Tag: competition

Recent Franchise Non-Compete Cases Show Unpredictability of Enforcement

December 20th, 2013

Summary: Recent cases involving attempted enforcement of covenants not to compete by franchisors show the unpredictability of the results in such cases. However, careful reading of the factual circumstances of the cases also supports the adage that “bad facts make bad law.” So it behooves franchisors to check whether they have a sympathetic case on the facts when trying to enforce their non-competes.

In July 2013, in the case of Golden Crust Patties, Inc. v. Bullock, Case No. 13-CV-2241, the U.S. District Court for the Eastern District of New York “threw the book” at a recently terminated Golden Krust Caribbean Bakery & Grill Restaurant franchisee. The franchise was terminated because the franchisee was “not only selling the competitor’s products (i.e., frozen Caribbean-style patties), but were selling those products using Golden Krust packaging.” Thus, the franchisee was engaging in a classic form of trademark piracy, likely to cause harm to the brand. Despite receiving an immediate termination notice, the franchisee only stopped using the trademarks after Golden Krust filed suit. Even then, rather than adopting a new name it put up a sign reading, “Come in. We are Open. Nothing has Changed Only Our Name”; and another sign that read: “Open. Same Great Food, Same Great Service. Thanks for Your Support!!! Come Again.”

Under those circumstances, the court enjoined the former franchisee and her son, who had managed the restaurant, from continued operation of a Caribbean-style restaurant. In its order the court, acting under New York law, enjoined such operations at the former franchised location and within 4 miles of it (rather than 10 miles, as written in the contract), or within 2.5 miles of any other Golden Krust restaurant (rather than 5 miles, as written in the contract). While giving them a bit of a break on the geographic extent of the non-compete, the court overall had no sympathy for the franchisee’s arguments of harm to their livelihood, including the possibility that their landlord would not allow them to operate a different type of restaurant at the leased premises; rather, the court found that to be a harm of the former franchisee’s own making.

In September of this year, in the case of Steak ‘N Shake Enterprises, Inc. v. Globex Company, LLC, the U.S. District Court for the District of Colorado found that the franchisor had good cause to terminate and force its Denver franchisee to cease use of the trademarks, but did not find cause to enjoin the former franchisee from violating the covenant not to compete. The cause for termination was that the franchisee refused to comply with the franchisor’s demand that it offer a “$4 value menu” and instead insisted on charging higher prices. The court held that Steak ‘N Shake had good cause to terminate the franchise and enjoined continued use of the Steak ‘N Shake trademarks, trade dress and menu item names.

However, the court did not order the former franchisee to refrain from operating a similar restaurant, finding that, because the next closest Steak ‘N Shake restaurant was in Colorado Springs (about 100 miles away) and the franchisor had no prospects to open up any Denver area locations in the near future, it could not prove irreparable harm if the former franchisee continued to operate. This decision does not preclude the franchisor from seeking damages due to violation of the covenant not to compete later in this case. While not expressly stated in the opinion, it is quite possible that the court may have been swayed by the fact that Steak ‘N Shake was requiring that an enormous number of meals be offered for $3.99, which likely would mean little or no profit to the franchisee on those sales. In other words, Steak ‘N Shake had a right to insist that restaurants using its name follow its pricing demands, but if it chose to terminate on those grounds it would have to suffer repercussions.

Finally, on August 6, 2013, in the case of Outdoor Lighting Perspectives Franchising, Inc. v. Patrick Harders, the North Carolina Court of Appeals affirmed a state trial court ruling denying enforcement of a post-expiration covenant not to compete by a North Carolina based franchisor against its former franchisee in northern Virginia. In so doing, the court wrote, “During the time in which Mr. Harders operated as an OLP franchisee, entities holding OLP franchises encountered numerous problems with OLP suppliers. Since [Outdoor Living Brands] purchased [the franchisor] in 2008, numerous franchises have closed and the OLP business model has been devalued. Among other things, [the franchisor] failed to provide its franchisees with adequate support, feedback, and product innovation. Although the information provided to Mr. Harders and OLP-NVA by [the franchisor] was alleged to be proprietary, much of it was publicly available and common knowledge in the industry. Similarly, the training that Mr. Harders had received from [the franchisor] was readily available without charge in many national home improvement stores.

Once the court laid out the facts in this manner, it was obvious that it would rule against the franchisor. It did so in a fairly creative manner, seizing on the fact that the non-compete prohibited the non-renewing franchisee from engaging in a “competitive business” within any “Affiliate’s territory.” At the time of the franchise agreement, the franchisor was only involved in Outdoor Lighting Perspectives, but during the term the franchisor was purchased by OUtdoor Living Brands, which also owned the Mosquito Squad® and Achadeck® franchise systems. While the likely purpose of restricting competition with “affiliates” was to protect Outdoor Lighting Perspective businesses owned by the Franchisor’s corporate siblings, and the franchisor was not seeking to enjoin the former franchisee from competing with later-acquired affiliates in unrelated fields, the literal language of the non-compete supported an argument that it was overbroad in its geographic scope.

The court also found that the definition of a prohibited “Competitive Business” under this non-compete was overly broad. It prohibited involvement in “any business operating in competition with an outdoor lighting business” or “any business similar to the Business.” The provision’s scope could prohibit the former franchisee from operating an indoor lighting business or “obtaining employment at a major home improvement store that sold outdoor lighting supplies, equipment tor services as a small part of its business even if he had no direct involvement” in that part of the operation. The appeals court affirmed the trial court’s decision to read the provision literally and therefore refuse to enforce it in any manner, rather than entering a more limited injunction prohibiting the former franchisee from operating or managing an outdoor lighting business.

Conclusion

These court rulings demonstrate the “bad facts make bad law” truism. The Golden Krust franchisor had a sympathetic case and a franchisee acting badly; in the Steak ‘N Shake case, the parties clearly needed to go their separate ways, but the franchisor’s inflexibility persuaded the court to allow the franchisee to operate independently, at least pending a full trial; and the Outdoor Lighting franchisor, despite litigating in its “home court,” apparently had such an unimpressive franchise system that the court was unwilling to fashion an equitable remedy when confronting an overly broad non-compete. These cases should make franchisors think carefully about the situations in which they seek to enjoin competition by their former franchisees.

Courts Enforce Waivers of Class Actions in Arbitration By Franchisees, Employees and Small Businesses

July 18th, 2013

In 1925, the Federal Arbitration Act (“FAA”) was enacted to strengthen the ability of parties to enforce “purely voluntary” pre-dispute promises to have disputes determined through arbitration. See, e.g., David S. Clancy & Matthew M.K. Stein, An Uninvited Guest: Class Arbitration and the Federal Arbitration Act’s Legislative History, 63 Bus. Law. 55, 60-61 (Nov. 2007). In the decades since, countless federal and state statutes have been passed to protect consumers, employees, franchisees, small businesses and investors, and class and collective lawsuits have developed as an avenue to vindicate those statutory rights. In response, companies have used arbitration clauses to decrease the risks of having to defend against such large potential liabilities. Recent decisions by both the U.S. Court of Appeals for the Fourth Circuit and the U.S. Supreme Court have emphasized that, if the arbitration clause clearly bars class or collective actions, then the FAA precludes parties to the agreement from pursuing a class or group action through court or arbitration. This established trend of statutory interpretation also may be increasing the possibility of that the U.S. Congress will pass the “Arbitration Fairness Act” to limit companies’ ability to use arbitration clauses as a bar to collective legal actions.

Shuttle Express Case – Fourth Circuit

In the case of Muriithi v. Shuttle Express, Inc., issued April 1, 2013, the U.S. Court of Appeals for the Fourth Circuit required individual arbitration of claims due to a franchise agreement’s inclusion of an arbitration clause 1) forbidding any class or group actions, 2) requiring the parties to split the cost of arbitration, and 3) containing a one-year limitations provision.

Plaintiff Samuel Muriithi was a driver for defendant Shuttle Express, who provided transportation for passengers to and from the Baltimore-Washington International Airport. Muriithi filed a class action in federal court against Shuttle Express asserting claims under the federal Fair Labor Standards Act (FLSA) and under Maryland law on behalf of himself and all other Shuttle Express drivers. Muriihi alleged that Shuttle Express misled the drivers about the compensation they would earn, inducing them to sign franchise agreements when they would be employees as a matter of law. Shuttle Express moved to dismiss the complaint, or in the alternative, to compel arbitration under the arbitration provision. The district court refused to compel arbitration on the grounds that the agreement contained three unconscionable provisions, which rendered the arbitration clause unenforceable. On appeal, the Fourth Circuit reversed the district court’s decision, holding that all three provisions at issue were not unconscionable and, therefore, the arbitration clause was enforceable.

In addressing the enforceability of the class action waiver, the Fourth Circuit rejected the district court’s decision, which identified the class action waiver as a factor in preventing Muriihi from “fully vindicating his statutory rights.” The Fourth Circuit explained that, subsequent to the district court’s decision, the U.S. Supreme Court addressed the issue of class action waivers in AT&T Mobility LLV v. Concepcion, 131 S. Ct. 1740 (2011). According to the court, the FAA, as interpreted in the Concepcion decision and prior Supreme Court rulings, “prohibited courts from altering otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures.” Because the district court reached an opposite conclusion prior to Concepcion, the Fourth Circuit reversed the district court’s decision, finding the class action waiver enforceable.

The Fourth Circuit then addressed the enforceability of the fee-splitting provision. The court found that Muriithi failed to meet his “substantial” burden of showing the likelihood of incurring prohibitive costs as required to invalidate an arbitration agreement. The court explained that a fee-splitting provision has the ability to render an arbitration agreement unenforceable if the arbitration costs are “so prohibitive as to effectively deny the employee access to the arbitral forum.” According to the court, a number of factors are considered when determining prohibitive costs including, “the costs and fees of arbitration, the claimant’s ability to pay, the value of the claim, and the difference between arbitration and litigation.” The court concluded that Muriithi did not meet his substantial burden for proving prohibitive costs because he failed to show the costs of arbitration, “the most basic element” of the challenge. The court further explained that Muriihi could not meet his burden “simply by showing the fees that some arbitrators are charging somewhere.” Muriithi also failed to show the value of his claims, which were necessary to determine the fees under the American Arbitration Association’s rules. Because Murihhi failed to prove these “critical factors”, the Fourth Circuit concluded that he had failed to meet the substantial burden required for a finding of prohibitive costs.

Finally, the Fourth Circuit held that the one-year limitations provision could not be considered in a motion to compel arbitration because it was “not referenced in the Arbitration Clause.” The court referred to Section 2 of the FAA, which states that a party challenging the enforceability of an arbitration clause must rely on grounds that “relate specifically to the arbitration clause and not just to the contract as a whole.” The court stated that the one-year limitations provision related to the general agreement itself rather than the arbitration clause because the language and terms of the provision “did not overlap” with the language of contract’s arbitration clause. Therefore, its enforceability was an issue to be decided by the arbitrator and could not be considered in the motion to compel arbitration.

American Express Antitrust Case – U.S. Supreme Court

In American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013), the U.S. Supreme Court, by a 5-4 majority, held that the prohibitively high cost of pursuing an individual claim is not a sufficient reason to invalidate a class action waiver in an arbitration agreement. This decision reinforces Concepcion in demonstrating the Court’s willingness to allow arbitration clauses to be used as class action avoidance mechanisms. This ruling also validates the Fourth Circuit’s interpretation of Concepcion in its Shuttle Express decision.

American Express (“Amex”) requires all of its merchants to enter into a standard form contract. These agreements contain arbitration provisions that require all disputes between the parties to be resolved by arbitration and prohibit all class action claims. In this case, a group of merchants filed individual claims against Amex, claiming that Amex used its “monopoly power” to force them into contractual agreements that violate anti-trust laws. Amex moved to dismiss and to compel arbitration. The district court agreed with Amex, and the merchants appealed. On appeal, the United States Court of Appeals for the Second Circuit reversed, finding the class action waiver unenforceable because the costs that an individual merchant would incur to pursue its claim would substantially exceed the amount of that individual merchant’s damages. The Supreme Court reversed the Second Circuit’s decision.

Justice Scalia, writing for the narrow majority, emphasized that the “overarching principle” of arbitration is a matter of contract, and that courts must “rigorously enforce” arbitration agreements by their expressed terms unless the FAA’s mandate has been “overridden by a contrary congressional command.” The majority failed to find any contrary congressional command that would require a rejection of the class action waiver. According to the Court, antitrust laws do not guarantee that a claim will be resolved affordably, nor do they “evince[e] an intention to preclude a waiver” of class-action procedure.

The Court rejected the merchants’ argument that enforcing the waiver of class arbitration bars effective vindication because merchants have no economic incentive to pursue their antitrust claims individually in arbitration. The Court declined to apply the “effective vindication” exception to the case at hand on the grounds that the exception’s purpose is to prevent “prospective waiver of a party’s right to pursue statutory remedies.” The Court explained that not being worth the costs to prove a statutory remedy is not an elimination of the right to pursue that remedy. In other words, according to the Court, class action waivers merely limit arbitration to the two contracting parties and do not eliminate parties’ rights to pursue statutory remedies.

The majority referred to its decisions in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and AT&T Mobility LLC v. Concepcion, 130 S. Ct. 1740 (2011) (also decided by a 5-4 vote), to validate that class action waivers in arbitration agreements are, indeed, enforceable and therefore do not preclude the effective vindication of statutory rights. In Gilmer, the Court had “no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue…expressly permitted collective actions.” In Concepcion, the Court stated that class arbitration was not necessary to prosecute claims “that might otherwise slip through the legal system.”

In Justice Kagan’s dissent, she emphasized that the purpose of the FAA is to resolve disputes and facilitate compensation of injuries. According to Justice Kagan, the majority’s decision “admirably flaunt[s]” the fact that monopolists get to use their power to force merchants into contracts that deprive them of all legal recourse. “Too darn bad,” says Justice Kagan, as she describes the majority’s decision in a nutshell. Justice Kagan explains that the majority’s decision offers support to parties who intend to confer immunity from potentially meritorious federal claims through arbitration clauses in standardized form “contracts of adhesion”, which is contrary to the purpose of the FAA as enacted in 1925.

What does this mean?

In light of the body of U.S. Supreme Court precedent in this issue, nearly all parties offering contracts to large groups of similarly situated persons such as employees, franchisees, and consumers of services, should strongly consider including an arbitration provision in the contract that explicitly bars class or collective actions. Under current law, those waivers will almost certainly be enforced and therefore sharply limit the likelihood that the company will have to defend against large-scale litigation brought by disaffected members of such groups. Such arbitration clauses do need to be carefully drafted and implemented to avoid other defenses to their enforcement, and they should be prepared and implemented with the assistance of experienced counsel.

Of course, ubiquitous arbitration clauses and these judicial decisions sharply limit the ability of private practice attorneys to deter violations of protective statutes through civil dispute resolution, leaving an even greater burden of enforcement on overburdened government regulators. This is unlikely to change unless the FAA is amended through legislation. In recent years, the “Arbitration Fairness Act” has been pending in the U.S. Congress. This act would invalidate the enforceability of pre-dispute arbitration clauses with regard to employment, consumer, and civil rights disputes, and antitrust class action proceedings. The bill has been languishing in recent years, and it remains to be seen whether the Supreme Court’s latest decision spurs more aggressive Congressional action on this issue.

AUTHOR’S NOTE: THIS ARTICLE WAS CO-WRITTEN BY DAVID L. CAHN, CHAIR OF THE FRANCHISE BUSINESS LAW GROUP AT WHITEFORD TAYLOR & PRESTON, AND KATELYN P. VU, WHO IS A SUMMER ASSOCIATE AT THE FIRM AND A 2015 J.D. CANDIDATE AT UNIVERSITY OF BALTIMORE LAW SCHOOL.

PLEASE ALSO NOTE THAT THIS ARTICLE REPRESENTS THE VIEWS OF THE AUTHORS AND NOT THE VIEWS OF WHITEFORD TAYLOR & PRESTON L.L.P.

Can I Stop “Bargain Basement Pricing” of My Branded Products?

May 7th, 2012

David Cahn

While the continuous growth of Internet-based commerce has to lower prices for many consumer shopping for goods, it has been a major problem for many “bricks and mortar” retailers and also has caused concerns for product manufacturers who want to insure quality experiences for customers purchasing their goods. The question is the extent to which manufacturers may, under applicable U.S. anti-trust and competition law, take steps to protect the image of their brand as well as stopping the “e-tailers” from “free-riding” on the promotion efforts of traditional retailers.

U.S. law applicable to manufacturer’s application of retail pricing requirements has been in flux since the Supreme Court’s decision in Leegin Creative Leather Products, Inc v. PSKS, Inc., 127 S. Ct. 2705 (2007). In that decision, the Court overruled the holding in Dr. Miles Medical Co. v. John D. Park & Sons Co., 31 S. Ct. 376 (1911), that any agreement not to sell a product at below a specific minimum price was per se illegal under Section 1 of the Sherman Act, the U.S.’s primary antitrust statute.

In Leegin, the Court ruled that, in determining whether Section 1 of the Sherman Act is violated by a series of express agreements in which dealers promise not to sell a manufacturer’s product at below a specific retail price, courts would apply the so-called “Rule of Reason” to determine whether such an agreement actually causes harm to competition. To boil this down, such an agreement will not violate U.S. antitrust law if (a) the manufacturer does not have more than 25% market share for the sale of that type of product, and (b) the minimum pricing program is not the result of the demands of a single dominant retailer or an agreement among retailers purchasing a substantial percentage of the goods to demand that the manufacturer adopt such policies (as opposed to individual retailers’ complaints).

An example of the “dealer cartel” scenario was a 2008 ruling in Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., in which Mack Trucks terminated a dealer who repeatedly sought sales of products in other dealer’s primary service areas by undercutting the local dealers on price. After numerous dealers complained about that specific discounter, and after Mack demanded that the discounter comply with pricing guidelines, Mack Trucks finally ceases supplying the discounter. Because Mack Trucks does have appreciable market power nationally in heavy construction equipment, the U.S. District Court refused to grant Mack summary judgment and the Third Circuit Court of Appeals upheld that decision.

A fact pattern in which a dominant retailer allegedly coercing several manufacturers into minimum pricing requirements is a 2008 ruling in Babyage.com, Inc. v. Toys “R” Us, Inc., which a court refused to dismiss a claim by an Internet retailer involving alleged actions by “Babies ‘R’ Us“ with regard to the sale of strollers and other baby products. Specifically, Babies ‘R’ Us allegedly threatened to cease buying the manufacturers’ items or to give them extremely unfavorable shelf space and promotion unless the manufacturer enforced a minimum RPM program with regard to Internet retailers. Because Babies ‘R’ Us has sufficient market power to coerce the manufacturers with such threats, its actions may have harmed competition at the consumer level and therefore violated the Sherman Act.

If a manufacturer has appreciable market power in a product market, then the risk of a series of minimum RPM agreements increases, particularly if manufacturers that also have substantial market share implement similar minimum RPM agreements and this “parallel conduct” causes an overall increase in pricing for “high-quality” apparel of this type. Such contracts may still be permissible under U.S. antitrust law if the manufacturer can demonstrate that it is driven by the desire to maintain the brand’s profile in high end (and high volume) traditional retail outlets, which would not be possible without such a program. If it can make the business case that such a move actually will result in higher total volume sales on a wholesale basis, then such contract clauses may be “pro-competitive” as envisioned by the Supreme Court in Leegin.

Yes, but What About State Antitrust Laws?

As the Supreme Court emphasized in a 1989 opinion, “Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies”, and states are free to enact laws that further the purposes embodied by U.S. anti-trust law of “deterring anticompetitive conduct and ensuring the compensation of victims of that conduct.” California v. ARC America Corp., 490 U.S. 93 (1989). In somewhere between 11 and 14 different U.S. states, including California, Illinois, Maryland, Michigan, New York, New Jersey and Ohio, it is illegal to enter into any contract requiring another party to agree to not to sell a product or service below a specific price. The manufacturer cannot enforce an express minimum RPM agreement with any retailer that is headquartered in any of those states, and it is possible that such retailers could prevail in a state law civil antitrust claim if the manufacturer refuses to sell and the retailer can prove damages from not being able to obtain the manufacturer’s products.

Moreover, in eight states (including California, Illinois, Michigan, New Jersey and New York), consumers have standing as “indirect purchasers” to pursue claims for damages in the amount of inflated prices caused by resale price maintenance programs. The decision of the Supreme Court of Kansas in O’Brien v. Leegin Creative Leather Products, Inc., Case No. 101,100 (decided May 4, 2012), Kansas’ highest court reversed summary judgment against the plaintiffs in a class action case brought under Kansas’ anti-trust statute against the same manufacturer of Brighton leather goods that had won the U.S. Supreme Court victory in 2007. Under the Kansas law, the practice of implementing and enforcing a retail pricing policy to be a per se violation of Kansas anti-trust statute, which that court summarized as follows:

There are alternate theories under which a Kansas restraint of trade plaintiff may proceed [under the state’s statute]: A plaintiff may prove the existence of an arrangement, contract, agreement, trust, or combination between persons designed to advance, reduce, or control price, or one that tends to advance, reduce, or control price. Mere arrangements between persons are within the scope of the statute; a plaintiff does not have to show a relationship rising to the level of an agreement. In addition, it is enough to show that the arrangement is designed to or tends to control prices; a plaintiff does not have to show that the arrangement actually succeeds in increasing prices.

It remains to be seen whether other states with statutes that more specifically address resale price maintenance follow this opinion and find that a practice intended to maintain a brand’s retail pricing is a violation, even if it is not embodied in a formal agreement between the manufacturer and its retailers.

Manufacturer’s Unilateral Use of a Pricing Policy

If a manufacturer sells at wholesale through purchase orders or other less formal means than written dealer agreements, there is little need for any reciprocal written agreement with retailers. Instead, in accepting purchase orders a manufacturer might unilaterally state, “Our products will be delivered to you with minimum suggested retail pricing (“MSRP”) for each item. If you sell any of our products at below the MSRP, we reserve the right to refuse to supply you with our products at wholesale in the future.” Such a policy is not a considered a “contract, combination or conspiracy” in restraint of trade, but rather the unilateral act of the seller. United States v. Colgate, 250 U.S. 300 (1919). See also, Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1236 (10th Cir. 2006) (holding that similar “rights reserved” language in a standard written, bilateral distributor agreement constituted unilateral action permissible under Colgate).

California and New York courts have confirmed that proper implementation of a Colgate policy is not a violation of their state antitrust laws. State of New York v. Tempur-pedic International, Inc., 916 N.Y.S.2d 900 (N.Y. County Sup. Ct. 2011) and Chavez v. Whirlpool Corporation 93 Cal. App. 4th 363 (Cal. Ct. App. 2001). However, the New York Attorney General’s office appeal of the adverse trial court ruling in Temper-pedic is currently pending.

Another method of mitigating risks is to use a Minimum Advertised Price (“MAP”) policy, rather than MSRP. Such a policy would merely restrict the advertising of the product for sale below a specific price. It does not restrict retailers from discounting at checkout, whether at a physical location or the “shopping cart” of a website, if the discounting is evenly applied to all goods sold by the retailer and is not specific to the manufacturer’s products.

There are disadvantages to using a Colgate policy. First, the manufacturer cannot offer more favorable pricing or terms for retailers who explicitly agree to adhere to the MSRP, since that would turn the policy into a bilateral agreement. Second, the manufacturer’s sole remedy is to cease selling to the retailer without issuing any additional warning. Confronting the retailer and demanding that it comply with policy risks waiving the Colgate defense to a claim of unlawful conspiracy, particularly if (as is usually the case) the confrontation is prompted by complaining dealers. Under Colgate, the manufacturer is free to “cut off” the discounter after receiving complaints from other retailers (subject to the “dealer cartel” issue explained above), but it cannot try to coerce the “violator” into complying.

Kansas Supreme Court’s decision in O’Brien v. Leegin Creative Leather Products, Inc. demonstrates the difficulty of proving that a pricing program’s implementation was truly “unilateral” by the manufacturer. While acknowledging that truly unilateral conduct by “Brighton” by issuing a pricing policy and then cutting off violating retailers would not prove a “combination” that is necessary to violate Kansas’ antitrust law. However, the Court found that two emails from Brighton’s chief operating officer to retailers, one denying a retailer’s request to offer discounted pricing and another explaining why compliance with the policy was important for all retailers of Brighton products, was sufficient evidence to show a knowing “arrangement” between Brighton and independent retailers to maintain the prices paid by consumers to Brighton’s suggested retail price. That court was clearly influenced by the facts that Brighton has a substantial direct to consumer retail sales division, including its own retail stores in Kansas, and also that Brighton “cut off” at least one Kansas retailer after receiving complaints about its discount pricing from another independent Kansas retailer.

Promotional Allowances

The one “inducement” that a manufacturer may be able to provide and remain within the Colgate exemption is promotional assistance to retailers who comply with MSRP or the MAP policy. If the manufacturer catches one of the retailers violating the policy, it can inform that retailer that it is no longer eligible for the allowance. The manufacturer should not “bargain” with the retailer after sending such a notice, i.e., agreeing to resume the assistance if the retailer agrees to comply with the policy. It can continue to supply the retailer and monitor its retail pricing and sales practices, and if that retailer starts complying then the manufacturer can resume providing promotional assistance. However, this type of program may be risky to use in the states identified above in which RPM programs are or may be per se unlawful.

Implementation

Even if individual retailers’ complaints (or threats) have led the manufacturer to decide to implement an MSRP or MAP policy, when implementing the policy the manufacturer should make clear to all of its wholesale customers that they are not to discuss retail pricing among themselves and that the manufacturer has the exclusive right to determine what steps to take if a customer does not comply with the policy. The manufacturer should then put in place a program to monitor compliance with the policy, either through internal staff or through a third party monitor. These steps are important to avoid converting a vertical manufacturer to retailer restraint into a horizontal conspiracy with complaining retailers that could be a per se violation of U.S. antitrust law. This is especially true if the manufacturer also sells direct to consumers on a retail basis.

International Law

As an attorney licensed in Maryland and the District of Columbia, I am qualified to provide a summary on U.S. anti-trust law as it concerns this subject, whereas I do not provide legal advice on other countries’ competition laws. However, as a general matter most other countries have yet to follow Leegin and continue to treat any manufacturer practices designed to set minimum retail price levels as per se illegal, and given that disposition are unlikely to look favorably on Colgate-like arguments regarding unilateral conduct in “cutting off” a seller who sells below the desired minimum price. In addition, European courts have issued decisions indicating that restrictions on the re-sale of products through the Internet will generally be considered violations of European competition law. See Pierre Fabre Dermo-Cosmétique SAS (European Court of Justice, March 3, 2011).

There is some basis for a position that the competition laws of other countries will not be applicable to vertical pricing restraints in which both the manufacturer and their wholesale customers are small enterprises that do not have substantial market share in the relevant product types. However, an analysis of the applicable law of the foreign jurisdictions must be made through qualified counsel before a manufacturer pursues any programs to restrict minimum retail price.

Talking to Your Competitors Can Be Risky

September 13th, 2011

Talking to your competitors can be risky

Criminal Price-Fixing Conspiracy Convictions Highlight Dangers

Two recent guilty pleas announced by the U.S. Department of Justice’s Antitrust Division highlight an underappreciated area of serious legal liability – price coordination in violation of the Sherman Act.

On August 24, 2011,the Justice Department announcedthe guilty plea of Great Lakes Concrete, one of four Iowa companies that sell “ready-mix concrete” for construction projects and have plead guilty to reaching agreements regarding their respective price lists and project bids and then accepting payment for those sales at prices artificially increased due to collusion. The press releaseemphasizes the maximum fine that may be imposed for the conviction, which is the greater of $100 million, twice the gain derived from the crime or twice the loss suffered by the victims of the crime. In addition, the president of Great Lakes Concrete was sentenced to serve a year and a day in prison.

On August 31, 2011, the Justice Department announced a guilty plea by a California company, Sabry Lee (U.S.A.) Inc., in “a global conspiracy to fix the prices of aftermarket auto lights.”The company is the U.S. distributor for a Taiwan producer of the auto lights, which are most commonly installed in vehicles after collisions. The alleged conspiracy was apparently between several Taiwan based manufacturers of auto lights and their U.S. distributors, who “met and agreed to charge prices of aftermarket auto lights at certain predetermined levels” and “issued price announcements and price lists in accordance with the agreements reached, and collected and exchanged information on prices and sales of aftermarket auto lights for the purpose of monitoring and enforcing adherence to the agreed-upon prices.” Executives of two of the U.S. distributor companies have pled guilty to price-fixing charges, and the second ranking officer of one of the Taiwan manufacturers was arrested in the U.S. and has been indicted.

While the press release leads one to believe that the executives in these cases knowingly intended to fix prices at artificially high levels, it is quite possible that at least some of them were not completely aware of the legal implications of their conversations. However, any communications between competing companies concerning prices are legally risky.

The Takeaway: Business people should seek pricing intelligence from customers, service providers, or independent websites — but not from direct communications with their competitors. This is particularly true for industries in which formal competitive bidding is common or in which a relatively small number of companies make a large percentage of the total sales.

Beyond that basic rule, certain types of communications and collaborationsbetween competitors are permitted and even encouraged by U.S. antitrust law. Each situation needs to be analyzed based on the particular facts and reasons for your collaborative effort.