Falls City Industries, Inc v. Vanco Beverage, Inc

• Decision Date: 22 March 1983
• Docket Number: No. 81-1271,81-1271
• Parties: FALLS CITY INDUSTRIES, INC., Petitioner v. VANCO BEVERAGE, INC
• Court: U.S. Supreme Court

75 L.Ed.2d 174

103 S.Ct. 1282

460 U.S. 428

FALLS CITY INDUSTRIES, INC., Petitioner

v VANCO BEVERAGE, INC.

No. 81-1271.

Argued Oct. 13, 1982.

Decided March 22, 1983.

Syllabus

During a certain period from 1972 through 1978, petitioner sold its beer to respondent, the sole wholesale distributor for petitioner's beer in Vanderburgh County, Ind., at a higher price than petitioner charged its only wholesale distributor in Henderson County, Ky., the two counties forming a single metropolitan area across the state line. Under Indiana law, brewers were required to sell to all Indiana wholesalers at a single price, Indiana wholesalers were prohibited from selling to out-of-state retailers, and Indiana retailers were not permitted to purchase beer from out-of-state wholesalers. Respondent filed suit in Federal District Court, alleging that petitioner's price discrimination violated § 2(a) of the Clayton Act, as amended by the Robinson-Patman Act. After trial, the court held that respondent had established a prima facie case of price discrimination, finding that although respondent and petitioner's Kentucky wholesaler did not sell to the same retailers, they competed for sale of petitioner's beer to consumers of beer from retailers in the market area; that petitioner's pricing policy resulted in lower retail prices for its beer in Kentucky than in Indiana; that many customers living in the Indiana portion of the market ignored Indiana law to purchase petitioner's beer more cheaply from Kentucky retailers; and that petitioner's pricing policy thus prevented respondent from competing effectively with petitioner's Kentucky wholesaler and caused respondent to sell less beer to Indiana retailers. The court rejected petitioner's "meeting-competition" defense under § 2(b) of the Clayton Act, which provides that a defendant may rebut a prima facie showing of illegal price discrimination by establishing that its lower price to any purchaser or purchasers "was made in good faith to meet an equally low price of a competitor." The court reasoned that instead of reducing its prices to meet those of a competitor, petitioner had created the price disparity by raising its prices to Indiana wholesalers more than it had raised its Kentucky prices; that instead of adjusting prices on a customer-to-customer basis to meet competition from other brewers, petitioner charged a single price throughout each State; and that the higher Indiana price was not set in good faith but instead was raised solely to allow petitioner to follow other brewers to enhance its profits. The Court of Appeals affirmed.

Held:

1. The District Court's findings, supported by direct evidence of diverted sales, more than established the "competitive injury" (the reasonable possibility that a price difference may harm competition) required to establish a prima facie violation of § 2(a). For § 2(a)'s purposes, injury to competition is established prima facie by proof of a substantial price discrimination between competing purchasers over time, although the inference of competitive injury may be overcome by evidence breaking the causal connection between the price differential and lost sales or profits. This rule is not limited to cases where the favored competitor is extraordinarily large. Nor is the competitive injury component of a Robinson-Patman Act violation limited to the injury to competition between the favored and the disfavored purchaser; it also encompasses the injury to competition between their customers. Pp. 434-438.

2. Petitioner's meeting-competition defense under § 2(b) is not defeated on the theory that the price difference resulted from price increases in Indiana rather than price decreases in Kentucky, and that the higher Indiana price resulted from petitioner's policy of following the Indiana prices of its larger competitors in order to enhance its profits. FTC v. A.E. Staley Mfg. Co., 324 U.S. 746, 65 S.Ct. 971, 89 L.Ed. 1338, distinguished. Pp. 438-447.

(a) The meeting-competition defense at least requires the seller to show the existence of facts that would lead a reasonable and prudent person to believe that the seller's lower price to the favored purchaser or purchasers would meet the equally low price of a competitor. The defense also requires the seller to demonstrate that its lower price was actually a good-faith response to that competing low price. Pp. 439-441.

(b) The standard governing the requirement of a "good-faith response" is the standard of a prudent businessman responding fairly to what he reasonably believes is a situation of competitive necessity. Here, the District Court did not address the crucial question whether petitioner's Kentucky prices remained lower than its Indiana prices in response to competitors' prices in Kentucky. If petitioner set its lower price in good faith to meet an equally low price of a competitor, it did not violate the Robinson-Patman Act. Moreover, the existence of industry-wide price discrimination within the geographic retail market did not itself establish collusion inconsistent with a good-faith response, particularly since the interstate price difference could well have been attributable not to petitioner, but to Indiana's extensive regulation of the sale of beer. Pp. 441-444.

(c) Nothing in § 2(b) requires a seller to lower its prices in order to meet competition. On the contrary, § 2(b) requires the defendant to show only that its lower price was made in good faith to meet a competi- tor's equally low price. A price discrimination created by selective smaller price increases can result from a good-faith effort to meet a competitor's low price. Nor is the good faith with which the lower price is offered impugned if the prices raised, like those kept lower, respond to competitors' prices and are set with the goal of increasing the seller's profits. Pp. 444-446.

(d) The meeting-competition defense is not limited to price discrimination for the purpose of retaining a customer. A seller's price discrimination must be a defensive response to competition, in the sense that the lower price must be calculated and offered in good faith to "meet not beat" the competitor's low price, but § 2(b) does not distinguish between meeting a competitor's lower price to retain an old customer and meeting a competitor's lower price in an attempt to gain new customers. Pp. 446-447.

3. Petitioner's meeting-competition defense is not defeated on the theory that § 2(b) applies only where defendant sets its lower price on a customer-by-customer basis rather than, as here, by the defendant's use of areawide pricing. Congress did not intend to limit the availability of § 2(b) to customer-specific responses, but also intended to allow reasonable pricing responses on an area-specific basis where competitive circumstances warrant them. A seller choosing to price on a territorial basis must show that the decision was a genuine, reasonable response to prevailing competitive circumstances. Pp. 447-451.

4. In the absence of further findings, petitioner has not established its meeting-competition defense as a matter of law. While there is evidence in the record that might support an inference that petitioner's decision to set a lower statewide price in Kentucky was a good-faith, well-tailored response to the competitive circumstances prevailing there, the question whether to draw such inference is for the trier of fact, not this Court. Pp.451-452

654 F.2d 1224, vacated and remanded.

Howard Adler, Jr., Washington, D.C., for petitioner.

Stephen M. Shapiro, Chicago, Ill., for the United States as amicus curiae by special leave of Court.

John T. Cusack, Chicago, Ill., for respondent.

Justice BLACKMUN delivered the opinion of the Court.

Section 2(b) of the Clayton Act, 38 Stat. 730, as amended by the Robinson-Patman Act, 49 Stat. 1526, 15 U.S.C. § 13(b), provides that a defendant may rebut a prima facie showing of illegal price discrimination by establishing that its lower price to any purchaser or purchasers "was made in good faith to meet an equally low price of a competitor." ¹ The United States Court of Appeals for the Seventh Circuit has concluded that the "meeting-competition" defense of § 2(b) is available only if the defendant sets its lower price on a customer-by-customer basis and creates the price discrimination by lowering rather than by raising prices. We conclude that § 2(b) is not so inflexible.

I

From July 1, 1972, through Nov. 30, 1978, petitioner Falls City Industries, Inc., sold beer f.o.b. its Louisville, Ky., brewery to wholesalers throughout Indiana, Kentucky, and 11 other States. Respondent Vanco Beverage, Inc., was the sole wholesale distributor of Falls City beer in Vanderburgh County, Ind. That county includes the city of Evansville. Directly across the state line from Vanderburgh County is Henderson County, Ky., where Falls City's only wholesale distributor was Dawson Springs, Inc. The city of Henderson, Ky., located in Henderson County, is less than 10 miles from Evansville. The two cities are connected by a four-lane interstate highway. The two counties generally are considered to be a single metropolitan area. App. 124.

Vanco and Dawson Springs each purchased beer from Falls City and other brewers and resold it to retailers in Vanderburgh County and Henderson County, respectively. The two distributors did not compete for sales to the same retailers. This was because Indiana wholesalers were prohibited by state law from selling to out-of-state retailers, Ind.Code § 7.1-3-3-5 (1982), and Indiana retailers were not permitted to purchase beer from out-of-state wholesalers. See § 7.1-3-4-6. Indiana law also affected beer sales in two other ways relevant to this case. First, Indiana required brewers to sell to all Indiana wholesalers at a single price. § 7.1-5-5-7. Second, although it was ignored and virtually unenforced, see Tr. 122-123, 135-136, state law prohibited consumers from importing...