Many product manufacturers understandably want to be able to exercise some control over the prices at which their products are sold to consumers. For manufacturers that produce and sell all of their new merchandise internally, price control is a non-issue, because pricing decisions may be revised at little more than the flip of a switch. However, this is a comparatively rare scenario. Most manufacturers rely, at least in part, if not entirely, on a network of wholesalers and retailers to distribute new merchandise to end users. Historically, in this type of arrangement, many manufacturers have relied and continue to rely on price maintenance agreements (PMAs) with their channel partners to specify the minimum prices at which the partners may offer the manufacturer’s merchandise for sale. Often, the motives for requiring compliance with PMAs is entirely consistent with good business practices, in that such agreements can facilitate competition among authorized resellers while protecting a brand’s image against what may be a perceived stigma associated with “bargain” products. However, PMAs also can be vehicles for anticompetitive practices, and many manufacturers have faced civil liability under the Sherman Act for agreements that courts have found to be unreasonable restraints on trade. Knowledge of how to implement an effective, legal PMA, therefore, can be an important asset.

Pricing agreements come in two principal flavors: vertical – agreements between players at different levels of the supply chain – and horizontal – agreements between players at the same level of the chain. Horizontal agreements typically are more difficult to justify, because they often run the greatest risk of embodying the sort of anti-competitive “price fixing” schemes that the Sherman Act is designed to prohibit. Courts often consider such agreements to be per se unreasonable restraints on trade, “conclusively presumed to unreasonably restrain competition without elaborate inquiry as to the precise harm [they have] caused or the business excuse for [their] use.” Toledo Mack Sales & Service v. Mack Trucks, Inc., 530 F.3d 204, 221 (3rd Cir. 2008).

However, courts most often analyze PMAs and other vertical agreements pursuant to a more searching inquiry, often termed the “rule of reason.” Under this model, the judge or jury reviews all of the facts and circumstances of a case in deciding whether a pricing agreement should be prohibited, often looking to a number of prescribed factors, including: whether there existed an actual conspiracy or agreement among several defendants to set prices; whether a conspiracy or agreement produced adverse, anti-competitive effects within relevant product and geographic markets; whether the objects of or conduct supporting a conspiracy or agreement were illegal; whether a plaintiff was actually injured as a result of a conspiracy or agreement; whether the impetus for the agreement came from the lower levels of the supply chain (e.g., from the retailers or wholesalers, as opposed to the manufacturer); and whether the party insisting on the pricing agreement has significant market power (i.e., “the ability to raise prices above those that would prevail in a competitive market”). Id. at 226.

Tags:

Businesses reviewing their price maintenance agreements (PMAs) for compliance with anti-trust law should do more than assess whether their agreements would be treated as “horizontal” or “vertical” by a reviewing court. (More on that subject is available here).

It is also important to keep in mind a few additional points when reviewing an existing or contemplated PMA. First, the Supreme Court has held that “the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result.” Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705, 18 (2007). Thus, to a point, courts generally consider brand-specific PMAs to be less of a threat than other types of agreements affecting products from multiple manufacturers: “[E]xcept when [resale price maintenance] spreads to cover the bulk of an industry’s output, depriving consumers of a meaningful choice between high-service and low-price outlets, most [resale price maintenance arrangements] are probably innocuous.” Id. at 2719 (citing F.M. Scherer & D. Ross, Industrial Market Structure and Economic Performance 558 (3d ed. 1990)). In addition, the fact that a manufacturer also may play a role at the same wholesale or retail level in the supply chain as the businesses with which it enters into PMAs likely does not mean that those agreements are subject to a potential per se reasonableness analysis often applied to horizontal agreements – where a manufacturer enters into a PMA with a reseller, that PMA likely will be reviewed under the rule of reason. See International Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 906 (6th Cir. 1989). However, to the extent that a vertical PMA is implemented in order to support an illegal, horizontal agreement among resellers, that PMA, even though remaining subject to the rule of reason, nevertheless will be more likely to be found to be an unreasonable restraint on trade.

It is vital that businesses contemplating the implementation of a PMA consult with counsel before proceeding with any contemplated agreement. Sherman Act liability can be significant, not only in terms of monetary damages awarded at trial, but also in terms of less tangible damage to a business’ brand or reputation. A knowledgeable attorney will be able to let you know when a proposed PMA is likely to be within the scope of permissible agreements, when it is in need of revisions, either in terms of substance or implementation, and when it should be avoided altogether, under the circumstances.

Tags:

Effective October 1, 2009, companies doing business in Maryland are subject to a new state law that re-imposes a blanket ban on vertical retail price maintenance (RPM) agreements. The ban highlights the challenge many manufacturers will face in coming years in assessing current or contemplated policies intended to control the ways in which their authorized resellers market their products.

In 2007, in its opinion in Leegin Creative Products v. PSKS, Inc., the U.S. Supreme Court did away with a century-old rule that vertical price restraints are, by their very nature, illegal under U.S. antitrust law. Such restraints often appear in minimum advertised price or “MAP” policies and usually take the form of restrictions imposed by product manufacturers on the minimum price at which authorized, “downstream” resellers may advertise the manufacturers’ products. Historically, agreements containing MAP policies were held to be per se illegal under the Sherman Act, the principal U.S. antitrust statute. In Leegin, the Supreme Court reversed this precedent, holding instead that such agreements are not per se illegal under the Sherman Act, but rather that they must be evaluated in light of all of the circumstances of a particular case to determine whether their net effect is to restrain competition generally. As a result of the opinion, in most cases it has become much more difficult and expensive to maintain successful antitrust claims based on allegedly unlawful MAP policies.

In reaction to Leegin, some states (and some U.S. legislators) have considered laws that return their respective jurisdictions back to the status quo before Leegin by expressly banning all vertical RPM agreements. Maryland’s new law applies to any businesses selling products to consumers or to purchasers in Maryland and effectively requires any of those businesses also selling or marketing products in other states either to have two different sets of agreements with its resellers or, effectively, to analyze all of their agreements under Maryland law, regardless of their resellers’ locations, in order to avoid liability in one jurisdiction. For many businesses, despite the potential cost, the latter option may make the most sense, especially if other states or the U.S. legislature follows Maryland’s lead and passes laws re-imposing the pre-Leegin ban.

However, compliance with such prohibitions and control over pricing are not necessarily mutually exclusive. Depending on the nature of their supply chains, many businesses may be able to avoid liability under the new Maryland law or other laws by including flexible termination provisions in their dealer agreements and by setting and enforcing MAP policies unilaterally and uniformly across their dealer network. Especially in the wake of the new Maryland law, manufacturers interested in maintaining such control need to consult with their attorneys in an effort to examine their existing dealer agreements and to make any changes needed to maintain compliance with changes in applicable law while also maintaining control over the supply chain.

Tags: