The Rapid Evolution of Resale Price Maintenance Regulation in the United States and United Kingdom

Vol. 43 No. 1

By

Brenner Allen, an attorney in the U.S. firm of Allen, Pinnix & Nichols, is licensed in the State of Washington and Washington, D.C. Ms. Allen advises clients in the areas of antitrust, administrative, and international law. E. Susan Singleton is a U.K. solicitor and founder of the London firm Singletons. She advises a wide range of clients on competition law. She is vice chairman of the U.K. Competition Law Association and author of Comparative Law of Monopolies.

Resale price maintenance regulations in the United States and the United Kingdom both appear to have a nearly identical goal: preventing and punishing agreements that restrain competition. But nuances abound within the laws and practices of both countries regarding price-setting policies and agreements. And since both countries’ antitrust regulations have extraterritorial reach, regulation of resale price maintenance stretches beyond U.S. and U.K. borders. Further, as the recent U.S. and EU challenges to the Apple Corporation’s e-book price-fixing schemes have demonstrated, companies may be obliged to simultaneously follow the regulations of both jurisdictions. The following is an introduction to this continually evolving area of the law in the United States and U.K.

Section 1 of the Federal Sherman Antitrust Act bans agreements to restrain trade: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.” 15 U.S.C. § 1. Federal law does allow manufacturers to unilaterally decide on a minimum resale price for their products, announce that price to retailers, and then refuse to deal with any retailer that fails to comply with the pricing. Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984). But, to varying degrees, federal and state antitrust laws currently prohibit price-setting agreements. Thus, the crucial legal questions are what constitutes a universally permitted policy and what constitutes a possibly illegal agreement. U.S. federal and state courts vary in their answers to this question, and the area of the law is rapidly evolving.

U.S. Federal Law

For over a century following the enactment of the Sherman Act in 1880, U.S. federal courts consistently held that vertical minimum price-setting agreements were illegal. These courts would not take into account any defenses or justifications if such an agreement were found to exist. However, this changed in 2007, with the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS Inc., 551 U.S. 877 (2007). The Court held that a vertical minimum price-setting agreement may be legal in some circumstances. It should be noted that Leegin has no effect on the legality of unilateral price-setting policies. Valuepest.com of Charlotte, Inc. v. Bayer Corp., 561 F.3d 282 (4th Cir. 2009). Thus, since Leegin, U.S. courts analyze some vertical agreements under the “rule of reason” doctrine. This means they examine the nature, purpose, and history of the restraint, and its actual or likely effect on competition. Rule of reason analyses are commonly performed by federal and state courts for a variety of other potentially anticompetitive acts. The ultimate question to be settled in a rule of reason assessment is whether the agreement to restrain trade is procompetitive or anticompetitive. Only an anticompetitive restraint is illegal under the rule of reason.

Since Leegin, U.S. courts have continued to find vertical minimum price-setting agreements per se anticompetitive in many circumstances, including: when a large fraction of a market’s manufacturers use such agreements, when a manufacturer that controls a significant fraction of a geographic or product market creates an agreement, when the vertical agreement facilitates horizontal price-setting, or when a retailer or a group of retailers direct or cause a manufacturer to propose prices. In such analyses, a “significant” fraction of the market, termed “market power,” is defined as “the ability to raise prices above those that would prevail in a competitive market.” United States v. Brown University., 5 F.3d 658, 668 (3d Cir. 1993). U.S. state attorneys general and federal courts are unlikely to consider control of less than 10 percent of a market to constitute “market power.”

For vertical minimum price-setting agreements not automatically deemed per se anticompetitive, the rule of reason assessment is the next step in the legal analysis. Agreements may be procompetitive if they make the manufacturer’s product more competitive than other brands, or encourage retailers to promote the brand, or encourage sales by retailers who will provide better services to customers, such as might be the case, for example, if the agreement protects actual, physical stores from losing sales to the Internet.

U.S. State Law

U.S. states also legislate against restraints on trade. State-level antitrust laws largely follow the text of the Sherman Act. State court interpretations of state antitrust laws generally follow the guidance of federal courts, with some variations. For example, U.S. state laws and courts take varying views of the legality of price-setting agreements. Thirty-seven states joined on an amicus brief in the Leegin case opposing the switch from per se illegality of price-setting agreements to permitting legality for agreements that pass the rule of reason analysis. And, in a number of states (California, Illinois, Indiana, Kansas, Maryland, Michigan, and New Jersey) price--setting agreements are still illegal. In contrast, there is a group of states where courts or laws have not yet indicated that they will diverge from Leegin (these states include Alaska, Colorado, Delaware, Idaho, Louisiana, Maine, Massachusetts, New Mexico, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, and Wisconsin). The situation is more ambiguous in the remaining states and Washington, D.C. In these jurisdictions, so far there is little law or case law providing guidance on the legality of price-setting agreements, or there is ambiguity on the subject.

Like federal courts, state courts have consistently permitted manufacturers to establish unilateral price-setting policies. However, manufacturers must be aware that there is a fine line between a legal unilateral policy and a potentially illegal price-setting agreement. Many factors contribute to the determination of whether a policy or agreement has been created. Factors tending to indicate a policy include: a price policy announced unilaterally, with no potential consequences stemming from a refusal to deal; temporarily or permanently refusing to deal with any and all retailers that do not abide by the policy; and distributing lists of suggested prices. United States v. Colgate & Co., 250 U.S. 300 (1919); Isaksen v. Vermont Castings, Inc., 825 F.2d 1158 (7th Cir. 1987). Factors tending to indicate an agreement include: evidence of a written or verbal agreement regarding pricing; any sort of coercion regarding compliance with a policy; and policing of the policy through harassment, threats, or informants. United States v. Parke, 362 U.S. 29 (U.S. 1960); Ben Sheftall Distributing Co. v. Mirta de Perales, Inc., 791 F. Supp. 1575 (S.D. Ga. 1992); FTC v. Beech-Nut Packing Co., 257 U.S. 441 (U.S. 1922).

Under the Foreign Trade Antitrust Improvements Act of 1982, federal U.S. antitrust laws can be applied extraterritorially to conduct that involves “import commerce” or “commerce with a direct, substantial and reasonably foreseeable effect” on import or domestic commerce. 15 U.S.C. § 6a. Similar language may be found in state antitrust acts; for example, the State of Washington’s Consumer Protection Act defines trade as “commerce directly or indirectly affecting the people of the state of Washington.” Wash. Rev. Code. § 19.86.010. Federal U.S. courts have frequently considered the question of exactly what “import commerce” includes. Federal agencies and federal courts take varying views of how U.S. specific conduct must be. At least one U.S. federal court of appeals has concluded that the Sherman Act is not limited to applying just to physical imports. J. Clayton Everett Jr. & Eyitayo St. Matthew-Daniel, Morgan, Lewis & Bockius LLP, The Sherman Act’s Increasingly Long Arm, Apr. 2, 2012, available at www.morganlewis.com/pubs/Antitrust_LF_ShermanActLongArm_02april12. Given the extraterritorial effect of the Sherman Act and the lack of consistency among federal courts regarding its application, foreign companies whose business involves import commerce or may have an effect on import or domestic commerce may wish to engage U.S. legal counsel to ensure compliance with U.S. federal and state antitrust laws.

U.K. Law

Much like its U.S. counterpart the Sherman Act, Chapter I of the U.K.’s 1998 Competition Act prohibits agreements that are aimed at “the prevention, restriction or distortion of competition” in the country. This restriction is also found in Article 101 of the Treaty on the Functioning of the European Union and thus is common to all 28 European Union member states. And, as in the United States, recommended or suggested retail prices (also known as price policies) are allowed as long as no steps are taken to require a distributor to resell at such price. Further, just as “horizontal” price agreements between competitors operating at the same level of the supply chain are violations of the U.S. Sherman Act, they are a criminal offense in the U.K. under the 2002 Enterprise Act. In the U.K., both criminal competitor price cartels and vertical price-fixing between supplier and distributor can lead to fines of 10 percent of worldwide group turnover under either U.K. or EU competition law. Indeed, the EU regulation in this area, Commission Regulation 330/2010, expressly prohibits resale price maintenance and any price restriction in such agreements. Any verbal agreement or clause in a written agreement to that effect is void and unenforceable throughout the EU Manufacturers may decide whom to sell to, and may operate selective distribution networks where they supply only authorized retailers so long as they comply with Regulation 330/2010. These agreements may not include price restrictions.

As in the United States, a central question in U.K. antitrust law is which specific resale pricing practices cross the line into illegality. The European Commission’s 2010 Vertical Agreements Guidelines accompanying Regulation 330/2010 make it clear that resale price agreements can still be illegal even if achieved through indirect means. The guidelines provide examples of such indirect agreements: fixing the distribution margin; fixing the maximum retailer discount or otherwise limiting rebates and discounts; tying manufacturer discounts to fixed prices; linking the prescribed resale price to the resale prices of competitors; and a broad range of threats and intimidations coercing observance of a fixed price. There is a critical difference between EU regulations in this area and federal U.S. law, however. In the EU, manufacturers generally may not threaten termination of contracts or suspension of deliveries in order to enforce price policies, though, of course, they may terminate deliveries for unrelated reasons, such as supply shortages or a retailer’s bad credit.

The 2010 Guidelines prohibit price policy monitoring systems that have anticompetitive effects, such as obliging retailers to report other members of the distribution network who deviate from the standard price level. Similarly, many U.S. courts also interpret this practice as transforming a legal price policy into a potentially illegal price-setting agreement. A manufacturer in the U.K. might be permitted to oblige the retailer to apply a most-favored-customer clause. However, such a clause has been discouraged in the EU on several recent occasions, such as one involving Amazon.com, Inc., which recently ended use of such clauses following an investigation by the U.K. Office of Fair Trading and its German counterpart, the Bundeskartellamt (Federal Cartel Office). As with some U.S. antitrust analyses, the legality of such practices can turn on the question of how much of a market share the manufacturer controls.

Written Internet-selling policies are common throughout the EU, though there have been several recent cases addressing policies applied to online retailers. In August 2013, the U.K. Office of Fair Trading announced it had obtained commitments from Booking.com, Expedia, and InterContinental Hotels Group to relax existing restrictions they imposed on online travel agents, permitting the agents to provide discounts on certain hotel accommodations. The Office of Fair Trading had alleged that Booking.com and Expedia had gone beyond permitted policies by entering into agreements with the Hotels Group to restrict online agents’ ability to offer discounted rates. Under the agreed-to commitments, the agents would become free to use their commission revenue or margin to fund discounts.

Practices that may be tantamount to resale price agreements are also generally illegal, with some exceptions. These include maximum resale prices that in reality constitute minimum or fixed prices. However, maximum resale prices that keep prices low to the benefit of consumers are usually allowed. Measures taken against retailers who do not adhere to resale prices and written statements or agreements with the effect of controlling the dealer or franchisee’s price are also illegal.

Manufacturers wanting to influence prices in the U.K. may set requirements for minimum levels of in-store sales required before online selling is permitted. However, there are limits. A landmark 2011 EU Court of Justice case involving the manufacturer Pierre Fabre Dermo-Cosmétique prohibited that company’s ban on retailers selling online. However, manufacturers may still ban the retail of premium brands on eBay in the U.K. Manufacturers may also endeavour to sell to retailers at high prices, as that is, of course, one of the best practical means of ensuring resale prices are high. Selling to all dealers at the same price in all countries removes the incentive for cheap, parallel importation of goods. Ensuring goods have holograms or codes to enable their source and, indeed, authenticity to be checked in the case of product recalls when product liability issues arise can also help suppliers maintain tight control over products and their distribution.

One interesting nuance in the 2010 Guidelines is that temporary resale price maintenance via agreements might be permitted in certain circumstances on a very limited basis. Such exceptions follow a roughly similar pattern to the U.S.’s rule of reason “procompetitive versus anticompetitive” analysis, though the details differ. The 2010 Guidelines suggest that it may be acceptable in a franchise system or similar system “applying a uniform distribution format” to coordinate a short-term minimum price campaign (two to six weeks in most cases) that will also benefit consumers. The extra margin provided by price maintenance may allow retailers to provide additional presale services, particularly in cases where expertise or complex products are involved. Resale price maintenance in such instances may also be applied to prevent free-riding at the distribution level. But the involved parties will have to demonstrate that the price agreement can be expected to not only provide the means but also the incentive to overcome possible free-riding and that the presale services overall benefit consumers as part of the demonstration that all the conditions of article 101(3) are fulfilled. And, under EU article 101(3), certain pricing agreement exceptions are permitted. But these are limited cases; it is rarely wise to assume that resale price maintenance is legal in the U.K.

Like the U.S. Foreign Trade Antitrust Improvements Act, the EU competition rules apply when an agreement has an effect in the EU even if all parties to the arrangement are based outside the EU Therefore, U.S. companies may need to obtain legal advice in the EU if their actions will have effects in the EU This is also true for U.S. companies whose customers will purchase in the EU, particularly for companies with assets in the EU that could be seized if fines were imposed.

In Both the U.S. and U.K. Systems: Legal Minefields

While there are differences in U.S. and U.K. legal approaches to resale price policies and agreements, one overarching similarity exists. In both countries, this area of the law is a legal minefield. This is particularly true in the United States when rapidly evolving state approaches to price-setting agreements are concerned. It is also true in the U.K. regarding online retailing of expensive branded products. In both countries, the penalties for antitrust law violators are serious, and case law is unsettled. Thus, manufacturers who wish to keep the resale price of their products high in the United States or U.K. will generally need to develop price policies and avoid actively creating agreements or enforceable maintenance schemes. In the United States, these policies may be enforced via termination of violators, but such terminations will not be an option in the U.K. Manufacturers and retailers engaged in commerce in either country should also ensure that all staff are informed as to which general practices may be illegal and exactly which types of actions could trigger illegality.

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