Resale Price Restraints in Vertical Agreements

Go to: Legal Background and Historical Treatment of Pricing Policies|Policies, Prices, and Terminology|Federal Law Prohibiting Vertical Agreements Affecting Reseller’s Prices|State Laws Prohibiting Vertical Agreements Affecting Resale Prices|Special Issues for Alternative Distribution Models|Guidelines for Manufacturers and Resellers

Maintained

by Michael A. Lindsay, F. Matthew Ralph, Jaime Stilson, and Anthony Badaracco, Dorsey & Whitney LLP

One of the most common questions you will hear when counseling manufacturers or distributors about product distribution matters is, “What can I do about resellers that are reselling my product at discounted prices?” Some corporate sales managers or marketing executives may recollect from a business law class that it is illegal to set a reseller’s resale price. They are not altogether wrong, but there are some legal tools that businesses can use to influence the prices that their resellers charge. Courts and scholars use the label “resale price maintenance” (RPM) to describe practices and agreements that manufacturers use to try to influence a reseller’s price (the actual selling price, not the advertised price). For decades, RPM agreements were considered per se violations of the Sherman Act. In response, manufacturers adopted unilateral pricing policies (UPP) that allowed them to take unilateral action against resellers discounting below MSRP. The Supreme Court’s holding in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 51 U.S. 877 (2007) eliminated per se treatment of RPM agreements at the federal level and shifted to the more flexible rule of reason analysis, under which a court considers all of the circumstances of a case in deciding whether an RPM agreement imposes an unreasonable restraint on competition and therefore is prohibited. As a result, manufacturers and distributors have more leeway under federal law to influence reseller’s prices.

This practice note will discuss:

Legal Background and Historical Treatment of Pricing Policies

Section 1 of the Sherman Act prohibits agreements that unreasonably restrain trade. 15 U.S.C. § 1. Agreements within the Sherman Act’s scope include agreements between actual or potential competitors (called “horizontal” agreements, because the parties operate at the same level of the product chain, such as a group of manufacturers or a group of retailers) and agreements between parties at different levels of the product chain (called “vertical” agreements, for example, between a manufacturer and a wholesaler, or between a distributor and a retailer). A vertical agreement can be either a price-related agreement (that is, dealing with a reseller’s resale prices or advertised prices) or a nonprice agreement (e.g., agreements granting exclusive resale territories or agreements prohibiting a reseller from selling competing products). This practice note is limited to price-related vertical agreements. For discussion of nonprice vertical agreements see the practice note Nonprice Restraints in Vertical Agreements.

The legality of an agreement in which a manufacturer or supplier sets the resale prices of its reseller has evolved over the last century, and particularly over the last 20 years, as the Supreme Court has changed its interpretation of antitrust law, including Section 1 of the Sherman Act. It is important that you understand this background for two reasons. First, some states continue to apply the old federal rule in interpreting their own state statutes—and state laws are critically important in this area. Second, your business client may have remembered something from a business law class taken before the law changed, and understanding the legal evolution will help you explain the current state of the law to your client.

Early in the twentieth century the U.S. Supreme Court held that agreements setting a minimum resale price were per se—that is, automatic—violations of the antitrust laws. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). Parties to such agreements were liable under federal law regardless of the parties’ market share or business reasons for making the agreement and regardless of whether the net effects of the specific agreement were anticompetitive. Even while courts began to apply the more flexible and fact-intensive rule of reason to non-price vertical agreements, courts continued to apply the per se rule to resale price agreements. Then, in 1997, the U.S. Supreme Court removed the “per se” label from agreements setting a reseller’s maximum price and held that the legality of these agreements would be determined using rule of reason analysis. State Oil Co. v. Khan, 522 U.S. 3 (1997). Ten years later, in 2007, the U.S. Supreme Court removed the per se ban from minimum resale price agreements and adopted the rule of reason to determine whether these types of agreements unreasonably restrict competition. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). For more information on the rule of reason and the per se rule, see the practice note, Standards to Assess the Legality of Conduct in Antitrust Cases.

As noted above, however, states have their own antitrust laws. In general, federal law does not prevent states from having their own antitrust laws that conflict with federal law or from providing different remedies for violations other than those provided by federal law. California v. ARC America Corp., 490 U.S. 93 (1989). Some states continue to apply a per se rule to minimum resale pricing agreements rather than the rule of reason that now applies at the federal level.

The law regarding RPM agreements not only varies among states, but also among foreign jurisdictions. If you are advising a client on the law outside the United States, you should know that most jurisdictions outside the U.S. (other than Canada) continue to prohibit minimum resale price agreements as “per se” or “hard core” violations.

Policies, Prices, and Terminology

Agreements versus Policies

Section 1 of the Sherman Act prohibits “contracts, combinations, or conspiracies”—agreements—that restrain trade. Without an agreement, there is no violation of Section 1, even if a manufacturer’s unilateral conduct would have substantially the same practical effect as an agreement between the manufacturer and its reseller. See generally United States v. Colgate & Co., 250 U.S. 300 (1919). A supplier who wants to influence its resellers’ prices can adopt a unilateral pricing policy (UPP), which discourages resellers from selling below the manufacturer’s suggested resale price (MSRP). For example, a manufacturer may tell each of its resellers that, as an independent business making its own business decisions, the reseller can set the price of the manufacturer’s products at any price it chooses, but likewise the manufacturer has decided that in the future it will not sell to resellers that choose to sell below MSRP. You will sometimes hear these referred to as Colgate policies, after the Supreme Court decision that confirmed their legality, or as RPM policies. Some UPPs are more complicated and contain provisions that gradually escalate the consequences for noncompliance. For example, the policy may provide that the first incident of noncompliance will result in a 30-day suspension of sales and shipments for the specific product at issue; the second incident, a 90-day suspension for the entire product line; the third incident, a one-year suspension.

Be careful when counseling clients about unilateral pricing/Colgate policies. Although a Colgate policy is legal, a Colgate policy can create a number of challenges in practice. Ideally, a manufacturer that learns of discounting should simply enforce its UPP, with no questions and no explanations. In many cases, however, a manufacturer wants to persuade the reseller to comply with its policy, usually by increasing its resale prices to the MSRP. This can create problems, because although a unilateral pricing policy is legal, certain actions by the manufacturer can convert the legal unilateral policy into an illegal agreement. For example, if an eager account representative asks the reseller to increase its prices, and the reseller does so, these facts can be interpreted as an agreement. Similarly, if the manufacturer attempts to enforce the policy by slow-shipping products to discounting resellers, the action may be construed as inviting an agreement. Isaksen v. Vermont Castings, Inc., 825 F.2d 1158 (7th Cir. 1987).

Similarly, a manufacturer’s termination of a discounting reseller at the request of a non-discounting reseller may be consistent with the manufacturer and non-discounting reseller having made an RPM agreement. Whether the circumstances constitute an RPM agreement will depend upon specific facts. Merely terminating a reseller, even in response to complaints from another reseller, does not constitute an illegal RPM agreement. First, the manufacturer may simply be receiving information from the other reseller and then making its own decision to terminate a price-cutting reseller – that is, the decision might not be the result of an “agreement” with the non-discounting reseller, and without an agreement, there is no violation of Section 1 of the Sherman Act. Second, even if the manufacturer terminates the discounting reseller as a result of an agreement with nondiscounting reseller, that does not necessarily mean that there also is an agreement that the nondiscounting reseller will charge any particular price level. Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988); Monsanto Co., v. Spray-Rite Service Corp., 465 U.S. 752 (1984).

A company that seeks to discontinue working with a distributor should send a letter to document its legitimate business reason for ending the relationship and retain a copy of this letter in its records. The letter can help substantiate a defense that the distributor was terminated for a legitimate business reason rather than for the anti-competitive reason alleged by the distributor. Your client can use the Distributor Termination Letter (Failure to Follow Resale Price Agreement) to terminate a distributor in cases where the company has adopted a policy of not selling to distributors that fail to follow its suggested resale prices and has included such an agreement in its contract with the distributor. When there is no agreement, you should use the letter Distributor Termination Letter (Failure to Follow Suggested Resale Prices). To terminate a distributor for reasons unrelated to pricing practices, you should use a letter such as Distributor Termination Letter (Reasons Other Than Pricing Practices).

Advertised Prices versus Actual Selling Prices

A manufacturer may be concerned either with its resellers’ actual selling prices or with the resellers’ advertised prices. For example, manufacturers with “cooperative” advertising programs, where a manufacturer pays for some or all of a reseller’s advertisement, may refuse to pay for an advertisement that mentions a price below MSRP or otherwise implies that the reseller offers prices below MSRP (e.g., “prices so low that the manufacturer won’t let us tell you”). Some manufacturers apply their Minimum Advertised Price (MAP) program to all advertising of their products (or to all advertising of a specified group of products), whether or not the manufacturer subsidizes the advertising.

An agreement between a manufacturer and its reseller that applies solely to the reseller’s advertised prices does not fall within the per se ban that some states still have against RPM agreements. Worldhomecenter.com, Inc. v. KWC America, Inc., 2011 U.S. Dist. LEXIS 104496 (S.D.N.Y. Sept. 15, 2011); Campbell v. Austin Air Systems, Ltd., 423 F. Supp. 2d 61, 68 & n.6 (W.D.N.Y. 2005). The distinction between advertised price and actual selling price used to make a difference under federal law as well, when MAP agreements were judged under the rule of reason but RPM agreements were per se illegal. MAP agreements, however, may be illegal under a rule of reason analysis.

As with RPM programs, a MAP program may be implemented through either agreements or policy. With the possible exception of co-op advertising programs, however, a manufacturer might prefer a MAP policy, rather than a MAP agreement, simply to control antitrust risk. (Remember that agreements which are analyzed under the rule of reason can be illegal in some circumstances.) If the program is implemented through a policy, rather than an agreement, the manufacturer has two lines of defense against potential antitrust claims: (1) there was no agreement, and (2) even if there was an agreement, it did not apply to or effect actual selling prices. (Under federal law, of course, the manufacturer has the further defense that, even if there was an agreement on actual selling price, the agreement was reasonable.) The manufacturer should consider whether the marginal benefit of having a potential breach of contract claim against its customers, which the manufacturer would have if it implements its program through agreements, outweighs the benefit of having additional antitrust defenses.

Federal Law Prohibiting Vertical Agreements Affecting Reseller’s Prices

The Supreme Court has now held that the “rule of reason” applies to all RPM agreements rather than treating these agreements as per se violations, as it did previously. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). Under the rule of reason, a court considers all of the circumstances of a case in deciding whether an RPM agreement imposes an unreasonable restraint on competition (and therefore is prohibited). As in any other civil case, the plaintiff bears the burden of pleading facts that make it plausible that an agreement exists and may have anticompetitive effects. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Ultimately, the plaintiff also bears the burden of proving that an agreement exists and that its net anticompetitive effects outweigh its procompetitive justification.

Using a rule of reason analysis, a court looks at whether an RPM agreement has anticompetitive effects based on a number of factors, including: the nature of the business and the structure of the industry; the nature, purpose, history, and effect of the agreement within that industry; and the market power of the supplier and affected resellers. Since Leegin, it is rare that a court will find that a true RPM agreement violates federal law. As in any other rule of reason case, if the manufacturer does not have significant “market power” in its market, then its agreements are unlikely to cause any net anticompetitive harm. Market share is often used as a surrogate for market power, and market shares below 35% are likely indicators that the manufacturer does not have market power. Moreover, what prompted the Leegin majority to abandon the per se rule for RPM agreements is the recognition that there are often procompetitive justifications for a manufacturer’s use of resale price maintenance. For example, RPM programs can stimulate inter-brand competition, encourage retailer promotion of the manufacturer’s product (and prevent other retailers from “free-riding” on the efforts of the retailers who promote the product), and facilitate entry of new firms and brands.

Nevertheless, there are some cases in which an RPM program will be in violation of antitrust laws regardless of the procompetitive justifications that are offered. There are also cases in which in RPM programs will likely be illegal under a rule of reason analysis. These cases include the circumstances described in each of the subsections below.

Agreements with Competitors to Adopt RPM or MAP Agreements or Policies

Sometimes your business client will obtain a copy of a competitor’s RPM or MAP programs. There is nothing intrinsically wrong with your client’s investigating what is going on in its industry and taking that into account in making its own business decisions. The Leegin decision, however, applies to vertical RPM agreements, not to horizontal agreements between competitors who all adopt such programs. An agreement between competitors to adopt RPM programs would likely be viewed as a per se violation of the Sherman Act. Consequently, if your client provides you a copy of a competitor’s RPM or MAP program, you should confirm that the copy was not sourced directly from the competitor and determine whether there are any facts or communications that might suggest (to you or to anyone else) an agreement between competitors. You should also advise your client to document the fact that it obtained the competitor’s program in a lawful way so that if the document is ever produced in discovery, there will be no inference it was obtained from the competitor. Moreover, if your client is considering adopting an RPM program, you should consider whether other companies in your client’s industry already employ these programs because the timing of the adoption of RPM programs, or similarities in their contents, could raise an inference of a horizontal conspiracy.

For example, each of the four leading manufacturers of disposable contact lenses, who accounted for approximately 90% of contact lens sales, announced its own unilateral pricing policy or RPM policy during 2013 and 2014. The policies were challenged in private class-action litigation. The district court denied a motion to dismiss the complaint, finding that the class complaint’s allegations of a horizontal conspiracy met the heightened pleading standard set forth in Bell Atlantic Corporation v. Twombly, 550 U.S. 544 (2007). Twombly required that a plaintiff plead sufficient facts to make it plausible that the defendants’ conduct result from agreements, rather than from independent actions. The court found that requirement satisfied because the adoption of RPM policies represented a “fundamental” change in the industry, the policies were all adopted within a compressed time period, the price increases were dramatically large (40% – 112%), and no one lens manufacturer would be able to raise its prices significantly unless others followed. See In re Disposable Contact Lens Antitrust, 215 F. Supp. 3d at 1272, 1296-1301 (M.D. Fla. June 16, 2016).

Similarly, even before Leegin, the Federal Trade Commission challenged the MAP policies of five firms in a relatively concentrated industry—the prerecorded music CD industry in the late 1990s. These manufacturers sold 85% of all music CDs, and the manufacturers tended to adopt and expand their respective MAP programs in tandem with each other. Moreover, the FTC found no procompetitive benefit from these programs. See Analysis in Aid of Public Comment, In the Matter of Universal Music & Video Distribution Corp., Docket No. C-3974 (FTC 2000), available at https://www.ftc.gov/system/files/documents/cases/000906minimumadprice-analysis.htm (all five distributors adopted MAP policies in 1992-93 and adopted similar program revisions in 1995-96). See also Federal Trade Commission, Record Companies Settle FTC Charges of Restraining Competition in CD Music Market, https://www.ftc.gov/news-events/press-releases/2000/05/record-companies-settle-ftc-charges-restraining-competition-cd (providing links to multiple complaints and consent orders). The defendant music CD manufacturers later settled the follow-on litigation with class plaintiffs and state attorneys general. In re Compact Disc Minimum Advertised Price Antitrust Litigation, 216 F.R.D. 197 (D. Me. 2003).

Enforcing a Manufacturer Cartel

The use of RPM agreements as a tool for enforcing a price-fixing cartel among manufacturers is likely per se illegal (and the price-fixing cartel itself is certainly illegal per se). Consider the following example: a cartel might have trouble determining whether its members are all adhering to the cartel price because there is little price transparency in the suppliers’ own selling prices. In that case, the cartel members might instead look to prices at the retail level, where prices might be more readily determinable. If the retailers are free to set their own prices, however, some retailers may be willing to take lower margins than others, which would limit the cartel’s ability to detect manufacturer deviation from the cartel price. If all of the cartel members adopt RPM programs, however, then all retailers will have the same price. If a retailer deviates from a uniform retail price, then the manufacturer may be selling to that retailer at a price below the cartel level—and the other manufacturer cartel members will be able to detect the violation. The price-fixing agreement among the manufacturers would be illegal per se, and if there is an agreement among the manufacturers to implement RPM programs, then that agreement would also be illegal per se. If there is no agreement among the manufacturers to adopt RPM programs (but all manufacturers do so anyway), then the vertical agreement between a manufacturer and its reseller might still be condemned as illegal under the rule of reason, because the anticompetitive effects (of reinforcing the manufacturers’ price-fixing cartel) would outweigh any claimed procompetitive benefits.

Enforcing a Retailer Cartel

Horizontal price-fixing can also occur at the retail level—a group of retailers agreeing on the prices that they will all charge to consumers. Retailers may enforce their own cartel by compelling manufacturers to establish RPM programs. A manufacturer would terminate a retailer who “cheats” on the retailers’ cartel by lowering prices. Indeed, the manufacturer might not even be aware of the retail price-fixing conspiracy, but its vertical RPM program might still be illegal under the rule of reason because their anticompetitive effects (reinforcing the retailer conspiracy) would outweigh any claimed procompetitive benefit.

To protect against claims the manufacturer has participated in an agreement among retailers on resale prices, manufacturers sometimes adopt a policy of refusing to accept reports from its distributor, dealer or retailer customers that the customers’ competitors are engaging in price cutting or failing to adhere to the company’s suggested resale prices. In such circumstances, your clients can use the Price Complaint Response Letter to respond to price complaints. Where a company has a policy of not accepting such reports from its customers, it is important to respond with this type of letter because otherwise a court may view the lack of a response as evidence the company acted upon the complaint and asked the complainant’s competitor to change its prices.

Protecting a Dominant Retail Position

A dominant retailer may want to prevent entry or expansion by retailers that could challenge its dominance (for example, through lower costs or more innovation). The dominant retailer might ask its suppliers to impose RPM agreements or policies to prevent the would-be entrant from passing along the benefits of its more efficient model (through lower prices to consumers). Without the ability to charge lower prices, the innovative retailer might not be able to gain enough market share to challenge the dominant retailer. Consequently, the agreement between the dominant retailer and its suppliers will likely be illegal under the rule of reason, and the supplier’s vertical RPM agreements might also be illegal under the rule of reason because their anticompetitive effects (in reinforcing the anticompetitive conduct of the dominant retailer) would outweigh any claimed procompetitive benefit.

Protecting a Dominant Manufacturing Position

A dominant manufacturer might use an RPM program to give retailers an incentive not to sell the products of smaller rivals or new entrants at the manufacturer’s level. The RPM program might result in higher profit margins on the dominant manufacturer’s products compared to the margins on the smaller firms’ products and impede the ability of the smaller firm to challenge the dominant manufacturer’s position. The dominant manufacturer’s RPM agreements might be illegal under the rule of reason if this exclusionary effect outweighs any procompetitive benefits of the agreements. The RPM program might also be illegal under section 2 of the Sherman Act if the dominant manufacturer has sufficient market power to be considered a monopolist.

You should also consider the scope of the MAP program, the degree of concentration in your client’s industry, and the procompetitive justifications for the program. As discussed above, the Federal Trade Commission once challenged the MAP policies of five firms in a relatively concentrated industry—the prerecorded music CD industry in the late 1990s. These manufacturers sold 85% of all music CDs, and the manufacturers all adopted MAP policies. See Record Companies Settle FTC Charges of Restraining Competition in CD Music Market, https://www.ftc.gov/news-events/press-releases/2000/05/record-companies-settle-ftc-charges-restraining-competition-cd (providing links to multiple complaints and consent orders).

State Laws Prohibiting Vertical Agreements Affecting Resale Prices

States have their own antitrust statutes. Most state antitrust laws follow federal antitrust law as to RPM agreements, but there are outliers, such as California, which treat RPM agreements as per se violations. This variation among state laws presents a challenge to a company that wants to adopt a uniform nationwide RPM program. The continuing risk that an RPM agreement would be per se illegal in California and other states means that the only way to implement a nationwide RPM program is through UPPs. The discussions below include examples of various state antitrust laws as well as the circumstances under which a state may assert jurisdiction in an antitrust case.

Provisions of State Laws

The antitrust laws in about half the states use substantially the same language as Section 1 of the Sherman Act, prohibiting “[e]very contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce.” For example, Delaware law provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” DEL. CODE. ANN. TIT. 6, § 2103. A number of other states have statutes that include a general prohibition that is substantially similar to the Sherman Act, but have other, more specific prohibitions as well. Connecticut law provides that “Every contract, combination, or conspiracy in restraint of any part of trade or commerce is unlawful,” CONN. GEN. STAT. ANN. § 35-26, but the statute also provides that “every contract, combination, or conspiracy is unlawful when the same are for the purpose, or have the effect, of . . . [f]ixing, controlling, or maintaining prices, rates, quotations, or fees in any part of trade or commerce. . . .” CONN. GEN. STAT. ANN. § 35-28. Other state statutes are not patterned on the Sherman Act. For example, California’s antitrust statute (known as the Cartwright Act) makes every “trust” illegal. CAL. BUS. & PROF. CODE § 16726. A “trust” is defined as any of a number of kinds of combinations or agreements, including a combination to “create or carry out restrictions in trade or commerce,” or 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 of merchandise,” or to enter into an agreement “in any manner to keep the price of such article, commodity or transportation at a fixed or graduated figure.” CAL. BUS. & PROF. CODE § 16720(a), (b), (d), and (e)(1).

In many states, courts will construe the state antitrust law in the same manner as federal courts have construed the Sherman Act because their state statute requires it. For example, Delaware provides that its statute “shall be construed in harmony with ruling judicial interpretations of comparable federal antitrust statutes.” DEL. CODE ANN. TIT. 6, § 2113. Kansas provides that its statute “shall be construed in harmony with ruling judicial interpretations of federal antitrust law by the United States supreme court,” unless those interpretations are inconsistent with two express provisions of the Kansas statute. KAN. STAT. ANN. § 50-163(b). Other states may not have statutory harmonization provisions, but courts may still construe their state antitrust statutes in accordance with federal law. For example, New York’s state antitrust statute does not have a harmonization provision, but New York courts generally use federal law as a guide in interpreting New York’s statute unless state policy, differences in the statutory language, or the legislative history would indicate otherwise. Sperry v. Crompton Corp., 863 N.E.2d 1012, 1018 (N.Y. 2007).

In states that do not follow federal law on vertical agreements, RPM agreements may continue to be challenged as per se illegal. California has filed a series of enforcement actions challenging RPM agreements as per se illegal. For example, in Bioelements, a supplier sold skin-care products through salon spas and authorized internet resellers under written agreements with explicit minimum RPM provisions that stated, “Accounts are prohibited from charging more or less than the Manufacturer’s Suggested Retail Price (MSRP).” The California Attorney General alleged that the agreements constituted “vertical price-fixing in per se violation of the Cartwright Act.” People v. Bioelements Inc., File No. 10011659 (Cal. Super. Ct. Riverside County, filed Dec. 30, 2010) (settled by consent decree disavowing existing RPM agreements and prohibiting future RPM agreements). See Michael A. Lindsay, A Tale of Two Coasts: Recent RPM Enforcement in New York and California, Antitrust Source (Apr. 2011), available at http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/apr11-lindsay_4-20f.authcheckdam.pdf.

For a summary of the relevant provisions of the laws of the fifty states and the District of Columbia, see Michael A. Lindsay, Overview of State RPM, Antitrust Source. This chart is available at http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/lindsay_chart.authcheckdam.pdf.

State Jurisdiction

A state is unlikely to assert jurisdiction over a manufacturer without some nexus to the state, but once that nexus is established, the extent of the state’s reach may be substantial. For example, in the Bioelements case discussed above, the California Attorney General’s complaint was resolved through a consent order. Bioelements was incorporated in Illinois and had its physical headquarters in Colorado, but its president worked from California, and the company delivered its products to resellers located in California. The order prohibited Bioelements from making resale price agreements that violated California statutes, and it required Bioelements to disavow any existing agreements and to notify its resellers that “you do not have an agreement with Bioelements to maintain any resale prices for Bioelements products.” The Bioelements consent decree did not distinguish between in-state and out-of-state resellers, although arguably the consent decree’s reference to the applicable state statute means that the injunction applies only to California resellers (and possibly only to those resellers’ sales to California residents). But the consent decree also required Bioelements to notify all distributors and resellers with whom it had RPM agreements—seemingly without regard to whether the reseller or its customers were located in California. Although the consent order did not establish a binding precedent, it is indicative of the scope of potential negotiations if a state challenges your client’s RPM agreements. Thus, in advising a client who does business nationally, you should invite the client to consider carving out states like California from the RPM program. This could discourage government or private-plaintiff challenges against your RPM program in the carve-out states, but it may also severely undermine the program’s effectiveness, depending on how resellers go to market (e.g., local bricks-and-mortar vs. internet-based sales), or it may simply be commercially unworkable.

Utah has gone even further than California, although its action involves a single-product statute. In 2015, Utah adopted a statute making it illegal for a contact lens manufacturer or distributor to “take any action, by agreement, unilaterally, or otherwise, that has the effect of fixing or otherwise controlling the price that a contact lens retailer charges or advertises for contact lenses.” UTAH CODE ANN. § 58-16a-905.1(1). Several contact lens manufacturers challenged the statute as a violation of the Commerce Clause. A district court denied the manufacturers’ motion for a preliminary injunction against the statute’s enforcement, and a divided panel of the Tenth Circuit affirmed. The appellate court held that the state statute did not discriminate on its face between in-state and out-of-state businesses. The statute applied only to sales to resellers in Utah, and did not purport to apply to sales to retailers located outside of Utah. The statute’s prohibition of discrimination against a retailer who “sells or advertises contact lenses for a particular price” is not explicitly limited to the retailers’ sales and advertising within Utah, but the Tenth Circuit stated that the district court did not err in relying on the “Utah Attorney General’s interpretation . . . saying that the statutes don’t apply to the conduct of manufacturers or retailers selling outside Utah.” Johnson & Johnson Vision Care, Inc., v. Reyes, 665 Fed. App'x 736, 743 (10th Cir. Dec. 19, 2016). The appellate court also held that the statute applies only to retailers located in Utah and that the statute “doesn’t regulate conduct occurring wholly outside of Utah—it only regulates sales from a Utah retailer that is located within Utah.” Id. The dissent noted that although the statute did not discriminate against out-of-state manufacturers, it did discriminate against out-of-state retailers. According to the dissent, Utah is home to a large retailer that sells roughly 99% of its contact lenses outside of Utah, and the statute enables that retailer to “to always undersell retailers outside of Utah when competing for sales in 49 states.” Id. at 751.

Consequently, in advising a business, you should assume that your client will be subject to a state’s law for at least the sales into that state. If your client’s resellers then resell outside the state, you may not be able to enforce an RPM agreement as to sales that the reseller makes to out-of-state customers.

Special Issues for Alternative Distribution Models

Dual Distribution

A manufacturer may operate through a “dual distribution” model, in which the manufacturer sells its products both through its own direct sales force and through independent resellers. Where a manufacturer sells only through its own direct sales force, a manufacturer’s instructions to its own sales employees regarding the sales price of the manufacturer’s products is a unilateral decision of a single actor (the manufacturer), and there is no vertical agreement. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). If a manufacturer also sells through independent resellers, however, the manufacturer may want to extend the same policy to those resellers. If the manufacturer acts through a true UPP, then there is no agreement that could potentially violate the law.

However, if the manufacturer implements its policy through an agreement, or if a UPP evolves into an agreement, the manufacturer faces legal risk. An agreement between the manufacturer and its independent reseller could be considered a vertical agreement—that is, between the manufacturer (in its capacity as manufacturer) and a reseller. The agreement could also be considered a horizontal agreement between two competing sellers—the manufacturer in its direct-sales capacity, and the reseller of the manufacturer’s products.

Some courts treat the dual distribution manufacturer-reseller agreement as a vertical agreement and, accordingly, judge it under the rule of reason. Other courts view the agreement as a horizontal agreement, but judge it under the rule of reason. Jacobs v. Tempur-Pedic International, 626 F.3d 1327, 1341 n.15 (11th Cir. 2010). Remember, though, that in states that condemn vertical minimum-price agreements as per se illegal, courts might use the per se approach for state-law claims regardless of whether the agreement is characterized as horizontal or vertical.

In Leegin, the defendant used a dual-distribution model, selling both through company-owned stores and through independent stores. On remand, both the district court and the Fifth Circuit rejected the plaintiff’s claim that the agreement between Leegin and its independent resellers should be condemned as a per se violation. PSKS, Inc. v. Leegin Creative Leather Products, Inc., 615 F.3d 412, 420 (5th Cir. 2010). According to the Fifth Circuit, a dual-distribution RPM agreement would be illegal per se only if “retailers were the source of the price restraint,” which plaintiff failed to allege. Id. The court also found that a manufacturer’s compliance (in its role as direct-seller) with its own policy was not sufficient to show an agreement between the manufacturer and its independent resellers.

In counseling a dual-distribution manufacturer that wants to adopt an RPM policy, you should first understand the origins of the proposed policy. If the policy was developed by the direct-sales arm of the manufacturer, then you should examine the circumstances more closely to determine whether there might be facts suggesting an agreement between the manufacturer and its independent resellers. If the proposed policy originated in the manufacturer’s marketing arm, the risk is likely to be lower.

Multi-Link Distribution Claims

Many manufacturers use a multi-link distribution model. In this model, the manufacturer sells to a wholesaler or distributor, who in turn sells to a retailer. This model presents a number of legal and practical problems for the manufacturer considering adoption of an RPM or MAP program. The primary issue is that the manufacturer does not have full control over its distribution system, and this may limit the manufacturer’s ability to implement a successful RPM or MAP program. Additional challenges include the following:

•The distributor’s interest may not be the same as the manufacturer’s interest. The manufacturer has an interest in limiting its retail channel to retailers who are likely to comply with its policy. The distributor’s interest might be in moving the largest number of units out of its warehouse, regardless of the retailer’s compliance with the manufacturer’s RPM or MAP program.
•Identifying the point of the breach can be challenging. When a supplier sells directly to a retailer, and the retailer sells below the supplier’s minimum resale price or minimum advertised price, the breach is obvious, and there are few mitigating circumstances (such as supply from another source). When a manufacturer sells to distributors who then resell to retailers, it is more complicated. For example, if distributors do not have exclusive territories, then the retailer who is selling below the RPM price may have purchased the manufacturer’s products from any one of the manufacturer’s distributors. Even if the distributors have exclusive territories, there are at least three possible explanations for a retailer who is selling below the supplier’s minimum price: the retailer is breaching a minimum RPM term; the distributor did not include the RPM term in its policy or agreement with the retailer; or the retailer bought from a distributor who breached its own geographic restraint prohibiting sales outside its territory.
•The enforcement mechanism might be more complicated than in the direct-to-retailer model. If the retailer’s agreement is with the independent distributor, the manufacturer either must have the right to enforce the distributor’s agreement with the retailer as a third-party beneficiary or must rely on the distributor to enforce the agreement. (This problem can be at least partly avoided by having the retailer’s agreement run directly to the manufacturer.)
•The enforcement mechanism might result in a pricing agreement. If the manufacturer has the right to require its distributor to discontinue sales to a retailer selling below the manufacturer’s RPM price, then the agreement might be viewed as illegal under some states’ laws. This risk can be controlled by prohibiting the distributor from selling to retailers who are not on the manufacturer’s approved list, but distributors may be resistant to this amount of manufacturer control over their business.

Despite these challenges, you should not automatically advise against an RPM or MAP program in a multi-link distribution model. The same procompetitive rationales approved in Leegin can exist in a multi-link distribution chain, and they might be even stronger. For example, a start-up supplier may have particular need to promote its product to full-service retail outlets that will invest in product promotion and service. The startup supplier may not have the resources to act as its own distributor. In such circumstances, the supplier may want to bind the distributor to sell only to full-service (non-discounting) retailers, and perhaps require the distributor’s contracts with retailers to contain a minimum RPM provision.

You should, however, think through the business and legal practicalities of the distribution model and whether an RPM or MAP program can be successfully developed and implemented given those realities.

Reseller Agreements

Pay attention to the provisions of any existing agreements with resellers, because these provisions can limit or preclude a manufacturer’s ability to implement an RPM or MAP program. Common provisions include:

•Some agreements will include a provision in which the reseller agrees to comply with all of the manufacturer’s policies. If the manufacturer later implements a unilateral RPM or MAP policy, then the provision in the prior agreement requiring the reseller to comply with all manufacturer policies, could be interpreted as converting the policy into an illegal agreement. This problem can be averted by including language in the RPM or MAP policy that a reseller does not need to comply with RPM or MAP policies “notwithstanding any contrary provisions in our agreement with you.”
•Some agreements might prevent a manufacturer from terminating a reseller without “good cause.” If the manufacturer seeks to terminate a reseller due to noncompliance with its unilateral RPM or MAP policy, then the reseller might argue that this incorporates the policy into the agreement—which is potentially unlawful (particularly in states such as California). A manufacturer might also be prohibited from terminating a reseller by a state statute protecting resellers.
•Conversely, an agreement might permit the manufacturer to discontinue sales of certain products to the reseller, without terminating the reseller altogether. This would permit the manufacturer to adopt a selective RPM or MAP policy and discontinue sales of products covered by the program—but not other products—to a noncompliant reseller.

For sample clauses regarding resale prices that you can include in contracts between a manufacture and its resale customers (i.e. distributors, dealers and retailers), see the Resale Price Clauses.

Guidelines for Manufacturers and Resellers

RPM and MAP programs are one set of tools that may be available to help address a business in its approach to the market. The first step in counseling your business client is to make sure that management has correctly concluded that it needs an RPM or MAP program to address the issue of low retail prices. For example, ask the client whether low retail prices might result from a cause other than the lack of an RPM or MAP program. Other causes include distribution issues—too many retailers or distributors, a lack of exclusive territories, a diminution in brand equity, or the wrong kind of distribution for the product.

Depending on the nature of the business issues, an RPM or MAP program may be helpful in achieving the company’s business goals, but only if it is properly designed, implemented, and enforced. Following are some practical guidelines when counseling clients regarding prices and pricing policies.

Guidelines When Representing a Supplier

1Understand your client’s business goals. If your client’s sole concern is price transparency in advertising, then consider a MAP program—even if management comes to you asking for an RPM or UPP program. An RPM or UPP program will affect more than advertised prices and involves more antitrust risk than a MAP program. If the riskier policy is not needed, the client should implement the less risky policy.
2Advise your client to adopt a written policy, not an informal practice. Without a written policy, sales or marketing personnel may inadvertently engage in a riskier practice.
3Inform or remind your client that RPM and MAP programs are not self-enforcing and that the client will need a plan for inducing reseller compliance with the policy. If your client adopts the UPP approach in its RPM or MAP program, then its enforcement policies should be designed to minimize the risks of converting the policies into agreements.
4Explain the importance of obtaining senior management buy-in. If a reseller (particularly a substantial reseller) chooses not to comply with the program, the team responsible for enforcing the policy will need management support.
5If your client intends to adopt a MAP-only policy, then your client will need to carefully consider where advertised price ends and selling price begins. For example, is the price that appears after moving a product to an online “shopping cart” an advertised price? In a bricks-and-mortar setting, does the policy apply to in-store advertising (such as banners and shelf-talkers), or does the policy apply only to external advertising (such as mailers and Sunday inserts). The answers to these questions will depend on the client’s business objectives and legal-risk tolerance. Failing to consider these questions in advance, however, can provide resellers a means to undermine the policy’s effectiveness.
6Consider the potential practices resellers might adopt to circumvent the policy. For example, in order to prevent resellers from attempting to circumvent a MAP policy, it is a good practice to prohibit not only explicit advertising below the MAP price, but also implicit advertising (such as, “prices too low to mention” or “move to shopping cart for price”).
7Any RPM or MAP policy should clearly and repeatedly state that it is unilateral, that resellers must make their own decision of whether to comply, that the company does not seek and will not accept agreements to comply with the policy, that no representative of the company is permitted to make agreements, and that any attempts to do so should be reported to the company.
8Instruct your client to provide education and training for the account representatives. Make clear that violations are grounds for disciplinary action.
9Ask your client how it plans to identify instances of reseller noncompliance with the policy. Some companies will use internal resources to monitor reseller advertising, and others will engage a third-party service to do so. The important point is that the client should consider and plan for this function before implementing the policy.
10In deciding how to monitor for program compliance, your client must decide whether it will accept reseller reports on other resellers who are not complying with the policy. You should advise your clients that accepting such reports creates additional risk as it can suggest that the manufacturer is acting as a conduit for, or an enforcer of, an agreement among the resellers.
11If the client is going to accept reseller reports, ask your client about its plans for receiving the reports. The best practice is to provide a single place (either an identified individual or a specific email address, such as MAPpolicy@company.com) to which all reports are directed.
12Determine in advance your client’s internal procedures for reviewing and acting on any reports and make sure the persons involved are educated about the antitrust risks and understand the policy. It is a best practice to channel reports to a small group of people who understand the antitrust risks to prevent the inadvertent assumption of additional risks caused by client employees who misunderstand the policy or provide information inconsistent with the policy.
13Explain to your client the need to establish in advance the consequences for noncompliance. For example, the first instance of noncompliance will result in a 30-day suspension (including pending orders) for the specific product advertised or sold contrary to the policy; the second instance will result in a 90-day suspension from sales of all SKUs within the product category; and the third instance will result in a one-year suspension of all sales. The consequences should be set at levels sufficient to induce the desired behavior, which will vary by industry and sales model. For example, a 30-day suspension may not be sufficient if the reseller already has a substantial inventory of the product or can readily shift customers to another product.
14Explain to your client the importance of having the consequences for noncompliance established before the program is implemented. The consequences do not need to be communicated to the resellers – some companies choose to disclose the consequences in advance, and others do not. But it is definitely better to set the consequences before you identify a noncompliant reseller, so that the decision-maker’s judgment is determined by the integrity of the policy, rather than the identity of the reseller.

Guidelines When Representing a Retailer

1Your client needs to understand that it should not negotiate the terms of a UPP with any supplier, and you should be prepared to explain this requirement. If a reseller negotiates the terms of a UPP, then the UPP is no longer a unilateral policy. Once a UPP is negotiated, it becomes an agreement between the reseller and the supplier, and the agreement will be illegal per se under some states’ laws and may also be illegal under the rule of reason. More importantly, by becoming party to an agreement, the reseller exposes itself to damages claims.
2There is a fine line between negotiating a policy and providing market intelligence to the supplier before the policy is adopted. A supplier may want to gather information about market conditions in order to make a decision on whether a MAP or RPM policy makes sense.
3Be wary if your reseller client asks you to review a copy of a supplier’s RPM or MAP program. Review it for any indication that the “policy” reads more like an “agreement” than a policy, or that compliance is mandatory (rather than the reseller’s choice). In particular, if the supplier asks the reseller to sign the policy, read carefully to see whether the signature commits the reseller to complying with the policy, or simply acknowledges that the reseller has received and read the policy.
4Determine whether your client will comply with a supplier’s RPM or MAP programs— and whether that your client’s compliance will be applicable to all such programs or will depend on the particular supplier’s importance to your client. For example, if the supplier’s products are an important part of the reseller’s product line, it may be more important for your client to comply (and to make sure that it has the systems in place to ensure compliance). On the other hand, if the product is less important, then the reseller may decide that the costs of compliance are too great relative to the value of the product line. In that case, advise your client on steps to take in case the policy is indeed enforced—such as building inventory or shifting to another product. In any event, your client needs to understand that noncompliance could result in termination of supply for some or all of the supplier’s product line (or whatever consequences the supplier’s policy provides).
5You should also ask your client about the communications that it has had with the manufacturer. You may find that these communications when viewed as a whole would be consistent with an agreement between the manufacturer and your client that your client will not sell below the manufacturer’s suggested prices (and possibly an agreement that the manufacturer will terminate a reseller that does not agree to sell at or above those prices).
6If your client wants to report another reseller’s noncompliance, you should advise your client to review the supplier’s RPM or MAP policy to determine whether the manufacturer will accept noncompliance reports and if so, to identify the proper method for such reports. You may want to advise your client to keep in mind that the manufacturer’s policy was set so that the manufacturer does not become involved in an illegal conspiracy with its resellers—and your client should also not want to be involved in that kind of agreement.
7You should also caution your client against asking the manufacturer to report back on its actions against the noncompliant reseller. The manufacturer is in charge of enforcing its policy. Your client should make its own business decisions, including whether to comply or discontinue compliance with the manufacturer’s policy, and it should do so based on what it sees in the marketplace (e.g., repeated and frequent acts of noncompliance), rather than on any explicit or implied promises from the manufacturer.
8Discuss with your client the possibility of revisiting an initial decision to comply with a supplier’s RPM or MAP program. If it appears that other resellers are not complying with the policy, it is possible that the supplier is not enforcing the policy, or that its enforcement efforts are not working. If that is the case, then your client may decide to abandon a previous decision to comply.
9Remind your client that, like the supplier, it should treat the policy as a unilateral policy. Your client should use its own judgment to decide whether to comply with a policy, and it should never make any promise to comply with the policy.
10Advise your client not to discuss its compliance decision with any other resellers. An agreement among resellers to comply with an RPM or MAP program is a horizontal agreement. An agreement among resellers to comply with a policy on actual selling prices will be a per se violation of the antitrust laws, and a similar agreement to comply with a supplier’s MAP policy is likely to be a per se violation as well.