Antitrust In Distribution - Tying, Bundling And Loyalty Discounts, Resale Pricing Restraints, Price Discrimination - Part II

Monday, May 1, 2006 - 00:00

Editor's Note: This panel captures some of the high points of presentations of the interviewees at a seminar held on March 2 as part of an Antitrust Seminar Series sponsored by Weil Gotshal & Manges LLP.

Part I of these interviews (including Mr. Weinschel's comments on tying, bundling and loyalty discounts and the first part of Mr. Scher's comments on resale pricing restraints) appeared in our April issue.


In the version of this panel on our Web site (metrocorpcounsel.com), we include links from Mr. Scher's comments to the underlined Exhibits One, Two and Three in those comments.

Editor: What steps can be taken to avoid problems?

Scher: Counsel for many suppliers conduct compliance meetings with their sales personnel where the importance of avoiding pricing agreements is stressed. Exhibit One (See Editors Note above) is an example of guidelines providing the kinds of instructions that can be given to sales personnel, but even these can be problematic. In real life, sales personnel - particularly those who make commissions on sales - may go too far in their discussions with customers, and unintentionally may obtain unlawful agreements. As noted at the outset, this is a difficult and murky area of antitrust law. All a supplier can do is suggest to a transgressor that while the supplier cannot control the customer's pricing, the transgressor might find it in its independent interest to make a greater profit on an item if it maintains suggested prices. This should not be stated in a threatening manner, because that may lay the groundwork for future legal problems. Unfortunately, a supplier may believe it is making a suggestion, but the customer may perceive that the supplier is making a demand.

A Unilateral Minimum Resale Price Program (UMRP policy) is another way that problems may sometimes be avoided, but such policies can also lead to serious problems. Over the last 15 years, these policies have become very commonplace in general merchandise areas. Such a policy usually announces the supplier's desire that its accounts should properly display the product and employ sales people who present and demonstrate the product to consumers. The policy then suggests that the retailer sell at the minimum retail prices identified by the supplier, which prices are stated to be intended to provide the retailer with a good margin for the product so that it can cover the cost of providing such in-store services.

Because there may be retailers that will free ride on these efforts without providing the services, while making sales at lower prices, the UMPR usually states that the supplier will terminate a retailer that sells below the suggested minimum retail price. It will provide that there will be no warnings or threats before such termination, and that the supplier's sales people have no authority to modify the UMRP or grant any exceptions. It usually also states that the policy is non-negotiable and that the supplier neither solicits nor will it accept any assurance of compliance. Exhibit Two (See Editors Note above) is an example of such a UMRP policy involving a fictional company).

Exhibit Three (See Editors Note above) is the "AudioCraft Corporation Distribution Policy." "AudioCraft" is a fictional name for an electronics supplier that in fact withstood a multi-state attorney general investigation. The products involved were not widely distributed. The company was careful about who it sold to at the outset. In separate instructions to sales people (not included in Exhibit Three), they were advised to consider the likelihood of acquiescence before they accepted a retail prospect rather than after it became a customer. Given this approach and neutral facts developed in the investigation, the company received a clean bill of health at a time (the early 1990s), when the state attorneys general were suing other electronics companies as well as running shoe manufacturers.

Editor: What is the status of Minimum Advertised Price Programs (MAP)?

Scher: The Federal Trade Commission issued a policy statement about MAP in 1987, after the Supreme Court liberalized the law concerning non-price vertical restraints of trade. The FTC policy statement declared that a supplier usually can issue cooperative advertising programs containing suggested minimums for the prices advertised by resellers. The Commission declared that such a co-op program can provide that if a retailer advertises below the stated prices, the supplier will not reimburse the retailer for the ad. However, the FTC policy statement recommended that the supplier also inform retailers that they are free to use their own funds to advertise below suggested minimum advertised prices, and that they remain free to sell below those prices.

The major recorded music suppliers apparently went further in the late 1990's. They issued policies announcing that they would not only refuse to provide financial support for advertised prices below MAP, but would suspend support for the advertising of all their products for a period of time, including support for in-store advertising, if a retailer advertised any product below MAP. When that happened, according to the FTC, retail prices increased. Accordingly, the FTC and 42 state attorneys general, as well as class action attorneys, brought suits against the major recorded music companies which eventually were settled at great cost.

Accordingly, when I counsel clients about MAP policies, I suggest that they go no further than the 1987 FTC policy statement, and that they simply provide that they will not reimburse retailers for advertisements below MAP, adding that retailers are free to use their own funds for below-MAP advertising.

Editor: Scott, please discuss the risks of criminal law enforcement actions by the DOJ, FTC or the states with respect to price discrimination.

Martin: As a general proposition, there is very little risk of enforcement action by any of those entities - criminal or civil. It's interesting that you mention criminal enforcement, Al, because most people actually don't know that the Robinson-Patman Act has a section 3 that imposes criminal liability, and it's been a dead letter for over 50 years. There are also state price discrimination laws as well, with activity in a few from time to time.

Editor: What about private litigation? What are the triggering circumstances and the types of litigation?

Martin: That's where one sees the risks. Ironically, for a statute that was enacted to protect the individual "mom and pop" stores from the incursion of large chains, you rarely see a little guy alone as a plaintiff in a downstream competition or "secondary-line" case. The days of active FTC enforcement are gone, with really only one or two civil actions in the last 20 years. The fact is that being a plaintiff in a federal case involves spending a lot of money, as you know. And the power buyers, the large department stores and the big box retailers, are not plaintiffs generally. So, what you sometimes see are organized groups of smaller retailers bringing multi-plaintiff lawsuits. (The Act is inherently unsuitable for class action treatment - there's been only one R-P case that was certified as a class action, over 30 years ago.) Also, associations may bring injunctive lawsuits on behalf of members, such as bookstores in the National Ass'n of College Bookstores v. Cambridge University Press, 990 F. Supp. 245 (S.D.N.Y. 1997), which included claims directed at competition over the Internet by amazon.com. Finally, again focusing on cases brought by disfavored buyers, vendors should be wary of financially distressed customers or former customers; it is not at all unusual, for example, when suing over a bad debt to find yourself faced with a price-discrimination counterclaim.

Editor: Could you discuss the recent Volvo case.

Martin: Volvo Trucks N.A., Inc. v. Reeder-Simco GMC, Inc., 126 S.Ct. 860 (2006) is significant on a couple of levels. The case involved a Volvo dealer that alleged discrimination by Volvo in the sale of heavy trucks. Volvo sells its heavy trucks through a competitive bidding process, whereby prospective customers invite a Volvo dealer to submit bids, and the dealer often bids against dealers representing other manufacturers. The dealer may request from Volvo a particular discount, and Volvo decides the discount, if any, on a case-by-case basis. Then, the dealer uses the discount to prepare the competitive bid.

The common thread in the situations presented in the case was that the alleged discrimination did not relate to a competitive bidding situation between the plaintiff and an allegedly favored Volvo dealer competing for the same customer in which plaintiff lost the bid. That would be your classic Robinson-Patman Act case - favored and disfavored entities trying to make a sale to the same customer, and the disfavored one either loses the sale or has to lower its price to compete. The Court found that absent actual competition with a favored dealer for the same customer, a plaintiff cannot establish the required competitive injury. Now, in one instance, there was competitive bidding for the same customer between plaintiff and another Volvo dealer, but the alleged discrimination was that the other dealer was granted an additional discount by Volvo after it had been awarded the bid. The Court found that there was no longer competition at that point, and therefore no claim.

Everyone would do well to read Part IV of the opinion, because it may portend some real changes in the approach to R-P law. Among other things, the Court underscores the importance of interbrand competition in antitrust law, including R-P. The Court also says "we would resist interpretation geared more to the protection of existing competitors than to the stimulation of competition." Volvo, at 872 (emphasis in original) . That's a familiar phrase to antitrust lawyers from Brunswick Corp. v Pueblo Bowl-O-Mat, Inc. , 429 U.S. 477 (1977), which picked up on Brown Shoe. Here, though, it seems to indicate that the standards previously developed in the First, Second, Third, Ninth and Eleventh Circuits - that injury to a single competitor may be sufficient to satisfy the injury to competition requirement - cannot stand. After Volvo, plaintiffs in those Circuits may be facing the more stringent test of demonstrating "true" injury to competition.

Editor: Do you have any general suggestions for our readers in terms of how to minimize risk?

Martin: That's a pretty big question, so I'll just touch on some key points. First, the Volvo case shows the flexibility offered by setting up competitive bidding scenarios - which is consistent with increasing competition and driving the lowest possible prices for consumers - and the Court cautioned against interpreting R-P law to enforce "price rigidity." Second, from the buyer's perspective, one should always ask, "What can I do to get a better price?" There may be functions a buyer can perform, or cost savings it can create that are entirely consistent with the Act. And, if one is not a "power buyer," the Volvo case certainly implies less concern, although it does not go so far as to limit the Act's application to such purchasers.