It has been three and one-half years since the United States Supreme Court’s controversial decision in Leegin Creative Leather Prods. Inc. v. PSKS Inc., 551 U.S. 877 (2007), which reversed earlier case law holding resale price maintenance (or RPM) agreements to be per se violations of the antitrust laws, thereby leaving such agreements subject to rule of reason analysis. Nonetheless, per se treatment of RPM is still very much alive in a number of states, with California and New York leading the charge.
The California Attorney General’s office recently obtained a settlement in the Superior Court for Riverside County, which requires a cosmetics company to refrain permanently from fixing resale prices for its merchandise (California v. Bioelements, Inc., Cal. Super. Ct., Riverside Cty., No. 10011659, 1/11/11). See 100 Antitrust & Trade Reg. Rep. (BNA) 54 (1/21/11) (with links to complaint and consent decree). Attorney General Kamala D. Harris announced on January 14 that her office had stopped Bioelements from engaging in “a blatant price-fixing scheme” that prohibited retailers from selling its products online at any price less than Bioelements’ suggested retail price.[1] The settlement permanently enjoins Bioelements from fixing resale prices for its merchandise, requires the company to inform distributors and retailers with whom it executed RPM contracts that those contracts are void and will not be enforced, and imposes civil penalties and counsel fees of $51,000 to be paid to the Attorney General’s office by Bioelements.
The complaint, filed on December 30, 2010, alleged that Bioelements had violated the Cartwright Act and California’s Unfair Competition Law. According to the complaint, Bioelements “entered into many dozens of written contracts . . . with third-party companies—several dozen of them physically located in California—that distribute and/or sell, retail to the public, Bioelements products, where such contracts contained resale price maintenance components.” The contracts in question were referred to as “Authorized Professional Accounts” (APA) or “Internet Only Accounts” (IOA). The APA contracts contained language stating that “Accounts shall not charge less than the Manufacturer’s Suggested Retail Price.” Similarly, the IOA contracts stated that “Accounts are prohibited from charging more or less than the Manufacturer’s Suggested Retail Price.”
The California Attorney General has consistently taken the position that the Supreme Court’s decision in Leegin did not affect California’s strict state antitrust law. In February 2010, the Attorney General obtained an injunction under California law against another cosmetics company, DermaQuest, Inc., to halt a vertical price-fixing scheme similar to that employed by Bioelements. See 98 Antitrust & Trade Reg. Rep. (BNA) 316 (3/12/10). Moreover, the Attorney General’s office has participated in an ongoing, nationwide effort to persuade Congress to pass legislation reinstating federal safeguards against vertical price-fixing schemes like those addressed in Bioelements.[2]
Attorney General Harris declared that, despite the Leegin decision, prices in California “must be set independently—and competitively—by distributors and retailers.” According to the Attorney General, requiring retailers to charge minimum prices dictated by a supplier is “price manipulation” that “harms consumers, competition, and our business community,” and California will “continue to be vigilant in protecting our markets from these kinds of abuses.”
California is not alone in continuing to apply per se treatment to RPM agreements despite Leegin. In April 2009, Maryland enacted legislation declaring RPM agreements to be per se illegal under its state antitrust law.[3] In addition, legislation that could be interpreted as rendering RPM agreements per se illegal has been considered in at least the following thirteen states—California, Connecticut, Kansas, Mississippi, Montana, Nevada, New Hampshire, New Jersey, New York, Ohio, South Carolina, Tennessee, and Virginia.[4]
New York authorities have also aggressively pursued per se treatment of RPM—but with less success than California. New York authorities filed an action in March 2010 against Tempur-Pedic International, a manufacturer of pillows and mattresses, similar to those filed by California against Bioelements and DermaQuest. New York alleged in that action that Tempur-Pedic had illegally entered into RPM agreements that required resellers of its products to charge prices dictated by Tempur-Pedic. New York v. Tempur-Pedic International, Inc., No. 0400837 (N.Y. Sup. Ct., N.Y.C., filed March 29, 2010). See 98 Antitrust & Trade Reg. Rep. (BNA) 464 (4/16/10) and 100 Antitrust & Trade Reg. Rep. (BNA) 111 (2/4/11) (with link to text of court’s opinion).[5]
Alleging that Tempur-Pedic’s advertising and pricing policies had violated New York General Business Law § 369-a,[6] and that those violations constituted illegal and fraudulent conduct in violation of New York Executive Law § 63(12), New York sought an injunction against Tempur-Pedic engaging in RPM and disgorgement of its profits. Decision, Order and Judgment (available at http://op.bna.com/atr.nsf/r?Open=srin-8dpvjj) at 1. However, the court found that Section 369-a did not make RPM contracts illegal but only unenforceable. Id. at 6-7. Moreover, the court found that Tempur-Pedic had committed no fraudulent act because its retailers were not misled into thinking they had entered into RPM contracts. Finally, relying on Monsanto v. Spray-rite Serv. Corp., 465 U.S. 752 (1984), the court found that there were no contracts that contained RPM provisions that would have prevented Tempur-Pedic’s retailers from selling at whatever price they wanted. Tempur-Pedic’s pricing restraints were contained only in a unilateral policy to which the retailers never agreed, and there was insufficient evidence that Tempur-Pedic had coerced adherence to that policy.[7] The advertising policies to which Tempur-Pedic required agreement by its retailers, while admitted to be contracts, restrained only advertising activities, not pricing practices.
Despite the outcome in the Tempur-Pedic action, several large states clearly continue to treat RPM agreements as per se price-fixing, and many of the other states that have supported national legislation to overturn Leegin may follow suit. Thus, the impact of Leegin to insulate RPM agreements from enforcement actions and/or civil liability is questionable. Certainly, it is imprudent to conclude in reliance on Leegin that RPM agreements will be judged solely under the rule of reason, particularly for any manufacturer with distribution in California, New York, or Maryland. The more prudent conclusion for any company with national distribution would be that RPM agreements are at risk of being successfully challenged as per se violations by one or more states.
- Although Bioelements is an Illinois corporation headquartered in Colorado, its founder and president, Barbara Salomone, lives and works for Bioelements in La Quinta, California. The company manufactures and markets a line of products that it refers to as “cosmesceuticals” because they allegedly combine the benefits of cosmetics and pharmaceuticals. The products are sold on the Internet and in beauty salons throughout California.
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- Federal legislation to overturn Leegin has the support of at least 35 state attorneys general.
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- Maryland Commercial Law Code 11-204(b) amended the Maryland equivalent of federal law by declaring that any contract, combination, or conspiracy that sets minimum prices is an unreasonable restraint of trade. The Deputy Chief of the Antitrust Division of the Maryland Attorney General has confirmed that section 11-204(b) was intended to overturn Leegin and preserve the per se rule for RPM agreements. See Alan M. Barr, FTC Hearings on Resale Price Maintenance, “State Challenges to Vertical Price Fixing in the Post-Leegin World” (May 21, 2009), available online at http://www.ftc.gov/opp/workshops/rpm/may09/
docs/abarr.pdf.
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- Richard A. Duncan & Alison K. Guernsey, “Waiting for the Other Shoe to Drop: Will State Courts Follow Leegin,” 27 Franchise L.J. (WTR. 2008) at 174.
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- Previously, in 2008, Illinois and Michigan had joined New York in alleging that a furniture manufacturer’s RPM policy was unlawful price-fixing under state antitrust statutes. New York v. Herman Miller Inc., No.08 CV-02977, 2008-2 Trade Cases (CCH) ¶ 76,454 (S.D.N.Y., filed March 21, 2008). The complaint appears to have alleged that the challenged RPM agreements constituted a per se violation. That action was settled within days for $750,000. See New York v. Herman Miller Inc., No.08 CV-02977 (S.D.N.Y. March 25, 2008) (Stipulated Final Judgment and Consent Decree), available online at http://www.oag.state.ny.us/bureaus/antitrust/
pdfs/Signed_FJ.pdf.
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- Section 369-a reads as follows: “Price-fixing prohibited. Any contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable or actionable at law.”
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- Tempur-Pedic had announced as its unilateral retail pricing policy that it would suspend doing business with any retailer that did not adhere substantially to Tempur-Pedic’s suggested retail price ranges. Tempur-Pedic made it clear that it neither sought nor would accept any retailer’s agreement to this policy and that its retailers were free to set prices at whatever level they believed to be in their interests. Id. at 3-4. There was no evidence that Tempur-Pedic had ever terminated a retailer pursuant to this policy. Id. at 12.
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