Metropolitan News-Enterprise


Friday, July 21, 2023


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Ninth Circuit Reverses Judgment Allowing  Energy-Shot Sales to Costco at Lower Prices

Majority Says Judge Erred in Determining Wholesalers Are Not in Competition With Costco Business Centers


By a MetNews Staff Writer



The Ninth U.S. Circuit Court of Appeals yesterday reversed a judge’s decision that sales of an energy-shot drink to Costco at lower prices than to the plaintiffs does not constitute proscribed price discrimination, remanding for further proceedings.

The Ninth U.S. Circuit Court of Appeals yesterday reversed the District Court’s decision not to enjoin a manufacturer’s sales of its energy drink to Costco at a lower price than it charges the plaintiffs, grocery wholesalers, with the majority finding error in the lower court’s determination that the plaintiffs and Costco are not in competition.

In an unusual division of labors, Circuit Judge Eric D. Miller wrote part of the majority opinion—holding that District Court Judge Consuelo B. Marshall of the Central District of California did not commit instructional error—and Circuit Judge Sandra S. Ikuta authored the portion dealing with whether the plaintiff wholesalers are competitors of Costco.

The defendants are Living Essentials, LLC, maker of 5-hour Energy, a caffeine-based tonic, and its parent corporation. They charge Costco $1.35 for bottles of their product in regular strength, while the plaintiffs must pay 10 cents per bottle more, and provide other advantages to Costco and not the wholesalers.

Miller wrote a concurring and dissenting opinion in which he argued that Marshall “did not clearly err in finding that the Wholesalers failed to establish by a preponderance of the evidence that they were competing with Costco.” Sixth Circuit Court of Appeals Judge Ronald Lee Gilman, sitting by designation, also concurred and dissented, expressing the view that one of the jury instructions was faulty.

Ikuta’s Opinion

“The key issue in this case is whether Costco and the Wholesalers (both customers of Living Essentials) are ‘customers competing’ with each other as to resales of 5-hour Energy for purposes of section 2(d)” of the Robinson-Patman Price Discrimination Act, Ikuta wrote.

A jury found in favor of Living Essentials as to the wholesalers’ claim for damages, under §2(a) but, Ikuta said, their verdict did not compel Marshall’s decision to withhold injunction relief under §2(d). She explained that §2(a) requires a finding of harm to competition while §2(d) does not.

“Therefore, in rejecting the Wholesalers’ claim, the jury could have determined that the Wholesalers and Costco were competing, but there was no potential harm to competition,” she wrote. “Because the jury did not necessarily find that the Wholesalers and Costco were not competing, the district court erred by holding that the jury had made an implicit finding of no competition.”

Same Functional Level

Ikuta said Marshall also erred in concluding that Costco and the wholesalers do not operate at the same functional level.

The District Court judge proceeded in the notion that Costco was strictly a retailer, she noted, while the evidence showed that those sales of 5-hour Energy that were in issue were at Costco Business Centers, patronized primarily by businesses.

“Because the evidence shows that Costco and the Wholesalers operated at the same functional level in the same geographic area, if the Wholesalers and Costco purchased 5-hour Energy within approximately the same period of time, this confluence of facts is sufficient to establish that Costco and the Wholesalers are in actual competition with each other in the distribution of 5-hour Energy,” the jurist declared.

The case was remanded for a determination as to whether the respective sales were made to Costco and to the wholesalers in the same time period.

Miller’s Dissent

Miller said in his partial dissent:

“In this case, Living Essentials presented evidence of substantial differences in operations that suggests that the Wholesalers and Costco were not competing ‘for the same customer.’…For example, unlike Costco, most of the Wholesalers sold 5-hour Energy only in store, negotiated pricing with their customers—offering in-house credit and different prices for 5-hour Energy—and sold only to retailers, not to end-consumers. Meanwhile, Costco Business Centers sold both in store and online at set prices to any consumer with a Costco membership, some of whom were end-consumers: in addition, they carried fewer than half of the 5-hour Energy flavors carried by the Wholesalers, and they did not sell 5-hour Energy display racks or other retailer-oriented accessories for Living Essentials. It is true that Costco Business Centers sold most of their 5-hour Energy to retailers. But it is far from clear that Costco sold to the same retailers as the Wholesalers.”

He went on to say:

“The presence or absence of competition must be assessed based on the facts.

“The district court appropriately reviewed all of the evidence in making a finding that Living Essentials had not established competition. Because that finding was not clearly erroneous, I would affirm the judgment in its entirety.”

No Instructional Error

Miller said in his portion of the majority opinion that Marshall did not err in telling jurors that in order to find liability, it would have to determine that sales to Costco were made at the same time it was selling to the plaintiffs. Contemporaneous sales had been conclusively established, the wholesalers insisted, rendering the instruction unnecessary.

“The Wholesalers’ position appears to be that when the plaintiff has the burden of proving an element of its case, a district court should decline to instruct the jury on that element if the court determines the plaintiff has proved it too convincingly,” Miller wrote. “We are unaware of any authority for that proposition.”

He said instructions have been condemned where “the party bearing the burden presented too little evidence to justify the instruction, not too much.”

Miller also said Marshall properly gave an instruction on “functional discount” because “Costco performed a number of marketing and other functions that no Wholesaler appears to have performed,” such as making efforts to promote sales of the product.

Gillman said in his separate opinion “that the district court abused its discretion in giving the ‘reasonably contemporaneous’ instruction to the jury,” explaining that “no reasonable juror could conclude that the transactions in this case were other than contemporaneous.”

The case is U.S. Wholesale Outlet & Distribution v. Innovation Ventures, 21-55397.


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