McCormick & Company, the world's largest spice company, has agreed to settle Federal Trade Commission charges that it violated federal antitrust laws by engaging in unlawful price discrimination in the sale of its spice and seasoning products. According to the FTC, for a substantial period of time, McCormick charged some retailers a substantially higher net price for its spice and seasoning products than it charged other competing retailers. The FTC alleges that McCormick sold its products at different prices by providing competing retailers discriminatory aggregate discounts off the list prices of its products. These aggregate discounts, known in the industry as "deal rates," took a variety of forms, including up-front cash payments similar to slotting allowances, free goods, off-invoice discounts, cash rebates, performance funds, and other financial benefits. According to the complaint, the victims of McCormick's price discrimination, referred to in the complaint as "disfavored purchasers," had few, if any, alternative sources from which to purchase comparable goods at prices and terms equivalent to those which McCormick provided to the favored purchasers. The proposed settlement resolves claims arising under the Robinson-Patman Act, which prohibits sellers from charging competing buyers different prices for goods of "like grade and quality," where "the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce ... ." The order would prohibit McCormick from engaging in price discrimination that violates the Act, unless the price differences are permitted by defenses recognized by the Act.
According to Richard Parker, Director of the FTC's Bureau of Competition, "The Order sends a strong message to dominant sellers that the Commission will not tolerate price discrimination where buyers have little choice but to do business with the discriminating company."
Maryland-based McCormick & Company is the largest manufacturer of spice and seasoning products in the world. It had 1998 retail sales of $623.7 million in the Americas. McCormick sells products for retail sale under a number of brand names, including McCormick, Schilling, Fifth Seasons, Spice Classics, Select Seasons, Mojave, Spice Trend, Royal Trading, Crescent, La Cochina De McCormick and Old Bay. The FTC alleges that McCormick typically requires that its customers allocate the large majority of the spice shelf to McCormick. In some instances, this requirement covered 90 percent of the supermarket's spice shelf space. According to the FTC, among firms supplying core or gourmet spice lines for sale in supermarkets in the United States, McCormick is by far the leading firm, accounting for the majority of such sales nationally. During the period pertinent to this complaint, McCormick faced competition in such sales from only one other national firm, Burns Philp Food Incorporated, and several, much smaller independent regional or local firms.
The proposed consent agreement would prohibit McCormick from selling its products to any purchaser at a net price higher than McCormick charged the purchaser's competitors, except when permitted by the Robinson-Patman Act. "Net Price" is defined in the order as the list price of McCormick products less advances, allowances, discounts, rebates, deductions, free goods and other financial benefits provided by McCormick and related to such products. The proposed order applies to McCormick's sale of spices, seasonings and other products which are used to season or flavor foods, packaged by McCormick for resale to consumers.
The order would permit McCormick to sell its products to competing purchasers at different prices when such price differentials are permitted by the statutory "meeting competition" defense. The "meeting competition" defense under the Robinson-Patman Act allows a seller to provide a lower price to a purchaser when the seller believes that it must provide the lower price to meet the equally low price offered by its competitor. If the lower price is offered to meet the seller's competition, the seller is not required to provide the same low price to the buyer's competitors. The proposed consent order goes beyond the statutory requirements of the Act by requiring McCormick for five years, for each instance in which it wishes to avail itself of the "meeting competition" defense, to contemporaneously document and maintain in its records all information on which it bases its entitlement to the defense. This information will assist the FTC in assuring that McCormick complies with the order and with the Act.
In addition, the order, which is effective for 20 years, would require McCormick to distribute a copy of the order to all of its current and new employees who are involved in the sale of products covered by the order and also would require McCormick to inform the FTC of corporate changes that may affect its compliance obligations. McCormick also would be required to file reports demonstrating its compliance with the order.
The Commission vote to accept the proposed complaint and consent agreement was 3-2, with Commissioners Orson Swindle and Thomas B. Leary, dissenting. In their dissenting statement Commissioners Swindle and Leary said that they recognized that the majority views this case as a vehicle to "clarify a controversial statute and properly circumscribe its application," but they feared that the case "will have precisely the opposite effect." The dissenting Commissioners questioned whether it was appropriate for the Commission to employ the Morton Salt inference of injury to competition when the facts of the case were inconsistent with the underlying rationale for the inference -- namely, the existence of buyer market power. Regarding the majority's effort to limit the Morton Salt inference to cases (such as this one) in which the supplier allegedly has market power, Commissioners Swindle and Leary explained that although "[i]t is laudable that the majority has tried to limit the use of the Morton Salt inference[,] [w]e do not believe . . . that evidence of supplier market power justifies bringing cases in which the Morton Salt inference is used as the basis to prove competitive harm among buyers."
Chairman Robert Pitofsky and Commissioners Sheila F. Anthony and Mozelle W. Thompson also issued a separate statement responding to the dissenting Commissioners. "In examining McCormick's discounts," the majority stated, "the Commission did not simply apply the Morton Salt presumption in finding injury to competition, but examined other factors, including the market power of McCormick and the fact that discounts to favored chains were conditioned on an agreement to devote all or a substantial portion of shelf space to the McCormick line products." While the "dissenting colleagues applaud the fact that the Commission is willing to examine injury to competition by looking at factors beyond those narrowly described in the Morton Salt approach," the majority noted, they still "conclude that those factors do not justify a secondary-line price discrimination case here." The majority does not find their arguments persuasive. "As the Analysis to Aid Public Comment points out, there will be circumstances in which the Morton Salt presumption is appropriate and dispositive. There may be other market settings in which it makes sense for the Commission, as a matter of prosecutorial discretion, or the Commission and Courts, in the process of considering whether there has been a violation, to look past the Morton Salt factors to a broader range of market conditions to determine whether there has been real injury to competition," the majority stated.
Taking those additional factors into account, the majority concluded that there "was injury not just to the disfavored buyers, but to secondary-line competition generally."
An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until April 7, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
NOTE: This consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
Copies of the complaint, proposed consent agreement and an analysis to aid public comment, as well as the two separate statements of the FTC Commissioners are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. 961 0050)
Office of Public Affairs
Bureau of Competition