Advisory opinion letter to Mr. Tobin

February 5, 1974 Dear Mr. Tobin:

In your letter of October 5 , 1973, you have advised us that the Federal Trade Commission has revoked the Advisory Opinion issued to our client MARros Network, Inc. , on September 3 1971. For the reasons set forth in detail below, we respectfully request a reinstatement of thc MARros Advisory Opinion, wbich was the result of extensive agency staff review, and expressly "approved (by the Federal Trade Commission J . . . on the condition that proportionalization of payments be based upon the number of cash register transactions at each participating retail outlet.. . ln good faith reliance on the Trade Commission s advice, MARPOS Network , Inc. has expended hundreds of thousands of dollars to develop and implement a highly innovative promotional arrangement and to encourage suppJier and retail outlet participation. The Commission s summary revocation of the MARPOS Advisory Opinion not required by the public interest; misconstrues the MARros program and consequent Icgal application; and arbitrarily and scverely penalizes MARros ),et work, Inc. for the company s substantial investment in and management commitment toward ,the program in reliance on the Commission s approvaL

Backg-round Stawment Essentially, the MARPOS third party promotional program offers payments based upon actual cash register transactions to participating retail outlets in return for leased space for variations of mobile as well as stationary advertising displays of participating suppliers' products. It is our understanding that the Trade Commission s revocation of the Advisory Opinion issued on September 3 1971, to MARros Network Inc. was predicated on agency-perceived noncompliance of the MARros ADVISORY OPINIONS 1417

program with "Guides 9 and/or 11" of the Commission Guirks for Advertising Allowances and Other Merchandising Payments and Servues as amended August 4, 1972.

In a press announcement issued on October 25, 1973, by the Commission concerning the revocation of 12 advisory opinions (including "ARPOS), the agency observed that "in many instances advisory opinions, which were revoked today approved compensation schemes based upon, for example, gross sales or customer count as determined by cash register transaction. " Such an approach was viewed as inconsistent with the Guides' admonition against al10wances that had litte or no relationship to the cost or approximate cost of thc services performed.

In discussions held with the Commission s staff on December 17 1973, we were advised it was assumed that retailer-participants in the MARPOS program would receive payments grossly in excess of the cost of the services being performed by these retailers, in view of the method of proportionality employed by the program.

DiSCU8si,on Basis for Proportwnality As the Commission s file in this matter wil1 reflect, our initial submission to the agency on behalf of MARPOS posited a program under which payments were related to the gross dol1ar sales volume of each participating rctail location. The company thereafter recast its proposed program as a result of a Commission request that MARPOS reconsider the method of payment. Thus, in our June 21 1971, letter to the Commission , we resubmitted the MARPOS program on the basis of two alternative methods of proportionalization- cash register transactions or actual annual dol1ar gross volume at each participating retail outlet.

MARPOS' proposal of the cash register transactions payment method was ful1y responsive to the Commission s request and proved to be a fairer and more accurate method of measuring the service being provided by participating retail outlets.

The utilization of the number of actual cash register transactions as the basis for proportionality within thg rrximum payment limit established by the "ARPOS program precludes the very problem of excess payments which appears to be the concern of the Commission staff. "ARPOS has imposed a maximum on the number of cash register transactions for which it wil1 compensate participants in the program. Consequently, large retail chains, whose cash register transactions per Jocation easily exceed the maximum, do not receive excessive

87 F. T.

payments. In addition, smaller retail outlets, although smaller in size and in annual gross voJume of sales, are placed on a more equal footing with their larger competitors since the smaller stores typically experience more cash register transactions in proportion to their annual do1lar volume of sales.

Reasonablerwss of Payrrnts

The MARPOS program does not resuJt in excess payments to participating retail outlets. Each participating retail outlet is reimbursed for the leasing of ceiling space on a uniform percentage of the number of cash register transactions-3/10 of 1 cent for eaeh cash register transaction for featuring 45 advertising signs of participating suppliers. The maximum annual payment of $1500 for 500 000 or more cash register transactions converts into a participating supplier payment of $33 per si6rn per location. The participating retailer is thus receiving 7 cents per thousand transactions per sign per location per year. Thus, the basis for proportionality results in payments which certainly are not excessive under any standard. 1 As Guide 7 makes clear: ":-0 single way to proportionalize is prescribed by law. Any method that treats competing customers on proportionally equal terms may be used. See Vanity Fair Paper Mills 1. c. v. FTC 311 F.2d 480 , 486 (2d Cir. 1962), cert. denied 372 U. S. 910 (1963). lJtiJizing number of cash register transactions per location as the basis for payment, within the minimum-maximum limits established by "ARPOS, is fair and non-discriminatory vis-a- vis participating retail outlets. Indeed, the use of a more conventional method of proportionalization- a precentage of retailer purchases of products from participating suppliers- would not operate in favor of t sma1ler retailer participants as does the MARPOS method. The number of cash register transactions does bear a relationship to the purchases of suppliers' products. In Advisory Opinion No. 88 FTC Advisory Opnion Digests 81 (1969), the Commission noted: Insofar as using the number of consumers exposed to the commercials as the standard for measuring payments to retaiJcrs, the Commission feJt that this method accords with the value of the service to the supplier and in the long run will probably correspond fairJy closeJy to the amount of purchases of the supplier s product. One reason for this is that suppliers probably wiJl not join the plan or stay with it if they are making payments to simes without any corresponding increase in their volume of sales by those sWres. Therefore, under these circumstances the Commission felt it was reasonable to permit proportionaJization to be based on the estimat€d number of customers, particularly where, as in this ca.';;e, the mea.'\ure for estimating the number of customers is weighted in favor of the smaJl stores. (Id. at 83 84.

, We have summarize the maximum payment unit figure. diRCUMW above in an appendix to thiR letwr. .. .. ..

ADVISORY OPINIONS 1419

Significantly, the Commission has never withdrawn this statement approving number of cash register transactions as a reasonable method of proportionalizing. Certainly, the revised GuUks contain no suggestion whatsoevcr that cash rcgister transactions would be an unacceptable basis. No mcmber of the Commission s staff has ever suggested that the MARPOS program is discriminatory or that it results in any adverse effect upon competition. Yet the Commission Guides clearly indicate that the question of excess payments falls within the purview of Section 2(a) of the Robinson-Patman Act:

A seller who pays a customer for services that are not rendered, or who overpays for services which have been rendered, may thereby violate Section 2(a) of the Clayton Act, as amended. Guws at p. 3. R. H. Macy Co. v. FTCThis is consistent with the court s analysis in 326 F.2d 445, 449 (2d Cir. 1964). Recognizing that Section 5 of the Federal Trade Commission Act would apply to a third-party promoter it is inconceivable that any Section 5 liability would attach to an intermediary for implementing a program that is non-discriminatory and is without any possible advcrse effect on competition. We point out that a supplier discount program which provided a percentage of the retail purchasers' cash register transactions similar to the "ARPOS method would not violate Scction 2(a), since such a discount wouJd bc non-discriminatory and could have no advcrse effect upon competition. This is especially so were the discount equivalent to the "ARPOS annual payment of 7 cents per sign per one thousand cash register transactions per retail location. Such a paymcnt, when viewed within the conceptual framework of Section 2(a) as would necessarily be the case wcre cxcess payments alleged, could not have an adverse competitive effect.

Cost- Val."" Cont.roversy Amended Guide 9, in a footnote, cautions that "allowances that have little or no relationship to cost or approximate cost of the service provided by the retai1cr may be considered in violation of rScctions 2(a) or (e) of the Robinson-Patman Actj. * * *"

Guide 11, as revised, statcs that the seller should not overpay his customer for promotional services rendered. Guide 11 continues: When customers may have different but closely related cost in furnishing services that arc difficult to dewrmine the seller may furnish tv each customer the same payment if it has a reasonable relationship to the cost of providing the service or is not grossJy in excess thereof.

87 F.

These recent amendments should not be applied in Procrustean fashion to tripartite promotional aJJowance programs. Under such programs, it is the third party promoter who underwrites the cost of formulating a promotional medium to advertise a participating suppJier s product. The costs and risks of the promoter continue once the program is operational. In many tripartite arrangements, a participating customer incurs no costs. If the Commission, in its revocation action, takes the position that a demonstration of customer-participant cost be made, then effectively the many space rental tripartite programs which represent little or no cost to the participating customer-or which do not lend themselves to cost analysis-are declared by the agency to be unlawful per se. We do not believe that the Trade Commission intended such a result in amending Guides 9 and II.

The MARPOS program involves the lease and novel utijization of retail grocery outlet ceiling space. Thc "cost" of the ceiling space provided by the participating retailer is not determinable in the same scnse as shelf or floor space. As a consequcnce, the reasonableness of program payments in terms of retailer facilities provided can only be measured by consideration of the value of the ceiling space as an advertising medium. Employcd as an advertising medium , this space carries a measurable value (spacc "cost") to thc retail participant in the program in the same way as aJJ other advertising media. Thus, one speaks of the value of an advertising medium-and consequently the cost to an advertiser to employ the medium- in tcrms of television viewer or radio listener exposure or newspaper or magazine circulation. This is a significant consideration for the ceiling rental payment basis utilizcd by MARPOS: number of cash register transactions at each participating storc location. Viewed in these terms , the MARPOS program "cost" or "value" as an advertising medium compares most favorably with the program payment to participating retail outlets. In Lever Brothers Co. 40 F. C. 494, 512 (1953), the Commission stated:

The law does not prohibit a seller from paying for servces of various typs. In some cases it might be his duty to do so in order to meet the test of availability. Nor does the law require a selJer to pay at the same rate, p€r unit of product sold, for typs of servC€s which are of unequal cost or value. The practical result of such a rule would be to restrict the payments some type of service that every single customer could furnish. It would adopt uniformity as it." goal rather than proportionality. Payments must be made in goo faith for services or facilities actual1y rendered and there should be a fair and reasonable relation between the amount of the payment and the type of service rendered.

While Section 2(d) requires that payments shaH be made avajJable on proportionaJly ,

ADVISORY OPINIONS 1421

equal terms to al1 competing customers, no standards arc laid down in the law for accomplishing this result. Indeed no standard could be Jaid down which would insure exact proportionality with the mathematical accuracy of a slide rule.

Although the Commission admonished against excessive promotional payments, it recognized that payments could be based on the value of the servicc to the supplier as wel1 as bear a reasonable relationship to the cost or valYR of the services rendered by rctailer-participants. See Giant Food, Inc. 58 F. C. 977, 1010 (1961). This is consistent with the flexible view of Congress toward proportional equality as reflected in the legislative history of the Robinson-Patman Act. The legislative history of the Robinson-Patman Act is clear and unambiguous with rcspect to the issue of value and cost. Thus, it was emphasized that a promotional al10wance "becomes unjust when the service is not rendered * * * or when, if rendered, the payment is grossly in excess of its value. . . ." S. Rep. No. 1502, 74th Cong., 2d Sess. 7 (1936). Value to the se1ler was a recognized factor in determining proportionality. S. Rep. No. 1502, 74th Cong., 2d Sess. 8 (1936). In short proportiona1ly equal terms" was viewed as a flexible standard permitting consideration of the value of the service to the se1ler as we1l as fair trcatment to compcting retailers:

The phrase "proportional1y equal terms" is designed to prevent the limitation of such allowances to single customers on the ground that they alone can furnish the servce or facilities or other consideration in the quantities specified. Whre a competitn can furnish th€m in /,ss quntity, but of the same relative value, he seems entitl-d, and this cUtuse is dRsigned (Q accord him, the riht (Q a simil.r allowance commensrate with those facilities. To illustrat.: "Were, as was revaled in the hearings earlier referred this report, a manufacturer grants a particular chain distributor an advertising aJJowance of a stated amount per month per sture in which the former s goos are sold, a competing customer with a smaJler number of stores, but equally able to furnish the same service per store and undr conitiom of the same value (Q the selwr would be entitJed to a similar allowance on that basis. H. Rep. No. 227, 74th Cong., 2d Sess. 16 (1936) (Emphasis added.

The Senate and House debates reinforce the conclusion that proportionally equal terms" was not intended to be wedded to costs as applied to promotional allowance provisions. Thus, Congressman Utterback, in explaining the promotional sections, noted: The bill also prohibits the seller from furnishing services or facilities to the purchaser in connection with the procssing, handling or sale of the commodities concerned unless they are accorded to all purchasers on proportionally equal terms. Again the last phrase has reference to the several purchasers' equipment and ability to satisfy the terms upon which the offer is made, or the services, or facilities furnished to any other purchaser. There are many ways in which advertising, sales, and other services and facilities may

2 The court s analysis inCo!mial Simes, 1m:. FTC, 450 F.2d 733 . 743744 (5th Cir. 1971), c.niinn the appruach adopte uy the Commission in U1ifrBros

87 F.

be either furnished or paid for by the seller upon terms that will at once satisfy the requirements of the Bill concerning equitable treatment of all customers, and at the same time satisfy the legitimate business needs of both the seller and the purchaser. 80 Congo Rec. 9418 (1936). See 80 Congo Rec. 9416 (1936). Thus, in enacting the Robinson-Patman Act, Congress did not intend to impose an ine1astic standard of proportional equality. There is no sound rationale for concluding that "no cost" tripartitc promotional programs arc lega1ly impcrmissible, whcre a1l participating customers are bcing trcated fairly and therc is no likelihood of any anti-competitive effcct.

EconomY; Impact of Summarlj Revocation The stigma of the Federal Trade Commission s withdrawal of the MARPOS Advisory Opinion effectively forecloses the company from pursuing the underlying program any further. This negative economic impact on MARPOS is as undeserved as it is severe. More specifica1ly, at the time that MARPOS was advised of the revocation, the company had expended or eommittcd for more than one milion dollars in developing and promoting its program, as f01lows:

Development of original prototyp machine and subsequent 12 test machines

used to test the equipment in Kansas
City, DaJJas and Tampa, in addition to
costs of preparation of ads and Nielsen
tests to measure effectiveness of this

media. $385 25S

Design, engineering and manufacture of
new machine by Bayer Manufacturing
Co. in Los Angeles , and t€st of this
chine in a Los AngeJes supermarket.
Salaries of personnel engaged specificaJJy
for :Marpos, consisting of engineers and
personnel to sign up supermarket chains
and saJesmen to solidt advertisers.
SaJes expenses, including preparation of

promotional mat€rials to solicit supermarkets and advertisers, advertising and travel expenses. 175 941 051 194 Clearly, the summary revocation of thc Advisory Opinion has resulted in irreparable harm to MARPOS. Thc Commission s arbitrary and precipitous action was not required by thc public interest, and nothing in the Robinson-Patman Act, its 1egislative history or Section 5 ADVISORY OPIXIONS 142

of the Federal Trade Commission Act warrants the conclusion ostensihly underpinning the agency s revocation. Indeed, if there is an element of cost to be considered here, assuredly it is the cost of a promotional program which was carefully drawn by MAPOS and undertaken in good faith reliance on Federal Trade Commission approval of the plan.

Request far Reinst,atement MAPOS requests that the Commission reconsider its revocation action, and that the "AROS Advisory Opinion, as set forth in the agency s letter of September 3 , 1971, be reinstated.

Respectfully submitted
ARENT, FOX, KI;\TNER
PLOTKIN & KAHN
By Isl
Earl W. Kintner
By Isl
Lawrcnce F. Henneberger
By Isl
Salvatore A. Romano
Appendix w LeUer of Request

MARPOS PROGRAM PAY1ENT ANALYSIS FOR PARTICIPATING

RET AlLERS RECEIVlr-G \1I\1VM PAYMENT
R = Participating Retailer
SI Supplierl Advertiser Participant

(Note: the analysis below is bascd upon maximum payment to an R 500 per year.

1. R receives an advertising space rental payment of 3/10 of 1 cent per cash register transaction, with a maximum payment (ceiling) of 500 (500 000 ar rore transactions) and a minimum payment (floor) of $12.50 (rcgardless of minimum number-approximately 417transactions). 2. In the maximum payment situation, MARPOS reserves 7 signs for public service mcssages (non-product).

R reserves 8 signs for own product/service and perhaps public service promotions.

SI A advertising is featured on 45 signs.

3. At $1 500 per year SI A (through MARPOS) is leasing advcrtising space costing SI A $33. 33 per sign per location ($1 500 divided by 45 signs).

4. On the basis of cash register transactions , R is receiving

87 F.

approximately 7 cents per thousand transactions per sign per year per location ($33.33 divided by 500) from each Sf A.

MemI to the Filt

January 9 , 1974 Re: MARPOS Network-Advisory Opinion File No. 713 7027 On December 14, 1973, Cal Collier, Tom Tucker, Gene Higgins and I met with Earl Kintner, Larry Henncbcrger and Sal Romano of the Arent, Fox law firm, which represents MARPOS. They had asked for the meeting in order to discuss the Commission s letter rescinding the advisory opinion.

Mr. Kintner mcntioned the firm has about $1 000 000 invested in its operation and that as a result of the letter of rescission, enrolled suppliers have decided not to participatc any longer. As a consequence MARPOS stands to lose its investment. Mr. Kintner said he felt they had been treated unfairly because MARPOS had no advance noticc that the Commission was considering rescission.

Mr. Kintner also mentioned payments by MARPOS to rcsellers are based on customer count, in accord with the advisory opinion, at a rate of two-thirds of a cent per customer to a maximum payment of $1500 per location per year and a minimum of $12.50 a year. For example $1500 is obtained by MARPOS from payments of about $33 by each of 45 participating suppliers to large resellers' outlets. MARPOS retains the difference between the payments by the suppliers (which are much in excess of $1500 or $33 per supplier per year) and the sums paid to the resellers. Thus, thc maximum amount paid per location to a reseller by MARPOS is $33, with the balance of payments madc by suppliers being held as compensation to MAROS for its services. In the course of the conference, it was brought out that information apparently is available as to any relationship between what a participating supplier might pay to his customers by using a conventional basis of calculating promotional assistance (e. percentage of the volume of purchases of the promoted product in a certain period) as compared with the $33 payments to the largest retailers per year per location which the supplier pays under the MARPOS plan.

provisions Mr. Kintner emphasized that the "floor" and "ceiling" ($12.50 and $1500.00) of the plan were inserted to insure that small resellers received something and that large resellers did not receive excessive payments. He said that proportionalization based on customer count tended to favor smaller resellers. He did not agree that ADVISORY OPINIONS 142

the fact that larger volume resellers usually sell a wider variety of goods unrelated to products normally sold in supermarkets, thereby increasing customer count, would counteract the smaller average dollar purchase figure common to smaller resellers, which would tend to increase tlwir customer count. Mr. Kintner also mentioned that he believed that "cost" to provide promotional assistance rather than the cost or value" to the advertiser was the better position for the Commission to take in measuring the reasonableness of payments for promotional assistance (see footnote 2 to Guide 9). Gene Higgins made the point that his concern stemmed from the fact that larger resellers appeared to be receiving far more than any costs they incurred in allowing installation of the MAOS system. Mr. Kintner and his colleagues conceded that such costs would be minimal (e. cost of electricity), because AROS' personnel install , maintain and repair the mechanism.

Mr. Collier pointed out that the Commission had receded from the cost or value" position in measuring whether a promotional assistance payment was proper in favor of "cost" because predicating such payments on "value " to the supplier would make it possible to pay excessive amounts to some resellers on the basis that advertising in their outlets was of greater worth to the suppliers than it would be in other resellers' outlets. He commented that if resellers purchased or leased the equipment there clearly would be "cost" to which the payments could be related but that with an intermediary in the picture, it was difficult to determine what "costs " if any, the resel1ers would have in using the systems.

Dufresne said he believed the thrust of the only theoretically viable charge the FTC might make in litigation against MARPOS would be a Section 5 count on the theory that large resellers were being unfairly favored by virtue of the fact that ARPOS was "collecting" funds from suppliers and paying large sums to some resellers and much smaller sums to other resellers. He diseounted the possibility that an R-P action would lie because no supplier pays more than $33 per year per location for his participation in the plan plus the fact that the payments which may be made have a "floor" and a "ceiling" and are proportionalized on the basis of customer count.

Mr. Kintner indicated he would submit a request to the Commission for an advisory opinion pursuant to the invitation contained in the

Jetter of rescission.
Isl
Joseph P. Dufresne

216-969 O- LT - 77 - 90

87 F.

Tripartite Promotional Assistance Plan (See Digest No. 418, 77 C. 1709; revoked Sept. 11, 1973, 83 F. C. 1839, File No. 703 7083. File No. 763 7002, release February 6 1976.

Opinion LettJ!r

January 29, 1976 Dear :vr. Odessky:

This is in response to your request for an advisory opinion concerning a revised tripartite promotional assistance plan on behalf of Don Odessky, Inc.

It is the Commission s undcrstanding that the revised Odessky plan cssentially involves artistically designed aisle-end merchandising displays featuring products of participating suppliers, erected in retail outlets in appropriately varying sizes so as to be useable in a practical business sense by all such outlets, both large and small. These aisle-end displays are featured for one week periods and are in addition to, and are independent of, the cxtent of shelf space otherwise devoted to the sale of the promoted products.

Payments under the plan to participating retailers are based on a percentage of purchases and are limited to the cost of the displays. The cost has been calculated in six ranges, from $50 to $125 for the most elaborate of the displays. Such costs, of course, are subject to change. Determination of the above costs takes into consideration the construction, labor, sign painting, material and the cost of dismantling at the end of the week. For those retailers not wishing the aisle-end display, but desiring alternatives such as handbills , newspaper advertising, bag stuffers and othcr means of promotions, proportional payments will similarly be based on costs.

All participating customers of the same supplier are paid at an identical rate (based on the dol1ar quantity of goods purchased) but in no event will such payment exceed the cost of the display or other promotion. Payments are made by the Odessky firm from moneys paid to it out of the available promotional assistance program funds of participating suppliers.

All customers of participating suppliers in a competing trade area are notified of the program and asked to participate. Retailers are notified oral1y and in writing by first class mail. Kotice includes a description of the plan and alternative methods of promotion together with all relevant details.

The Odessky company is responsible for insuring that all customers are advised of the availability of the program and for determining costs of the promotion utilized. It additionally sees to it that the ADVISORY OPINIONS 142

services the supplier is paj ng for arc furnished, by chccking the stores the displays or other promotions utilizcd, and also by making certain that no overpayments are involved.

Under the plan, no supplier may contract for more than six of the onc-week displays in anyone calendar year. The maximum payment to a retailer by a single supplier would thus be $750 per store (assuming, for il1ustration, the maximum tentative cost figure of $125 referenced above). Payments would be less if the cost involved were for smal1er and thus less expensive , displays or if a supplier did not choose to promote his product six times during the annual period. Based on its understanding of the revised plan as outlined above, the Commission has concluded that it wil not initiate action if the plan is implemented in the manner described.

You are advised that the Commission has eareful1y considered that aspect of the subject plan relating to the lease through Odessky of display or shelf space. The Commission notes that, strictly speaking, the lease of shelf space, as such, is not involved, although the merchandise display devices, as described, appear clearly to provide a product merchandising facility as wel1 as a product display. The plan however, provides restrictions on the frequency with which a supplier may participate (i. only six times in one year for a week at a time) and limits payments to retail stores to the actual cost to erect displays

theor Inprovidelimitingalternativeal10wanceservices.payments to the cost of displays, Commission expects that no unnecessary costs to construct or reconstruct displays wil1 be occasioned. Rather, the Commission expects that, in its intermediary function, Odes sky, Inc. , wil1 see to it that any excess payments wil1 be returned to the supplier involved, if payments in fact exceed the approximate cost necessary to erect displays.

To assure that the plan is implemented so as to provide allowances to all competing purchasers on proportional1y equal terms, Don Odessky, Inc. , should report to the Commission, after the plan has been in operation for one year, the ful1 extent of retailer and supplier participation , including time periods and products involved, and the total allowances paid to each participating retailer by each supplier under the plan.

By direction of the Commission.

Third Supplem€ntal uttRr Relative to Request