BILL ANALYSIS
----------------------------------------------------------
| Hearing Date: April 25, 2005 |Bill No: SB |
| |582 |
----------------------------------------------------------
SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Liz Figueroa, Chair
Bill No: SB 582 Author: Figueroa
As Amended: April 11, 2005 Fiscal: Yes
SUBJECT: Retailers: Disclosures.
SUMMARY: Requires that (1) retailers provide
information to a vendor of a product regarding the
discounts and stocking fees offered by other vendors
to place similar products on the shelf; (2) retailers
share market information equally with all vendors.
Existing state law:
1) Prohibits manufacturers and distributors of
alcoholic beverages from paying retailers for any
services such as stocking, advertising, or storage.
Violation of these provisions is a misdemeanor.
2) Prohibits vendors from offering rebates for the
purpose of injuring or destroying competition under
the California Unfair Practices Act.
3) Prohibits two parties from entering into a
contract with the explicit purpose of restraining
competition under the California Cartwright Act.
Existing Federal Law under the Robinson-Patman Act:
1)Prohibits a party from charging different prices for
the same product or services when price
discrimination has the effect of injuring
SB
582
Page 2
competition.
2)Prohibits a party from paying or receiving a
commission or brokerage fee in relation to a sale of
goods unless something of value is exchanged in
return.
Existing Federal Law under the Sherman Antitrust Act,
prohibits two or more parties from entering into an
agreement for the purpose of restraining trade.
Existing Federal Law under the Clayton Act, prohibits
a party from creating or attempting to maintain a
monopoly through tactics that exclude or significantly
impair the ability of other firms to enter the market.
This bill:
1) Requires a retailer to disclose shelf placement
fee information about products within 10 feet of
the products most similar to those offered by a
vendor or qualified potential vendor.
2) Requires that if a retailer shares sales or
promotional information with a vendor about a
competitor's products that the retailer must share
the same sales and promotional information with all
other vendors of similar products.
3) Provides that a qualified vendor can recover a
$10,000 civil penalty, attorney's fees and court
costs from a retailer who fails to comply with the
provisions of the bill.
FISCAL EFFECT: Unknown. This bill has been keyed
"fiscal" by Legislative Counsel.
COMMENTS:
1.Purpose. This bill is sponsored by the Author.
According to the Author, SB 582 will bring
SB
582
Page 3
transparency to California's retail trades and
assure that small manufacturers and suppliers have a
chance to compete for shelf space in California's
retail outlets. According to the Author, shelf
placement fees and the preferential relationships
between retailers and suppliers can be used
anticompetitively. However, because these
relationships are secretive it is difficult for
either regulators or other vendors to know when
abuses are occurring. This bill requires retailers
to share information with product vendors about what
types of relationships the retailer has with other
vendors so that small vendors can compete with other
vendors and monitor abuses.
2.Background on Shelf Placement Fees. Shelf placement
fees, also called "slotting fees," are the fees paid
by suppliers and manufacturers to retailers in order
to introduce a new product. It can be expensive for
a retailer to introduce a new product into a store.
In order to share the risk of shelf placement,
retailers charge manufacturers a shelf placement
fee. It is also increasingly common for retailers
to charge slow moving products "pay-to-stay" fees to
recoup some of the cost of continuing to carry a
slow moving product.
In 2000 the Federal Trade Commission (FTC) estimated
that vendors pay $9 billion in shelf placement fees
annually to the grocery industry alone. Other
studies have suggested that the number may be as
high as $16 billion. Although shelf placement fees
are predominantly in the grocery industry, they have
also been reported in a number of other retail
industries including books, cameras, movies and
software.
Shelf placement fees do not necessarily relate to
the cost of putting items on the shelf. In 2003 the
FTC found that although all of the stores they
surveyed had shelf placement fees for some products,
the percentage of products affected as a ratio of
SB
582
Page 4
new products ranged from 6% to 65.2%. The category
of average fee per chain ranged from $500 to
$28,921, one particular chain had slotting fees
ranging from $500 to $15,820 depending on the
category. Categories, such as Ice Cream saw average
slotting fees as high as $28,921 and as low as
$4,125.
Shelf placement fees are not always cash. Small
manufacturers that have spoken to Committee staff
confidentially have detailed a variety of shelf
placement fee arrangements which include a promise
of free goods, contributions to year-end parties,
participation in promotional programs, guaranteed
advertising buys, and discounts on other products.
Shelf placement fees are generally not recorded or
disclosed. A 1997 study of shelf placement fees
found that 93% of food vendors did not know what
fees other vendors of similar products paid for
shelf space. It is not common practice in the food
industry to provide contracts or receipts of shelf
placement fees paid. One manufacturer told
Committee staff that he had paid $170,000 to place a
product on stores throughout California and was
unable to get a written guarantee that his product
would actually be placed.
3.Background on Category Captaincy: Category Captaincy
is the general term given to a range of practices in
which a retailer relies on dominant vendors to
assist with making product selection, placement,
pricing, and promotion decisions. In 2001 the FTC
observed that "even the very largest retailers are
less well-informed about particular product areas
than the manufacturers, and can thus benefit from
their assistance." In 2003 the FTC found that 5 of
the 7 grocery chains that participated in its survey
used Category Captains.
Category Captains participate in managing both their
own and their competitors' products. Although the
SB
582
Page 5
arrangements varied, the FTC noted that "a key
component of the category captaincy is . . . the
sharing of category specific information, data,
expertise, and analysis." This sensitive
information is not generally shared with smaller
vendors who are not privy to the Category Captain
relationship.
A 2003 study conducted by Debra Desrochers found
that 84% of Category Captains participated in the
programs because they believed they could influence
product placement decisions and advantage their
products over their competitors.
4.The Special Case of Alcohol: Federal law through
the Federal Alcohol Administration Act of 1935
(FAAA) prohibits any practice which threatened the
independence of retailers from alcohol
manufacturers. In 1992, the D.C court of appeals
observed that the special treatment of alcohol was
designed to serve the two goals of trying to: (1)
limit the "unique threat of corruption in the
newly-legal alcohol industry" and,
(2) "positively promote a competitive alcohol market."
Federal regulators prohibit shelf placement fees
because they view them as a threat to retailer
independence. Additionally, in 1953 California
prohibited breweries, distilleries and wineries from
giving anything of value to retailers of liquor,
with a few statutory exceptions, for coasters, beer
taps, and similar products.
5.Regulation of Shelf Placement Fees and Category
Captaincy in Other Jurisdictions.
Federal: There has been no federal regulation of
either shelf placement fees or category captaincy.
In 2003, the FTC issued a report detailing the
various arguments for how shelf placement fees and
captaincy can benefit and hurt competition. In
SB
582
Page 6
conclusion, the FTC stated that because of the
limited data they were able to collect "it is not
possible to determine with confidence which, if any,
of the discussed economic theories best explain why
suppliers pay retailers slotting fees."
Canada: The Canadian Competition Bureau (CCB), the
equivalent to the FTC in the United States, issued a
bulletin in November 2002 indicating that it would
take action if "payment of slotting allowances
[shelf placement fees] is being used by dominant
firms(s) to acquire exclusivity or to tie up enough
of the available shelf space to preclude other
competitors from entering or expanding into the
market." The bulletin went on to include category
captaincy as a suspect practice because the CCB
found that category captaincy facilitates
interdependence and tacit collusion among firms.
Israel: In 2003, the General Director of the
Antitrust Authority issued a directive outlawing
many types of shelf placement fees, requiring that
shelf placement decisions be made by retailers,
independent of suppliers, and prohibited retailers
from sharing market information with a supplier's
competitors, in effect outlawing category captaincy.
6.Court Cases Related to the Use of Slotting Fees and
Category Captaincy.
Brought by Vendors: In Conwood v. United States
Tobacco, 290 F.3d 268 (2002), the court found that
United States Tobacco Corporation, the maker of 77%
of chewing tobacco, used its position as category
manager to exclude competition by suggesting that
retailers carry fewer products, particularly
competitor's products; attempting to control the
number of price value brands introduced in stores;
and by suggesting that stores carry its slower
moving products instead of better selling competitor
products. The court awarded Conwood $1.05 Billion,
SB
582
Page 7
the largest anti-trust award in United States
history.
In El Aguila Food Products v. Gruma Corporation, 301 F.
Supp. 2d 612 (S.D. Tex. 2003) (currently on appeal, 5th
Circuit in Federal Court), the plaintiff, a Salinas,
California tortilla maker, presented evidence to show
that Gruma, a competitor, was paying excessive slotting
fees to gain control of the tortilla market. El Aguila
submitted documents from Gruma in which Gruma stated, "If
Gruma can duplicate its California retail position in
Texas, Gruma can effectively block future meaningful
competition." Furthermore, the plaintiff presented
testimony that the money which Gruma paid for slotting
fees did not come from tortilla sales. Instead Gruma had
invested money earned elsewhere to buy shelf space.
Brought by Consumers: In, Diaz v.
Gruma, CASE NO BC. 316086, Los Angeles Superior
Court, filed August 6, 2004, plaintiff, a member of
the general public, brought action against Gruma and
assorted grocery stores for entering into
exclusivity contracts and paying excessive slotting
fees with the intent of forcing its competitors out
of the Southern California tortilla market so that
they could charge excessive prices. At the time of
filing, Gruma controlled 90% of the Southern
California tortilla market.
Brought by Retailers: In American Booksellers Assn.
v. Barnes & Noble, 135 F.Supp.2d 1031 (N. Dist. Cal.
2001), plaintiffs, consisting of 27 independent
California booksellers, brought action against large
chain bookstores arguing that "the large
booksellers have received secret discounts and other
favorable terms from booksellers that are not
available to independent bookstores." The court
found that the independent booksellers had provided
evidence of the conduct, however the case settled
out of court before a final decision could be
reached.
SB
582
Page 8
In Alan's of Atlanta v. Minolta Corporation, 903
F.2d 1414 (11th Cir. 1990), plaintiffs, a small
camera distributor, brought action against Minolta
for not offering it proportionately equivalent
participation in Minolta's key retailer program as
it offered one of the plaintiff's competitors. On
summary judgment, the court held that providing
discounts and services to one retailer without
offering the same services to another was grounds
for a violation of the Robinson-Patman Act.
7.Informational Hearing of the Business, Professions
and Economic Development Committee on February 9,
2005. At the February 9th informational hearing the
committee heard testimony from national experts,
small businesses that have been impacted by shelf
placement fees, grocery store workers responsible
for enforcing shelf placement arrangements, as well
as representatives from the United Food and
Commercial Workers Union and the California Grocery
Association. Speakers discussed both the advantages
and potential harm associated with shelf placement
fees and category captaincy, and raised many of the
arguments and issues that are reflected in their
support and opposition to this measure in Items #8
and #9 of the analysis. The Author drafted the bill
in response to the concerns and recommendations of
many of the parties that testified at the
informational hearing.
8.Arguments in Support.
It is inherently unfair for retailers to privately
share information about a vendor with that vendor's
competitor. The supporters of this bill argue that
common practice of sharing information with only a
select supplier about that supplier's competitors,
disadvantages the suppliers which do not have access
to information. Furthermore, one-sided disclosure
invites preferred suppliers to behave
anticompetitively as they did in the Conwood case
discussed above.
SB
582
Page 9
Transparency benefits small product manufacturers.
The supporters of this bill argue that without
transparency small product manufacturers are unable
to meet their competition and unaware when shelf
placement fees and Category Captaincy are being used
anticompetitively. By making information public,
small producer manufacturers will be able to (1)
strategically compete for shelf space in markets
where their products are wanted, and (2) learn when
they are being excluded from shelves by
anticompetitive practices and take proper action
under current law.
Why small producers are beneficial to California.
The supporters of this bill argue that protecting
California's small producer manufacturers is good
for California for two reasons: (1) small product
manufacturers are more likely to be from California
and employ Californians than large manufacturers,
and (2) small product manufacturers are more often
the innovators that keep California's economy
dynamic and growing.
Transparency benefits retailers. The supporters of
this bill believe that fair competition among
producers will benefit retailers in three ways: (1)
by creating a competitive bidding market for
California's shelves, supporters believe that in
many categories shelf placement fees are likely to
increase to accurately reflect the actual risk
associated with new product introduction; (2) when
large suppliers put small suppliers out of business
retailers are in a disadvantaged negotiating
position; and (3) retailers will be better able to
select successful products if suppliers are able to
offer competing evidence about a product.
Transparency benefits consumers. The supporters of
this bill believe that the ultimate beneficiaries of
this bill are California's consumers. Protecting
competition assures that new innovative products
SB
582
Page 10
will continue to be available at affordable prices.
When competition is thwarted, consumers overpay for
inferior products and are unable to buy specialty
products.
Why transparency is necessary when anticompetitive
practices are already prohibited? Supporters of
this bill argue that when the arrangements between
retailers and suppliers are secret it is impossible
for a supplier to know of anticompetitive practices
without bringing a lawsuit and compelling discovery.
Even when a supplier suspects an anticompetitive
practice, it often does not make good business sense
to bring a lawsuit unless they have strong evidence.
Why a $10,000 fine payable to plaintiffs is
necessary? The supporters of this bill believe that
due to the frequency and complexity of vendor
retailer negotiations it is impractical for the
state to effectively monitor disclosure. However,
without a payable fine it will be hard for private
parties to finance lawsuits. The amount $10,000 is
consistent with the fines already imposed for
violation of existing restrictions on the
relationships between alcoholic beverage producers
and retailers.
9.Arguments in Opposition Prior to Amended Version of
April 11, 2005.
Transparency will enable anticompetitive behavior.
The California Retailers Association (CRA) and the
California Grocers Association (CGA) argue that
disclosing shelf placement fees will induce
anticompetitive behavior. This view was also shared
in the February 9th hearing in this committee.
Opponents make two arguments on anticompetitive
behavior: (1) that by disclosing shelf placement
fees, large suppliers will be able to raise their
shelf placement offer in order to displace smaller
SB
582
Page 11
competitors; and, (2) that by disclosing shelf
placement fees large suppliers will be able to
coordinate the amount they offer for shelf placement
allowances. The opponents also argue that the bill
is virtually unenforceable because "shelf placement
fees come in all forms, colors, flavors, shapes and
sizes."
Supporters answer these criticisms generally by
pointing out that both of the practices which
opponents believe could occur are not possible today
and illegal. By forcing transparency on retailers
practices involving slotting fees and category
captaincy, supporters argue that they will become
aware of anticompetitive practices and be able to
contest them. As far as this measure being
unenforceable, supporters answer this criticism by
pointing to provisions regulating shelf placement
fees for alcoholic beverages that have effectively
prohibited shelf placement fees in California since
1953.
NOTE: Double-referral to Senate Judiciary Committee.
SUPPORT AND OPPOSITION:
Support:
A Perfect Pear from Napa Valley, Napa
Consumer Federation of CA
El Aguila Tortilla, Salinas, CA
Filipino-American Chamber of Commerce
Food Industry Roundtable (FIBR)
Kiyomura-Ishimoto Associates
La Bonita Tortilla, Bakersfield, CA
Lawrence Equipment, So. El Monte, CA
Llorena Family Brand, Los Angeles, CA
Mi Rancho Tortilla, Clovis, CA
Monterrey County Farm Bureau
UFCW Local 870
SB
582
Page 12
Opposition:
California Grocers Association
California Retailers Association
Charles Magowan, TradePoint Solutions, Inc.
Consultants: Nathaniel Leeds/Doug Brown