SEMA eNews Vol. 14, No. 4, January 27, 2011

Two Court Cases Emphasize State Oversight of Resale Price Maintenance Agreements

—By Barbara Sicalides, Pepper Hamilton LLP

Arrangements where resellers are required to sell at or above the price set by the manufacturer are known as resale price maintenance agreements or RPM. As a quick refresher, in Leegin Creative Leather Products Inc. vs. PSKS Inc., the U.S. Supreme Court decided that, under federal antitrust law (Sherman Act), RPM was no longer automatically illegal. Instead courts will now apply a balancing test of the procompetitive and anticompetitive effects flowing from the challenged RPM arrangement. Even though more than three years have passed since Leegin, RPM is still risky business for suppliers because it is unclear what state legislatures will do, how courts will handle the cases filed under any existing or new state laws and whether the U.S. Congress will pass federal legislation making RPM automatically illegal again as it was before Leegin.

With the recent elections and the shift in power in Congress, federal legislation is not likely in the short-term. So, the focus now is on the states and how each state will decide to treat RPM. Attorneys general in some states, including New York, Connecticut, Illinois, Ohio and California, have claimed that RPM is automatically illegal under their existing state laws. Indeed, after Leegin, New York, Illinois and Michigan prosecuted Herman Miller Inc. (maker of the famous Aeron chair), alleging that its RPM agreements with retailers violated each state’s antitrust laws. Also, last year the Kansas Attorney General argued to the Kansas Supreme Court that RPM was automatically illegal under that state’s existing law.

On January 14, 2011, California’s Attorney General announced that it settled a dispute with a Colorado cosmetics company that prohibited retailers from selling its products over the Internet at a discount. California alleged that since 2009, Bioelements contracted with dozens of resellers requiring them to sell Bioelements products online for at least the manufacturer’s suggested retail price. Under its settlement with California, Bioelements must pay $51,000 in civil penalties and attorney fees as well as refrain from fixing resale prices and inform its distributors the contracts at issue are void. In February 2010, California entered into a similar settlement with another cosmetics company, DermaQuest Inc.

On the very same day that California announced its Bioelements settlement, the New York Attorney General suffered a set-back when a New York state court found that Tempur-Pedic’s RPM policy and minimum advertised price agreement were not automatically illegal. In its lawsuit, the New York Attorney General claimed that Tempur-Pedic entered into RPM agreements that required retailers to charge prices dictated by the mattress manufacturer. Specifically, New York charged that Tempur-Pedic’s resale price policy and its separate minimum advertised price agreement, were automatically illegal under Section 369-a of the New York General Business Law. Section 369-a says that “any contract provision that purports to restrain a vendee of a commodity from reselling . . . at less than the price stipulated by the vendor or produce” is unenforceable.

The complaint alleged that Tempur-Pedic’s Retail Partner Agreements with its authorized retailers barred discounting, offering free gifts with purchases, rebates, coupons, free gift cards or other in-store credit. The AG claimed that Tempur-Pedic sent letters to its accounts stating the company would “not do business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic” and that retailers monitored the prices of their competitors and reported prices below the manufacturer’s suggested price to Tempur-Pedic.

The Attorney General argued, as it did in its numerous earlier public comments, that Section 369-a, which applies only to contracts, does more than simply make RPM unenforceable. Instead, the Attorney General claimed that the statute prohibits manufacturers from setting minimum resale prices. Plus, the Attorney General argued that the court could conclude that a contract exists based solely on Tempur-Pedic’s course of dealings with its retailers.

The N.Y. court rejected the Attorney General’s arguments and held that New York law does not prevent a vendor from insisting that resellers use the prices specified by the vendor or otherwise restrict the reseller’s right to discount the resale price. The court concluded that RPM does not constitute “an illegal act” and that the text of the statute itself clearly did not prevent RPM. The court found that the language of the statute was clear and refused to consider the title of the statute—“Price Fixing Prohibited”—or look any more deeply into the intent of the N.Y. legislature. The court stated “[t]here is no ambiguity in the text of General Business Law 369-a. Contracts for resale price restraints are unenforceable and not actionable, but not illegal.”

The court also rejected the Attorney General’s arguments that Tempur-Pedic’s advertised price agreements violated Section 369-a. The court noted that the advertised price agreement did not prohibit discounts, rebates, promotional items or coupons; instead that agreement only barred the advertisement of these types of promotions “in conjunction with Tempur-Pedic products.” Although Tempur-Pedic’s advertised pricing program was part of a contract with its retailers (not a unilateral policy), the court found the advertising restrictions were not part of the retail price agreement. Thus, because the advertised price agreement did not actually bar discounting, the court found that it could not be illegal under the New York statute.

The New York Attorney General’s complaint did not include claims under New York’s separate antitrust statute, the Donnelly Act. The Attorney General likely did not pursue the issue since New York courts have traditionally deferred to federal antitrust cases when interpreting the Donnelly Act, namely the Leegin case.

It is virtually certain that New York will appeal its loss in Tempur-Pedic. While many states try to interpret their antitrust laws like the federal antitrust law, some states specifically prohibit RPM agreements and others want to. The New York and California cases are one way in which the states are trying to prevent the spread of RPM. Maryland’s 2010 statute banning all RPM is another example of the steps that states are taking to stop RPM. State RPM law is still unsettled and dangerous.

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Note: The court also found that no contract existed between Tempur-Pedic and its resellers that restricted retail prices because the parties did not have a “meeting of the minds” as to RPM. Instead, retailers said that they adhered to Tempur-Pedic’s suggested prices because it was the company’s policy not to do business with retailers who did not adhere to its prices.

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SEMA's publication of this article is not intended to suggest that it approves or disapproves of RPM. Each company must make decisions about restrictions like RPM independently and in consultation with its attorney.


Barbara Sicalides is a partner in the Philadelphia and Washington offices of Pepper Hamilton LLP and head of the Antitrust Section within the firm’s Commercial Litigation Practice Group. Sicalides is very familiar with the specialty auto parts industry, having worked individually with a number of SEMA members and having provided SEMA seminars, webinars and articles. Her webinars: “How Resale Price Restraints and Minimum Advertised Price Programs Can Help or Hurt Your Business” and “What the U.S. Supreme Court’s Leegin Decision Means for Minimum Resale Price Agreements” are available at www.sema.org/categories/keywords/international-and-legal-webinar.

Sicalides’ practice covers the full range of antitrust litigation and counseling matters. For further information about resale price maintenance agreements or other antitrust issues, contact her at:

Barbara T. Sicalides
Partner
Pepper Hamilton LLP
3000 Two Logan Sq.
Eighteenth and Arch Sts.
Philadelphia, PA 19103-2799
Tel: 215/981-4783
sicalidesb@pepperlaw.com
www.pepperlaw.com

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