Maryland outlaws RPM

A bill passed by the Maryland legislature is intended to nullify the effects of the Supreme Court's Leegin decision in that state.

Under the new state law, retailers doing business in Maryland -- as well as state officials -- can sue manufacturers that impose minimum-pricing agreements. The law also covers transactions in which consumers in Maryland buy goods on the Internet, even when the retailer is based out of state. That could potentially affect manufacturers throughout the country.

The article says that several other states are considering such legislation, but I doubt there will be any need. Senator Herb Kohl's subcommittee begins hearings next month on a bill to overturn Leegin at the federal level, and that will preempt any state actions.

FTC's RPM workshops scheduled for May

The Federal Trade Commission will hold workshops on resale price maintenance May 20-21:

The first panel will be moderated by Pauline Ippolito, Acting Director of the FTC’s Bureau of Economics, and will examine empirical evidence on the effects of RPM. Specifically, it will review existing empirical studies of RPM, or studies of other vertical restraints that might inform the thinking on RPM. The panel also will explore potential future research in light of possible testable hypotheses underlying the competitive effects of RPM.

The second panel, to be moderated by Laurel Price, Attorney Advisor to FTC Commissioner Pamela Jones Harbour, will examine the legal and business history of the use of RPM in the United States. It will explore how RPM has been treated in this country historically, as well as the legal and business management doctrines related to RPM.

The third panel, also to be moderated by Price, will examine “rule of reason analyses” after the Supreme Court’s landmark Leegin decision, and will assess guidance provided by the Leegin Court regarding the analysis of RPM.

The sessions will be of value to manufacturers who wish to establish minimum pricing rules for their resellers, although it's quite possible the rules might change again very soon.

Repealing Leegin is Kohl's job #1

Senator Herb Kohl has been speaking out strongly against the Leegin decision, which legalized resale price maintenance under certain circumstances, ever since the Supremes handed it down almost two years ago. This matters because Kohl is chairman of the Senate Antitrust Subcommittee. The subcommittee announced its agenda this week, and guess what's the first item on the list?:

Discount Pricing of Consumer Goods: The Subcommittee will continue its examination of the elimination of the nearly century-old ban against manufacturers setting a minimum retail price as a result of the 2007 Supreme Court decision in the Leegin case. Allowing retail price maintenance has the potential to seriously harm discount pricing and retail competition. Senator Kohl intends to seek passage of the Discount Pricing Consumer Protection Act (S. 148), his bill to restore the ban on vertical price fixing.

There are few guarantees in life, but I'll be shocked if this doesn't pass.

Resale price maintenance in a recession

I came across this study from Japan, Demand Uncertainty and Resale Price Maintenance, which argues that RPM in conditions of uncertain demand will be "profitable for the manufacturer and not damaging to the retailers."

I am embarrassed to admit that I had not before now given any thought to how RPM might have different effects under current conditions than it did a year or so ago at the time of the Leegin decision that changed the law on RPM. The position taken by the paper may well be true in Japan where, the author tells us, retailers have the right of full return on unsold merchandise. That is not generally the case in the US (other than for books and perhaps a few other categories).

Which raises some questions (and I'm not going to pretend I have answers). If I were a retailer, I think I'd be reluctant, in the current retail environment, to buy merchandise covered by RPM policies unless I were given return guarantees, for fear of being stuck with unmoveable inventory as other retailers cut price on competitive products. Are manufacturers giving return guarantees in such cases? If not, are they offering other solutions (perhaps sale periods when price-cutting is allowed, or inventory financing allowances)?

This is a good time for a reminder that the FTC will be offering workshops on RPM -- more info on that here.

The MAP enforcers

Apparently there is a new service industry springing up to help manufacturers enforce minimum advertised price (MAP) policies.

Tiny companies like NetEnforcers -- with only 56 staffers jammed into a dim, spare cubicle farm in Arizona -- wield economic power far beyond their size. These companies scour hundreds of thousands of Web sites daily, looking for retailers offering bargains below the "minimum advertised price," or MAP, set by manufacturers on an array of consumer goods.

When NetEnforcers finds items like cameras, handbags or ovens for sale at too-low prices, as it claims to do 5,000 to 10,000 times a day, it alerts its clients, including Sony Corp., Black & Decker Corp., Cisco Systems, JVC Kenwood Holdings and Samsung.

MAP is slightly different from reseller price maintenance (RPM) in that MAP deals with policies involving advertised price, whereas RPM deals with efforts by a manufacturer to set a selling price, whether advertised or not. Both types of policies are getting a lot of attention these days, and my guess is that the level of attention is likely to escalate considerably in 2009.

The FTC is investigating musical-instrument and audio-gear makers for possible MAP-related antitrust violations. And online retailers such as BabyAge.com and HomeCenter.com have sued manufacturers with MAP or similar price-maintenance policies, alleging antitrust violations.

Sony imposes RPM on high-end products

Sony has decided to take advantage of the Leegin decision by imposing resale price maintenance rules on some of their highest-priced products.

Eliminating price competition among retailers for high-end cameras and TVs is a great benefit for consumers — or so Sony executives argued Thursday.

At a chat with reporters in New York, Stan Glasgow, the president of Sony Electronics in the United States, and Jay Vandenbree, the company’s president for consumer sales, discussed its new rule that bans retailers from discounting Sony’s Alpha digital camera line, its more expensive televisions and some other high-end products.

Mr. Vandenbree said that by having the price for these products be the same at all retailers, Sony had eliminated stress for buyers.

“Consumers don’t have to worry about whether I can get a better deal at retailer A or retailer B,” he said. “Everybody gets the best deal.” He said stores can now compete on other attributes, like education and support.

Mr. Vandenbree said this program was part of the reason that the Alpha line was gaining share in the single-lens reflex camera market.

The Leegin rule allows manufacturers to set retail prices under certain circumstances, although the Supreme Court seemed to make clear that they would be more suspicious if the manufacturer imposing RPM had significant marketing power (which, to belabor the obvious, Sony has more of than Leegin does). Still, I'm sure Sony had a battalion of lawyers study this before proceeding.

As a reminder, the FTC is going to have workshops soon on this subject.

FTC offers workshops on resale price maintenance

There has been a lot of discussion about what constitutes price-fixing by a manufacturer since the Leegin decision last year: Under what circumstances can a manufacturer dictate prices to its retailers?

If your company might be interested in using some form of price maintenance program, but aren't certain if you would be safe in doing so, you might wish to send your corporate attorneys to these workshops at the Federal Trade Commission.

The Federal Trade Commission today announced that it will hold a series of public workshops early next year to explore, for the purposes of enforcing Section 1 of the Sherman Act and Section 5 of the FTC Act, how to best distinguish between uses of resale price maintenance (RPM) that benefit consumers and those that do not. The Commission expects the workshops to focus on legal doctrines and jurisprudence related to RPM, theoretical and empirical economic research, and business and consumer experiences.

There will be 4-6 workshops in the January-March timeframe, although exact dates haven't been set.

(Thanks to Consumer Goods & Retail Industry Litigation Blog for letting us know about this).

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.