Distribution, Competition, and Antitrust / IP Law

Archives for March 2015

Sixth Circuit Applies Cost Screen to Tying by Differential Pricing

English: Eastman Kodak model B

Eastman Kodak model B (Photo credit: Wikipedia)

In Collins Inkjet Corp. v. Eastman Kodak Co., No. 14-3306 (6th Cir. March 16, 2015), the U.S. Court of Appeals for the Sixth Circuit held that differential pricing – charging more for one product when the customer does not also purchase a second product – can constitute an unlawful tying arrangement only when the price differential in effect discounts the second product below the seller’s cost.

Eastman Kodak sells refurbished printer components for industrial printers. It also sells ink. Its competitor, Collins, competes for the sale of ink. In 2013, Kodak announced a new pricing policy – it discounted print heads for customers that also buy Kodak ink. Collins sought, and obtained in the district court, a preliminary injunction against the pricing policy.

The Sixth Circuit affirmed the grant of the preliminary injunction, but clarified the test for what it termed “non-explicit tying via differential pricing.” In the Court’s view, differential pricing becomes equivalent to an unlawful tying arrangement when the price discount, as applied to the original price of the second (or “tied”) product, in effect lowers the price of the tied product below the seller’s cost. “[D]ifferential pricing . . . is unlawful only if it might [force] a more efficient competitor out of business.” The below-cost test is required because

differential pricing, unlike other forms of indirect coercion, can be employed legitimately without illegal anticompetitive influence from the defendant’s control over the tying product market . . . . [I]f the defendant merely offers a discount on the tying good to buyers who also purchase the tied good, then buyers are only ‘forced’ to buy the tied good elsewhere at a price low enough to offset the forgone discount for the tying product. The defendant uses its market power over the tying good to shift the discount from the tied good to the tying good, but this in itself does not ‘force’ buyers to purchase the tied product any more than a discount on the tied product would.

In applying a below-cost screen, the Sixth Circuit followed the Ninth Circuit’s approach to bundled discounts in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 906 (9th Cir. 2008), and criticized the Third Circuit’s approach in LePage’s, Inc. v. 3M, 324 F.3d 141, 154-57 (3d Cir. 2003 (en banc).

Application of a cost screen has the obvious advantage of providing a relatively bright line test that firms can apply themselves to avoid potential violations in the first instance.

Return of Robinson-Patman Act and Resale Price Maintenance Litigation?

A quick note on a few recent developments suggesting that RP and RPM litigation is not yet dead.

First, on February 2, 2015, a court refused to dismiss claims against Clorox arising from its refusal to sell a small regional grocery chain the same large packs of products as Clorox sells to big box retailers. Clorox didn’t refuse to sell the smaller retailer products – it simply didn’t sell it the same large packs, which have a lower per unit cost. The court held that the practice might violate Section 2(e) of the Robinson-Patman Act, which prohibits discrimination in the furnishing of services or facilities in connection with the processing, handling, sale or offering for sale of a commodity purchased for resale. See Woodman’s Food Market, Inc. v. The Clorox Co., No. 14-cv-734-slc (W.D. Wis. Feb. 2, 2015).

Second, a slew of recently-filed suits have accused contact lens manufacturers of conspiring to set minimum resale prices for contact lenses sold at certain outlets. The manufacturers have been sued both by putative indirect purchaser classes as well as by Costco. The lawsuits generally allege that the manufacturers started to implement so-called “unilateral pricing policies” because they were concerned about deep discounts being offered by Wal-Mart, Costco, and others.

These cases do remind us to be careful about the design and implementation of pricing policies.

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