May 31, 2011

KEEPING CURRENT: Antitrust: California Antitrust Case Demonstrates Need to Be Cognizant of State Laws

Businesses that market products or services in multiple jurisdictions are aware that laws differ from place to place. This is true in the area of antitrust, where all of the states have enacted legislation. While there is a great deal of similarity among state antitrust laws, individual statutes and their interpretations by state courts and regulators do vary somewhat from state to state. Additionally, while state antitrust statutes generally are modeled after the federal antitrust laws, differences do exist. These divergences between and among federal and state laws can have important practical consequences for businesses. A recent consent decree between the State of California and a manufacturer of beauty care products illustrates one difficulty that can confront companies operating interstate, particularly in the Internet age--specifically in the context of setting resale prices for products or services.

The attorney general of the State of California sued Bioelements, Inc., contending that contracts with its distributors and retailers prescribing the minimum prices at which they could sell Bioelements products online constituted per se violations of California's state antitrust law, the Cartwright Act. California v. Bioelements, Inc., Case No. 10011659 (Cal. Super. Ct., Riverside Co. Jan. 11, 2011). (A government enforcer or a private claimant can establish a per se antitrust violation merely by proving that particular acts occurred. It is not necessary to show an impact on competition.) Rather than proceed to trial, earlier this year Bioelements agreed to refrain in the future from controlling the prices at which distributors and retailers could resell its products, to inform the existing distributors and retailers that they were no longer bound by the price control provisions in their contracts, and to pay $51,000 in civil penalties and attorney fees.

This case would have been unremarkable a few years ago. The practice in question--known as "vertical price-fixing," or "minimum resale price maintenance" (RPM)--was held to be illegal per se under the federal antitrust laws in 1911. In 2007, however, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the United States Supreme Court, recognizing that RPM can be procompetitive (for example, by stimulating competition between different brands), overruled that long-standing doctrine. Now, RPM is not per se illegal under the federal antitrust laws, but its legality is judged under the "rule of reason" standard. A rule of reason case requires analysis of the competitive effects of challenged conduct, a far more in-depth and complicated inquiry than in a per se case. As a result, a practice long held to be illegal under federal law is now likely to be challenged less frequently and held illegal even less often.

Individual states, however, are free to enact and enforce their own antitrust laws, and to apply their own standards, within limits. The precise scope of application of those laws to conduct occurring in other states can present difficult legal issues, but it is clear that the states may regulate conduct that occurs within their borders and some out-of-state conduct that affects their residents. (Here, Bioelements' president worked in California, many of Bioelements' distributors were located in California, and the products were sold to consumers in California.)

Application of a state's antitrust laws to conduct that takes place in, or affects, that state can create difficulties for companies that seek some control over the prices at which their products are sold. Imagine a manufacturer that, like Bioelements, sells to the public through distributors that sell online. The manufacturer wishes to maintain the prices of its products above a certain point--perhaps to maintain the image of the products as quality products; perhaps to prevent prospective customers from obtaining information about the products at conventional brick-and-mortar stores and then buying more inexpensively online. Under federal law, in most cases, this would no longer be illegal. But if the manufacturer sells to distributors/retailers in California, or in another state that still regards RPM as illegal per se, or if such distributors/retailers sell to customers in California or in such other state, such restrictions might be impermissible as a matter of state law.

The Internet, of course, does not respect state boundaries. Online distributors and retailers in California may sell to consumers in Kansas through the same websites from which California residents make purchases. And if distributors can price at whatever levels they choose in California, those same prices will appear on computers in Kansas. The manufacturer's efforts to maintain its desired price levels in Kansas will thus be undermined by lower prices that originate in California but are equally available to consumers all over the country.

The manufacturer may be able to avoid this result, but the methods available to it may be costly, imperfect, or even counterproductive. For example, under most circumstances, the manufacturer can legally agree with the California distributor that the distributor will sell only to California residents, but in order to ensure that residents of other states not view the lower California prices--for which they don't qualify--on their computer screens, the distributor would have to incur the trouble and expense of partitioning its website content by geography, something not all distributors might be willing to do. Or, the manufacturer might refrain entirely from selling to distributors in California, but even if the manufacturer sold only to out-of-state distributors, California might nevertheless argue that those distributors' online sales to California residents at prices set by the manufacturer violated California law. A manufacturer faced with this dilemma could reasonably conclude that its best choice is to refrain altogether from including price maintenance provisions in its distribution contracts.

There is still vigorous debate among lawyers and economists regarding when RPM is anti-competitive and when it can have salutary effects. Courts and legislatures in different jurisdictions have reached different conclusions on this issue. The Bioelements case presents a timely reminder that, unless and until state and federal laws conform--in RPM and in other areas in which they currently diverge--companies must continue to be mindful of the laws of all applicable jurisdictions.