Giving free merchandise to obtain new customers The Commission was recently requested to render an advisory…

No. 132. Giving free merchandise to obtain new customers The Commission was recently requested to render an advisory opinion with respect to the legality of a proposal by a seller to give free merchandise in order to obtain new customers among retaD food outlets not presently selling the products of the seller. According 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 one free case of goods is given and the offers are generally not repeated.

Under the proposal, for each such outlet which has from one to six check-outs, both inclusive, the seller will give one free case of each product which is purchased by or for sale through such outlet. The requisite purchase must be in case lots. For each such outlet which has seven or more check-outs, the seller wil give two free cases of each product which is purchased by or for sale through such outlet and the requisite purchase again must be in case lots. For the purpose of this offer, the term "check-outs " means cash registers or other places in the outlet at which customers regularly pay for food purchases made in said outlet. The Commission advised that it was of the opinion that where a seller gives his customers free merchandise without expecting any promotional performance in return, he has in effect and in la\v granted a reduction in price to the extent of the value of the free merchandise. This being so, the practice 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 and where none of the defenses afforded by the Act are present. Thus the seller was advised that it could give free merchandise under these circumstances to the same extent and in the same amounts as it could grant lower prices to the recipients thereof.

Considering the nature of the statute involved, the Commission went on to advise that it was diffcult to rule categorically with respect to any particular proposal in the context of an advisory opinion. This is especial1y true when it comes to measuring in a prospective manner the competitive eftects of a proposal which has not yet been placed into effect. Despite the presence of these un- ADVISORY OPINION DIGESTS 1743 known factors, the Commission did feel that it could offer certain comments of a cautionary nature which might prove helpful to the seHer in determining whetber or not to embark upon this program.

Under the formula which the seller proposed to use for determining the amount of free goods to be given each customer, namely, one free case for each outlet with up to six checkouts and two free cases for each outlet with more than six, it appeared unJikely to the Commission that any of the defenses made available by the Act could be established. The only ones which would seem 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 seHer obviously would not be reacting to any competitive situation but would instead be motivated solely by its own marketing purposes. AdditionaHy, it was diffcult for the Commission to visuaJize 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 amount is to be determined solely by the number of checkouts per outlet which the purchasers operate, 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 that 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 competing old customers who would receive nothing under the proposal. Even if the offers were made to a11 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 probabiJity of anti competitive effect requisite to a finding of iHegality 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 possibiJity of a violation of Section 2 (a) of the Clayton Act as amended by the RobinsonPatman Act, the Commission is unable to give its approval to this plan. (File Ko. 673 7100, released June 27, 1967. BEATRICE FOODS CO. 797 Statement

IN HE MATTER OF BEATRICE FOODS CO.

MODIFIED ORDER, OPINIONS , ETC., IN REGARD TO THE ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT AND SEC. 7 OF THE CLAYTON ACT Docket 6653. Complaint, Octobe1'16 , 1965 Decision, June , 1967 Order modifying a divestUl'e order dated Dec. 10 , 1965 , 68 F, C. 1003 which required a major food processing corporation to divest certain acquired companies by further requiring the corporation, pursuant to a final decree of May 23, 1967, 8 S.&D. 495, by the Court of Appeals for the Ninth Circuit, to sell certain plants to a single pm' chaser to be approved in advance by the Commission.

STATEMENT OF THE COMMISSION A maj ority of the Commission has agreed to present to the Ninth Circuit for its consideration a proposed consent settlement of the Commission s Section 7 proceeding against BeaJ1"ice Foods Co. Dkt. No. 6653.

Complaint in this matter was filed October 16, 1956. Five of the 175 acquisitions 1 charged in the complaint as illegal were found by the hearing examiner to be in violation of Section 7. His decision, rendered on March 2, 1964, was sustained by the Commission in an opinion issued on April 26, 1965 (67 F. C. 473 697J. The final order entered by the Commission on December 10 1965 (68 F. C. 1003J, required divestiture within 18 months of four of the five acquisitions found to have been megal and prohibited Beatrice from making any fmther acquisitions of dairy companies without Commission approval for a period of 10 years. This order and the Commission s decision, finding Jiability, is now on appeal to the Ninth Circuit. The printing of the-record is not yet complete, final briefs have not been exchanged, and oral argument has not yet been scheduled.

The consent order now agreed to by the parties resulted from renewed negotiations instituted in February 1967 at the request of respondent's counsel and participated in by the Commission and its staff and Beatrice.

Under the consent offer now proposed Beatrice agrees to divest itself of plants and related faciJities located in Pasadena, CaJifornia; Cedar City, Utah; Las Vegas, )I evada; EI Paso, Texas;

'Of these acquisitions 77 were cha11enged under Section 7 und the femaining 98 under Section 5, either because the companies were not corporations or wefe not in commerce