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Hogan Lovells
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See note below about Hogan Lovells Continued lack of clarity on the legality of resale price maintenance
Recent cases in Kansas and New York have illustrated the continued uncertainty of state law concerning resale price maintenance (RPM) in vertical agreements. This patchwork of laws presents companies with national resale networks continued risks if they choose to use these types of agreements even though the U.S. Supreme Court found them not per se unlawful under federal antitrust law in 2007 in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). On 4 May 2012, the Kansas Supreme Court in O’Brien v. Leegin Creative Leather Products, Inc., No. 101,000, 2012 WL 1563976 (Kan. 4 May 2012), held that RPM agreements are per se unlawful under state law notwithstanding the treatment of such agreements under federal law. Days later on 8 May 2012, the Appellate Division of the New York Supreme Court, First Department, in People v. Tempur-Pedic International, Inc., 2012 WL 1583575 (N.Y. App. Div. 8 May 2012), upheld a lower court’s decision rejecting the New York Attorney General’s claim that RPM agreements were unlawful under New York law. The companies in these cases faced very different results because of the state laws governing these agreements. These recent decisions, in conjunction with prior actions in other states like the enactment of strong statutes in Maryland and California that explicitly make RPM terms unlawful,1 emphasize the need for companies to perform careful state-by-state analyses of statutes and case law before using RPM language. Companies should also be aware that certain language may pose more of a risk than other language. Hewing closely to the guidance contained in the U.S. Supreme Court’s decision in Colgate, which stands for the proposition that unilateral business decisions concerning pricing policies are not unlawful, is a good approach for companies who still wish to retain some influence over resale pricing in the murky waters of today’s RPM state jurisprudence. Nevertheless, any resale policies or agreements with RPM language should be reviewed by antitrust counsel before use.
The Kansas Supreme Court in O’Brien reversed and remanded a district court ruling granting summary judgment in favor of the defendant, Leegin Creative Leather Products, the maker of Brighton accessories and luggage. O’Brien, the plaintiff, filed a class action against Leegin on behalf of herself and others, alleging that its pricing policy requiring retailers to sell Brighton goods at a suggested price violated the Kansas antitrust act (Kansas Restraint of Trade Act or KRTA) by “‘controlling the price of Brighton goods to the customer.’” O’Brien, 2012 WL 1563976 at *9. The pricing policy required retailers to set prices at an amount equal to twice wholesale plus a small amount and permitted retailers to discount some low selling and seasonal products. Id. at *4. For at least one year, retailers were required to sign an acknowledgment that violations of the policy were punishable by termination. Id. In addition, the company offered a “Heart Store” program and the opportunity to sell Brighton luggage. Participation required retailers to maintain certain inventory levels and again sell products at Brighton’s suggested retail price, among other things. Id. at *7.
The Court’s analysis wholly rejected federal antitrust law to evaluate O’Brien’s claim under the KRTA. First, the Court discounted the defendant’s argument that O’Brien had not shown a concrete antitrust injury stating that she had shown enough circumstantial evidence to avoid summary judgment. Id. at *16–17. Second, the Court stated that the rule of reason, the federal standard applied to RPM agreements, did not apply under the KRTA because the statute never “mentions reasonableness or a rule of reason.” Id. at *18; see K.S.A. 50-101 (“[[a]ny such combinations [trusts created to restrict trade, increase, reduce, or fix the price of goods, or prevent competition] are hereby declared to be against public policy, unlawful and void.”); K.S.A. 50-112 (“[[a]ll arrangements, contracts, agreements, trusts or combinations between persons, designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles . . . are hereby declared to be against public policy, unlawful and void."). Disavowing its own precedent, the Court added that it would have ruled differently in two prior Kansas state cases that used a “reasonableness rubric” because “we are loathe to read unwritten elements into otherwise clear legislative language.” Id. at *22. The Court concluded, “The simple, per se rule … survives.” Id. at *23.
On 8 May, days after the Kansas Supreme Court announced its decision, the Appellate Division of the New York Supreme Court, First Department, rejected the New York Attorney General’s claim that New York’s antitrust law made RPM agreements unlawful in People v. Tempur-Pedic International, Inc. The Court affirmed the lower court’s dismissal of the Attorney General’s Complaint. The Complaint alleged that Tempur-Pedic’s retail pricing policy violated New York’s General Business Law § 369-a, which states, “[[a]ny contract or provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable or actionable at law.” People v. Tempur-Pedic, 916 N.Y.S.2d 900, 902 (N.Y. Sup. Ct. 2011). The Complaint alleged also that Tempur-Pedic’s pricing policy entitled the Attorney General to invoke Executive Law § 63(12), allowing it to enjoin “any person from engaging in ‘repeated fraudulent or illegal acts’ or otherwise demonstrating ‘persistent fraud or illegality’ in transacting business.” Id. Tempur-Pedic maintained a retail pricing policy with its retailers that stated retailers who did not “adhere substantially” to Tempur-Pedic’s suggested retail prices would have their shipments suspended, informing retailers that “the policy is Tempur-Pedic’s unilateral decision; the policy is not negotiable; and that Tempur-Pedic neither seeks nor will it accept its retailers’ agreement with the policy.” Id. at 903. Tempur-Pedic also informed retailers they were free to set prices at “whatever level they believe to be in their best interests.” Id. In addition to the pricing policy, Tempur-Pedic required retailers to agree to its Retail Partner Obligations and Advertising Policies (RPOAP), which included rules on advertising, restrictions on ship-to location, maintenance of a physical store location, and restrictions on the use of coupons, rebates, and promotions, among other things. Id.
The lower court’s analysis, with which the Appellate Court agreed, focused on the language of New York’s antitrust law like the Kansas Supreme Court did. The Attorney General claimed that Section 369-a “directly demonstrates the legislative intent to declare contracts to restrain resale pricing illegal.” Id. at 904. Siding with Tempur-Pedic, the lower court determined the statutory language does not make RPM agreements unlawful, only unenforceable. Id. at 905. Because the language was clear, it required no additional interpretation. Id. The court also rejected the Attorney General’s secondary argument that the pricing policy constituted a fraud within the meaning of Section 63(12) because retailers and customers were deceived to believe the pricing policy was enforceable. Id. at 906. The court found no evidence that retailers or customers were misled in any way. Id. Further, citing Monsanto and Colgate, U.S. Supreme Court precedent on unilateral action, the court determined there was no contract even between the retailers and Tempur-Pedic with respect to price because the policy was unilateral and the company never sought or accepted agreement from the retailers. Id. at 906–907. Retailers who acquiesced did so independently. The court found that the RPOAP, as distinct from the pricing policy, constituted a contract but rejected the claim that the prohibition on the advertising of coupons, rebates, and promotional items actually prevented retailers from using such devices because the agreement said nothing about their use, only their advertisement. Id. at 908–909.
O’Brien and Tempur-Pedic are the two most recent examples of the wide divergence of state positions and interpretations of RPM language in the post-Leegin world. The landscape remains fraught with dangers for companies that wish to use them, and there may be no definitive answer for companies until more state courts, legislatures, and attorneys general take affirmative positions on the subject.2 Even in Kansas, there seems to be no definitive answer. Following the Kansas Supreme Court’s decision, Kansas state lawmakers proposed legislation on 10 May to overturn O’Brien, stating the decision “is contrary to the intent of the Kansas legislature in enacting the Kansas restraint of trade act.” H.B. 2797, 84th Leg., Reg. Sess. (Kan. 2012).3 The legislature stated its concern that the ruling would invite unnecessary lawsuits and deter companies from doing business in the state. While states like Kansas continue to develop their positions, companies should bear in mind that careful drafting and adherence to the Colgate doctrine can limit the risks the use of RPM language poses as Tempur-Pedic showed.
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J. Robert Robertson Partner, Washington, D.C. robby.robertson@hoganlovells.com +1 202 637 5774
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1 See Cal. Bus. & Prof. Code § 16720(b) (2009); Md. Code Ann., Com. Law § 11-204(b) (West 2009). Hogan Lovells Key Antitrust, Competition & Economic Regulation Contacts
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