Price Maintenance: Strategies to Protect Profits and Brands
As Apple Inc. (AAPL) inches ever closer to a one trillion dollar market capitalization,[1] one must recognize the immense value of the Apple brand. Branding is especially powerful in a world full of consumer choice, instantly available information, and easy comparison shopping. There are many strategies that can be utilized to develop a brand, but regardless of the strategy, consistency is essential in order to build consumer trust and cement good qualities about your company in the consumer’s mind. Developing consistency is a long process that impacts every aspect of an organization, including product or service pricing. As such, price maintenance has become an important part of a successful company’s strategy. However, implementing price maintenance policies must be done carefully, for the risk of violating federal and state antitrust laws is omnipresent and the consequences of such violations can be devastating.[2] This article discusses the legal landscape of price maintenance approaches and develops a guideline for drafting enforceable minimum advertised pricing (“MAP”) policies.
A. Legal Environment
A decade has passed since the Supreme Court upended nearly a century of precedent and caused a disconnect between federal and state law related to resale price maintenance (“RPM”) agreements.[3] Leegin established that RPM agreements instituting a minimum price at which goods could be sold were no longer per se illegal under federal law.[4] This result could have been a boon to organizations seeking to implement such polices, whether for branding or other purposes, such as to eliminate price undercutting between dealers (intra-brand competition). Unfortunately, several states, including the business and population hubs of California and New York, have failed to follow suit with their own state antitrust laws,[5] creating a legal minefield of enforcement policies that nationwide organizations need to successfully traverse. Such an unstable environment has prevented many organizations from pursuing such agreements, even if Leegin would allow for such policies.
The non-uniformity of legal enforcement of RPM agreements has driven organizations to adopt MAP policies rather than RPM agreements. MAP policies are distinct from RPM agreements because they restrict prices resellers can advertise, not the actual resale price.[6] However, simply labeling a policy as a MAP policy does not mean it will be deemed enforceable; the concept of substance over form applies – MAP policies must uniformly pass antitrust law’s rule of reason test under both federal and state law. The rule of reason test determines whether a business practice violates antitrust laws by analyzing a variety of factors, including the condition of the industry before and after a restraint is imposed, in order to determine whether the procompetitive benefits of the business practice outweigh the competitive harm it causes.[7]
B. MAP Policy Guidelines
Due to the application of the rule of reason test, there is not a one-size-fits-all policy that will guarantee your MAP policy is enforceable; even if a policy followed all of the following guidelines, the individual circumstances of a particular situation will determine whether the policy is enforceable. However, the following guidelines have been utilized by courts to dismiss claims that MAP polices were unenforceable. Careful drafting and enforcement of the policy are critical, and the policy should be periodically reviewed and updated to address changing circumstances.
- Advertised Price. MAP policies must only restrict advertised prices. A reseller must still retain the right to determine the resale price.[8]
- Unilateral Adoption. There should be no indication of an agreement between the manufacturer and the dealer, as this will tend to make the policy fall closer to a RPM agreement surrounding price, which can be deemed as a price-fixing arrangement under federal antitrust law. In addition, there should be no mention of adopting the policy under the influence of dealers concerned about undercutting competitors.[9]
- Alternative Communication Methods. There should always be an effective method for resellers to be able to communicate the price of an item to consumers without violating the policy. This is especially true when enforcing the policy against online resellers. For example, organizations should consider allowing a price to be displayed online in the checkout process, or advertising that a consumer could call for a price.[10]
- General Application. MAP policies should not discriminate between dealers.[11] If it is applicable to online retailers, it should also be applicable to brick-and-mortar resellers.
- Coop Advertising Programs and Additional Services. If a manufacturer can establish that it provides additional services to resellers, including training or funding to help with advertising, there is clearer consideration for MAP restrictions placed upon the reseller.[12]
C. Conclusion
Price maintenance is an important part of many companies’ strategies, especially those attempting to promote and brand themselves as a producer of high quality goods. While there are methods to impose certain resale prices, organizations have determined that enforcing MAP policies is an effective way to reinforce a company brand at a lower risk than attempting to navigate the current legal landscape of RPM agreements. However, MAP policies still require careful drafting, and a thorough understanding of the practical restraints it may be imposing, as each organization’s circumstances are different.
This article was published in [February 2018] edition of the Newsletter of the Middle Market and Small Business Committee of the ABA Business Law Section.
[1]See Apple Inc. (AAPL), Morningstar, Inc., http://www.morningstar.com/stocks/xnas/aapl/quote.html (last visited, September 11, 2017) ($834 billion as of the date last visited).
[2]The Antitrust Laws, Federal Trade Commission, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws (last visited August 17, 2017) (criminal penalties of up to $100 million for corporations and $1 million for individuals, along with up to 10 years in prison; private actions allow for triple damages).
[3]See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overturning Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373 (1911) (invalidating a minimum resale price agreement as per se illegal as a restraint on trade with no procompetitive benefits), and its subsequent line of precedent cases).
[4]Id.
[5]See Michael A. Lindsay, Overview of State RPM, American Bar Association: The Antitrust Source (April 2017), https://www.americanbar.org/content/dam/aba/publishing/antitrust_source/lindsay_chart.authcheckdam.pdf.
[6]See, e.g., People v. Tempur-Pedic Int’l, Inc., 944 N.Y.S.2d 518, 519 (2012) (holding that while RPM agreements are unenforceable, agreements on minimum advertised prices “cannot be the subject of a vertical RPM claim, because they do not restrain resale prices but merely restrict advertising.”).
[7]See Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899); see also Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911).
[8]In re Compact Disc Minimum Adver. Price Antitrust, 216 F.R.D. 197 (D. Me. 2003).
[9]Manufacturer-Imposed Requirements, Federal Trade Commission, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/dealings-supply-chain/manufacturer-imposed (last visited September 11, 2017) (“Legal issues may arise if it appears that the dealers have agreed to threaten a boycott or collectively pressure the manufacturer to take action.”); cf. In re Sony Music Entm’t, Inc., No. C-3971 (F.T.C. Aug. 30, 2000) (stating that different MAP policies appeared to have been implemented at the urging of retailers concerned about discount dealers).
[10]WorldHomeCenter.com, Inc. v. Franke Consumer Prods., Inc., 2011 WL 2565284 (S.D.N.Y. June 22, 2011); WorldHomeCenter.com, Inc. v. KWC America, Inc., 2011 WL 4352390 (S.D.N.Y. Sept. 15, 2011).
[11]See 15 U.S.C. § 13.
[12]Manufacturer-Imposed Requirements, Federal Trade Commission, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/dealings-supply-chain/manufacturer-imposed (last visited September 11, 2017) (“The law allows a manufacturer considerable leeway in setting the terms for advertising that it helps to pay for.”).