Understanding and Complying With Antitrust Laws

September 20, 2011

By Theresa A. Andre

A big part of any company’s success is pricing. This success involves pricing your product so it is not too high compared to competitors and pricing your product so it is not so low that your margins are dismal. Another consideration is preventing resellers of your product from discounting so much that your product is considered   a commodity and preventing resellers from engaging in price wars with your product. The examples are endless. But while the stakes of pricing your product effectively are so high, so are the legal implications. Because where pricing issues are involved, so are the legal implications of that legal morass known as antitrust law.

The Basics of Antitrust Law

In a nutshell, antitrust law prohibits agreements that unreasonably restrain trade. That sounds simple enough, but what does that mean? For companies struggling to prevent discounting by their resellers, it means having to be careful that the policies your company puts in place are not perceived as an agreement or conspiracy with your resellers to control the minimum resale price of your product.

What is or is not permissible?

One of the reasons antitrust law is such a headache to comply with is because what is or is not permissible has changed over time. For nearly a century, the law of the land put down by the United States Supreme Court was that it is unlawful per se (meaning in and of itself) for franchisors to enter into agreements that set a minimum resale price that their product must be sold at. Under this rule, there was no assessment regarding the precise harm caused by the pricing agreement or the business excuse for the pricing policy; it was   simply not allowed. Violators faced steep monetary penalties.

Unfortunately for franchisors struggling with pricing issues, the courts have hardly been a model of clarity in enforcing antitrust laws. For example, even though it was out-right illegal for a franchisor to enter into an agreement with a reseller that set a minimum resale price for the franchisor’s product, a franchisor was not prohibited from announcing a resale pricing policy and then refusing to do business with any reseller that failed to follow the policy. The key was that the policy was put in place by the franchisor’s own initiative, rather than through an agreement with a reseller. Courts also allowed franchisors’ conduct if they merely engaged in “exposition, persuasion, argument, or pressure” to encourage resellers to decide independently to observe a “suggested retail price.” But it was obviously difficult for franchisors to determine where to draw the line. How much persuasion was considered too much persuasion? Courts have also permitted franchisors to merely suggest resale prices, even allowing a franchisor to advertise a suggested resale price. And courts have permitted franchisors to announce their resale prices in advance and then refuse to deal with any resellers who fail to comply.

But, on the other hand, franchisors have run into problems where they have threatened sanctions for noncompliance with suggested resale prices or used short-term leases or contracts to make it easier to terminate resellers who discount their products.

The inconsistent court decisions leave franchisors wondering whether it was really proper to threaten to terminate, or even to actually terminate, a reseller engaging     in discounting that deviated from the franchisor’s suggested resale price. If a reseller ignored the franchisor’s suggestion regarding a minimum resale price for its product, could the franchisor really terminate its agreement with the reseller, or would doing so subject it to antitrust liability?

In 2007, the Supreme Court decided a case, (Leegin Creative Leather Products, Inc. v. PSKS, Inc.), 551 U.S. 877 (2007), meant to give franchisors more flexibility in setting minimum prices at which resellers must sell their products. To determine whether the franchisor’s pricing policies are permissible or not, the decision requires courts to determine if the franchisor’s pricing policies promote competition or suppress competition. The decision is good in that the Supreme Court decided that it is not a per se violation of antitrust law for a franchisor and its reseller to enter an agreement regarding the minimum resale price of the franchisor’s products. The decision, however, does not set forth clear guidelines for franchisors to tell where the line is between their policies encouraging competition or suppressing competition. The court did not lay down any hard and fast rules regarding what will be considered permissible conduct, and what conduct will run afoul of antitrust law.

The uncertainty created by the Leegin decision itself is compounded by the fact that moving away from the per se rule has not been popular with everyone. There are those in the Senate and House who would like to change back the rules of the road. On Oct. 30, 2007, Sens. Herbert Kohl (D-Wis.), Joe Biden (D-Del.) and Hilary Clinton (D-N.Y.) introduced the “Discount Pricing Consumer Protection Act,” S.B. 2261, 110th Cong. (2007). If enacted, the bill would have reversed Leegin and again made it a violation of   the antitrust law per se for a franchisor to enter an agreement with its resellers setting a minimum resale price for the franchisor’s product. That bill was   approved in the Antitrust Subcommittee, but did not pass. Undeterred, on July 13, 2009, Reps. Hank Johnson (D-Ga.) and John Conyers (D-Mich.I) introduced bill H.R. 3190,   111th Cong. (2009), which would also prohibit all minimum price-setting agreements outright. As with the first bill proposed, H.R. 3190 also did not pass. But while these bills did not past, the fact that lawmakers are hostile to all agreements setting minimum resale prices makes it hard for franchisors to feel confident in establishing a minimum resale pricing policy because some day it may no longer be permissible to have such a policy.

Best Practices to Avoid Antitrust Pitfalls

Given the lack of clarity in antitrust law and the fact that what is and is not permissible has changed over time, franchisors should implement best practices that minimize the chance that their pricing policy will run afoul of antitrust laws. A few of the best practices to keep in mind are:

Verify that your efforts to police discounting do not run afoul of your contracts with resellers.
Verify that your company puts in place the resale pricing policy, rather than resellers putting in place the policy.
Use other restraints instead of, or in addition to resale pricing policies, such as exclusive territories and location clauses.
Provide incentives for resellers who follow your resale price policy, rather than simply imposing sanctions on resellers who do not comply.

The uncertainty surrounding what conduct will land franchisors in hot water underscores the importance of the best practices described above. And given the uncertainty in this area of the law, and the severe monetary penalties for violations, it behooves franchisors to consult an attorney who specializes in antitrust laws prior to implementing a resale pricing policy.

Theresa A. Andre is an attorney with Foley & Lardner LLP, where she is a member of the Insurance & Reinsurance Litigation; Business Litigation & Dispute Resolution; and Distribution & Franchise Practices.