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Resale Price Maintenance Remains Per Se Illegal In California

By Jason Hicks, Esq.

The California Attorney General announced a settlement agreement that prohibits a cosmetics company from agreeing with its retailers not to sell its products online at prices below the MSRP. In a stipulated court judgment, Bioelements agreed to permanently refrain from fixing resale prices and pay $51,000 in penalties and attorney fees.

Bioelements markets a line of beauty-care products it claims have quasi-medical properties such as reducing wrinkles. Products such as this -- also known as "cosmesceuticals" because they supposedly merge the attributes of cosmetics and pharmaceuticals -- are sometimes the target of investigations by state and federal regulators for overstating their medical benefits. This time, however, the California Attorney General brought suit against Bioelements for vertical price fixing -- also known as resale price maintenance ("RPM").

RPM used to be per se illegal under federal antitrust laws, until the Supreme Court's decision in Leegin Creative Leather v. PSKS. In that case, the Supreme Court held that a manufacturer may reach an agreement with its retailers as to minimum resale price without automatically violating federal antitrust laws. Instead of being per se illegal, such agreements are analyzed under the rule of reason -- a fact specific inquiry that balances the anticompetitive effects and procompetitive benefits of a particular restraint. At the time the Leegin decision was said to have opened the door for all sorts of vertical price fixing agreements between manufacturers and retailers. Such has not been the case, however, because certain states, such as California and New York, have threatened to prosecute such arrangements under state antitrust laws. RPM agreements may still be per se illegal under state antitrust law, even if such agreements are not per se illegal under federal law.

This is what happened in the Bioelements case. The California Attorney General's complaint alleges that Bioelements entered into dozens of "Internet Only Accounts Agreements" with third party companies for the distribution and sale of its products over the Internet. These contracts stated that "Accounts are prohibited from charging more or less than the Manufacturer's Suggested Retail Price (MSRP)."

The Attorney General's press release stated: "Bioelements operated a blatant price fixing scheme by requiring online retailers to sell its products at high prices.... Price manipulation harms consumers, competition and our business community." The United States Supreme Court, however, would disagree with this assertion because in Leegin the Court held that RPM is not always anticompetitive and can have procompetitive benefits. The United States Supreme Court, however, does not have the last say when it comes to interpreting state antitrust law.

Although Bioelements' distribution agreement referred to "MSRP," it was not a lawful Colgate policy. Instead of merely suggesting prices and unilaterally terminating discounting retailers, Bioelements made its retailers "agree" not to sell below MSRP. Thus, the agreement went beyond a unilateral Colgate policy.

Given that Bioelements sells products -- cosmesceuticals -- that are sometimes the target of false advertising investigations, it would not be surprising if the Attorney General discovered the price fixing agreements while investigating false advertising claims. It would be unwise, however, to presume that the Attorney General will only bring vertical price-fixing claims against companies she suspects of false advertising. Since Leegin, regulators have investigated or brought claims against several respected manufacturers -- such as Herman Miller and Toys-R-Us -- for vertical price fixing.

For more information on how to structure pricing and distribution policies that do not violate state and federal antitrust law, contact Jason Hicks or Mark Poovey.

Full post as published by Antitrust and Distribution Law Blog on January 14, 2011 (boomark / email).