May 01, 2019

The Online Marketplace: How To Maintain Your Pricing Strategy

By Anshu Pasricha, Shaun McGaughey, and John Fraczek

KOLEY JESSEN, P.C., L.L.O.
  • Increasing connectivity and the gig economy has made it easier than ever for individuals to sell products online with anonymity; at the same time, discount online retailers are often looking to meet or beat any other prices available online.
  • These events have made it more difficult for manufacturers, who often do not have contractual arrangements with online resellers of their products, to maintain carefully crafted pricing strategies that can impact brand perception.
  • What considerations must be given in order to appropriately enforce such pricing models?

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Despite a now decade-old Supreme Court case that could have made it easier for manufacturers to maintain control of their pricing throughout their distribution network, the continued rise of e-commerce, the gig economy, and online pricing competition have, in practice, made it more difficult for manufacturers to enforce any pricing policies they may implement. When any number of individuals can obtain a manufacturer’s products and then resell them online anonymously without a contract with the manufacturer, there may appear to be little that a business can do to ensure that its established pricing model is honored. This article will present several enforcement options open to such manufacturers and, although focusing on the more common issue of online resellers undercutting the manufacturer’s desired pricing, can also be applied to those resellers overpricing goods.

A. Background
The Supreme Court attempted to open the door for manufacturers to better control their pricing downstream with the precedent-abandoning case Leegin Creative Leather Products, Inc. v. PSKS, Inc. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007). However, many states did not follow suit, and the patchwork of federal and state laws surrounding resale price maintenance agreements has instead caused an increase in minimum advertised pricing policies (MAP Policies) that are enforceable under applicable law—for a more detailed discussion of MAP Policies, and to help determine whether your MAP Policies are enforceable, see Price Maintenance: Strategies to Protect Profits and Brands, NEWSLETTER OF THE MIDDLE MARKET & SMALL BUSINESS COMMITTEE (ABA Business Law Section), Feb. 2018. Yet, having an enforceable MAP Policy and actually being able to enforce it in practice against online resellers are two different issues. The antitrust laws that permit MAP Policies are not designed to assist manufacturers in enforcement; they simply allow manufacturers to include such requirements in their contracts. Therefore, contract law is the primary enforcement mechanism. Yet, the further down the distribution network we analyze, the less likely there will be any contractual business relationship between the online reseller and the manufacturer, making it more difficult to enforce the applicable MAP Policy.

With no direct contractual enforcement mechanism against the online reseller, manufacturers are typically left with three alternatives: (1) contract enforcement against direct distributors for failing to assist in the manufacturer’s pricing structure; (2) enforcement against the online resellers utilizing intellectual property claims; and/or (3) changing pricing upstream to impact the final price. However, there are pros and cons to each mechanism, and the manufacturer must determine how aggressively it wants to enforce its brands, intellectual property, and pricing. Without a willingness to actively pursue enforcement, any changes to legal documents will have no impact.

B. Enforcement Alternatives

1. Enforcement against Distributors
Manufacturers can convince direct distributors to live up to their obligations under applicable contracts and any MAP Policy by indicating possible breach-of-contract claims and reminding such distributors of the remedies available to the manufacturer under such contract. This enforcement mechanism requires a holistic approach in that the contract documents executed with each distributor must be prepared with an eye toward enforcing the manufacturer’s desired pricing structure. Thus, regardless of the name or type of contract entered into, such contract should require the distributor to assist the manufacturer in enforcing the MAP Policy down the chain in the distribution network, which can include requirements on the distributor to implement the same MAP Policy on its own direct business relationships. Another contractual obligation that could be negotiated with distributors is a restriction on sales to any person or entity that advertises below the MAP Policy. One reason this approach may be preferred is that it has the potential to sweep up multiple resellers at the same time by simply enforcing against one distributor. However, the downside to this approach is that it is only as useful as the manufacturer is willing to make claims against its direct customers, i.e., the party from which it receives its revenue. Given that these direct distributors have much more impact on the revenue of a business than any individual reseller, maintaining a friendly and mutually beneficial relationship with the direct distributors may cause hesitancy on the part of the business in attempting to enforce a contract. This approach must be backed up with active involvement of the manufacturer in enforcement through the use of breach notifications or outright removal of repeat or egregious violators from the ranks of the manufacturer’s authorized distributors.

2. Enforcement against Resellers
Manufacturers wishing to skip over their distributors and instead attempt enforcement directly against downstream online resellers have two actions available to them. The first is to report the downstream online reseller to the online retailer that is hosting the sales posting, such as Amazon or eBay, for failure by the reseller to abide by the code of conduct of such resellers (more on this below). The second is based in intellectual property, which attempts to preserve the goodwill of the manufacturer and its brands; by selling products in an unauthorized manner, the goodwill of the manufacturer can be impaired. These actions are grouped together because they each have similar practical considerations that allow for enforcement. If the manufacturer wishes to utilize either or both of these actions, it must structure itself in advance in order to have the best chance of success.

The key to these actions primarily lies with the manufacturer’s standard warranty. When a manufacturer develops a warranty program that voids its warranty when products are not sold through authorized distributors or resellers, it is forcing unauthorized downstream entities to sell products that have been judicially determined to be materially different than their standard product. See e.g., Beltonics USA, Inc. v. Midwest Inventory Distrib., LLC, 562 F.3d 1067 (10th Cir. 2009); see also Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633 (1st Cir. 1992). As such, a claim that the manufacturer’s goodwill with its customers is harmed can be made in order to avoid the first-sale doctrine of intellectual property, which would ordinarily prevent such claims.

This strategy not only provides the direct intellectual property claim of infringement and erosion of goodwill, it can also force online retailers to remove listings. Many online retailers have a code of conduct for sellers on their sites that includes standards and guidelines for describing the condition of the product being sold. These guidelines most often require any items that are “new” to be exactly as the product would come from the manufacturer. See, e.g., Amazon’s seller guidelines at https://sellercentral.amazon.com/gp/help/external/help.html?itemID=200339950&language=en-US&ref=efph_200339950_relt_200301050 (“new” products are “brand-new, unused, unopened … in original packaging with all original packaging materials … [and the] original manufacturer’s warranty still applies.”). When the manufacturer makes it clear that its warranty is voided upon unauthorized sale, the product is no longer as it would come from the manufacturer and thus cannot be listed as a “new” product. Under these circumstances, reporting sellers and sales posts in violation of retailer guidelines may allow a manufacturer to get the seller banned or else remove the infringing listing.

There are a number of issues with direct enforcement, however. Without privity of contract with the reseller, the manufacturer does not have the same leverage with the reseller as they do with direct distributors. Another issue is that enforcement becomes a numbers game without a complete solution; even if a particular reseller is stopped, there are most likely many others that can take that resellers place, forcing the manufacturer to begin enforcement actions all over. Utilizing these processes can thus turn into a “whack-a-mole” game that would require the manufacturer to react to every reseller that pops up online, which can be an expensive proposition. Furthermore, due to the ease of online anonymity and the minimal incentive that online retailers have to control third-party resellers, resellers could easily create new accounts or revise listings that do not violate condition guidelines (such as by using “used” or “like new” conditions). For the foregoing reasons, a manufacturer must use enforcement against resellers with clear eyes toward the difficulties they may be undertaking.

3. Pricing Pressure
The first two alternatives are legal considerations; however, a manufacturer should not look solely to legal principles to drive solutions to the problem. If the true goal of a manufacturer is to ensure that its brands are protected by being priced appropriately online, then the simplest solution could be to increase product prices to the applicable direct distributor. Assuming that all parties are selling the manufacturer’s product in order to make a profit, an increase in prices should cause a similar reaction throughout the distribution network. If the distributors’ costs increase, they will be forced to increase prices for their own customers in order to make the same profit, and the same pricing increase could occur all the way through to those entities placing the products with the online retailers. Increasing the price enough could allow the final online sales price to be at or above the MAP price that the manufacturer is attempting to enforce. Consideration, including a cost-benefit analysis, must be made on how an increase in pricing would impact business relationships and the quantity of goods sold, and whether the increase in revenue from the higher prices would offset any losses in quantity being shipped. Another issue with this scenario would be those resellers who unload unwanted or excess merchandise to recoup any amount, regardless of whether they are profitable. Finally, if the distributors with a current distribution agreement are part of the issue, increasing pricing in this way may not be allowed under their distribution agreements, so all such agreements would need to be reviewed and amended, if possible.

C. Conclusion
Unauthorized online resale of a manufacturer’s products is, at its core, a business issue. Although there is no perfect legal solution, there are certain alternatives that can be considered, but any solution must be analyzed carefully to ensure that enforcement creates more benefits than the potential harm caused by the enforcement mechanism. Regardless of how manufacturers will attempt to enforce their pricing policies, planning out and structuring all of their legal documents, including their MAP Policy, distribution agreements (or entire dealer program), and warranties, is a key step to be successful when the need for enforcement arises. By having a well-crafted plan, manufacturers may be able to avoid the headaches of e-commerce and instead use the powerful benefits of e-commerce to grow their business.