Tuesday, November 25, 2014

Retailer Challenges Clorox’s “Club Pack” Policy as Robinson-Patman Violation

             Woodman’s Food Market, Inc. recently filed a lawsuit against The Clorox Company, alleging that Clorox’s policy of no longer selling “large pack” – a.k.a. “club pack” – products outside of the club channel violates the Robinson-Patman Act. 
Alleged Facts 
Woodman’s is a large-format grocery store that competes against Sam’s Club and Costco.  Clorox’s club pack products are cheaper per unit compared to smaller pack products, and Woodman’s had been purchasing the club pack products for years.  In September 2014, Clorox informed Woodman’s that, as of October 1, 2014, it would only sell its club pack products to club stores – i.e. Costco, Sam’s Club, and B.J’s.  Woodman’s describes the competitive consequence of Clorox’s new policy as follows:
As a consequence of this new policy, two of Woodman’s primary competitors, Sam’s Club and Costco, will be able to buy and sell at retail special large packs of Clorox products that Woodman’s will no longer be able to sell giving a significant competitive advantage to these competitors of Woodman’s.  In addition, because the unit price on these large pack items is significantly lower than the unit price charged for small packs of these same products, Sam’s Club and Costco will generally be able to buy and ultimately sell these large pack items at significantly lower unit costs than will be available to Woodman’s and ultimately its retail customers.

Complaint ¶ 36.
Alleged Robinson-Patman Act Violation and Relief Sought
Woodman’s alleges that Clorox’s new policy violates three provisions of the Robinson-Patman Act, 15 U.S.C.A. §§ 13(a), (d), and (e). 
Section 13(a) of the Robinson-Patman Act prohibits selling products of “like grade and quality” at different prices, if the price differences may injure competition.  Woodman’s alleges that Clorox’s new policy violates § 13(a) because Sam’s Club and Costco will be able to purchase Clorox’s products for less per unit than Woodman’s and thus resell the products for less per unit, which will diminish Woodman’s ability to compete on price. 
Sections 13(d) and (e) of the Robinson-Patman Act prohibit a seller from granting advertising and promotional allowances or services to customers unless they are available to all competing customers on proportionally equal terms.[1]  Woodman’s alleges that Clorox’s new policy violates these sections – primarily § 13(e) – because Clorox is now making available a special pack/package size to the club channel that is not available to Woodman’s.
Woodman’s seeks declaratory and injunctive relief that would prevent Clorox from selling its “club packs” only to the club channel and prevent Clorox from providing services and prices to the club channel that are not also proportionally made to Woodman’s.  Woodman’s also filed a preliminary injunction motion at the same time as it filed its complaint, seeking an order from the Court (under §§ 13(d) and (e) of the Robinson-Patman Act) that would require Clorox to continue to sell its “club packs” to Woodman’s during the pendency of the lawsuit. On November 24, 2014, Clorox filed its response to the motion for a preliminary injunction; this response was filed under seal and therefore is not publicly available.  A decision on the preliminary injunction will likely be made in the first quarter of next year.  Among other things, the court will likely address in its decision the likelihood of success of Woodman’s argument that Clorox’s policy restricting the sale of club packs outside the club channel violates §§ 13(d) and (e) of the Robinson-Patman Act. 
Implications of the Woodman’s Suit
            Woodman’s suit raises issues of increasing importance to consumer goods manufacturers and retailers:  whether a manufacturer can lawfully treat retailers operating in different channels differently, particularly club stores.  Clorox’s club pack policy was not tied to any performance criteria that would at least arguably enable Woodman’s to make a business decision as to whether it would continue to sell club packs.  Clorox simply informed Woodman’s (allegedly) that Clorox would no longer sell club packs outside of the club channel without giving Woodman’s an option to continue to distribute the packs.  If this is true, Woodman’s suit likely has merit. 
The key to legally managing channels differently is to develop viable performance criteria associated with packages (and trade programs) that allow retailers to make business decisions as to the packs they will distribute (and the trade they will receive).  Clorox’s (alleged) failure to develop such performance criteria could be a fatal flaw in its new club pack policy.
 Industry participants interested in viable performance criteria that avoid the pitfalls associated with Clorox’s new policy should consult with legal counsel.

[1] Section 13(d) applies to payments in connection with transactions involving “commodities”; §13(e) applies to services in connection with a “commodity.”

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