Presenting a live 90‐minute webinar with interactive Q&A Resale Price Maintenance: Minimizing Antitrust Scrutiny Structuring Pricing Agreements Amid Differing State, Federal and International Treatment of RPM T d ’ f l f 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, APRIL 13, 2011 T oday’ s faculty features: Lynda K. Marshall, Partner, Hogan Lovells, Washington, D.C. Robert A. Lipstein, Partner, Crowell & Moring, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Transcript
Presenting a live 90‐minute webinar with interactive Q&A
Resale Price Maintenance: Minimizing Antitrust ScrutinyStructuring Pricing Agreements Amid Differing State, Federal and International Treatment of RPM
Lynda K. Marshall, Partner, Hogan Lovells, Washington, D.C.
Robert A. Lipstein, Partner, Crowell & Moring, Washington, D.C.
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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Minimum Resale Price Maintenance Agreements: Back to the Future or Days of Future Past?Future Past?
Robert A LipsteinRobert A. LipsteinCrowell & Moring LLP202 624 [email protected]
April 13, 2011
RPM – The DebateRPM The Debate
» Pro – RPM Arguments: – Enhances retailer pre-sale, point-of-sale and post-
sale service and support by eliminating free-riding– Reduces retailer risk of taking on unknown products– Reduces retailer risk of taking on unknown products
and thereby facilitates entry– Interbrand competition is what matters; if product is
“too high” in price for perceived value, it will lose in the marketplace
» Anti RPM Arguments:» Anti-RPM Arguments: – Prices are higher; intra-brand price competition is lost
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The Way We WereThe Way We Were
» Dr. Miles (1911): Resale price maintenance t i l t S ti 1agreements violate Section 1.
» Colgate (1919): Announcement of a unilateral i i li d b t f l t d lpricing policy and subsequent refusals to deal
do not violate Section 1.» Beech Nut (1922); Parke Davis (1960):» Beech-Nut (1922); Parke, Davis (1960):
Acquiescence from retailers through coercion is still an agreement – scope of Colgate extremelystill an agreement scope of Colgate extremely limited.
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The Way We WereThe Way We Were
» Spawned a generation of other pricing th d l i d i d t hi i imethodologies designed to achieve pricing
uniformity without offending the law:Colgate “policies”– Colgate policies
– Suggested retail prices (MSRP)» And non-price techniques» And non-price techniques» Result:
– No history of rule of reason analysis of RPM– No history of rule of reason analysis of RPM– Effective control of resale prices by many
manufacturers, with high transaction costs– Tortured analysis of when an “agreement” is formed
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PSKS, Inc. v. Leegin Creative Leather Products, g
» What started as a “policy” went south:
– Leegin asked retailers to “work together” with Leegin and “ask[ed]” retailers not to discount Leegin products.
– Leegin assured PSKS that other retailers had agreed to the policy and demanded quid pro quos: take those “SALE” signspolicy, and demanded quid pro quos: take those SALE signs down or we’ll cut you off.
» Result: Jury verdict for treble damages of $3 6 million» Result: Jury verdict for treble damages of $3.6 million, plus over $350,000 in attorneys’ fees (cheap, midwest firm).
» Leegin “hail Mary” pass connects in the Supreme Court
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The Leegin RoadmapThe Leegin Roadmap
» Leegin (2007):– Considered potential procompetitive justifications for
– Decided that minimum RPM does not “always or l t l t d t t i t titi dalmost always tend to restrict competition and
decrease output,” and that the rule of reason is the appropriate mode of analysispp p y
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Today’s Landscape (In Theory)Today s Landscape (In Theory)» Leegin set out some potential factors for a court
to consider in a rule of reason analysis of RPM:to consider in a rule of reason analysis of RPM:– How many manufacturers in the industry use RPM?– Source of the restraint (manufacturer or power ( p
retailer, or group of retailers)?– Is there Market Power?
» Leegin (2010):– Fifth Circuit affirms Leegin’s motion to dismiss– PSKS fails to allege a cognizable relevant market
S C t d i t– Supreme Court denies cert11
So That Settles It, Right?So That Settles It, Right?
» Meager post-Leegin caselaw– Babies R Us
• Case survived motion to dismiss; class certified July 2009; case preliminarily settled for $35 millionJuly 2009; case preliminarily settled for $35 million
• Relied on theory in which dominant bricks and mortar retailer coerced manufacturers to agree on RPM with Internet retailers, preventing discounting
• Ticks two of the three Leegin boxes: a dominant retailer pushing for RPMretailer pushing for RPM
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Nope.Nope.
» Confusion continues to reign over RPM at the f d l l lfederal level.– Very little caselaw
Muddled messages from DOJ/FTC– Muddled messages from DOJ/FTC– Potential federal repealer legislation– And that’s all besides the state and internationalAnd that s all besides the state and international
issues!
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Views from the Federal Enforcement C itCommunity» Agencies view RPM generally negatively
– FTC and DOJ support Leegin repealer legislation– Agencies feeling their way toward an enforcement
rationalerationale• Nine West
– FTC permits RPM but ominously focuses on its potential anticompetitive outcomes
• NAMM
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Agency PerspectiveAgency Perspective
» The View from DOJ– “Structured application” of Leegin– Plaintiff must show existence and scope of
agreement and structural conditions suggestingagreement, and structural conditions suggesting policy is anticompetitive.
– Burden shifts to defendant to show plaintiffs are wrong about the market, or that policy is procompetitive.
• Dominant manufacturer• RPM covers most of the market• Foreclosure effects on rival manufacturer
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Varney ParadigmsVarney Paradigms
» Retailer-Driven RPM– Retailer Exclusion
• One or more retailers with market power• Coercion of manufacturers to adopt RPM and RPMCoercion of manufacturers to adopt RPM, and RPM
covers much of the market • Significant exclusionary effect on actual rival
– Retailer Collusion• RPM is pervasively used (more than 50% of market)• Retailer coercion (not merely persuasion)• Retailer coercion (not merely persuasion)• Manufacturers unable to thwart retailer collusion
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Federal Repealer LegislationFederal Repealer Legislation
» S. 75– Senator Kohl’s Leegin repealer introduced in January
2011– Federal legislative repeal unlikely but– Federal legislative repeal unlikely, but . . . . .
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Beware the State AGsBeware the State AGs
» States continue to pound the RPM Drum: – California
• Bioelements (agreement to sell at least at MSRP)DermaQuest (similar)• DermaQuest (similar)
– New York• Temper-Pedic (NY failed to prove a contract to fixTemper Pedic (NY failed to prove a contract to fix
resale prices had been formed)– Maryland
• Leegin repealed
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So, Where Does That L U ?Leave Us?» Colgate remains a (relatively) safe option, read
i li ht f t i l fi d t d i iin light of recent single-firm conduct decisions» Manufacturers can thus achieve relative price
if ituniformity» If there is a “slip” in observance of the policy, still
rule of reason at the federal level (not per serule of reason at the federal level (not per se illegal)
» Lose the efficient solution of simply using an» Lose the efficient solution of simply using an agreement to establish RPM
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DESIGNING MINIMUM RPM PROGRAMS TO COMPLY WITH CONFLICTING LEGAL STANDARDSCOMPLY WITH CONFLICTING LEGAL STANDARDS
Lynda K. MarshallHogan LovellsWashington DCWashington, DC(202) 637-5338 Strafford [email protected] April 13, 2011
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The Challenge for CounselorsThe Challenge for CounselorsAs Rob’s presentation made clear, there is no easy or clearly protected path for suppliers trying to influence the resale priceprotected path for suppliers trying to influence the resale price of their products
• Leegin seems to offer new flexibility, but federal law only must be vertical and satisfy rule of reason
• State laws likely will apply, and some much less flexible• International suppliers also need to consider enforcement pp
policy of other nations in which their goods or services are sold
22
What are the alternatives?What are the alternatives?Potential options if your sales are subject to unfriendly state law include:include:
• Agency relationship• Use of wholesale price as practical floorUse of wholesale price as practical floor specified amount higher of specified amount or percent of customer’s higher of specified amount or percent of customer s
resale price• MAP Program – intended to affect only advertised -- not g y
actual -- resale price• Colgate program
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The Challenges of MAP ProgramsThe Challenges of MAP Programs• Traditionally treated more favorably than RPM
agreements or policies if:g p Voluntary Adherence to MAP merely controls customer’s eligibility for
supplier’s coop advertising funds Customer free to advertise below MAP at own expense
C t d i h b l th ti h• Courts and agencies have been less sympathetic where not all these elements present • Worldhomecenter.com v. Kichler, 05-cv-3297, 2007 WL 963206Worldhomecenter.com v. Kichler, 05 cv 3297, 2007 WL 963206
(E.D.N.Y. 2007) • In the matter of Sony Music Entertainment, Inc. et al., FTC
Docket No C-3971 reported at
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Docket No. C-3971, reported at http://www.ftc.gov/os/caselist/c3971.shtm
The Challenges of MAP ProgramsThe Challenges of MAP Programs
• Attempts to adopt and enforce MAP Programs especially h ll i i th t t f I t t lchallenging in the context of Internet sales May be difficult to distinguish advertised and actual resale prices May be more likely to affect actual resale prices May be more likely to affect actual resale prices
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Challenges for Colgate ProgramsChallenges for Colgate Programs• Contrary to human nature Too much “chatter” Too much chatter Hard to keep clearly unilateral and supplier-imposed Can result in loss of major customersj
• Seems arbitrary if properly enforced• May prompt litigation by terminated dealers (in addition to y p p g y (
governmental challenges)• Seeks to achieve the same result as an agreement –
legality may depend on how result is achieved and not on outcome
26
Maximizing the Odds of a Unilateral Program Under ColgateProgram Under Colgate
These may not all be necessary in every instance, and they may not be sufficient in some instances but should increasemay not be sufficient in some instances, but should increase odds of success
• Use of written statement to explain the policy Not in dealer agreement Explain reasons, scope, enforcement, etc. Be sure to be consistent with any “dealer” agreement,
“dealer” protection statute, etc. Educate both internal and external readers as to what Educate both internal and external readers as to what
supplier is and is not doing, and how it’s doing it
27
Maximizing the Odds of a Unilateral Program Under Colgate (cont’)Program Under Colgate (cont )
• Be sure the program is unilateral and vertical No agreement with dealers No agreement with other suppliers Not imposed on supplier by dealer group or, perhaps, by a
powerful individual dealer
• State the policy and the penalties are for non-complianceState the policy and the penalties are for non compliance• Confirm dealer freedom to decide whether to comply• Tell dealers not to tell supplier whether they will comply• Tell dealers not to tell supplier whether they will comply,
and that the supplier doesn’t want to know
28
Maximizing the Odds of a Unilateral Program Under Colgate (cont’)Program Under Colgate (cont )
• Ask dealers not to complain about or report conduct of another dealer and say that company will handleanother dealer and say that company will handle enforcement on its own
• Don’t discuss what one dealer is doing with another dealer• No warnings or “second chances”• No exceptions or “protected” dealers – enforce uniformly
as to all• Enforce “quietly” – no notice except to the dealer who is
ff t d l lli t daffected unless some compelling reason to do so• Termination is the safest remedy (however excessive or
arbitrary it may seem in some circumstances)
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arbitrary it may seem in some circumstances)
Maximizing the Odds of a Unilateral Program Under Colgate (cont’)Program Under Colgate (cont )
• Any termination should be for indefinite, unspecified periodperiod
• Designate one person (or a very small number) as the only one(s) authorized to discuss the policy with dealers Tell dealers that no one else is authorized to discuss the
policy with them T ll h li l h h bj Tell other supplier employees that they are subject to
discipline up to and including termination if they discuss the policy with dealers
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Maximizing the Odds of a Unilateral Program Under Colgate (cont’)Program Under Colgate (cont )
• Training is critical to the success of the program• The authorized person(s) should be carefully trained and given a
list of accurate and appropriate answers for questions likely to arise
• Train other supplier employees (especially sales and marketing) about the reasons for the policy and these rules
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Other Significant Factors Under Rule of Reason (If Policy Not Unilateral)(If Policy Not Unilateral)
• Origins (again important) P• PurposeProtect image of productEncourage dealer promotion and servicesg pAvoid “free riding”Promote interbrand competition
C i t f li ith• Consistency of policy with purpose• Supplier’s market share• Number and combined market share of other suppliersNumber and combined market share of other suppliers
with similar policy• Number and combined market share of dealers affected
by the policy
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by the policy
Other ConsiderationsOther Considerations
• Dual distribution • Preemption
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Case Study – Emerging Electronics (“EE”)Case Study Emerging Electronics ( EE )• EE, a California-based Apple spin-off, has developed a new iPod
product. Its marketing plan includes the following: – A survey of brick & mortar retailers who have expressed interest in
possibly carrying EE’s products, but are concerned that: • Tight capital markets mean they cannot invest in inventory unless they are
highl confident it ill mo e q ickl andhighly confident it will move quickly, and• EE will go to market over the Internet and prices will rapidly erode, leaving
no margin for the brick & mortar retailers.
A l b EE t dd th lt b lli t th EE• A proposal by EE to address the survey results by rolling out the EE products in two stages: – Very limited Internet distribution coupled with a strict RPM agreement with a
zero tolerance provision (i.e., total termination on first violation); andzero tolerance provision (i.e., total termination on first violation); and – To be followed by brick & mortar roll-out, also with RPM agreement terms, to
ensure adequate stocking of products to meet consumer demand as the initial Internet distribution works to create the appropriate consumer buzz
34
Case Study – Emerging Electronics (“EE”)QuestionsQuestions
1. Can EE proceed with the program as designed? What are the legal risks under (a) federal and (b) state law?risks under (a) federal, and (b) state law?
2. Can EE enter into an agreement with an Internet retailer that has a nexus with Maryland?
3 C EE t i t t ith b i k & t t il h ll3. Can EE enter into an agreement with a brick & mortar retailer who sells to Maryland consumers, but is based and maintains its stores outside of Maryland?
4 What about New York in light of Tempur Pedic?4. What about New York in light of Tempur-Pedic? 5. If EE cannot proceed via the proposed RPM agreement, how would you
advise it to modify its marketing plan?
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Case Study – Unauthorized SellersCase Study Unauthorized Sellers
• EWholesalers.com is a New York-based website devoted to selling discount electronicsselling discount electronics. – Buys inventory from overstocked dealers (Internet and bricks and
mortar), and then sells that inventory on its website.
– EWholesalers prices are so good and its inventory so sophisticated that it has become an Internet phenomenon.
EWh l l b ht ll l f EE’ d t f• EWholesalers bought a small volume of EE’s new product from one of EE’s bricks & mortar retailers and has placed that product for sale on its website at half of EE’s required price. – The product is selling at the speed of light
– EE and its dealer network is up in arms, threatening all sorts of legal action against EWholesalers
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action against EWholesalers.
Case Study – Unauthorized Sellers QuestionsQuestions
1. Does EWholesalers face liability for its sales given that it h t ith EE? If h t i th li bilithas no agreement with EE? If so, what is the liability risk?
2 What sort of actions can EWholesalers take to protect2. What sort of actions can EWholesalers take to protect itself?
3 What sort of risk does the dealer who sold EWholesalers3. What sort of risk does the dealer who sold EWholesalers the EE product face? Can EE take action against it and, if so, what type of action? How would it come out?
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Case Study – Take 2Case Study Take 2
• In light of the fiasco with EWholesalers and the numerous complaints dealers have lodged regarding the proposed pricingcomplaints dealers have lodged regarding the proposed pricing structure, including complaints regarding each others’ compliance with that structure, EE has decided to make changes to its di t ib ti t kdistribution network. – One authorized Internet dealer
– Distribute the remainder of its product through a more limited bricks &Distribute the remainder of its product through a more limited bricks & mortar dealer network.
Questions• How should EE go about restructuring its network? • What sort of internal documentation should it put in place, if any? • How should it carry out the terminations?
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y• Does it face any legal risk from the terminations?
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