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.

  1. Bargain Basement Pricing, epilogue - May 24th, 2012 at 2:40 pm

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