Pesticide Manufacturers’ Distribution Chain Not Vertical Price Fixing

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Two manufacturers of pesticides did not illegally conspire with their distributors to set minimum resale prices of certain termiticide products in violation of federal antitrust laws, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

A federal district court’s grant of summary judgment against the Sherman Act claim asserted by a putative class of pest control service providers was affirmed.

The pest control service providers claimed that the manufacturers instituted a manner of distribution in which their termiticides were sold to them, the end consumers, through distributors that acted only as facilitators of the transactions, enabling the manufacturers to set the price at which the termiticides were ultimately resold.

Under the non-exclusive agency agreements that bound the distributors to the manufacturers, the agent-distributors received commissions for the sales they facilitated, but never actually held title to the products. The agreements specified that the manufacturers constituted the sellers of the termiticides to the pest control service providers.

The 1926 U.S. Supreme Court decision—U.S. v. General Electric Co., 272 U.S. 476—permitted manufacturers to lawfully set minimum prices for their products when there was a genuine principal-agent relationship between them and their distributors. Such relationships existed in this case, the court noted.

An argument by the pest control service providers that the General Electric decision was implicitly overruled by more a recent Supreme Court decision involving resale price maintenance—Leegin Creative Leather Products v. PSKS, Inc. (2007-1 Trade Cases ¶75,753)—was rejected. Leegin did not eliminate the agency defense to a claim of resale price maintenance, the appellate court stated.

Unlike General Electric, which addressed what types of relationships constituted agreements to set prices for purposes of the Sherman Act, Leegin instead concerned whether such agreements, once proven, should be considered per se unlawful or evaluated for their reasonableness.

The two cases dealt with separate and distinct issues and different elements of Sec. 1 liability. Thus, no part of Leegin’s reasoning case the slightest bit of doubt on the underpinnings of the rule of General Electric, the court concluded.

An additional argument that the purported agency relationships between the defending manufacturers and their distributors were a sham was also rejected by the appellate court. Factors indicating that the challenged relationships constituted genuine agency included the fact that the manufacturers bore the risk of loss on termiticides until they were delivered into the hands of the end customers, the strong business justifications of the particular manufacturer-distributor arrangements, and the absence of evidence that the supposed agency agreements were the product of coercion.

The March 24 decision is Valuepest.com of Charlotte v. Bayer Corp., 2009-1 Trade Cases ¶76,547.