Chapter V briefly described the initial victory of independent pharmacists in Arkansas over Wal-Mart.1 The case was brought under the Arkansas Unfair Trade Practices Act, and resulted in a national discussion on whether or not national discount retail chains might be prosecuted for predatory pricing under the existent laws of 24 states having these laws. The thought was expressed that if the federal government was reluctant to explore relevant clauses under Sherman, Clayton or Robinson-Patman -- that plaintiffs representing small retailers might follow the Arkansas experiment among many national retail chains in many other states, or that the federal agencies might begin to explore their own avenues to study possible predatory pricing activities on the part of chain stores.
The decision in favor of the independent pharmacies was overturned in Wal-Mart's favor in the Arkansas Supreme Court. However, of interest to scholars was the fact that in the Chancery proceedings, Wal-Mart did admit selling below cost, but denied the predatory charge. David Glass, Wal-Mart's CEO, said that the Bentonville, Arkansas retailer regularly sells a variety of items below cost, including such standards as Crest® toothpaste and Listerine® mouthwash. But he maintained the selling below cost doesn't violate the law or destroy competition. 2
The Arkansas statutes, which were being tested for the first time since passage in 1937, generally forbade businesses from selling or advertising "any article or product . . . at less than the cost to the vendor . . . for the purpose of injuring competitors and destroying competition." 3
Wal-Mart's attorneys argued in a pre-trial brief that what the law described as a "product" shouldn't be considered to apply to individual items, but rather to Wal-Mart's "market-basket" or full line of products. If the entire line isn't priced below cost, they contended it wasn't a violation of the statute. 4
It is obvious that to determine a state violation on "predatory pricing" that the court must determine what principle it would accept as "non-predatory" in pricing below cost. This is indeed a gray area and possibly was the issue resulting in Wal-Mart's reversal victory in the Arkansas State Supreme Court. Furthermore, federal surveillance of predatory pricing under the Robinson-Patman Act is based upon a different type of "below cost" formulae and analyses. This will be discussed later.
The second element to be considered under state laws is whether there was an "intent" to injure competition, and whether in fact the result of such malice was to injure the competition. The third element was "recoupment." Were the prices ultimately raised, once the competition was put out of business?
At issue in the case was whether Wal-Mart, which had built the nation's largest retail chain with its everyday-low-price strategy, went beyond the legally recognized retail practice of promotional pricing and intended to destroy its competition.
Although Chancery Court, Judge Reynolds said there was not any direct evidence tying Wal-Mart's pricing policies to such a plot, he did say circumstantial evidence existed.
"The court finds that purpose to injure competitors and destroy competition cannot be inferred from below-cost advertising and sales alone. There must be other proof," 5 the judge wrote, citing Wal-Mart's policy of allowing store managers to unilaterally cut prices on goods below that of local competitors as part of the evidence.
Attorneys for Wal-Mart in the Chancery Court also argued that "federal antitrust law should pre-empt the Arkansas law . . . and seek not to protect businesses from the workings of the market, but to protect the retailer from the failure of the market." 6
This was not the first time that Wal-Mart had been in litigation involving pricing. In 1986, it was found to have violated an Oklahoma state law that required retailers to sell products at least 6.75% above cost, unless the store is having a sale or matching a competitors price. Wal-Mart settled out of court during an appeal and agreed to raise prices at all of its stores in the state. 7
Wal-Mart became the number one major retail discount chain by obviously offering value and the lower prices possible. Pricing is the essential advantage that the mega-stores have over the small retailers who have few options to buy direct and who are attempting to buy merchandise from a reduced number of regional wholesalers. Even the major wholesalers have begun to consolidate their operations as was the case in June 1994, when the number two and number three United States food wholesalers, Fleming Company, Inc. and Scrivners, Inc., began discussions to merge. The contemplated merger would have resulted in combined total sales of $19 billion, making Fleming the nation's largest food distributor. Fleming's rival is Supervalue with $16 billion in sales. The trend towards consolidation continued to threaten the ability of the small retailer to survive. In October 1992, Supervalue had acquired Wetterau, Inc. of St. Louis for $1.1 billion.
While the continued consolidation of wholesaler and distribution into fewer hands raised possible antitrust concerns; nevertheless the argument employed by the mega-retailers is that distributors would cut their own duplicative operations and hopefully provide cost savings to consumers. 8
But Ortega in a Wall Street Journal article pointed out that Wal-Mart intends to deal with manufacturers directly:
Pricing is the name of the game. It has been the issue in previous litigation against major corporations in state cases and will obviously remain a key issue in possible review by federal agencies, such as the Justice Department and the Federal Trade Commission.
In May 1994, Wal-Mart had to change its slogan about claiming the lowest prices after a National Advertising Review Board protested against Wal-Mart's format in claiming low prices. An article, which follows, in USA Today from May 1994, reported on Wal-Mart's reaction to competitors' criticism of Wal- Mart's pricing advertising.
In a related matter, but in a governmental involvement in Michigan, Wal-Mart agreed to modify its pricing rules after negotiations with Michigan's Attorney General. 11
The growing power of the mega-retail discount chains is in part a matter of mass purchasing at discounts from manufacturers and major wholesalers, which provide merchandise at very low costs to consumers; often below costs as "loss leaders." Also, the reduced overhead per store as the corporations grow in accelerated fashion and introduce formidable powers to confront City Councils, zoning boards, etc. to accomplish their real estate objectives is contributing to their power.
Scholars such as Kenneth Stone, Professor of Economics at Iowa State University, a Wal-Mart analytical observer and Thomas Muller, a Fairfax, Virginia economist and the author of a report on the impact that three proposed Wal-Mart stores would have on Northeastern Vermont communities, both previously mentioned, might have a somewhat similar point of view on the major impact resulting from the growth of the Kmarts and Wal-Marts on small retailers, "Main Street" and community stability.
The writer will point out Muller's testimony before the House Small Business Committee in 1994 at a later point in this chapter. Seven years ago, Kenneth Stone, began to study the Wal-Mart phenomenon in his state after he noted the commercial life of many towns being hollowed out by the huge intruder. Few scholars had paid any attention. Now Stone is in demand all over the United States lecturing on the nature of Wal-Mart and how to deal with it. Stone estimates that Wal-Mart's stores -- a combination of general merchandise, groceries and wholesale clubs -- could, if growth in the 1990's equals that of the 1980's, gross $200 billion annually by the end of the decade. "It could be the biggest corporation in the United States," says Stone, and that includes Exxon and General Motors. 12
Wal-Mart is already the largest retailer, smothering Sears and Kmart. "The impact of a corporation of that size and that involvement in the life of this country is immense." 13
Stone advises small-town merchants on how to deal with the arrival of a Wal-Mart in their region. "I don't fight Wal-Mart . . . if you believe in the free-market system as I do, then you cannot keep them out of your community. Much of what I tell you will be to emulate them." 14 Stone talks about such ideas as finding special merchandising niches not occupied by Wal-Mart, about improving service and extending store hours.
In an earlier chapter the author described the "Ten Commandments" where the American Management Association prescribed how the small retailer could survive the Wal-Mart competition. This author points out the inability of the small retailer to apply the principles of "Management 101" without professional staff, capital, financial and other resources, to be able to contribute to the revival of downtown "Main Street." Little can be done in this respect without the strong support of the local, state and federal governments. These programs will be discussed in Chapter VIII.
Time continued its review of the hopelessness of Stone's prescriptions by the following statement in Sedey's article:
This appeal is classic in that hundreds of lawyers in various states in which mega-retail discount chains are located are reviewing the majority and minority opinions to determine whether additional state litigation on various predatory pricing and selling below cost cases are worth exploring; and whether any of the data provided in both the majority and dissenting opinions might throw light on whether similar predatory pricing cases may be in the purview and plans by either the U.S. Department of Justice and the Federal Trade Commission.
The Supreme Court of Arkansas agreed with Wal-Mart, on their first point and hence reversed the Chancery Court order and dismissed the case. 19
The Chancery Court had earlier ascertained certain findings among others in coming to its decision against Wal-Mart. 20 These findings should be kept in mind when reviewing the successful appeal later in this chapter.
The Chancery Court then stated:
The court found that the appellee drug stores had lost sales to Conway Wal-Mart due to the below-cost policy, and that the growth in sales and profits for those drug stores had substantially decreased.
This author discussed previously in Chapter V, the major findings of the Chancery Court which ruled in the plaintiff's favor against Wal-Mart. While it may be somewhat repetitious to present these findings again, it is necessary for the reader to understand that the majority opinion in the Arkansas Supreme Court ruling which favored Wal-Mart and reversed the Chancery Court order. It is germane to an overall understanding of the pros and cons in the arguments before the Supreme Court when reviewing Wal-Mart's appeal.
The crux of the Chancery Court's order was as follows:
The Court found that the purpose to injure competitors and destroy competition cannot be inferred from below cost advertising and sales alone. There must be other proof of intent or purpose. A person's purpose or intent, being a state of mind, ordinarily cannot be proven by direct evidence, but may be inferred from other circumstances.
The Court found from the following circumstances the Conway Wal-Mart advertised and sold pharmaceutical and health and beauty products below cost for the purpose of injuring competitors and destroying competition:
The Chancery Court then granted the injunction against below-cost sales. The chancellor also assessed treble damages as a penalty.
"We (the dissenters) review Chancery cases de Novo and will not reverse a finding of fact, unless it is clearly erroneous. We consider the evidence in the light most favorable to the appellee (the pharmacists). The burden is upon the appellant to show the findings are erroneous."
"Appellant's second argument concerns the inference of intent to destroy competition and that the enumerated factors identified by the Chancellor could not possibly support an unlawful inference. The burden is upon the appellant to show that the findings are erroneous. Despite their analysis of each factor, Appellants fail to articulate a legal basis to reverse the findings and conclusions of the Chancellor."
This section of the dissenting opinion is very important in reviewing possible review of pricing and the Federal Trade Commission, and hence the author provides details of the dissenting opinion.
The Supreme Court, despite the strongly worded dissenting opinion reversed the Chancery Court's victory for American Drugs Inc., dismissed the original plaintiff's case and awarded in favor of Wal-Mart, the Appellant.
The author has provided great detail in the dissenting opinion because of references to the predatory pricing features of the Robinson-Patman Act; particularly with respect to the several different approaches to calculating below cost sales on (a) the "market-basket" approach or (b) the "single product" approach. The majority opinion in the Supreme Court reversal also acknowledged that: "Admittedly, there is a point where competitive pricing ends and predatory pricing begins." Further, Justice Robert L. Brown's majority decision in favor of Wal-Mart also pointed out that the Eighth U.S. Circuit Court of Appeals had discussed the difficulty in distinguishing the two in the context of the Sherman Act; i.e. "Competitive pricing" vs. "Predatory pricing." Moreover, while a finding that a defendant has engaged in selling below cost is not the equivalent of finding specific predatory intent; nevertheless, it could be a basis from which such intent might be inferred.
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