Key Vertical Restraints
Analysis: Evolving Standards
on Vertical Price Restraints
Saul P. Morgenstern
KAYE SCHOLER LLP
Antitrust Institute 2015
PRACTISING LAW INSTITUTE
1177 Avenue of the Americas
New York, New York
May 7, 2015
Special thanks to Margaret Rogers and David Giroux of
Kaye Scholer NY for their significant contributions to this
presentation
Types of Vertical Restraints
• Vertical Nonprice Restraints
• Vertical Price Restraints
– Distribution Restrictions
– Minimum Resale Price
Maintenance
– Dealer Terminations
– Maximum Resale Price
Maintenance
– Refusals to Deal
– Tying Arrangements
– Minimum Advertised Pricing
– Exclusive Dealing
– Consignment Arrangements
– Reciprocal Dealing
– Suggested Resale Prices
– Most Favored Nation Clauses
– Promotional Programs
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The First Question to Ask
• Your client asks you whether instituting a resale price program of some
type is lawful.
• What is the first question you should ask?
Why? What is the business objective?
• OK. So that’s two questions.
• What do you think the answer(s) might be?
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Vertical Price Restraints Overview
• Vertical price restraints or resale price maintenance refers to agreements
between firms at different levels in the chain of distribution that establish
maximum or minimum prices for products that are resold in the market.
• Historically, vertical agreements that fixed resale prices were considered
per se unlawful, similar to horizontal agreements that fix prices.
– Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)
– Albrecht v. Herald Co., 390 U.S. 145 (1968)
• Today, in recognition that there are procompetitive justifications for vertical
price restraints, these agreements are analyzed under the rule of reason.
– State Oil Co. v. Kahn, 522 U.S. 3 (1997)
– Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877
(2007)
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Minimum Resale Price Maintenance
Agreements
Leegin Overturns Nearly 100 Years of
Federal Case Law Applying Per Se Rule
• Vertical price restraints may stimulate interbrand competition and improve
consumer choice:
– “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; highprice, high-service brands; and brands that fall in between.” Leegin, 551 U.S. at
890.
• Absent such restraints, discounters can free ride on retailers who provide
enhanced services, undermining their ability to offer those services.
• Such restraints may encourages market entry for new firms and brands by
inducing competent retailers to invest capital and labor.
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Factors Considered Under Leegin
• When considering the net procompetitive or anticompetitive effect of
resale price maintenance, the Court suggested consideration of three
factors:
1) The number of manufacturers engaged in the practice in the
market
2) The source of the restraint (manufacturer or retailer)
3) Whether the manufacturer or retailer(s) driving the practice
possess market power
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A Word of Caution: Rule of Reason
Does Not Mean “Presumptively Lawful”
• Minimum Resale Price Maintenance (“RPM”) agreements are still reviewed
with a healthy dose of skepticism because they:
– prevent distributors from offering
discounts or lowering prices to
consumers;
– might be used to organize cartels at the
retailer level;
– might be abused by a manufacturer to
incentivize retailers not to sell products of
smaller rivals or new entrants;
– might be abused by a powerful retailer to
forestall innovation in distribution that
decreases costs.
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Federal Enforcement
• RPM enforcement has not been a federal priority for many years.
• But, the FTC has expressed skepticism as to whether RPM encourages
interbrand competition.
– Nonetheless, in 2014, the FTC reversed a ruling by an Administrative Law Judge
that a manufacturer had violated Section 1 by entering into a minimum resale
price agreement with a distributor in the ductile iron pipe fittings industry.
– The Commission reasoned that, even though the manufacturer had monopoly
power, the distributor was only one of many and had a limited market presence.
– There was no evidence that the price restraint had or was likely to have marketwide effects.
– In the Matter of Mcwane, Inc., A Corp., & Star Pipe Products, Ltd. A Ltd. P'ship.,
2014-1 Trade Cas. (CCH) ¶ 78670 (MSNET Jan. 30, 2014).
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State Enforcement: Some
State Laws are Hostile to RPM
• Md. Code Ann., Com. Law § 11-204 (West) (contracts, combinations, or
conspiracies that establish minimum resale prices are an unreasonable
restraint on trade)
• California v. Bioelements, Inc., No. 10011659, 2011 WL 486328 (Cal.
Super. Ct. Jan. 11, 2011) (post-Leegin consent judgment in a vertical price
fixing case enforcing Cal. Bus. & Prof. Code § 16720)
• New York v. Tempur-Pedic Int'l, Inc., 944 N.Y.S.2d 518 (2012) (Section 369
of the General Business Law (New York’s Donnelly Act) provides that
minimum RPM agreements are unenforceable, but does not declare them
unlawful)
• Companies with nationwide distribution must consider compliance
with state, as well as federal, law
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Private Enforcement: New Contact Lens Cases
• Large discount retailer and consumers have filed suits and class actions
against the nation’s largest contact lens manufacturers and wholesaler
ABB Optical Group.
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Contact Lens Industry Background
• Manufacturers implemented minimum retail price policies that prevent
resellers (including discount resellers such as Costco) from selling lenses
below a certain price point.
• Plaintiffs allege that:
– Pressure from prescribing/selling eye care professionals led to RPM policies.
– Argument that eye care professionals should be compensated for their service is
a pretext as they are paid separately for their medical services.
• Defendants argue that the policies:
– Help protect consumers, allow defendants to lower their prices overall, and
prevent grey market sales.
– Prevent free riding by discounters on the effort and expertise professionals
provide to educate consumers with respect to product attributes, proper use, etc.
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Growing Litigation Over Contact Lens Policies
• Twenty-two cases have been filed and are pending in the Northern District
of California before Judge Haywood S. Gilliam, Jr.
• Class action plaintiffs seek to represent all customers who have purchased
disposable contact lenses since June 1, 2013. Machikawa et al. v. Cooper
Vision, Inc. et al., 3:15-cv-00941-HSG (complaint filed Mar. 3, 2015).
• Costco sued, alleging:
– Secret conspiracies between and among J&J and unnamed eye care
professionals.
– That J&J threatened to refuse to sell lenses to Costco when it complained.
• Costco Wholesale Corp. v. Johnson & Johnson Vision Care, Inc., 3:15cv-00941-HSG (N.D. Cal.) (complaint filed Mar. 2, 2015).
• J&J has moved to dismiss.
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Discounters Seek Legislative Protection
• Lobbying for legislative protection, discounters argue that there is no
interbrand competition to protect because resellers cannot substitute one
brand for another without the prescriber’s permission.
– Does that mean that there is no interbrand competition or that the interbrand
competition takes place in the eye care professionals channel?
• On March 27, 2015, Utah enacted S.B. 169 – Contact Lens Consumer
Protection Act Amendments.
– Class A misdemeanor for any contact lens manufacturer or distributor to engage
in any action, unilateral or otherwise, that has the effect of fixing or controlling the
advertised or charged retail prices of contact lenses.
– Unlawful to discriminate against contact lens retailers based on their advertised
or charged prices, their channel of trade, or whether they are – or are associated
with – authorized prescribers.
– Utah is home to 1-800 CONTACTS, a major discount contact lens retailer.
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Manufacturers Fight Back
• Alcon, Bausch & Lomb and Johnson & Johnson Vision Care are
challenging Utah’s law.
• Allege that the amendment violates the Commerce Clause.
• The cases were consolidated on April 21st, and Costco Wholesale Corp.
and 1-800 Contacts, Inc. were permitted to intervene.
– Alcon Laboratories, Inc. v. Reyes, 2:15-cv-00252-DB (D. Utah)
– Bausch & Lomb, Inc. v. Reyes, 2:15-cv-00259-DB (D. Utah)
– Johnson & Johnson Vision Care v. Reyes, 2:15-cv-00257-DB (D. Utah)
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Maximum Resale Price Maintenance
Agreements
Maximum Resale Price Maintenance Overview
• An agreement between manufacturers and resellers setting a price ceiling.
• Post-State Oil Co. (1997), maximum resale price maintenance is analyzed
under the rule of reason under federal law.
– “Low prices, we have explained, benefit consumers regardless of how
those prices are set, and so long as they are above predatory levels, they
do not threaten competition.” State Oil, 522 U.S. at 15 (internal
quotations omitted).
• Unlike RPM agreements, Maximum Price Agreements are not treated
with hostility – to the contrary, they are virtually presumed lawful.
• No court has addressed a claim challenging a maximum resale price
maintenance agreement under the rule of reason.
• A Maximum Price Agreement is likely to run into trouble only if it is
viewed as effectively creating a floor rather than a ceiling – i.e., a sham.
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Minimum Advertised Pricing Programs
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Minimum Advertised Pricing Programs
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Minimum Advertised Pricing
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Minimum Advertised Pricing Programs Overview
• Often part of a cooperative advertising program:
– Resellers receive an allowance in exchange for refraining from advertising product
below a minimum price.
– Resellers remain free to sell at whatever price they see fit.
• Used by manufactures to protect brick-and-mortar stores from online resellers –
which have lower overhead and offer fewer services – to limit free riding.
• Previously viewed as per se illegal under Section 5 of the FTC Act
– FTC now applies the rule of reason. In the Matter of U.S. Pioneer Electronics
Corp., 115 F.T.C. 446, 1992 WL 12011046 (1992).
• Heightened scrutiny where strict enforcement mechanisms and aggressive
restrictions effectively:
– Prevent resellers from communicating discounts to consumers and
– Have the effect of raising prices overall. In the Matter of Sony Music Entm’t, Inc.,
C-3971, 2000 WL 1257796 (MSNET Aug. 30, 2000).
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Consignment Arrangements
Agency and Consignment Arrangements
• Arrangements in which distributors act as agents for manufacturers.
• Bona fide agency and consignment agreements are antitrust-neutral.
– Compare United States v. GE, 272 U.S. 476 (1926), with Simpson v. Union Oil
Co., 377 U.S. 13 (1964) (coercive “consignment” of gasoline to independent
dealers was a cover for price fixing; consignees bore the risk of loss).
• Analysis focuses on whether the arrangement is truly a consignment (i.e.,
the manufacturer does not transfer title to the reseller).
– What is the manufacturer’s purpose?
– How much control does the manufacturer retain over the goods?
– Who has the risk of loss?
– Sales tax obligations?
• Bona fides of arrangement is a question of fact.
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Suggested Resale Prices
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Suggested Resale Prices Overview
• A manufacturer may suggest a resale price to a reseller.
• The manufacturer's suggestion does not become unlawful if the reseller
independently chooses to sell at the suggested price.
• No resale agreement is likely to be found based solely on manufacturer
provision of suggested resale price lists, advertising of prices directly to
consumers, or printing suggested resale prices on products.
• The issue is how far a manufacturer can press its dealers to follow its
suggested pricing without turning unilateral action into a resale price
maintainance agreement.
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Suggested Resale Prices
• A “simple refusal to sell to customers who will not resell at prices suggested
by the seller is permissible [not unlawful coercion] under the Sherman Act.”
United States v. Parke, Davis & Co., 362 U.S. 29, 43 (1960) (reviewing the
Colgate doctrine).
• Coercive tactics that convert suggestions to agreements:
– Sanctions
– Requiring approval of deviations from list prices
– Short term leases and contracts
• It must also be shown that these tactics secured a dealer’s assent.
• More than “exposition, persuasion and argument” is required.
 “[A] manufacturer may advise a dealer that its policy is to terminate a dealer who
does not sell at keystone, or to favor filling orders placed by complying dealers.”
 The Jeanery, Inc. v. James Jeans, Inc., 849 F.2d 1148, 1558-59 (9th Cir. 1988).
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Suggested Resale Prices
• “At most we have unilateral pressure by [a manufacturer] on [a reseller] to
adhere to [manufacturer’s] suggested resale pricing or face less favorable
treatment, and a unilateral decision by [reseller] to comply.
– This is insufficient evidence of an antitrust violation . . . .”
– Lattice Semiconductor Corp. v. Interface Elec. Corp., 37 F.3d 1505 (9th Cir. 1994).
• “[A] manufacturer may have legitimate, independent reasons for terminating
a discounter in response to dealer complaints. One reason is to avoid losing
the business of disgruntled dealers.”
– “[W]hether the complaints are mere expressions of dismay or constitute economic
duress, coercion, and threats, the terminated distributor must still present
additional evidence that the manufacturer and another distributor acted in concert
to set or maintain prices.”
– Garment Dist., Inc. v. Belk Stores Servs., Inc., 799 F.2d 905, 909 (4th Cir. 1986).
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Most Favored Nation Clauses
Most Favored Nation Clauses
• Agreements whereby one party agrees to deal with the other on terms
no less advantageous than it does with any other entity. For example, a
manufacturer agrees with a reseller to sell goods to that seller at a
lower price if it begins offering goods at that lower price to a third party.
• Historically, courts consistently upheld MFNs. Indeed, until Judge Cote
decided United States. v. Apple, Inc., 952 F. Supp.2d 638 (S.D.N.Y.
2013), no court had found an MFN to be anticompetitive.
• MFNs have, however, been the subject of enforcement actions under
the theory that MFN clauses can discourage price cutting and/or
encourage coordinated pricing.
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MFN Enforcement Examples
• United States v. Delta Dental Plan of Arizona, Inc., No. 94-1793 PHXPGR, 1995 WL 454769,
at *2 (D. Ariz. May 19, 1995) (consent decree enjoining the maintenance, adoption, or
enforcement of MFNs between a dental plan and participating dentists).
• Matter of Rxcare of Tennessee, Inc., 121 F.T.C. 762 (1996) (consent decree prohibiting
entering, maintaining, or enforcing an MFN related to third-party payer reimbursement rates
between a pharmacy service administrative organization with any pharmacy).
• United States v. Vision Serv. Plan, No. 1:94CV02693 TPJ, 1996 WL 351147, at *2 (D.D.C. Apr.
12, 1996) (consent decree enjoining maintenance, adoption, or enforcement of an MFN
between a vision plan and participating optometrists or ophthalmologists).
• United States v. Blue Cross Blue Shield of Michigan, 809 F. Supp. 2d 665 (E.D. Mich. 2011)
(complaint plausibly alleged that MFNs entered into by BCBS with various Michigan hospitals
established anticompetitive effects as to other health insurers and the costs of health
services). This case was subsequently dismissed by stipulation of the parties after Michigan
passed a law forbidding the use of most favored nation clauses by health insurers and other
entities providing health insurance in provider contracts.
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Electronic Books Antitrust Litigation –
An MFN Case? Not Really
• United States. v. Apple, Inc. (“eBooks”), 952 F. Supp.2d 638 (S.D.N.Y. 2013)
– The DOJ alleged that five leading U.S. publishers conspired with Apple to raise
the price of eBooks in violation of Section 1 of the Sherman Act.
– Apple entered into agency agreements with each publisher, and the agreements
contained an MFN clause under which Apple was entitled to match the lowest
price offered by the publishers’ other eBook retailers.
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Role of MFN in eBooks
• Because the publishers would be the sellers under the Apple agreement,
reducing Apple’s selling price meant reducing the publisher’s price.
– Publishers could only avoid being forced to lower their own prices by requiring all
other resellers to either:
• Enter into agency agreements, or
• Agree to RPM agreements.
– All five publishers adopted agency market-wide.
• DOJ conceded that MFN’s were not inherently unlawful.
– But viewed the MFN in this setting as a tool to create and/or enforce the alleged
conspiracy.
• Publisher settlements all precluded certain types of MFNs for several years.
• Permanent injunction prohibits Apple from enforcing any MFN clauses with
the e-book publishers.
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Promotional Programs
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Types of Promotional Programs
• Consumer Rebates: Manufacturer provides rebates directly to consumers,
or reimburses resellers for rebates to consumers.
– Lowers consumer prices and is presumptively pro-competitive.
– Closer scrutiny if there are minimum resale price strings attached.
• Wholesale Discounts: Manufacturer reduces wholesale prices to permit
resellers to better compete in the interbrand space.
– Often called “dealer assistance programs.”
– Lowers wholesaler cost and is presumptively pro-competitive.
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Promotional Programs Overview
• Pass-Through Wholesale Discounts: Manufacturer reduces wholesale
prices on the condition that resellers also reduce resale prices.
– Some older cases found such arrangements to violate Section 1 of the Sherman
Act.
– More recent cases recognize that manufacturers have a legitimate interest in
ensuring that resellers are not simply pocketing price support discounts.
• Cooperative Advertising with Strings Attached: Manufacturer
provides funds for resellers to use for advertising, contingent on the
resellers using the manufacturers established pricing in advertising.
– Typically permissible, particularly if not coercive, and:
• Reseller participation is optional
• Resellers set actual sale prices.
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