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ABC Distributing, Inc. v. Living Essentials LLC

United States District Court, N.D. California

September 1, 2017

ABC DISTRIBUTING, INC., et al., Plaintiffs,
LIVING ESSENTIALS LLC, et al., Defendants.


          NATHANAEL M. COUSINS, United States Magistrate Judge

         In this price discrimination case, several wholesaler plaintiffs allege that defendants Living Essentials LLC and Innovation Ventures LLC sold the dietary supplement 5-hour Energy to Costco Wholesale Corp. at a lower price than they offered to Plaintiffs. Plaintiffs' claims arise from Sections 2(a) and 2(d) of the federal Robinson-Patman Act, which proscribes price discrimination that is likely to have an anticompetitive effect. Plaintiffs' fundamental burden is to show that Living Essentials charged Plaintiffs a higher price for 5-hour Energy than it charged to Costco, and that the price discrimination could be harmful to competition.

         To show the requisite competitive injury, Plaintiffs must demonstrate that they actually competed with Costco for 5-hour Energy sales and that they experienced substantial price discrimination over a significant period of time. Plaintiffs' best evidence to that end is a set of statements by employees of Living Essentials and its broker, Paramount Sales Group. Those employees express their concern that promotional pricing given to Costco has negatively affected 5-hour Energy sales to and by wholesale distributors in California.

         Relying primarily on these statements, Plaintiffs now move for partial summary judgment on their RPA and related state law claims, leaving out the damages amount. Living Essentials moves for summary judgment on all of Plaintiffs' claims. Fatal to Plaintiffs' motion, the evidence on record leaves open a genuine factual dispute whether Plaintiffs actually competed with Costco for 5-hour Energy sales. Conversely, Plaintiffs offer sufficient evidence of actual competition, discriminatory pricing, and anticompetitive effect to thwart Living Essentials' motion. Accordingly, both parties' motions for summary judgment are DENIED.

         I. BACKGROUND

         A. Facts Presented

         The following facts are undisputed, except where noted.

         Plaintiffs ABC Distributing, Inc., Elite Wholesale, Inc., and Tonic Wholesale, Inc. dba Ace Wholesale are small wholesale distribution corporations with their principal place of business in Los Angeles, California. While all three plaintiffs sell general merchandise to small shops and convenience stores, ABC is primarily a tobacco business and promotes its own brand of cigars, called “Splitarillos.” ABC offers delivery to its customers. Elite and Ace do not offer delivery, so their customers tend to be nearby grocery and convenience stores. During the relevant time period, between May 7, 2011 and when this action was filed, Elite handled Ace's 5-hour Energy sales; Ace never purchased the product for itself.

         Defendants Living Essentials LLC and its parent company Innovation Ventures LLC (collectively, “Living Essentials”) have their principal place of business in Michigan. Living Essentials manufactures and distributes 5-hour Energy, a popular dietary supplement. 5-hour Energy is sold as a liquid 1.93-ounce bottle, and all bottles that Living Essentials sold were of like grade and quality. From 2011 to when this action was filed in 2015, Living Essentials sold 5-hour Energy to California wholesalers, including Plaintiffs, through Paramount Sales Group, a commissioned, third-party broker.

         During the relevant time period, third party Costco Wholesale Corp. operated four Costco Business Centers (CBCs) located in California, including two in Los Angeles. The parties dispute the exact nature of Costco's role in the supply chain. Plaintiffs assert Costco is a “convenience store wholesaler” (“C-store wholesaler”), on par with Plaintiffs. Living Essentials contends Costco is not a C-store wholesaler, but is instead a “Club Store, ” with a unique sales channel that differentiates it from Plaintiffs. It is undisputed that, during the relevant time period, the CBCs offered both “cash and carry” service, as well as delivery service to customers within certain zip codes in an approximately 25-50-mile radius. Several of Plaintiffs' customers were located in zip codes to which Costco offered delivery.

         Living Essentials sold 5-hour Energy to wholesalers in various configurations. Most wholesalers could purchase “master cases” containing 18 twelve-packs of a single flavor and strength, and “display racks” containing multi-flavored packages in both “regular strength” and “extra strength.” Costco was limited to purchasing, by the pallet, “club packs” containing 24 bottles, in a limited selection of flavors. The list price for the master cases and display racks was $1.45/bottle for regular strength flavors and $1.60/bottle for extra strength, and the list price for club packs was $1.35/bottle for regular strength and $1.50/bottle for extra strength.

         From these list prices, Living Essentials offered various discounts to both Plaintiffs and Costco. For example, Plaintiffs received for at least some of the limitations period a $0.07/bottle “everyday discount” off of the list price, and were offered (though on a limited basis) an additional $0.07/bottle “display allowance.” On the flip side, Living Essentials gave Costco, but not Plaintiffs, a “business scan promotion” in the form of an instant rebate to Costco customers that ranged in value from $0.15/bottle to $0.30/bottle. And Living Essentials offered other promotional discounts to Costco, including a “fence program, ” where stores displayed 5-hour Energy as a promotional product along the fence at the front of the store, and “endcap promotions, ” where stores displayed the product at the end of an aisle where it was more visible to customers. While there is no dispute that a given purchaser rarely paid the original list price, the parties dispute which discounts should be factored into Plaintiffs' and Costco's net prices for purposes of Plaintiffs' price discrimination claim, and whether the discounts were offered on fair and equal terms.

         During this litigation, both sides submitted expert reports. Plaintiffs' expert, Dr. DeForest McDuff, generated a damages model that compares five hypothetical but-for prices, ranging from a weighted average of the favored and disfavored prices, to a hypothetical world in which Plaintiffs received a price identical to Costco's. The report's basis for inferring competition between Plaintiffs and Costco is the fact that some of Plaintiffs customers are located in a zip code to which CBCs offer delivery. See Dkt. No. 220-11 (McDuff Report).

         For its part, Living Essentials submitted two expert reports. Dr. Darrell Williams rebutted Dr. McDuff's analysis largely in the context of class certification, criticizing Dr. McDuff's analysis of causality between Living Essentials' allegedly illegal conduct and Plaintiffs' harm, the scale at which competition allegedly occurred, and the commonality of impact on the plaintiffs. See Dkt. No. 179-11 (Williams Rebuttal Report). Dr. Glenn Woroch's report critiqued the methodology Dr. McDuff used to calculate net prices, arguing that many of the discounts Living Essentials offered should be excluded from price comparisons, and criticized the economic assumptions Dr. McDuff used to define a geographic market and infer competition between Plaintiffs and Costco. See Dkt. No. 221-1 (Woroch Report).

         B. Procedural History

         ABC and a now-dismissed plaintiff originally filed this action against Living Essentials alleging violations of the California Unfair Competition Law (“UCL”), California Business & Professions Code § 17200, and “Unjust Enrichment / Quasi-Contract / Restitution.” See Dkt. No. 1 (Compl.). The first and second amended complaints were filed as class-actions, adding named plaintiffs Elite and Ace, and adding additional claims under the Robinson-Patman Act (“RPA”), 15 U.S.C. §§ 13, 15, and the California Unfair Practices Act, California Business & Professions Code § 17045.

         Plaintiffs moved to certify two different classes. The first proposed class comprised any California wholesaler located within a zip code to which a Costco Business Center (CBC) offered delivery, and that purchased 5-hour Energy from Paramount during the limitations period and received a $0.07/bottle “Everyday Discount.” See Dkt. No. 151 (Mot. Class Cert.). The second proposed class was defined identically to the first, minus the zip code limitation; it encompassed wholesalers in the entire state of California. Id. The Court denied class certification and denied Plaintiffs' request for reconsideration. Dkt. Nos. 192, 241. Plaintiffs submitted a petition the Ninth Circuit for permission to appeal the certification order, which was denied. Dkt. No. 281.

         Defendants now move for summary judgment on all claims. Dkt. No. 218 (Defs.' Mot. Summ. J. (“D. Mot.”)). Plaintiffs also move for summary judgment on all claims, except the damages portion of their claim under RPA § 2(a). Dkt. No. 224 (Pls.' Mot. Summ. J. (“P. Mot.”)). Each party opposes the other's motion. Dkt. No. 244 (P. Opp.); Dkt. No. 254 (D. Opp.). All parties have consented to the jurisdiction of a magistrate judge. Dkt. Nos. 14, 15, 34.


         Before moving to the merits, the Court addresses three evidentiary motions. Living Essentials moves to exclude the testimony of Dr. McDuff. Dkt. No. 219. Plaintiffs move to exclude the testimony of Dr. Woroch, Dkt. No. 229, and to exclude certain evidence related to Living Essentials' responses to interrogatories. Dkt. No. 228. The Court addresses the expert witnesses first, then the interrogatory-related evidence.

         A. Daubert Motions

         Rule 702 of the Federal Rules of Evidence permits expert witness testimony “if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.” The Ninth Circuit has interpreted Rule 702 to require that such testimony “be both relevant and reliable.” Estate of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 463 (9th Cir. 2014) (quoting United States v. Vallejo, 237 F.3d 1008, 1019 (9th Cir. 2001)).

         Living Essentials' motion to exclude Dr. DeForest McDuff's expert opinon is DENIED. While the report uncompellingly assumes that geographic proximity equals competition, Dr. McDuff's testimony “logically advance[s] a material aspect” of Plaintiffs' case, Cooper v. Brown, 510 F.3d 870, 942 (9th Cir. 2007), by opining on economic impacts that could occur if his assumptions are true. And the testimony has “a reliable basis in the knowledge and experience of the relevant discipline, ” Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 149 (1999), because Dr. McDuff's conclusions stem from his expertise in economic markets.

         Plaintiffs' motion to exclude Dr. Woroch's expert opinion is also DENIED. Plaintiffs argue that Dr. Woroch's opinion is inadequately supported by facts and contradicts legal precedent regarding rebates and competition. However, the Court is persuaded that Dr. Woroch's opinion responds to facts in the record, and the Court is capable of determining for itself or a jury what the law is. The report otherwise satisfies the relevance and reliability requirements of Rule 702, so the report is admissible.

         B. Motion to Exclude Evidence

         Under Federal Rule of Civil Procedure 37(c), “[i]f a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless.” Plaintiffs assert Living Essentials was required to, but did not, disclose certain evidence relevant to the parties' summary judgment motions, and it seeks sanctions excluding that evidence.

         Plaintiffs' motion to exclude evidence is GRANTED in part and DENIED in part. First, Living Essentials' response to Interrogatory No. 7 does not preclude it from introducing evidence regarding functional discounts, because the interrogatory asked for information about price differences justified by Living Essentials' “cost of manufacture, sale, or delivery, ” i.e. a cost justification defense. Functional discounts like rebates or advertising promotions do not fall within the cost justification defense, so sanctions are not warranted here. As it pertains to Interrogatory No. 7, the motion to exclude is DENIED.

         Second, Plaintiffs' motion to exclude evidence related to Interrogatory No. 20 is GRANTED. Living Essentials may not introduce evidence that it offered to sell 5-hour Energy to Plaintiffs at a lower list price than the list price at which it sold to Costco. For purposes of this order, “list price” does not include rebates or discounts given as payment for services, like advertisements. While the Court agrees with Plaintiffs that rebates must be factored into the net price for purposes of RPA § 2(a), see Fred Meyer, Inc. v. F.T.C., 359 F.2d 351, 362 (9th Cir. 1966), Living Essentials claims to have believed in good faith that rebates and certain other discounts are external to a “list price.” The Court cannot say that Living Essentials clearly did not believe this in good faith, so its non-substantive response to a question about Costco's list price does not warrant sanctions.[1] Thus, Living Essentials is barred only from introducing evidence that Plaintiffs' list price, as defined above, was lower than Costco's.

         The third and final set of disputed evidence relates to net pricing and Plaintiffs' Interrogatory No. 21. Plaintiffs argue that Living Essentials' non-substantive response warrants sanctions barring evidence that Plaintiffs were charged a net price equal to or lower than the net price charged to Costco. Living Essentials argues that its response to Interrogatory No. 10, dated October 14, 2016, directed Plaintiffs to already-disclosed documents[2] that, according to Living Essentials, allowed Plaintiffs to deduce Costco's net price. These same documents, according to Living Essentials and Dr. Woroch's expert report, include the specific evidentiary claim Plaintiffs seek to exclude: that Living Essentials gave retailers buying 5-hour Energy from Plaintiffs a rebate of $0.07 per bottle and offered them a “2 for $5” promotion. See Mot to Excl. at 14.

         However, Living Essentials did not submit these documents with any filing, so the Court cannot determine whether the documents say what Living Essentials claims they do, or whether, as Plaintiffs claim, they do not speak to net pricing. Thus, the Court rules as follows: Living Essentials may not use or introduce evidence that it gave Plaintiffs' customers a $0.07 per bottle rebate or offered a 2-for-$5 deal, beyond what is contained in the bate stamped documents it cited to in its October 14, 2016, response to Interrogatory 10. Because those documents are not before the Court at this time, the Court will not consider the evidentiary claim on the specific figures above for summary judgment purposes.

         With the evidentiary issues resolved, the Court turns to the merits.


         Summary judgment may be granted only when, drawing all inferences and resolving all doubts in favor of the nonmoving party, there is no genuine dispute as to any material fact. Fed.R.Civ.P. 56(a); Tolan v. Cotton, 134 S.Ct. 1861, 1863 (2014); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute about a material fact is genuine if “the evidence is such that a reasonable jury could return a verdict for the ...

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