Boise Cascade Corporation v. Federal Trade Commission

WILLIAMS, Circuit Judge,

concurring:

I willingly concur in Judge Starr’s excellent opinion and write separately to indicate the extraordinary difficulties facing the Commission if it should attempt to pursue this case on remand. On my reading of the law (which is somewhat less generous to the Commission than that of the majority), the practices complained of cannot be found to be illegal price discrimina-tions.

In 1980, the Commission filed a complaint charging Boise with “knowingly [receiving] a discrimination in price” that may substantially lessen or injure competition in violation of § 2(f) of the Robinson-Patman Act. 15 U.S.C. § 13 (f) (1982). The complaint attacked Boise’s receipt of “functional discounts” — discounts that its suppliers offered to each and every customer who met certain objective criteria. The most important of these criteria was that the customer resell a minimum percentage of its purchases at wholesale. In the face of powerful evidence that the discounts in no way injured competition, the Commission assumed injury. Instead of evaluating the evidence of competitive injury, it considered only evidence that might “break the causal connection” between the imagined injury and the contested discounts. In support of this odd set of blinkers, it invoked FTC v. Morton Salt Co., 334 U.S. 37 , 68 S.Ct. 822 , 92 L.Ed. 1196 (1948), which allows an inference of competitive injury from the mere fact of price discrimination. 1 As Judge Starr points out so well, Maj. at 1144, Morton Salt clearly cannot justify this complete dismissal of the issue of competitive injury vel non.

In my view, however, the case suffers graver faults than those identified by the *1149 court. The Commission’s theory seems to me to place the Robinson-Patman Act in hopeless and complete conflict with the other antitrust laws, in violation of innumerable Supreme Court injunctions that it must be construed to avoid such conflict. E.g., Great Atlantic & Pacific Tea Co. v. FTC, 440 U.S. 69 , 80-81 & n. 13, 99 S.Ct. 925 , 933 & n. 13, 59 L.Ed.2d 153 (1979); United States v. United States Gypsum Co., 438 U.S. 422, 447-59 , 98 S.Ct. 2864, 2879-84 , 57 L.Ed.2d 854 (1978); Automatic Canteen Co. v. FTC, 346 U.S. 61, 63, 74 , 78 S.Ct. 1017 , 1024, 97 L.Ed. 1454 (1953). As a matter of law the very conditions on which sellers offer the discounts should preclude their being illegal price discriminations. ******

The Robinson-Patman Act has been no favorite among enthusiasts of competition. Price differentials may be found violative of the Act even when they represent the opening wedge of competition in a market that is largely cartelized or in which for some other reason competition is sluggish. See R. BoRK, The Antitrust Paradox 385-91 (1978); R. Posner, The Robinson-Pat-man Act 37-38 (1976). But the Act is law, together with the pro-competitive provisions of the antitrust laws. The courts accordingly have struggled to reconcile the two. In practice, they have read the Act to protect certain fairness goals, at the expense of competition. In no case, so far as I know, have they read the Act to stamp out a pro-competitive practice that in no way permits any competitor an unfair advantage.

Price discrimination in an economic sense — and I will shortly address the issue of Robinson-Patman cases that might be seen as extending the Act's reach beyond discrimination in that sense — causes disfavored purchasers to bear a disproportionate share of the seller’s total costs of production. If variable production costs per unit are $1 and fixed costs $2, and a firm sells in equal amounts to A at $2.50 and to B at $3.50, B will bear % of fixed costs while A will bear only %. (E.g., if 100 units are sold to each, sales to B will account for $250 of the $400 in total fixed costs, while those to A will account for only $150.) Such differentials appear to give the favored purchaser an edge over his competitors in the resale market, even where he has no superior efficiency to justify the advantage. The advantage has at least a look of unfairness. Thus it is not altogether surprising that Congress might seek to prevent such unfairness by prohibiting the practice, even though to do so may inhibit competition or injure consumers. 2

We deal here, however, with a practice that cannot entail such an unequal allocation of costs. In instances of genuine price discrimination, the seller is able to extract a higher proportion of fixed costs from the disfavored customers because he has segmented the market. Critical to that segmentation is the existence of a barrier preventing resales by favored customers to disfavored ones — resales known as “arbitrage.” In the absence of such a barrier, the favored customers would make such resales. Thus they would displace their own supplier and would capture for themselves the revenue that the original supplier sought to secure by his price discrimination.

Accordingly, it is black letter economics that price discrimination cannot occur if the favored customers can resell to the disfavored. See, e.g., P.R.G. Layard & A.A. Walters, Micro-Economic Theory 240-41 (1978); E. Mansfield, Microeconomics: Theory & Applications 286 (2d ed. 1975); W. Baumol, Economic Theory and Opera *1150 tions Analysis 347-48 (3rd ed. 1972); A. Alchian & W. Allen, Exchange and Production: Theory in Use 136-37 (1969).

Obviously the principle cannot apply if arbitrage is obstructed, and barriers may take a variety of forms. A physical problem is common. If, for example, local gas companies discriminate in favor of residential gas customers and against industrial ones, clearly the residential customers cannot increase their purchases and resell to industrial users: they lack control over the pipes necessary to reship the gas to their hypothetical purchasers. But physical barriers are hardly essential. The law itself may obstruct arbitrage, 3 as may firm behavior. For example, a seller can sometimes monitor the favored customers’ resales and credibly threaten to cut off their supplies if they resell to disfavored ones. The defendant salt manufacturer in Morton Salt, for example, surely possessed that modest monitoring capability. (The absence of discussion of the subject in that case, cf. Dissent at 1161, is hardly a sturdy basis for an inference that the salt seller could not penalize attempted arbitrage.) Discount recipients could conceivably organize a group boycott of disfavored buyers. Cf. Dissent at 1162 (reference to “price umbrella”).

The present case is not merely bereft of evidence of any such barrier, but plainly demonstrates its absence. Far from restricting favored customers’ sales to disfavored ones, or relying on any physical or legal barrier to their doing so, Boise's suppliers demand of the favored customers that they resell to disfavored ones. Indeed, the only condition uniformly imposed upon recipients of the discounts is that they make a minimum proportion of their sales to dealers (the disfavored customers). Boise’s suppliers seek not to segment the market; they demand its integration. Far from seeking to discourage arbitrage, or relying on any physical or legal barrier to arbitrage, they insist on it. These are not the acts of a price discriminator.

Once the absence of any barrier to arbitrage is clear, 4 the exact terms under which wholesalers resell to dealers, whatever they may be, cannot support a claim that manufacturers are offering wholesalers unmerited discounts. Suppose, for example, that wholesalers do not share any of their discounts with retailers to whom they sell. Cf. Dissent at 1162 (“[I]t is not to [dual distributors’] advantage to reduce prices for competing retailers.”). If this be so, 5 there appear to be two imaginable explanations. (1) There are no unmerited discounts; the costs of selling to wholesalers are lower or they perform services of offsetting value to manufacturers (or some combination). As the wholesalers have already given value for the nominal discounts, there is nothing for them to “pass” through to dealers. (2) The manufacturers are giving wholesalers unmerited discounts *1151 and, given the availability of arbitrage, are allowing them to capture the “excess profits” available on sales to the disfavored customers. The principle accepted without dissent by economists is that the second hypothesis is utterly implausible. So it seems to me. Nothing in the record appears to support the notion that office supply manufacturers are engaged in such a bizarre charitable program.

The Dissent suggests that the inferences from arbitrage-availability are undercut by findings that “disfavored retailers performed many of the functions that Boise performed.” Dissent at 1155; see also id. at 1161. There is, however, no finding nor even a contention that any single retailer performs all the services provided by Boise or other wholesalers. See J.A. 139-40 (listing of some services provided by some dealers); Maj.Op. at 1134 n. 7. Nor is there any qualitative or quantitative evaluation of the services provided by the two classes of intermediaries. Thus there seems no reason to question the inferences that are normally to be drawn from ease of arbitrage.

I must confess puzzlement at the Dissent’s contrasting “realistic appraisals of relevant competitive facts” with “general economic theorems.” Dissent at 1161. The theorems relied on, if they should be so labelled, are hardly metaphysical speculations; they are inferred from widely shared propositions about human behavior, e.g., that firms do not gratuitously turn profit opportunities over to other firms for no reason. The Dissent contends that this proposition is not at issue, id. at 1161-1162, evidently on the basis of various theories which, if 100% true, would show only that wholesalers do not pass their discounts on to retailers. But the issue is precisely whether there are any unmerited discounts to pass on. 6

Of course the fact that obstruction of arbitrage is a necessary condition of “price discrimination” as economists use the term would not prevent Congress from enacting a prohibition that spoke more broadly. Indeed, the Supreme Court has explicitly said that price discrimination for Robinson-Patman Act purposes means no more than a price differential. See FTC v. Anheuser-Busch, Inc., 363 U.S. 536, 549 , 80 S.Ct. 1267, 1274 , 4 L.Ed.2d 1385 (1960). Under this view — which of course is authoritative — the price differential offered by Boise’s suppliers to wholesalers is price discrimination. But the Act prohibits only price discrimination whose effect “may be substantially to lessen ... or to injure ... competition.” 15 U.S.C. § 13 (a). The issue is whether this “price discrimination” can injure competition in any sense that Congress might have intended. Cf. F. Rowe, Price Discrimination Under the Robinson-Patman Act 96-97 (1962) (discussing An-heuser-Busch ).

Even Falls City Industries, Inc. v. Vanco Beverage, Inc., 460 U.S. 428 , 103 S.Ct. 1282 , 75 L.Ed.2d 174 (1983), which the Commission appears to regard as the Court’s most expansive extension of Morton Salt’s readiness to infer injury to competition, makes clear that the Act is not intended to reach losses that are consistent with fairness. There a brewer charged an Indiana beer distributor more than it charged a competing Kentucky distributor. The Court held that unlawful price discrimination could be found (and that anticompeti-tive effect could be inferred from the price discrimination itself) even though the favored buyer was not “extraordinarily large.” 460 U.S. at 436 , 103 S.Ct. at 1289 . Although this holding extended Robinson-Patman liability beyond the core image animating Congress — the buyer that uses sheer size to secure unfair advantages — it in fact did not disconnect Robinson-Patman liability from the economic concept of price discrimination or from a concern over unfair competitive advantages.

The economists’ definition of price discrimination requires, to be sure, that the seller have market power (i.e., a power to raise the price above competitive levels *1152 without loss of all sales): otherwise the discriminatees would simply buy from alternative sources. Although Falls City does not refer to any finding of market power, as it was not at issue, the record might well have sustained such a finding. The seller was a regional brewer with an established brand name, and brand name loyalties typically enable a seller to raise prices without all customers abandoning it for alternative suppliers.

Moreover, Falls City expressly limited the permissibility of inferring competitive injury. It pointed out that the defendant brewer had identified no “economic reason” why the inference should not be drawn. 460 U.S. at 436 , 103 S.Ct. at 1289 . So far as appeared, the brewer’s pricing practices enabled Kentucky wholesalers to increase their sales at the expense of Indiana ones regardless of the latters’ efficiencies. As the Court noted, Indiana and Kentucky retailers competed in a single interstate market, so that the relatively high prices paid by Indiana wholesalers would necessarily impede their sales. Id. The message of the case is that where some inherent aspect of the practice supplies an economic reason why it could not generate such an unfair competitive advantage, the inference cannot be drawn.

The “price discrimination” here cannot lead to the sort of competitive injury evidently feared by Congress — an impaired ability to compete regardless of the losers’ efficiency. 7 If the disfavored customers bore a disproportionate share of their suppliers’ costs, their ability to buy from the favored ones would enable them to escape the burden. The terms of the discounts themselves assure this result.

Because the nature of the challenged practice compels the conclusion that it could confer no competitive advantage of the sort the Robinson-Patman Act sought to eradicate, the practice should be absolved as a matter of law. The Supreme Court’s mandate to construe the Robinson-Patman Act consistently with the other antitrust laws demands no less.

I am frankly unable to see how the Commission can resurrect this case, nor any reason beyond bureaucratic momentum why it should try to do so. With luck, however, it will make use of the remand to develop an intellectually coherent policy on functional discounts, one that addresses economic reality.

. I question whether the Morton Salt inference can ever be applied in a § 2(f) case. The Supreme Court has clearly held that the Commission cannot shift the burden of production onto the buyer simply by showing that the buyer knew that it was receiving a price discount unavailable to others. Automatic Canteen Co. v. FTC, 346 U.S. 61, 79 , 73 S.Ct. 1017, 1027 , 97 L.Ed. 1454 (1953). The Commission cites no Supreme Court precedent applying the inference in a § 2(f) case, see Brief for Commission at 28-29 n. 26, and the only supporting circuit court case that it cites, Kroger Co. v. FTC, 438 F.2d 1372, 1378-79 (6th Cir.), cert. denied, 404 U.S. 871 , 92 S.Ct. 59 , 30 L.Ed.2d 115 (1971), has been strictly limited to its unique facts, see Great Atlantic & Pacific Tea Co. v. FTC, 440 U.S. 69 , 81-82 n. 15, 99 S.Ct. 925 , 933-34 n. 15, 59 L.Ed.2d 153 (1979). In A & P, the Court held that a buyer accepting the lower of two prices competitively offered does not violate § 2(f) if seller has a "meeting competition” defense; it confined Kroger, which denied a buyer that defense, to instances of a “lying buyer.” The decision appears to implement Automatic Canteen's unwillingness to foist onto a defendant buyer production burdens that are appropriate only for a seller responsible for a price discrimination.

. See Statement of Representative Utterback, presenting Conference Report to the House, 80 Cong.Rec. 9413, 9416 (1936) (contrasting unfair advantages said to accrue to some firms with "the assurance of equal opportunity and fair play” afforded by the bill); Report of House Judiciary Committee, H.R.Rep. No. 2287, 74th Cong., 2d Sess., pt. 1 at 8 (1936) (favored buyers’ partial non-contribution to costs and profits leads to "burden and injury” to disfavored customers); Report of Senate Judiciary Committee, S.Rep. No. 1502, 74th Cong., 2d Sess. 3 (1936) (committee’s goal has been "the preservation of equal opportunity” to those engaged in distribution "comportably with their ability ... to serve ... with real efficiency’’); FTC v. Simplicity Pattern Co., 360 U.S. 55, 69 , 79 S.Ct. 1005, 1014 , 3 L.Ed.2d 1079 (1959) (smaller firms said to suffer “hopeless competitive disadvantage” unrelated to cost).

.This appears to have been the case in Falls City Industries, Inc. v. Vanco Beverage, Inc., 460 U.S. 428 , 103 S.Ct. 1282 , 75 L.Ed.2d 174 (1983). Falls City sold beer to Kentucky wholesalers at a lower price than to Indiana ones (evidently solely because of a quirk in Indiana law). The Indiana wholesalers could not simply turn around and buy from Kentucky wholesalers across the border. It is a crime for an Indiana wholesaler to purchase beer from an out-of-state seller who does not hold a valid brewer’s permit. The prerequisites to such a permit include not holding a disqualifying interest in another liquor permit, posting a bond to cover taxes, and agreeing to file reports with Indiana. See Ind.Code §§ 7.1-5-8-9; 7.1-5-9-1 to -13; 7.1-3-2-4 and -5 (1984). While the Falls City Court does not discuss the matter, the tone of the opinion strongly suggests that the Kentucky wholesaler did not hold the requisite permit.

. The Dissent's suggestion at 1162-63 that wholesalers cannot discover disfavored buyers of substantial quantities of discriminatorily priced goods reflects a robust imagination. It is, of course, the business of wholesalers to sell to retailers. Recipients of the wholesale discounts are typically listed as members of the Wholesale Stationers Association. Maj.Op. at 1133. Thus the wholesaler seeking to engage in arbitrage can simply start with all firms in the business downstream from manufacture, subtract members of the Association, and have a prima facie list of the target group.

. There is in fact substantial competition for sales to dealers between and among the wholesalers, and the suppliers. See AF 7, 30, 33, 38, J.A. at 46, 51-53. Accordingly, if sellers in fact gave wholesalers unmerited discounts, competition among wholesalers would shift the benefit forward to dealers.

. As Holmes said, "A fact taken in its isolation ... is gossip.” 1 M. Howe, ed., Holmes-Laski Letters 129 (1953).

. This analysis is not altered in the slightest by the fact that sellers generally give the discount on all products bought by a wholesaler, even though many of them may be resold to end users. So long as the resale condition assures that non-discount customers are not saddled with a disproportionate share of fixed costs and profits, the sort of injustice at which the Act strikes is necessarily absent.

Moreover, a rule requiring suppliers to limit the discounts to items actually sold at wholesale would work to the detriment of Boise’s purchasers, including dealers. Enforcement of such a rule would entail substantial administrative costs, see Calvani, Functional Discounts Under the Robinson-Patman Act, 17 B.C.Ind. & Com.L. Rev. 543, 556 (1976) (a company that had insisted on certification of resale scrapped the requirement "as unworkable because it was not adopted by its competitors, was resented by its customers, and resulted in falsehood and inaccuracy"), which would doubtless be passed on to customers. Because of these administrative costs, Commission insistence on such market segregation might well eliminate the use of functional discounts and the substantial efficiencies they generate for dealers, see ALJ Finding (“AF”) 46, J.A. at 54-55 (dealers recognize that wholesalers provide them with valuable services unavailable from manufacturers), and for end users, see AF 393, J.A. at 114 (" 'The City of Seattle buys from Boise because of usage reports, because of some of the sophistication in the invoicing system, because of depth of inventory and high [fill] rates.’”); see also AF 385, 392, 398, 402, J.A. at 113-16. The high administrative costs, as well as the tendency of the resulting efficiencies to spill over in sales to end users, likely account for sellers’ disinclination to so restrict the discounts.