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A Colorado grocery store won't have to pay over $1.5 million to two competitors after the Tenth Circuit U.S. Court of Appeals held that a now-amended state law did not forbid offering customers a discount on gasoline if they purchased a qualifying amount of groceries. The court's decision affirmed the right of retailers to sell items "below cost" when bundled with other items.
In 2005, Parish Oil, a gas station operator, and Ray Moore Tire & Petroleum Service, a defunct filling station, sued City Market, a grocer operated by a subsidiary of Kroger. Since 2003, City Market had offered customers gas discounts as part of its store loyalty card program. Under the original program, if a customer purchased $25-50 in groceries, she would receive a 4-cents-per-gallon discount on a subsequent purchase of gasoline from City Market. (The discount was doubled for grocery purchases over $50.) The value of the discount changed over time, at one point offering customers a 20-cents-per-gallon discount. Parish Oil and Ray Moore claimed they unfairly lost business because of City Market's discounts. They sued under Colorado's Unfair Practices Act (UPA), which prohibits "below cost" sales intended to injure competitors. In 2005, the UPA contained a special provision that prevented "below cost" sales of motor fuel regardless of intent. In federal district court, City Market argued that "combined sales" were exempt from the UPA's price controls. Specifically, the statute permitted bundling of items provided the "selling price shall not be below the cost of all articles, products, commodities, and concessions included in such transactions." Read literally, this means it's legal to sell one item below cost provided the price for the bundle is above the combined costs. The district court refused to apply the statute as written, however. Instead, the court said that the UPA should be read to forbid any combined sale where any one item is sold below its cost. Based on this reading of the law, the jury found City Market guilty. A final judgment was entered ordering the grocer to pay $588,000 in damages to Parish Oil and $826,875 to Ray Moore, as compensation for sales lost because of City Market's discounting. In an opinion issued on April 25, 2008, the Tenth Circuit reversed the jury's verdict. Circuit Judge Michael McConnell, writing for a unanimous three-judge panel, said the district court incorrectly interpreted the bundling exemption. McConnell said there was no other reading except a literal one. As an example, McConnell cited a fast food value meal: "if the restaurant sells a hamburger and french fries for $5, throwing in a milk shake for “free,” the transaction is lawful if the cost of all of the included goods is not greater than the price. If cost to the restaurant of the hamburger is $2, the french fries $1, and the shake $1.50, the transaction would be lawful." But under the district court's interpretation, the transaction would be illegal since one item -- the milk shake -- was sold below cost. In City Market's case, the court erroneously instructed the jury to consider the price of gas alone rather then the aggregate value of the gasoline and qualifying grocery purchase. Under this standard, the combined sale was perfectly legal. Indeed, McConnell noted that under the reading of the UPA supported by the plaintiffs (and the district court), almost any customer loyalty program would be illegal. McConnell invoked an episode of "Seinfeld" where Elaine Benes had a card from a local sandwich shop that awarded a free sub after purchasing 24 subs at regular price: "If the first twenty-four sandwiches are sold for $4 apiece at a cost to the maker of $3, the customer who follows through and redeems the offer will have spent $96 to buy $75 worth of sandwiches. But the last one is sold below cost (in fact, it is free”), making it illegal under the plaintiffs’ version of the UPA. We do not believe the Colorado legislature would have acted so cavalierly as to ban such customer-rewards programs—indeed, to make them criminal—without more clearly expressing an intent to do so." The Tenth Circuit's decision sends the case back to the district court for further proceedings. Fortunately for Colorado retailers, the legislature amended the UPA in 2007 in direct response to the district court's decision against City Market. The amended law directs courts to consider the combined selling price of bundled items versus the combined costs, rather than the costs of items individually. You can download the Tenth Circuit's opinion at this link. If you enjoyed this article, please consider making a contribution to the Voluntary Trade Council. |
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