COMMERCIAL LITIGATION Controlling Retail Prices The Resale Price Maintenance By Pat Pascarella, Anne Swoboda Cruz, Two-Step and Stephanie Rzepka Until anti-Leegin states permit companies simply to enter into pro- competitive resale price agreements, properly implemented and monitored policies can In 2007, the U.S. Supreme Court abolished the per se rule provide a fair amount against minimum resale price agreements and held that of price discipline, and they were to be judged instead under the more lenient rule pose marginal risk. of reason standard. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 877 (2007). ance has placed manufacturers competing But 10 years later, the combined effect in nationwide markets in the unenviable of a disconnect between Leegin and cer- position of weighing the benefits of ratio- tain states’ laws and a lack of dispositive nalizing their retail distribution channels court decisions providing substantive guid- against unpredictable litigation risks. ■ Pat Pascarella is the chair the Tucker Ellis’ Antitrust Group. Before joining Tucker Ellis, he served with the U.S. Department of Justice, Antitrust Division in Washington D.C. and as chief in-house antitrust counsel to a Fortune-10 company. Anne Swoboda Cruz, a partner in Tucker Ellis’ Los Angeles office, is a trial attorney specializing in commercial litigation and antitrust. Ms. Cruz also is an active member of DRI, including the DRI Women in the Law Com- mittee. Stephanie Rzepka is an associate in Tucker Ellis’ Houston office. She represents businesses in antitrust, class action, and complex commercial litigation before state and federal courts and antitrust enforcement agencies. 20 ■ For The Defense ■ October 2017 © 2017 DRI. All rights reserved. The Problem A Word of Warning on Anti-Leegin Laws There are many pro- competitive reasons why a manufacturer might want to have With many antitrust violations, the prohibited conduct is obvious even to non-lawyers (e.g., some control over the retail pricing of do not agree on prices with competitors, do not allocate bids). This is because most antitrust its products. One commonly espoused rules are founded in rational economic reasoning. An anti-Leegin law banning RPM agree- rationale comes from manufacturers that ments outright does not fall under this umbrella. Rather, a law that bans RPM agreements in believe that to compete effectively in the any situation is economically irrational. Per the Leegin court, the prior per se treatment of mini- marketplace, their retailers must offer cer- mum resale pricing agreements was based on “formalistic legal doctrine” rather than “demon- tain customer services. This could come in strable economic effect.” Leegin, 551 U.S. at 887. In most cases, if a manufacturer is not a the form of a showroom, where customers monopolist, imposing a minimum resale price cannot possibly have an adverse effect on con- can view or try out the product, or some other form of customer support. Because sumers since they can simply switch to another supplier. And even if the manufacturer is a these services come at a cost, the manu- monopolist, a minimum resale price will not harm consumers because, in short, there is only facturer must assure that retailers can col- one monopoly rent (i.e., the amount a monopolist can charge for its products over and above lect a sufficient margin on their products what might be considered a competitive margin). But the monopolist has that with or with- despite providing these additional serv- out a minimum price restraint. It cannot increase that monopoly rent by imposing a minimum ices. That margin, however, can be eroded resale price on its retailers. if some retailers opt not to offer the requi- The point here is that because a ban on RPM agreements is irrational, conduct that could site services and instead attract customers support a finding that the ban has been violated likewise is not intuitively obvious. To an exec- via discount prices. The end result is that utive or director, such conduct may simply seem to be sound pro- competitive business prac- customers will tend to use the full-service tices. Accordingly, when implementing an RPM policy or MAPP, a manufacturer must take retailers to view or evaluate a product, then care to establish somewhat rigid guidelines and procedures to avoid these abstruse pitfalls. purchase the same product from the dis- For The Defense ■ October 2017 ■ 21 COMMERCIAL LITIGATION counter. Simply lowering wholesale prices Unfortunately, the key word here is “fed- ride-sharing is not “Uber’s product,” the is insufficient because it does not prevent eral.” Forty-nine states have their own case is readily distinguishable from most these discount retailers from proportion- antitrust statutes. And while most have RPM cases where there is no question that ally cutting their prices to attract price- federal harmonizing clauses (i.e., the laws the RPM policy applies to the manufactur- sensitive consumers. are interpreted consistently with their fed- er’s product. Manufacturers in this or similar posi- eral counterparts), at least two remain out tions will find it desirable to engage in some of sync. AfterLeegin , Maryland passed The Two-Step Solution form of resale price maintenance (RPM). anti-Leegin legislation, maintaining per In light of all of the above, a manufacturer The goal is to maintain resale (or retail) se treatment of resale price maintenance competing in a national market cannot rely agreements. And California courts have on the fact that an RPM agreement with continued to hold that such agreements are its retailers is pro- competitive (i.e., that it per se violations of the Cartwright Act (Cal- could pass the rule-of-reason test) to pro- After Leegin, Maryland ifornia’s antitrust statute). tect it from challenge. Instead, it must do A few other states also have been labeled the RPM two-step. This dance consists of passed anti-Leegin anti-Leegin by some commentators as implementing two mechanisms to discour- a result of actions brought, or consent age discounting while avoiding any “agree- legislation, maintaining per decrees entered, by their attorneys general. ment” on the resale price of the product However, closer scrutiny of those actions with the retailers. se treatment of resale price reveals that these states may, in fact, not • Step 1: Announce a suggested resale be anti-Leegin, as the matters challenged price policy (sometimes referred to as a maintenance agreements. tended to focus on evidence of horizon- unilateral pricing policy (UPP)), under tal agreements between manufacturers or which the manufacturer sets a suggested And California courts retailers rather than the presence of a ver- minimum resale price and ceases doing tical RPM agreement. (Even Leegin does business with distributors or retailers have continued to hold not give quarter to horizontal agreements that discount below that price. between competitors affecting price.) Add- • Step 2: Limit retailers’ ability to adver- that such agreements are ing to this uncertainty, many post-Leegin tise a discounted price via a minimum, opinions provide limited general guidance advertised pricing policy (MAPP). per se violations of the because they are either highly fact specific or were resolved too prematurely to rule Step One: Implementing a Suggested Cartwright Act (California’s dispositively on the antitrust issues. Retail or Uniform Pricing Policy Finally, there are at least two cases A suggested retail price policy is a bit of antitrust statute). involving the computer applications mar- a misnomer. While the lowest acceptable ketplace that contain some unfortunate retail price may be “suggested,” failure to language regarding the applicability of Lee- follow that policy will ultimately result in prices at or above a level that permits retail- gin. In United States v. Apple Inc., 791 F.3d the termination of the seller. Typically, a ers to earn a living wage, while at the same 290, 321 (2d Cir. 2015), the Second Circuit retail pricing policy sets out the products time investing in the customer services found that Leegin did not apply to the verti- covered and the “suggested” minimum that a manufacturer requires. Ten years ago cal agreements between Apple and certain prices, and advises that the company will the Supreme Court recognized that verti- book publishers, in part because the agree- not do business with resellers that price cal agreements between a manufacturer ments would not have been in the publish- below its suggested price. A well-drafted and its retailers to maintain minimum er’s own interest if acting independently. policy also will make it quite clear that resale prices were often pro- competitive And in Meyer v Kalanick, 174 F. Supp. 3d the manufacturer simply is announcing because the sacrifices to intrabrand com- 817 (S.D.N.Y. 2016), the court refused to the policy and is not seeking agreement or petition were more than offset by enhance- apply Leegin to Uber’s agreements with its affirmation regarding its policy from the ments to interbrand competition. Leegin, drivers that they would adhere to its pric- retailers. This is because the goal of a resale 551 U.S. at 877–78. Accordingly, the Court ing algorithm because “Uber is not selling pricing policy is to avoid any “agreement” mandated that vertical RPM agreements anything to the drivers that is then resold.” with the retailers since it is this “agree- should be judged under the rule of reason Id. at 826. While one cannot ignore these ment” that renders a resale price policy ille- test. Id. Thus, if a manufacturer has a pro- cases, neither is likely to alter materially gal under the anti-Leegin laws. competitive business rationale for con- how courts treat RPM policies. In Apple, trolling retail prices, it should be free to there was significant evidence alleged of a Unilateral Means Unilateral: enter into enforceable agreements about broader, more complex conspiracy as well Avoiding a Vertical Agreement the appropriate retail price with its distrib- as Apple’s role in orchestrating the con- A manufacturer should begin by announc- utors and retailers without running afoul of spiracy.