Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

N.D. Cal. Rejects Retail Shelf Space Discounting Claims

Discounting is usually pro-competitive.  A recent case in the Northern District of California illustrates just how difficult it is to challenge discounts under the antitrust laws.

Church & Dwight Co. (“C&D”), which makes Trojan-branded condoms, uses discounts.  Retailers get “planogram” or “POG” rebates if they dedicate a specified minimum percentage of the available condom “facings” on their in-store displays to C&D condom products.  The C&D POG program has several tiers, ranging from about 7% to 8% discounts, corresponding to about 65% to 75% of the facings.  These discounts are apparently all above cost. 

C&D has a large (>75%) market share, and its much smaller competitor, Mayer Labs, challenged its rebates, and some other practices, in Church & Dwight Co. v. Mayer Laboratories, Inc., 2012 U.S. Dist. LEXIS 51770 (N.D. Cal. Apr. 12, 2012) (Chen, J.).  In a thorough opinion, the Court granted C&D summary judgment on Mayer Lab’s Sherman Act Section 1 and Section 2 claims.

The Court focused on Mayer Lab’s inability to show any actual harm to competition:

  • Mayer failed to obtain evidence from any retailer’s employees or other third parties as to the supposed coercive or anticompetitive effect of C&D’s rebate program.
  • Over 50% of the industry display space is not even covered by C&D’s POG program.
  • C&D does not force retailers to purchase anything, much less a certain percentage, of products from C&D.  Nor do the agreements force retailers to give any specified amount of shelf space to C&D over its rivals.  Instead, retailers are free to give C&D as much or as little shelf space as they want.  The only consequence is that retailers may not receive a rebate based on those decisions.
  • The C&D agreements are terminable at any time, for any reason, on 30 days notice.

Following Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group LP, 592 F.3d 991 (9th Cir. 2010), the court ruled that Mayer had not shown any actual injury to competition at the retail level as a result of actual and substantial foreclosure of rivals.

The court considered, and rejected, Mayer’s argument that notwithstanding Allied Orthopedic, C&D’s discontinuous rebate structure (where the rebate percentages jumped up or down instantaneously at certain “facing” percentage points) creates “cliffs” whereby retailers face harsh “penalties” (in the form of lost rebates applicable to all sales starting with the first dollar, thus increasing the costs to the retailer) for moving downward on the rate schedule.  Even assuming this argument had merit and could distinguish Allied Orthopedic, the court concluded that Mayer had no evidence that the POG program in fact has such a coercive effect.  A significant number of large retailers do not participate in the POG program; C&D’s average share of sales at non-POG retailers is roughly on par with its share of sales at POG retailers; and C&D’s shelf share rarely exceeds its overall market share.  Other manufacturers (Durex and Lifestyles) have remained in the market despite the POG program.

In short, a foreclosure rate of perhaps 45% to 50%, coupled with the facts above and the easy terminability of the C&D contracts, is not enough to support either a Section 1 or a Section 2 claim — even when the defendant has a monopoly market share.

The court also rejected Mayer’s arguments that C&D, as a category “captain” (i.e., a manager of shelf space for a category of products) had abused its power to harm competition.  It found no evidence similar to that in Conwood Co., L.P. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002).

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