By Colin Kass and David Munkittrick

Law360 (April 28, 2020, 5:29 PM EDT) --

Colin Kass

David Munkittrick

It is no secret that businesses are grappling with some of the toughest choicest they have ever faced. As the economic fallout of stay-at-home orders continues, there are already rumblings of defaults and a likely wave of bankruptcy filings.

One business' inability to pay its bills cascades throughout the economy. When customers stop paying their bills, firms stop paying their suppliers, and so on.

While no one knows exactly how pervasive or long-lasting the effects will be, two things are almost certain. Many customers will ask for extended payment terms, and some customers will go out of business. This means suppliers will face a resurging risk of price discrimination claims under the Robinson-Patman Act.

Price-gouging laws — state laws prohibiting extreme price increases during an emergency — tend to be at the forefront of the mind during a crisis. But that is a short-term problem, and only those who act egregiously are likely to find themselves in hot water. When the pandemic passes, so too will that problem.

The bigger exposure lies in the aftermath. Firms making credit and payment-term decisions now may be choosing which businesses will survive and which will fail. The Robinson-Patman Act constrains that choice.

The Robinson-Patman Act prohibits selling the same product at different prices to similarly situated business customers. It is a Depression-era federal antitrust law originally passed to protect the small mom-and-pop stores on main street that were being put out of business by the rise of large national chains that could command volume discounts from suppliers.

As the U.S. Supreme Court explained, "Congress considered it to be an evil … that a large buyer could secure a competitive advantage over a small buyer solely because of the large buyer's quantity purchasing ability."[1]

In its heyday, the law was a bastion to small businesses everywhere, creating significant antitrust risk for manufacturers and large retailers. But over the last few decades, the Robinson-Patman Act fell out of favor. Courts and commentators came to see the law as creating unnecessary barriers to discounting. U.S. Circuit Judge Frank Easterbrook observed, "The control of price discrimination poses substantial risks to competition, which often works through 'discriminatory' chiseling down of prices."[2]

Robert Bork famously described the law as "the misshapen progeny of intolerable draftsmanship coupled to wholly mistaken economic theory."[3] The growing rift between economic theory and the Robinson-Patman Act made it increasingly difficult to square the text of the act with the general purpose of the antitrust laws — to protect consumers. Critics argued: As long as customers got lower prices, what does it matter if they got them at big national chains rather than a small retailers on main street?

Yet the Robinson-Patman Act has remained on the books, and efforts to repeal it have uniformly failed. So the federal courts stepped in. In the absence of legislative action, there is no surer way to strip a law of its power than to make it unprofitable to bring a claim. Courts, therefore, erected numerous hurdles for plaintiffs seeking to bring a Robinson-Patman Act claim.

Most importantly, the Supreme Court rejected damages measures based simply on the difference between prices offered to favored and disfavored customers.[4] This effectively killed the class action device in Robinson-Patman Act claims by making it all but impossible to prove damages using common evidence across classes of customers.

Because a single plaintiff's lost sales were often too small to make the cost of litigation worth the candle, price discrimination cases slowed to a trickle, save for the occasional strike suit.

That may change. In the fallout of a crisis, people naturally look for places to attach blame. And a bankrupt customer has every incentive to allege its supplier's discriminatory refusal to extend credit hastened its demise —whether or not based in reality — entitling it to the future profits it would have earned as a going concern, all trebled.

Of course, the ultimate viability of such claims is far from assured. Courts have long recognized that credit can be an element of price, but it is not entirely clear that, in the context of the Robinson-Patman Act, payment-term discrimination is the same as price discrimination. One court described the problem this way:


It is also not clear that losses from a business' demise constitute harm to competition, or antitrust injury — the type of injury the antitrust laws were designed to prevent. Nor is causation as simple as showing a rejection of credit followed by a plaintiff's going out-of-business sign. Plaintiffs would need to show far more connective tissue.

Still, a case brought by a bankrupt customer would present higher risks than the usual case brought by an ongoing business. That is because the amounts at stake would be larger and more likely to entice a contingency lawyer to take the case.

When the plaintiff is an ongoing businesses, price discrimination damages are generally measured by the profits lost on sales that were diverted from the plaintiff to a favored retailer. That is, a mom-and-pop plaintiff would need to show how many of its customers chose not to buy from it and instead traveled to a big-box store to purchase the same item (assuming the big-box store received more favorable credit or payment terms).

It is a nearly impossible task to prove meaningful damages that way. Imaging trying to show hordes of customers flying out the doors of a local grocery store because a box of salt costs 5 cents more than at the nearest big box. That explains the rarity of Robinson-Patman Act cases.

But a bankrupt plaintiff could tell a different damages story. It might seek the difference between its precrisis profits and the zero profits it earned after going out of business. Even adjusting for the short-term reduction in foot traffic while shelter-in-place or social distancing orders were in effect, damages are still likely to be large because, having closed its doors forever, the plaintiff will claim lost profits from now until the end of time.

It is not clear whether courts would countenance such a damages measure, but that has never stopped plaintiffs from bringing cases. And if history is any guide, many courts may be unwilling to toss these cases on a prediscovery motion to dismiss. The prospect of protracted litigation exposes defendants to real risk and gives plaintiffs significant settlement leverage. And if any plaintiff is successful in wresting a large judgement or settlement, rest assured there will be other similar bankrupt customers waiting in the wings.

So how to prepare for this potential onslaught of price discrimination claims? For starters, companies should develop and employ fair and consistent standards in determining whether and when to extend credit or payment terms.

Companies can also look to avail themselves of the functional availability defense by developing payment programs that are functionally available to all customers, such as by requiring all customers seeking payment extensions to agree to specific repayment terms or to agree to purchase additional products in the future.

Similarly, since a bankrupt plaintiff needs to prove causation, requiring customers to establish both their ability to pay if credit is extended, and their inability to remain in business if credit is not extended, would limit the pool of potential plaintiffs.

Another strategy to prophylactically manage risk would be to extend credit to one class of customers, but not other types, if the classes of customers do not compete. For example, if a supplier sells its products to airlines and auto makers, it could decide to extend credit to the former but not the latter. Since auto makers and airlines do not compete, price discrimination between these channels of trade does not harm competition and is not prohibited.

Finally, businesses need to be mindful of how they communicate decisions to grant, or decline, credit extensions. For better or worse, those communications will become fodder for potential plaintiffs. Attempts, for example, to throw the Robinson-Patman Act up as a shield ("sorry, the law doesn't let me give you an extension") could be repurposed by plaintiffs as a sword if the supplier takes a different stance with a big customer ("see, you admitted what you did was illegal").

Credit decisions have always been complicated. They are all the more so now. Today's decisions will impact businesses — both suppliers and customers — in the immediate weeks and months ahead, and for years to come. Those who emerge with only a shell of a once vibrant business may view their only asset as a contingent claim against suppliers who discriminatorily refused to extend a credit lifeline.

Keeping this in mind, and implementing credit and payment-term policies that comport with the Robinson-Patman Act will help avoid funding a bankrupt plaintiff's lottery ticket.

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Colin Kass is a partner and David Munkittrick is an associate at Proskauer Rose LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See FTC v. Morton Salt Co. , 334 U.S. 37 (1948).

[2] Ball Mem. Hosp. Inc. v. Mutual Hosp. Ins., Inc. , 784 F.2d 1325 (7th Cir. 1986).

[3] The Antitrust Paradox: A Policy at War with Itself at 382 (1993).

[4] See, e.g., J. Truett Payne Co. v. Chrysler Motors Corp. , 451 U.S. 557, 564-65 & n.4 (1981).

[5] Whirlpool Corp. v. U.M.C.O. Int'l Corp. , 748 F. Supp. 1557, 1566 (S.D. Fla. 1990).

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