Robinson-Patman Act Losing a Lot of Its Punch

May 21 -- A longstanding legal weapon in the small-business arsenal has gotten a lot less powerful.

It's called the Robinson-Patman Act—a Depression-era law intended to keep a level playing field between big firms and small ones. For instance, suppliers can't give a retail chain lower prices than an independent store. And buyers can't knowingly pay lower prices than everyone else.

That's the way it's supposed to work. But a recent study shows that it's much tougher to win lawsuits based on the act than it used to be.

From 2006 through March 31, 2010, plaintiffs, many of them small companies, won just 4% of Robinson-Patman suits in federal courts. That's down from 35% in the years 1982 to 1993, according to the report in the December 2010 issue of the journal Management Science.

What's going on? A couple of landmark cases have raised the burden of proof for small companies that bring suits, says Anthony Dukes, a professor of marketing at the Marshall School of Business at the University of Southern California. Prof. Dukes co-authored the study with Ryan Luchs of Duquesne University's Palumbo Donahue School of Business, Tansev Geylani of the University of Pittsburgh's Joseph M. Katz Graduate School of Business and Kannan Srinivasan of Carnegie Mellon University's Tepper School of Business.

One of those landmark cases involved a type of Robinson-Patman lawsuit called "primary line," where a defendant sells the same type of product as the plaintiff, but at much lower prices.

In this case, a cigarette manufacturer alleged that a larger rival was effectively selling its products at a loss in an effort to stifle competition. In 1993, the Supreme Court ruled against the plaintiff because it hadn't proved a crucial point—that the larger company intended to jack up prices later on to make back the money it had lost with the deep discounts.

The decision represented a shift in legal thinking, according to the recent report. Rather than focusing on the welfare of smaller competitors, the high court focused on how consumers were affected by the price war—hence the emphasis on whether the bigger company planned to raise prices.

"Recoupment is the ultimate object of an unlawful predatory pricing scheme," according to the Supreme Court's majority opinion on the case, written by Justice Anthony Kennedy. If prices don't ultimately go up, that means "predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced."

Between 1982 and 1993, plaintiffs won 57% of primary-line cases, according to the recent study. Since 1993, the year the decision was handed down, the percentage has fallen below 6%, the report says.

Another landmark decision involved a "secondary line" case, where a defendant charges a plaintiff a higher price than its rivals for the same goods.

In this case, a truck dealer alleged that a manufacturer hurt its business by offering other dealers better prices. The Supreme Court ruled against the dealer in a 2006 decision. The court's reasoning, according to the majority opinion written by Justice Ruth Bader Ginsburg: The dealer didn't show that the different pricing made it tougher to compete with rivals for the same customers at the same time.

That represents a much higher standard of evidence, according to the study. Previously, plaintiffs had to show only that there were big price differences in effect for a considerable time. Since this decision came down, the study says, plaintiffs have won fewer than 5% of secondary-line cases—down from 27% between 1982 and 1993.

Perception and Reality

Higher standards for lawsuits mean a tougher road for small businesses, since lawsuits are the only way to pursue violations of the act.

The government hasn't actively enforced Robinson-Patman for decades, says Prof. Dukes, because agencies think the act makes it tougher for more efficient sellers to pass on lower prices to customers.

On the other hand, Prof. Dukes says, even as big companies gain more power, they're still acting like Robinson-Patman is a major concern, which gives small companies a measure of breathing room they wouldn't otherwise have. Big companies regularly train their managers on compliance with the act and are careful to avoid the appearance of direct competition with small companies, such as repackaging products as house brands before slashing prices on them, Prof. Dukes says.

"Our sense is that many people in the industry still believe [the act] is enforced and perceive the threat as more potent than the data indicate," he says.

 Robert J. Toth    www.online.wsj.com