Setting Minimum Resale Prices - Don't Even Think About It06/10/2010 | Summer 2010 Newsletter
Franchisors and manufacturers who want to maintain control and uniformity over their products may be tempted to dictate minimum resale prices to their franchisees or distributors.
A U.S. Supreme Court decision three years ago appeared to signal that a manufacturer might be allowed to set minimum resale prices. In the Leegin decision, the Supreme Court reversed 80 years of precedent and decided that it was no longer an automatic violation of federal antitrust laws to do so. Rather, such practices would be examined on a case by case basis under a much more relaxed reasonableness standard. Because states often try to conform their antitrust laws to federal laws, it was believed that this decision might spell the end of the prohibition against minimum resale price maintenance. But recent events at the state level have made it clear that franchisors and manufacturers should not set minimum resale prices. Although it is not an automatic violation of federal law, it is still an automatic violation of many state laws.
On March 29, 2010, New York’s Attorney General sued Tempur-Pedic, a leading mattress manufacturer, to impose penalties against it for engaging in alleged resale pricing policies, in violation of New York state law which prohibits vendors and producers from setting minimum resale prices. The Attorney General said that Tempur-Pedic’s agreements with its authorized retailers prohibited them from engaging in discounting practices such as “free gifts with purchase,” “no sales tax,” and “gift cards, rebates, coupons or other in-store credits.” The Attorney General also claimed that Tempur-Pedic had advised its retailers that it “will not do business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic.” The Attorney General also asserted that Tempur-Pedic had terminated retailers for discounting. The matter is still pending, but it shows that the Attorney General is not going to follow the lead of the U.S. Supreme Court. Rather, the Attorney General still considers minimum resale pricing to violate state law.
Earlier this year, the California Attorney General sued DermaQuest, a seller of beauty-care products, claiming that it had entered into illegal price fixing agreements with its distributors, in violation of the state’s antitrust and unfair competition laws. The California AG alleged that DermaQuest had entered into contracts providing that its retail distributors may not resell its products below its suggested retail prices. In March 2010, DermaQuest settled the action by agreeing not to enter into such agreements in the future and to pay civil penalties and legal costs.
Courts in other states, including Tennessee and Kansas, have ruled that minimum resale price maintenance may still be an automatic violation of state antitrust laws even if they do not violate federal law, and the Maryland legislature recently adopted a state law imposing a similar prohibition.
Congress is currently considering legislation that would reverse the Supreme Court’s Leegin decision and again make minimum resale price maintenance a violation of federal antitrust law. In March, such a bill was reported out of the Senate Judiciary Committee.
Manufacturers who want to control prices might consider using a different business model for distribution, which cuts out the middleperson and sells directly to end users. For example, some manufacturers use selling agents or manufacturer’s representatives, who merely forward customer orders directly to the manufacturer which then ships and bills the customer directly.
But if such a business model is not an option, then franchisors and manufacturers using the franchise or distribution model should continue to avoid dictating minimum resale prices.