For more than 100 years the Supreme Court has consistently held that a business entity has the “unilateral” right to do business or not to do business with whomever it chooses and to establish the terms and conditions of its business relationships. This “unilateral right,” however, is qualified and its boundaries have been shaped over time by the antitrust laws. Today, the precise contours of this “unilateral right” and its proper exercise play an important role in the decision making in many business relationships, including the manufacturer-retailer relationship. With the rise of online retailing, manufacturers face significant challenges in controlling product distribution and supporting healthy retail partnerships. This column explores the ability of manufacturers to control retailers and retail pricing under the antitrust laws.
The “unilateral” right
Section 1 of the Sherman Act prohibits a “contract, combination … or conspiracy” that unreasonably restrains interstate trade or commerce. The trigger for a violation of Section 1 is the existence of “joint” conduct. A “contract, combination…or conspiracy” exists if there is proof of an “agreement” between two or more legally distinct entities. An “agreement” does not need to be written, but can be inferred from the conduct of the parties. The relationship between the parties matters. Horizontal agreements (between entities at the same level of distribution) as to price, supply and/or the presence of competitors are unlawful without more. Vertical agreements (between entities at different levels of distribution) as to price, supply and/or the presence of competitors are not automatically unlawful, but are subjected to an expensive, time-consuming balancing test to determine their lawfulness.
Because the existence of an “agreement” is a threshold issue under Section 1, courts distinguish “unilateral” from “joint” conduct. Rooted in English common law notions of “liberty rights” and “freedom of contract,” the Supreme Court in United States v. Colgate reiterated that businesses were free to unilaterally choose the parties with whom they did business and the terms and conditions of those relationships. Colgate is good law today, but it has been shaped by an ever-changing antitrust landscape. First, terminating an existing business relationship with a direct competitor will be carefully scrutinized. Second, terminating an existing business relationship by a dominant market-share holder that further enhances a dominant position will be carefully scrutinized. Third, the unilateral right to set prices must be in conformity with the Robinson-Patman Act (price discrimination) and each state’s antitrust laws.
Manufacturer’s control over retail prices
Because the antitrust laws consider price to be the “central nervous system” of our economy, the antitrust laws are highly sensitive to a manufacturer’s desire to control retail prices downstream. While retail price agreements implicate Section 1 of the Sherman Act and each state’s antitrust laws, manufacturers have employed several legitimate methods to unilaterally control retail prices.
1. Consignment arrangements. In consignment arrangements, the manufacturer does not sell its products to the retailer. Rather, the manufacturer (the consignor) consigns the products to the retailer (consignee) and retains all legal title to the goods. The retailer acts as the agent for the manufacturer. Because title to the goods never transfers, the concern of a price agreement between the consignor and consignee is eliminated. The consignor is merely controlling its own price.
2. Colgate retail price policies. Colgate retail price policies pertain to the control over retail selling prices. Assuming product title passes to the retailer, a manufacturer may rely on the Colgate doctrine to unilaterally control retail selling prices. Under a Colgate policy, the manufacturer may unilaterally:
- Select its retail partners
- Set all terms and conditions (including retail prices) in forming and amending its retail policy
- Announce, in advance, its policy and any amendments thereto to its retailers
- Unilaterally terminate, if it chooses, any non-compliant retailer.
The decision to formulate and implement a Colgate policy must be done independently. It is a take it or leave it policy.
3. Manufacturer’s suggested retail price (MSRP) policies. Manufacturer’s suggested retail prices (MSRP) pertain to the control over retail selling prices. Assuming product title passes to the retailer, a manufacturer may “suggest” retail selling prices to its retailers. Retailers are free to charge or ignore MSRP. A “suggestion” —without more—is not a price agreement. MSRP is frequently employed in brick and mortar retail stores as a method to advertise retail selling prices. Discounting off of MSRP is a frequent means by which retailers seek to increase in-store demand and decrease in-store supply. If the manufacturer seeks retailer compliance to MSRP, it must adopt a valid Colgate policy first.
4. Minimum advertised price (MAP) policies. Minimum advertised price (MAP) policies do not pertain to the control over retail selling prices. MAP policies pertain to retail advertised pricing. Assuming product title passes from the manufacturer to the retailer, manufacturers may rely on an MAP policy to control retailer advertised prices. MAP policies are on the rise due to an increase in online retailing. Because it is a stand-alone advertising policy, the manufacturer should contribute some or all of the costs associated therewith. In this way, the manufacturer’s contribution furnishes an independent basis to determine the precise terms of the arrangement. The manufacturer’s contribution may be comprised of cash and intellectual property (i.e., copyrights, trademarks, trade names, brands, images, product descriptions and likenesses).
Because of substantial cost differences between brick and mortar retailers (who furnish a physical location, shelf space, product education, trained staff and product return/exchange facilities) and online retailers (who bear none of those costs), online retailers are frequently accused of “free-riding.” Free-riding causes margin disparities which, in turn, create friction within the entire distribution system. Controlling online advertising has become a key focus for manufacturers. While MAP programs do not pertain to retail selling prices, to ensure the lowest level of risk to manufacturers, it is best to employ a MAP policy consistent with the Colgate doctrine. While MAP policies may be monitored by third parties, they should be enforced only by the manufacturer.