Loyalty Discounts Becoming More Complicated Than Ever

According to a sharply divided opinion from the US Court of Appeals for the Third Circuit, discounts conditioned on customer loyalty can be anticompetitive even if the discounted price still exceeds the seller's cost. Further, a seller's insistence that dealers charge less for its brand than for rival brands can also spell trouble.

In its 2012 decision in ZF Meritor, LLC v. Eaton Corp.,1 the Third Circuit confirmed that "loyalty discounts"— in which a seller provides price reductions or rebates to customers that buy at least a specified percentage of their purchases of a product from that seller— can violate the antitrust laws even if the discounted price is not below the seller's cost, and even if eligibility for the discount does not require 100 percent loyalty. How to tell whether a loyalty discount crosses the line depends on a variety of factors under the Third Circuit's approach, and the opinion illustrates some things that sellers may want to avoid. Also folded into the opinion is an important reminder of the risk associated with agreements with dealers that restrict the prices those dealers may charge for competing brands.

Discounts. The case involved loyalty discounts offered by Eaton Corporation, the leading maker of heavy-duty truck transmissions with a market share in excess of 80 percent. There were only four customers in the industry—the four manufacturers of heavy-duty trucks—and Eaton offered all of them contracts providing rebates conditioned on their purchasing 70 to 97.5 percent of their requirements from Eaton for a term of at least five years. The contracts provided that if a manufacturer did not meet its target, Eaton could require repayment of the rebates and also could pull the plug on the entire contract. Eaton's only competitor was ZF Meritor, which introduced an innovative new transmission in 2001, but did not offer as full a line as Eaton. ZF Meritor disappeared from the business in 2007, but not before initiating this lawsuit.

Preferred Pricing. In addition to incorporating loyalty discounts, Eaton's contracts required the truck manufacturers to charge truck buyers a "preferential price" for Eaton transmissions so that Eaton transmissions were always priced lower than those of its competitors. One truck manufacturer was instructed to price ZF Meritor transmissions at a $200 premium over Eaton transmissions, while other manufacturers agreed to impose what they termed a penalty on ZF Meritor transmissions. In...