The Colgate Doctrine and Resale-Price Maintenance Agreements: What is the Difference Under the Antitrust Laws?
April 12, 2021
Author: Kristen Harris
Resale-price maintenance (RPM) is a common and controversial issue for antitrust attorneys because of the variety of arrangements a manufacturer or supplier may use to control the price downstream and the implications of setting prices in this manner. We have already explored some of the features and implications of a variety of RPM strategies businesses commonly pursue, including entering RPM agreements. We have also discussed various alternatives to RPM agreements, including the Colgate doctrine, which is a unilateral pricing policy.
This article presents a breakdown of the structural differences between the Colgate doctrine and RPM agreements.
In brief, the Colgate doctrine refers to the Supreme Court’s 1919 decision in United States v. Colgate & Co., which held that a manufacturer may refuse to deal with downstream market participants who do not honor the manufacturer’s announced resell price. See this article for a more in-depth discussion of the Colgate doctrine.
In contrast, RPM agreements are vertical agreements between manufacturers and distributors or retailers, which require the reseller to price at or above the manufacturer’s chosen minimum resale price. For decades, RPM agreements were per se illegal under Section 1 of the Sherman Act. But the Supreme Court’sLeegin decision in 2007 recognized that these agreements have the potential to produce procompetitive benefits and held that these types of agreements would be analyzed under the rule of reason. Now, under the federal antitrust laws, an RPM agreement’s effects are scrutinized to determine whether any anticompetitive effects outweigh the procompetitive benefits.
The key structural difference between these two strategies is that the Colgate doctrine involves a unilateral decision by the manufacturer while an RPM agreement explicitly requires an agreement, albeit a vertical one. You may wonder why the structural difference matters if they accomplish the same goal. It matters because Section 1 of the Sherman Act does not apply to unilateral conduct. In other words, an agreement is necessary to establish a violation of Section 1.
While both pricing strategies have the potential to run afoul of the antitrust laws, a vertical agreement that involves a price-setting mechanism is more likely to violate the antitrust laws (i.e., a Section 1 violation) than a unilateral refusal to deal.
In fact, RPM agreements are still considered per se illegal under some state’s antitrust laws, despite their treatment under the rule of reason when applying federal antitrust law (i.e., the Sherman Act). For a discussion of the application of California’s antitrust law to RPM agreements, check out this article. But as mentioned above, courts applying federal antitrust law adopt a balancing approach recognizing that RPM agreements have the potential to increase consumer welfare but they also might harm competition.
Even a strategy that uses unilateral pricing policies under the Colgate doctrine is not without risk. The absence of an express agreement may make unilateral pricing strategies more attractive to manufacturers who would prefer to be free from liability under the antitrust laws. But courts will evaluate the course of conduct between a manufacturer and its retailers (e.g., how the manufacturer enforces its pricing strategy) and may determine that an implied agreement existed, thus bringing the conduct within the purview of Section 1. Here, it is important that the manufacturer’s conduct is truly independent.
In conclusion, whether a manufacturer chooses to enter into RPM agreements or to adopt a Colgate policy, an antitrust violation may be lurking in the shadows. It is best to seek advice from an antitrust attorney when considering any RPM strategy.