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The Latest on Leegin and Resale Price Maintenance – Should Manufacturers Rest Easy after the Tempur-Pedic Decision?

Friday, April 29, 2011

This article originally appeared in the April 2011 issue of The Antitrust Counselor (Vol. 5.2), published quarterly by the American Bar Association Section of Antitrust Law, Corporate Counseling Committee. Copyright 2011, American Bar Association. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. All requests for reprint should be sent to: Director, Copyrights and Contracts, American Bar Association, 321 N. Clark, Chicago, IL 60654-7598, e-mail: copyright@abanet.org.

For nearly a century, federal antitrust law (the Sherman Act) prohibited resale price maintenance (RPM or vertical price fixing) agreements as a per se illegal form of price-fixing. See 15 U.S.C. § 1 (1997). In 2007, however, the Supreme Court’s 5-4 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), held that RPM arrangements are not illegal per se under the Sherman Act. In so doing, the Court overturned Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). Instead, RPM agreements are subject to “rule of reason” analysis, which allows RPM if its procompetitive benefits outweigh its anticompetitive effects.1

Despite the passage of more than three years since the Supreme Court’s decision, it is unclear what, if any, long-term effect Leegin will have, particularly with respect to state antitrust laws and the cases filed alleging claims under those laws. While many states interpret their antitrust laws in conformity with federal law, some states specifically prohibit RPM agreements, including states like Maryland that enacted per se statutes in response to Leegin.2

Most recently, the state antitrust authorities advocating for per se treatment of vertical price fixing have had mixed results. They suffered at least a temporary set back in New York v. Tempur-Pedic International, No. 0400837 (N.Y. Sup. Ct., N.Y.C. Mar. 29, 2010). There, the trial court granted Tempur-Pedic’s motion to dismiss on the grounds that the state had failed to establish the existence of a contract or agreement between Tempur-Pedic and its retailers and that N.Y. law did not make RPM illegal. On the other hand, in People of the State of California v. Bioelements, Inc., No. 10011659 (Cal. Sup. Ct. Jan. 11, 2011), California obtained another consent judgment permanently prohibiting the manufacturer from fixing vertical prices.

Leegin Creative Products, Inc. v. PSKS, Inc. on Remand

Leegin, a manufacturer of Brighton brand women’s accessories introduced a marketing initiative designed to provide incentives to retailers that created a separate section for the Brighton brand within their stores. To participate in this initiative, retailers had to pledge to “follow the Brighton Suggested Pricing Policy at all times.” In 2002, Leegin learned that PSKS had violated its pricing policy by discounting Brighton merchandise. In response to this violation, Leegin suspended all shipments to PSKS.

Generally, the Supreme Court decided that RPM agreements should not be per se illegal. The Court wrote that minimum price agreements can benefit consumers by enabling retailers to invest in customer services without fear of being undercut by discount rivals, by giving consumers more options to choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between and by allowing new entrants to attract resellers with the guarantee of certain margins. The Court explained that such pricing agreements should encourage retail services that increase competition between different brands, which is good for the consumer. RPM agreements also could make it easier for new products to enter the market because competent retailers will be more willing to invest the effort and expense required to distribute a new product if they are able to charge a higher price. Although the Court acknowledged that there could be negative effects on competition, it concluded the fact that negative effects were possible was not sufficient reason to treat RPM agreements as automatically illegal.

The Supreme Court changed the legal standard that courts use to examine RPM, but did not give a “green light” for all RPM agreements. Instead RPM practices will be examined by the courts, which will weigh a number of factors, but may still find vertical pricing agreements to be illegal. The Court explained that resale price agreements are dangerous and warned the lower courts “to be diligent in eliminating their anticompetitive uses from the market.” The Court gave examples of situations where such pricing agreements will be particularly treacherous. Specifically, when a significant number of manufacturers in a given industry decide to use this practice, when there is evidence that pressure from the resellers was the impetus for the price minimums, or when the manufacturer implementing such an agreement is dominant, the Supreme Court warned that setting resale price floors is particularly dangerous.3

On remand after its Supreme Court defeat, PSKS filed a second amended complaint, apparently attempting to fit is claims within one of the Supreme Court’s examples of how RPM might result in harm to competition. Specifically, PSKS alleged that: (1) independent retailers were involved in the enforcement of Leegin’s RPM policy; (2) at a meeting more than 100 retailers reached a consensus regarding special discounts and incentives which was later adopted as Leegin’s policy; (3) Leegin was the hub in a hub-and-spoke conspiracy by intervening to resolve pricing disputes between and among competing retailers; and (4) Leegin, acting at the retail level, agreed with other retailers on the resale price. The court noted that PSKS did not, however, claim that retailers were the “source” of the RPM policy or that Leegin established the policy at the retailers’ urging or that there was any agreement among retailers or between competing manufacturers to set resale prices.4

The Fifth Circuit rejected PSKS’ argument that the rule of reason was inapplicable because Leegin is a dual distributor. In addition, the Fifth Circuit held that PSKS failed to plead a proper relevant product market because, despite having alleged two alternative markets, neither proposed market included interchangeable substitute products or recognized the cross-elasticity of demand for Leegin’s products. Next, the court rejected PSKS’ claim that Leegin’s RPM program artificially inflated consumer prices, and stated that the “claim defies the basic laws of economics. Absent market power, an artificial price hike by Leegin would merely cause it to lose sales to its competitors.” The court further found that PSKS’ complaint failed because it did not plausibly allege harm to interbrand competition.5

The Supreme Court denied PSKS’ petition for certiorari on February 22, 2011.

New York v. Tempur-Pedic International, No. 0400837 (N.Y. Sup. Ct., N.Y.C.)

On January 14th, the New York Supreme Court issued its eagerly anticipated RPM decision in the case filed by New York’s Attorney General’s Office (NYAG) against the mattress manufacturer, Tempur-Pedic International, Inc (Tempur-Pedic). The N.Y. court struck a blow to the AG’s often repeated and forceful position that N.Y. law barred automatically any and all minimum resale price agreements.

After publishing articles and making public statements regarding their intention to enforce rigorously state laws prohibiting RPM, on March 29, 2010 the NYAG's office filed a petition against Tempur-Pedic. New York challenges Tempur-Pedic’s minimum advertised price policy, under Section 369-a of the N.Y. General Business Law and Section 63(12) of the N.Y. Executive Law, alleging that Tempur-Pedic entered into RPM agreements that required resellers of its products to charge prices dictated by Tempur-Pedic. The NYAG’s petition does not include claims under the Sherman Act or under New York’s antitrust statute -- the Donnelly Act, General Business Law § 340 et seq.

Section 63(12) provides for equitable relief when the defendant is “engage[d] in repeated fraud or illegal acts” and Section 369-a makes unenforceable “any contract provision that purports to restrain a vendee of a commodity from reselling . . . at less than the price stipulated by the vendor or producer.” New York contends Tempur-Pedic’s establishment and enforcement of a RPM policy violated Section 63(12) and Section 369-a. According to the petition, Tempur-Pedic’s Retail Partner Agreements with its authorized retailers prohibited discounting, free gifts with purchases, rebates, coupons, free gift cards, or other in-store credit. The petition further alleges that Tempur-Pedic implemented an RPM program through “a series of letters to all accounts from its president” stating that Tempur-Pedic “will not do business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic.” The petition also states that retailers assisted Tempur-Pedic’s enforcement of its RPM restrictions by “monitoring the prices of their competitors and reporting to Tempur-Pedic any pricing below the retail prices set by Tempur-Pedic.”

New York contends, as it did in its earlier public comments, that Section 369-a does more than simply make RPM provisions unenforceable, instead, it affirmatively “provides that a vendor or producer cannot set a minimum price at which its product can be resold.” Additionally, the state maintains that the Uniform Commercial Code’s definition of a “contract” governs whether a contract exists within the meaning of Section 369-a. Under this theory, the state can rely on Tempur-Pedic’s course of dealings with its resellers to prove the existence of an agreement.

It is likely that the AG did not bring a federal antitrust claim because of earlier unsuccessful (11th Circuit) federal private litigation challenging Tempur-Pedic resale pricing practices and because of Creative Leather Products, Inc. v. PSKS, Inc., 552 U.S. 877 (2007). Perhaps the NYAG omitted the state antitrust claim because the Donnelly Act has long been construed consistent with the Sherman Act.

The N.Y. court rejected the NYAG’s arguments and held that N.Y. law does not prevent a vendor from insisting that retailers use the prices specified by the vendor or otherwise restrain the reseller’s right to discount the resale price. The court concluded that RPM does not constitute “an illegal act” and that the text of the statute itself clearly did not bar any and all RPM. Because the court found that the language of the statute was clear, it refused to consider the title of the statute – “Price Fixing Prohibited” – or look any more deeply into the intent of the N.Y. legislature. The court stated “[t]here is no ambiguity in the text of General Business Law §369-a. Contracts for resale price restraints are unenforceable and not actionable, but not illegal.”

The court also rejected the NYAG’s arguments that Tempur-Pedic’s advertised price agreement violated Section 369-a. The court noted that the advertised policy did not prohibit discounts, rebates, promotional items or coupons; instead the policy only barred the advertisement of these types of promotions “in conjunction with Tempur-Pedic products.” Although Tempur-Pedic’s advertised pricing program was part of a contract with its retailers (not a unilateral policy), the court found the advertising restriction was not a retail price agreement. Thus, because the advertised price policy did not actually bar discounting, the court found that it could not be illegal under Section 369-a.

Interestingly, the NYAG was not the first to challenge Tempur-Pedic’s distribution and pricing methods. In Jacobs v. Tempur-Pedic International, Inc., 2007 WL 4373980 (N.D. Ga. Dec. 11, 2007), customers of a Tempur-Pedic distributor claimed that the mattress manufacturer had established resale price agreements that artificially inflated mattress prices by eliminating competition between retailers and distributors in violation of Section 1 of the Sherman Act. Plaintiffs claimed that Tempur-Pedic required its distributors to charge a minimum resale price and to advertise that price as the “lowest factory authorized pricing” or the “Lowest Possible Price.”

In Jacobs, Tempur-Pedic moved to dismiss the plaintiffs’ price-fixing claims under Leegin and argued that the plaintiffs might have had a valid price-fixing claim under the pre-Leegin per se standard, but that the plaintiffs failed to state a claim under the new rule of reason standard. Id. The court concluded that plaintiffs failed to state a claim under the rule of reason because, among other reasons, the complaint did not identify the relevant market and found the plaintiffs’ allegation about inflated mattress prices was unpersuasive. Consequently, the court dismissed the plaintiffs’ price-fixing claims under the rule of reason standard articulated in Leegin.

As expected, in the New York case, the NYAG has filed an appeal.

People of California v. Bioelements, Inc., No. 10011659 (Cal. Sup. Ct. Jan. 11, 2011)

On January 14, 2011, California’s Attorney General announced that it settled a dispute with a Colorado cosmetics company that prohibited retailers from selling its products over the Internet at a discount. California alleged that since 2009, Bioelements contracted with dozens of resellers requiring them to sell Bioelements products online for at least the manufacturer’s suggested retail price. Under its settlement with California, Bioelements must pay $51,000 in civil penalties and attorney fees as well as refrain from fixing resale prices and inform its distributors the contracts at issue are void.

California v. DermaQuest, Inc., Case No. RG 10497526 (Cal. Sup. Ct. Feb. 23, 2010)

Last year, California’s Attorney General filed a complaint and stipulated final judgment in a California state court action challenging DermaQuest’s RPM practices. DermaQuest is a California-based manufacturer of cosmetics. The complaint alleged that DermaQuest entered into minimum RPM agreements with some of its distributors in violation of California’s Cartwright Act and Unfair Competition Law. California claimed that DermaQuest’s contracts required its wholesalers to represent and warrant that their retailer customers would not resell DermaQuest’s products below the manufacturer’s suggested minimum price. The complaint does not allege any federal antitrust claims, but does make clear California’s position that RPM remains per se illegal under state law.

Pursuant to the consent judgment in the case, DermaQuest agreed to send written notice to the relevant distributors that it was disavowing all parts of any agreement that obligated the distributors to maintain certain resale prices and to refrain from entering into any agreements with any third party, including independent contractors, that increase prices or that fix at any standard or figure the price of the products to consumers.

Conclusion

Since Leegin, neither the federal nor the state courts have clarified how RPM claims will be handled or how manufacturers seeking to regulate resale prices can safely accomplish procompetitive, lawful goals. From the cases above, it is evident that a number of state antitrust enforcers still consider RPM harmful to consumers and commerce and that they intend to seek out opportunities to bring actions that will deter manufacturers considering RPM.

The Tempur-Pedic case could provide lawyers counseling clients on RPM issues with substantial insight into, among other things, the definition of a contract or agreement, the scope of certain key New York statutes, and the way in which courts will weigh the factors deemed important in Leegin. Of course, there was uncertainty before the Supreme Court’s Leegin decision. Thus, even if federal or state legislatures enact statutes repealing Leegin, questions will remain, such as, when a manufacturer’s conduct crosses the line from a unilateral policy into a coerced agreement with its resellers to adhere to RPM, or, when resellers’ actions cross the line from simple complaints into an agreement to terminate or maybe even a boycott of a rival. Regardless of the outcome in Tempur-Pedic, questions will also remain regarding the level of activity or effect required within each state to trigger that state’s statute.

Endnotes

1 Leegin did not change the fact that the per se rule would still apply to claims that a horizontal agreement to implement RPM existed among competitors at either the manufacturer or reseller level. Id. at 886.

2 See Michael A. Lindsay, Overview of State RPM, http://www.antitrustsource.com [under References] (summarizing RPM-related state law). There also continues to be proposed federal legislation pending to overrule Leegin and declaring RPM illegal per se under the Sherman Act.

3 In Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., 530 F.3d 204 (3d Cir. 2008), the Third Circuit applied the Leegin factors in its rule-of-reason analysis.

4 PSKS, Inc. v. Leegin Creative Leather Products, Inc., 615 F.3d 412 (5th Cir. 2010), cert. denied, 179 L. Ed. 2d 301 (U.S. Feb. 22, 2011)

5 In a separate case filed on behalf of a purported class of purchasers of retail products manufactured by Leegin, the court’s analysis tracks, for the most part, the analysis of the Fifth Circuit. See Spahr v. Leegin Creative Leather Products, Inc., 2008 U.S. Dist. LEXIS 90079 (E.D. Tenn. Aug. 20, 2008).

Barbara T. Sicalides

Written by

Barbara T. Sicalides
Phone: 215.981.4783
202.220.1205

Fax: 215.981.4750
202.220.1665

sicalidesb@pepperlaw.com


The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.


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