Acceptance of free merchandise by grocery retailer The Commission was recently requested to render an…

No. 131. Acceptance of free merchandise by grocery retailer The Commission was recently requested to render an advisory opinion with respect to the legality of the acceptance by a grocery retailer of offers of free merchandise from some of its suppliers. Basicany, the retailer was interested in the legality of accepting an offer, in connection with the purchase of merchandise , of 011e case of free goods for every location the purchaser operates. AccOJ' ding to information supplied by the requesting party, such offers are often introductory in nature, and are used by manufacturers to acquire new customers or to introduce new products. Only 011e free case of goods is given and the offers are generally not repeated.

Under wen-settled principles, the Commission advised that it was of the opinion that \vhere a seller gives his customers free ll1erchandise without expecting any promotional performance in return, the retailer having advised that no such performance Ivas expected, he has in effect and in 1mv granted a reduction in price to the extent of the value of the free merchandise. This being so the practice of making such offers would be governed by the provisions of Section 2 (a) of the Clayton Act, as amended by the Robinson-Patman Act, which , in brief, provides that it shall be unlawful for a seller to discriminate in price between different purchasers of goods of like grade and quality where the effect may be to substantially lessen competition or to create a monopoly and where none of the defenses afforded by the Act are present. As the buyer, the Commission advised that the retailer was governed by the provisions of Section 2 (f) of the Act, which would make it unlawful knmvingly to induce 01' receive a discrimination in price which is prohibited by Section 2 (a). Thus the suppliers could give and the retailer could accept free merchnndise under ADVISORY OPIXIOX DIGESTS 1741 these circumstances to the same extent and in the same amounts as lower prices would be lawful.

Considering the nature of the statute involved, the Commission stated that it was diffcult to rule categoricaUy with respect to any particular proposal such as presented in the context of an advisory opinion. This is especiaUy true when it comes to measuring the competitive elIects of a proposal which has not yet been placed into effect. Despite the presence of these unknown factors , the Commission felt it could offer certain comments of a cautionary nature which might be helpful to the retailer in determining whether or not to accept such offers.

Under the formula which the suppliers proposed to use for determining the amount of free goods to be given each customer namely, one free case for every location the purchaser operates the Commission felt it was very unlikely that any of the defenses made available by the Act could be established. The only ones which seemed to have any possible application to this situation would be good faith meeting of competition and cost justification. The very statement of facts seemed to negate any question of meeting competition, for the suppliers obviously would not be reacting to any competitive situation but would instead be motivated solely by their own marketing purposes.

AdditionaUy, it was diffcult for the Commission to visualize how these offers could be cost justified since cost factors obviously do not enter into the determination of the amount of free goods to be given. Quite the contrary, the amoun: is to be determined solely by the number of outlets which the purchaser operates, without regard to quantities ordered or differences in the cost of manufacture sale or delivery.

If the offer is made to obtain new customers, the Commission felt price discriminations could result as between new customers who would receive varying amounts of free goods depending upon the number of outlets which they operate, or between any given new customers and compebng old customers who would receive nothing under the proposal. Even if the offers were made to aU customers for the purpose of introducing a new product, price discriminations could result because of the varying amounts of free goods depending upon the number of outlets which they operate. The question of whether such price differentials would have the probability of anticompetitive effect requisite to a finding of illegality under the statute would depend on the specific cIrcumstances of the individual case. This determination cannot be made with certainty at this time. In view of the possibility of a violation of Section 2 (a) of the Clayton Act as amended by the Robinson-

Patman Act, the Commission is unable to give its approval to this plan. (File Ko. 673 7099, released June 27, 1967.