to resell these products to convenience store customers who would place the displays and racks on their counters. Living Essentials never sold these displays and racks to Costco.

  • Any loss of customers for 5-hour Energy, defendants argued, could be due to store cleanliness, professionalism, free shipping, rewards programs or a number of other reasons beyond the discounts and rebates Living Essentials offered to Costco.

  • Without proof of diverted customers, there was no way to know whether customers lost by these wholesalers went to Costco rather than other competitors in the area, such as Sam’s Club, McLane, or other wholesalers.

• The jury sided with Living Essentials and found that it had not engaged in illegal price discrimination.

WHAT THIS MEANS:

• Distinguishing customers by channel for potentially different discounts or promotions can raise Robinson-Patman Act risk if customers perceive they compete differently than their classification or if consumers view customers as competitors regardless of how the supplier has classified them.

• A well-defined channel distribution strategy can withstand Robinson-Patman Act scrutiny, but it can be a fact-intensive analysis to determine which customers compete against each other and, therefore, which customers belong in which channels.

• Scanner data can be a useful tool in determining whether customers are purchasing a product at one store versus another store and whether customers are price sensitive.

• Discounts and rebates should be subjected to Robinson-Patman Act analysis before being offered only to a subset of customers.