Are Resale-Price-Maintenance Agreements Legal Under the Antitrust Laws?
In today’s economy, manufacturers (and suppliers) often enter resale-price maintenance agreements with distributors and retailers. These are agreements that set the minimum price at which a reseller can sell the manufacturer’s product. This is vertical price-fixing.
Until the United States Supreme Court decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet) in 2007, these agreements were per se antitrust violations. The Supreme Court in Leegin reversed course and held that courts will typically analyze these agreements instead under the rule of reason.
Per Se Antitrust Violation v. Rule of Reason
A classification that a particular type of conduct is a per se antitrust violation means that it falls into the rare category of agreements that the antitrust laws consider to have little or no redeeming competitive value in almost all cases. As a practical matter, a plaintiff filing a per se antitrust lawsuit has a much easier road to victory. Such a plaintiff need not show anticompetitive harm (which often includes complex market analysis and market power showings) and defendants do not have the ability to respond with business or competitive justifications for their conduct. The types of claims that are per se antitrust violations are horizontal price fixing (i.e. price fixing between or among competitors), market allocation among competitors, bid rigging and certain forms of group boycott and tying agreements.
The Supreme Court’s decision to demote resale-price-maintenance antitrust cases to the rule-of-reason standard means that plaintiffs bringing such claims under federal law must prove that anticompetitive market effects overcome any efficiencies and pro-competitive market benefits from the agreements. As a practical matter, this change makes the cases much more difficult and expensive.
A manufacturer or reseller considering a resale-price-maintenance agreement should consult with an antitrust attorney to determine whether the agreement is likely to face antitrust scrutiny. For example, courts (and antitrust agencies) may scrutinize these agreements more than usual when (1) multiple manufacturers adopt resale-price maintenance; (2) if retailers were the impetus for the vertical-price fixing; and (3) where one or more of the parties to the agreement possess market power.
Where one of the parties is a dominant retailer or manufacturer, for example, courts express concern that the resale-price-maintenance agreement is used to foreclose competition. Where several manufacturers each adopt the practice or where the retailer insists on the agreement, courts and agencies are often suspicious that the resale-price-maintenance arrangement is supporting a manufacturer or retailer cartel.
By contrast, courts point to several pro-competitive reasons for resale-price-maintenance agreements. If you are considering such an agreement, look for the following pro-competitive benefits, which will increase the likelihood of surviving antitrust scrutiny: (1) the agreement encourages the reseller to invest in customer-friendly services like showrooms, product promotions, demonstrations, and knowledgeable employees; (2) the agreement diminishes free riding by low-cost sellers that do not provide services that benefit the product; (3) the manufacturer seeks to maintain a premium reputation; or (4) the manufacturer is a new entrant in the market and seeks to induce key retailers to invest in customer services and promotion for the product. Overall, anything that increases inter-brand competition could qualify as a pro-competitive benefit.
An alternative to a resale-price agreement is a Colgate policy, which must be unilateral. You can read more about Colgate policies here.
State Antitrust Law
One important caution about the legality of resale-price-maintenance agreements is that even though they are no longer per se antitrust violations under the federal antitrust laws, many states still consider them per se illegal under their state antitrust laws. For example, although it has not been definitively addressed since Leegin, it appears that these agreements may still be per se unlawful in California’s antitrust statute, the Cartwright Act. If you are considering such an agreement in California or elsewhere, you should consult with an antitrust attorney.
These agreements have stirred great controversy over the years, particularly following the Supreme Court’s 2007 decision in Leegin. If you are considering a resale-price-maintenance agreement or want to challenge one, we may be able to help you. For additional detail on resale-price-maintenance agreements, you can read a related blog post at The Antitrust Attorney Blog.