PETITION TO THE FEDERAL TRADE COMMISSION
ON BEHALF OF
THE INDEPENDENT BAKERS ASSOCIATION,
THE TORTILLA INDUSTRY ASSOCIATION
THE NATIONAL ASSOCIATION OF CHEWING GUM MANUFACTURERS
FOR THE ISSUANCE AND ENFORCEMENT OF
SLOTTING ALLOWANCES IN THE GROCERY INDUSTRY
Robert A. Skitol
Kathleen S. O’Neill
Drinker Biddle & Reath LLP
1500 K Street, N.W.
Washington, D.C. 20005
Counsel for Petitioners
April 14, 2000
The Independent Bakers Association ("IBA"), the Tortilla Industry Association ("TIA") and the National Association of Chewing Gum Manufacturers ("NACGM") hereby jointly petition the Federal Trade Commission for the issuance and enforcement of guidelines on the use of slotting allowances in the grocery industry.
IBA is a trade association of over 400 small to medium-sized wholesale bakers and allied industry trades. TIA is a trade association of over 175 companies connected to the tortilla industry of which 77 are tortilla producers representing approximately 75% of all tortilla products sold to consumers. NACGM is a trade association of 20 companies connected to the chewing gum industry of which nine are domestic chewing gum manufacturers including some of the largest consumer products companies in the United States.
Petitioners’ members have long been burdened by slotting allowance demands from supermarket chains on which they depend for the distribution of their goods. Many members have been forced to pay excessive amounts that have impaired their competitive viability. Others have been excluded from critically important distribution channels either by inability to meet the demands or by various exclusionary aspects of slotting fee arrangements negotiated by their far larger rivals. Some members have gone out of business as a result of these and related industry conditions.
Petitioners have previously advocated both legislative and enforcement agency clarification of the law as applied to slotting allowances. Clarification has become all the more necessary as disagreement and confusion over the legality of these kinds of payments have intensified in recent years. As discussed below, the industry often appears divided between those who believe slotting allowances are beyond the law’s reach and those who believe they are or should be prohibited altogether. Neither belief is well-founded: the former would tolerate considerable anticompetitive conduct while the latter would chill considerable procompetitive conduct.
Petitioners now believe the Federal Trade Commission is in the best position to provide clarification and thereby promote reform of practices that threaten competition throughout the grocery industry. The Commission is in this position because of (a) its longstanding expertise in applying the Robinson-Patman Act to complex and changing industry conditions; (b) the breadth of its authority over "unfair methods of competition" under Section 5 of the FTC Act; and (c) the wealth of experience gained from its many investigations in recent years of supermarket mergers and their impact on competitive conditions in the grocery industry generally.
Attachment 1 to this petition sets forth 10 proposed guidelines that we believe would advance the pressing clarification objective. Petitioners welcome public dissemination of these proposals and dialogue about them at the Commission’s workshop on slotting allowances, as now scheduled for May 31 and June 1, 2000. There is obvious room for amplification, perhaps with thoughtful examples of how the principles we propose would apply to particular situations in the way that examples are used in other recently promulgated agency guidelines.
The widespread and abusive use of slotting allowances in the grocery industry has received considerable publicity and has been the subject of extensive investigation over the past year by the Senate Committee on Small Business, the House Judiciary Committee, the U.S. Department of Agriculture, the General Accounting Office, and this Commission. We appreciate that the Commission’s own investigation is still underway and that the upcoming workshop is designed to collect information for it. Petitioners are committed to supporting the Commission’s inquiry to the best of their ability and offer this petition as a contribution to it.
Attachment 2 is a statement provided on October 20, 1999, by Nicholas Pyle, IBA’s Vice President for Legislative Affairs, setting forth IBA’s concerns with respect to slotting allowances at hearings before the House Judiciary Committee. Attachment 3 is a statement provided on September 14, 1999, by Robert Skitol, appearing at that time on behalf of the American Antitrust Institute, at hearings on slotting allowances before the Senate Committee on Small Business. The perspectives set forth in these two statements underlie the present petition and are the foundation for the proposed guidelines provided in attachment 1.
We wish, however, also to endorse and adopt as further support for today’s petition the Commission’s own testimony of October 20, 1999, on "Slotting Allowances and the Antitrust Laws" as presented by Deputy Bureau Director Willard Tom before the House Judiciary Committee. Petitioners propose to build on the thrust of that testimony as it reflects the following points: (a) slotting allowances are neither always benign nor always anticompetitive; (b) they can in some circumstances reflect efficient cost-sharing arrangements between suppliers and retailers and can in other circumstances reflect the misuse of both supplier and retailer market power; (c) exclusionary and discriminatory slotting allowance practices can undercut the competitive viability of smaller suppliers and retailers alike; (d) they can thereby reduce competition generally and increase concentration at both levels of the distribution chain; and (d) consumers are the ultimate victims in these situations as they then confront higher prices, less innovation and less choice. The use of slotting allowances in circumstances that threaten these effects should be recognized as illegal under the antitrust laws.
Our petition asks that guidelines consistent with that recognition be accompanied by a meaningful commitment to their enforcement, including new procedures for expeditious handling of industry complaints and requests for advice about them. Responsible, law-abiding members of the industry can be expected to comply with the guidelines only if there is the visible presence of a "cop on the beat" ready to prosecute flagrant violations by complying firms’ competitors. We return to and amplify on this point below.
A. The Need For Guidelines
There has been a steep rise in the frequency of slotting fee demands and a sharp escalation in the size of fees demanded throughout the grocery industry over the course of the past decade. As one close observer recently noted, these fees "are now reported to account for up to $9 billion in annual promotional expenditures, or approximately 16 percent of all new product introduction costs." They have also increasingly been accompanied by stipulations enabling dominant suppliers to control shelf display and merchandising arrangements in ways that ensure their enhanced dominance at the expense of their smaller rivals. The merger wave throughout the supermarket industry has exacerbated the problem. Increasingly dominant chains now exercise their formidable "gatekeeping" power to the anticompetitive benefit of their largest suppliers who get to buy "exclusionary rights" beyond mere access for their own products. Smaller retailers without the ability to extract slotting fees end up paying more for the goods on their shelves and are increasingly selling out to their larger rivals.
Legal challenges have been rare. Injured suppliers are deterred from suing or even complaining to a government agency by widespread fear of business-destroying retaliation from the grocery trade against any supplier with the temerity to question the legality of these payments. Disfavored retailers are deterred by the fact that their injury is the result of widespread and cumulative discriminatory treatment across a diverse array of products so that no single suit could effectively address their problem. The dirth of precedents applying the law to these situations has enabled the dominant firms at both levels and their trade association representatives to promote the entirely erroneous view that there are no legal impediments in this area. Indeed, one industry spokesman at the Senate Small Business Committee hearing last Fall insisted without any qualification that slotting fees are "perfectly legal" and that FTC officials have endorsed that view "on numerous occasions over the years." Of course, that is a dangerous untruth.
The Commission’s March 8, 2000 enforcement action against McCormick & Company should be seen as a first polite warning to this industry. Petitioners believe that the conduct alleged in the McCormick complaint and accompanying documents is prevalent in many grocery product lines. Thus, dominant suppliers and dominant chains throughout the grocery industry have good reason to take a fresh look at the legality of their own practices in light of this action. Absent further and more deliberate clarification of applicable legal principles, however, there can be no reasonable expectation of a broad effect on the industry generally. The main beneficiaries of slotting allowance abuses have too much to gain from their continuation to allow one action to change entrenched ways of doing business. They can also, rightly or wrongly, assume the Commission is not in a position to pursue many more resource-intensive cases of this sort.
For those reasons, petitioners applaud the Commission’s determination to broaden and deepen its inquiry into these industry practices. We know the Commission staff has been engaged in extensive fact-gathering and thoughtful analysis of this situation; the upcoming workshop should elicit valuable perspectives from many quarters, thereby deepening the agency’s expertise in this area. The logical and desirable aftermath of the workshop should be the Commission’s issuance of guidelines on this subject.
Guidelines would provide clear benchmarks for all industry players and their counsel. Particularly if accompanied by a meaningful commitment to their enforcement as we urge below, they would promote voluntary compliance and thus a more competitive industry generally. Guidelines would also be of assistance to courts in their rulings on private suits attacking practices in this area, as has occurred to good effect with the Commission’s "Guides for Advertising Allowances and Other Merchandising Payments and Services." The proposed guidelines in attachment 1 are offered only as a starting point for the development process.
B. The Proposed Guidelines
Attachment 1 sets forth 10 proposed guidelines beginning with a general slotting-allowance definition and then suggesting different standards for different kinds of allowances within the definition. Petitioners believe that some reasonable level of industrywide adherence to standards of this sort would materially protect against (a) anticompetitive exclusion of smaller suppliers and prospective new entrants from access to retailers’ shelves ("Upstream Concerns") and (b) competitive injury to smaller retailers ("Downstream Concerns").
The guideline 1 definition encompasses "any payment, discount or other consideration granted by a grocery product supplier for a grocery retailer’s acceptance, stocking, display or other favorable treatment of the supplier’s product." Petitioners have sought to craft a definition that is neither unduly broad (discouraging procompetitive conduct that can benefit consumers) nor unduly narrow (inviting migration of payments into other anticompetitive directions). We do not claim the final word on a proper definition and welcome comment on our proposal. It does, however, importantly include both (a) flat one-time or recurring payments not related to volume of purchases and (b) per-unit discounts or other consideration directly related to volume of purchases. As already noted, petitioners propose different standards for each of these two kinds of allowances.
The definition includes general limitations on the universe of parties to which the whole set of guidelines would apply: suppliers accounting for 20% or more of either U.S. or applicable regional sales of an affected product category; and retailers accounting for 20% or more of retail food (or supermarket chain) sales within an affected standard metropolitan area. The rationale for these limitations is that (a) allowances paid and received by parties below those market-share levels do not entail the exercise of appreciable "market power" and are thus unlikely to threaten sufficient competitive harm to warrant enforcement attention; and (b) allowances paid and received by parties enjoying market shares above those levels may entail the exercise of appreciable market power and thus (absent adherence to specified standards) present sufficient risk of competitive harm to warrant enforcement attention.
Guidelines 2 through 7 address upstream concerns but include recognition of their relationship to downstream concerns addressed in guidelines 8-10. Our premise is that violations of these guidelines threaten anticompetitive exclusion of competition at the upstream or supplier level and thereby constitute unfair methods of competition in violation of Section 5 of the FTC Act. Guidelines 2-3 set forth basic standards for allowances in the form of either one-time payments or recurring payments not related to volume of purchases; guideline 4 sets forth more permissive standards for allowances in the form of per-unit discounts or other consideration directly related to volume of purchases.
The rationale for that differentiation is as follows. Payments unrelated to volume of purchases are (a) more likely than volume-based allowances to be serious barriers to smaller suppliers or new entrants unable to afford the amounts demanded given their expected unit volumes; (b) more likely to go to the receiving retailer’s "bottom line" rather than to become passed on into lower consumer prices, while adding to the paying suppliers’ overall costs that go into setting wholesale prices, and (c) thus more likely to cause competitive harm without offsetting consumer benefit. Conversely, per-unit discounts and similar allowances related to volume (a) should ordinarily be affordable by smaller suppliers and new entrants; (b) are more likely to get passed on in the form of lower retailer prices and also easier for the supplier to make equally available to competing retailers; and (c) are sufficiently like lawful and desirable price competition to warrant more permissive treatment of them. The differentiation we have suggested creates incentives for both suppliers and retailers to shift their practices from flat payments to per-unit discounts (less legal risk), a shift we believe is in the public interest for all of the reasons set forth above.
All of the guidelines for both kinds of allowances speak of "presumptively lawful" versus "presumptively unlawful" slotting allowance practices. The objective is to establish rebuttable presumptions. A party injured by a practice deemed presumptively unlawful would enjoy the benefit of proving a prima facie case of illegality by showing that the described practice occurred; the party responsible for the challenged practice would then bear the burden of establishing a defense of no adverse effect on competition and thus no antitrust violation. A party engaging in a practice deemed presumptively lawful under these guidelines but nonetheless subject to challenge would enjoy the benefit of an initially dispositive defense; a challenger, to prevail, would bear the burden of proving an adverse effect on competition and thus an antitrust violation. In these respects, the guidelines are both more restrictive than some interpretations of existing law would support and more permissive than other interpretations of existing law would support.
Guideline 2 treats an allowance unrelated to purchase volume as presumptively lawful if it meets three conditions: (a) it bears a "reasonable relationship" to relevant retailer costs; (b) it is not accompanied by any understanding that has the effect of "foreclosing reasonable access" to distribution for competing products; and (c) the supplier meets its nondiscrimination obligations under guidelines 8 and 9. Conversely, guideline 3 treats such an allowance as presumptively unlawful if it fails to meet any of those three conditions.
The requirement for a "reasonable relationship" to retailer costs rests on the premise that an allowance tied to those costs should ordinarily be defensible as efficient cost-sharing while an allowance materially exceeding those costs cannot be defended on efficiency grounds. Guideline 5 adds an important element to this idea: prior to agreeing to pay such an allowance, the supplier should possess "credible documentation of the reasonable relationship" between the payment and the relevant costs "based on credible cost information that the supplier receives from the retailer in question."
The requirement that the allowance not be accompanied by any understanding that has an exclusionary effect on competing products addresses concerns presented by such provisions as the shelf-space allocation scheme described in the Commission’s McCormick complaint. It would, however, apply to less formal and less explicit understandings as well -- space commitments that preclude reasonable display opportunities for competing products, delegations of undue control over space allocations for competing products, "category management" arrangements that enable the supplier to place competing products in noncompetitive places, etc. See generally Tom, Balto & Averitt, "Anticompetitive Aspects of Market Share Discounts and Other Incentives to Exclusive Dealing," 67 ABA Antitrust Law Journal 615 (2000). Guideline 6 adds an important element to this idea: if a retailer accepts a supplier’s allowance and thereafter refuses to accept a competing product "without a demonstrably valid business justification, or imposes materially disproportionate terms" as a condition to acceptance without justification, "it will be presumed that there is an unlawful" exclusionary understanding.
Guideline 4 concerns allowances in the form of per-unit discounts or other consideration tied to purchase volumes. For reasons stated above, the standards are materially more permissive. The Guideline treats an allowance of this sort as presumptively lawful "regardless of whether it bears any relationship to retailer costs," subject only to two conditions: (a) it is not accompanied by any exclusionary understanding of the sort already discussed; and (b) the supplier meets its nondiscrimination obligations under guidelines 8 and 9.
Guidelines 8 and 9 are directed at downstream concerns -- price and other discriminations that adversely affect competition between favored and disfavored retailers. Our premise is that violations of these guidelines threaten anticompetitive effects at the downstream or retailer level and thereby violate either Section 2(a) or Section 2(d) of the Robinson-Patman Act.
Guideline 8 treats as presumptively unlawful a supplier’s payment of substantial recurring allowances to any retailer unless (a) the supplier offers comparable allowances to all competing retailers or (b) the supplier satisfies the conditions of the "meeting-competition" defense under the Robinson-Patman Act or (c) the supplier satisfies the conditions of the "cost-justification" defense under the Robinson-Patman Act. This is in essence a mere restatement of existing law under Section 2(a) of the Robinson-Patman Act, as governed by the Morton Salt inference of competitive injury in circumstances applicable to the grocery industry. Guideline 9 treats as presumptively unlawful a supplier’s payment for preferential shelf space or other in-store preferred treatment unless (a) the supplier offers comparable allowances to all competing retailers or (b) the supplier satisfies the conditions of the meeting-competition defense under the Robinson-Patman Act. Again, this is just a restatement of existing law under Section 2(d) of the Robinson-Patman Act; it is consistent with Guide 9 (and footnote 1 thereunder) of the Commission’s 1990 Guides for Advertising Allowances and Other Merchandising Payments and Services.
Guidelines 7 and 10 encourage public disclosure by both suppliers and retailers of their general slotting allowance policies. Adherence to these disclosure principles could count in some manner as a plus factor on behalf of the adhering party in any challenge to its policies. Conversely, nondisclosure could raise an adverse presumption that the nondisclosing party’s policies fail to comply with other applicable guidelines. The pervasive secrecy about practices in this area is a major impediment to informed analysis of their effects; those who publicly defend the status quo should be more open about exactly what the status quo is. On the other hand, arguments can be made that publication of such "competitively sensitive" information could dampen some dimensions of competition. Petitioners invite dialogue about the relative pros and cons of encouraging widespread disclosures of this kind.
Assuming (as petitioners do at this time) that widespread disclosure is in the public interest, the Commission has the power to bring it about without reliance upon voluntary compliance. Specifically, it could invoke its authority under Section 6(b) of the FTC Act to require all of the 25 largest grocery manufacturers and all of the 25 largest supermarket chains in the United States to submit to it annual or special reports regarding their slotting allowance policies and practices. The Commission could then use its related authority under Section 6(f) of the FTC Act to make the reports public or, alternatively, to issue its own summary and analysis for public dissemination.
C. Guidelines Enforcement
Guidelines alone will not solve the slotting allowance problem. The National Grocers Association ("N.G.A.") underlined this point in its September 30, 1999 statement to the Senate Small Business Committee. Noting its support 12 years ago for revisions to the Commission’s Fred Meyer Guides, N.G.A. expressed understandable disappointment over the ensuing "[y]ears of enforcement inaction" in the face of "demands of power buyers" that manufacturers could not resist and that "have resulted in a tremendous competitive disadvantage for the independent sector of the grocery business." N.G.A. then elaborated as follows:
The FTC has brought no case to enforce its revised rules, lending additional support to the belief that government enforcement of the law is no threat. Just as the policeman has to park along the highway to deter speeding, the FTC needs to devote enforcement resources and oversight to Robinson-Patman Act requirements. It is little wonder, then, why discrimination under that Act appears to be at an all-time high: The existence of the statute and the FTC’s rules have lost all of their deterrent effect.
Today’s Commission should ensure against any critique of that sort in the decade ahead by accompanying new slotting allowance guidelines with a public commitment to a serious enforcement program in this area. Victims of abusive slotting fee practices should know who are the agency personnel ready and willing to hear their complaints and respond to them with reasonable expedition. Complainants should know what information the agency will need to justify commencement of investigations and enforcement actions; they should also be appropriately informed when and why the agency may decide not to proceed. All industry members should know who to contact with questions on how the guidelines are appropriately interpreted and applied to particular situations. Dominant suppliers and retailers alike should know disregard of the guidelines will entail serious risk of agency challenge.
With new procedures and resources committed to these tasks, the Commission can make guidelines a constructive force for reform throughout the grocery industry. The guidelines would earn industrywide credibility, promote industrywide voluntary compliance, discourage the extension of similar abuses into other sectors of the economy, and thereby protect competition and consumers generally.
For all of the reasons set forth above, petitioners urge the Commission in the aftermath of the upcoming workshop to issue and enforce guidelines on slotting allowances in the grocery industry. Petitioners believe the proposed guidelines set forth in attachment 1 are an appropriate starting point for an undertaking of this kind and welcome comment on them.
DRINKER BIDDLE & REATH LLP
1500 K Street, N.W.
Washington, D.C. 20005
Robert A. Skitol
Kathleen S. O’Neill
The Independent Bakers Association,
The Tortilla Industry Association and
The National Association of Chewing Gum Manufacturers
April 14, 2000
1. "Slotting allowance" as used herein means any payment, discount or other consideration granted by a grocery product supplier for a grocery retailer’s acceptance, stocking, display or other favorable treatment of the supplier’s product. These guidelines, however, are intended to govern or otherwise suggest only (a) supplier liability in situations where the granting supplier accounted for 20% or more of either U.S. or applicable regional sales of the product category encompassing the product for which a slotting allowance is granted in the most recent completed calendar year; and (b) retailer liability in situations where the receiving retailer accounted for 20% or more of retail food (or supermarket chain) sales within any standard metropolitan area for which a slotting allowance is received in the most recent completed calendar year.
A. Upstream Concerns
2. A slotting allowance in the form of either a one-time payment or recurring payments, other than a per-unit discount or other consideration directly related to volume of purchases, is presumptively lawful if (a) it bears a reasonable relationship to costs that the retailer incurs in its acceptance, stocking and display processes (substantiated per Guideline 5 below); (b) it is not accompanied by any understanding that has the effect of foreclosing reasonable access to distribution for competing products; and (c) the supplier meets its nondiscrimination obligations under Guidelines 8 and 9 below.
3. A slotting allowance of the kind described in Guideline 2 is presumptively unlawful if (a) it bears no reasonable relationship to and materially exceeds costs that the retailer incurs in its acceptance, stocking and display processes; or (b) it is accompanied by any understanding that has the effect of foreclosing reasonable access to distribution for competing products; and (c) the supplier fails to meet its nondiscrimination obligations under Guidelines 8 and 9 below.
4. A slotting allowance in the form of a per-unit discount or other consideration directly related to volume of purchases is presumptively lawful, regardless of whether it bears any relationship to retailer costs, if (a) it is not accompanied by any understanding that has the effect of foreclosing reasonable access to distribution for competing products; and (b) the supplier meets its nondiscrimination obligations under Guidelines 8 and 9 below.
5. Prior to agreeing to a slotting allowance of the kind described in Guideline 2, the supplier should possess credible documentation of the reasonable relationship between the payment in question and the retailer’s costs for acceptance, stocking and display processes, based on credible cost information that the supplier receives from the retailer in question.
6. If a retailer accepts a slotting allowance of the kind described in either Guideline 2 or Guideline 4 from a supplier and thereafter refuses to accept a competing product without a demonstrably valid business justification, it will be presumed that there is an unlawful understanding that has the effect of foreclosing reasonable access to distribution for competing products.
7. Retailers are encouraged to publicize their slotting allowance policies on websites or in other ways that will be readily available to all supplier and to the public generally.
B. Downstream Concerns
8. It is presumptively unlawful for a supplier to pay substantial recurring slotting allowances in any form to any retailer unless (a) the supplier offers comparable and proportionate slotting allowances on the same or substantially similar terms and conditions to all competing retailers; or (b) the supplier can demonstrate that an allowance to a retailer that is not made available to competing retailers was made in good faith to meet an allowance offered by a competing supplier within the terms of the "meeting-competition" defense under the Robinson-Patman Act; or (c) the supplier can demonstrate that an allowance to a retailer that is not made available to competing retailers makes only due allowance for lower costs incurred in the supplier’s dealings with that retailer within the terms of the "cost-justification" defense under the Robinson-Patman Act.
9. It is presumptively unlawful for a supplier to pay for preferential shelf space or other in-store preferred treatment unless (a) the manufacturer offers comparable and proportionate payments on the same or substantially similar terms and conditions to all competing retailers; or (b) the supplier can demonstrate that a payment of this kind that is not made available to competing retailers was made in good faith to meet a payment offered by a competing supplier within the terms of the meeting-competition defense under the Robinson-Patman Act.
10. Suppliers are encouraged to publicize their slotting allowance policies on websites or in other ways that will be readily available to all retailers and to the public generally.