Friday, June 29, 2007

Is MSRP OK?

The Supreme Court handed down a ruling Thursday overturning a precedent that had stood for almost a hundred years, and has opened up the possibility that manufacturers could have more freedom in crafting price maintenance programs.

The ruling, in the case of Leegin v. PSKS, overrides the Court’s 1911 Dr. Miles decision, which had established a per se standard in vertical price maintenance cases, and replaces it with a rule-of-reason standard. Translated from the legalese, this means that under the Dr. Miles standard, any manufacturer-imposed price plan was a violation of the Sherman Act, but now such a plan is a violation only if it can be proven to have anti-competitive effects.

I won’t go into too much detail on the case, both because I’m not qualified to do so, and because the legal fine points are not necessary for a marketer-level understanding of the implications. Those implications will become clearer as time passes, but we’ll try to get an early start on it here.

To summarize the case very briefly, Leegin sold its Brighton line of fashion accessories through boutique outlets, which were required to price the products at a certain level. PSKS was one of their customers, but was cut off after they reduced prices below the specified levels. PSKS sued Leegin for damages and won at the lower court level. Leegin tried to introduce expert testimony that their suggested price program was not anticompetitive, but they were not allowed to do so, because the courts held that such testimony was irrelevant, given the per se rule established in the Dr. Miles case.

The new ruling allows the case to be retried including Leegin’s expert testimony. If they can show that their program did not damage competition, they can win the case.

In their decision, the Court listed some of the ways in which a price-maintenance program can be pro-competitive. It seems likely, therefore, that if you can show that your program is crafted in such a way as to achieve these goals, you may be on solid ground.

The Court argues that reducing intrabrand competition (the competition among retailers selling the same product) can enhance interbrand competition (competition among manufacturers).
The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” … A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.
They go on to argue that price maintenance programs promote higher levels of service to consumers by eliminating free-riding.
Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. … If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer.
They also believe that other services might be provided by retailers who are confident of their margins:
Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.
In addition, the Court believes that price maintenance can facilitate entry of new brands, thus increasing competition.
“[N]ew manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer.” … New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect.
In a final section, the decision lists some of the things that would indicate an anticompetitive effect:
For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction. When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers. … Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice.

The source of the restraint may also be an important consideration. If there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer. … If, by contrast, a manufacturer adopted the policy independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct. … A manufacturer also has an incentive to protest inefficient retailer-induced price restraints because they can harm its competitive position.

As a final matter, that a dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes may not be a serious concern unless the relevant entity has market power. If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers. … And if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets.
Although this case dealt with price maintenance rather that minimum advertised price (MAP) programs, it would seem that the Court has indicated a more-lenient attitude toward manufacturer involvement in pricing generally, and that MAP programs might be allowed more latitude as well. This would allow manufacturers to put more teeth into co-op/MDF policies forbidding payment for advertising below specified prices.

These policies can of course be enacted only by those manufacturers who have the appropriate brands and the channels (independent resellers and smaller chains) to implement and enforce pricing rules.

If your company has products and channels for which price-maintenance programs are appropriate, you should bring this decision to the attention of your counsel. Here’s where to direct them:
  • A short write-up on the background of the case is here.
  • The decision is here.

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