United States v. Borden Co.
370 U.S. 460, 8 L. Ed. 2d 627, 1962 U.S. LEXIS 2292 (1962)
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Rule of Law:
Under the Robinson-Patman Act, a seller's cost justification defense for price discrimination is invalid if it relies on classifying customers into broad groups for cost-averaging, unless the members of each group are sufficiently homogeneous with respect to the principal cost-determinative factors.
Facts:
- The Borden Company and Bowman Dairy Company, major milk distributors in Chicago, sold fluid milk products to both independently owned grocery stores and large grocery store chains.
- Both companies offered independent stores a percentage discount off the list price that increased with the volume of purchases, up to a specified maximum.
- Simultaneously, both companies granted the chain stores, such as A&P and Jewel, a flat discount that was substantially greater than the maximum discount available to any independent store.
- Borden justified its price difference by creating two customer classes—chains and independents—and comparing the average cost of serving the entire chain class to the average cost of serving the independent class.
- Borden's 'independent' class included some stores with purchase volumes comparable to or even larger than some stores in the 'chain' class.
- Bowman justified its price difference based on costs for 'optional customer services' (like stocking refrigerators) and daily cash collections, which it claimed were not provided to chains.
- Bowman's cost study charged all independent stores for these services and collection methods, despite admitting that not all independents used cash payments or received the optional services.
Procedural Posture:
- The United States Government filed suit against The Borden Co. and Bowman Dairy Co. in federal District Court, alleging violations of the Sherman Act and Section 2(a) of the Clayton Act.
- The District Court initially dismissed the suit in its entirety.
- On a direct appeal, the U.S. Supreme Court affirmed the dismissal of the Sherman Act charges but reversed the Clayton Act dismissal and remanded the case.
- On remand in the District Court, the dairies did not dispute the existence of price discrimination but presented voluminous cost studies as a justification defense.
- The District Court found a prima facie violation of § 2(a) but held that the dairies' cost studies sufficiently justified the price differences under the statute's proviso, and therefore dismissed the government's suit.
- The United States Government, as appellant, filed a direct appeal of the dismissal to the U.S. Supreme Court, with the dairies as appellees.
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Issue:
Does a seller's cost justification defense under Section 2(a) of the Clayton Act, which relies on averaging the costs of serving broad customer groups (e.g., 'all chain stores' vs. 'all independent stores'), satisfy the statute's 'due allowance' provision when the groups contain members with substantially different characteristics regarding the cost factors?
Opinions:
Majority - Mr. Justice Clark
No. A cost justification defense under Section 2(a) of the Clayton Act is not satisfied by classifying customers into broad, heterogeneous groups. The Robinson-Patman Act allows for price differentials based on actual cost savings, and while grouping customers for cost accounting is a practical necessity, such classifications are only permissible if they are 'composed of members of such selfsameness as to make the averaging of the cost of dealing with the group a valid and reasonable indicium of the cost of dealing with any specific group member.' Borden's classification was improper because it created artificial disparities by grouping high-volume independents with low-volume ones, comparing them against an averaged chain class; it was like 'averaging one horse and one rabbit.' Bowman's classification was similarly flawed because it attributed costs for services to all independents, even though not all of them incurred those costs. The burden is on the seller to prove the homogeneity of its customer groups, and the appellees failed to meet that burden.
Concurring - Mr. Justice Douglas
No. The cost justifications are invalid because they rely on class-wide averages rather than store-by-store costs, which are the only relevant criteria here since no centralized purchasing is involved. The purpose of the Robinson-Patman Act is to protect independent merchants from the 'competitive oppression' of large chains. Allowing discounts based on arbitrary classifications that are not tied to actual, traceable cost differences for a particular buyer enables chains to gain a 'competitive advantage' not from efficiency, but from their market power, leading to the 'ploughing under of the independents.' The Act should be read to preserve free enterprise by preventing monopoly power from breeding more monopoly.
Dissenting - Mr. Justice Harlan
Yes, the lower court's finding should be affirmed. The majority scrutinizes the cost studies too harshly, as the District Court correctly judged their overall adequacy in accordance with accepted legal principles. The lower court found the studies were conscientiously prepared and provided a prima facie justification for the price differentials. Given that this litigation has been ongoing for nearly 12 years and the market situation has likely changed, the District Court's decision to deny injunctive relief was an 'eminently sensible and fair disposition.' Remanding the case for what would amount to a third trial is a pointless exercise.
Analysis:
This decision significantly heightened the standard for the cost justification defense under the Robinson-Patman Act by establishing the 'homogeneity' or 'selfsameness' requirement for customer groupings. It curtails the ability of sellers to justify discounts to large buyers by simply averaging costs across broad, crudely defined classes like 'chains' and 'independents.' The ruling forces businesses to use more granular and accurate accounting to ensure that price differences reflect actual cost savings attributable to specific customers or narrowly defined, truly similar groups. This precedent serves to protect smaller competitors from discriminatory pricing schemes that are masked by flawed, overly generalized cost studies.
