Recent state enforcement actions and proposed federal legislation have raised concerns over what manufacturers and distributors can do in terms of requiring their downstream distributors and retailers to adhere to a suggested minimum price. This concern exists in spite of the fact that the Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS overruled the nearly century old rule that minimum RPM (“you can’t charge less than X when you resell my product”) is not a per se violation of the federal antitrust law and held that minimum RPM is subject to the rule of reason standard. Under the rule of reason, a court conducts a balancing test of both the pro-competitive and anti-competitive effects of the alleged violation to determine whether the RPM is illegal (whereas under the per se rule, it is often game over for defendants). However, not all states have decided to follow the Leegin decision in interpreting state antitrust law and this has led to some confusion over the risk of implementing minimum RPM agreements. Some states have enacted legislation making it clear they do not follow Leegin. For example, Maryland became the first state to adopt legislation that made RPM agreements per se illegal under the Maryland Antitrust Act in October 2009. While some states try to interpret their antitrust statutes in conformity with federal law, several state enforcers have brought actions under state law to challenge such agreements.
In March 2010, the New York AG’s office filed a lawsuit against Tempur-Pedic,the well-known mattress manufacturer, accusing it of violating New York state law by enforcing minimum retail prices for its products. The complaint alleged that Tempur-Pedic unlawfully prohibited dealers from discounting, by not doing “business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic.” The lawsuit sought an injunction barring Tempur-Pedic from enforcing the anti-discounting policy and restitution for those consumers who had been adversely affected by the practice. The New York Supreme Court disagreed with the AG last month, finding that New York law does not prevent a vendor from restraining a reseller’s right to discount the resale price. The Supreme Court held that resale price maintenance is not an “illegal act” and that the language of the applicable provision makes such contracts unenforceable, but not illegal.
Interestingly enough, the same day as the New York Supreme Court decided the Tempur-Pedic case, the California OAG entered into a settlement with Bioelements,a small Colorado-based manufacturer of skin care products sold to beauty salons throughout California and on the internet. In its complaint, the OAG accused Bioelements of engaging in what it described as a “blatant price fixing scheme” when it entered into dozens of contracts called “Internet Only Accounts Agreements” with third party companies that required them to sell Bioelements’ products online for at least as much as the suggested retail price set by Bioelements in violation of California’s Cartwright Act (California’s general antitrust law) and California’s Unfair Competition Law (UCL). Under the settlement, Bioelements is required to permanently refrain from fixing resale prices for its merchandise; inform distributors and retailers with whom Bioelements made price-fixing contracts that Bioelements considers the contracts void and will not enforce them; and pay a total of $51,000 in civil penalties and attorneys’ fees. This is the second such action focused on minimum RPM in the past year. In February 2010, the OAG successfully obtained an injunction under the Cartwright Act and the UCL against another cosmetics company, DermaQuest, Inc., for similarly entering into contracts that prevented third parties from selling their products below a suggested retail price set by DermaQuest. The OAG has also focused on the federal legislative front by sending two open letters to Congress in the last three years urging it to reinstate federal safeguards against minimum RPM schemes.
In tandem with state enforcement efforts, Senator Herb Kohl of Wisconsin recently introduced the Discount Pricing Consumer Protection Act to the Senate Judiciary Committee which would essentially overturn the holding in Leegin and restore the rule that makes minimum RPM agreements between manufacturers and retailers, distributors, or wholesalers a per se violation of the Sherman Act. The proposed bill has been endorsed by the NAAG, 38 state attorneys general, and several consumer advocacy groups.
In light of these recent state actions and the proposed federal legislation, manufacturers and distributors who wish to prevent their downstream suppliers from offering their products at discount prices must proceed with caution. Any outright ban on discounting and even incentive programs aimed at discouraging discounting should be carefully considered by weighing the potential business benefits of brand protection with the legal risks still posed by the current state of competition law.
Requiring downstream suppliers to price no more than a ceiling price (maximum RPM) is a much less risky proposition. These arrangements were found to be subject to the defendant-friendlier rule of reason in State Oil v. Kahn and since this time states have followed the ruling and we are not aware of any such mandatory discounting schemes that have been found to be unlawful.