June 14 2012
Recent cases in Kansas and New York have illustrated the continued uncertainty of state law concerning resale price maintenance in vertical agreements. This patchwork of laws presents ongoing risks to companies with national resale networks if they choose to use these types of agreement, even though the Supreme Court found them not to be unlawful per se under federal antitrust law in 2007 in Leegin Creative Leather Products, Inc v PSKS, Inc.(1)
On May 4 2012 in O'Brien v Leegin Creative Leather Products, Inc(2) the Kansas Supreme Court held that resale price maintenance agreements are unlawful per se under state law, notwithstanding the treatment of such agreements under federal law. Then, on May 8 2012, the Appellate Division of the New York Supreme Court, First Department in People v Tempur-Pedic International, Inc(3) upheld a lower court's decision rejecting the New York attorney general's claim that resale price maintenance agreements were unlawful under New York law. The companies in these cases faced very different results because of the state laws governing these agreements. These recent decisions, in conjunction with prior actions in other states, such as the enactment of strong statutes in Maryland and California that explicitly make resale price maintenance terms unlawful,(4) emphasise the need for companies to perform careful state-by-state analyses of statutes and case law before using resale price maintenance language. Companies should also be aware that certain language may pose more of a risk than other language. Following the guidance contained in the Supreme Court's decision in Colgate, which stands for the proposition that unilateral business decisions concerning pricing policies are not unlawful, is a good approach for companies which still wish to retain some influence over resale pricing in the murky waters of state jurisprudence on resale price maintenance . Nevertheless, any resale policies or agreements with resale price maintenance language should be reviewed by antitrust counsel before use.
In O'Brien the Kansas Supreme Court reversed and remanded a district court ruling granting summary judgment in favour of the defendant, Leegin Creative Leather Products, the maker of Brighton accessories and luggage. O'Brien filed a class action against Leegin on behalf of herself and others, alleging that its pricing policy requiring retailers to sell Brighton goods at a suggested price violated the Kansas Restraint of Trade Act by "controlling the price of Brighton goods to the customer".(5) The pricing policy required retailers to set prices at an amount equal to twice wholesale plus a small amount, and permitted retailers to discount some low-selling and seasonal products.(6) For at least one year, retailers were required to sign an acknowledgment that violations of the policy were punishable by termination.(7) In addition, the company offered a "Heart Store" programme and the opportunity to sell Brighton luggage. Participation required retailers to maintain certain inventory levels and again sell products at Brighton's suggested retail price, among other things.(8)
The court's analysis wholly rejected federal antitrust law to evaluate O'Brien's claim under the Kansas Restraint of Trade Act. First, the court discounted the defendant's argument that O'Brien had not shown a concrete antitrust injury, stating that she had shown enough circumstantial evidence to avoid summary judgment.(9) Second, the court stated that the rule of reason, the federal standard applied to resale price maintenance agreements, did not apply under the Kansas Restraint of Trade Act because the statute does not mentionm "reasonableness or a rule of reason".(10) Disavowing its own precedent, the court added that it would have ruled differently in two prior Kansas state cases that used a "reasonableness rubric" because "we are loath to read unwritten elements into otherwise clear legislative language".(11) The court concluded, "The simple, per se rule... survives."(12)
Just days after the Kansas Supreme Court announced its decision, the Appellate Division of the New York Supreme Court, First Department, rejected the New York attorney general's claim that New York's antitrust law made resale price maintenance agreements unlawful in People v Tempur-Pedic International, Inc. The court affirmed the lower court's dismissal of the attorney general's complaint. The complaint alleged that Tempur-Pedic's retail pricing policy violated Section 369-a of New York's General Business Law, which states:
"Any contract or 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."(13)
The complaint also alleged that Tempur-Pedic's pricing policy entitled the attorney general to invoke Section 63(12) of the Executive Law, allowing it to enjoin "any person from engaging in 'repeated fraudulent or illegal acts' or otherwise demonstrating 'persistent fraud or illegality' in transacting business".(14) Tempur-Pedic maintained a retail pricing policy with its retailers which stated that retailers which did not "adhere substantially" to Tempur-Pedic's suggested retail prices would have their shipments suspended, informing retailers that "the policy is Tempur-Pedic's unilateral decision; the policy is not negotiable; and that Tempur-Pedic neither seeks nor will it accept its retailers' agreement with the policy".(15) Tempur-Pedic also informed retailers that they were free to set prices at "whatever level they believe to be in their best interests".(16) In addition to the pricing policy, Tempur-Pedic required retailers to agree to its retail partner obligations and advertising policies, which included rules on advertising, restrictions on ship-to location, maintenance of a physical store location and restrictions on the use of coupons, rebates, and promotions, among other things.(17)
The lower court's analysis, with which the appellate court agreed, focused on the language of New York's antitrust law, just as the Kansas Supreme Court had done. The attorney general claimed that Section 369-a "directly demonstrates the legislative intent to declare contracts to restrain resale pricing illegal".(18) Siding with Tempur-Pedic, the lower court determined that the statutory language does not make resale price maintenance agreements unlawful, only unenforceable.(19) As the language was clear, it required no additional interpretation.(20) The court also rejected the attorney general's secondary argument that the pricing policy constituted a fraud within the meaning of Section 63(12) because retailers and customers were deceived into believing that the pricing policy was enforceable.(21) The court found no evidence that retailers or customers were misled in any way.(22) Further, citing Monsanto and Colgate (ie, Supreme Court precedent on unilateral action), the court determined that there was no contract even between the retailers and Tempur-Pedic with respect to price because the policy was unilateral and the company never sought or accepted agreement from the retailers.(23) Retailers which acquiesced did so independently. The court found that the retail partner obligations and advertising policies, as distinct from the pricing policy, constituted a contract, but rejected the claim that the prohibition on the advertising of coupons, rebates and promotional items actually prevented retailers from using such devices because the agreement said nothing about their use, only their advertisement.(24)
O'Brien and Tempur-Pedic are the two most recent examples of the wide divergence of state positions and interpretations of resale price maintenance language in the post-Leegin world. The landscape remains fraught with dangers for companies that wish to use such language, and there may be no definitive answer for companies until more state courts, legislatures and attorneys general take affirmative positions on the subject.(25) Even in Kansas, there seems to be no definitive answer. Following the Kansas Supreme Court's decision, on May 10 2012 Kansas state lawmakers proposed legislation to overturn O'Brien, stating that the decision "is contrary to the intent of the Kansas legislature in enacting the Kansas restraint of trade act".(26)The legislature stated its concern that the ruling would invite unnecessary lawsuits and deter companies from doing business in the state. While states such as Kansas continue to develop their positions, companies should bear in mind that careful drafting and adherence to the Colgate doctrine can limit the risks of the use of resale price maintenance language poses, as Tempur-Pedic showed.
For further information on this topic please contact J Robert Robertson or Meghan C Edwards-Ford at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (firstname.lastname@example.org or email@example.com).
"[a]ny such combinations [trusts created to restrict trade, increase, reduce, or fix the price of goods, or prevent competition] are hereby declared to be against public policy, unlawful and void."
Also see Kansas Statutes Annotated 50-112:
"[a]ll arrangements, contracts, agreements, trusts or combinations between persons, designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles... are hereby declared to be against public policy, unlawful and void."
(25) Maryland and California have made the use of resale price maintenance language explicitly per se illegal by statute. See Cal Bus and Prof Code § 16720(b) (2009); Md Code Ann, Com Law § 11-204(b) (West 2009). Other states have statutory language that strongly suggests that resale price maintenance agreements may be unlawful and go beyond the typical prohibition on restraints of trade in state antitrust statutes. These are Alabama (Ala Code § 8-10-1 (2009)), Connecticut (Conn Gen Stat § 35-28(A) (2005)), Hawaii (Haw Rev Stat § 480-4(b)(1) (2009)), Indiana (Ind Code § 24-1-2-1 (2006)), Minnesota (Minn Stat § 325d.53, Subdiv 1(1)(a) (2009)), Mississippi (Miss Code Ann § 75-21-1(c) (West 2009)), Missouri (Mo Rev Stat § 416.031 (2009)), Montana (Mont Code Ann § 30-14-205 (2007)), Nevada (Nev Rev Stat Ann §598A.060 (West 2009)), New Hampshire (NH Rev Stat Ann § 356:2 (2009)), Ohio (Ohio Rev Code Ann §§ 1331.01(B)(4)-.02 (West 2009)), South Carolina (SC Code Ann § 39-3-10 (2008)), Tennessee (Tenn Code Ann § 47-25-101 (West 2009)) (even though the statutory language declares unlawful all agreements that tend to reduce or control price, a federal district court decision in 2008 using state law determined that the rule of reason applied to resale price maintenance agreements under Tennessee's antitrust law); and West Virginia (W Va Code § 47-18-3(b)(1)(2009)). See Michael A Lindsay, "Overview of State RPM", The Antitrust Source, April 2011, www.americanbar.org/content/dam/aba/publications/antitrust_law/source_lindsay_chart.authcheckdam.pdf.
(26) HB 2797, 84th Leg, Reg Sess (Kan 2012). Available at http://kslegislature.org/li/b2011_12/measures/documents/hb2797_00_0000.pdf.
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