Over 99 years ago, on June 2, 1919, the United States Supreme Court held in U.S. v. Colgate & Co. [1] that the Sherman Act [2] does not prevent a manufacturer from: 1) unilaterally announcing prices at which goods may be advertised and/or sold; and 2) subsequently refusing to deal with retailers that choose not to acquiesce with the announcement. Before Colgate, a manufacturer’s resale price maintenance (“RPM”) policy was subject to per se scrutiny under the Sherman Act, where simple proof of the policy’s existence was dispositive for finding of an illegal price fixing agreement. [3] In the wake of Colgate, manufacturers began to take advantage of the legal avenue created for implementation of unilateral pricing policies — then referred to as “Colgate policies.” Now, these “Colgate policies” are known as unilateral pricing (“UP”) policies and enable manufacturers to maintain some control over the price of their products without exposing themselves to legal liability.
Today, there is much confusion amongst product manufacturers in relation to pricing policies and their legality. Despite the common belief that the 2007 Supreme Court decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. [4] made all forms of RPM legal, many forms of RPM still carry great risk. That risk, however, can be greatly mitigated through the implementation of a UP. UP’s continue to be the safest and most effective form of RPM, especially when a manufacturer’s goal is to combat price erosion on the Internet.
What Is a Unilateral Policy and Why Isn’t it Price Fixing?
Under a UP, a manufacturer announces resale or advertised prices at which it believes its products should be sold and/or advertised and then may refuse to continue to conduct business with any retailer who fails to acquiesce with the announced prices. In Colgate, the Supreme Court recognized the legality of this practice premised on two foundational principles. First, manufacturers are absolutely free to choose which retail partners they will do business with and under what terms they will continue to do business with those retail partners. Second, the retail partner has an absolute right to choose and set whatever prices it wants to advertise and sell products. Together, these two foundational principles establish the framework for the use of UP’s.
Critically, a UP is not an agreement and therefore does not run afoul of federal laws against agreements to fix prices. Under a UP, a manufacturer instead unilaterally announces the terms and conditions under which it will sell its products to retailers, including minimum advertised and/or resale prices, and may stop providing products to retailers that choose to not acquiesce with the announced terms and conditions. [5] A primary benefit of a UP is that it affords a manufacturer wide discretion as to what amounts to acquiescence or non-acquiescence with the UP. In the event of non-acquiescence, it is entirely proper for a manufacturer to simply stop supplying products to the retailer. [6]
MAP Policies — A Riskier, Less Effective Alternative to Unilateral Policies
While most product manufacturers call their pricing policy a Minimum Advertised Price (“MAP”) Policy, they fail to recognize the legal distinction between a MAP Policy and a UP. In a UP, there is no agreement, whereas a MAP agreement is a bilateral agreement between a manufacturer and retailer. A MAP agreement conditions the availability of cooperative advertising funds to the reseller in exchange for the retailer’s compliance with the manufacture’s advertising guidelines. While these guidelines could relate to any aspect of advertising, most often they relate to a minimum advertised price, which is set by the manufacturer. Ultimately, the retailer retains its right to advertise at any price it desires but may forfeit the conditioned cooperative advertising funds for failing to comply with the manufacturer’s set minimum advertised price. If the retailer advertises below the minimum advertised price, a MAP agreement allows the manufacturer the remedy of withholding the cooperative advertising funds from the retailer. Importantly, a manufacturer cannot stop-ship products or terminate a retailer due to a retailer’s advertisement below the manufacturer’s minimum advertised price. [7]
Despite being an agreement related to advertised price, a properly implemented MAP agreement is legally defensible because:
a. The manufacturer is free to place reasonable guidelines and conditions on the availability of cooperative advertising funds available to retailers [8];
b. The retailer remains completely free to advertise at any price it chooses; and
c. A MAP can never impact the price at which a retailer sells the products.
Unfortunately, many manufacturers have grafted UP principles onto MAP programs in a knee-jerk response to the rise of online price erosion. Because most hybrid UP/MAP agreements are just that — agreements — they face heightened scrutiny as an illegal agreement on resale price. Accordingly, attempts to combine a bilateral MAP Policy (advertising policy) agreement with a unilaterally announced UP often enhances legal risk as the concepts underpinning the two policies cannot be legally reconciled and often, in practice, end in an illegal agreement on resale price.
Lastly, the increased antitrust liability is not even worthwhile, as a MAP agreement is not an effective strategy for curbing online price erosion. MAP agreements arguably can only apply to the advertised price and do not apply to resale price or in-store advertising. For example, while it would be a violation of a MAP agreement if a retailer advertises a product below the minimum advertised price in a newspaper, it is not a violation for that same retailer to price below the minimum advertised priced inside its store. Instead prices inside the store are not legally considered advertising and are instead considered to be the resale price (which is beyond the reach of a MAP agreement). [9] Given this legal interpretation, a MAP agreement has limited enforceability on the Internet. Large online retailers take the position that their webpage is “in-store,” meaning a MAP agreement could not apply to prices on their webpage or “in cart,” as those instances would be in-store and therefore RPM. Certainly, the distinction between advertised price and resale price when goods are sold online is unclear, but large online retailers and marketplaces are leveraging the interpretation that once a customer is on a website, or in-store, it is no longer advertising and therefore is in compliance with the MAP agreement. Further, if the manufacturer’s sole recourse is to withhold the cooperative advertising funds for non-compliance, how can it do so to a large retailer...
