Advisory opinion letter to Mr. Brown

Senior Counsel, Trade Regulation

*Not reproduced herein. Copies of..ll Attachments nnd Exhibits ar available for inspection in Room 13() , Publi Reference Branch, Federal Trade Commission, 6th St. and Pa. Ave., N. ., Washington, D.C. 20580. ADVISORY OPINIONS

Issued guidance in defining and interpreting key terms of RobinsonPatman Act and Motor Carer Act of 1980. (813 7002, Grocery Manufacturers of America, Inc.

July 29, 1981

Dear Mr. Brown:

This is in response to your request of October 8, 1980, on behalf of the Grocery Manufacturers of America (GMA), for an Advisory Opinion pursuant to Sections 1.1-1.4 of the Federal Trade Commission Rules of Practice and Procedure, 16 C. R. 1.1-1.4 (1980). The Commission has carefully reviewed your request and has concluded that, while you have not provided sufficient information to permit a response in detail to each and everyone of your detailed factual situations, some general and, it is hoped, useful guidance in responding to your request is appropriate.

All nine of the factual situations yon posit relate to the recentlyenacted legislation, Section 8(a) "(a)" of the Motor Carrier Act of 1980, Pub. Law 96-296, 94 Stat. 798 '(July 1, 1980) ("Section 8"). Section 8 permits "a seller of food and grocery products using a uniform zone delivered pricing system to compensate a customer who picks up purchased food and grocery products at the shipping point of the seller if such compensation is available to all customers of the seller on a nondiscriminatory basis and does not exceed the actual cost of delivery to such customer." The Commission believes it is appropriate to offer advice in connection with the questions of law that may arise under Section 8, because of that statute s relationship, as set forth in its legislative history, to the Clayton Act as amended by the Robinson-Patman Act of 1936, 15 V. C. 13 (1970). The latter statute is enforced by this Commission. To the extent that Section 8 creates a limited exemption from the Clayton Act or, as a practical matter, may provide a new defense to a claim of violation of that statute when its terms are met, the Commission believes that it has authority to interpret Section 8 in light of the historic principles embodied in the Robinson- Patman Act, and especially those precedents that are not inconsistent with the purposes of Section 8. Your nine factual situations address, in essence, three issues under Section 8. The first has to do with the meaning of the phrase "actual cost" under the statute and the related second issue addresses Section 8's use of the phrase "nondiscriminatory basis. " The third issUf relates to the breadth of the exemption or defense available unde) Section 8 by focusing on the identity of "sellers of food and grocer:

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products" who may offer to compensate customers under Section 8; the identity of products, in connection with the sale of which compensation may be offered under Section 8; and the identity of customers who are eligible to receive compensation under the statute. Turning first to your six factual situations relating to the meaning of "actual cost", the Commission is of the view that it cannot advise with any precision what the exact actual cost would be under these sitnations without engaging in an extensive collateral inquiry beyond the scope of the Commission s advisory opinion rules. The determination of the precise actual cost in each instance would depend upon the facts of each situation.

It appears, however, that at least one common principle would apply to that determination in each situation. The determination of a seller s "actual costs" should be based on the actnal costs the particular seller would have incnrred had that seller performed his obligation to deliver under the uniform delivered price to a particular buyer. If a common carrier would have provided the service, the published common carrier rate shonld be nsed. If a contract carrier would have performed the service, the contract rate should be used. If the seller leases trucks or uses its own trucks, it should know its actual costs and those should be used. If the. seller ships by rail, rather than by trnck, under its uniform delivered price system, the rail rates should be used, even if those rail rates do not result in full compensation to a customer using a truck to pick up. Section 8 and its legislative history are clear that the critical reference is to the seller costs, not the buyer s. Moreover, this approach is fully consistent with the approach required to be taken when questions of "actual cost" arise under the Robinson-Patman Act.

Actual costs" need to be determined only for one pnrpose under Section 8: to establish a "ceilng" amount, above which compensation may not be granted in compliance with Section 8. It shonld be kept firmly in mind that compensation, according to Section 8, need not equal those actual costs. The statnte only requires that compensation "not exceed" such costs.' This concept is also fully consistent with the analysis of cost-based discounts, rebates and other forms of "ice reductions under the Robinson-Patman Act. In addition to " not exceeding" a seller s actual costs, compensaion under Section 8 must be "available to all customers on a noniscriminatory basis." Your factual inqniries also touch on this issue.

The seller presumably can use indirect costs(see your factmi! inquiry no. 2) as wetlas direct costs to determine cost ceilg, so lung as the allowances based On the ceilg are offered andapplied On II nondiscriminatory basis. iiscussed below. The Commission would add, however, that the use of such costs should be approached with CIIU, inasmuch liS they may be difficult to aUocate On a nondiscriminatory basis. ADVISORY OPINIONS

The Commission understands this proviso to mean that similarly situated customers - that is, customers located the same distance from a seller s shipping point - should have the opportunity to, and be entitled to, receive the same dollar value of compensation for picking up identical quantities of food and grocery products. Thus, it appears generally correct that the amount of compensation for identical purchases by similarly situated customers should vary only by the distance traveled to deliver.

Given these understandings, the Commission believes it is appropriate to advise you with respect to your factual inquiries addressing the computation of "actual" cost in less than trnckload (LTL) shipping sitnations. The Commission believes that compensation to cnstomers on an L TL basis, if such compensation is renective of the seller s usual "actual costs," is permitted under Section 8. The Commission notes, however, that determining the actual cost ceilng in L TL circumstances appears to be complicated, as evidenced by your factual situation no. 1. In addition, it wonld seem that, depending upon how "actual" costs are determined in the LTL context, similarly situated customers conceivably could be entitled to receive different dollar value compensation. This result wonld appear to be inconsistent with Section 8' s reqnirement that compensation be available on a non-discriminatory basis, and sellers shonld proceed with caution in this area to avoid stepping outside of Section 8. Your remaining factual inquiries address the breadth of Section 8. The statute only applies to food and grocery products sold under a uniform delivered pricing system. The Commission believes that food and grocery products should be defined as products sold primarily in situationgrocery stores. The Commission also believes that in a where the seller sells both "food and grocery products" and other types of goods, Section 8 permits the seller to offer compensation with respect to those food and grocery products but not with respect to other types of goods it may sell. If a seller of food and grocery products offers compensation under Section 8, however, the seller must so offer to all customers who may purchase those products, regardless of the type of retail outlet - grocery store, drug store, etc. operated or supplied by the customer. Section 8 does not contain any langnage limiting or modifying the word "customer

, In this regard it should be noted that it would appear that a seller of food and grocery products may limit the op. portunity to receive compensation by settmg minimum quantity purchases without losing the Section 8 exemption if such minimum quantitim; do not make the allowances unavailable to an identifiable class of purchasers. , The definition of "customer" in this context is CDPsistent with established principles of Robinson.Patman law enforcement. See, e. . the FTC's Guides for Advertising Allowances and Other forms of Merchandising Payments and Service8. Guide J, which defines nt. tomer 810 "samuone who buys for resale directly from the seller, the seller agent, Or broker; and, in addition, a customer is any buyer of the seller s product for resale who purchas",; from or through II wholesaler or other intermediate r!meller. " 16 C. R. 9 240.3 119801.

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The .commission has tried. to bring to bear, in providing this limited advice, its accumulated expertise in matters having to do with direct and indireCt forms of price discrimination under the laws which it administers. It is hoped that you and the membership of GMA wil find this advice of some use in implementing Section 8 of the Motor Carrier Act of 1980.

By direction of the Commission.

SEPARATE STATEMENT OF ACTING CHAIRMAN CLANTON

Whie I am in agreement with the Commission s advisory opinion letter to the Grocery ManufaCturers of America in most respects, there is one point of departure on which I believe that the majority opinion should give additional guidance. The majority s letter defines similarly situated customers" to include only those customers who are located equal geographical distances from the shipper s dock. While it is correct under a single-mode, mileage-based backhaul allowance formula that, in order to meet the non-discrimination criterion of Section 8, the amount of compensation for identical purchases by similarly situated customers should vary only by the distance from the seller s dock, I believe that our advice should go a step beyond this.

I would take this opportunity to acknowledge the possibilty, without attempting to define the circumstances, that customers might be "similarly situated" in cost-related ways other than mere geographical distance and, conversely, that between equidistant customers clear cost differences based on actual experience may be established. Such cost-related circumstances might involve the historic use of different or multiple modes of transportation to different customers, so that a formula measuring only mileage from a seller s dock using single-mode rates may not truly reflect all the circumstances under which customer comparabilty could be achieved. In short, I believe the majority s letter can be read as saying that a single-mode, mileage-based backhaul allowance formula is the only system that a seller can use which wil comply with the terms of Section 8, and I would disagree with such a narrow interpretation.

Letter of Request

OCtober 8, 1981 )ear Secretary Thomas:

This letter requests an advisory opinion pursuant to FTC Rules of ADVISORY OPINIONS

Practice and Procedures!i LIon the meaning of (A) the terms "actual cost" and the interrelated term "nondiscriminatory ; and (B) the term "food and grocery products , as contained in Section 8(a) of the Motor Carrier Act of 1980, Pub. Law 96-296, as applied to the factual situations described below.

Grocery Manufacturers of America (GMA) is a trade association composed of the leading manufacturers of food and grocery products sold in retail outlets throughout the United States. As a result of numerous inquiries from our members, we are aware of their deep concern about the definition of the above-mentioned terms and the requirements manufacturers must meet in order to lawfully grant the pickup allowances authorized by Section 8. None of the terms is defined in the section and the legislative history offers, at best, only limited guidance as to their application. The situation remains unclarified even though Section 8 became law on July 1, 1980. In the absence of clarification, many manufactnrers are reluctant to implement the section because deviation from its requirements might well expose them to Robinson-Patman liabilty, especially in the form of treble damage suits. Accordingly, GMA seeks, on behalf of its members, authoritative advice from the Commission on the factual situations which are described below and which have grown out of the inquiries of our members. Such advice would not only materially assist the industry in complying with laws administered by the Commisssion, but would also assist the Commission by minimizing the number of requests for advisory opinions. The public interest would also be served by early resolution of these substantial questions for which there are no Commission or judicial precedents. A. Actual Cost" and "Non-Discriminatory

In each of the factual situations described below, food and grocery products are involved, and the seller utiizes a valid uniform zone delivered price system. As can be seen, all of the situations deal with the definition of "actual cost" and nnmbers 1 and 3 also involve the term " nondiscriminatory 1. If, using one truck, it costs seller $1 per case to deliver LTL shipments to buyers A, B, and C; $.80 per case to deliver to Band C when A picks up, and $.75 per case to deliver to C when A and B pick up, what is seller s "actual cost" in each case?

Comment: Both committee reports would seem to suggest that

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20 per case is the actual cost when A picks up, i.e., $1 minus $.80. Beyond that, however, the situation is far from clear. Carrying these examples to their logical conclusion, B would then get an allowance of 05 per case and C, $.75 per case- If the three buyers are roughly equidistant from the seller, as they could easily be, these diferences based on the order in which the bnyer elected to switch from delivery to pickup, fly in the face of fairness to say nothing of the requirement in Section 8 that snch allowances be made available on a nondiscriminatory basis. In this case, it would appear that the only course for the seller to avoid discrimination after the first buyer picks up is to offer an allowance of $.05 per case to each bnyer, even though such a result could be questioned in view of the purpose of Section 8.

2. A seller calculates, using its own trucks, the operating costs for a delivery to be $10. Must he also attempt to compute allocable overhead, joint, and fixed costs in determining actnal cost? Comment: Seller s books should yield operating costs, but compnting and allocating other types of costs is an administrative and bookkeeping nightmare fraught with opportunities for anticompetitive behavior and endless conflcts among buyers, sellers competitors, and the government.' The Commission wonld certainly be forced into issuing detailed guidelines if non-operational costs are to be recognized, and even then, the conflct would go on. 3. Seller A, nsing its own trncks, bases its determination of "actual cost" on common carrier rates for comparable deliveries. Seller B uses a mix of its own trucks and regulated carriers. How would Seller B determine actual cost?

Comment: In the first case, use of common carrier rates would seem precluded. As the House Interstate and Foreign Commerce Committee report states: "actual cost" means "the cost which would have been incurred if delivery to the customer had been made by the seller in the ordinary course of its business and by means, modes, and under conditions that wonld have been elected by the seller'" (See ,Iso Senator Long s statement at the time of final passage). ' As the oregoing quote also suggests, the answer in the second case would eem to be dictated by the particular circumstances of each situaSee sLIlLemeIlt by Alfred F, Dougherty, Jr., former Director, Bureau of Competition, Federal Trade Commission. hIJarings before the Senate Select Committee on Smal! Business on "Customer Pickup Proposals and Their 1mt on Small Business and the Robinson-Patman Act. " April 3. 1980, p. 26.

RepL 96-1069, lit 20 (June 3, J980).
l26 Cong. Rl1, 7686 (June 20, 1980).
ADVISOHV OPINIONS

tion-the mode that had been used to make deliveries to the buyer in the past, or to other buyers similarly sitnated. 4. A seller using only regulated carriers can have a product delivered to a buyer by carrier A for $10 and by carrier B for $11. What is seller s "actual cost"

Comment: The legislative history (see qnote from committee report above) suggests that it would be the rate of the carrier the seller is, in fact, using. If neither carrier is being used, $10 would seem to be the proper answer.

5. Seller A makes deliveries by regulated carriers. May he permit a buyer to pick up a truckload order in two half truckload lots and receive a pickup allowance based OIl the higher L TL rate?

Comment: Again, the legislative history quoted above would seem to preclnde such a practice.

6. A seller delivers most of its food and grocery products by rail. In such a case, would the answers to questions 1 and 5 be altered?

Comment: As long as the rail deliveries are made under a uniform delivered pricing system, it would appear that the result should be the same. There is nothing in the language of Section 8 limiting its application to truck deliveries by the seller, and the excerpt from the committee reports quoted in the comment under item 3, above, shows clear Congressional intent that actual cost be measured on the basis of delivery modes the seller chooses.

B. Food and Grocery Products In each of the factual situations described below, the seller ntilzes a valid uniform zone delivered price system and would make actnal cost allowances available on a non-discriminatory basis. 1. A seller of food products has been approached by a large drug store chain desirous of picking up certain food products at the seller dock and receiving an actnal cost allowance pursuant to Section 8. The seller intends to offer the allowance.

Comment: We think the seller appears to be on sonnd legal grounc Neither the section nor the legislative history evidences any requir'

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ment for the customer to be engaged in the food or grocery industry; the "food and grocery products" limitation in the section applies only to the seller of products.

2. Seller makes toys and food. A supermarket chain desires to pick up several lines of toys and receive an actual cost allowance under Section 8. Seller is uncertain whether or not to grant the allowance.

Comment: Toys would not normally be regarded as a grocery product. Yet, if they are sold in retail outlets whose principal business is sellng food, i.e., a grocery store, then they may, by virtue of this fact, be considered as grocery products.

3. Seller, which manufactures prescription and OTC brand name drugs, has been approached by a retail drug chain which desires to buy the drugs at seller s dock and receive a Section 8 allowance. Seller is uncertain whether it can legally grant the allowance.

Comment: This situation goes beyond 1 and 2 above, in that neither the business of the bnyer or seller is principally related to food, yet such drngs are widely sold in outlets such as supermarkets where their presence might well qualify them to be treated as grocery products.

Please feel free to call upon us for further information or if we can help you in any other way to facilitate responses to these questions.

Sincerely,

/s/ Stephen A. Brown

Vice President and General Connsel