How do Tennessee's milk-pricing rules treat brand matching, volume rebates, and store loyalty cards when figuring out whether a retailer is selling below cost?

Subject

Opinion No. 12-03, Unfair Trade Practices under the Tennessee Dairy Law, January 13, 2012

Plain-English summary

Tennessee's Unfair Milk Sales Act, Tenn. Code Ann. §§ 53-3-201 to 204, makes it illegal for milk processors, distributors, and retailers to sell milk below cost or to give certain things of value to retailers when the purpose is to injure a competitor, destroy competition, or create a monopoly. The Act exists to keep small dairy farmers and small retailers in the market against larger players that can afford to absorb losses. Hogue v. Kroger Company (Tenn. 1963).

Commissioner Johnson at the Tennessee Department of Agriculture asked the AG four operational questions about how to apply the Act:

Question 1: For the "good faith to meet competition" exemption in § 53-3-204(7), does the retailer have to match the competitor's brand exactly, or is matching by product type enough? The AG said matching by type is enough. The statute lists over a dozen specific milk products as separate "milk products" (Tenn. Code Ann. § 53-3-201(6)) and the Commissioner can define varieties by rule (§ 53-3-104(a)(1)(A); Tenn. Comp. R & Regs. 0080-3-2-.01 lists 37 categories). But the statute and regulations make no brand distinctions. Reading "competition" as brand-specific would let any retailer escape the Act by selling under a unique house label, an outcome the legislature would not have wanted. So competition is judged by product type (whole milk, 2%, buttermilk, etc.), not by brand.

Question 2: Is a rebate or volume discount from a processor to a retailer a "thing of value" under § 53-3-202(b)(3)? Yes. Section 53-3-202 forbids certain unfair practices when done with intent to injure a competitor, destroy competition, or create a monopoly. § 53-3-202(b)(3) prohibits a processor or distributor from giving a retailer "any free service or any other thing of value." The Act lists examples of "things of value" but says the list is non-exhaustive ("but are not limited to"). Plain meaning: anything with monetary worth. State v. Majors (Tenn. 2010). Rebates and volume discounts are monetary by nature, so they are things of value. (Note: this is about the structure of the prohibition, not an automatic violation; intent to injure competition is still required.)

Question 3: Is a rebate or volume discount received by a processor or distributor included in computing "cost to the processor or distributor" under § 53-3-201(3)(A)? Yes. "Cost to the processor or distributor" is the "actual cost of bulk milk or other ingredients, plus the cost of doing business." Section 53-3-201(3)(A) lists components of "cost of doing business" (labor, rent, depreciation, shrinkage, interest, etc.) but doesn't define "actual cost." Plain meaning, again: the amount paid after subtracting any rebate or discount. A processor that receives a $1 rebate on a $10 input does not have a $10 cost; it has a $9 cost.

Question 4: Are the values of retailer "loyalty cards" ("buy 9 get the 10th free") included in the retailer's cost under § 53-3-201(4)? No. The retailer's cost is the "invoice price paid by the retailer for milk products, plus that portion of the retailer's overhead or cost of doing business." § 53-3-201(4)(A). Trading stamps and redeemable coupons are listed as overhead concessions that get included. But a loyalty card represents a presumptive discount in the sales price to the customer, not a cost to the retailer. The discount may never be redeemed; the cost is uncertain and presumptively negligible. The Hogue precedents on trading stamps focus on the actual outlay to obtain the stamps, which is different in kind from a loyalty card's promised future discount.

The opinion handles real operational ambiguities in the Act. The four answers map to four discrete questions; the underlying theme is that the Act is read against the plain meaning of its terms, with brand vs. type and discount mechanics resolved in favor of operational consistency.

Currency note

This opinion was issued in 2012. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The Act. Tenn. Code Ann. §§ 53-3-201 to 204 (Tennessee Unfair Milk Sales Act). Purpose: protect small dairy farmers and small retailers from financially strong competitors selling below cost. Hogue v. Kroger Company, 213 Tenn. 365, 372, 373 S.W.2d 714, 717 (1963).

The below-cost prohibition. Tenn. Code Ann. § 53-3-202(c): "No retailer shall advertise, offer to sell or sell within the state any milk product for less than cost to the retailer."

Things of value prohibition. § 53-3-202(b)(3) prohibits processors or distributors from giving "any retailer or prospective retail customer ... any free service or any other thing of value." The Act says the list of things of value "include, but are not limited to," various enumerated items.

Intent requirement. § 53-3-202(a) requires the act to be done "with the intent or with the effect of injuring a competitor, of destroying competition or of creating a monopoly."

Cost definitions. § 53-3-201(3)(A) (cost to processor or distributor) and § 53-3-201(4) (cost to retailer). § 53-3-201(4)(C): "The cost of doing business includes the fair value of any concession, of any kind whatever, that has the effect of reducing the actual sales price or increasing the costs of the goods delivered" (trading stamps and redeemable coupons listed as examples).

Milk product definitions. § 53-3-201(6) lists more than a dozen items; § 53-3-104(a)(1)(A) authorizes the Commissioner to further define varieties; Tenn. Comp. R & Regs. 0080-3-2-.01 identifies 37 categories.

Good-faith exemption. § 53-3-204(7): "The price of the items is made in good faith to meet competition; provided, that the prices shall not be cut more than once, nor, in any event, cut below the price of competition."

Statutory construction. Bryant v. Baptist Health System (Tenn. 2006) (expressio unius); State v. Majors, 318 S.W.3d 850, 859 (Tenn. 2010) (plain meaning, dictionary).

Trading stamps precedent. Hogue v. The Kroger Co., 210 Tenn. 1, 356 S.W.2d 267 (1962).

Common questions

Why does brand matching not matter for the meet-competition defense?

Because the legislature defined milk products by type (whole milk, 2%, etc.) without brand subdivisions. If brand mattered, a retailer with a house-label milk could always claim no competition existed. The defense is about meeting market pressure, not about brand-perfect arbitrage.

Does giving a retailer a rebate automatically violate the Act?

No. § 53-3-202(a) requires intent to injure a competitor, destroy competition, or create a monopoly, plus the rebate has to be a "thing of value" given to the retailer. The opinion answered the threshold question (yes, rebates are things of value), but a particular rebate could still be lawful if not done with the prohibited intent.

If a processor gives a rebate, does that lower the cost calculation for the processor?

Yes. Question 3 of this opinion. A processor that nets out a $1 rebate on a $10 input has $9 of cost. Anti-below-cost compliance for the processor's sales prices must reflect that lower base.

Why are loyalty cards different from trading stamps?

Trading stamps had a direct outlay cost to the retailer (the retailer paid the trading stamp company). Loyalty cards typically have no upfront cost; they just promise a future discount the customer may or may not redeem. Hogue treated trading stamp cost as a real overhead component. Loyalty cards are more like a price-cut mechanism on the customer side.

What if a loyalty card costs the retailer money to print and administer?

The opinion noted that any administrative cost "could be included as part of the 'cost to the retailer' but likely would be negligible." A retailer keeping detailed cost records of its loyalty program could probably allocate some expense, but the redemption value itself is not part of cost.

Does this apply to milk in coffee shops or restaurants?

The Act applies to sales of milk products. Restaurants serving milk as part of a meal are typically not the target of the Act, which focuses on retail sales of packaged milk. The opinion did not address restaurant sales.

Citations

• Tenn. Code Ann. §§ 53-3-201 to 204
• Tenn. Code Ann. § 53-3-201(3)(A)
• Tenn. Code Ann. § 53-3-201(4)
• Tenn. Code Ann. § 53-3-201(4)(A)
• Tenn. Code Ann. § 53-3-201(4)(C)
• Tenn. Code Ann. § 53-3-201(6)
• Tenn. Code Ann. § 53-3-202
• Tenn. Code Ann. § 53-3-202(a)
• Tenn. Code Ann. § 53-3-202(b)(3)
• Tenn. Code Ann. § 53-3-202(c)
• Tenn. Code Ann. § 53-3-204(7)
• Tenn. Code Ann. § 53-3-104(a)(1)(A)
• Tenn. Comp. R & Regs. 0080-3-2-.01
• Hogue v. Kroger Company, 213 Tenn. 365, 373 S.W.2d 714 (1963)
• Hogue v. The Kroger Co., 210 Tenn. 1, 356 S.W.2d 267 (1962)
• Bryant v. Baptist Health System Home Care of East Tennessee, 213 S.W.3d 743 (Tenn. 2006)
• State v. Majors, 318 S.W.3d 850 (Tenn. 2010)
• Op. Tenn. Att'y Gen. No. 77-109 (Apr. 6, 1977)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2012/op12-003.pdf

Original opinion text

January 13, 2012
Opinion No. 12-03
Unfair Trade Practices under the Tennessee Dairy Law

QUESTIONS

1. In order to qualify for a good faith exemption to meet competition pursuant to Tenn. Code Ann. § 53-3-204(7), is it necessary that the milk products of the retailer and competitor be identical in brand, i.e., Purity, Mayfield, Kroger; or is it sufficient that the retailer meet competition in type of milk product, i.e., whole milk, 2%, buttermilk, etc.?

2. Is a rebate or volume discount offered by processors or distributors to their retailers a "thing of value" pursuant to Tenn. Code Ann. § 53-3-202(b)(3)?

3. Is the value of any rebate or volume discount received by the processor or distributor included in the "cost to the processor or distributor" in calculating the actual cost of bulk milk as defined in Tenn. Code Ann. § 53-3-201(3)(A)?

4. Are the values of "loyalty cards," e.g., "buy 9 get the 10th free," offered by retailers to their customers included in the "cost to the retailer" in calculating the cost of milk products pursuant to Tenn. Code Ann. § 53-3-201(4)?

OPINIONS

1. No, it is not necessary that milk products of the retailer and competitor be identical in brand in order to qualify for the "good faith" exemption set forth in Tenn. Code Ann. § 53-3-204(7). It is sufficient that the retailer meet competition in the type of milk product.

2. Yes, a rebate or volume discount offered by a processor or distributor to a retailer is a "thing of value" as defined by Tenn. Code Ann. § 53-3-202(b)(3).

3. Yes, the value of any rebate or volume discount received by the processor or distributor is included in the "cost to the processor or distributor" in calculating the actual cost of bulk milk as defined under Tenn. Code Ann. § 53-3-201(3)(A).

4. No.

ANALYSIS

1. The Tennessee Unfair Milk Sales Act prohibits processors, distributors, and retailers of milk products from engaging in certain defined unfair, anti-competitive trade practices. Tenn. Code Ann. §§ 53-3-201 to 204. This Act is designed to prohibit retailers from selling milk below their cost, thereby protecting small dairy farmers and small retailers from financially strong competitors who are able to sell below their cost for extended periods of time. Hogue v. Kroger Company, 213 Tenn. 365, 372, 373 S.W.2d 714, 717 (1963); see also Op. Tenn. Att'y Gen. No. 77-109 (Apr. 6, 1977).

The Act defines a number of prohibited practices, including the following prohibited practice by a retailer:

(c) No retailer shall advertise, offer to sell or sell within the state any milk product for less than cost to the retailer.

Tenn. Code Ann. § 53-3-202(c).

The Act also delineates several exemptions to the prohibited practices outlined in Tenn. Code Ann. § 53-3-202, including the following:

Section 53-3-202 shall not apply to advertisements or offers to sell, or sales, where:

. . . .

(7) The price of the items is made in good faith to meet competition; provided, that the prices shall not be cut more than once, nor, in any event, cut below the price of competition.

Tenn. Code Ann. § 53-3-204(7).

Whether the above-stated exemption requires the milk products of the retailer and competitor be identical in brand necessitates an examination of the meaning of the term "competition" as used in these statutes, as well as the definition of "milk products" found at Tenn. Code Ann. § 53-3-201(6).

Tenn. Code Ann. § 53-3-201(6) lists over a dozen specific items in providing a non-exhaustive list of products that fall within the definition of "milk products." This itemization implies that the General Assembly considered each of the listed products to have a separate and distinct economic value for purposes of defining and prohibiting unfair sales. In addition, the statute provides the Commissioner the authority by rule to further define the varieties and types of dairy products, including milk products. Tenn. Code Ann. § 53-3-104(a)(1)(A). See also Tenn. Comp. R & Regs. 0080-3-2-.01 (2011) (identifying thirty-seven categories of "milk products"). Neither the statute nor the regulations, however, make distinctions based on brands within each product. Given the General Assembly's demonstrated awareness of the intricacies of competition with regard to milk products, it appears the General Assembly did not intend for the term "competition" to encompass specific product brands.[1] Such an interpretation is in accord with the rules of statutory construction that the mention of one subject in a statute implies the exclusion of other subjects that are not mentioned and that a statute should not be given any forced or subtle interpretation which would extend or limit its meaning. See Bryant v. Baptist Health System Home Care of East Tennessee, 213 S.W.3d 743, 749 (Tenn. 2006).

In sum, given the Act's intended purpose of maintaining equal prices on competing items and silence regarding distinctions in product brand as compared with the detailed listing of distinct product types, it is not necessary that milk products of the retailer and competitor be identical in brand to qualify for the statutory good faith exemption.

2. Your second question asks whether a rebate or volume discount offered by processors or distributors to their retailer customers is a "thing of value" under Tenn. Code Ann. § 53-3-202(b)(3). Tenn. Code Ann. § 53-3-202 prohibits certain unfair trade practices "when done with the intent or with the effect of injuring a competitor, of destroying competition or of creating a monopoly." Tenn. Code Ann. § 53-3-202(a).

One such unfair trade practice may occur when a processor or distributor gives or offers to give "any retailer or prospective retail customer of a processor or distributor ... any free service or any other thing of value." Tenn. Code Ann. § 53-3-202(b)(3). The Act provides various examples of "things of value" which, if provided with requisite intent, constitute unfair trade practices. Id. Rebates and volume discounts are not included in the list of things of value enumerated in the statute; however, the statute explicitly states that the list of prohibited acts is non-exhaustive. Id. (stating things of value include, "but are not limited to," various defined items). Thus, the lack of inclusion of rebates and volume discounts among the list is not dispositive of whether they are in fact things of value.

In the absence of an explicit definition of "thing of value" in the statute, we must look to the plain, ordinary meaning of the phrase in an attempt to discern whether a rebate or volume discount is, in fact, a thing of value. See State v. Majors, 318 S.W.3d 850, 859 (Tenn. 2010) (stating that the words of a statute must be given their ordinary and natural meaning, and courts will refer to dictionary definitions where appropriate). "Value" is defined as an object or service possessing some monetary worth. Black's Law Dictionary 1586 (8th ed. 2004). By their very nature, rebates and volume discounts can be assigned a monetary value and thus they fit within the ordinary definition of a thing of value.

Accordingly, rebates or volume discounts offered by processors or distributors to their retail customers should be considered things of value within the context of Tenn. Code Ann. § 53-3-202.

3. Your third question asks whether the value of any rebate or volume discount received by the processor or distributor is to be included in the "cost to the processor or distributor" in calculating the actual cost of bulk milk under Tenn. Code Ann. § 53-3-201(3)(A).

The "cost to the processor or distributor" is defined as the "actual cost of bulk milk or other ingredients, plus the cost of doing business ...." Tenn. Code Ann. § 53-3-201(3)(A). A number of items are listed as being included in "the cost of doing business." Id. These include, but are not limited to:

labor, employee salaries, rent, maintenance and depreciation on real or personal property, shrinkage, interest, power, supplies, advertising, transportation and delivery costs, credit losses, all permits and license fees, all taxes, insurance and any and all other overhead expenses.

Id.

This list is not exhaustive. Furthermore, while the statute sets forth a lengthy list of items included in the "cost of doing business," there is no corresponding list or definition of the "actual cost" of bulk milk or other ingredients.

Accordingly, we again must be guided by the plain and ordinary meaning given the term "actual cost." See State v. Majors, 318 S.W.3d at 859. "Cost" generally means the amount paid or charged for something. Black's Law Dictionary at 371. Based upon this definition, the actual cost to the processor or distributor would be the cost paid for the milk products after the subtraction of any rebate or volume discount that the processor or distributor received.

Thus the value of any rebate or volume discount received by the processor is to be included in calculating the "cost to the processor or distributor."

4. Finally, you have asked whether the values of loyalty cards offered by retailers to their customers are to be included in the cost to the retailer in calculating the cost of milk products pursuant to Tenn. Code Ann. §§ 53-3-201(3) or (4). The cost to the retailer is defined as the "invoice price paid by the retailer for milk products, plus that portion of the retailer's overhead or cost of doing business ...." Tenn. Code Ann. § 53-3-201(4)(A). The statute states that "[t]he cost of doing business includes the fair value of any concession, of any kind whatever, that has the effect of reducing the actual sales price or increasing the costs of the goods delivered ...." Tenn. Code Ann. § 53-3-201(4)(C). The statute lists trading stamps and redeemable coupons as examples of concessions which must be included in the cost of doing business. Id. See also Hogue v. The Kroger Co., 210 Tenn. 1, 356 S.W.2d 267 (1962).

As previously mentioned, the term "cost" means the amount paid or charged for something. Black's Law Dictionary at 371. The statute defines a retailer's cost to include (1) the invoice price paid by the retailer for milk products and (2) the retailer's overhead or cost of doing business properly allocable to milk products, which absent evidence to the contrary is presumed to be ten percent of the invoice price and includes the fair value of any concessions that reduce the actual sales price or increase the cost of the goods delivered, such as the cost to the retailer of trading stamps or redeemable coupons. Tenn. Code Ann. § 53-3-201(4).

The redemptive value of the discount provided to a retailer's customers by loyalty or discount cards is not part of either the invoice price paid by the retailer or the retailer's overhead cost. Instead such cards represent merely presumptive discounts in the actual sales price to the customer.[2] Thus, the actual redemptive value of these type cards is not part of the retailer's cost as contemplated by Section 53-3-201(4). Furthermore, such cards, unlike trading stamps or redeemable coupons which carry a cost to the retailer that is approximate to the actual redemptive value of the stamps or coupons, likely do not engender a significant overhead cost to the retailer. Such an expense could be included as part of the "cost to the retailer" but likely would be negligible. See Hogue v. Kroger Co., 356 S.W.2d at 269-270 (noting that the Legislature intended to include within overhead cost the actual cost to the retailer of obtaining trading stamps or redeemable coupons).

[1] If the Act were construed to apply only to milk products that are identical in brand, as well as type, then any retailer could avoid the Act's prohibitions by selling milk products under a "house" label unique to that retailer. In light of the Act's language and structure, it seems unlikely the General Assembly would have intended such a result.

[2] We say "presumptive" discounts because the customer may or may not ever redeem the loyalty or discount cards. Indeed this uncertainty around redemption would make it difficult to value the total discount actually provided by the retailer on an ongoing basis.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

LINDSEY O. APPIAH
Assistant Attorney General

Requested by:
The Honorable Julius Johnson
Commissioner of Agriculture
Ellington Agricultural Center
P.O. Box 40627
Nashville, TN 37204