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HASBROUCK v. TEXACO

September 11, 1985

Ricky HASBROUCK, d/b/a Rick's Texaco, et al., Plaintiffs,
v.
TEXACO, INC., a foreign corporation, Defendant



The opinion of the court was delivered by: QUACKENBUSH

 QUACKENBUSH, District Judge.

 AS SCHEDULED, this matter came on for oral argument in Spokane, Washington on August 14, 1985. Plaintiffs were represented by Robert Whaley and Lucinda Whaley. William Fremming Nielsen, Randall Robinson, Mark Litvack and Ira Sacks appeared on behalf of the defendants.

 Upon consideration of the record and the oral presentations of counsel, the court rules as follows: defendant's motion for judgment notwithstanding the verdict or a new trial (Ct.Rec. 739) is DENIED.

 DISCUSSION

 A. Judgment Notwithstanding The Verdict :

 Pursuant to Fed.R.Civ.P. 50(b), Texaco asks this court to set aside the verdict and enter judgment in accordance with its motion for directed verdict. *fn1" Such a motion may be granted only if the jury's verdict is not supported by substantial evidence. Los Angeles Memorial Coliseum Com'n v. National Football League, 726 F.2d 1381, 1392 (9th Cir.1984). Stated another way, a judgment notwithstanding the verdict is appropriate when the evidence permits only one reasonable conclusion as to a verdict and the jury's verdict is inconsistent with that conclusion. See Walker v. KFC Corp., 728 F.2d 1215, 1223 (9th Cir.1984). In making that analysis, this court is prohibited from considering witness credibility or weighing the evidence but must view the evidence in the light most favorable to the plaintiffs. Los Angeles Memorial Coliseum Com'n v. National Football League, 726 F.2d at 1392. Applying those principles to each of the four grounds asserted in defendant's motion, the court concludes the verdict must stand.

 1. Price differentials as "functional discounts ":

 A "functional discount" is a traditional technique used in business pricing practices. Sawyer, Business Aspects of Pricing Under the Robinson-Patman Act (1963). A functional discount occurs where a buyer is permitted to purchase a product for a lower price than another buyer because of the different levels of distribution occupied by the buyers or because the buyers perform different functions in the seller's marketing system. *fn2" The primary justification for the discount is to compensate the buyer for its cost of performing functions ordinarily performed by the seller. *fn3" Generally, functional discounts do not trigger Robinson-Patman Act liability either because the buyer who receives the discount and the buyer who does not are on different trade levels (and therefore are not competitors) or because the discount merely offsets the competing buyer's additional costs incurred in performing the seller's functions. In other words, if the buyers do not function at the same level the requisite "competitive injury" is unlikely. Similarly, if the discount merely offsets the buyer's additional costs, it is unlikely the buyer's condition would be enhanced enough to cause an injury to competition. Thus, the critical question in determining the legality of a functional discount is whether the price differential has an adverse effect on competition; if it does, and conventional defenses are absent, the discount violates the Act. 3 Kintner & Bauer, Federal Antitrust Law, 308 (1983) ("underlying inquiry . . .: is there injury to competition?"); Antitrust Section, Monograph No. 4, The Robinson-Patman Act: Policy and Law, Volume 1 54 (1980) (legality of functional discounts "depends upon the absence of adverse competitive effects"); Calvani, Functional Discounts Under the Robinson-Patman Act, 17 B.C. Indus. & Comm.L.Rev. 543, 546 (1976) (legitimacy of functional discounts "depends on the absence of an anti-competitive effect"); Mueller Company v. Federal Trade Commission, 60 F.T.C. 120, 129 (1962), aff'd 323 F.2d 44 (7th Cir.1963), quoting General Foods Corporation, 52 F.T.C. 798 (1956) (the Robinson-Patman Act permits "lower prices to one functional class as against another, provided that injury to commerce as contemplated by the law does not result . . ."); Doubleday and Company, Inc., 52 F.T.C. 169, 207 (1955) ("traditional [functional] discounts . . . remained lawful under the Robinson-Patman Act unless engendering adverse effects on competition . . ."); cf. FLM Collision Parts, Inc. v. Ford Motor Co., 543 F.2d 1019, 1027 (2nd Cir.1976), cert. denied, 429 U.S. 1097, 97 S. Ct. 1116, 51 L. Ed. 2d 545 (1977) ("we do not suggest or imply that . . . a price discount to . . . wholesalers . . . which has the purpose or effect of defeating the objectives of the Act" is beyond the scope of the Act).

 Even without viewing the evidence in the light most favorable to the plaintiffs, the preponderance of the evidence produced in this case demonstrated that Texaco's functional discounts adversely affected competition. That result was brought about primarily by two reasons. First, since Texaco engaged in dual distribution, i.e., sold to both retailers and distributors, the plaintiffs and the favored buyers were not always in competition. *fn4" That absence of competition, however, does not negate competitive injury, where, as here, the disfavored buyer competes with the favored buyer's customers. As the Supreme Court recently confirmed, a Robinson-Patman Act violation may occur even though the favored and disfavored buyers are not competitors. Falls City Industries v. Vanco Beverage, Inc., 460 U.S. 428, 103 S. Ct. 1282, 75 L. Ed. 2d 174 (1983) (competition was between customers of favored buyers and customers of disfavored buyers). The record in this case contains substantial evidence that the favored purchasers' (or their customers') lower retail prices attracted customers away from the plaintiffs and that the lower prices were the major reason for the diverted sales. Such evidence more than establishes injury to competition. Falls City Industries v. Vanco Beverage, Inc., 460 U.S. at 437-38, 103 S. Ct. at 1290-91, citing J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557, 561-62, 101 S. Ct. 1923, 1926-27, 68 L. Ed. 2d 442 (1981).

 Secondly, the functional discounts negatively affected competition because they were, in part, reflected in the favored purchasers' (or their customers') retail prices. In other words, the discount was not consumed or absorbed at the level of the favored buyers; rather, the amount of the discount (or a significant portion) appeared in the favored purchasers' retail price, or in the favored purchasers' price to their customers and in their customers' retail prices. Under such circumstances, the otherwise innocuous nature and presumed legality of functional discounts is rebutted, for it is universally recognized that a functional discount remains legal only to the extent it acts as compensation for the functions performed by the favored buyer. See 3 Kintner & Bauer, Federal Antitrust Law 309-10 (1983); Rill, Availability and Functional Discounts Justifying Discriminatory Pricing, 53 Antitrust L.J. 929, 939-41 (1985). The discount must "be reasonably related to the expenses assumed by the [favored] buyer" and the discount "should not exceed the cost of . . . the function [the favored buyer] actually performs . . ." Doubleday and Company, 52 F.T.C. at 209, cited in Boise Cascade Corp., Docket No. 9133, slip op. at 117 (Feb. 14, 1984) (initial decision). If the discount exceeds such costs, it cannot be justified as a functional discount, particularly where, as here, the excess has a negative effect on competition.

 In this case Texaco made no serious attempt to quantitatively justify its functional discounts. While a precise accounting of the value of the performed functions is not mandated, merely identifying some of the functions is not sufficient. *fn5" There is no substantial evidence to support Texaco's position that the discounts were justified. In fact, the preponderance of the evidence points to the contrary: had the amount of the discounts been merely reimbursement for the value of the services performed by the favored buyers, it is improbable that the discounts (or a portion) could have been passed along and been reflected in the retail price. Consequently, the price differential and its resultant impact on competition cannot be legitimized under the rubric of functional discount.

 2. Competitive Injury :

 To prove a violation of the Robinson-Patman Act, a plaintiff must, inter alia, establish that the effect of the price differential " may be substantially to lessen competition." Section 2(a). The Act "does 'not require that the discriminations must in fact have harmed competition.'" J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. at 562, 101 S. Ct. at 1927 quoting Corn Products Refining Co. v. FTC, 324 U.S. 726, 742, 65 S. Ct. 961, 969, 89 L. Ed. 1320 (1945). Rather, a plaintiff must only show "a reasonable possibility that a price difference may harm competition." Falls City Industries, Inc. v. Vanco ...


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