Senate Bill Restoring Per Se Rule for Resale Price Maintenance Passes Judiciary Committee

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The Senate Judiciary Committee has approved legislation that would restore the rule of per se illegality for minimum resale price maintenance (RPM). The committee ordered reported the proposed “Discount Pricing Consumer Protection Act” (S. 75) without amendment on November 3.

The measure would reinstate a rule that was overturned by a five-to-four decision of the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753).

Under Leegin, RPM agreements are judged under the rule of reason, which requires a fact finder to consider all of the circumstances to distinguish “between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.”

The Leegin decision overturned a nearly 100-year-old precedent, Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373, which made it per se illegal under Sec. 1 of the Sherman Act for a manufacturer and its distributor to agree on the minimum price the distributor can charge for the manufacturer's goods.

The bill was introduced by Senator Herb Kohl (D-WI), chairman of the Senate Antitrust, Competition Policy and Consumer Rights panel, in January. It is co-sponsored by Senators Dianne Feinstein (D-CA), Charles Schumer (D-NY), Richard Durbin (D-IL), Sheldon Whitehouse (D-RI), Amy Klobuchar (D-MN), Al Franken (D-MN), Ron Wyden (D-OR), and Richard Blumenthal (D-CT).

It is identical to legislation introduced in the last two Congresses. In the 111th Congress, the measure was approved by the Senate Judiciary Committee.

The proposal would amend Sec. 1 of the Sherman Act by adding after the first sentence the following:

“Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.”

The provision would take effect 90 days after the date of enactment.

“Allowing manufacturers to set minimum retail prices threatens the very existence of discounting and discount stores, and causes higher prices for consumers,” Senator Kohl said in a November 3 statement, announcing the committee’s action. “This legislation will ensure that stores can sell products at a discounted rate, helping consumers to save more of their hard earned money.”

High Court Will Not Consider Retailer’s Resale Price Fixing Claim

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Supreme Court on February 22 denied a petition to review a decision of the U.S. Court of Appeals in New Orleans (PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2010-2 Trade Cases ¶77,130), rejecting a Texas retailer’s resale price maintenance claims against the manufacturer of handbags and other accessories sold under the “Brighton” brand.

In an earlier decision in the matter, the Supreme Court held that vertical price restraints should be judged under rule of reason analysis (2007-1 Trade Cases ¶75,753).

The retailer purportedly had violated the manufacturer’s resale price maintenance policy by offering Brighton products at a discount. When the retailer refused to stop discounting the goods, the manufacturer ceased to sell Brighton goods to it. The retailer sued.

In its latest ruling, the Fifth Circuit affirmed dismissal of the action for failure to assert a valid relevant market or anticompetitive harm resulting from the manufacturer’s resale price maintenance program.

The retailer had asked the Supreme Court, among other things:

• Whether the appellate court’s rejection of its proof of market definition and power was proper, and

• Whether it was necessary to prove market power where it had presented direct evidence of anticompetitive effects and a lack of procompetitive justifications for the manufacturer’s conduct.

The petition is PSKS, Inc. v. Leegin Creative Leather Products, Inc., Dkt. 10-653, cert denied February 22, 2011. Further information is available here on the U.S. Supreme Court website.

Cosmetics Company Settles California Vertical Price Fixing Charges

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Cosmetics company Bioelements, Inc. has agreed to settle a complaint brought by the State of California, alleging that the company engaged in vertical price fixing in per se violation of the California Cartwright Act.

The state alleged that Bioelements had entered into dozens of contracts with other companies that required them to sell Bioelements’ products online for at least as much as the retail prices prescribed by Bioelements.

Under a consent decree signed by a state court judge on January 12, Bioelements agreed to refrain from fixing resale prices for its merchandise, to inform distributors and retailers that it will not enforce the challenged contracts, and to pay a total of $51,000 in civil penalties and attorney fees.

State Ban of Vertical Price Fixing

In a January 14 statement, the California Attorney General’s office said that the settlement “is one of the first applications of California’s strict, pro-consumer antitrust law banning vertical price-fixing in the wake of a controversial 2007 U.S. Supreme Court decision that weakened federal law in this area.”

In 2007, the U.S. Supreme Court in Leegin Creative Leather Products v. PSKS, Inc. (2007-1 Trade Cases ¶75,753) overruled the long-standing per se prohibition on resale price maintenance under the Sherman Act and held that resale price maintenance was instead subject to a more lenient standard, the rule of reason.

Previous Settlement

Bioelements is not the first cosmetics company to face vertical price fixing allegations from the State of California in recent years. Last February, DermaQuest, Inc. agreed under the terms of a consent decree to settle charges that it entered into distribution agreements with distributors and retailers containing resale price maintenance components, including prohibitions on pricing below suggested retail prices (2010-1 Trade Cases ¶76,922).

Bioelement is an Illinois corporation with its physical headquarters in Colorado. The company’s founder and president is domiciled in California. In its complaint, California also alleged that the company regularly sells and delivers cosmetics in the state. The complaint points to dozens of contracts between Bioelements and third party sellers.

Further information regarding the settlement appears here on the California Attorney General’s website.

The final judgment in People of the State of California v. Bioelements, Inc., Case No. 10011659, will appear at 2011-1 Trade Cases ¶77,306.

Cosmetics Firm Resolves California Resale Price Fixing Suit

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A company that markets cosmetics and skin care products has agreed to settle a civil suit brought by the State of California, alleging that it engaged in vertical price fixing in per se violation of the California Cartwright Act and the California Unfair Competition Law.

The state alleged that the northern California-based company entered into distribution agreements with resale price maintenance components, including prohibitions on pricing below suggested retail prices.

Under the terms of a final judgment approved by a California trial court, the cosmetics company was prohibited from entering into agreements to fix resale prices.

In addition, the company was required to pay a $70,000 civil penalty under the Unfair Competition Law and $50,000 to cover investigation costs and expenses.

Further details regarding The People of the State of California v. DermaQuest, Inc. will appear at 2010-1 Trade Cases ¶76,922.

State v. Federal Antitrust Law

The case is a reminder that resale pricing practices can run afoul of state antitrust laws, even if such conduct is no longer considered per se illegal under federal antitrust law.

In 2007, the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753, reversed a 96-year-old precedent applying the per se rule to vertical price fixing.

And California is not the only state to challenge vertical price fixing. Following the Supreme Court’s decision in Leegin, furniture maker Herman Miller, Inc. entered into a consent decree resolving a multi-state complaint, alleging resale price fixing in violation of federal and state antitrust law.

Herman Miller was prohibited from agreeing with dealers to fix the resale price at which its furniture was advertised or sold to end-user consumers and from terminating a dealer or discriminating against a dealer to secure a commitment from the dealer to adhere to the manufacturer's suggested resale prices. The manufacturer was also required to pay a monetary payment of $750,000 under the consent decree.

The consent decree settled charges brought by the States of Illinois, Michigan, and New York that the manufacturer violated federal and state antitrust laws by entering into agreements with dealers to fix the prices at which its furniture was offered to consumers.

The case is State of New York, et al. v. Herman Miller, Inc., No. 08-civ-02977 , 2008-2 Trade Cases ¶76,454.

On Opening Day of Term, High Court Denies Review of Three Trade Regulation Cases

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

The U.S. Supreme Court opened its 2009-2010 term yesterday by denying review of three trade regulation decisions—concerning resale price fixing, Lanham Act false advertising, and arbitration of an in-term restrictive covenant in a trademark license.

Resale Price Maintenance

Left standing by the Court was a decision by the U.S. Court of Appeals in Richmond, Virginia (2009-1 Trade Cases ¶76,547), holding that two pesticide manufacturers did not conspire with their distributors to set minimum resale prices of certain termiticide products.

In their petition for review, complaining providers of pest control services asked: (1) whether resale price agreements, through which retailer agents raised consumer prices, is controlled by Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), 551 U.S. 877 (2007) or United States v. General Electric Co., 272 U.S. 476 (1926); and (2) whether it was established that the manufacturer's resale price agreements with retailers violated §1 of the Sherman Act under Leegin.

The petition is Valuepest.com of Charlotte, Inc. v. Bayer Corp., Docket 08-1584, cert. filed June 22, 2009.

Lanham Act False Advertising

The Supreme Court declined to review a decision by the U.S. Court of Appeals for the Federal Circuit (2009-1 Trade Cases ¶76,553, CCH Advertising Law Guide ¶63,320), reversing a jury award of more than $8 million against a Japanese basketball manufacturer for falsely advertising its product design as “innovative.”

On appeal, the manufacturer contended that Lanham Act claims based on advertisements that falsely claim authorship of an idea were barred by the U.S. Supreme Court’s decision in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003).

In its petition, the manufacturer had asked whether Dastar established an authorship limitation on false advertising claims brought under Section 43(a)(1)(B) of the Lanham Act. The petition is Baden Sports, Inc. v. Molten USA, Inc., Docket 08-1477, cert. filed May 28, 2009.

Restrictive Covenant

The Court denied a petition for review of a decision of the U.S. Court of Appeals in San Francisco (2009-1 Trade Cases ¶76,482, CCH Business Franchise Guide ¶14,055), which held on remand from the U.S. Supreme Court that an arbitrator manifestly disregarded California law by enforcing an in-term restrictive covenant in a trademark license.

On October 6, 2008, the Supreme Court vacated an earlier decision of the appeals court (2008-1 Trade Cases ¶76,129, CCH Business Franchise Guide ¶13,703) in light of the Court’s decision in Hall Street Associates, LLC. v. Mattel, Inc., 128 S.Ct. 1396 (2008).

In a petition for review, a party to the trademark license asked whether a decision vacating an arbitration award on the non-statutory ground of "manifest disregard" was inconsistent with U.S. Supreme Court precedent and whether an arbitrator's good faith but erroneous interpretation of state law constituted a basis for vacating an arbitration award under the Federal Arbitration Act.

The petition for review is Improv West Associates v. Comedy Club, Inc., Docket 08-1525, cert filed June 8, 2009.

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 A recent article in The Economist magazine asks whether the Obama Administration will back up its “tough talk” on antitrust enforcement (“Return of the Trustbusters,” August 27 print edition). “Companies are likely to find themselves scrutinised at least as intensively as they were under the administration of Bill Clinton, when many senior antitrust officials in the justice department and Federal Trade Commission (FTC) cut their teeth on a celebrated anti-monopoly lawsuit against Microsoft.” While new antitrust chief Christine Varney believes that the Bush Administration’s lax antitrust enforcement contributed directly to the economic crisis, that view is “debatable, to say the least,” according to the article. The Bush Administration did pursue cartel activity enthusiastically, obtaining record convictions, jail sentences, and fines, the story contends. Varney’s efforts to ramp up enforcement will face several obstacles, including the U.S. Supreme Court (which has issued several decisions narrowing trustbusters’ room to maneuver) and the “possible disagreement within Mr. Obama’s cabinet.” Given the “wretched state of the economy,” some administration officials are questioning whether to “risk upsetting the few bits that are growing strongly with gratuitous antitrust cases.” Text of the article appears here.

 On August 17, the American Antitrust Institute filed an amicus brief, urging the U. S. Court of Appeals in New Orleans to adopt a presumption of illegality for resale price maintenance agreements and to overturn the lower court's dismissal of the amended complaint filed in PSKS, Inc. v. Leegin Creative Leather Products, Inc. The brief, which appears here, also argues that the lower court erred in requiring the plaintiff to meet a strict test of market definition. In 2007, the Supreme Court reversed the Court of Appeals’ decision (PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2006-1 Trade Cases ¶75,166), applying the per se rule to uphold an award of $3,975,000 to a retailer that was terminated by its manufacturer for discounting. The high court declared that vertical price restraints are no longer per se illegal, but instead should be evaluated under the rule of reason standard (2007-1 CCH Trade Cases ¶ 75,753).

 Maine’s new privacy law—which prohibits the collection of personal information for marketing purposes from a minor without parental consent and bans “predatory marketing” to minors—is being challenged in a lawsuit brought by media and online companies, including AOL, eBay, and Yahoo. The lawsuit, filed August 26 in the federal district court in Maine, claims that the law violates the First Amendment rights of adults, as well as minors and online operators. The Maine statute (“An Act to Prevent Predatory Marketing Practices Against Minors,” Public Law 230) was signed by the Governor on June 2, 2009, and will take effect on September 12, 2009. Text of the law appears here on the Maine State Legislature’s website. Further details about the law appear in an August 12, 2009 posting on Trade Regulation Talk.

Congressional Subcommittees Hear Testimony on Vertical Price Fixing, Railroad Exemption

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

Subcommittees of the U.S. Senate and House Judiciary Committees held hearings May 19 on bills that would, respectively, reinstate the per se rule for resale price maintenance and repeal the antitrust exemption for railroads.

Restoration of Per Se Rule

The Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing entitled "The Discount Pricing Consumer Protection Act: Do We Need to Restore the Ban on Vertical Price Fixing?"

The hearing considered the impact of the U.S. Supreme Court decision in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), which requires that resale price maintenance be scrutinized under a rule of reason standard rather than declared per se illegal under federal antitrust.

Senator Herb Kohl (D-Wis.) said in a prepared statement that manufacturers have begun to set minimum retail prices resulting in higher prices for consumers, as a result of Leegin. Kohl introduced the "Discount Pricing Consumer Protection Act" (S. 148) in January 2009 to overturn the decision.

Among the witnesses was FTC Commissioner Pamela Jones Harbour, who reiterated earlier testimony before a House subcommittee on the same issue. Harbour said that Leegin had the effect of legitimizing minimum resale price fixing, which was "contrary to good economic and legal policy" because it subordinated consumer preferences to the interests of manufacturers and merchants of branded consumer goods.

Jim Wilson, the current Chair of the Section of Antitrust Law of the American Bar Association (ABA), also testified. Wilson said that the "[b]ecause the intention and likely impact of the Discount Pricing Consumer Protection Act would be to effectively overturn the Leegin decision and reestablish a rule of per se illegality, the ABA respectful urges Congress not to enact this legislation."

The rule of reason is the proper standard because minimum resale price maintenance “can stimulate interbrand competition and is not so inevitably pernicious as to warrant per se illegality,” he noted.

Todd Cohen, vice president and deputy counsel, government relations, for eBay, observed that the Leegin decision “is beginning to undermine many of the consumer benefits delivered by innovators using the openness of the Internet. Leegin empowers those who want to curtail the ability of small and mid-size online retailers to communicate and offer lower prices to consumers.” Since the decision was issued, there appears to have been an increase in RPM programs that restrict intrabrand price competition, he said.

“For example, a recent report in the Wall Street Journal details how some businesses limit price competition through continually scanning the eBay platform to identify sellers offering their prices at a lower price,” according to Cohen. “They then use a plethora of tools to identify the seller and enforce their minimum prices.”

Stacy John Haigney, attorney for Burlington Coat Factory, testified that off-price retailers like Burlington would never have gotten off the ground in the 1970s if the Leegin rule had been in effect. During that time, department stores “could not legally coerce their suppliers to impose high-pricing structures through the industry . . . However, post-Leegin, there is no practical way to stop such retailer-imposed price-fixing schemes from being put in place.”

Further details on the hearing—including written testimony and a webcast of proceedings—appear here at the Senate Judiciary Committee website.

Repeal of Railroad Antitrust Exemption

Adversaries and supporters of the proposed "Railroad Antitrust Enforcement Act of 2009" squared off at a Congressional hearing regarding the legislation in Washington D.C. The bill, introduced in both the House of Representatives (H.R. 233) and Senate (S. 146), would repeal railroads' antitrust exemption and provide for numerous means to halt "anticompetitive rail conduct."

Speaking to the House Judiciary Committee's Subcommittee on Courts and Competition Policy, Association of American Railroads officials said that the measure would have harmful impacts on railroad customers—and American consumers in general—by severely distorting the relationship between regulation and antitrust laws.

Union Pacific executive J. Michael Hemmer observed that the bill's potential granting of regulatory authority to the FTC created a glaring conflict with the Surface Transportation Board and that the bill’s proposed retroactive effect could lead to antitrust attacks on the continuing operation of every federally approved transaction in rail history. Hemmer added that the legislation should not be considered in isolation.

"If Congress wants to address rail transportation policies," he said, "it should work with colleagues in other committees of jurisdiction to craft a coherent, national rail policy that integrates regulation with antitrust jurisprudence."

In response, the Consumer Federation of America asserted that the legislation was sorely needed because "rampant consolidation" and a lack of regulatory oversight have "allowed railroads to abuse their monopoly pricing power and overcharge consumers and shippers $3 billion per year."

Shippers without rail-competitive options pay 75 percent to 100 percent more for rail shipments compared with similar movements in competitive markets, the CFA reported. Captive shippers' costs have been rising substantially over the past five years.

Speaking on behalf of the ABA Section of Antitrust Law, M. Howard Morse referred to the group’s frequent opposition to industry-specific exemptions from the antitrust laws. This opposition is based on the belief that “antitrust laws are sufficiently flexible to account for particular market circumstances.”

Accordingly, the Antitrust Section encourages Congress to dismantle the exemption for the railroad industry and to consider additional legislation to eliminate antitrust exemptions in other industries.

Written testimony and a webcast of the hearing appear here on the House Judiciary Committee’s website.

Resale Price Fixing Claims Fail After Remand from High Court

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

A leather goods and accessories manufacturer did not engage in unlawful vertical price fixing by terminating a retailer for pricing the manufacturer’s goods below the suggested retail price, the federal district court in Marshall, Texas, has ruled.

The retailer’s suit, which initially succeeded at trial and ultimately led to a U.S. Supreme Court decision removing resale price maintenance from among the types of anticompetitive conduct subject to a per se illegality standard (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753) was dismissed.

Relevant Markets

With vertical price fixing no longer deemed per se illegal, the retailer’s claims had to be assessed under the rule of reason, the court explained. However, the retailer failed to surmount the first obstacle in a rule of reason antitrust claim: alleging a valid relevant market.

Neither the “retail market for Brighton women’s accessories” (the manufacturer’s brand) nor the “wholesale sale of brand-name women’s accessories to independent retailers constituted a valid product market. A single brand, no matter how distinctive or unique, could not be its own market, and the retailer’s broader market definition suffered from its own shortcomings.

“Wholesale sale was inappropriate because it did not focus on how any agreement impacted consumers, and inclusion of “brand name in the product market definition was unsupported by any allegations explaining why brand names were important to product interchangeability in the case.

In addition, “women’s accessories grouped together products that were not interchangeable with each other, and “independent retailers improperly limited the relevant market to a subset of retailers without explaining why there was a lack of interchangeability between that subset and other retailers selling exactly the same products, according to the court.

Horizontal Restraint Pleadings

Attempts by the retailer to reattach the per se illegality standard to the claim by asserting a horizontal restraint were inadequate, the court also found. The retailer was barred from claiming that the manufacturer engaged in a per se illegal horizontal price fixing agreement based on the fact that it was also a distributor of its own products.

The retailer failed to raise the theory in the original trial in the case, even though nothing prevented it from doing so. In reversing the trial outcome on the vertical restraint claims, the U.S. Supreme Court had not specifically allowed the retailer to replead allegations it had previously abandoned.

Even if such a claim were permissible, restraints in dual distribution systems—including price fixing agreements—were still analyzed under the rule of reason, rather than held to the per se illegality standard.

“Hub and Spoke” Retailer Cartel

An alternative theory that the manufacturer engaged in per se illegal horizontal price fixing in furtherance of a “hub and spoke retailer cartel also failed as a matter of law, the court determined.

The complaining retailer contended that it would prove that there was a series of agreements between the manufacturer and independent retailers to fix prices of its goods; that the independent retailers formed a cartel with each other and with the manufacturer as a retailer to prevent discounting and price competition; that, in response to pressure from retailers involved in the cartel, the manufacturer enforced its price fixing agreements against discounters to stamp out price competition; and that retailers discussed and came to agreements as to the terms of the price fixing agreements and exceptions.

These allegations were insufficient to plead a hub and spoke conspiracy. No claim was made that retailers agreed to the alleged resale price maintenance among themselves. Without such an allegation, the complaining retailer was missing the requisite wheel in the classic hub and spoke arrangement, the court concluded.

The decision is PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2009-1 Trade Cases ¶76,592.

Maryland Amends Antitrust Law to Make Resale Price Maintenance Per Se Illegal

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

Legislation clarifying that resale price maintenance (RPM), also known as vertical price fixing, remains per se illegal in the State of Maryland was signed into law on April 14 by Governor Martin O’Malley. The measure—Laws of 2009, Chapters 43 and 44—will take effect on October 1, 2009.

Response to Leegin Decision

The amendment to the Maryland Antitrust Act signifies the first legislative action taken to reverse the U.S. Supreme Court's ruling, in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), that RPM should be held to a rule of reason standard rather than declared per se illegal under federal antitrust law.

For Maryland and other states that are statutorily-required to interpret their own antitrust laws in accordance with the prevailing judicial interpretations of federal antitrust law, the High Court’s ruling effectively changed state law as well.

During a Maryland Senate Judiciary Committee hearing on February 25, American Antitrust Institute President Albert Foer argued that the decision to apply the per se rule rather than the rule of reason standard “generally determines who wins an RPM case, and indeed determines whether legitimate cases are even initiated."

Foer contended that use of the rule of reason standard for RPM increases retail prices, primarily victimizing two groups—average retailers and end-use consumers—while protecting profit margins of manufacturers and mass merchandisers. Since the Leegin ruling was delivered, he noted, the practice of setting minimum prices has become far more commonplace.

Federal Legislative Efforts

The Maryland law is not the only initiative being taken to address or even undo the Supreme Court decision. A proposal to restore the rule of per se illegality for vertical agreements to fix minimum prices has been introduced by Sen. Herb Kohl (D-Wis.) in each of the last two sessions of Congress. Hearings on the current “Discount Pricing Consumer Protection Act” (S. 148) will be held in May.

At a meeting of retailers, online merchants, consumer advocates, and antitrust experts in Washington, D.C. last December, representatives from the House Judiciary Committee stated their intention to hold hearings to address the RPM issue this spring.

In February, the FTC began a series of workshops to address the problems of RPM by exploring how to best distinguish between uses of RPM that benefit consumers and those that do not. The next two workshops will be held in Washington, D.C. on May 20 and 21. At these workshops, panels will focus on the history of the practice, empirical evidence on the effects of RPM, and how it should be analyzed under the antitrust laws. Further information regarding these workshops can be found here on the FTC website.

While no other state has considered legislation similar to Maryland’s, more than 30 states took the position that RPM should remain per se illegal, in briefs with the Supreme Court during its consideration of the Leegin case. It is expected that the legislative action by the State of Maryland will prompt at least a few other states to follow its lead.