Discriminatory Pricing and the Robinson-Patman Act: Brief Overview, Including Some Exceptions
Released: 2002-10-16T00:00:00

The Robinson-Patman Act (15 U.S.C. §§13, 13a, 13b, 21a) was enacted in 1936 with the specific purpose of creating and maintaining a market atmosphere in which small business could compete effectively, at least in the purchase of commodities, with its larger rivals. The immediate impetus for that Depression-era legislation was the concern for smaller grocery store operators who complained that their businesses were suffering as the direct result of the activities of the chain grocery stores generally and the Great Atlantic & Pacific Tea Company (A&P) particularly. In pertinent part, the statute states that

it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or sale within the United States ..., and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with the customers of either of them.

Very simply, the Act prohibits sellers in interstate commerce from charging different purchasers different prices for goods of "like grade and quality." The Act applies only to the sale of goods ( i.e., it does not apply to the sale of services) and only where each sale is of goods purchased for resale within the United States ( i.e., it does not prohibit price differentials between goods sold for resale within the United States and those sold for export.)

Defenses

Among the affirmative defenses permitted to refute the Robinson-Patman illegality of differential pricing is the so-called "meeting competition" defense, which has at least two levels: a defendant may assert (and must prove) that the lower price charged to a favored buyer was selected in order to permit the seller to meet that of a competing seller (primary line competition); or he may assert (and must prove) that the challenged price was necessary in order to enable his buyer to meet the competition of one of the buyer's competitors (secondary line competition). A seller may not, however, knowingly "beat" the prices of a competitor. A Robinson-Patman defendant may also successfully defend his challenged pricing activity if he can show that his price differentials were "cost justified"— i.e., that the price differential made only due allowance for the costs incurred in producing or delivering the goods.

In addition, the 1938 Nonprofit Institutions Act (15 U.S.C. §13c), which expressly permitted price breaks on "purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit" (emphasis added), created a broad exemption from the general price-discrimination prohibition:

The underlying intent in granting such an exemption was indisputably to permit institutions which are not in business for a profit to operate as inexpensively as possible.

Robinson-Patman in the Courts: The Non-Profit Exemption

Two Supreme Court opinions, announced in the mid-1970s and early 1980s, provided significant interpretations of the scope of the nonprofit exemption from the Robinson-Patman prohibition. Both involved challenges to the practice of a pharmaceutical supplier who was selling its products to certain hospitals at prices lower than those charged to retail pharmacists in the areas surrounding the hospitals in question.

Abbott Laboratories v. Portland Retail Druggists Association, Inc. , 425 U.S. 1 (1976), discussed the "for their own use" phrase in the Nonprofit Institutions Act; the provision was interpreted strictly. The Court relied largely on the "for their own use" language to hold that purchases made by a nonprofit hospital are not all necessarily exempt from price discrimination prohibitions, only those made in order to able to meet the needs of the hospital ( e.g., dispensing to inpatients, outpatients treated in the hospital, emergency room use) and those of staff physicians, medical and nursing students, and their dependents: "The Congress surely did not intend to give the hospital a blank check" Although the Court included within permissible uses by the hospital, "genuine take home prescription[s], intended, for a limited and reasonable time, as a continuation of, or supplement to, the treatment that was administered at the hospital to the patient who needed, and now continues to need, that treatment," it specifically excluded from the Robinson-Patman exemption embodied in the Nonprofit Institutions Act "the refill for the hospital's former patient." Further, the Court refused to sanction purchases by the hospital-based physician for use in "that portion of his private practice unconnected with the hospital."

While the primary concern addressed by the Court in Portland was the sale of pharmaceuticals to nonprofit hospitals for all uses, including patient care and resale, four years later, in Jefferson County Pharmaceutical Ass ' n., Inc. v. Abbott Laboratories , 460 U.S. 150 (1983), the Court set out the limits of the exception to Robinson-Patman for government purchases; Jefferson County presented an issue "limited to state [read "nonprofit hospital"] purchases for the purposes of competing against private enterprise—with the advantage of discriminatory prices—in the retail market." Jefferson County stressed that Robinson-Patman's prohibitions against unjustified discriminatory price differentials in the sale of commodities of "like grade and quality" dictated that government [nonprofit hospital] purchases for use in retail competition with private enterprise, as opposed to those for "traditional governmental [hospital] functions," are fully subject to the strictures of the Act. The Court held that purchases of pharmaceuticals by the University of Alabama Hospital for uses other than in the treatment of its patients, as, for example, in retail sales, may not be made at prices which would give the University Hospital an unfair price advantage over its competitors in the retail sale of pharmaceuticals.

Health maintenance organizations were found to be "eligible institutions" under the Nonprofit Institutions Act in De Modena v. Kaiser Foundation Health Plan, Inc. , 743 F.2d 1388 (9 th Cir. 1984), cert. denied , 469 U.S. 1229 (1985). After acknowledging that the Act "does not explicitly list HPs [health plans]," and that no case law at that time specifically included HPs as "charitable" institutions, the appeals court relied on "precedent defining the term charitable for purposes of the tax code and the law of charitable trusts" to reach its conclusion: "[T]he emergence of social welfare, insurance, and municipal hospitals [has] drastically reduced the number of poor requiring free or below cost medical services . . . .

This reduction eliminated the rationale upon which the traditional, limited definition of charitable was predicated, resulting in a move towards a less restrictive interpretation of the term in recent years. Now all non-profit organizations which promote health are considered charitable under the law of charitable trusts. Further, a number of courts have specifically held that health maintenance organizations, such as HPs, are charitable institutions for tax purposes. . . . Given this increasingly liberal interpretation of the term, we conclude that the [defendant] HPs are charitable institutions within the meaning of the Nonprofit Institutions Act.

Further, the court relied on the expression of the "for their own use" criterion propounded by the Supreme Court in Abbott Laboratories v. Portland Retail Druggists to decide that the "basic institutional function" of a health plan—providing a "complete panoply" of health-care services, including continuing and preventative services, to its members—requires that "drugs purchased by an HMO . . . for resale to its members [be considered as] purchased for the HMO's `own use' within the meaning of the Nonprofit Institutions Act."

Since its enactment, the Robinson-Patman Act has been less than enthusiastically viewed by the Department of Justice, which has believed since 1936 that the Act is not beneficial to consumers. Accordingly, government enforcement of the Act has always been entrusted to the Federal Trade Commission (FTC). In its 1977 Report on the Robinson-Patman Act, the Antitrust Division noted that

It should not be surprising ... that Robinson-Patman can be shown to have many adverse effects on the economy. To be sure, there are some who do not recognize these effects or who argue that they are outweighed by benefits to specific sectors of the economy, notably small business; to competition by preventing increased concentration in a line of commerce; and to public values in general by establishing as a legal norm the concept of `fair dealing' in pricing. But any discussion of the benefits of Robinson-Patman can be made only with a clear understanding of the burdens that the statute places on American economic activity.

In the mid 1970s, the 94 th Congress, through an Ad Hoc Subcommittee of the House Small Business Committee, held hearings on and considered proposals to amend or repeal the Robinson-Patman Act. Although the Subcommittee received several draft bills from the Department of Justice to either substantially amend, or to repeal the Act, no legislation was introduced at that time; nor are we aware of any introduced at any time thereafter.