State AG’s Action Another Reminder of the Risks of Minimum Resale Price Policies

The AG’s action followed closely on the heels of multi-party private litigation against J&J and highlights why manufacturers should carefully consider why and how they are implementing reseller price-maintenance controls before jumping in.

The allegations highlight pitfalls of resale price policies.

The State of Maryland’s Complaint, available here, tracks the allegations in dozens of private suits filed against J&J in the last year. The Complaint alleges that eye care professionals expressed discontent to J&J with competition from discount stores on the prices of contact lenses, and J&J responded by implementing a resale price policy. J&J’s policy restricted sales to those resellers that advertised or sold J&J contact lenses at prices at or above J&J’s list prices.

By announcing its policy, J&J presumably was attempting to create a “Colgate policy.” A Colgate policy, which is named for the Supreme Court’s 1919 ruling, permits a manufacturer to issue a unilateral policy statement calling for resellers to sell at manufacturer-set prices. By contrast, an agreement between resellers and a manufacturer to sell products at manufacturer-set prices constitutes a vertical restraint of trade that could be prohibited under the Sherman Act and is prohibited by Maryland law.

Here, J&J is alleged to have fallen outside of the Colgate framework. Specifically, Maryland alleges that J&J failed to implement a unilateral policy and instead had an agreement with discount store Costco. According to the Complaint, when Costco complained to J&J that the policy would cause an increase in prices at Costco’s stores, J&J and Costco engaged in a series of discussions resulting in a revision to the resale price maintenance policy, permitting resellers to offer a store gift card as a form of a discount under certain circumstances. The Complaint alleges that J&J’s discussions with Costco effectively created an agreement on the resale price maintenance policy in violation of Maryland’s prohibition on resale agreements.

The complaint could mean trouble in other jurisdictions as well.

Maryland is not the only state that prohibits all resale-price agreements. California, Illinois, Michigan, and New York have taken the same position. Meanwhile, the Supreme Court’s 2007 Leegin ruling means that federal law no longer considers resale price agreements to always be illegal. But, even under the rule of reason standard set forth in Leegin, resale price agreements are analyzed in the context of demonstrable procompetitive effects, such as heightened interbrand competition, and whether it outweighs the reduction in intrabrand competition.

The litigation offers lessons for manufacturers considering price-maintenance strategies.

Manufacturers’ marketing and sales teams confronting increased price competition through online and other resellers routinely consider, “How can I help my resellers compete and continue supporting my products?” For many manufacturers, resale-price agreements are not a viable answer, unless the agreement can be tailored to avoid the major markets that prohibit such agreements (e.g., CA, IL, MD, and NY) and can achieve a predictable improvement to competition sufficient to outweigh the potential anticompetitive effects.

A unilateral policy, carefully constructed and implemented, however, may offer a practical alternative. A unilateral price-maintenance policy, like the one that J&J implemented, is one option as long as the manufacturer avoids dialogue with its resellers about the policy, both before and after implementation.

Another form of a unilateral policy that may be attractive is a minimum advertised price (“MAP”) policy. A MAP policy focuses on setting the price that resellers may advertise, but allows resellers to complete sales at prices determined by the resellers. MAP policies often offer resellers co-op advertising funds as an incentive to comply. Some manufacturers go further, applying MAP policies to all resellers, and refusing to sell to those that fail to comply; some manufacturers apply MAP policies only to online advertising, thus emphasizing in-store promotional activities. While a MAP policy often carries less risk than a Colgate policy because it avoids control over sales prices, a MAP policy can be problematic if it ends up controlling the resale price or forming an agreement with resellers as a result of how it is implemented.

Before adopting any of these strategies, manufacturers are well-advised to review their objectives and strategy with antitrust counsel.