[Originally published in the Fall 2015 issue of the Federal Bar Association/Orange County Chapter Newsletter. See the original article here.]
A growing number of manufacturers and wholesalers are using minimum advertised pricing (“MAP”) policies to control how retailers showcase the price of their goods. Whether the products are smartphones, luxury handbags, or golf clubs, manufacturers use MAP policies to protect brand integrity, to encourage retail investment in product display, customer service, and sales, and to avoid the ever-present “free-rider” problem that results when retailers who do not expend resources on brand promotion take advantage of those who do by out-pricing them. In contrast with a resale price maintenance (“RPM”) policy, which controls downstream pricing, a MAP policy places restrictions on the price at which downstream retailers display prices in fliers, store windows – and with increasing importance, on their websites. A thoughtfully drafted—and consistently enforced—MAP policy may avoid some of the antitrust pitfalls in state and federal law that would otherwise apply to agreements on price.
In today’s e-commerce, smart web crawlers can complicate the successful implementation of a MAP policy. Using automated bots, competitors can now access information within an online retailer’s shopping cart, and advertise these in-cart prices directly on the Internet. These tactics, when successful, essentially defeat the benefits of a MAP policy. Now more than ever, manufacturers need to develop robust MAP policies to combat smart web crawlers, yet avoid the antitrust implications of direct price controls.
Advertised Price v. Sales Price Online
The difference between advertised price and sales price can be tough to tell with an online retailer. After all, both the advertised price and the sales price are available on the retailer’s website, and are often one and the same. Though the Ninth Circuit has yet to address this issue head on, a pair of district court decisions in New York have determined that MAP policies do not constitute RPM or vertical price-fixing policies when they (a) specifically state that retailers can set their own sales price; (b) apply to internet and non-internet retailers alike; and (c) provide retailers with “with more than one way to communicate lower prices to clients” either by allowing customers to call or email for a price quote, or by allowing retailers to offer coupons at a website’s checkout page. WorldHomeCenter.com v. Franke Consumer Products, Inc., 2011 WL 2565284 *5 (S.D.N.Y. 2011); WorldHomeCenter.com v. KWC Products, Inc., 2011 WL 4352390 *5 (S.D.N.Y. 2011).[i] Thus, at least for now, the distinction between advertised price and sales price lies at the point of sale on the website – the ubiquitous shopping cart.
Smart Web Crawlers – Combatting “AI” Free Riders
In the past, simple “Captcha” codes (those weird twisted words that determine if you are human) blocked web crawlers from accessing the shopping cart. If an online retailer implemented a MAP policy, automated web crawlers would only “report” the higher, advertised prices to search engines or competitor websites, not the lower in-cart price. Lately, as we can see from the growing difficulty of CAPTCHA codes, web crawlers have grown smart enough to get through these barriers.
To address this growing problem, manufacturers have the option of drafting their resale contracts (usually “authorized reseller” agreements) to require additional security measures on checkout. These have the double benefit of blocking web crawlers and improving safeguards on consumer credit card data:
- Two-Step Authentication Prior to Checkout: Instead of a simple one-stage login process, more and more retailers – including Apple, Google, and Amazon use two-stage verification processes. These verification processes require consumers to enter passcodes or data received via e-mail or text (or some other format), in addition to the normal login. The PCI Security Standards Council, an organization originally formed from the largest credit card vendors, provides baseline security standards and certifications for credit card data security, required by law in certain states. [ii]
Alternatively, manufacturers can implement more restrictive MAP policies to combat web crawlers, which fall within the scope of Franke and KWC[iii]. The MAP policy can require the retailer to implement a “call in for a lower price” strategy, or only allow the use of limited-time or one-time only coupon codes.
Of course, the advantage of all of these approaches for manufacturers – increased barriers to web crawlers – also creates a potential deterrent to consumers, as consumers face additional barriers to purchasing products. Prior to implementing these barriers, retailers should carefully measure the loss of customers through these additional verification processes, either through online A/B market testing or other methods. The loss of customers may or may not outweigh any potential gains in profit from a robust MAP policy.
Why Can’t I Control Price Directly? The Aftermath of Leegin.
Prior to the Supreme Court’s decision in Leegin Creative Leather Products Inc. v. PSKS Inc., 551 U.S. 877 (2007), federal antitrust law subjected horizontal price-fixing and vertical price-fixing to the same standard of review. Whether it was a deal between competitors to maintain prices (“horizontal price-fixing”) or a deal between a manufacturer and its retailer to maintain prices (“vertical price-fixing” or RPM), the courts considered the activity to be per se illegal. The Leegin decision, however, noted the many pro-competitive effects of RPM. Higher margins could encourage retailers to invest in customer service and attractive displays. By enforcing RPM policies, manufacturers can protect retailers that spend money on these pro-consumer services, and prevent them from being undercut by discount competitors that “free ride” off of these advertising and services for which they themselves have not paid. Id. at 890-91. Consequently, the Supreme Court adopted the more forgiving “rule of reason” standard to analyze whether the activity was an “unreasonable restraint of trade.”
Though Leegin loosened the federal regulations against RPM policies, the state responses to Leegin were more mixed. Manufacturers that implement RPM policies may yet face the risks of civil litigation and state-level prosecution. For example, in both Franke and KWC, the courts noted that RPM policies are unenforceable under section 369-a of New York’s General Business law.[iv] In New York, the Attorney General sued Tempur-Pedic for terminating contracts with retailers that did not follow a RPM policy.[v] Closer to home, in California, the Attorney General sued beauty product manufacturers Bioelements and Dermaquest for implementing RPM agreements.[vi]
In contrast to RPM, MAP policies have always been subject to the “rule of reason” standard of review, and do not have the same degree of litigation and prosecution risks that RPM policies face. See Blind Doctor Inc. v. Hunter Douglas, Inc., 2004 WL 1976562 (N.D. Cal 2004); Campbell v. Austin Air Systems, 423 F.Supp.2d 61 (W.D.N.Y. 2005).
Enforcing MAP – The Importance of Unilateral Action under Colgate
The federal Sherman Act prohibits all contracts, combinations, and conspiracies in restraint of trade. The Supreme Court held in United States v. Colgate & Co., 250 U.S. 300 (1919), however, that manufacturers do not violate the Sherman Act when they unilaterally announce resale prices in advance and refuse to sell to those that do not comply. California courts have expressly adopted the Colgate doctrine when applying California’s own antitrust statute, the Cartwright Act. Chavez v. Whirlpool Corp., 93 Cal.App.4th 363, 370 (2001).
Thus, the Colgate doctrine provides a safe haven for manufacturers under federal and California antitrust law. So long as a manufacturer unilaterally announces a MAP policy in advance, and then, without negotiation, refuses to deal with anyone who fails to comply with the MAP policy, the manufacturer will be on safer ground under the Sherman Act and Cartwright Act.
As soon as a manufacturer fails to enforce its MAP policy (or negotiates different terms) with one retailer, but enforces it with another, there is a risk that the unequal treatment will be viewed as (i) an illegal conspiracy with the first retailer to harm the second retailer in violation of the Sherman/Cartwright Act; or (ii) unfair competition in violation of California Business and Professions Code §17200 et seq. Similarly, if manufacturers agree amongst each other to implement similar MAP policies for their retailers, this would no longer constitute a unilateral policy, and would fall under the prescriptions of the Sherman and Cartwright Act. See In the Matter of National Association of Music Merchants, Inc. (FTC File No. 001 0203) (FTC filed charges against a music trade organization for facilitating agreements among music manufacturer dealers on MAP policies, and a consent order followed).
In advance, implementation of a unilateral MAP policy sounds easy enough – that is, until a large and/or very important retailer decides to disregard the MAP policy. At that point, dropping the retailer may seem like an intolerable business decision. Prior to implementing any MAP policy, manufacturers must consider whether they are willing to enforce MAP equally for all retailers, regardless of size or market power. If not, the risk of liability for antitrust and unfair competition could outweigh the potential benefits of the MAP policy.
Best Practices for Implementation of MAP Policies
Given developments in case law and advances in web technology, manufacturers should consider the following best practices when deciding if and how to implement a MAP Policy:
- Expressly allow the retailer to control end prices in the text of any MAP Policy. Whether it is through coupon codes, loyalty points, or calling in for prices, retailers must have opportunities to set sales prices at checkout.
- Follow the Colgate Doctrine and strictly enforce MAP policies. Negotiations with retailers or other manufacturers can lead to antitrust liability.
- Determine whether the risks of enforcing strict MAP policies on consumer retention outweigh the benefits of higher advertised prices.
- Determine whether the risks of enforcing a MAP policy, and losing a major distributor, outweigh the benefits of higher advertised prices.
Online retail is continuously evolving. While web crawlers, flash sales, social media events, and discount coupons may be popular today, innovative marketers – and hackers – are always looking for the next technological edge (live-action coupons and rick rolling on virtual reality headsets?). Since antitrust case law and legislation will always be one step behind the next technological ‘surprise’, manufacturers and lawyers alike must consider MAP policies and distribution practices in anticipation of industry disruption, and be able to adapt accordingly.
[i] Cf. Worldhomecenter.com, Inc. v. L.D. Kichler Co., 2007 WL 963206(E.D.N.Y. March 28, 2007). In this pre-Leegin decision, the court denied defendant’s motion to dismiss a Sherman Act claim, when plaintiff argued that a MAP policy constituted vertical price fixing. In this case, the MAP policy at issue did not give retailers the opportunity to provide different online prices at checkout. The KWC court expressly declined to follow the reasoning of Kichler. Despite the failure of court’s to follow the reasoning of Kichler, this case serves as a cautionary tale to any manufacturers that wish to impose strict MAP policies across a retailer’s website. [ii] https://www.pcisecuritystandards.org/ [iii] In Blind Doctor Inc. v. Hunter Douglas, Inc., 2004 WL 1976562 (N.D. Cal 2004) the court upheld a MAP policy that restricted all online sales of certain “proprietary products” in the window covering industry (blinds, shades etc.). This is another extreme strategy for avoiding online price wars – obviously not applicable for most products. [iv] Franke, 2011 WL 2565284 *5; KWC, 2011 WL 4352390 *5. [v] People v. Tempur-Pedic Int’l, Inc.,No. 400837/10 (N.Y. Sup. Ct. 2011); People v. Bioelements, Inc., No. 10011659 (Cal. Super. Ct. 2010); People v. Dermaquest,Inc, No. RG10497526 (Cal. Super. Ct. 2010). For more details on the risks of RPM policiessee “Minimum Advertised Pricing Programs: Practical Pointers in the Wake of Leegin”, available at http://www.edwardswildman.com/insights/PublicationDetail.aspx?publication=1834
– Lily Li is a former commercial and IP litigator at Brown Wegner McNamara LLP. She can be reached at firstname.lastname@example.org.
*Disclaimer* This article is not legal advice or legal opinion, and the contents are intended for general informational purposes only. Circumstances may differ from situation to situation.