Author: Jarod Bona We see many antitrust issues in the distribution world—and from all business perspectives: supplier, wholesale distributor, authorized retailer, and unauthorized retailer, among others. And at the retail level, we hear from internet and brick-and-mortar stores and consumers. The most common distribution issues that come up are resale-price-maintenance (both as an agreement and as a Colgate policy), terminated distributors/retailers, and Minimum Advertised Pricing Policies or MAP polies. Today, we will talk about MAP Policies and how they relate to the antitrust laws.
A MAP policy is one in which a supplier or manufacturer limits the ability of their distributors to advertise prices below a certain level. Unlike a resale-price-maintenance agreement, a MAP policy does not prohibit a retailer from actually selling below any minimum price. In a resale price maintenance policy or agreement, by contrast, the manufacturer doesn’t allow distributors to sell the products below a certain price. As part of a “carrot” for following MAP policies, manufacturers often pair the policy with cooperative advertising funds or other benefits for the retailer. Typical targets of MAP policies are online retailers and competition focused on low prices. These policies also do not typically restrict in-store advertising. The manufacturers that employ MAP policies often emphasize branding in their corporate strategy or have luxury products and fear that low advertised prices for those products will make them seem less luxurious. But these policies exist in many different industries and aren’t limited to luxury brands. In any event, MAP policies are accelerating in the marketplace. Indeed, brick and mortar retailers that fear “showrooming,” will often pressure manufacturers to implement either vertical pricing restrictions or MAP policies. Not surprisingly, the impetus to implement and enforce MAP policies often come from established retailers that want to limit price competition. We hear many questions about MAP policies, from both those that want to implement them and those that are subject to them.
MAP policies don’t—absent further context—violate the antitrust laws by themselves. But, depending upon how a manufacturer structures and implements them, MAP policies could violate either state or federal antitrust law. So the answer to the question of this heading is the unsatisfying “maybe.” We can, however, add further context to better understand the level of risk for particular MAP policies. There is some case law analyzing MAP policies, but it is limited, so if you play in this sandbox, you can’t prepare for any one approach. I had considered going through the cases here, but I think that has limited utility. The fact is that there isn’t a strong consensus on how courts should treat MAP policies themselves. So the best tactic is to understand the core competition issues and make your risk assessments from that. Because of the limited case law, you should consider, as we do, that there will be a greater variance in expected court decisions about MAP policies, which creates additional risk. This may particularly be the case at the state level because state judges have little experience with antitrust. In any event, you will need an antitrust attorney to help you through this, so the best I can do here for you to is to help you spot the issues so you can understand if you are moving in the right direction. If you are familiar with resale price maintenance or Colgate policies, you will notice a lot of overlap with MAP policy issues. But there are important differences. A minimum advertised price policy is not strictly a limit on pricing. From a competitive standpoint, that helps, but not necessarily a lot. The reality is that a MAP policy can be—for practical reasons—a significant hurdle for online distributors to compete on price for the restricted product. That is, for online retailers, sometimes the MAP policy price is the effective minimum price.
Before we go further, let’s review a little bit. A resale price maintenance agreement is a deal between a manufacturer and some sort of distributor (including a retailer that sells to the end user) that the distributor will not sell the product for less than a set price. Up until the US Supreme Court decided Leegin in 2007, these types of agreements were per se illegal under the federal antitrust laws. Resale price maintenance agreements are no longer per se federal antitrust violations, but several states, including California, New York, and Maryland may consider them per se antitrust violations under state law, so most national manufacturers avoid the risk and implement a unilateral Colgate policy instead. Under federal law, courts now usually analyze resale-price-maintenance agreements under the antitrust rule of reason. Some misunderstand that this means they are necessarily legal under federal law, but that isn’t correct. The consequence of the US Supreme Court’s Leegin decision is that under federal law, challengers to Resale Price Maintenance policies must now face the the more difficult rule of reason standard instead of the per se standard.
Colgate policies are named after a 1919 Supreme Court decision that held that it is not a federal antitrust violation for a manufacturer to unilaterally announce in advance the prices at which it will allow its product to be resold, then refuse to deal with any distributors that violate that policy. You can read our article about Colgate policies here. The bottom line with Colgate is that in most situations the federal antitrust laws do not forbid one company from unilaterally refusing to deal with another. There are, of course, exceptions, so don’t rely on this point without consulting an antitrust lawyer. And a refusal to deal with a competitor is different than a refusal to supply a customer in retaliation for dealing with a competitor. But that is starting to send us into an entirely different doctrine, so I will stop there.
The MAP policies that create antitrust problems usually are paired with other risky behavior. For example, if you are a manufacturer and you communicate with your competitors about MAP policies, then everyone implements them, you have a problem. But your problem is less about MAP and more about your horizontal agreement to implement a restraint. In other words, you would have an antitrust problem no matter what the restraint—MAP or something else. If this comes up, you might want to read our article about resale-price maintenance and horizontal restraints. Another risky behavior is using an agreement with retailers or other distributors to implement a MAP policy. That is, if you make your MAP policy look sort of like a resale-price-maintenance agreement, you risk per se antitrust liability under certain state antitrust laws. Sure, if the matter gets to litigation, you will argue that MAP is different than vertical price fixing—and it is. But your adversary will argue that the practical effect of MAP is vertical price fixing, at least in certain circumstances. From an antitrust counseling perspective, we would usually advise that clients considering a MAP policy avoid offering an easy lawsuit to file and a difficult one to resolve. Let me add a caveat to this conservative approach that we typically take: A company that desires to do so can include a MAP policy in an agreement with a retailer, but there are some risks. The rationale for taking on those risks may be that the company wants to have contractual recourse against its distributors if they don’t abide by the MAP policies. Or they may want to contractually require the distributors’ customers that resell to follow the MAP policy. Importantly, however, if you do add a MAP policy to your agreement with a distributor, you should make it absolutely clear that the distributor and anyone else down the chain can sell at whatever price they’d like. Even then, there are still risks as a court could conclude that a MAP requirement is effectively a pricing requirement, based upon the practicalities of the market. And when the case law is sparse, as is the case with MAP policies, the error factor for court decisions increases. You should not do this without an antitrust attorney. That is how companies get hurt, or sued. So if you want to do a MAP policy, you can reduce risk by creating it within the framework and protections of a Colgate policy, which is unilateral. If, however, you want future antitrust problems, you will find a MAP policy online, cut and paste your information into it and send it to all of your distributors. The reason that is risky is that when it comes to Colgate policies (including those with a MAP policy element), the details of implementation matter just as much as the policy itself. You can find a great policy, but screw it up by, for example, debating the details of it on email with a distributor such that you effectively create an agreement. That could push you into RPM agreement territory. One common tip for MAP policies that antitrust attorneys offer is to pair the MAP policy with cooperative advertising dollars for the retailer. If the retailer declines to follow the MAP policies, the manufacturer will then withhold the advertising dollars. From a practical perspective, this advice makes sense: It feels less draconian for a manufacturer to stop offering money for a policy breach than to completely cut off the distributor. And from an antitrust perspective, you might convince some courts that if all you are doing is declining to fund advertising that prices below a certain amount, you certainly aren’t violating the antitrust laws. But I think that this advice is overrated. The practical business reasons for the advertising dollars approach make sense, but that depends upon many factors, including budget, advertising ROI, and a host of other market issues. Looking at the question from a purely antitrust perspective, it is true that some courts may find the “advertising dollars” technique persuasive. And that does matter. But if we look at core competition issues, it may not matter. If you effectively implement a MAP policy through the Colgate approach, the advertising-dollars technique may be unnecessary. Of course, if we are adding up risk, I suppose it doesn’t hurt. The negative, however, is that once you introduce this additional complexity of advertising dollars, you have to implement it. And that is sort of complicated. Now you are potentially negotiating how, specifically, to use those advertising dollars. And if you are a manufacturer negotiating with a distributor, you sure enjoy the leverage of being able to pull the dollars. But, in any event, you go deeper into the negotiation and it is easy for your Colgate policy to turn into an effective agreement that incorporates the MAP issues, along with the other issues that are the real subject of the negotiation. Again, like I mentioned above, you can include a MAP requirement in an agreement, but there are some added risks and you need to make sure the agreement isn’t close to a vertical pricing agreement. So the risk is not that using the advertising dollars in a vacuum will lead to a greater likelihood of liability, but that incorporating the advertising dollars into the overall package will make it more likely that the manufacturer will engage in risky behavior and end up with an effective RPM agreement. Finally, as you think about your MAP policy, consider that at best it will be subject to the antitrust rule of reason, so if the anticompetitive aspects of the agreement exceed the procompetitive benefits, you may still have a problem. And at the state level, some jurisdictions still apply the per se antitrust standard to vertical price agreements. Every policy and market is different, so I can’t offer you a cookie cutter you can use to create your policy. You need to find an antitrust attorney, and fast. photo credit: dirkb86 dirks LEGO world map 2 side view via photopin (license)
