Below is set forth the argument (made in a written memorandum of law dated January 12, 2001) by the plaintiffs in the auto-parts price discrimination litigation in support of their claims that the defendant superstores violated Section 2(c) of the Robinson-Patman Act. The Court disagreed with the plaintiffs' argument and dismissed plaintiffs' 2(c) claims. [Plaintiffs believe they will be able to obtain the effect of a 2(c) claim (which is a per se claim, with no defenses) by showing that the auto-parts defendants and manufacturers have no idea of the price at which auto parts are being sold by the manufacturers to the superstore defendants.]
Here is the plaintiffs' 1/12/01 memorandum on Section 2(c):
PLAINTIFFS HAVE STATED A SECTION 2(c) CLAIM
BASED UPON SHAM TRANSACTIONS, SUBTERFUGE
PAYMENTS AND PROPERTY TRANSFERS FROM THE
16 MANUFACTURERS TO DEFENDANTS WHICH ARE NOT
ATTRIBUTABLE TO SPECIFIC AUTO-PARTS PURCHASES
Section 2(c) claims are materially different from Sections 2(a)/2(f) claims in that (i) only the 2(c) claims are per se violations [Federal Trade Commission v. Simplicity Pattern Co., Inc., 360 U.S. 55, 189, diss. opin.; and Lupia v. Stella D'oro Biscuit Co., 586 F.2d 1163, 1169 (7th Cir. 1978)]; (ii) allegations and proof of competitive injury are not required for Section 2(c) claims (Federal Trade Commission v. Simplicity Pattern Co., Inc., 360 U.S. 55, 64-65 (1959); (iii) the cost-justification defense is not allowed as to a Section 2(c) claim [Simplicity Pattern at 64-65; and Federal Trade Commission v. Henry Broch & Co., 363 U.S. 166, 175-176 (1960)]; and (iv) only Section 2(c) claims require transactions involving a sham or subterfuge. The Supreme Court (dissenting opinion) quoted from the legislative history for Section 2(c): "'The bill has nothing to do with brokerage at all. The bill deals with schemes and shams used to bring about discriminations in prices....'" (Henry Broch, 363 U.S. 180). Also, it said that the Robinson-Patman Act "was enacted in 1936 to curb and prohibit all devices by which large buyers gained discriminatory preferences over smaller ones by virtue of their greater purchasing power" (Henry Brock, 363 U.S. 168). [Emphasis added.] When uncovering new ways by which price discrimination is effected, a person only needs to read the statute to see what section or sections apply. When direct discounts on purchases are being given, Section 2(a) applies. But when non attributable payments or other benefits are involved in which the nature of the payment is being hidden, Sections 2(a) and 2(c) are both involved, with differing elements of proof, so that if the plaintiff cannot prevail under Section 2(a), the plaintiff may still be able to recover under Section 2(c). This section was enacted to force price discrimination to take place where it can be more readily detected and proven. As said by the Supreme Court in Simplicity Pattern, 360 U.S. 68:
In allowing a "cost justification" for price discriminations and not for others, Congress could very well have felt that sellers would be forced to confine their discriminatory practices to price differentials, where they could be more readily detected and where it would be much easier to make accurate comparisons with any alleged cost savings." n12 Biddle Purchasing Co. v. Federal Trade Comm'n, 96 F.2d 687, 692 (C.A. 2d Cir. 1938)....
This insight clearly indicates that discrimination based on sham and subterfuge falls squarely within Section 2(c), especially because a literal reading of Section 2(c) covers such transactions. Brokerage transactions are only a typical example involving the required subterfuge and deception, and as pointed out above in the quoted legislative history Section 2(c) does not prohibit non-subterfuge transactions. There is no reason to believe that sham dealings, deception and subterfuge under some contractual form other than "brokerage" would be permitted by the legislators. Whether sham services in distributing a manufacturer's goods are supplied by a purchaser or a broker for a purchaser the evil is the same -- the manufacturer is paying too much, and the purchaser is obtaining a payment or benefit which in effect reduces its price of goods purchased from the manufacturer, but in a concealed way (unless the payments or other benefits are tied in to specific purchases of goods).
The use of subterfuge rebates, fees and allowances (received by the favored purchasers) directly from the manufacturer or through third-parties (such as free trucks or free advertising) is the essence of plaintiffs' Section 2(c) claims in Count II. Section 2(c) (quoted at n. 20, p. 41 of Defts' Main Memo.) prohibits
"any person ... to receive or accept, anything of value as a commission, brokerage, or other compensatsion, or any allowance or discount in lieu thereof, except for services rendered ... either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf, or is subject to the direct or indirect control, of any party to such transaction [except the payor]."
Plaintiffs have not alleged and do not claim that plaintiffs' Section 2(c) claims include all Sections 2(a)/2(f) claims made by plaintiffs (which a comparison of Paragraphs 69 and 90 will show). On the other hand, Section 2(c) claims are not required to be based on transactions which cannot be the basis of Sections 2(a)/2(f) claims. There is some overlap, in which case the Section 2(c) claim has great significance to the parties because of its per se status.
In the Intimate case referred to in defendants' Main Memo., at pages 42-43, the plaintiffs did not allege a specific example of transactions covered by Section 2(c), unlike the amended complaint in this instant action. In the instant action, plaintiffs alleged, in Paragraphs 69S and 90S (p. 43), a specific third-party subterfuge transaction as follows:
S. Free trucks paid for by several Manufacturers to each defendant upon the opening up by the defendant of each new retail store;
The total number of branches opened by defendants (other than Wal-Mart and Sams) during the period starting 4 years prior to the commencement of this action, up to the present, amounts to thousands, and plaintiffs have alleged, in effect, Section that thousands of trucks have been paid for by manufacturers and given at no cost to defendants. This is covered by Section 2(c) with third-party involvement (i.e., the truck manufacturer shipping the trucks to defendants with payment by the auto-parts manufacturers).
Also, the Intimate decision is reflective of unsettled law, in conflict with the 9/28/99 Philip Morris decision of Judge Hurley in this District, which pointed out the existing of various conflicting decisions under Section 2(c).
Plaintiffs require discovery to identify the extent to which the other allegations in Paragraph 90 (at pages 42-43) involve third parties and their relationship to defendants and the auto-parts manufacturers (## 1-16) and the nature of the sham, deception and subterfuge involved.
The foregoing assumes that a third party or broker is required under Section 2(c). The Courts are not in agreement that a third-party or broker involvement is required by Section 2(c).
In Philip Morris, Inc. v. Grinnell Lithographic Co., Inc., 67 F. Supp. 2d 126; 1999 U.S. Dist. LEXIS 15638; 1999-2 Trade Cas. (CCH) P72,708 (E.D.N.Y. 1999), the Court briefly summarized the state of the law concerning Section 2(c), as follows:
Neither the Supreme Court nor the Second Circuit has delineated the elements which a private litigant must establish to recover treble damages for a violation of Section 2(c), n4 and decisions from district courts and other circuits reflect varied approaches to the issue, producing divergent, often unreconcilable results.Indeed, some courts have held that Section 2(c) is essentially a self-contained antitrust statute, the violation of which may properly serve as a predicate for a monetary award. See Calnetics Corp. v. Volkswagen of Am. Inc., 532 F.2d 674, 696 (9th Cir. 1967) ("We hold that, if distributor is able on remand to prove that [defendants] indeed committed acts of commercial bribery in violation of Section 2(c), then the [distributor] ought to be allowed any damages proximately caused by that violation."); Roosevelt Savings, 1987 WL 30194, at *1; Gregoris Motors, 630 F. Supp. at 910.
Given that Congress has concluded that Section 2(e), along with Section 2(c) and Section 2(d) involve per se violations, (i.e., "the proscriptions of these three subsections are absolute"' id.), the Court held that neither the absence of proven competitive injury nor the presence of cost justification was relevant to the charged violation. In other words, if the act was committed, the substantive violation occurred. [**27]
The lack of restrictive language [in the treble damages provision of Section 4] reflects Congress' 'expansive remedial purpose' in enacting Section 4: Congress sought to create a private enforcement mechanism that would deter violators and deprive them of the fruits of their illegal actions, and would provide ample compensation to the victims of antitrust violations." [**35]
For the reasons given, the holdings in antitrust cases involving non per se violations are not interchangeable with those involving per se unlawful business practices under the Robinson-Patman Act, such as commercial bribery under Section 2(c). That statement is beyond cavil for substantive violations. Based on the statutory language of Section 2(c) and Section 4, the purpose sought to be advanced by each of the statutes, and what I believe to be the better reasoned cases, (particularly Municipality of Anchorage), I conclude that the per se character of Section 2(c) violations is equally applicable to claims under Section 4 in the sense that an aggrieved party -- while required to establish both a substantive violation and an antitrust injury -- is not obligated to also prove that such injury caused competitive harm. [**41]
When the defendants receive a direct discount or rebate on their invoices or credit memos relating to a specific transaction, the antitrust issues are clear-cut because the purchase price is clearcut. The statutory defenses such as cost justification, meeting competition and deteriorating goods become the focus of the litigation, not whether there is a discriminatory price.
To avoid this quick focus on unlawful price discrimination, the defendants and manufacturers ## 1-16 have allegedly resorted to the subterfuge of giving back property and money to the defendants under false pretenses, and certainly not directly related to any specific transactions, for the purpose of preventing the true purchase price from being known or determined.
It is just such a situation that Section 2(c) was directed, to have the cases involving sham payments, whether made directly to the favored purchaser, or to an agent or broker for the favored purchaser, be dealt with on a per se basis because of the difficulties in tracing the competitive effect on payments which are not even stated to relate to a specific purchase by the favored defendant.
To discourage such sham violations of Sections 2(a)/2(f) of the Robinson-Patman Act, Section 2(c) was enacted which prohibited all types of subterfuge payments and transfers, whether direct or indirect, and made the violations per se. Such per se violations do not permit the statutory defenses applicable to Sections 2(a)/2(f) violations (other than meeting competition) because of the obvious and planned difficulty in applying such defenses to transactions which do not identify any specific transaction.
Accordingly, the extent to which plaintiffs prove the existence of sham payments (i.e., payments made by manufacturers ## 1-16 to defendants for purposes other than the stated purposes - such as advertising and promotional payments not required to be spent for the alleged purpose granted; payments made to defendants in excess of the costs incurred by defendants to perform such services for the manufacturers; as well as third-party transfers of property to defendants, such as the free trucks for defendants' store openings paid for by the manufacturers; and free inventory upon opening up of defendants' new stores), and that such sham payments are not attributable to any specific auto-parts purchases by a defendant, plaintiffs have proven a per se Section 2(c) violation.
Plaintiffs have alleged these Section 2(c) violations in Paragraph 90 (at pages 42-43) of their complaint.
With the increase in mergers, the opportunity for manufacturers to given secret rebates through their varied dealings with a defendant and defendant's own business interests requires that Section 2(c) be used to intercept the discriminatory pricing which is not obvious from the invoices for the transactions involved.
Section 2(c) was intended to intercept these other techniques for granting unlawful rebates, in ways which are difficult and often impossible to detect, and to discourage such sham techniques Section 2(c) was enacted giving plaintiffs a per se claim, not requiring the plaintiff to prove the near impossible, of matching thousands of illegal payments with specific transactions which are often invoiced at lawful prices (unless the subterfuge payments are taken into account).
Without application of Section 2(c) to subterfuge transactions of the type described by plaintiffs, defendants and others subject to the Robinson-Patman Act will increasingly resort to subterfuge transactions to avoid any Robinson-Patman Act liability, by having invoices for specific transactions showing the manufacturer's list price (with no more than a slight volume discount), with the rest of the rebate handled by non-attributable subterfuge transaction (which Section 2(c) clearly intended to cover).
Rangen, Inc. v. Sterling Nelson & Sons, Inc., 351 F.2d 851; 1965 U.S. App. LEXIS 4272; 1965 Trade Cas. (CCH) P71,583 (9th Cir. 1965) reviewed the legislative history of Section 2(c) and held that Section 2(c) includes payments made directly to the "other party to the transaction", or to such party's agent, representative or intermediary (351 F.2d 862); and that Section 2(c) prohibits more than just "rebates described as brokerage" payments (351 F.2d 858). "Pseudo-brokerage" and "other practices" were also intended to be covered by Section 2(c) (351 F.2d 856). "Subterfuge" will be disregarded to enable a payment to be treated according to its real purpose (351 F.2d 862).
In Roosevelt Savings Bank v. Eveready Maintenance Supply Co., 1987 U.S. Dist. LEXIS 13397; 1987-2 Trade Cas. (CCH) P67,819 (E.D.N.Y. 1987), the Court held that the language of Section 2(c) was sufficiently flexible to cover more than "large buyers acting through pseudo-brokers", and that the language proscribes sham brokerage arrangements and does "address other business practices themselves". The Court stated that such prohibition applies whether or not "such practices are used to effect price discrimination", with the result that the plaintiff under Section 2(c) "need not show that the illegal practice caused anti-competitive injury". (**4).
The practices of defendant in obtaining their lower prices through payments of various types not attributed to any specific invoice clearly fall within the language and intent of Section 2(c), because of their lack of clear-cut prohibition under Sections 2(a)/2(f).
The breadth of Section 2(c) is found in Abernathy v. Bausch & Lomb, Inc., 97 F.R.D. 470; 1983 U.S. Dist. LEXIS 18575; 36 Fed. R. Serv. 2d (Callaghan) 158; 1983-2 Trade Cas. (CCH) P65,572 (N.D. Tex., Dallas Div. 1983), which held:
Under the broad language of this section, all payments covered by it are unlawful, regardless of whether or not any adverse competitive effect occurs, so long as the payments are not made to compensate "for services rendered." L. Sullivan[, Handbook of the Law of Antitrust 704 (1977)], at 698. In this sense, the section creates a statutory per se rule. Id. n8n8 * * * Sham brokerage payments occur where large buyers set up "dummy" brokers who are employed by the buyer and who render no services; * * * Henry Broch, 363 U.S. at 169. Since the statute also proscribes payments "in lieu" of brokerage, it means that large buyers who purchase directly from the seller and do not require the services of a seller's broker may not demand or receive price reductions equivalent to the seller's ordinary brokerage expenses in sales to other customers. Id. at 171. * * *
Based upon the foregoing, defendants' motion to dismiss Count II should be denied in its entirety, and plaintiffs should be able to develop through discovery the nature of the various payments and benefits given to the defendants by the manufacturers directly, or indirectly through so-called brokers or other third persons. Discovery should also reveal the extent to which the manufacturers ##1-16 gave a price reduction based upon an alleged savings in brokerage expenses, which would be a prohibited "allowance in lieu of brokerage". Henry Broch, 363 U.S. 172-173. The evil prohibited by Section 2(c) is not described by reference to sham brokerage transactions, but instead to sham transactions of any type, involving any persons, by which money or other benefits are transmitted from manufacturer to favored purchaser to give such purchaser a lower price for the goods it purchases from the manufacturer.
With the use of computers to keep tallies of benefits vs. purchases, the manufacturers and defendants can run their own secret books reflecting actual prices, which never appear on any invoices for specific purchases and therefore can easily escape detection and liability unless Section 2(c) is held to apply.
Dated: January 12, 2001
[End of Argument Regarding Section 2(c), Robinson-Patman Act]
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