FILED
United States Court of Appeals
Tenth Circuit
April 25, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
PARISH OIL CO., INC., and RAY
MOORE TIRE & PETROLEUM
SERVICE, INC.,
Plaintiffs-Appellees,
v. No. 07-1032
DILLON COMPANIES, INC.
d/b/a CITY MARKET,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 1:05-CV-00081-REB-PAC)
Timothy R. McDonald (Timothy G. Atkeson, Jessica Brody, and Brittany K.T.
Kauffman on the brief), Arnold & Porter LLP, Denver, Colorado, for Defendant-
Appellant.
Alphonse M. Alfano, Bassman, Mitchell & Alfano, Chartered, Washington, D.C.
(Andrew R. Shoemaker and Tamera D. Westerberg, Hogan & Hartson LLP,
Denver, Colorado, with him on the brief), for Plaintiffs-Appellees.
Before TACHA, HARTZ and McCONNELL, Circuit Judges.
McCONNELL, Circuit Judge.
We must decide, under a now-amended Colorado unfair competition statute,
whether a grocery store may sell gasoline below cost if such sales are conditioned
on the purchase of enough groceries above cost that the entire series of
transactions comes in at a profit. We hold that it may, and therefore reverse a
jury’s judgment in favor of the competitors who challenged this practice.
I.
A.
Defendant Dillon Companies, a Kansas corporation and subsidiary of the
Cincinnati-based Kroger Co., operates two of the four full-service grocery stores
in the city of Montrose, Colorado, under the name City Market. One is in
“downtown” Montrose; the other, two miles down Townsend Avenue on the south
end of town. At those locations it also operates retail gasoline filling stations.
Plaintiffs are competitors in the retail gasoline business. Parish Oil is a gasoline
jobber, or wholesaler, and also operates retail filling stations in Montrose under
the Phillips 66 Food Plaza and Conoco-Humdinger’s Travel Shoppe names. Ray
Moore Tire & Petroleum Service (“Ray Moore”) operated a filling station
downtown until closing shop in November, 2004.
On December 3, 2003, City Market kicked off a new promotion, the
“Grocery Discount Program,” allegedly intended as a pilot for a Kroger-wide plan
to boost grocery sales. Under the Program, a customer who purchased a
qualifying amount of goods at a City Market grocery store using his store loyalty
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card would receive a one-time per-gallon discount on gasoline on his next visit to
a City Market filling station, redeemable by swiping his loyalty card at the pump.
The terms of the deal changed with time. From December 3, 2003 to March 2,
2004, a purchase of $25.00–$49.99 in groceries earned the customer 4¢ per gallon
off the posted price of gasoline, and a purchase of $50 or more earned 8¢ off.
The qualifying amount of groceries had to be purchased in a single transaction,
and the gasoline discount was available only at the filling station at City Market’s
south store. From March 3 to November 9, 2004, a purchase of $35 or more in
groceries earned 15¢ per gallon off gasoline. Separate grocery purchases over
any seven-day period could be accumulated to reach the qualifying amount, and
the discount could be redeemed at either City Market location. From November
10, 2004 to February 28, 2005, a purchase of $50 or more in groceries in a single
transaction netted the customer a whopping 20¢ per gallon off the price of
gasoline. Since March 1, 2005, any customer with a City Market loyalty card has
received 3¢ per gallon off at the pump without the need to buy groceries, and
those customers who buy $100 or more of City Market groceries over a calendar
month have received a discount of 7¢ per gallon. In every incarnation of the
program, the discount could be used only once; it applied to every grade of
gasoline, expired if not redeemed within two weeks, and required that the same
loyalty card be used in the grocery store and at the pump.
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On the ledgers, City Market kept its groceries’ and filling stations’
accounts separate, so at the end of each four-week accounting period the gasoline
end of the business would bill the grocery end for the total value of the discounts
it had honored. It is stipulated that the Grocery Discount Program operated at a
total profit; that is, “[t]he margin of profit on qualifying grocery sales, when
viewed in the aggregate, fully covered the cost of the aggregate discounts offered
under these programs at City Market’s Montrose, Colorado stores.” App. 577.
But because City Market kept only aggregate figures, it is unknown how many
individual customers, if any, received more in discounts at the pump than City
Market had earned on their qualifying purchases of groceries.
B.
City Market’s competitors cried foul. Over this period of time Parish Oil
and Ray Moore had been losing substantial amounts of business, both in volume
and in profit. (The amounts and causes of their losses are in contention, but when
the matter came to trial a jury calculated Parish Oil’s losses due to City Market’s
discount program at $200,000 and Ray Moore’s at $281,250.) On January 14,
2005, Plaintiffs sued City Market in federal district court under Colorado’s Unfair
Practices Act (UPA). The UPA, Colo. Rev. Stat. §§ 6-2-101 to -117, was enacted
in 1935 “to safeguard the public against the creation or perpetuation of
monopolies and to foster and encourage competition by prohibiting unfair and
discriminatory practices by which fair and honest competition is destroyed or
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prevented.” Id. § 6-2-102. The Act has subsequently been amended by the
legislature, but at the times relevant to this case it contained two prohibitions on
selling items below cost: a general prohibition against below-cost sales or gifts
where the seller has a “purpose of injuring competitors and destroying
competition,” id. § 6-2-105(1)(a) (2002), and a specialized prohibition, added in
1993, applicable only to below-cost motor fuel sales and omitting the intent
requirement:
It is unlawful for any person, partnership, firm, corporation, joint
stock company, or other association engaged in business within this
state to engage in a pattern of selling, offering for sale, or advertising
for sale motor fuel for less than the cost thereof to such vendor, when
such pattern has the effect of injuring one or more competitors or
destroying competition.
Id. § 6-2-105(1)(b) (2002), repealed by Act of April 16, 2007, 2007 Colo. Legis.
Serv. Ch. 140, § 2 (West) (effective April 16, 2007). A below-cost sale is
permissible if it is part of “an endeavor made in good faith to meet the legal
prices of a competitor.” Id. § 6-2-110(1)(d) (2002), amended by Act of April 16,
2007, supra, § 4. A violation is a misdemeanor, id. § 6-2-105(1)(b), and the UPA
creates a private right for any person or company “injured thereby” to maintain an
action for treble damages and to “enjoin the defendant from a continuance of the
violations,” id. § 6-2-111(1).
This case was brought under Section 105(1)(b), the special motor-fuel
provision. The complaint accused City Market of carrying on a pattern of illegal
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sales of gasoline below cost, in that City Market’s posted prices were often below
both City Market’s cost and the prices of its competitors, and actual selling prices
under the Grocery Discount Program were even lower. For instance, according to
the complaint, City Market’s posted price for regular unleaded gasoline was
below its cost on 171 out of the 365 days between December 5, 2003 and
December 3, 2004. This pattern, it was charged, had a “dramatic adverse impact
on [City Market’s] competitors,” reducing gross margins on gasoline sales at
Parish Oil’s Phillips 66 station by almost 43 percent, and forcing Ray Moore out
of the general gasoline retail business it had been in for 36 years. App. 31–32.
The two-count complaint sought both treble damages and preliminary and
permanent injunctions to bar City Market from further below-cost selling.
The district court denied the preliminary injunction. After discovery, City
Market moved for summary judgment. It asserted that its Grocery Discount
Program fell into an exception for combined sales. That provision, Section 113 of
the UPA, which is at the heart of this appeal, provided at the times relevant to this
case:
For the purpose of preventing evasion of the provisions of this article
in all sales involving more than one item or commodity and in all
sales involving the giving of any concession of any kind, whether it
be coupons or otherwise, the vendors’ or distributors’ selling price
shall not be below the cost of all articles, products, commodities, and
concessions included in such transactions.
Colo. Rev. Stat. § 6-2-113, amended by Act of April 16, 2007, supra, § 5.
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According to City Market, this provision allows a vendor to “bundle”
products, so that one item may be sold below cost if its sale is tied in an
appropriate way with another item or items such that the total price is above the
combined costs. Under this interpretation, a City Market gasoline sale would be
bundled with the related qualifying grocery sales, if any, to determine whether the
transaction as a whole generated a profit or a loss. Because, City Market argued,
it was stipulated that the Grocery Discount Program operated at a net profit, there
could be no “pattern” of below-cost gasoline sales, and Plaintiffs must lose.
The district court disagreed. Although it admitted that, “read literally,”
Section 113 supported City Market’s view, it found the statute “internally and
irreconcilably inconsistent” because allowing below-cost bundled sales would
permit an “end-run around the underlying purposes of the UPA” in contravention
of the provision’s stated purpose of “preventing evasion” of the Act. App.
315–16. The court held instead that Section 113 must be read to require
consideration of prices and costs item-by-item, and thus to forbid a sales scheme
like the Grocery Discount Program. It therefore denied summary judgment for
City Market.
The case proceeded to a three-day trial, held on October 30 – November 1,
2006, whereupon the jury found City Market liable for injuries to both Parish Oil
and Ray Moore. It fixed Parish Oil’s damages at $200,000 and Ray Moore’s at
$281,250. In response to a special interrogatory, the jury assigned responsibility
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for each plaintiff’s losses in the amounts of 98 percent to defendant City Market,
and 1 percent each to nonparties Safeway and Bradley Petroleum, which also
operated filling stations in Montrose. The district court, discounting damages for
nonparty liability and then trebling the award in accordance with Section 111(1),
entered a final judgment against City Market in the amount of $588,000 for Parish
Oil and $826,875 for Ray Moore. It also permanently enjoined City Market from
selling motor fuel below cost, irrespective of reimbursements from any grocery
discount program, except as permitted under the UPA to meet a competitor’s
price.
City Market timely brought this appeal. We exercise jurisdiction under 28
U.S.C. § 1291, review de novo the district court’s interpretation of the UPA,
reverse, and remand.
II.
On appeal, City Market again urges the interpretation of Colo. Rev. Stat. §
6-2-113 that the district court rejected: that it permits bundling of below-cost
sales with above-cost sales. Because the meaning of the statute is a matter of law,
our review is de novo. Cooper v. Cent. & Sw. Servs., 271 F.3d 1247, 1251 (10th
Cir. 2001). As we are sitting in diversity and construing a Colorado statute, we
must give it the meaning it would have in the Colorado courts. Erie R.R. v.
Tompkins, 304 U.S. 64, 77–78 (1938); Mem’l Hosp. of Laramie County v.
Healthcare Realty Trust Inc., 509 F.3d 1225, 1229 (10th Cir. 2007). “To
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accomplish this objective, th[is] court must begin with the plain language of the
statute. If the statute is unambiguous and does not conflict with other statutory
provisions, we need look no further. If, however, the language of the statute is
ambiguous, or in conflict with other provisions, we then look to legislative
history, prior law, the consequences of a given construction, and the goal of the
statutory scheme, to ascertain the correct meaning of [the] statute.” People v.
Luther, 58 P.3d 1013, 1015 (Colo. 2002) (internal citations omitted).
We therefore turn first to the plain language of the statute. The operative
language states: “[I]n all sales involving more than one item or commodity and in
all sales involving the giving of any concession of any kind, whether it be
coupons or otherwise, the vendors’ or distributors’ selling price shall not be
below the cost of all articles, products, commodities, and concessions included in
such transactions.” Colo. Rev. Stat. § 6-2-113. We agree with the district court
that, “read literally,” the statute “suggest[s] the very interpretation defendant
urges here: that a transaction will be considered legal so long as the price charged
accounts for or exceeds the cost of all items included in the transaction.” App.
316. Unlike the district court, however, we conclude that the literal meaning of
the statute must be given effect.
The general prohibition of Section 105(1)(a) bars sales below cost if the
seller has “the purpose of injuring competitors and destroying competition,” and
the more specific prohibition of Section 105(1)(b), since repealed, bars sellers of
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motor fuel from engaging in a pattern of below-cost sales with the
effect—purpose is not required—of injuring competitors or destroying
competition. Colo. Rev. Stat. § 6-2-105(1)(a), (b). Section 113, entitled “Selling
Below Cost,” addresses sales involving more than one item. It provides that when
sales of more than one item are bundled, whether in a single transaction or in the
form of coupons or other concessions, compliance with the statute is determined
by comparing the selling price to the cost of all items “included in such
transaction[].” Thus, to use the familiar example of a fast-food outlet’s 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.
Similarly, if a record store gives purchasers of more than $100 worth of music a
coupon good for a discount on future purchases, the question is whether the sum
of the costs of all goods purchased exceeds the total price charged for them.
As we read the statute, when all the items are obtained in a single
transaction, it is regarded as a “sale[] involving more than one item or
commodity,” and when a discount is given for a later purchase, it is regarded as a
“concession.” Either way, however, compliance with the statute is determined by
comparing the cost of all the items involved in the transaction with the sales price
for all of the items.
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Under this plain reading of the statute, the district court erred in denying
City Market’s motion for judgment as a matter of law. The parties stipulated that
“[t]he margin of profit on qualifying grocery sales, when viewed in the aggregate,
fully covered the cost of the aggregate discounts offered under these programs at
City Market’s Montrose, Colorado stores.” App. 577. In other words, in the
aggregate, the combined cost of groceries and gasoline did not exceed the
combined selling price of these items. 1 It was an error for the district court to
allow the jury to base its judgment on the price of the gasoline alone. Because
the gasoline sales were bundled with the grocery sales, the statute required a
comparison of the costs and prices of the transactions taken together, not
separately. To compare the cost and price of gasoline in isolation from the
grocery sales would be like saying the value meal in our example is unlawful
because the milk shake is being given away for less than its cost.
It does not matter, under Section 113, whether we view the City Market
program as a discount on the purchase of groceries, payable in the form of a
lower price on gasoline, or as a discount on the purchase of gasoline received as a
result of the purchase of groceries. The statute does not indulge in economically
meaningless formalism. Either way, the statute asks us to compare the combined
1
The records kept by City Market do not permit a comparison of costs to
prices for individual purchases, but only in the aggregate. The plaintiffs do not
challenge the district court’s conclusion that it was permissible to evaluate
compliance with the statute on the basis of the aggregate figures.
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price of all items involved in the transaction to the combined cost of those items.
Because it is not contested that the aggregate margin on qualifying grocery sales
exceeded the aggregate discount on gasoline, City Market was not in violation of
the statute.
Our interpretation is consistent with the only Colorado case interpreting
Section 113, Mastercar, Inc. v. Amoco Oil Co., 835 P.2d 534 (Colo. App. 1992).
Mastercar arose from a challenge to the defendants’ practice of offering a free car
wash with the purchase of ten gallons of gasoline. Suit was brought under
Section 105(1) of the UPA, the general prohibition on giveaways and below-cost
sales. 2 Plaintiff argued that the gift of the car wash was an illegal means of
competition; defendants countered that it was “a legal concession pursuant to §
6-2-113, C.R.S., wherein the sales price charged for the gasoline constitutes the
consideration for both the car wash and the gasoline.” Mastercar, 835 P.2d at
535. Siding with the defendants, the court concluded that the car wash was not a
gift at all. Rather, “when consideration is paid for one product that is sold in
conjunction with another product described to be ‘free’ or otherwise offered at no
cost to the consumer, the transaction constitutes a combined sale, and thus, the
product is not a gift pursuant to § 6-2-105, C.R.S.” Id. at 536.
2
This subsection was transferred to § 6-2-105(1)(a) at the same time the
specific prohibition on below-cost motor fuel sales at issue in this case, § 6-2-
105(1)(b), was added. Act of June 6, 1993, 1993 Colo. Legis. Serv. S.B. 93-224,
§ 1 (West).
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In further support of its holding, the court explained the impact of Section
113 in conjunction with the other parts of the UPA which define “cost”:
The effect of these provisions is that, in any transaction in which a
product or article is offered in conjunction with the purchase of
another product at no “cost,” or at less than “cost,” the consideration
paid by the purchaser must be sufficient to cover the “costs,” as
defined under § 6-2-105(2), of both products or articles. By
mandating that a combined sale transaction may only be offered at a
price above cost, under § 6-2-105(1), the General Assembly prevents
the evil it sought to avoid under that portion of § 6-2-105(1) that
declares it unlawful to “give” a product to a consumer “for the
purpose of injuring competitors and destroying competition.” If a
product must be sold at or above cost, injury to competitors is
averted and the purposes of § 6-2-105(1) are satisfied.
Id.
The present case is similar. Here, as in Mastercar, a customer who
purchases a certain quantity of one commodity (gasoline in Mastercar, groceries
here) is given a concession on a subsequent purchase of a different commodity (a
car wash in Mastercar, gasoline here). The holding of Mastercar applies with
equal force to this case: “in any transaction in which a product or article is
offered in conjunction with the purchase of another product at no ‘cost,’ or at less
than ‘cost,’ the consideration paid by the purchaser must be sufficient to cover the
‘costs,’ as defined under § 6-2-105(2), of both products or articles.” Id.
The plaintiffs, relying on the district court, offer three grounds for
distinguishing Mastercar. First, they note that “the Mastercar court was not
called on to construe Section 113,” making its interpretation dictum. Appellees’
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Br. 22. We do not agree. The defendant in Mastercar relied on Section 113, and
the Colorado court relied in part on that Section in determining that the offering
of the car wash fell outside Section 105’s below-cost prohibitions. But even
assuming Mastercar’s interpretation is technically dictum and thus not binding,
we find it persuasive. Second, the plaintiffs note that the question in Mastercar
was whether the car wash was a “gift” rather than a below-cost sale. We regard
this as a distinction without a difference. There is no reason to think Mastercar
would have come out differently if the car wash had been for half price instead of
for “free.” Finally, they note that the Mastercar court “ignored the introductory
clause of Section 113.” Id. n.12. But the question in this case (as discussed
below) is whether the introductory clause of Section 113 requires us to interpret
the statute in a fashion at odds with its language; the fact that the Mastercar court
did not do so is reason for us to take the same course, not a reason for us to
distinguish the decision. 3
Finally, we would be hesitant to adopt the plaintiffs’ reading of Section 113
because it would appear to prohibit a number of ordinary commercial practices
3
City Market also points to another authority: a letter opinion by the
Colorado Attorney General, issued on November 26, 2002, which concluded that
an earlier incarnation of the motor fuel discount program, under which grocery
customers who purchased items from specified manufacturers received “free gas”
vouchers, did not violate Section 105(1)(b). Because in that situation the gasoline
vendor was reimbursed by third party manufacturers, rather than (as here) from a
different unit of the same retailer, we do not regard the letter as applicable to the
current case.
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which we do not think the legislature intended to stamp out by such vague words.
Consider a cellular service provider. It sells phones for $100, above cost, but if a
customer will sign a two-year service contract he may have the phone for a dollar.
The plaintiffs’ reading would likely prohibit this common practice, especially if
the entire purchase price (for the telephone and the service plan) is not paid up
front and together, because the price of the phone itself would have to be
considered “separately” from the price of the cellular service. Indeed, the
plaintiffs’ reading would apparently render unlawful in the State of Colorado a
promotional gimmick so common that it features in an episode from Seinfeld:
JERRY: “Atomic Sub”? Why are you eating there?
ELAINE: I got a card, and they stamp it every time I buy a sub. Twenty-
four stamps, and I become a Submarine Captain!
JERRY: What does that mean?
ELAINE (embarrassed): Free sub.
Seinfeld: The Strike (NBC television broadcast Dec. 18, 1997). 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
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customer-rewards programs—indeed, to make them criminal—without more
clearly expressing an intent to do so.
We therefore interpret Section 113, as it existed prior to amendment in
April 2007, to mean that where the ability to make a purchase at a concession
price is expressly contingent on the purchase of other goods, the concession
goods are sold below cost only if the total price paid by the customer for the
goods involved in such linked transactions is below the total cost of such goods.
III.
Neither the plaintiffs nor the district court offer a plausible alternative
reading of the language of the operative provision of Section 113. As discussed
below, the district court explicitly abandoned any “literal” reading of the statute
in favor of an interpretation based on the court’s perceived legislative purpose. In
their appellate briefs, the plaintiffs deny that the operative clause of Section 113
has a “plain or literal meaning” that supports the defendant’s position, Appellees’
Br. 24 n.16, but they do not suggest any plausible alternative. As best we can
understand their position, plaintiffs argue that because the City Market program
involves a “concession” rather than a combined purchase, the correct approach is
not to compare the combined price of the purchased items to the combined cost of
the purchased items but to examine one side of the related transactions in
isolation:
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The only transaction involving the ‘giving of any concession’ is the
transaction in which a qualified customer purchases motor fuels at a
discount. Under that provision, because the concession is not applied
to the price of any of the qualifying grocery items, which purchases
are made in separate transactions, the only relevant transaction is the
one in which the customer purchases discounted motor fuel.
The only items included in the relevant transaction are the
motor fuels and the concession. The cost of the motor fuels,
therefore, is combined with the cost of the concession, and compared
to the price of the motor fuel to determine whether it is being sold
below “cost.” If City Market sells gasoline at a price lower than the
combined cost of the motor fuel and the discount, the product is
being sold below cost.
Id. at 25–26.
This seems to us a distorted interpretation of the statute. It is simply not
true to say that the “only transaction involving the ‘giving of any concession’ is
the transaction in which a qualified customer purchases motor fuels at a
discount.” The concession—i.e., entitlement to a discount on gasoline—is
“given” in connection with the purchase of groceries. When we add the cost of
the groceries to the cost of the concession (i.e., the discount on gasoline), and
compare this to the price paid for the groceries, it is undisputed that City Market
makes a profit on the entire transaction. In this respect, the situation is precisely
analogous to Mastercar, where the concession (a free car wash) was given in
connection with the purchase of gasoline.
The plaintiffs want to pretend that “the only relevant transaction is the one
in which the customer purchases discounted motor fuel,” but this directly
contradicts the language of Section 113, which requires that when coupons or
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other concessions are involved, “the vendors’ or distributors’ selling price shall
not be below the cost of all articles, products, commodities, and concessions
included in such transactions.” When customers purchase groceries, they receive
not only groceries but a concession on the price of gasoline; according to the
statute, the cost of “all” of these articles must be considered in combination. To
look only at the transaction where the coupon or concession is cashed in would
effectively outlaw the practice of giving coupons or other bonuses to customers
on one purchase, to be used in connection with another—including the transaction
in Mastercar. That is not what the statute says.
IV.
The district court departed from the literal meaning of Section 113 because
it regarded that meaning as “internally and irreconcilably inconsistent” with the
purpose of the Section, as stated in its introductory clause: “For the purpose of
preventing evasion of the provisions of this article . . .” App. 316. According to
the district court, the literal meaning of Section 113 would “permit [an] end-run
around the underlying purposes of the UPA . . . to prevent the practice of ‘loss
leader’ selling.” Id. at 315. (Loss-leader selling is the practice of selling selected
goods, like a Thanksgiving turkey, at a loss in order to lure customers into the
store.) “Given that conclusion,” the court reasoned, “a literal meaning of the
statute must give way to a consideration of legislative purpose.” Id. at 316. The
district court therefore concluded that “the only rational interpretation must be
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one in which the cost of each item and the cost of the concomitant concession is
considered separately to determine whether that individual price is below cost.”
Id. at 317. Under that reading, the discounted price of gasoline under the City
Market program must be considered “separately” from the margin of profit on
qualifying grocery sales.
Even when it is true that “an absolutely literal reading of a statutory
provision is irreconcilably at war with the clear congressional purpose,” United
States v. Campos-Serrano, 404 U.S. 293, 298 (1971) (quoted in App. 316–17),
this entitles a court only to consider “a less literal construction.” Id. It does not
permit the court to adopt the exact opposite of the statute’s operative language.
The district court did not suggest any way the statute’s operative language could
be read to express a prohibition on the bundling of sales. 4
Moreover, we do not find anything approaching an “irreconcilable” conflict
between the operative provision of Section 113 and its stated purpose. According
to the district court, the literal meaning of Section 113 “could not have [been]
intended” by the legislature because it would “swallow the rule” (apparently
Section 105) by “permit[ting] sellers to evade the UPA’s ultimate goal of
promoting competition by prohibiting below cost and loss leader sales.” App.
317. Not so. The prohibitory terms of the UPA, under either interpretation of
4
There is no suggestion here that Section 113 contains a scrivener’s error,
which may, when clear, be corrected by the interpreting court.
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Section 113, fully ban ordinary below-cost sales. The general rule against below-
cost sales is not “swallowed” merely because some sales may be made below cost
if appropriately linked with above-cost sales. Rather, the rule is enforced that
combined sales, treated together, must still comply with Section 105.
Even under the literal interpretation, Section 113 can be seen to thwart
several kinds of evasion of Section 105. First, it negates the potential argument,
albeit unlikely, that if two six-dollar harmonicas are sold together for ten dollars
then neither one is really being sold below cost because the price paid can be
assigned to cover the cost of either. More importantly, it clarifies the illegality of
one very likely type of evasion: giving away free coupons that reduce price below
cost. The UPA defines “cost,” but not “price,” and but for Section 113 it might
have been argued that an item’s selling price for purposes of the below-cost sales
prohibition is its list price without respect to the application of any coupon or
other concession. If that were the case, a vendor could easily skirt the law if with
his right hand he priced goods at 10% above cost while with his left he doled out
50%-off coupons. By making plain that the cost of any concession must be taken
into account, Section 113 prevents this.
Parish Oil argues that the district court’s nonliteral interpretation of Section
113 is necessary to prevent “loss leader sales.” Although, as the district court
acknowledged, there is no legislative history concerning the adoption of the
Colorado UPA from which its purpose may be gleaned, “[o]ne of the chief aims
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of state laws prohibiting sales below cost was to put an end to ‘loss-leader’
selling.” Safeway Stores, Inc. v. Okla. Retail Grocers Ass’n, 360 U.S. 334, 340
(1959). As early as 1960, the Colorado Supreme Court acknowledged that “[i]t
has been said that the true purpose of acts of this character was to eliminate
destructive price competition and the economic effect of the sale of ‘loss
leaders.’” Flank Oil Co. v. Tenn. Gas Transmission Co., 349 P.2d 1005, 1012
(Colo. 1960) (quoting Dikeou v. Food Distribs. Ass’n, 108 P.2d 529, 531 (Colo.
1940)). We do not believe, however, that City Market’s program offends the goal
of stamping out genuine loss leaders.
A “leader” may be “any item which, whether by national advertising or
some other way [i]s sufficiently well known so that its being displayed in front of
the store or in the window attracts attention and brings people into the store to get
that item.” F EDERAL T RADE C OMMISSION , C HAIN -S TORE L EADERS AND L OSS
L EADERS , S. D OC . N O . 72-51, at 3 (1932) (quoting “an official of a large drug
chain”). A leader makes a particularly attractive lure when the customer knows
the same product is more expensive elsewhere, so items featured as leaders are
usually staples, commodities, or branded items whose customary price is familiar.
See id. at 3, 11–14; see also E DWARD S. R OGERS , G OOD W ILL , T RADE -M ARKS
AND U NFAIR T RADING 265–66 (1914); P.W.S. Andrews, Some Aspects of
Competition in Retail Trade, 2 Oxford Econ. Papers 137, 162–63 (1950). When
discounted so deeply that it is sold below the vendor’s cost, the item is a “loss
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leader.” The loss on an item sold below cost, the vendor hopes, will be more than
offset by gains in goodwill, habit-forming and customer loyalty, and the sale of
other items—at regular or inflated prices—to the customer attracted by the special
who does not want the hassle of a second trip to his usual store. “The loss on the
‘leader’ is merely an indirect way of paying for advertising the store.” A LBERT
H ARING , R ETAIL P RICE C UTTING AND I TS C ONTROL B Y M ANUFACTURERS 15
(1935); see generally James D. Hess & Eitan Gerstner, Loss Leader Pricing and
Rain Check Policy, 6 Mktg. Sci. 358 (1987). 5 As such, loss leaders can have
legitimate economic purposes and effects.
The principal way in which loss-leader sales have been regarded as harmful
is that the consumer may be misled “to expect what generally is not true, namely,
that a store which offers such an amazing bargain is full of other such bargains,”
Safeway Stores, 360 U.S. at 340. See L OUIS D. B RANDEIS , Competition That
Kills, in B USINESS —A P ROFESSION 236, 246–48 (1914) (reprinted from Louis D.
Brandeis, Cutthroat Prices: The Competition That Kills, Harper’s Weekly, Nov.
15, 1913, at 10–12); R OGERS , supra, at 266–67; Murray C. Kemp, An Appraisal of
5
Loss-leader sales are distinguished from predatory pricing; with the latter,
the vendor’s hope is to drive other competitors from the market and use its
consequent market power to recoup losses on underpriced goods through
supracompetitive prices. See Brooke Group Ltd. v. Brown & Williamson Tobacco
Corp., 509 U.S. 209, 224 (1993); R OBERT H. B ORK , T HE A NTITRUST P ARADOX
149–55 (1978) (explaining why predatory pricing is unlikely to succeed in
practice).
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Loss Leader Selling, 21 Can. J. Econ. & Pol. Sci. 245, 247–50 (1955). 6 Under
this theory, loss leaders “convey[] the idea that all a given store’s merchandise is
similarly low-priced.” C HARLES G. D AUGHTERS , W ELLS OF D ISCONTENT 172
(1937). Brandeis called them “mis-leaders.” B RANDEIS , supra, at 245–46. Thus,
for instance, “[t]he advertisement by a department store of Big Ben clocks which
everybody knows are universally sold at two dollars and a half, at a cut price of
one dollar and ninety-eight cents gives verisimilitude to the statement which
immediately follows in the same advertisement that thirty dollar suits are being
sold at thirteen sixty-nine.” R OGERS , supra, at 265–66.
By these lights, City Market’s Grocery Discount Program does not establish
gasoline as a true loss leader. Indeed, gasoline is not a “leader” at all; the
customer attracted to City Market’s gasoline pumps is unlikely to be lured to buy
other items on the assumption that they are similarly low-priced. Indeed, the
structure of the City Market program belies the misleading effect of prototypical
loss leaders. Where the ability to purchase discounted gasoline is expressly
dependent on the prior purchase of a qualifying amount of other goods, the
customer openly confronts the fact that he can purchase the gasoline cheaply only
as part of a special, contingent discount which is not available on other products.
6
We cite economic literature from the first half of the last century because
that is when the Colorado legislature enacted the UPA. We do not mean to
suggest that these theories would necessarily pass muster under more modern
economics.
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There is no reason to imagine that the gasoline’s low price is an everyday value
provided by a vendor whose retail magic must allow him to stock the entire store
with other “amazing bargain[s],” Safeway Stores, 360 U.S. at 340. A loss leader
is tied to other products with invisible strings of psychology and convenience, but
in a bundled-sale program like City Market’s the strings are explicit and
compliance with the program’s terms is required. The Submarine Captain whose
twenty-fifth hoagie is free will not suppose everything at the shop—chips, sodas,
and all—is a steal. If she pauses to think of the matter at all, the customer in such
a situation will likely realize that the purchase of other goods is mandated
precisely because the vendor needs to sell a higher volume to subsidize the
discounted item.
For these reasons we cannot conclude that a program like City Market’s
contravenes the proffered public policy against loss leaders, or other policy of the
State of Colorado. It is in this respect that we take note of the recent amendments
to the UPA. In April 2007, as a direct response to the district court’s opinion now
under review, the Colorado legislature repealed Section 105(1)(b), the specific
prohibition on below-cost motor fuel sales under which this case was brought, Act
of April 16, 2007, 2007 Colo. Legis. Serv. Ch. 140, § 2 (West) (effective April
16, 2007), and rewrote Section 113 as follows:
For the purposes of this article, in all sales involving more than one
product or service and in all sales involving the giving of any
concession of any kind, the combined total selling price of all
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products or services shall be compared to the combined total cost of
all products or services involved in the sales to determine whether
the vendor or distributor is selling below cost.
Id. § 5. The fact of its subsequent amendment has changed nothing about our
interpretation of the old Section 113, and we express nothing of how we would
interpret the new Section 113 were it before us. However, the legislature’s
evident attempt to negate the anti-bundling interpretation adopted by the district
court is heartening, for it reassures us that the foregoing analysis cannot have
strayed too far from sound and acceptable principles of public policy.
V.
We have also reviewed the various cases Parish Oil has cited, and find that
nothing in them commends another outcome than that reached above.
Food & Grocery Bureau of Southern California, Inc. v. Ziskin, 1941-3
Trade Reg. Serv. (CCH) ¶ 25,578, at 26,652 (Cal. Super. Ct. Dec. 28, 1940), was
a suit against a grocer who would advertise “super values”; for instance, on
matches: Buy two boxes at three cents apiece, get a third box for a penny. Sued
under California’s UPA, the grocer replied that, in such cases, although the third
box was worth more than one cent, he was really selling each box for 2 a cents
each, above cost. Id. The Los Angeles County Superior Court struck down this
practice as illegal, holding that the alleged “super value” was in truth naught but
“a bait or lure to the readers of the advertisement, leading them to believe that
they were obtaining an unusual bargain.” Id. at 26,653.
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Whatever the persuasive value of this antique Superior Court case as an
interpretation of California law, it is irrelevant to the quite different language of
the Colorado UPA. The California statute included no analogue to Colorado’s §
6-2-113, instead featuring broad, express prohibitions on “the practice of using
any article or product as a ‘loss leader,’” and on “any scheme of special rebates,
collateral contracts, or any device of any nature whereby a sale below cost is
effected in violation of the spirit and intent of any of the provisions of this act.”
Act of July 1, 1937, ch. 860, § 2, 1935 Cal. Stat. 2395, 2397. Moreover, we
cannot accept the authority of an out-of-state decision like Ziskin when it would
conflict with the Colorado Court of Appeals’ opinion in Mastercar. The “free”
car wash in that case was just as much a lure, but the court held that it was not a
“true gift[]” because it was “given in conjunction with the purchase of another
product.” Mastercar, Inc. v. Amoco Oil Co., 835 P.2d 534, 536–37 (Colo. App.
1992) (distinguishing Miller’s Groceteria Co. v. Food Distribs. Ass’n, 109 P.2d
637 (Colo. 1941)). Under the terms of Section 113 and the logic of Mastercar,
the matches in Ziskin would not be regarded as below-cost sales, because they
were sold in conjunction with other products.
The plaintiffs also rely on Home Oil Co. v. Sam’s East, Inc., 199 F. Supp.
2d 1236 (M.D. Ala. 2002). In that case, Sam’s Club was sued for below-cost
sales of motor fuel. The company argued that the profits it earned on membership
fees for its clubs more than covered its losses on gasoline. The district court held
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this illegal as a matter of Alabama law—notwithstanding the existence of a
“combined price” statute similar to Colorado’s § 6-2-113. 7 Its analysis, however,
highlights important differences between Sam’s Club’s case and City Market’s.
First, in Alabama, the legislature had made a specific finding that
[u]nfair competition in the marketing of motor fuel occurs whenever
costs associated with the marketing of motor fuel are recovered from
other operations, allowing the refined motor fuel to be sold at
subsidized prices. Such subsidies most commonly occur in one of
three ways: . . . [e.g.,] where a business uses profits from nonmotor
fuel sales to cover losses from below-cost selling of motor fuel.
Ala. Code § 8-22-2(2). As a reflection of legislative intent, this finding makes
explicit that a sales structure like the Grocery Discount Program would violate the
Alabama statute. Colorado, by contrast, has made no such finding concerning its
UPA. Second, as the Home Oil court pointed out, a “combined-sale statute”
simply does not have much to do at all with “the purchase of a membership by the
consumer and a later purchase of goods.” 199 F. Supp. 2d at 1241.
Similarly, in Star Fuel Marts, LLC v. Sam’s East, Inc., 362 F.3d 639 (10th
Cir. 2004), this Court affirmed the entry of a preliminary injunction against Sam’s
Club barring it from selling gasoline below cost to its members. But Sam’s had
presented no argument in that case that its membership sales should be considered
7
That statute provides that in all sales “involving two or more items, at
least one of which items is motor fuel, at a combined price, . . . the wholesaler’s
or retailer’s combined selling price shall not be below the cost to the wholesaler
or the cost to the retailer, respectively, of the total of all articles, products,
commodities, gifts, and concessions included in such transactions.” Ala. Code §
8-22-10.
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together with its sales of gasoline to determine whether gasoline was sold below
cost, and even if it had, the facts of that case showed that “‘no rational allocation
of membership fees [wa]s sufficient, as a mathematical proposition,’” to cover the
company’s losses on gasoline. Id. at 646 (quoting Star Fuel Marts, LLC v.
Murphy Oil USA, Inc., No. 02-CV-202, 2003 WL 742191, at *5 (W.D. Okla. Jan.
29, 2003)). Nor does Oklahoma have a statute, like Colorado’s § 6-2-113, that
would arguably permit such bundling. Sam’s was simply selling below cost, or so
the evidence seemed to show.
VI.
In this case, because it did not keep transaction-by-transaction records, City
Market is unable to show that each customer who bought the discounted gasoline
had himself paid enough for groceries so that the company made a net profit.
But, absent any showing that this accounting method was chosen in bad faith, we
agree with the district court’s view that it suffices that City Market’s aggregate
profits on groceries purchased as part of the Grocery Discount Program exceeded
its aggregate losses on motor fuel sold under the program. App. 314 n.2; see
Dikeou v. Food Distribs. Ass’n, 108 P.2d 529, 533 (Colo. 1940) (holding that,
under the UPA, where “a particular method [of accounting] adopted by a
merchant cannot, under the facts disclosed, be said to be unreasonable, and does
not disclose an intentional evasion of the law, the method so adopted should be
accepted as correct” (quoting State v. Langley, 84 P.2d 767, 779 (Wyo. 1938))).
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Here, the evidence suggested that aggregate profit on the qualifying sales of
groceries was two to five times greater than the aggregate loss on the discounted
gasoline.
We do not reach any of the other issues raised by City Market in its appeal,
relating to whether intent to injure competition should be required under Section
105(1)(b) and to the sufficiency of the evidence at trial. We observe that the
parties have stipulated that
if the courts determine (upon the exhaustion of any appeals) that
pursuant to C.R.S. § 6-2-113, City Market’s Discount Program does
not violate the UPA because the aggregate cost of the gasoline
discount was fully covered by the aggregate profit City Market
realized on qualifying grocery purchases made by the persons
redeeming the discount, then that ruling will be dispositive of this
litigation . . . .
Supp. App. 26–27. The parties, however, have not argued on appeal the impact of
this stipulation on the viability of this litigation in toto, so we leave that issue to
the district court to resolve.
* * *
The judgment of the United States District Court for the District of
Colorado is REVERSED, and this matter is REMANDED to that court for
further proceedings consistent with this opinion.
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