resale price maintenance: minimizing antitrust...

Resale Price Maintenance: Minimizing Antitrust Scrutiny Structuring Pricing Agreements Amid Differing State, Federal and International Treatment of RPM

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TUESDAY, JUNE 5, 2012

Presenting a live 90-minute webinar with interactive Q&A

Thomas R. Sheran, Shareholder, Moss & Barnett, Minneapolis

William L. Monts, III, Partner, Hogan Lovells, Washington, D.C.

Michael A. Lindsay, Partner, Dorsey & Whitney, Minneapolis

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Treatment of RPM: Federal Overview

Thomas R. Sheran Strafford Webinar: Resale Price Maintenance: Minimizing Antitrust Scrutiny June 5, 2012

overview In the aftermath of 2007 Leegin decision: Minimum RPM agreements are no longer per se illegal, -- but neither are they per se legal. The difference between price and non-price vertical

restraints is greatly diminished, -- but vertical minimum price restraints (RPM) are still

subject to more “suspicion” than non-price restraints. The presence of an actual RPM “agreement” no longer

renders the RPM arrangement per se illegal -- but Sherman One liability still requires an agreement

(i.e. concert of action) between multiple actors having distinct economic interest.

6

Some Unanswered Questions The Leegin decision addresses RPM as a purely

“vertical” restraint -- but Leegin’s company stores create an ostensibly “horizontal” relationship with its re-seller customers.

Leegin had express RPM agreements with its retailer customers -- but many firms have minimum retail price policies that do not include express agreements.

The Leegin decision clearly rejects per se illegality in favor of a rule-of-Reason -- but the majority suggests special rules may be needed to ensure that courts using the new standard are able to identify anticompetitive RPM.

7

Dual Distribution Arrangements

Manufacturer often sell both to resellers and to consumers – does that mean that price restraints in RPM agreements with reseller customers have “horizontal” effects (still potentially per se illegal)?

Experience with non-price vertical restraints. Leegin decision on remand: PSKS v. Leegin, 615

F.3d. 413 (5th Cir. 1010) Online sales application: Jacobs v. Tempur-Pedic

Int’l, Inc. 626 F.3d 1327 (11th Cir. 2010)

8

Colgate’s Continued Validity

9

The significance of an “agreement” has been reduced in RPM cases , but it still plays an important role.

All Sherman One claims require “contract, combination,” or “conspiracy” which entails

-- plurality of actors (Copperweld requirement) -- some evidence of an “agreement” to act in

concert. Valuepest.com of Charlotte, Inc., v. Bayer Corp., 561 F.3d 282, 284

(4th Cir. 2009) (Genuine agency arrangement not subject to challenge under Sherman One).

De Facto Legality? Will an unstructured rule of reason standard and Twombly’s

plausibility requirement result in per se legality? -- can plaintiffs reasonably be expected to plead facts that plausibly

show a relevant market and anticompetitive effect?

Courts dismissing Rule-of-Reason claims appear to think so, including Leegin remand:

PSKS, Inc. v. Creative Leather Prods., Inc., 615 F.3d 412 (5thCir. 2009) (Market power screen deemed compatible with Leegin); Rik-Mik Enters. v. Equilon Enters., 532 F.3d 963 (9th Cir. 2008) (claim “failed for vagueness” under Twombly); Jacobs v.Tempur-Pedic Int’l, Inc. 626 F.3d 1327 (11th Cir. 2010) )(Affirming dismissal for failure to allege proper relevant market); Spahr v. Leegin Creative Leather Products, 2008 WL 3914461 (E.D. Tenn. 2008); Vaughn Medical Equip. Repair Service, LLC v. Jordan Reese Supply Co., 2010 WL 3488244 (E.D.La. 8/26/10) (single supplier/dealer RPM claim dismissed for failure to allege relevant market).

10

Even Courts allowing claims to proceed in problem areas (e.g. dealer-driven RPM) have required Market Power.

Toledo Mack Truck Sales & Services, Inc. v. Mack Trucks, Inc. 530 F.3d. 204 (3d Cir. 2008) (reversing JMOL for defendant where plaintiffs’ evidence showed dealer conspiracy and agreement with allegedly dominant manufacturer); McDonough v. Toys “R” Us, Inc. 2009 WL 2055168 (E.D. Pa. 2009)(dominant retailer); BabyAge. com, Inc. v. Toys “R” Us, Inc., 558 F. Supp. 2d 575 (E.D. Pa. 2008) (dominant retailer).

No post-Leegin decision has held that an RPM Agreement violates Sherman One

-- Jury verdict for defendant in Toledo Mack Truck -- but too few courts have reached the merits..

11

Special Rule of Reason for RPM? Leegin Majority’s “Flinches”: If it is applied to RPM

“courts would have to be diligent in eliminating their anticompetitive uses from the market.”

Invitation to Lower courts: As they gain experience applying the rule-of-reason to RPM courts can

Establish Litigation Structure “to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses.”

Adopt Evidence Rules or Presumptions: “to make the rule of reason a fair and efficient way” to separate anticompetitive from procompetitive RPM.

12

Special Rule – DOJ Guidance? 2009 Speech by Christine Varney: says DOJ won’t

“disrupt the traditional preeminent role of the FTC and the states in this [RPM] area -- but also says that structured rule of reason is consistent with modern Sherman One analysis (shifting from binary choice to more focused inquiry)

Proposed Approach: Plaintiff proves existence of RPM and its scope plus structural conditions “under which RPM is likely to be anticompetitive.” -- burden then shifts to defendant to show procompetitive effects (or that conducive conditions don’t exist)

Detailed Application --Discussed later

13

Special Rule – FTC Guidance? 2008 Nine West Review: Leegin factors should be

used to determine “when RPM might be subjected to a closer analytical scrutiny, such as that anticipated by Polygram Holdings [v. FTC] or other truncated rule of reason analysis.” -- but Nine West allowed to resume RPM because of its “modest market share.” NineWest, Doc No.-3-3937

2009 FTC Workshops: Intended “to explore []how to best distinguish between uses of RPM that benefit consumers and those that do not” -- but no findings or recommendations to date.

2009 Enforcement Action Against NAMM: Bars NAMM from assisting or facilitating members to enter or enforce RPM agreements

-- but not an RPM case.. In re. NAM Inc. Doc. No. C-4255

14

Corrective Federal Legislation? Possible Range of Legislative Provisions: -- Simply Override Leegin (restore per se illegality) -- Partially Override Leegin (per se illegality with

exceptions) * Breyer dissent suggests that a per se rule subject to

exception for new entry might be more consistent with Stare Decisis

* Some Leegin Amici argued for per se illegality if RPM encompasses a certain percentage of the relevant market.

-- Accept Leegin but enact special rules regarding evidence/presumptions. (i.e. legislating what the Leegin majority left to the lower courts)

15

Pending Legislation Discount Pricing Consumer Protection Act of

2011 would completely override Leegin -- by adding a sentence to Sherman One stating: ‘‘Any contract, combination, conspiracy or

agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.’’

• Introduced in Senate (S. 75) last January, and in the House (H.R. 3406) last November

• Both bills referred to committee • Note: Agreement still required (so Colgate issues would

be preserved).

16

Some Take-Aways Unless Congress acts, per se treatment of RPM

under federal law is a thing of the past. Courts are showing reluctance to create a

litigation structure that would make the rule of reason more efficient and fair.

Enforcement agencies have professed an interest in streamlining the rule of reason, but have not yet put words into action.

Its too soon to assume that express RPM agreements are risk free.

Colgate plans continue to have vitality as an alternative to that risk.

17

State RPM Enforcement After Leegin

Michael A. Lindsay

DORSEY & WHITNEY LLP

June 5, 2012

19

States as Source of Antitrust Law

• “. . . Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies. . . And on several prior occasions, the Court has recognized that the federal antitrust laws do not pre-empt state law.”

– California v. ARC America Corp., 490 U.S. 93 (1989)

• “Although there are federal antitrust statutes, e.g., the Sherman Act . . . and a large body of interpreting caselaw, antitrust law has traditionally been the province of the states. . . . [F]ederal antitrust law is intended to supplement the remedies available under Kansas law, not to replace Kansas antitrust provisions.”

– O’Brien v. Leegin Creative Leather Products, Inc., ___ WL ___ (Kan. May 4, 2012)

20

State RPM Enforcement After Leegin

• Enforcement actions in California and New York

• Kansas supreme court decision in O’Brien

• Maryland adopts Leegin repealer – No enforcement actions

• Early enforcement actions in Illinois and Michigan (Herman Miller states) or North Carolina (McLeod Oil)

21

California Statutes

• CAL. BUS. & PROF. CODE § 16720(b) (2009) (defining a trust as a combination “[t]o . . . increase the price of merchandise or any commodity”)

• CAL. BUS & PROF. CODE § 16720(d) (defining a trust as a combination to “fix at any standard or figure, whereby its price to the public or consumer shall be in any manner controlled or established, any article or commodity . . .”)

• CAL. BUS. & PROF. CODE § 16720(e) (defining a trust as a combination to “agree in any manner to keep the price of such article . . . at a fixed or graduated figure” or “establish . . . the price of any article . . . between them . . . and others, so as directly or indirectly to preclude a free and unrestricted competition . . .”)

22

California v. DermaQuest

• CA AG files Complaint Feb. 5, 2010 against DermaQuest (“cosmeceuticals”) alleging that reseller agreements provide: – “Distributor may not resell Product in a price structure

that yields a Product price at ultimate retail sale below Dermaquest's Suggested Retail Price (DSRP)”

– “Reseller may not resell Product in a price structure that yields a Product price at resale below . . . DSRP”

23

DermaQuest Consent Decree

• Filed Feb. 23, 2010

• Enjoins DermaQuest from violations of statute

• Requires DermaQuest to pay $70,000 in civil penalties, plus $50,000 in costs

24

California v. Bioelements

• People v. Bioelements, Inc., File No. 10011659 (Cal. Super. Ct., Riverside County, filed Dec. 30, 2010)

• Consent decree filed Jan. 11, 2011

• Allegation that “agreements constituted ‘vertical price-fixing in per se violation of the Cartwright Act’” and “unfair competition” under California UCL

25

Bioelements, cont’d

• Bioelements enjoined from – agreements to “increase the price of merchandise or any

commodity,” or “to fix at any standard or figure, whereby its price to the public or consumer shall, be in any manner controlled or established, any article or commodity . . . intended for sale, barter, use or consumption in this State”

– agreements binding third parties “not to sell . . . any commodity . . . below a common standard figure, or fixed value,” or “to keep the price of such . . . commodity . . . at a fixed or graduated figure”

• Bioelements required to pay $15,000 in civil penalties and $36,000 for the state’s attorney’s fees

26

Bioelements, cont’d

• Bioelements also required to send a letter to its resellers with RPM agreements since 2005 – “immediately, unilaterally disavowing all parts of

Bioelements’s distributor or resale agreement with you that purportedly obligated you to maintain certain resale prices for Bioelements products”

– “[Y]ou do not have an agreement . . . to maintain any resale prices for Bioelements products”

• No limitation to resellers based in or selling to Californians

27

New York v. Tempur-Pedic Int’l

• People v. Tempur-Pedic, International Inc., 400837/10 (N.Y. Sup. Ct. N.Y. County Verified Petition filed Mar. 29, 2010); Decision, Order, and Final Judgment filed on Jan. 14, 2011, aff’d May 8, 2012, 2012 NY Slip Op 03557

• NY Attorney General files Complaint alleging contractual prohibition of discounting in violation of 369-a

• Trial court dismisses complaint

• Dismissal affirmed on appeal

28

New York Statute

• “Any contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable at law.”

– N.Y. Gen. Bus. – Art. 24-A - § 369-A Price-fixing Prohibited

29

New York v. Tempur-Pedic

• NY law (369-a) makes pricing agreements unenforceable but not actionable – “there is nothing in the text to declare those contract

provisions to be illegal or unlawful; rather the statute provides that such provisions are simply unenforceable in the courts of this state”

• The only “agreement” applies only to advertised price – “Advertising agreements cannot be the subject of a

vertical RPM claim, because they do not restrain resale prices, but merely restrict advertising”

People v. Tempur-Pedic International, Inc., , 2012 NY Slip Op 03557 (N.Y. App. Div., 1st Dept. May 8, 2012) available at http://www.nycourts.gov/reporter/3dseries/2012/2012_03557.htm

http://www.nycourts.gov/reporter/3dseries/2012/2012_03557.htm�

30

Kansas: O’Brien v. Leegin

• Same basic facts as in Leegin federal case

• Agreements for calendar 2001-02 stated that the retailer would maintain minimum inventory, showcase Brighton products in dedicated spaces, "[s]ell Brighton products for the suggested price every day, 365 days a year," and "close out markdown styles you do not plan to reorder." – Agreements (2003) applying to Brighton luggage

stated that retailer agreed to "sell the luggage at the suggested retail price."

31

Kansas Statute Prohibits Agreements - -

• “to fix any standard or figure, whereby such person's price to the public shall be, in any manner, controlled or established, any article or commodity of merchandise, produce or commerce intended for sale, use or consumption in this state”

• “to [b]ind . . . themselves not to sell [or] . . .dispose of . . . any article or commodity . . . below a common standard figure”

• “to keep the price of such article, commodity or transportation at a fixed or graded figure”

• “which tend to prevent full and free competition in the importation, transportation or sale of articles imported into this state, or in the product, manufacture or sale of articles of domestic growth or product of domestic raw material

• “designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles”

32

O’Brien Rejects Rule of Reason for RPM

• State statute does not mention “reasonableness”

• Plain language prohibits “any” agreements” and “all” arrangements, contracts, agreements, trusts or combinations . . . designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles”

• Rejects deference to federal cases – “federal precedents interpreting . . . federal statutes

have little or no precedential weight when the task is interpretation and application of a clear and dissimilar Kansas statute”

33

Colgate Doctrine Survives in Kansas

• Kansas statute requires “something more than merely a unilateral pricing policy adopted by a wholesale supplier in the position of Brighton”

34

Some Lessons

• State laws – or at least a state’s relative chances of success in challenging RPM agreements – vary significantly by state

• Smaller companies may be more attractive targets in some states

• Maximum RPM challenges are still “mostly dead”

• But the Colgate doctrine is alive and well

35

Lessons, cont’d

• Uniformity may be achievable only with the lowest common denominator

• Manufacturers should carefully consider their Internet sales and resale strategy

• Manufacturers should continue to weigh the incremental risks and benefits of RPM agreements

June 5, 2012

International Treatment of Resale Price Maintenance William L. Monts III Hogan Lovells US LLP Washington, D.C.

www.hoganlovells.com 37

Resale Price Maintenance Under European Competition Law

• In most cases, minimum resale price maintenance is considered a serious infringement of European Union competition law

• Usually resale price maintenance agreements are sanctioned by a fine

• Competition authorities generally believe that resale price maintenance – restricts price competition at the retail level and leads to

higher retail prices; or – induces collusion at supplier level

• Rules are generally the same under the competition laws of most EU member states



• European competition law is also stringent on what is called “indirect” resale price maintenance, which may result from the following practices: – fixing margins – penalizing dealers/distributors/resellers for various

practices relating to resale prices – making promotional support conditional on the

dealer/distributor/reseller maintaining a set resale price

– preventing dealers/distributors/resellers from granting rebates or imposing maximum rebates (i.e., indirectly imposing a minimum price)



• European competition law generally allows for the following practices so long as they are not disguised forms of minimum resale price maintenance – Maximum resale prices – Minimum discounts – Suggested resale prices


Resale Price Maintenance Under European Competition Law • Under the Block Exemption for Vertical Restraints, the

European Commission recognizes some limited circumstances in which minimum resale price maintenance might be permissible: – Programs of limited duration when necessary for the introduction

of a new product – Programs that the parties can demonstrate are needed to prevent

free riding among dealers on pre-sale or point-of-sale services that benefit consumers

• Very limited, fact-specific exceptions and should only be implemented with the aid of knowledgeable and experienced European competition counsel


Resale Price Maintenance Under Other Competition Law Regimes Around the World

• China – Resale price maintenance is the only vertical restriction expressly

prohibited under the Antimonopoly Law (subject to a rule of reason analysis)

– In technology contracts, unreasonable restrictions regarding prices imposed on technology recipients are illegal under the Contract Law

• Brazil – Competition authorities have imposed fines for manufacturer-

dealer agreements setting fixed mark-ups in the rolling bearings and lubrications solutions businesses

• Korean and Canadian authorities have also imposed significant fines for minimum resale price maintenance agreements


The Bottom Line Is . . .

• Under most competition law regimes outside the United States, minimum resale price maintenance is almost always illegal and subjects the parties to substantial fines

• What few exceptions to the general rule of illegality exist are: – Limited in scope – Fact-specific – Have not been tested in practice

• The safest course: Don’t do it

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Antitrust Liability Triggers: Horizontal Agreements

Leegin’s Express Warning Leegin majority: “Resale price maintenance, it is

true, does have economic dangers.” Cautionary Note: The decision suggests four

areas where horizontal agreements might be implemented through or facilitated by vertical RPM agreements:

Manufacturer cartels (classic price/output fixing)

Manufacturer exclusion (e.g. foreclosure of outlets)

Retailer cartels (price fixing at retail level)

Retailer Exclusion (e.g. foreclosure of supply)

45

RPM and Cartels Horizontal Cartel: If an agreement among competitors at

either level decreases output or reduces competition in order to increase price it “is and ought to be per se illegal.”

Role of RPM: A vertical RPM agreement could be used to aid a cartel at either level by:

-- Assisting conspirators to identify price-cutting “cheaters.” -- Discouraging Mfrs. from cutting prices to dealers (if dealer then

maintains minimum price)

Multiple RPM agreements can also supply a “plus factor” tending to show the existence of a horizontal agreement.

Reasonableness Standard: To the extent the RPM agreement facilitates either type of cartel “it too would need to be held unreasonable” -- but under the rule-of-reason.

Integrated Sys. And Power v. Honeywell Int’l.,Inc., 737 F. Supp. 2d 286 (SDNY, 5/13/10).

46

Reasonableness Factors Leegin Majority: Factors “relevant” to whether

the price restraint imposed by RPM agreement is “unreasonable” under Sherman One:

Prevalence of RPM in market because without it -- Mfr. cartel can be undercut by non-participating rivals

-- Retail cartel would be subject to interbrand competition from non-participating brands.

Source/impetus for the RPM restraint -- retailer-driven RPM is more consistent with retail cartel -- Manufacturer-driven RPM is more ambiguous (unless

use of RPM is widespread). Market Power: Ability to abuse RPM “may not be a

serious concern unless relevant entity has Mkt. Power.”

47

Prima Facie case -- Collusion Potential cartel at Manufacturer Level : RPM used pervasively (majority of Manufacturers.?) Conducive Market structure (i.e. concentration) RPM plausibly helps identify cheaters (not the case if

prices are otherwise transparent) Potential Cartel at Dealer Level: RPM used pervasively (majority?) RPM instituted by retailer coercion (persuasion plus…) Manufacturer unable to thwart retailers. Query: Does the potential furtherance of a per se illegal

horizontal agreement eliminate the need for full Rule-of-Reason in these cases?

48

Prima Facie Case -- Exclusion Manufacturers’ Exclusionary agreement – to

insure large retailer margins as a disincentive to take on small incumbents or new entrants.

Combined market “dominance” Prevalent use of RPM (majority?) Significant foreclosure of outlets is “plausible.” Retailers’ Exclusionary agreement – to force

adoption of RPM as bulwark against discounting (including from “intertype” competition)

Participating Retailers have market power RPM instituted by retailer coercion Significant impact on rival is “plausible.”

49

Apple e-book Case Distinguished Complaint in United States v. Apple, Inc. (filed 4/11/12) Publisher Cartel -- alleged to have agreed to stabilize

and raise retail price of e-books. -- An obvious restraint on interbrand competition

(the first degree murder of antitrust) -- Per Se claim under Sherman One

Agency Agreements: Concurrently entered into in order to recover pricing authority for publishers -- means used to implement conspiracy (not RPM)

-- suggested by Apple as a means of entering e-book market (gathering content for iBook store)

-- includes “price fixing” terms (price tiers & MFN clause)

50

Thomas R. Sheran (612) 877-5255 [email protected]

51

mailto:[email protected]�

Vertical Triggers for Antitrust RPM Concerns

Michael Lindsay

53

Leegin Observations on Vertical Concerns

• Vertical restraint to facilitate retailer cartel – “Vertical price restraints also ‘might be used to organize

cartels at the retailer level.’ . . . A group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance.”

• Vertical restraint to exclude rivals – “Resale price maintenance, furthermore, can be abused by

a powerful manufacturer or retailer. A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network. . . . . A manufacturer with market power, by comparison, might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants.”

54

In re eBooks Antitrust Litigation

• Not a classic RPM case, but with some pertinent lessons

• Publishers historically used a “wholesale” model for distribution of books – Retailer bought books from publisher (or wholesale

distributor) at a price of NN% off list – Retailer determined retail selling price

• Same model was applied in distribution of electronic books (“eBooks”)

In re Electronic Books Antitrust Litigation, File No. 11 MD 2293 Opinion & Order, 1212 WL 1 (S.D.N.Y. May 15, 2010) (Cote, J.)

55

In re eBooks Antitrust Litigation

• Amazon offers eBooks at prices significantly lower than hard-covers’

• Apple enters the picture and seeks “agency” model – Publisher determines book’s selling price and pays

Apple a commission

• Each publisher signs agreement with Apple

56

Central Allegation

• “Publisher Defendants, concerned by [Amazon’s] pricing of newly released and bestselling e-books at $9.99 or less, agreed among themselves and with Apple to raise the retail prices of e-books by taking control of e-book pricing from retailers.” – Each publisher feared Amazon resistance to unilateral

action – And feared competition if other publishers’ prices remained

low

U.S. v. Apple, Inc., Competitive Impact Statement, File No. 1:12-CV-2826 (April 11, 2012), available at http://www.justice.gov/atr/cases/f282100/282143.pdf

57

Allegations of Apple Role

• Apple wanted to enter the business of selling eBooks for use on the iPad, but did not want to compete with Amazon on price

• Apple therefore insisted on selling eBooks through the agency pricing model, and negotiated nearly identical contracts with each of the Publisher Defendants in January 2010

• Contracts were signed within days of each other and prompted an industry-wide switch to the agency model, which constrained price competition among eBooks retailers

• Publisher Defendants communicated with each other over the course of the negotiations and Apple acted as a conduit for their message

In re Electronic Books Antitrust Litigation, File No. 11 MD 2293 Opinion & Order, 1212 WL 1 (S.D.N.Y. May 15, 2010) (Cote, J.)

58

So is eBooks Antitrust This?

versus

New Entrant Incumbent

59

Or This?

Apple

Publisher

Publisher

Publisher

Publisher

Publisher

Publisher Publisher

Publisher

60

Pointers on Vertical Concerns

• Identify business rationale for proposed policy

• Identify source of policy – Policy should advance distribution objectives of

supplier – Policy based solely on retailer complaints poses more

legal risk, but – Retailer complaints are a source of information

61

Michael Lindsay Dorsey & Whitney LLP 612.340.7819 (Voice) 612.340.2868 (Fax) [email protected]

June 5, 2012

Best Practices for Creating Programs Designed to Influence Resale Prices William L. Monts III Hogan Lovells US LLP Washington, D.C.


Best Practices for Implementing Lawful Programs to Influence Resale Prices in the United States • As the earlier presentations make clear, there is no simple or certain

way for suppliers seeking to influence resale prices to eliminate legal risk

• The Options: – Express or tacit agreements on resale prices as in Leegin

• Must be vertical • Must satisfy the rule of reason • Certain to be judged under the rule of reason only under federal law • Per se illegal in some state laws (multiple distribution approaches) • Significant risks under international competition regimes

– Agency or Consignment Relationships • Must be bona fide agency relationship or consignment arrangement • Details of arrangements are subject to challenge • State-law definitions of agency and consignment vary • Additional potential non-antitrust liabilities with agency relationships


Best Practices for Implementing Lawful Programs to Influence Resale Prices in the United States

• The Options: – Wholesale Price Level Adjustments – Minimum Advertised Price (MAP) Programs

• Applies (at least in theory) only to advertised prices • “Clever evasions” • Violations difficult to detect • Application to Internet sales is unclear

– Colgate Programs • Easy to understand in theory, but as we will discuss, rarely easy to

implement or monitor in practice • Often entail substantial burdens on the manufacturer (see Amicus Brief filed

by Ping in the Leegin case) • Handling violations and discriminatory enforcement

– Vertical Integration


Challenges Under Minimum Advertised Price Programs

• MAPs have historically been treated more leniently than resale price maintenance agreements when: – Program is voluntary and imposed unilaterally by the

manufacturer (and not as a result of prompting from a group of dealers)

– Program is tethered to advertising paid for by manufacturer with co-operative advertising funds

– Dealer is free to depart from the MAP in advertising for which he or she pays

• MAPs exist without all of these elements, but courts and enforcement agencies have sometimes given more stringent programs closer scrutiny


Challenges Under Minimum Advertised Price Programs

• MAPs subject to the “Clever Evader” – “See Dealer for Price” – “Call Store for Price and Other Details” – “Prices So Low that We Can’t Tell You”

• Application of MAPs to Internet Sales is Particularly Challenging – Internet sales are often a tool of the free rider, BUT – Distinction between advertised prices and actual sales

prices on the Internet is less clear – Restrictions on advertised prices on the Internet may be

somewhat more likely to affect actual resale prices


Designing Minimum Advertised Price Programs • Written policy promulgated unilaterally by the

manufacturer – Not included in dealer agreement – Clearly sets forth the policy and describes the products to

which it applies – Clearly and simply states the business rationale for the

policy (e.g., premium product, protect the reputation and brand image of manufacturer)

– Clearly establishes the minimum advertised price – Explains the consequences of a violation

• Risks of “progressive discipline”

– Explains that manufacturer alone will enforce the policy and does not solicit or desire complaints


Challenges for Colgate Programs • Easy to Implement in Theory

– Concept as articulated in Colgate is simple – Manufacturer announces unilaterally determined

minimum resale price – Manufacturer announces that it will not deal with

any dealer that does not adhere to the announced minimum resale price

– Terminates any dealer who does not comply


Challenges for Colgate Programs • Real-World Facts Virtually Never Match the

Theory – Compliance

• Natural inclination is to seek to compel compliance with policy • Efforts to enforce compliance by manufacturer, however, have

been held to be an “agreement” • “Coerced” compliance = agreement • Concept seem irrational to business • The Colgate Paradox – program is “safe” when all dealers on

board (implies agreement) but becomes risky when mavericks emerge (implies lack of agreement)


Challenges for Colgate Programs

– Ubiquity of Dealer Complaints/Inquiries • No matter how much the manufacturer asserts that it does not want

complaints from dealers about violations of the Colgate program, complaints from one or more dealers about another dealer’s lack of compliance with the Colgate program are a certainty

• Dealer complaints alone followed by manufacturer action is not enough to infer agreements on resale prices, Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984)

• Dealer complaints, however, can be coupled with other evidence of attempts to “coerce” compliance to create an inference that either the manufacturer and “coerced” dealer agreed on a resale price OR the manufacturer and complaining dealers agreed on resale prices


Challenges for Colgate Programs – The “Helpful” Sales Representative

• Two Rules of Thumb – The characteristics that make a good sales representative

also make an antitrust risk – Always check the sales files first

• Dealer complaints are often made to sales representatives • Good sales personnel are “problem solvers” and they often

view their job as resolving complaints about non-compliance • Inclination is for sales representatives to then speak to the

allegedly non-complying dealer to get him or her “on board” with the program

• Often sales staff will “helpfully” document their activities • All of these activities become evidence of agreement on resale

prices


Challenges for Colgate Programs – Consequences of Non-Compliance

• Discriminatory Enforcement – varying enforcement based on perceived severity of the violation can be evidence of agreement and increase risk of dealer litigation

• Typical inclination is to impose “progressive discipline” (e.g., warning or probation for initial violation followed by increasingly stringent penalties for subsequent violation)

• “Progressive” disciplinary steps followed by compliance by the previously non-complying dealer may raise an inference of express agreement on resale prices or “coerced” agreement on resale prices

• In jurisdictions in which resale price maintenance agreements are per se illegal, the finding of agreement may be dispositive

• Safest course of action is prompt and indefinite termination, BUT that is generally not palatable from a business perspective, particularly when the non-complying dealer is a large customer of the manufacturer or a longstanding dealer


Minimizing Antitrust Risk in Recurring Business Situations THE SITUATION: Complaint by One Dealer About Another’s Non-Compliance Received by Headquarters or a Field Sales Representative THE RISK: Person receiving the complaint communicates with the allegedly non-compliant dealer to obtain compliance with the program, which then becomes the basis of an allegation of agreement on resale prices


Ways for Minimizing Antitrust Risk – Written Policy

• State the terms of the policy in writing making clear that it is imposed by the manufacturer unilaterally (i.e., not as the result of any agreement with (a) a powerful dealer; (b) a group of dealers; or (c) another manufacturer)

• Do not include the policy in a dealer or distributor agreement and do not attach it as an exhibit to the agreement

• Explain the scope of the policy and its supporting business rationale (e.g., encourage provision of point-of-sale services)

• State in policy that manufacturer neither wants nor solicits complaints from dealers and will enforce the policy on its own

• Make clear in the policy the consequences of non-compliance • State directly that dealer compliance is voluntary and dealers remain

free to set their own resale prices • State that manufacturer does not seek dealer assent to policy


Ways for Minimizing Antitrust Risk – Train Employees and Have Procedures in Place to Respond

to Complaint • If possible, have questions directed about the policy to a single

person or a central department with a few people • Authorize only one or a limited number of employees to discuss the

policy with dealers • Train employees about the risk of complaints and have them direct

dealer inquiries to the designated individual or central department • Train field sales representatives how to respond to dealer complaints

or inquiries and tell them not to discuss the conduct of one dealer with another

• Provide a list of frequently asked questions with accurate answers to help sales representatives know how to respond to complaints or inquiries

• Reiterate to the complaining dealer that manufacturer neither wants nor solicits complaints and will enforce the policy on its own


Minimizing Antitrust Risk in Recurring Business Situations THE SITUATION: Complaint by a Group of Dealers About Another’s Non-Compliance or a Request/Demand by a Group of Dealers that the Manufacturer Implement a Colgate Program THE RISK: Imposition of a policy or program at the behest of competing dealers or upon “coercion” by competing dealers creates a risk that manufacturer has joined a horizontal dealer price-fixing agreement


Ways for Minimizing Antitrust Risk – Antitrust Compliance Program • Manufacturers that join or enforce anticompetitive

agreements among dealers are considered to have joined a horizontal conspiracy. See, e.g., United States v. Sealy Corp., 388 U.S. 350 (1967); United States v. General Motors Corp., 384 U.S. 127 (1966) Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959); Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939).

• Train employees to recognize the risk of agreements with competitors

• Train employees to refuse to discuss such issues with dealers


Minimizing Antitrust Risk in Recurring Business Situations THE SITUATION: Non-Compliance with Colgate Program by the Manufacturer’s Largest Customer THE RISK: Discriminatory enforcement poses risk that compliance by dealers will be deemed product of agreement and also poses risk of litigation by any dealers terminated for violating the Colgate program


Ways for Minimizing Antitrust Risk

– Enforcement • Enforce uniformly – no “protected” dealer or class of

dealers • Safest course is termination for indefinite period

– No warnings or “second chances” – May seem arbitrary or unfair – Raises significant business issues – “Progressive discipline” as an alternative?

• Do not enforce the policy with fanfare • Do not give advance notice to the affected dealer absent

compelling circumstances – may enforcement effective immediately

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