Should Bargains Be Illegal?

As a consumer, you choose to shop where your patronage is appreciated-as evidenced by offers of large order discounts, for instance, or by enticements of "gifts" or "bonuses." You would be aghast if another business sued both you and the place you chose to shop because that store treated you better than some of its other customers.

This, however, is precisely the situation involving a recent suit filed in U. S. District Court by the Zeller Corporation of Defiance, Ohio against its former customer, Southfield, Michigan-based Federal Mogul Corporation.

Zeller lost a contract to supply Federal Mogul with automotive parts by refusing to pay a "signing bonus," a type of gift for agreeing to shop with Zeller. Federal Mogul, to minimize costs and maintain its own financial stability, secured another supplier-Neapco, Inc. of Philadelphia, Pennsylvania.

Neapco was quick to see the value of coming to terms with a large purchaser like Federal Mogul and offered to pay a bonus. When parties enjoy freedom of contract, economic efficiency is advanced: both parties seek terms that improve their financial positions. That's clearly what happened here.

Zeller is troubled by financial losses and layoffs that were necessary after losing Federal Mogul's business. But had Federal Mogul chosen to take a less-than-optimal contract with Zeller, jobs would have been threatened in Southfield and new ones would not be created at Neapco. In the long run, actions that cut costs and improve efficiency are far more likely to lead to job creation and a healthy economy than actions that keep costs artificially high. If that were not the case, America would never have progressed from the vacuum tube to the transistor to integrated circuits.

Zeller now wants to shift accountability away from its own unwise contract decision. The company contends that Neapco's payment of the signing bonus constitutes a discriminatory price discount under the Robinson-Patman Act because in effect, Neapco

would be selling products to Federal Mogul at a lower price than it sells to its other customers. That claim may not be easy to prove, however.

First, price differentials are justified under Robinson-Patman if they are made in "due allowance for differences in the costs of manufacture, sale, or delivery." Neapco offered the bonus precisely because it could forecast orders of high volume from Federal Mogul that would reduce its cost per unit. Nothing indicates Neapco would not offer comparable discounts to other similarly valuable customers.

Secondly, Neapco was merely "meeting competition" by responding to its competitor's offer. Zeller offered Federal Mogul a volume-based discount contending that this alternative should have been even more attractive than the signing bonus. Neapco agreed to pay the bonus knowing that it needed to defend its bid against the offer by Zeller.

Furthermore, Zeller distorts the intent of the act when it claims that signing bonuses are prohibited, per se, as commercial bribes. Neapco's payment of the bonus was to Federal Mogul as a company, not to any individual within it as a means for corruptly influencing the company's choice of a seller. It was paid in reflection of the value of the contract as an advance discount based on Neapco's forecasted savings.

Zeller made a mistake it now regrets, but Federal Mogul should not be punished simply because it was a wise shopper. Turning to the regulators after making poor business decisions is no substitute for making good decisions in the first place. Businesses, in their own interest, should restrain themselves from using the court system as a means to void the verdicts of the market and restrict free exchange; the process can easily be used against them in the future.

Are bargains of the sort between Federal Mogul and Neapco illegal? If so, then maybe it's time to repeal the Robinson-Patman Act. In any event, punishing those seeking efficiency in private exchange can only do harm to the economy and send precisely the wrong signals to those who make mistakes in the marketplace.