IN THE

Supreme Court of the United States

October Term, 2004

Docket No. 2004-14676

On Writ of Certiorari from the United States Court of Appeals for the Sixth Circuit

Brief for the Respondents

James A. Lewis, doing business as B & H Vendors; Pen Vending Company; Eagles Coin Machine; Belfiore Music & Cigarette Company,

                        Petitioner,

v.

Philip Morris Incorporated,

                        Respondents.

Michael J. Bootsma

5472 270^th Street

Sanborn, Iowa 51248

Phone: 712-348-4727

Attorney for the Respondent

* The following writing sample is the first part of a brief that I wrote for an antitrust seminar.

I.                    THIS COURT SHOULD AFFIRM THE APPELLATE COURT DECISION THAT INDIRECT VENDORS DO NOT HAVE STANDING BECAUSE SECTION 2(d) OF THE ROBINSON PATMAN ACT DOES NOT COVER FAVORED INDIRECT PURCHASERS.

This Court should affirm the decision in Lewis v. Philip Morris, 355 F.3d 515 (6th Cir. 2004), because the Court of Appeals for the Sixth Circuit was correct in finding that Philip Morris did not violate Section 2(d) of the Robinson Patman Act.  In the current case, the plaintiffs, cigarette vendors, have accused Philip Morris of providing promotional allowances to convenience stores, mini-marts, and gas stations in violation of Section 2(d) of the Robinson Patman Act. 15 U.S.C. § 13 (1986).[1]  This Court, however, has limited the protection granted by Section 2(d) to situations involving a direct buying retailer[2] who exercised power sufficient to threaten the existence of small competitors. Fred Meyer v. Federal Trade Comm’n,390 U.S. 341, 357 (1968).  The appellate court’s decision should be affirmed, because the holding in Fred Meyer is inapplicable in the current case for several reasons.  First, Fred Meyer involved a favored purchaser who purchased directly from the supplier granting promotions, while the current case involves a favored purchaser who buys from a wholesaler.  Second, in Fred Meyer the Court worried that the large favored customer would threaten small businesses, but the current case does not involve a large favored purchaser.  Third, the appellate court found that Philip Morris did not exercise enough control over its promotional programs to be found liable under the indirect purchaser doctrine.  Finally, allowing a Section 2(d) claim in this case conflicts with Section 1 of the Sherman Act and may lead to the extinction of promotional allowance programs. 

A.                 The Holding In Fred Meyer Is Inapplicable Because Convenience Stores Are Indirect Purchasers And Not Direct Buying Retailers. 

The application of Section 2(d) to a favored indirect purchaser, such as the convenience stores in this case, is inherently limited by this Court’s decision in Fred Meyer, 390 U.S. at 357.  Fred Meyer was a supermarket chain that operated thirteen stores in Oregon, and it bought directly from suppliers and not a wholesaler. Id. at 345.  Each year, Fred Meyer conducted a four-week promotional campaign during which it distributed coupon books that contained various discounts. Id.  Fred Meyer financed the campaign either by charging suppliers to have their products placed in the book or by receiving discounts on the products it purchased from the suppliers. Id.  In response to the situation, the FTC decided to bring suit on behalf of several small retailers who bought from wholesalers but did not purchase directly from the suppliers. Id. at 347.  The small retailers, who the FTC hoped to protect, did not receive the same discounts and allowances afforded to Fred Meyer. Fred Meyer, 390 U.S. at 357.  When the Court decided the case, it applied Section 2(d) and held that Fred Meyer was on a different functional level than wholesalers, because it did not compete with wholesalers in “distribution” and therefore Section 2(d) did not apply. 

 The Court reasoned in its Fred Meyer decision that Section 2(d) should be limited to situations in which a favored direct buying retailer is involved.  First, it adopted the reasoning of Sun Oil, and stated that “without a clear indication from Congress that § 2(d) was intended to compel the supplier to pay the allowances to a reseller further up the distributive chain who might or might not pass them on to the level where the impact would be felt directly,” Section 2(d) would be limited to direct buying retailers. Id. at 357.  Then the Court stated it was holding only that “when a supplier gives allowances to a direct buying retailer, he must also make them available” to those who purchase indirectly from a wholesaler, which also gives rise to the presumption that protection is extended only to direct buying retailers. Id. at 358. 

The current case involves a situation that is easily distinguishable from that in Fred Meyer, because the convenience stores are not direct buying retailers as Fred Meyer had been.  The Court stated in Fred Meyer that its holding only reached situations involving a direct purchasing retailer. Fred Meyer, 390 U.S. at 358.  In the current case, however, the favored purchasers are indirect purchasers, because they buy from a wholesaler and not directly from Philip Morris.  In 1998, after Philip Morris terminated its prior promotional program, which favored cigarette vendors [hereinafter,“Vendors”], it started to provide promotional programs called Retail Masters, Retail Leaders, and Ranch Party ’99 programs.  Under the new programs, Philip Morris provided monetary allowances to those who indirectly purchased cigarettes from wholesalers, such as convenience stores, mini-marts and gas stations [hereinafter, “Convenience Stores”] if the Convenience Stores passed on these allowances to retail customers.  An example of a promotional program is the “buy one, get one free” price promotion in which a customer purchasing a pack of cigarettes could get a second pack for free.  It is alleged by several Vendors that these programs discriminated against those indirect purchasing vendors who purchased from a wholesaler in favor of those indirect purchasers who operated as Convenience Stores and who also bought from a wholesaler and not Philip Morris.  These facts show that the current case is distinguishable from Fred Meyer, because the Convenience Stores are not direct purchasing retailers as Fred Meyer had been.  The Convenience Stores are indirectly purchasing cigarettes from Philip Morris through a wholesaler and are not in the position to extort allowances from Philip Morris as Fred Meyer had extorted from its suppliers.  Therefore, this Court should find that Fred Meyer is inapplicable in the current case, because there is not a favored direct purchasing retailer, like Fred Meyer, that is extorting allowances from its suppliers.   

B.                 The Current Case Is Distinguishable From Fred Meyer Because There Is Not A Large Direct Buying Retailer That Threatens The Existence Of Small Competitors. 

The holding in Fred Meyer is based on the belief that Congress’s sole intention in passing the Robinson Patman Act was to protect small businesses.[3]  The Court stated that even though neither the statute itself nor its legislative history afforded protection to disfavored indirect purchasers, it was going to extend such protection to disfavored indirect purchasers, because if it did not the “result would be diametrically opposed to Congress's clearly stated intent to improve the competitive position of small retailers by eliminating what was regarded as an abusive form of discrimination.”  Fred Meyer, 390 U.S. at 352.  The Meyer Court seemed to think that this holding was necessary, because Fred Meyer was a large retailer that could afford to undertake the traditional wholesaling function, while small indirect purchasing retailers could not.  Id.

Even if this Court were to find that Fred Meyer was applicable when there is no favored direct purchasing retailer, it could not apply the Fred Meyer analysis of Section 2(d) in the current case.  In Fred Meyer, the Court perceived Fred Meyer as a threat because it was a retailer that was large enough to undertake the wholesaling process for itself.  Due to its large size and buying power, Fred Meyer was able to extort promotional allowances from suppliers that a small business could not. Id.  The current case does not involve a large chain store extorting allowances from a supplier; it involves small businesses that retain a negligible part of their profits from cigarettes. Philip Morris, 355 F.3d 515 at 529.  These are the type of small businesses that the Court hoped to protect under Section 2(d) with its holding in Fred Meyer.  Applying the Fred Meyer holding in this case may hurt small businesses by forcing Philip Morris to cut its promotional programs, which are currently benefiting small businesses such as convenience stores and mini-marts.  Therefore, the reasoning used by the Court to extend coverage under Section 2(d) of the Robinson Patman Act in Fred Meyer is inapplicable in the current case. 

C.                 Even If Fred Meyer Were Applicable In The Current Case, This Court Could Not Find That Philip Morris Exercised Sufficient Control Over The Current Programs.

Even if by some outlandish reasoning this Court could serve the purpose of the Robinson Patman Act by extending Section 2(d) to cover small indirect favored purchasers, this Court could not hold Philip Morris liable.  If this Court were to find that Section 2(d) applied in situations containing both favored and disfavored buyers who were purchasing indirectly from a wholesaler, then it would have to formulate some type of rule to distinguish whether or not the supplier was liable.  If this Court did not adopt the indirect purchaser rule, promotional programs would become extinct because the supplier would be open to liability the minute it initiated a promotional allowance program.  For example, if a supplier granted promotional allowances to all its wholesalers and the wholesalers in turn did not pass on these allowances to the disfavored indirect purchaser, it would hardly be just to hold the supplier liable.  Therefore, in order to limit liability to those suppliers who actually control which retailers receive promotional allowances, this Court would have to adopt the indirect purchaser doctrine.

Under the indirect purchaser doctrine adopted by several circuit courts, a supplier has to exercise significant control over the downstream sale before it is liable under the Robinson Patman Act. Baronsky Oils, Inc. v. Union Oil Co. of California, 665 F.2d 74, 83 (6th Cir. 1984); American News Company v. FTC, 300 F.2d 104 (2d Cir. 1962), cert. denied, 371 U.S. 824 (1962).  In the current case, the court of appeals found that Philip Morris did not contain enough control over the allowance programs to warrant a finding that it violated Section 2(d). Philip Morris, 355 F.3d at 529.  This was largely a factual finding by the Court of Appeals, and thus this Court should review it solely for clear error. Pierce v. Underwood, 487 U.S. 552, 558 (1988).  Therefore, even if Fred Meyer were applied in the current case, this Court could not hold Philip Morris liable in the current case because the appellate court found that Philip Morris did not exert sufficient control over the distribution of the allowances to be liable under the indirect purchaser doctrine.

D.                 Fred Meyer Analysis Is Inapplicable Because The Application Of Section 2(d) In The Present Case Would Create A Violation Under Section 1 Of The Sherman Act. 

An application of Fred Meyer in the current case would create a duty that would violate Section 1 of the Sherman Act. 15 U.S.C. § 1 (1986).  Requiring a company like Philip Morris to control its promotional programs even though they are provided to indirect purchasers would create liability for claims of illegal price maintenance or nonprice restraints under Section 1 of the Sherman Act.  Under Section 1 of the Sherman Act, it is illegal to have a “contract, combination . . . or conspiracy” in unreasonable restraint of trade. 15 U.S.C. § 1; 6 P. Areeda & H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1400, at 1 (2d. ed. 2002).  This Court found that both price and nonprice restraints imposed by a supplier can violate Section 1 of the Sherman Act.  In Dr. Miles, this Court found that under Section 1 of the Sherman Act, it is per se illegal for a supplier to fix the prices at which its wholesalers distribute its products, a situation referred to as retail price maintenance. Dr. Miles Medical Co. v. John D Park & Sons Co., 220 U.S. 373, 385 (1911).  Furthermore, in retail price maintenance cases, this Court has held that an agreement in which the supplier refuses to deal with non-complying purchasers constitutes an unreasonable restraint in trade. U.S. v. Bausch and Lomb Optical Co., 321 U.S. 707, 729 (1944). 

 Applying Fred Meyer in the current case may potentially cause a supplier like Philip Morris to violate Section 1 of the Sherman Act by forcing it to engage in retail price maintenance.  In order to avoid allegations of retail price maintenance in the present case, Philip Morris would have to control the distribution process of its wholesalers and dictate the terms of resale in order to make sure that the promotional allowances were available to every indirect purchaser of cigarettes.  For example, if Philip Morris offered a program in which it provided allowances to retailers who offered two packs of cigarettes for $4, it would have to make sure that its wholesalers provided that promotional program to its customers.  If the wholesalers did not provide the promotional allowance to all of its customers, then under the vendors’ theory, Philip Morris would be liable under Section 2(d) of the Robinson Patman Act.  Thus, in order to avoid liability, Philip Morris would have to refuse to deal with wholesalers that did not provide its promotional programs (for example, the two packs for $4).  However, a refusal to deal with wholesalers who do not carry out the supplier’s promotional programs is an unlawful restraint of trade under the Sherman Act if it constitutes retail price maintenance. Bausch and Lomb Optical Co., 321 U.S. at 729.  Requiring wholesalers to pass on cigarettes at $4 for two packs would clearly violate retail price maintenance because the supplier would be setting the price at which the wholesaler sells to retailers.  Therefore, if this Court were to accept the vendors’ theory and include indirect purchasers under Section 2(d), then Philip Morris may be forced to either violate Section 1 of the Sherman Act for retail price maintenance by refusing to deal with non-complying wholesalers or be liable under Section 2(d) of the Robinson Patman Act for not offering the promotional allowance to every indirect purchaser of its cigarettes.

Applying the holding of Fred Meyer in the current case would potentially cause the same result in nonprice cases as well.  In Continental T.V., Inc., v. GTE Sylvania, Inc., 433 U.S. 36, 59 (1977), this Court stated that vertical restraints may violate Section 1 of the Sherman Act if they unreasonably restrain intrabrand competition.  This Court has recognized that the potential problem with franchise agreements is that they restrict access to a product by limiting the number of those who supply it, which results in damage to intrabrand competition. Id. at 56.  Holding Philip Morris responsible for making certain that all indirect purchasers receive allowances could eventually result in an unreasonable restraint in intrabrand competition as discussed in Sylvania.  If indirect purchasers, such as vendors, are allowed to bring suit in the current case, then Philip Morris will have to eventually cut those wholesalers who do not pass on the promotional allowances to indirect retailers.  Philip Morris may even decide to enter into exclusive agreements with only those wholesalers who pass on the allowances.  However, if Philip Morris cuts down on the number of wholesalers, it will decrease the amount of intrabrand competition and make itself liable for claims of unreasonable restraint of competition under Section 1 of the Sherman Act.  This would leave Philip Morris with only one option: cut the promotional allowances.  However, then Section 2(d) becomes worthless because there are not any promotional allowances for it to govern.  In addition, small businesses will lose valuable access to promotional allowances, and maybe even product, if Philip Morris decides to vertically integrate in order to avoid antitrust claims.  Therefore, this Court should find Fred Meyer distinguishable from the current case in order to prevent suppliers that provide promotional allowances from being liable under either Section 2(d) of the Robinson Patman Act or Section 1 of the Sherman Act.

CONCLUSION

For the foregoing reasons this Court should affirm the holding of the appellate court. 

Respectfully Submitted,

_______________________

                                                                                    Michael J. Bootsma