Smith Wholesale Co. v. R.J. Reynolds Tobacco

477 F.3d 854

SMITH WHOLESALE COMPANY, INC., Rice Wholesale Co., Inc., Andalusia Distributing Co., Inc., Dixie Tobacco & Candy Co., George Wholesale Co., Ltd., Independent Wholesale Inc., L.P. Shanks Co., McCarty-Hull Cigar Co., Inc., R.C. Taylor Distributing Co., Reidsville Grocery Co., Inc., A.B. Coker

Co., Inc., Affiliated Foods, Inc., Acadia Wholesale & Tobacco Co., Caldwell Wholesale Co., Inc., Novelart Manufacturing Co., Yakima Distributing Co., Inc., Huntsville Wholesale Grocery, Pelican State Cigar & Tobacco, Inc., Plaintifs-Appellants State of Mississippi, and State of Tennessee, Intervenor Plaintiffs M.K. Grocery Co., Inc., and Corso, Inc., Plaintiffs, v. R.J. REYNOLDS TOBACCO COMPANY, Defendant-Appellee.

No. 05-6053.

United States Court of Appeals, Sixth Circuit.

Argued: April 21, 2006.

Decided and Filed: February 27, 2007.

ARGUED:

Kyle M. Keegan, Roy, Kiesel, Keegan & DeNicola, Baton Rouge, Louisiana, for Appellants. Thomas Demitrack, Jones, Day, Reavis & Pogue, Cleveland, Ohio, for Appellee.

ON BRIEF:

Kyle M. Keegan, Chris D. Kiesel, Roy, Kiesel, Keegan & DeNicola, Baton Rouge, Louisiana, Earl R. Booze, Herrin, Booze, Rambo, Jenkins & Wheeler, Johnson City, Tennessee, for Appellants. Thomas Demitrack, Robert S. Walker, Michelle K. Fischer, Jones, Day, Reavis & Pogue, Cleveland, Ohio, William C. Bovender, Hunter, Smith & Davis, Kingsport, Tennessee, Eric P. Berlin, Jones Day, Chicago, Illinois, for Appellee.

Before MOORE, GRIFFIN, and CUDAHY, Circuit Judges.^*

OPINION

GRIFFIN, Circuit Judge.

In this case alleging illegal price discrimination in violation of Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Price Discrimination Act ("the Act"), 15 U.S.C § 13(a), the plaintiffs-appellants, eighteen full-service wholesalers who are also direct distributors for defendant R.J. Reynolds Tobacco Company ("RJR"), appeal the district court's order of summary judgment entered pursuant to Federal Rule of Civil Procedure 56(c) in favor of defendant RJR. We affirm.

I.

The eighteen plaintiffs-appellants in this case, lead by plaintiff Smith Wholesale Company, are full-service distributors serving grocery and convenience stores and other retail outlets in a multi-state region, primarily in the southeastern United States. Tobacco products constitute 50% or more of their revenues. All of the plaintiffs are direct distributors of defendant RJR, some having distributed RJR's products for more than fifty years. Plaintiffs also purchase cigarettes from all other major manufacturers, as well as fourth-tier manufacturers.

Cigarettes are divided into four price categories or tiers. The most expensive, first-tier or premium, cigarettes are manufactured by defendant RJR (Camel and Winston cigarettes), as well as Philip Morris USA, Inc., Lorillard Tobacco Company, Liggett-Vector Brands, and Commonwealth Brands. Second-tier and third-tier cigarettes are also produced by the major manufacturers, but their prices are substantially lower than first-tier cigarettes. Fourth-tier brands are produced by smaller manufacturers (including Liggett and Commonwealth) and sell at prices somewhat lower than third-tier brands. All of RJR's discounted, non-premium brands are collectively classified as "savings" brands. RJR's second-tier product is Doral; its third-tier cigarettes include Monarch, Best Choice, Citation, and Cardinal. RJR does not price any of its savings brands at the fourth-tier level.

RJR is the second largest cigarette manufacturer in the United States, with a market share of approximately 22% prior to its July 2004 merger with the United States operations of Brown & Williamson.¹ The newly formed Reynolds American now has a market share of approximately 31%. At the other end of the spectrum, the fourth-tier segment has grown from 0.89% of all cigarette sales in 1998 to around 15% in 2003, making it the fastest growing portion of the cigarette market. Competitive pressure increased following the industry's 1998 Master Settlement Agreement, which settled smoking and health litigation by requiring per carton payments to the settling states. That agreement led to the rapid growth of producers of fourth-tier cigarettes that did not make settlement payments. RJR's market share has decreased in this competitive environment.

In April 2000, in an effort to allay its declining market share, RJR sought to enlist wholesalers in RJR's marketing efforts by providing financial incentives to wholesalers willing to focus on RJR savings brands. The new Wholesale Partners Program ("WPP") emphasized its savings brands because of the importance of RJR's Doral savings brand to its overall business. The WPP revised RJR's wholesale pricing structure through a three-level pricing system, ranging from Level 1 (the least favored), Levels 2 "A" through "H," to Level 3 (the most favored), which based price discounts and back-end monies² on a comparison of the distributor's sales of RJR's savings brands to its sales of non-RJR savings brands. All wholesalers could earn a base discount by participating in Level 1, although the amount of the Level 1 discount diminished over time until it ended in June 2003. To earn discounts at Level 2 or payments at Level 3, wholesalers were required to meet quarterly targets based on their sales of RJR savings brands as a percentage of their total savings brand sales.

Wholesalers that met their share targets earned the same Level 2 discounts.³ For five quarters beginning in the third quarter of 2002, wholesalers also earned additional, progressively higher quarter-end payments (so-called Levels 2A through 2H rebates), depending on the extent to which their RJR savings share exceeded the base share targets.⁴

The discount/rebate structure of the WPP is best summarized by the magistrate judge in his Report and Recommendation in this case:

First, in each state the defendant ascertained what percentage of each wholesaler's total sales of savings brand cigarettes consisted of RJR's savings brand cigarettes. Each wholesaler was then ranked in descending order, with the wholesaler having the highest percentage of RJR cigarettes listed at the top, and the wholesaler selling the smallest percentage of defendant's products (relative to the total sales of savings brand cigarettes) at the bottom. The defendant thereupon listed the volume of its savings brand cigarettes sold by each of the distributors. It is important to note that the distributor listed at the top, which sold the highest percentage of defendant's products, did not necessarily sell the highest volume of defendant's products; indeed, the distributor with the highest percentage of defendant sales very easily could have been the distributor that sold the lowest volume of defendant's products.

After determining the volume of defendant's cigarettes sold by each distributor in the descending order discussed in the preceding paragraph, [defendant] ascertained the total volume of RJR savings cigarettes sold in each state. Defendant then selected as its state target the RJR percentage of that wholesaler whose volume sales, when added to all those above it, equaled eighty-five percent (or as close thereto as possible) of defendant's total wholesale volume in the state. Defendant thereafter calculated a "share-of-savings" target for each wholesaler, using the state targets described above. The target was stated in terms of defendant's "savings brands" as a percentage of the total sales of cheap cigarettes sold by a distributor. For those wholesalers doing business in more than one state (and there were several), defendant had yet another formula that adjusted a multi-state wholesaler's target goals to reflect the different states in which that wholesaler does business. The closer a wholesaler comes to the goal established for it, the higher the incentive level applicable to it. And the higher the incentive level, the lower the price it pays for defendant's cigarettes. It is at first difficult to understand, and even more difficult to describe in words, but it does have a mathematical logic to it, and the resulting state target is intended to capture eighty-five percent of the volume of defendant's savings brand in any particular state.

As noted, the incentive level in which any wholesaler was placed determined the amount that wholesaler paid for defendant's savings brand cigarettes. Obviously, some wholesalers participated at higher levels than others, which meant that they purchased their cigarettes from defendant at a cheaper price. This price differential resulted in this litigation.

Because participation in the WPP did not depend on the volume of a wholesaler's RJR sales, small wholesalers were treated ostensibly the same as large wholesalers. From August 2000 through the first quarter of 2004, all discounts and rebates received under RJR's WPP were based solely on a distributor's RJR SOS brands. Beginning in the second quarter of 2004, RJR adopted a "share of market" approach, whereby WPP quotas, and resultant discount/rebate levels, were thereafter based on the distributor's total RJR sales (savings and premium) as a percentage of all cigarettes it sold.⁵

The WPP's per carton premium brand price differences between Level 1 and the best price from August 2000 to present were approximately: ($0.55) August 2000 — April 2001; ($0.50) May 2001 — May 2002; ($0.57) June 2002 — December 2002; ($0.85) January 2003 — June 2003; ($1.12) July 2003 — September 2003; ($0.75) October 2003 — March 2004; and ($0.74) April 2004 — present.

All wholesalers entered the program at Level 2. A Level 2 wholesaler that missed Level 2 in any quarter received a three-month grace period to maintain its Level 2 status. The WPP placed no limit on the volume that wholesalers could sell to any customer and capped quarterly increases in a wholesaler's target at 0.5%, even if RJR's actual share increased by a larger percentage, while reducing a wholesaler's target...