Discriminatory Pricing and the Robinson-Patman Act: Brief Background and Analysis
Released: 2009-01-16T00:00:00

The Act and Some Issues It Raises

The Robinson-Patman Act (R-P)(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 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.

As is noted in a 1986 article, "[f]or the first time within the umbrella of the federal antitrust laws, the Congress declared that it was enacting legislation to remedy injury to competitors rather than a generalized injury to competition itself."

Very simply, the act prohibits sellers in interstate commerce from charging different purchasers different prices for goods of "like grade and quality." It 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).

Since its enactment in 1936, the Robinson-Patman Act has been less than enthusiastically viewed by the Department of Justice, which believes that the act is not beneficial to consumers. 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.

Government enforcement of the act, therefore, has always been entrusted to the Federal Trade Commission (FTC), which over the years has acted inconsistently with respect to R-P actions. The bulk of R-P cases have generally been brought by disfavored buyers.

Other Defenses to Robinson-Patman Challenges

Meeting Competition

In addition to the commodities-not-of-"like grade and quality" and sales-for-export justifications for price differentials, an additional, affirmative defense 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"—that is, that the price differential made only due allowance for the costs incurred in producing or delivering the goods.

The Non-Profit Exemption

There is yet another defense to an allegation of unlawful price differentials under the Robinson-Patman Act. The 1938 Nonprofit Institutions Act (15 U.S.C. §13c), which expressly permits 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. As the Court of Appeals for the Ninth Circuit stated in 1967:

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.

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, and interpreted the provision strictly. The Court relied largely on the "for their own use" language to hold that not all purchases made by a nonprofit hospital are necessarily exempt from price discrimination prohibitions. The exemption is applicable only to those purchases made in order to enable the hospital 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 Druggist s 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."

De Modena was endorsed in 1995 by the United States District Court for Northern Illinois:

In De Modena the Ninth Circuit resolved to 'follow the true mandate of Abbott ... by determin[ing] the basic institutional function of [the HMO in issue] and then decid[ing] which sales are in keeping with this function.' De Modena , 743 F.2d at 1393. The court began its analysis by recognizing that the intended institutional operation of an HMO is to 'provide a complete panoply of health care to [its] members.' Id. The court further observed that, unlike the 'temporary and usually remedial' care that fee-for-service hospitals provide to their patients, HMOs 'provide continuing and often preventative health care for their members.' Id . Thus, concluded the De Modena court, 'any sale of drugs by an HMO to one of its members falls within the basic function of the HMO' and, therefore, constitutes 'own use' within the meaning of the Nonprofit Institutions Act. Id .

To our knowledge, the inclusion of HMOs in the list of entities entitled to take advantage of the "for their own use" language of the Nonprofit Institutions Act has not been judicially repudiated, although the Supreme Court has not yet provided an opinion on the subject.

Damages Under Robinson-Patman

If none of the affirmative defenses set out above justifies a challenged price differential, and the non-profit exemption is unavailable to the defendant, price discrimination in violation of the Robinson-Patman Act is proved. That the successful plaintiff is entitled to damages in the amount of the unlawful price differential is not, however, a foregone conclusion. In J.Truett Payne Company, Inc. v. Chrysler Motors Corporation, the Supreme Court, deciding "the appropriate measure of damages in a suit brought under § 2(a) of the Clayton Act," rejected the contention that "once [a plaintiff] has proved a price discrimination in violation of § 2(a) it is entitled at a minimum to so-called 'automatic damages' in the amount of the price discrimination:"

To recover treble damages [the measure of antitrust damages under 15 U.S.C. § 15, which requires as a prerequisite to recovery that one have been 'injured in his business or property'], then, a plaintiff must make some showing of actual injury attributable to something the antitrust laws were designed to prevent.

Previously, the Court had noted that "[t]he automatic-damages theory has split the lower courts," but found more persuasive the opinions that rejected it, noting that Robinson-Patman "is violated merely upon showing that 'the effect of such discrimination may be substantially to lessen competition.'"

Conclusion

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. At that time, representatives of small business, and others, contended that retention of Robinson-Patman was essential. 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, and CRS is not aware of any introduced at any time thereafter.

The Antitrust Modernization Commission was authorized in P.L. 107-273 , "21 st Century Department of Justice Appropriations Authorization Act," to "examine whether the need exists to modernize the antitrust laws and to identify and study related issues," and issued its final Report in April 2007. In its chapter on "Government Exceptions to Free-Market Competition," it devoted several pages to its study of the Robinson-Patman Act, noting that despite the aim of supporters of its passage to remedy the "concern of small businesses … that they were losing share to larger supermarkets and chain stores and in some cases were being forced to leave the market,"

[i]n its operation … the Act has had the unintended effect of limiting the extent of discounting generally and therefore has likely caused consumers to pay higher prices than they otherwise would.

The Commission recommended that "Congress should repeal the Robinson-Patman Act in its entirety."

Whether the current economic climate will result in a further renewal of efforts to modify or repeal the statute, or whether Congress will determine that statutory intervention is appropriate, is not known at this time.