Antitrust Pitfalls for Manufacturer-Imposed Requirements

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Antitrust Pitfalls for Manufacturer-Imposed Requirements Structuring RPM Provisions and Overcoming Antitrust Risk in Territory and Customer Restrictions TUESDAY, APRIL 16, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Logan M. Breed, Partner, Hogan Lovells, Washington, D.C. James M. Burns, Member, Dickinson Wright, Washington, D.C. Adrian Emch, Partner, Hogan Lovells International, Beijing, China The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 Resale Price Maintenance: Federal and State Overview James M. Burns, Esq I Street, N.W., Suite 1200 Washington, DC (202) jmburns@dickinsonwright.com

5 What is RPM? Wikipedia: Resale price maintenance (RPM) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to comply with such an agreement, the manufacturer may stop doing business with it

6 Federal Law 1911 In Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911), the United States Supreme Court held that a minimum resale price maintenance agreement violated Section 1 of the Sherman Act. Subsequent decisions characterized Dr. Miles as holding that minimum resale price maintenance is unlawful per se - that is, without regard to its impact on the marketplace or consumers and per se treatment was extended to maximum resale price maintenance in Albrecht v. Herald Co. 390 US 145 (1968) In Leegin Creative Leather Products v. PSKS, 551 U.S. 877 (2007), the United States Supreme Court overruled Dr. Miles, holding that minimum resale price maintenance would no longer be subject to per se condemnation (per se treatment of maximum resale price maintenance had previously been overturned in State Oil Co. v. Khan, 522 US 3 (1997)). In reaching this result, the Court noted that, in some circumstances, vertically imposed RPM can be procompetitive, not anticompetitive

7 Why the change? Potential Procompetitive Effects of RPM identified by the Court: 1. Eliminates intrabrand competition, which can encourage retailers to invest in services or promotional efforts designed to aid the manufacturer in competing against rival manufacturers; 2. Prevents free riding by retailers not providing customer service so that retailers compete on service, to the benefit of consumers; and 3. Increasing interbrand competition by facilitating market entry of new firms and brands

8 In the aftermath of the Leegin decision... The rule of reason has rendered federal challenges to RPM largely unsuccessful Jacobs v.tempur-pedic Int l, Inc. 626 F.3d 1327 (11th Cir. 2010) (Affirming dismissal for failure to allege proper relevant market). Vaughn Medical Equip. Repair Service, LLC v. Jordan Reese Supply Co., 2010 WL (E.D.La. 8/26/10) (RPM claim dismissed for failure to allege relevant market). Rick-Mik Enters. v. Equilon Enters., 532 F.3d 963 (9th Cir. 2008) (claim failed for vagueness under Twombly). The Colgate Doctrine also remains a complete defense to any RPM challenge, further reducing plaintiff success in federal court Valuepest.com of Charlotte, Inc. v. Bayer Corp., 561 F.3d 282 (4th Cir. 2009) (Genuine agency arrangement not subject to challenge based upon absence of agreement between two independent entities)

9 Post Leegin Cases in Federal Court, cont d Market Power the cases that have proceeded past motions practice have typically required a showing of market power on the part of the manufacturer: Toledo Mack Truck Sales & Services, Inc. v. Mack Trucks, Inc. 530 F.3d. 204 (3d Cir. 2008) McDonough v. Toys R Us, Inc WL (E.D. Pa. 2009) BabyAge. com, Inc. v. Toys R Us, Inc., 558 F. Supp. 2d 575 (E.D. Pa. 2008) However, no reported post-leegin decision to date has held that an RPM agreement violates Sherman One under the rule of reason -- Jury verdict for defendant in Toledo Mack Truck, affirmed on appeal. Recent Cases Turik v. Expedia. One of over 30 challenges to online travel company best price guarantee provisions between hotels and OTCs that have now been consolidated into an MDL proceeding in Dallas

10 What about Dual Distribution Arrangements? Per se or Rule of Reason? Many manufacturers sell both to resellers and to consumers - Leegin did. Does dual distribution transform rule of reason analysis into per se condemnation? Probably not. Spahr v. Leegin 2008 US Dist. LEXIS (E.D. Tenn. 2008) (applying rule of reason to dual distribution arrangement). PSKS v. Leegin, 615 F.3d. 413 (5th Cir. 2010) (Leegin on remand; in dicta)

11 FTC Activity regarding RPM 2008 Nine West Review: Leegin factors should be used to determine when RPM might be subjected to a closer analytical scrutiny -- Nine West allowed to resume RPM because of its modest market share. In re NineWest, FTC Docket No. C In 2009 the FTC held an RPM Workshop, which was intended to explore []how to best distinguish between uses of RPM that benefit consumers and those that do not. Unfortunately, no findings or recommendations were ever issued after the workshop

12 DOJ Activity Regarding RPM United States v. Apple, 12-CV-2826 (S.D. N.Y. 2012) The Ebooks case In April of 2012 the DOJ filed an action against Apple and five large publishers alleging they had restrained competition in the sale of electronic books. While involving the resale price of ebooks, the DOJ s claim included the allegation that the publishers had entered into a horizontal agreement as well, making the claim materially different than a traditional manufacturerimposed RPM agreement. All publishers have since settled, leaving only Apple as a defendant

13 Federal Legislative Efforts Discount Pricing Consumer Protection Act of 2011 would have trumped Leegin by adding a sentence to Sherman One stating: Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act. 41 State A.G.s wrote to Congress expressing their support of Leegin repeal, but the legislation failed to be enacted. New legislation has NOT been introduced this Congress, but Assistant AG William Baer endorsed Leegin repeal in his confirmation hearing last July, providing additional support ; on the other hand, new FTC Commissioner Wright has strongly supported Leegin

14 State RPM Issues Post-Leegin Confusion and Uncertainty

15 State Authority Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies... and on several prior occasions, the Court has recognized that the federal antitrust laws do not pre-empt state law. - California v. ARC America Corp., 490 U.S. 93 (1989)

16 State Court RPM Actions After Leegin Early post-leegin enforcement action by New York, Illinois and Michigan More recent enforcement actions by the California and New York Attorneys General Kansas Steals the Show With O Brien v. Leegin

17 Who Cares about Leegin? We have a State Antitrust Statute to Enforce In 2008, New York, Illinois and Michigan challenged office furniture Herman Miller s use of RPM; New York v. Herman Miller, 08-cv (S.D. N.Y.) - Complaint alleges Herman Miller coerced retailers not to discount furniture below suggested retail price. While the complaint does not expressly allege per se violations, no attempt to plead a rule of reason violation is evident in the pleadings (no allegations about market share, etc.)

18 Herman Miller Action, cont d Consent Decree quickly accepted by Herman Miller, only four days after the filing of the complaint, precluding detailed analysis into the legal merits of the claims. Herman Miller agrees to refrain from enforcing its suggested retail prices and fined $750,

19 California: People v. DermaQuest California AG Jerry Brown files complaint on Feb. 5, 2010, alleging that DermaQuest has engaged in vertical price fixing in per se violation of the Cartwright Act. The DermaQuest agreements provide: Distributor may not resell product in a price structure that yields a product price below Dermaquest's Suggested Retail Price (DSRP) Reseller may not resell product... at resale below... DSRP

20 DermaQuest Consent Decree Enjoined DermaQuest from Entering agreements that bind distributors not to sell... below a common standard figure or fixed value Required DermaQuest to send written notice of the discontinuation of its pricing policies to its distributors Required DermaQuest to pay $70,000 in civil penalties, plus $50,000 in costs

21 California: Bioelements Case California AG Brown follows up DermaQuest with People v. Bioelements, Inc., File No (Cal. Super. Ct., Riverside County, filed Dec. 30, 2010) Allegation that Bioelement s agreements with distributors and resellers constitute vertical price-fixing in per se violation of the Cartwright Act and unfair competition under the California Unfair Competition Law

22 Bioelements, cont d While initiated under California Attorney General Brown, the Bioelements action was concluded by a Consent Judgment in Jan that was approved by Attorney General Kamala Harris Despite a change in administration, the Bioelements consent terms mirror those in Dermaquest Agreement to permanently refrain from fixing resale prices for its merchandise Agreement to inform distributors and retailers that the existing contract provision is void and that Bioelements would not try to enforce it Bioelements required to pay $15,000 in civil penalties and $36,000 for the State s attorney fees

23 New York: People v. Tempur-Pedic Int l In 2010, the NY Attorney General brought an action contending that a contractual prohibition on discounting contained in Tempur-Pedic s Retail Partner Obligations and Advertising Policies agreement violated NY General Business Law 369-a, which provides: Any contract 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 at law. The action sought to enjoin Tempur-Pedic from enforcing its antidiscounting policy and restitution to consumers

24 New York v. Tempur-Pedic People v. Tempur-Pedic International Inc. 30 Misc. 3d 986, 916 N.Y.S. 2d 900 (2011); aff d 95 A.D. 3d 539, 944 N.Y.S. 2d 518 (2012) Section 369-a makes RPM agreements unenforceable, but not actionable there is nothing in the text to declare those contract provisions to be illegal or unlawful; rather the statute provides that such provisions are simply unenforceable in the courts of this state The court further held that the only agreement between the parties applied to advertised prices, not prices themselves Advertising agreements cannot be the subject of a vertical RPM claim, because they do not restrain resale prices, but merely restrict advertising

25 Kansas: O Brien v. Leegin Creative Leather Products Same basic facts as in the Leegin federal case heard by the U.S. Supreme Court A challenge to Leegin s retailer agreement, which required that a retailer "[s]ell Brighton products for the suggested price every day, 365 days a year. At the trial court level, the court held that the rule of reason applied to the conduct

26 Kansas Supreme Court Rejects Leegin Kansas antitrust statute does not mention reasonableness or the rule of reason in proscribing anticompetitive conduct The plain language of the Kansas Antitrust Act prohibits all arrangements, contracts, agreements, trusts or combinations... 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 Rejects deference to federal cases federal precedents interpreting... federal statutes have little or no precedential weight when the task is interpretation and application of a clear and dissimilar Kansas statute Holds that Leegin s conduct is per se unlawful under Kansas law

27 What Do the State Court RPM Cases Seem to Suggest? The likelihood of plaintiff success varies considerably by state, with those states that have a history of challenging RPM agreements in the past and/or those that do not strictly apply federal precedent presenting the greatest risk Actions by State Attorneys General probably create heightened risk, although the legal principles are likely to be the same Challenges are almost always going to be to minimum RPM agreements; challenges to maximum RPM, though still possible under some state laws, are not being brought The Colgate Doctrine remains the best defense to RPM claims

28 Legislative Efforts in the States

29 Maryland Leegin Repeal Maryland Commercial Law Code Section (b) A contract, combination or conspiracy that establishes a minimum price below which a retailer, wholesaler or distributor may not sell a commodity or service is an unreasonable restraint of trade.

30 Pennsylvania Legislation Senate Bill 848, introduced last month, would prohibit Contracts, combinations or conspiracies to establish a minimum price below which a retailer, wholesaler or distributor may not sell a commodity or service

31 Kansas Legislation SB 124, an extensive revision of the Kansas Antitrust Act, was passed in different forms by the Kansas Senate and House. Each version includes a reasonableness component to permit rule of reason treatment for RPM. The bill was subsequently harmonized in conference committee and passed. It now awaits the Governor s signature

32 States Likely to Present the Greatest Legal Risk under State Antitrust Law Maryland (unlawful by statute) Kansas (unlawful by Kansas Supreme Court decision at least for the moment) North Carolina (State AG pronouncement that RPM remains per se unlawful) Alabama, California, Connecticut, Mississippi, Montana, Nevada, New Hampshire, Ohio, South Carolina, Texas and West Virginia

33 Vertical Non-Price Restraints Logan Breed, Partner Hogan Lovells April 16, 2013

34 Overview Vertical non-price restraints generally subject to rule of reason treatment Several common types Territorial and customer restrictions Exclusive distributorships Location clauses and areas of primary responsibility Minimum Advertised Price (MAP) policies Dual distribution 34

35 Standard for Vertical Non-Price Restrictions Vertical non-price restraints frequently increase overall competition by promoting interbrand competition more than they reduce intrabrand competition Theory predicts that a vertical non-price restraint can affect consumer welfare only if the supplier has market power, i.e., if the supplier can price above marginal cost Some courts have accepted this theoretical claim and have held that a vertical non-price restriction is reasonable, and thus legal, if the supplier has no market power 35

36 Standard for Vertical Non-Price Restrictions Procompetitive justifications: May enable distributors to strengthen their organizations and compete more effectively with distributors of competitive products May lower distribution costs by enabling each distributor to make the investment in its distributorship necessary to obtain economies of scale May lead to improved product quality, service and safety by fostering close, long-term relationships between suppliers and distributors May facilitate entry of a new producer by enabling distributors to recover initial market development costs 36

37 Standard for Vertical Non-Price Restrictions Potential anticompetitive effects: May eliminate or unnecessarily reduce intrabrand competition May allow the prices of other brands to rise, thereby reducing interbrand competition May facilitate collusion among competitors 37

38 Territorial and Customer Restrictions Dealer is restricted with respect to the territory in which, or the customers to whom, it may sell Relevant factors in rule of reason analysis include: the purpose of the restriction the effects on inter- and intrabrand competition the manufacturer s market share any offsetting procompetitive benefits of the restraint whether there is a less-restrictive means to accomplish the procompetitive benefit 38

39 Exclusive Distributorships Provides dealer with the right to be the exclusive outlet for supplier s product in a given geographic area They are evaluated under the rule of reason and are presumptively legal. Republic Tobacco Co. v. North Atlantic Trading Co., 381 F.3d 717, 736 (7th Cir. 2004) 39

40 Exclusive Distributorships Relevant factors include whether: the dealer or manufacturer has market power the geographic scope is unreasonably broad the duration is excessive the distributor has exclusive appointments from other suppliers the exclusive dealer is given veto power over new dealers the supplier and exclusive dealer are in substantial competition resulting in a horizontal allocation of markets there is a product shortage or a shortage of alternative sources of supply the arrangement is part of a broader restrictive scheme the product is patented 40

41 Location Clauses & Areas of Primary Responsibility Location clauses restrict the dealer to selling the supplier s products from a designated location Area of primary responsibility clauses provide that each dealer must sell the supplier s products primarily (but not necessarily entirely) within a specified geographic area In some cases, if the dealer fulfills its sales obligations (in quotas or dollar terms) in the primary region, it may sell products outside the primary region Generally upheld under rule of reason They might limit, but will not necessarily eliminate, intrabrand competition; thus, there is less cause to find these less restrictive agreements unreasonable restraints of trade 41

42 MAP Policies Under a MAP program, the manufacturer warns a dealer not to advertise the product below a specified price, but the dealer remains free to charge any price it wants once a customer walks in the door Suppliers sometimes enforce a minimum advertised price by refusing to share the cost of cooperative advertising with dealers who advertise at some lower price Suppliers sometimes enforce by terminating dealers who violate the policy 42

43 MAP Policies Not subject to Sherman Act 1 if unilateral Subject to rule of reason if there is an agreement Factors include the manufacturer s justification for the advertising policy the manufacturer s market share and market power with regards to each product to which the advertising program is applied the importance of price advertising to competition in the sale of such products the ability of dealers to convey price information to consumers by other means Internet MAP is perhaps the most difficult to assess 43

44 MAP Policies Federal Enforcement FTC Guides for Advertising Allowances Manufacturer s decision to condition availability of cooperative advertising funds on the dealer s use of the suggested retail price in advertisements paid for through the cooperative advertising funds should be analyzed under the rule of reason and deemed illegal only where it is shown to injure competition FTC consent orders with recorded music companies FTC alleged the agreements were implemented with the anticompetitive intent to limit retail price competition and to stabilize the retail prices in this industry By defining advertising broadly enough to include all in-store displays and signs, the policies effectively precluded retailers from communicating prices below MAP to their customers 44

45 MAP Policies State Enforcement MAP is an enforcement priority for NAAG, which regards minimum advertised price co-op advertising programs as per se illegal Some state Attorneys General will challenge if MAP is used to support an RPM policy Herman Miller involved MAP 45

46 MAP Policies Best Practices Ensure that cooperative advertising programs do not restrict the price actually charged by dealers to their customers Do not impose excessive penalties for minor or isolated violations Limit the definition of advertising so cooperative advertising programs do not prevent in-store promotion of discounted prices Ensure cooperative advertising programs do not prevent dealers from advertising discounted prices in advertising not paid for by the manufacturer Do not provide cooperative advertising contributions that exceed retailers actual promotional costs 46

47 Dual Distribution Arrangements A dual distribution system exists where a supplier markets its products both through its own outlets and through independent dealers The difficult issue with these agreements is how to characterize them Is the agreement a horizontal agreement between competitors because the supplier s own outlets compete with the independent dealers? Or is the agreement a vertical agreement between a supplier and a dealer? The trend is to consider these restraints to be vertical agreements and therefore subject to the rule of reason Some courts simply apply the rule of reason in analyzing these arrangements without characterizing the restraints as vertical or horizontal 47

48 RPM in Asia / China Adrian Emch adrian.emch@hoganlovells.com April 16, 2013

49 Introduction 49

50 Antitrust regimes in Asia Many new competition laws around the world in the past decade, including in Asia many antitrust regimes follow EU law In Asia, some are established regimes eg, Japan or Korea Others are more recent Singapore (2004) China (2008), India (2002+), Malaysia (2012) and Hong Kong (2013/4) Antitrust rules also exist in smaller jurisdictions 50

51 Antitrust regime in Malaysia Competition Act enacted in June 2010 effective from January 2012 Other pre-existing statutes with antitrust provisions Communications and Multimedia Act 1998 Energy Commission Act 2001 Malaysian Competition Commission (MyCC) is enforcement body 51

52 Antitrust regime in Singapore Competition Act enacted in October 2004, and effective from January 2005 Competition Commission of Singapore is main enforcement body Ministry of Trade and Industry, with some powers Sectoral regulators with antitrust oversight, such as MDA Variety of regulations, guidelines and case decisions on authority website 52

53 Antitrust regime in Taiwan Fair Trade Act enacted in 1991 effective from February 1992 amended five times, eg, in 2011 adoption of leniency program Combination of antitrust and unfair competition law Taiwanese Fair Trade Commission is main enforcer 53

54 Antitrust regime in Hong Kong Competition Ordinance passed in June 2012 staggered effectiveness, likely to be completed in 2014 Competition Commission and Tribunal being set up Guidance to be issued after bodies are operational Parallel jurisdiction for media sectoral regulator 54

55 Antitrust regime in China AML enacted in 2007, effective from August 2008 Prior to AML and now in parallel other statutes have antitrust provisions in particular, Anti-Unfair Competition Law and Price Law Three enforcement agencies, with different structures and priorities all of them issued AML implementing rules NDRC in charge of enforcement against RPM 55

56 RPM in Asia 56

57 RPM in Malaysia Competition Act 2010 explicitly mentions 'vertical agreements' as potentially anti-competitive if object or effect is to significantly restrict competition MyCC guidelines specifically list fixed and minimum price RPM but not clear if per se offense "In general, the MyCC will take a strong stance against minimum RPM and find it anti-competitive" not certain whether 25% safe harbor applies to RPM possibly, MyCC may challenge maximum and recommended RPM 57

58 RPM in Malaysia In theory, RPM could be justified for procompetitive effects In February 2013, MyCC rejects Nestlé application for exemption of scheme with RPM clause 58

59 RPM in Singapore Vertical restraints including RPM are generally excluded from the application of the Competition Act But Ministry of Trade and Industry may order that vertical agreement be subject to competition law if anti-competitive outweighs pro-competitive effect Applicable to RPM 59

60 RPM in Taiwan RPM in principle per se unlawful under Fair Trade Act no distinction between minimum, maximum and range of resale prices Recent fines for RPM in leisure sector TFTC reportedly submitted proposal to legislator to move RPM to 'rule of reason' analysis 60

61 RPM in Hong Kong 'First conduct rule' focused on cartel-like agreements Vertical agreements are subject to 'warning notice' system direct prosecution by Competition Commission not possible only upon non-compliance or repetition 61

62 RPM in China 62

63 RPM in China Fixing resale prices is prohibited Recommended and maximum resale prices not addressed in law RPM may be exempted based on nonexhaustive list of justifications In short, RPM seems subject to 'rule of reason' analysis 63

64 RPM in China (2) Johnson & Johnson case in 2012 indicates difficulties for plaintiffs to challenge RPM Shanghai court requires plaintiffs to prove that RPM practice actually harms competition Analysis of anti-competitive effects should include examination of market shares level of competition in upstream and downstream markets RPM's impact on supply quantity and price 64

65 RPM in China (3) NDRC local offices fine Maotai and Wuliangye RMB 247 / 202 million (around USD 40 / 32 million) combined, new record for antitrust violation in China Wuliangye's RPM policy held to be illegal intra-brand price competition eliminated inter-brand competition restricted ('bad example') consumer interests harmed, due to strong market position and low degree of substitutability Difficult to interpret, but case shows risks 65

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74 For any questions, please contact: Adrian Emch Tel:

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