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WAL-MART's BELOW-COST PRICING OF Rx AND OTC PRODUCTS RULED "UNFAIR"

This article was originally published in The Tan Sheet

Executive Summary

WAL-MART's BELOW-COST PRICING OF Rx AND OTC PRODUCTS RULED "UNFAIR" under the Arkansas Unfair Trade Practices Act by Chancery Judge David Reynolds on Oct. 11 in Conway, Ark. The judge ruled that the Conway Wal-Mart "advertised and sold pharmaceutical and health and beauty products below cost for the purpose of injuring competitors and destroying competition." While the judge found that "there is no direct evidence that the purpose of Wal-Mart's pricing policy or Conway Wal-Mart's implementation of the policy is to injure competitors or to destroy competition," he ruled that "such purposes may be inferred" from Wal-Mart's "meet or beat" pricing policy, the effects of that policy and "other circumstantial evidence." Reynolds ruled that the "evidence is clear that Conway Wal- Mart advertised and sold pharmaceutical and health and beauty products below invoice or acquired costs . . . on a regular-basis. " He also noted that the below-cost sales "do not fall within the exemptions" set out in Arkansas law, which include: seasonal, damaged, deteriorated and perishable items; good-faith closing business sales; and court order sales. To determine Wal-Mart's intent to hurt competition through below-cost pricing, Reynolds cited: "the number and frequency" of the Conway Wal-Mart's below-cost sales; "the extent" of below-cost sales; Wal-Mart's stated pricing policy -- "meet or beat the competition without regard to cost"; the company's "stated purpose" of below-cost sales -- "to attract a disproportionate number of customers"; the Conway store's "in-store price comparison of products sold by competitors"; and "the disparity in prices between Faulkner County prices of the products and other markets with more and less competition." The complaint against Wal-Mart was filed in December 1991 by three independent pharmacies operating in Conway: American Drugs; Tim Benton, owner of Mayflower Family Pharmacy; and Jim Hendrickson, owner of Baker Drug. The plaintiffs maintained that Wal-Mart "advertised, offered for sale and has sold at retail, certain items of merchandise at less than cost to the retailer as defined in and in violation of the Arkansas Unfair Practices Act." The items listed in the complaint include the prescription antiulcer drug Tagamet, the prescription diuretic Dyazide, and five OTC and H&BA products: Efferdent, Listerine, Mylanta, Oil of Olay and Crest toothpaste. In addition, the plaintiffs charged that Wal-Mart's "advertising, offers for sale and sales have been made with the intent to deceive purchasers, to substantially lessen competition, to unreasonably restrain trade and to injure competitors." The plaintiffs sought $ 100,000 in compensatory damages and a sum of "at least" $ 1 mil. in punitive damages. In his decision, Judge Reynolds enjoined the Conway Wal-Mart "from selling below cost as defined by the "Unfair Trade Practice Act'" and awarded treble damages that totaled more than $ 289,000. The plaintiffs' requests for attorney's fees were denied. The judge noted that Wal-Mart determines its "everyday" price at corporate headquarters in Bentonville, Ark. and that local store owners "cannot raise their store's prices above the price determined" at headquarters. Under the chain's policy, local store managers monitor retail prices charged in their market area and set prices "frequently below Wal-Mart's cost of acquiring some of these products," Reynolds stated. The judge added that the Conway Wal-Mart "has reduced the retail prices of some items in its relevant product lines below" the company's acquisition cost and has advertised pharmaceutical items at prices below the chain's cost. He noted that while the Conway Wal-Mart prices individual products at below cost, the store sells "the whole product line above cost." In its defense, Wal-mart argued that the court should look at "market basket" cost rather than focusing on individual product costs. The judge, however, stated that the relevant Arkansas statute "is clear" and "applies to 'any article or product' and not 'market basket' or 'overall product line' cost." n response to Judge Reynolds" decision, Wal-Mart declared in an Oct. 12 statement that it "will immediately appeal" the decision to the Arkansas Supreme Court and claimed that the decision will lead to "higher prices -- not just for Wal-Mart customers -- but customers of every retail store, large and small, in Arkansas." In an Oct. 15 release, NARD, the national association representing independent retail pharmacy, commented that the "court's ruling is a victory not only for the pharmacies that brought the suit, but for small businesses in general and ultimately for the American consumer." NARD, which said it "played a key role in assisting the Arkansas pharmacists with their litigation," asserted that violations of antitrust laws by large businesses "drive competitors out of business." As a result, NARD contends, "prices rise and consumers suffer." In a related case, 10 independent pharmacies and 10 drug store chains including Rite Aid and Revco are suing seven drug companies for alleged price discrimination and illegal price fixing in a private antitrust complaint filed Oct. 14 in a federal court in Harrisburg, Penn.

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