Vedder Price

Vedder Thinking | Articles Forming And Maintaining Legal Resale Price Control Policies

Part One of Three, Corporate Compliance Insights

Article

The following article is the first of a three-part series on compliance issues published in Corporate Compliance Insights on January 14, 2019, authored by Shareholder Brian K. McCalmon, To read the article on the Corporate Compliance Insights website, please click here.

Minimizing Antitrust Risk in Pricing

Most manufacturers continue to avoid price maintenance agreements with distributors and resellers and impose unilateral resale price policies. Vedder Price’s Brian McCalmon discusses how what’s visible to the consumer confronted with MAP and MRP is only the tip of an iceberg comprised of a carefully constructed, maintained and enforced customer relationship program that walks a line between legal and possibly illegal conduct under federal and state antitrust laws.

“Place in Cart to See Price” – the message on retailer websites is never more than a few clicks away. It’s an extra step in the process, but you are usually rewarded with a sizable discount. Of course, many products are never discounted. You never see a cheap price for a genuine Rolex, for example, no matter where you look. Why not? Some products are almost never sold below certain price levels because the manufacturers’ resale pricing policies discourage it. So unfortunately, you cannot buy a Rolex on Amazon at a major discount. Other manufacturers restrict the price at which their products are advertised, leaving the sale price unaddressed. Retailers comply with these minimum resale price and minimum advertising policies (MRP and MAP, respectively) announced by their suppliers because they risk being cut off if they do not. Compliance issues arise when policies do not firmly and clearly set out manufacturer expectations or when lines of communication open between manufacturers and dealers about the policies.

Price Maintenance: How did we get here?

The federal Sherman Antitrust Act prohibits, among other things, “agreements” in unreasonable restraint of trade. Most states have similar laws. Until 1997, agreements between a seller and a buyer to set the resale price of a product (a restraint of trade) were illegal per se, without regard to the market effect of the agreement. This made any attempt to influence the resale price of products perilous.

Yet such efforts were critical to manufacturers’ distribution and marketing plans. So manufacturers found a workaround: the unilateral policy. Relying on the long-established principle that a merchant generally can decide unilaterally with whom it will deal (known as the Colgate doctrine for the case that established the principle), manufacturers began to publish unilateral policies announcing to whom they would sell their products. Instead of WidgetCorp agreeing with its distributors that its widgets would be sold at or above a certain price, WidgetCorp announced that distributors were free to sell its widgets at whatever price they wished, but that WidgetCorp would sell its widgets only to distributors who resold them at or above a certain price. By carefully communicating and enforcing the policy, manufacturers could count on most distributors to price as the manufacturer wanted — without the agreement that triggered the application of Section 1 of the Sherman Act.

In 1997, near the end of a long shift in how federal antitrust law evaluates business conduct, the Supreme Court held that agreements to set a maximum resale price for a product are illegal only if they are “unreasonable” – a difficult claim for a plaintiff to prove.[1] Ten years later, the Supreme Court extended this holding to agreements to set minimum resale prices.[2] Since then, under federal law, resale price maintenance agreements have not been condemned categorically; they are reviewed for whether they actually burden competition unreasonably.

The Current Environment with Price Maintenance Policies

Today most manufacturers continue to avoid price maintenance agreements with distributors and resellers and impose unilateral resale price policies like they always have. Why? Two reasons.

First, although resale price maintenance is no longer illegal per se under federal law, neither is it automatically legal. Manufacturers can easily be drawn into costly and drawn-out litigation, with uncertain prospects for success, by disgruntled consumers seeking to prove such agreements unreasonable.

Second, minimum resale price maintenance is still in some states the result of administrative and legislative populist resistance to the Supreme Court’s decision in Leegin, which took a decidedly more long-term view of what would benefit consumers than most state government agencies do. Maryland, for example, amended its antitrust statute after Leegin to prohibit resale price maintenance agreements specifically and provide for a private right of action and, for willful violations, civil penalties of up to $500,000 (plus imprisonment).[3] California, New York and Kansas enforcement agencies consider minimum resale price maintenance to be illegal under state law, and the rest of the country has mostly remained silent – not exactly the firm guidance to businesses that the Supreme Court predicted would follow when it decided Leegin.[4]

In recent years, MAP policies have supplanted MRP policies as the preferred tool for maintaining desired prices. MAP policies do not prohibit lower sales prices, so, theoretically, they carry less potential to harm price competition. They prohibit advertising prices below the policy’s minimum, but generally permit lower prices to be applied at the checkout stage, which is visible only to the shopping individual who takes the time to proceed to that stage. Thus, they can be effective in stemming price erosion, especially in online retail outlets, while avoiding the possibility that an agreement on actual pricing may occur. Nevertheless, manufacturers follow the same Colgate procedures that have applied to MRP.

Keys to a Successful Policy: Best Practices for Compliance Teams

An effective Colgate policy is clear and concise and applies equally to all distributors and resellers. It generally contains a firm disavowal of any intent to seek agreement with any distributor or reseller on pricing or advertising restrictions. The policy also should include an affirmation that no such agreement exists or will be accepted, nor discussion entertained. It contains a clear explanation of the consequences of violating the policy. It entertains no appeal or discussion, but directs any inquiries to a single (and well-trained) contact for answering questions and receiving information about possible violations.

How the policy is communicated to the customer base and enforced is just as important as what goes into it. For this, the advice of experienced antitrust counsel is helpful, as pitfalls await the unwary. For example, panicked calls from terminated distributors can be used as evidence of a price agreement in later litigation. Unevenly enforced policies can give rise to group boycott claims by terminated distributors who find their competitors have not suffered the same fate, a concern heightened as some large online retailers’ pressure manufacturers not to impose MAP or MRP policies against them. Strategies for enforcement of MAP policies should be thought through carefully and can include a wide variety of tools, such as trademark enforcement, publication strategies and channel management, to minimize MAP violations and reduce antitrust exposure for both manufacturers and resellers. They can even include tools other than MAP policies entirely, such as conditional grants of marketing assistance and other means of influencing pricing behavior that fall short of a flat prohibition.

Compliance professionals for both manufacturers and resellers can minimize antitrust risk in MRP and MAP policies by consulting with experienced antitrust counsel, but a few basic guidelines include:

Keep it simple:
Avoid ambiguous messages and leave no room for misunderstandings.
Keep it public: Publicize your policy; if you’re a retailer, read the manufacturers’ policies.
Keep it close: Do not engage in argument about the policy or about compliance with the policy; communicate only through the channel designated by the manufacturer.
Keep it fair: Apply the policies equally and do not request favorable treatment.

 



[1] State Oil Co. v. Kahn, 522 U.S. 3 (1997).

[2] Leegin Creative Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

[3] MD. CODE ANN., COMM. LAW § 11-204(b).

[4] Leegin, 551 U.S. 879 (“As courts gain experience … applying the rule of reason over the course of decisions, they can … provide more guidance to businesses.”).

 



Professionals



Brian K. McCalmon

Shareholder