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Resale Price Maintenance:

Minimizing Antitrust Risks Structuring Pricing Agreements Amid Differing State,

Federal and International Treatment of RPM

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, FEBRUARY 8, 2017

Michael A. Lindsay, Partner, Dorsey & Whitney, Minneapolis

William L. Monts, III, Partner, Hogan Lovells, Washington, D.C.

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AGENDA

1. Influencing Resale Prices Under U.S. Federal and State Antitrust Law

2. Influencing Resale Prices Under European and Foreign State

Competition Law

3. Practical Applications and Best Practices

U.S. Antitrust Rules for Resale Price

Maintenance

Michael A. Lindsay

DORSEY & WHITNEY LLP

February 8, 2017

Federal Law

To 2007 and Beyond

7

Pre-2007 U.S. Antitrust Treatment

of RPM Practices

• Resale pricing agreements were illegal per se – Viewed as form of “price-fixing”

• Prohibition applied to “agreements” (not true unilateral policies) on actual reselling price (not advertised price) – Practical issues of implementation

• Non-price vertical agreements (from mid-1970s forward) were largely assessed under Rule of Reason – Facts-and-circumstances test, evaluating competitive effects in

specific context

• 1997’s State Oil v. Khan abandoned per se rule for maximum resale price agreements

8

Leegin Decision (2007)

• Economics does not justify a per se prohibition of minimum RPM agreements – Not “always or almost always” anticompetitive

– Promote inter-brand competition by reducing intra-brand competition

– Encourage provision of services by reducing “free-rider” problem of “discounting” resellers

– Facilitate market entry by new brands, products, or firms

• Administrative convenience does not justify a per se prohibition

• Overrules Dr. Miles rule of per se prohibition

• But not a rule of per se legality – Rule of Reason applies

9

Leegin Examples of Illegal RPM Agreements

• Enforcement for Manufacturer Cartel – “An unlawful cartel will seek to discover if some manufacturers

are undercutting the cartel's fixed prices. Resale price maintenance could assist the cartel in identifying price-cutting manufacturers who benefit from the lower prices they offer”

• Enforcement for Retailer Cartel – “A group of retailers might collude to fix prices to consumers and

then compel a manufacturer to aid the unlawful arrangement with resale price maintenance”

• Protecting a dominant position – “A dominant retailer . . . might request resale price maintenance

to forestall innovation in distribution that decreases costs”

– “A manufacturer with market power . . . might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants”

10

State Law

Post-Leegin Developments

11

States as Source of Antitrust Law

• “. . . Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies. . . And on several prior occasions, the Court has recognized that the federal antitrust laws do not pre-empt state law.”

– California v. ARC America Corp., 490 U.S. 93 (1989)

• “Although there are federal antitrust statutes, e.g., the Sherman Act . . . and a large body of interpreting caselaw, antitrust law has traditionally been the province of the states. . . . [F]ederal antitrust law is intended to supplement the remedies available under Kansas law, not to replace Kansas antitrust provisions.”

– O’Brien v. Leegin Creative Leather Products, Inc., 294 Kan. 318, 277 P.3d 1062, 1067-68 (Kan. 2012)

• States have not uniformly embraced Leegin for interpretation of state antitrust laws

12

State RPM Enforcement After Leegin

• Enforcement actions in California – Series of consent judgments

– Private civil litigation

• Enforcement action in New York

• Maryland adopts Leegin repealer – No enforcement actions until Contact Lens Litigation

(discussed below)

• Kansas supreme court rejects Leegin in O’Brien, but Kansas Legislature changes law

• Illinois – Early enforcement actions in Illinois and Michigan (Herman

Miller states) or North Carolina (McLeod Oil)

– Private civil litigation

13

California Statutes

• CAL. BUS. & PROF. CODE § 16720(b) (2009) (defining a trust as a combination “[t]o . . . increase the price of merchandise or any commodity”)

• CAL. BUS & PROF. CODE § 16720(d) (defining a trust as a combination 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 . . .”)

• CAL. BUS. & PROF. CODE § 16720(e) (defining a trust as a combination to “agree in any manner to keep the price of such article . . . at a fixed or graduated figure” or “establish . . . the price of any article . . . between them . . . and others, so as directly or indirectly to preclude a free and unrestricted competition . . .”)

14

California v. DermaQuest

• CA AG files Complaint Feb. 5, 2010 against DermaQuest (“cosmeceuticals”) alleging that reseller agreements provide:

– “Distributor may not resell Product in a price structure that yields a Product price at ultimate retail sale below Dermaquest's Suggested Retail Price (DSRP)”

– “Reseller may not resell Product in a price structure that yields a Product price at resale below . . . DSRP”

• Consent order Filed Feb. 23, 2010

– Enjoins DermaQuest from violations of statute

– Requires DermaQuest to pay $70,000 in civil penalties, plus $50,000 in costs

15

California v. Bioelements

• People v. Bioelements, Inc., File No. 10011659 (Cal. Super. Ct., Riverside County, filed Dec. 30, 2010)

• Consent decree filed Jan. 11, 2011

• Allegation that “agreements constituted ‘vertical price-fixing in per se violation of the Cartwright Act’” and “unfair competition” under California UCL

16

Bioelements, cont’d

• Bioelements enjoined from

– agreements 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 . . . intended for sale, barter, use or consumption in this State”

– agreements binding third parties “not to sell . . . any commodity . . . below a common standard figure, or fixed value,” or “to keep the price of such . . . commodity . . . at a fixed or graduated figure”

• Bioelements required to pay $15,000 in civil penalties and $36,000 for the state’s attorney’s fees

17

Bioelements, cont’d

• Bioelements also required to send a letter to its resellers with RPM agreements since 2005

– “immediately, unilaterally disavowing all parts of Bioelements’s distributor or resale agreement with you that purportedly obligated you to maintain certain resale prices for Bioelements products”

– “[Y]ou do not have an agreement . . . to maintain any resale prices for Bioelements products”

• No limitation to resellers based in or selling to Californians

18

Darush v. Revision

• Private action (not state AG enforcement)

• Manufacturer adopts UPP policy, but coupled with multiple in-person and telephone efforts to secure compliance

• Federal district court

– Applies per se rule under Cartwright Act

– Finds sufficient allegations of agreement to get past Rule 12 motion to dismiss

19

Darush MD APC v. Revision LP, No. 12-cv-10296,

2013 WL 1749539 (C.D. Cal. Apr. 10, 2013)

New York v. Tempur-Pedic Int’l

• People v. Tempur-Pedic, International Inc., 400837/10 (N.Y. Sup. Ct. N.Y. County Verified Petition filed Mar. 29, 2010); Decision, Order, and Final Judgment filed on Jan. 14, 2011, aff’d May 8, 2012, 2012 NY Slip Op 03557

• NY Attorney General files Complaint alleging contractual prohibition of discounting in violation of 369-a

• Trial court dismisses complaint

• Dismissal affirmed on appeal

20

New York Statute

• “Any contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable at law.”

– N.Y. Gen. Bus. – Art. 24-A - § 369-A Price-fixing Prohibited

21

New York v. Tempur-Pedic

• NY law (369-a) makes pricing agreements unenforceable but not actionable

– “there is nothing in the text to declare those contract provisions to be illegal or unlawful; rather the statute provides that such provisions are simply unenforceable in the courts of this state”

• The only “agreement” applies only to advertised price

– “Advertising agreements cannot be the subject of a vertical RPM claim, because they do not restrain resale prices, but merely restrict advertising”

22

People v. Tempur-Pedic International, Inc., , 2012 NY Slip Op 03557 (N.Y.

App. Div., 1st Dept. May 8, 2012) available at

http://www.nycourts.gov/reporter/3dseries/2012/2012_03557.htm

http://www.nycourts.gov/reporter/3dseries/2012/2012_03557.htm

NY Attorney General and NFL Ticket Exchange

• New York AG partnered with Penn., Mass., Ohio, and DC AGs to investigate NFL Ticket Exchange’s rules setting a minimum resale price for tickets sold over the exchange, with the floor typically being the face value of the ticket

– NY statute forbids an “operator of a place of entertainment, or operator's agent” to restrict by any means the resale of any tickets included in a subscription or season ticket package as a condition of purchase

• November 2016: AGs reached a settlement agreement with the National Football League

– NFL had removed the floor and “leaves the decision whether to maintain a ‘price floor’ on the NFL Ticket Exchange for tickets resold on that platform for its own home games to each individual member club, to be made unilaterally”

• Settlement (i) provides 10-year ban on NFL’s reinstating a price floor on the exchange, and (ii) prohibits any NFL efforts to facilitate member teams’ ticket resale prices in a way that would result in a resale price floor on the NFL exchange

• Settlement Agreement does not address two clearly vertical practices – NFL’s setting resale price floors for tickets originally sold by the NFL for events (Super

Bowl, Pro Bowl) whose tickets are sold primarily by NFL

– Member team’s setting of resale price floors for tickets sold by that member

23

Kansas: O’Brien v. Leegin

• Same basic facts as in Leegin federal case

• Agreements for calendar 2001-02 stated that the retailer would maintain minimum inventory, showcase Brighton products in dedicated spaces, "[s]ell Brighton products for the suggested price every day, 365 days a year," and "close out markdown styles you do not plan to reorder."

– Agreements (2003) applying to Brighton luggage stated that retailer agreed to "sell the luggage at the suggested retail price."

24

Kansas Statute Prohibits Agreements - -

• “to fix any standard or figure, whereby such person's price to the public shall be, in any manner, controlled or established, any article or commodity of merchandise, produce or commerce intended for sale, use or consumption in this state”

• “to [b]ind . . . themselves not to sell [or] . . .dispose of . . . any article or commodity . . . below a common standard figure”

• “to keep the price of such article, commodity or transportation at a fixed or graded figure”

• “which tend to prevent full and free competition in the importation, transportation or sale of articles imported into this state, or in the product, manufacture or sale of articles of domestic growth or product of domestic raw material

• “designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles”

25

O’Brien Rejects Rule of Reason for RPM

• State statute does not mention “reasonableness”

• Plain language prohibits “any” agreements” and “all” arrangements, contracts, agreements, trusts or combinations . . . designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles”

• Rejects deference to federal cases – “federal precedents interpreting . . . federal statutes have

little or no precedential weight when the task is interpretation and application of a clear and dissimilar Kansas statute”

• But Colgate doctrine survived – Kansas statute requires “something more than merely a

unilateral pricing policy adopted by a wholesale supplier in the position of Brighton”

26

Kansas Legislature O’verturns O’Brien

• Legislature passes and governor signs bill that effectively overturns O’Brien

• Federal harmonization

– Adopts express harmonization principle with federal law

– Limited to rulings by U.S. Supreme Court

• Express adoption of Rule of Reason

– Makes clear that statute does not prohibit a restraint of trade that is “reasonable in view of all of the facts and circumstances of the particular case and does not contravene public welfare”

27

Kan. Stat. Ann. § § 50-161, 50-163(b), (c)

Illinois’s House of Brides

• Private plaintiff alleges RPM agreement

• District court dismisses federal claims under Rule of Reason for failure to allege a plausible market definition

– Rejects allegation of single-brand market: “House of Brides does not allege that consumers are for any reason unable to choose wedding dresses produced by competitors to the Alfred Angelo brand, nor can it plausibly suggest that they cannot”

• Dismisses Illinois state claims as well

– Illinois Antitrust Act instructs Illinois courts to look to federal courts' constructions of that federal law as a guide when construing the state statute

– “House of Brides offers no argument for liability under state antitrust law apart from its arguments relating to the Sherman Act claim”

28

House of Brides, Inc. v. Alfred Angelo, Inc., No. 11 C 07834, 2014

WL 64657, at *11 (N.D. Ill. Jan. 08, 2014), amended complaint

dismissed with prejudice, 2014 WL 6845862 (Dec. 4, 2014)

Federal Rule of Reason Enforcement

Since Leegin

29

Jacobs v. Tempur-Pedic Intern. Inc.

• Consumer action against Tempur-Pedic, which set minimum prices for resellers (and followed same in its own direct sales)

• CTA affirms DCT dismissal of complaint based on insufficient pleading of relevant market

– Allegation: “[v]isco-elastic foam mattresses comprise a relevant product market, or sub-market, separate and distinct from the market for mattresses generally”

• Further ground that plaintiff failed to prove actual or potential harm to market

– “nothing establishing the competitive level above which TPX's allegedly anticompetitive conduct artificially raised prices”

30

626 F.3d 1327 11th Cir. 2010)

Jacobs, cont’d

• CTA also rejects claim of horizontal price-fixing between TPX (as retailer) and independents

– Allegations consistent with independent action

– TPX's direct-sales website sets cap – independents will lose sales to TPX if they raise prices above this level

– TPX won’t go below minimum RPM price because it would lose distributors (and their showrooms, where customers can test out mattresses)

31

Contact Lens Litigation: Background

• Contact lenses are prescribed by Eye Care Professionals (ECPs) on brand-specific basis

– Shifting brands requires new prescription

• Four leading manufacturers account for approximately 90% of contact lens sales

• Contact lenses sold through ECPs themselves and through other channels, including mass merchandisers (e.g. Costco) and online (e.g. 800-Contacts)

• In 2013 and 2014, each of the four announces its own “unilateral pricing policy” or RPM policy

• Litigation ensues

– J&JVC discontinued its policy in April 2016

– Alcon discontinued its policy in December 2016

32

Costco v. J&JVC

• March 2015: Costco alleges J&JVC conspired with ECPs

• Nov. 2015: DCT denies motion to dismiss – Injury-in-fact: Costco claims lower unit sales at higher prices

(and fewer unit sales of other products); any short-term gains outweighed by long-term harm to business model

– Antitrust injury:

• Costco alleges lens manufacturers were focused on “facilitating high minimum retail prices and margins rather than lowering wholesale prices” and that without the vertical collusion with ECPs, the lens manufacturers would have competed with each other by using more efficient retailers

• Debate as to whether each brand is a definable submarket, but J&JVC 43% market share across brands sufficient

– Sufficient allegation of agreement under Twombly

• “To be sure, it is unusual in this posture, for Plaintiff Costco to include itself in this alleged unlawful scheme”

• March 2016: Stipulation for dismissal without prejudice

33

Costco Wholesale Corp. v. Johnson & Johnson Vision Care, Inc. File No.

3:14-cv-00734, Dkt No. 99 (M.D. Fla. Nov. 4, 2015)

Maryland AG Action

• Maryland statute applies per se rule to minimum RPM agreements

– For RPM policy to be legal in MD, policy “must result from the purely unilateral decision of a manufacturer, without negotiation as to its terms, and must be enforced unilaterally”

• MD AG files action alleging that J&JVC negotiated terms with Costco

• No substantive rulings

• J&JVC filed “assurance of discontinuance”

– AG has not accepted

– Debate as to whether court can approve AoD without AG’s acceptance

34

Complaint, State of Maryland v. Johnson & Johnson

Vision Care, Inc., File No. 03C16002271 (Balt. County

Cir. Ct. Feb. 29, 2016)

Class Plaintiffs v. Manufacturers

• Plaintiffs allege horizontal conspiracy among manufacturers and vertical conspiracy with one distributor (ABB)

• District court denies motion to dismiss

35

Sufficient Pleading of Horizontal Agreement

• Court determined that class allegations of horizontal conspiracy survived Twombly because

– Each manufacturer knew of ECP complaints

– Adoption of RPM policies represented a “fundamental” change in the industry

– Significant portion of market affected

– Policies were all adopted within a relatively compressed time period (between 6 and 13 months)

– Number of persons (the ECPs) to be coordinated was very large

– Opportunities to exchange information at trade shows

– Price increases were dramatically large (40% to 112%)

– No one lens manufacturer would be able to raise its prices significantly unless others went along

36

• “If the Defendant Manufacturers' conduct in implementing and enforcing their respective UPPs is indeed valid independent conduct permissible under Colgate, the evidence will show that. But at this juncture, the Court concludes that construing the factual allegations of the Complaint in favor of Plaintiffs, the Court finds that the allegations raise a reasonable expectation that discovery will reveal evidence of illegal agreement, and that the Manufacturer Defendants' parallel conduct when considered in context raises a suggestion of a preceding agreement.” [citing Leegin]

37

Sufficiency of Vertical Agreement Allegations

• Court finds sufficient allegations of communications and other considerations to support inference of agreement

– “allegations plausibly establish a flow of information up and down the distribution chain about UPPs, from the ECPs’ pressure on the Manufacturer Defendants to relieve ECPs of the price competition and thus the siphoning of sales of contact lenses to the Discount Retailers, to the Manufacturer Defendants' dramatic response out of a concern for the ECPs' ability to make a profit on selling contact lens which in turn would incentivize ECPs to prescribe their lenses”

– Proximity of policy adoptions

– “[D]irect evidence of an actual negotiations and ‘agreement’”

38

Competitive Effects

• Alleged market (soft disposable contacts) is plausible

• Portion of market affected (at least 40%, projected to grow to 80%) is significant – “ECPs, who, through their agent ABB, entered into the alleged

vertical conspiracy, control two-thirds of the disposable contact lens retail market . . . and thus possess market power as a ‘retailer cartel’ or ‘dominant inefficient retailer’”

• “Defendants have not asserted any pro-competitive justification for the UPPs”

• Plaintiffs alleged “significant anti-competitive effects, including significant price increases; elimination of intrabrand competition among retailers selling the same brand; the restrictions on consumers' ability to ‘’shop around;’ the elimination of price competition from Discount Retailers”

39

State Law Claims

• Denies motions to dismiss claims under Maryland antitrust law and California Cartwright Act – No discussion of state laws’ per se treatment of vertical

agreements

• Denies MTD claims under California Unfair Competition Law – Defendants: conduct permissible under Colgate “cannot be

deemed ‘unfair’” – Court: “UCL claim is derivative of [the] Section 1 Sherman

Antitrust Act and Cartwright Act claims” and “[t]hus . . . alleges a plausible claim of violation of the California UCL for the same reasons”

• Grants MTD of claims under Maryland Consumer Protection Act – Rejects “Plaintiffs' novel theory of liability under the MCPA”

and notes that MCPA “does not provide a cause of action for antitrust claims”

40

Utah Statute and Litigation

• In 2015, Utah passes statute forbidding a 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”

– Anti-Colgate: Applies not just to “agreements” but also to a manufacturer’s unilateral actions

– Anti-MAP: Applies not just to actual selling prices, but to advertised prices as well

– Anti-Khan: Applies to both minimum and maximum prices (although the statute was prompted, presumably, by concerns about minimum prices)

41

Constitutional Challenge Rejected

• Lens manufacturers seek preliminary injunction against enforcement

• District court denies injunction

• CTA 10 grants temporary injunction in May 2016 then vacates in June 2016

• CTA 10 affirms denial of preliminary injunction in December 2016

– Nonprecedential opinion

42

Valid under Commerce Clause

• Statute did not discriminate on its face between in-state and out-of-state businesses

• Applies only to sales to resellers in Utah and does not purport to apply to sales to retailers located outside or Utah – Accepts Utah AG representation that the statute “the statutes don’t apply to

the conduct of manufacturers or retailers selling outside Utah.”

– “Retailers outside of Utah are free to sell contact lenses for whatever price they would like, including the prices set by the Manufacturers’ UPPs”

• No extraterritorial effect – Lens manufacturers argued that the statute “‘bars an out-of-state contact lens

manufacturer from setting a minimum resale price for the sale of its products by a Utah contact lens retailer to a customer in California’”

– CTA 10: this “ignores Utah’s interest” and “ignore[s] the location of the retailer—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”

• Neither statute nor court distinguishes between (i) sales to Utah retailers for resale to Utah residents and (ii) sales to Utah retailers for resale to nonresidents

43

Some Lessons

44

Some Lessons

• State laws – or at least a state’s or private plaintiff’s relative chances of success in challenging RPM agreements – vary significantly by state

• Maximum RPM challenges are still “mostly dead”

• The Colgate doctrine is alive and well (but with significant real-world complications)

• Uniformity may be achievable only with the lowest common denominator

• Manufacturers should carefully consider their Internet sales and resale strategy

• Manufacturers should continue to weigh the incremental risks and benefits of RPM agreements – Caution in concentrated industries and segmented industries – Caution where policy introduction may be followed by large

price increases for consumers on frequent-purchase products

45

Michael Lindsay

Dorsey & Whitney LLP

612.340.7819 (Voice)

612.340.2868 (Fax)

[email protected]

46

www.hoganlovells.com

February 8, 2017

William L. Monts III

Hogan Lovells US LLP

Washington, D.C.

Resale Price Maintenance: International Approach/ Best Practices

www.hoganlovells.com 48

Resale Price Maintenance Under European Competition Law

• In most cases, minimum resale price maintenance is considered a serious infringement of European Union competition law

• Usually sanctioned by a fine

• Rationale is that resale price maintenance

– restricts retail price competition and leads to higher prices;

– induces or facilitates collusion at supplier level; or

– Induces or facilitates collusion at the distribution level

• Competition laws of most EU member states generally follow EU rules



• Also stringent on so-called “indirect” resale price maintenance, such as:

– fixing margins

– penalties for various practices relating to resale prices

– conditioning promotional support on maintaining a set resale price

– prohibiting granting rebates or imposing maximum rebates (i.e., indirectly imposing a minimum price)



• European competition law generally allows for the following practices so long as they are not disguised forms of minimum resale price maintenance

– Maximum resale prices

– Minimum discounts

– Suggested resale prices




Resale Price Maintenance Under Other Competition Law Regimes Around the World

• China

– Resale price maintenance expressly prohibited under the Antimonopoly Law (subject to a rule of reason analysis)

– In technology contracts, unreasonable restrictions regarding prices imposed on technology recipients are illegal under the Contract Law

• Korean and Canadian authorities have also imposed significant fines for minimum resale price maintenance agreements


The Bottom Line Is . . .

• Under most competition law regimes outside the United States, minimum resale price maintenance is almost always illegal and subjects the parties to fines

• What few exceptions to the general rule of illegality exist are:

– Limited in scope

– Fact-specific

– Have not been tested in practice

• The safest course: Don’t do it


Best Practices for Implementing Lawful Programs to Influence Resale Prices in the United States

• No simple or certain way for suppliers seeking to influence resale prices to eliminate all legal risk

• The Options:

– Express or tacit agreements on resale prices as in Leegin

• Must be vertical

• Must satisfy the rule of reason

• Certain to be judged under the rule of reason only under federal law

• Per se illegal in some state laws (multiple distribution approaches)

• Significant risks under international competition regimes

– Agency or Consignment Relationships

• Must be bona fide agency relationship or consignment arrangement

• Details of arrangements are subject to challenge

• State-law definitions of agency and consignment vary

• Additional potential non-antitrust liabilities with agency relationships


Best Practices for Implementing Lawful Programs to Influence Resale Prices in the United States

• The Options: – Wholesale Price Level Adjustments

– Minimum Advertised Price (MAP) Programs • Applies (at least in theory) only to advertised prices

• “Clever evasions”

• Violations difficult to detect

• Application to Internet sales is unclear

– Colgate Programs • Easy to understand in theory, but rarely easy to implement or monitor in

practice

• Often entail substantial burdens on the manufacturer (see Amicus Brief filed by Ping in the Leegin case)

• Handling violations and discriminatory enforcement

– Vertical Integration


Challenges Under Minimum Advertised Price Programs

• MAPs historically treated more leniently than resale price maintenance agreements when: – Program is voluntary and imposed unilaterally by the

manufacturer (and not as a result of prompting from a group of dealers)

– Program tethered to advertising paid for by manufacturer with co-operative advertising funds

– Dealer free to depart from the MAP in advertising for which he or she pays

• MAPs exist without all of these elements, but courts and enforcement agencies have sometimes given more stringent programs closer scrutiny


Challenges Under Minimum Advertised Price Programs

• MAPs subject to the “Clever Evader”

– “See Dealer for Price”

– “Call Store for Price and Other Details”

– “Prices So Low that We Can’t Tell You”

• Internet Sales are Particularly Challenging

– Internet sales are often a tool of the free rider, BUT

– Distinction between advertised prices and actual sales prices is less clear

– Restrictions on advertised prices on the Internet may be somewhat more likely to affect actual resale prices


Designing Minimum Advertised Price Programs

• Written policy promulgated unilaterally by the manufacturer

– Not included in dealer agreement; no assent sought

– Clearly states the policy and the products to which it applies

– Clearly and simply states the business rationale for the policy (e.g., premium product, protect the reputation and brand image of manufacturer)

– Clearly establishes the minimum advertised price

– Explains the consequences of a violation • Risks of “progressive discipline”

– Explains that manufacturer alone will enforce the policy and does not solicit or desire complaints


Challenges for Colgate Programs

• Easy to Implement in Theory

– Concept as articulated in Colgate is simple

– Manufacturer announces unilaterally determined minimum resale price

– Manufacturer announces that it will not deal with any dealer that does not adhere to the announced minimum resale price

– Terminates any dealer who does not comply



• Real-World Facts Virtually Never Match the Theory

– Compliance • Natural inclination is to seek to compel compliance with policy

• Efforts to enforce compliance by manufacturer, however, have been held to be an “agreement”

• “Coerced” compliance = agreement

• Concept seem irrational to business

• The Colgate Paradox – program is “safe” when all dealers on board (implies agreement) but becomes risky when mavericks emerge (implies lack of agreement)

• Violation by big customers – the fingernail or the head?



– Ubiquity of Dealer Complaints/Inquiries • No matter how much the manufacturer asserts that it does not want

complaints from dealers, dealers will complain about violations by others

• Dealer complaints alone followed by manufacturer action is not enough to infer agreements on resale prices, Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984)

• Dealer complaints, however, can be coupled with other evidence of attempts to “coerce” compliance to create an inference that either the manufacturer and “coerced” dealer agreed on a resale price OR the manufacturer and complaining dealers agreed on resale prices


Challenges for Colgate Programs – The “Helpful” Sales Representative

• Two Rules of Thumb

– The characteristics that make a good sales representative also make an antitrust risk

– Always check the sales files first

• Dealer complaints are often made to sales representatives

• Good sales personnel are “problem solvers” and often view their jobs as resolving complaints about non-compliance

• Inclination is to speak to the allegedly non-complying dealer to get him or her “on board” with the program

• Often sales staff will “helpfully” document their activities

• All of these activities become evidence of agreement on resale prices



– Consequences of Non-Compliance • Discriminatory Enforcement – varying enforcement based on

perceived severity of the violation can be evidence of agreement and increase risk of dealer litigation

• Inclination to impose “progressive discipline” (e.g., warning or probation for initial violation followed by increasingly stringent penalties for subsequent violation)

• “Progressive” disciplinary steps followed by compliance – may raise an inference of express agreement on resale prices or “coerced” agreement on resale prices

• Where resale price maintenance is per se illegal, a finding of agreement may be dispositive

• Safest course of action is prompt and indefinite termination, BUT is that palatable from a business perspective? The fingernail or the head?


Minimizing Antitrust Risk in Recurring Business Situations

THE SITUATION:

Complaint by One Dealer About Another’s Non-Compliance Received by Headquarters or a Field Sales Representative

THE RISK:

Person receiving the complaint communicates with the allegedly non-compliant dealer to obtain compliance with the program, which then becomes the basis of an allegation of agreement on resale prices


Ways for Minimizing Antitrust Risk

– Written Policy • Put the policy in writing making clear that it is imposed by the

manufacturer unilaterally (i.e., not as the result of any agreement with (a) a powerful dealer; (b) a group of dealers; or (c) another manufacturer)

• Policy is neither in a dealer or distributor agreement nor attached as an exhibit; stand-alone document

• Explain the policy’s scope and business rationale (e.g., encourage provision of point-of-sale services)

• State that the manufacturer neither wants nor solicits complaints from dealers and will enforce the policy on its own

• Make clear in the policy the consequences of non-compliance

• State directly that dealer compliance is voluntary and dealers remain free to set their own resale prices

• State that manufacturer does not seek dealer assent to policy


Ways for Minimizing Antitrust Risk – Train Employees and Have Procedures in Place to Respond

to Complaints • If possible, have questions directed to a single person or a central

department with a few people

• Authorize one or a limited number of employees to discuss the policy with dealers; other employees refer to those authorized to handle complaints

• Train field sales representatives how to respond to dealer complaints or inquiries and tell them not to discuss the conduct of one dealer with another

• Provide a list of frequently asked questions with accurate answers to help sales representatives know how to respond to complaints or inquiries

• Reiterate to the complaining dealer that manufacturer neither wants nor solicits complaints and will enforce the policy on its own



THE SITUATION:

Complaint by a Group of Dealers About Another’s Non-Compliance or a Request/Demand by a Group of Dealers that the Manufacturer Implement a Colgate Program

THE RISK:

Imposition of a policy or program at the behest of competing dealers or upon “coercion” by competing dealers creates a risk that manufacturer has joined a horizontal dealer price-fixing agreement



– Antitrust Compliance Program

• Manufacturers that join or enforce anticompetitive agreements among dealers are considered to have joined a horizontal conspiracy. See, e.g., United States v. Sealy Corp., 388 U.S. 350 (1967); United States v. General Motors Corp., 384 U.S. 127 (1966) Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959); Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939).

• Train employees to recognize the risk of agreements with competitors

• Train employees to refuse to discuss such issues with dealers



THE SITUATION:

Non-Compliance with Colgate Program by the Manufacturer’s Largest Customer

THE RISK:

Discriminatory enforcement poses risk that compliance by dealers will be deemed product of agreement and also poses risk of litigation by any dealers terminated for violating the Colgate program



– Enforcement • Enforce uniformly – no “protected” dealer or class of

dealers

• Safest course is termination for indefinite period

– No warnings or “second chances”

– May seem arbitrary or unfair

– Raises significant business issues

– “Progressive discipline” as an alternative?

• Do not enforce the policy with fanfare

• Do not give advance notice to the affected dealer absent compelling circumstances – make enforcement effective immediately

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