FTC v. McCormick & Co.

UNITED STATES OF AMERICABEFORE FEDERAL TRADE COMMISSION COMMISSIONERS:Robert Pitofsky, ChairmanSheila F. Anthony Mozelle W. ThompsonOrson SwindleThomas B. LearyIn the Matter ofMcCormick & Company, Incorporated, a corporation.DOCKET NO. ________________ComplaintPursuant to the provisions of the Federal Trade Commission Act and the Clayton Act and by virtue of the authority vested in it by these Acts, the Federal Trade Commission, having reason to believe that McCormick & Company, Incorporated, a corporation (sometimes referred to as "respondent" or "McCormick"), has violated the provisions of these Acts, and it appearing to the Commission that a proceeding would be in the public interest, hereby issues its complaint, stating its charges as follows:Definitions1. For purposes of this complaint, the following definitions apply:a. "Core spice line" means a retail product line of basic spices, herbs, and blends of spices, herbs and other food products that are sold in similar packaging with the same brand or trade name. Generally, the product line is composed of 40 or more items or products. b. "Gourmet spice line" means a retail product line of basic spices, herbs and blends of spices, herbs and other food products with the same brand or trade name that are generally of a higher ingredient grade than a core spice line. Gourmet spice lines are commonly packed in same-size glass jars. c. "Dry seasoning mixes" means retail products consisting of blends of spices, herbs and other food products with the same brand or trade name that are used to prepare a specific dish, such as meatloaf or tacos, or to prepare gravy or other sauce. Dry seasoning mixes are generally sold in foil or paper packets and typically, the entire packet is used for one average-size dish. d. "Competitive seasonings" means retail products other than dry seasoning mixes, such as meat tenderizers, monosodium glutamate (MSG), and garlic and other spice blends that are not part of a core or gourmet spice line. Competitive seasonings are frequently marketed by suppliers that do not offer complete core spice lines or gourmet spice lines. e. "Full Line" means the McCormick product line or offering comprising the products described above in subparagraphs a through d. f. "Net Price" means 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 Respondent2. Respondent McCormick & Company, Incorporated., is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Maryland, with its principal office and place of business at 18 Loveton Circle, Sparks, Maryland 21152. 3. Respondent is now and has been engaged for many years in the production, distribution and sale of spice and seasoning products for resale, including the products that make up its Full Line. Respondent sells these products under the brand names McCormick, Schilling, Fifth Seasons, Spice Classics, Select Seasons, Mojave, Spice Trend, Royal Trading, Crescent, McCormick Schilling, La Cochina De McCormick, McCormick Collection and Old Bay, among others.4. Respondent has manufacturing facilities in Hunt Valley, Maryland and Salinas, California. The Maryland facility generally serves customers in the Eastern portion of the United States, while the California facility generally serves customers in the West. In the course and conduct of its business, respondent has engaged and is now engaging in commerce, as defined in the Federal Trade Commission Act and the Clayton Act, by selling, distributing, shipping, or causing to be shipped spice and seasoning products produced in some states of the United States to customers located in other states and in the District of Columbia.5. With 1998 retail sales of $623.7 million in the Americas, respondent is the largest supplier of spice and seasoning products in the United States. Respondent claims to be "the world's largest spice company."6. 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. These circumstances, combined with the superior brand recognition of McCormick products, mean that supermarkets that purchase McCormick products have relatively few alternative sources for equivalent products from other suppliers at equivalent prices and terms.McCormick's Pricing7. During the period pertinent to this complaint, McCormick had a single national price list for its product lines sold to its direct customers, whether retail or wholesale. McCormick commonly referred to this price list as the "A" List. This list specified separate prices for each individual product or SKU. McCormick modified this price list from time to time, to reflect changes in McCormick's costs to manufacture particular products, among other reasons. 8. Relatively few McCormick customers paid the "A" list price. Instead, McCormick commonly entered into written or unwritten supply agreements with customers that provided substantial discounts off the "A" list prices. These discounts have taken a variety of forms, including cash payments at the commencement of the agreement, free goods, off-invoice discounts, cash rebates, performance funds and other financial benefits that effectively reduced the Net Price of McCormick's products. In addition, McCormick supply agreements have included payments for advertising and other promotional activities designed to help customers resell McCormick products. McCormick commonly referred to the aggregate percentage of discounts and benefits provided to a particular customer as the "allowance offer" or "deal rate." McCormick's aggregate discounts and benefits to some customers were substantially greater than to others.9. Typically, McCormick individually negotiated with particular customers the amount of discounts and promotional payments. The discounts and promotional payments typically were for all or a substantial part of the existing McCormick product line and typically were not incentives to accept new McCormick products.10. In its supply agreements with customers, McCormick has commonly included provisions that, much as is sometimes seen with slotting allowances, restrict the ability of customers to deal in the products of competing spice suppliers. Such provisions typically demand that the customer allocate the large majority of the space devoted to spice products -- in some cases 90% of all shelf space devoted to packaged spices, herbs, seasonings and flavorings of the kinds offered by McCormick -- to McCormick.Discrimination in Price11. Each of the spice and seasoning products that make up McCormick's Full Line is a commodity within the meaning of Section 2(a) of the Robinson-Patman Act amendments to the Clayton Act, 15 U.S.C. fl 13(a).12. In the course and conduct of its business in commerce in the period from at least 1994 to the present, McCormick has in no fewer than five instances discriminated in price by providing different deal rates consisting of preferential up-front "slotting"-type payments or allowances, discounts, rebates, deductions, free goods, or other financial benefits to some purchasers of McCormick products including, but not limited to, McCormick's core spice line, gourmet spice line, dry seasoning mixes and competitive seasonings. In these instances, through such discriminatory terms of sale, McCormick has sold McCormick products to some purchasers (the "favored purchasers") at a lower Net Price than to other purchasers (the "disfavored purchasers"). 13. The favorable prices and terms McCormick provided to the favored purchasers were not justified by a good faith attempt to meet the equally low price of a competitor, nor were the favorable prices justified by cost savings associated with doing business with the favored retailer.14. In each instance, McCormick engaged in contemporaneous sales of McCormick products of like grade and quality to the favored and disfavored purchasers.15. In each instance, the disfavored purchaser competed with the favored purchaser who resold respondent's products at the same level of distribution.16. In each instance, at least one of the discriminatory sales by McCormick involved commodities that crossed state lines.17. Each instance involved a substantial price difference over a substantial period of time between competing purchasers in markets where profit margins are low and competition is keen.18. In each instance, the disfavored purchaser had few, if any, alternative sources from which to purchase comparable goods at prices and terms equivalent to those McCormick provided to the favored purchaser.19. The effect of these discriminatory acts and practices has been or may be substantially to lessen competition in the line or lines of commerce in which favored and disfavored purchasers are engaged, or to injure, destroy or prevent competition between favored and disfavored purchasers.20. The acts and practices of the respondent set forth in Paragraphs 11-19 above constitute unlawful price discrimination in violation of Section 2(a) of the Robinson-Patman Act amendments to the Clayton Act, 15 U.S.C. fl 13(a), and unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. fl 45, and will continue in the absence of the relief herein requested.WHEREFORE, the Federal Trade Commission on this day of _______, 2000 issues its complaint against said respondent. By the Commission.Donald S. ClarkSecretaryDISSENTING STATEMENT OF COMMISSIONERS ORSON SWINDLE AND THOMAS B. LEARY in McCormick & Company, Inc. File No. 961-0050We respectfully dissent from the Commission's decision to accept a consent agreement with McCormick & Company, Inc. ("McCormick") to resolve allegations that the company violated the Robinson-Patman Act. We recognize that the majority sincerely believes that this case will clarify a controversial statute and properly circumscribe its application. We are concerned, however, that this case will have precisely the opposite effect.McCormick is the largest American supplier of spices to grocery stores, with more than 2,000 contracts(1) that account for a majority of spice sales in the United States. (Complaint No. 5). During the past decade, McCormick's main competitor has been Burns Philp Food Incorporated ("Burns Philp"). In the early 1990s, Burns Philp commenced a price war in which both it and McCormick offered increased discounts and other payments to try to win the business of grocery stores.(2) When the price war ended, McCormick remained the dominant spice supplier in the United States, and Burns Philp's ability to compete may have been impaired.(3)A supplier may violate Section 2(a) of the Robinson-Patman Act amendments to the Clayton Act, 15 U.S.C. No. 13(a), if it engages in price discrimination that causes so-called "primary-line" injury. Primary-line injury under the statute occurs when a difference in price causes harm to competition between suppliers. A case predicated on primary-line injury to Burns Philp or other suppliers of spices would require proof that the discriminatory prices that McCormick charged grocery stores were below cost and that McCormick had a reasonable prospect of recouping its losses. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). In other words, primary-line injury to suppliers is actionable only when there is a threat of ultimate injury to buyers. The Commission's complaint does not allege that McCormick engaged in price discrimination that caused primary-line injury to suppliers such as Burns Philp.Instead, after more than three years of investigation and the commitment of substantial resources, the majority of the Commission has alleged that McCormick engaged in price discrimination that caused "secondary-line" injury, i.e., harm to competition between buyers. Specifically, out of McCormick's more than 2,000 contracts, the complaint alleges that in five instances McCormick charged higher prices to certain grocery stores than it charged to their competitors. (Complaint - 12). The higher prices that the disfavored grocery stores paid McCormick for spices allegedly harmed their ability to compete against other grocery stores for customers. (Id. - 19). The majority statement conveys the impression that there was actual secondary-line injury in this case. But the Commission does not rely on direct evidence of secondary-line injury to the disfavored grocery stores. Rather, the Commission relies on the so-called "Morton Salt inference" of competitive harm. (Id. - 17). For more than 50 years, courts have used the Morton Salt inference that "injury to competition is established prima facie by proof of a substantial price discrimination between competing purchasers over time."(4) In essence, the Morton Salt inference permits a court to infer injury to a disfavored purchaser from a persistent and substantial discriminatory price in a market where profit margins are low and competition is keen, and then to infer injury to competition from the injury to the disfavored purchaser.We question whether the facts in this case support the application of the Morton Salt inference. The Robinson-Patman Act was primarily intended to prevent price discrimination in favor of large buyers at the expense of small buyers.(5) When a small buyer pays more than a large buyer for an item in an industry with low profit margins and keen competition, the Morton Salt inference may make sense. In such circumstances, it is reasonable to infer that the purchasing power of the large buyer will cause the price discrimination to be repeated across many items, with consequent competitive injury to the small buyer. The complaint does not allege that the favored grocery stores were larger than the disfavored grocery stores(6) or that they purchased more spices from McCormick. Since the favored stores here were not necessarily purchasing larger quantities of spices than the disfavored stores, it is unlikely that McCormick granted lower prices to the favored grocery stores because of their buying power. In fact, the most plausible explanation for the lower prices granted in the five instances alleged in the complaint is that they were the almost fortuitous and incidental result of McCormick's responses during its price war with Burns Philp. If the favored stores were not accorded lower spice prices because of their buying power, there is little reason to believe that the favored stores generally would receive lower prices from the suppliers of the thousands of products sold in the typical grocery store. It follows that it is unlikely that the ability of the disfavored grocery stores to compete with favored stores would be harmed - the underlying rationale for use of the Morton Salt inference.The Analysis to Aid Public Comment emphasizes that the Commission is not relying on the Morton Salt inference by itself to support bringing a case. Analysis of Proposed Consent Order to Aid Public Comment at 4. The Analysis explains that the use of the Morton Salt inference in this case is particularly appropriate because McCormick is the largest supplier of spices in the United States and because the company typically demanded that grocery stores allocate to McCormick a large majority of the shelf space they devoted to spices. Id.; see Complaint -- 6, 10, 18. Although we share the majority's apparent view that the public interest generally would be better served if the Commission did not bring Robinson-Patman cases based only on the Morton Salt inference, the majority has not identified additional facts that warranted bringing this case. McCormick's alleged market power as a supplier and its alleged discriminatory prices may have harmed the ability of Burns Philp and other suppliers to compete with McCormick. But this does not make it any more plausible that McCormick's alleged discriminatory prices harmed the ability of the disfavored grocery stores to compete with the favored grocery stores.In the long run, if McCormick's pricing has harmed the ability of Burns Philp or other suppliers to compete, the loss of alternative suppliers would harm both the disfavored grocery stores and the favored grocery stores (once their present contracts with McCormick expire). A loss of alternative suppliers is a classic consequence of primary-line injury, but such a loss does not necessarily have a differential impact on buyers that will cause secondary-line injury -- the relevant level of commerce in this case.(7) We recognize that there has been much controversy over the years concerning the use of the Morton Salt inference and that the inference has not been uniformly applied.(8) Overall, the concern has been that the inference makes violations too easy to prove.(9) It is laudable that the majority has tried to limit the use of the Morton Salt inference. We do not believe, however, 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.(10) Because the majority has no other basis on which to show secondary-line competitive injury in this case, we dissent.(11) 1. See McCormick & Company, Inc., Press Release, McCormick Signs Settlement Agreement with the Federal Trade Commission at 2 (Feb. 3, 2000), (McCormick has "more than 2,200 customer contracts"). 2. Anthony Hughes, Burns Philp Was Inept, Says ASIC, The Age at 2 (Mar. 11, 1999). 3. Id. ("Inadequate financial reporting to the board of directors and its failure to question overstated valuations were largely behind the near-collapse of the food group Burns Philp & Co., a report by the Australian Securities and Investments Commission has found."). 4. Falls City Indus., Inc. v. Vanco Beverage, Inc., 460 U.S. 428, 435 (1983) (citing Federal Trade Commission v. Morton Salt Co., 334 U.S. 37, 46, 50-51 (1948)). 5. In enacting the Robinson-Patman amendments, the Congress addressed the concern that large buyers could secure a competitive advantage over small buyers solely because of the large buyers' quantity purchasing ability. H.R. Rep. No. 2287, 74th Cong., 2d Sess. 7 (1936); S. Rep. No. 1502, 74th Cong., 2d Sess. 4-6 (1936). 6. To the extent that the majority tries to suggest that the disfavored stores are "mom-and-pop"operations, in fact only one of the disfavored stores could be so characterized; the rest of the disfavored stores are all large or relatively large grocery store chains. 7. We do not suggest that market power of the supplier is irrelevant in a Robinson-Patman Act case - in fact, it is likely to be present in all cases of economic price discrimination. However, supplier market power is not dispositive of whether secondary-line injury is likely to have occurred. Our agreement with the majority that McCormick is the dominant spice seller does not overcome the lack of proof of secondary-line injury in this case. 8. See ABA Section of Antitrust Law, Antitrust Law Developments 450-51 (4th ed. 1997). 9. See, e.g., LaRue, Robinson-Patman Act in the Twenty-First Century: Will the Morton Salt Rule Be Retired?, 48 S.M.U.L. Rev. 1917 (1995). 10. As noted above, McCormick's alleged discriminatory prices were offered during a price war with its main competitor. We assume without deciding that a "meeting competition" defense under the Robinson-Patman Act would not have insulated McCormick from liability. 11. We do recognize that the proposed narrowly circumscribed order would be appropriate in a proper secondary-line case.STATEMENT OF CHAIRMAN ROBERT PITOFSKY AND COMMISSIONERS SHEILA F. ANTHONY AND MOZELLE W. THOMPSONMcCormick & Co., Inc. File No. 961-0050 The Analysis to Aid Public Comment fully describes the Commission action in this matter. Some comments by our dissenting colleagues, however, require a brief response.The Commission has accepted for public comment a consent order from McCormick & Company Inc. ("McCormick") in which the company has agreed to cease and desist granting discounts (partly in the form of up-front shelf-allocation payments) to large chains without making comparable payments available to other chains and independents that compete with the favored chains. Under the Supreme Court's controlling decision in FTC v. Morton Salt Co.(1) injury to competition at the retailer (i.e., "secondary") level can be inferred where substantial and durable price discrimination exists between competing purchasers who operate in a market with low profit margins and keen competition.McCormick is far and away the largest manufacturer and supplier of full lines of spices to grocery stores in the United States. In the early 1990s, it found itself in a price war with Burns-Philp Food Inc. ("Burns-Philp"), its only full-line competitor. Substantial discriminatory discounts were granted to favored chains, often accounting for many individual stores, and not to competing retailers. In examining McCormick's discounts, 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 of products. Our 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, but conclude that those factors do not justify a secondary-line price discrimination case here. We do not find their arguments persuasive. 1. The dissenting Commissioners observe that the discriminatory discounts were granted in the midst of, and possibly because of, a price war. But the Robinson-Patman Act limits on discriminatory pricing - including the rule that a seller can meet but not exceed prices offered by a competitor(2) - are not suspended during price wars. 2. Our colleagues suggest that this is a primary-line case (i.e., injury at the producer level) masquerading as a secondary line (injury at the retailer level) enforcement action. But that kind of distinction between primary-line and secondary-line anti-competitive effects is unduly rigid and mechanical -- particularly in light of the facts of this matter. It is true that part of the injury at the secondary level occurred because McCormick's behavior injured its only full-line competitor. But that is just one part of the secondary-line case. The fact remains that favored chain store buyers received from a dominant seller substantially better discounts than disfavored buyers, and they were injured, and competition at the secondary line was injured, as a result. Moreover, with Burns-Philp out of the picture as an aggressive competitor, chain stores and other retailers at the secondary level will be denied benefits of future competition.3. The Commission was influenced in the decision to enforce the Robinson-Patman Act here because McCormick is a dominant seller. Our colleagues' conclusion -- that market dominance by the discriminating seller should be irrelevant to secondary-line price discrimination -- flies in the face of commentary by leading scholars such as Herbert Hovenkamp suggesting that the dominance of the seller is exactly the factor that should be examined in the exercise of prosecutorial discretion.(3)The essential feature of Commission action here should not be lost in a quarrel over particular facts. 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. 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. 1. 334 U.S. 37 (1948) (Morton Salt). 2. See Falls City Indus. v. Vanco Beverage, Inc., 460 U.S. 428, 446 (1983) ("a seller's response must be defensive, in the sense that the lower price must be calculated and offered in good faith to 'meet not beat' the competitor's low price.") 3. See, e.g., Herbert Hovenkamp, Market Power and Secondary-Line Differential Pricing, 71 Geo. L.J. 1157, 1170 (1983) ("Systematic, long-term price discrimination can be achieved only by a seller with market power. If the seller does not have market power, purchasers asked to pay the higher price will purchase from another seller willing to sell at a more competitive price.")

FTC v. McCormick & Co.

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