Are Reseller Pricing Policies Even Legal?
In the previous two modules we took a deep dive into the details of the most commonly used reseller pricing policies—MAP and MRP. Now that you have a basic understanding of how those policies work, it’s time to learn the legal implications of drafting and enforcing them, so you’re able to control your products’ pricing across your resale channel without putting your company in jeopardy of violating price-fixing laws.
In this module, we’ll cover:
- The legal justifications for MAP and MRP policies
- Important legal standards and principles to understand
- An antitrust cheat sheet of key terms and concepts
- Legal pitfalls to avoid when drafting and enforcing MAP or MRP
- Best practices for keeping your reseller policy on the right side of the law
The Legal Justifications for MAP and MRP Policies
We discussed why Minimum Advertised Price (MAP) policies are typically deemed legal in our module on MAP, but here’s a quick refresher on the subject.
The primary legal justification for MAP policies
Antitrust regulators and courts tend to view MAP policies as legal (unless proven otherwise) because as their name suggests, these policies represent attempts by manufacturers or brands to establish only a minimum advertised price—not a minimum price at which a retailer may actually sell the product.
As long as a brand’s retail partners are free to sell the product for any price they choose, the courts have reasoned, a MAP policy would not constitute price fixing.
The primary legal justification for MRP (and UPP) policies
In many cases, government antitrust-law enforcers also legally allow policies that seek to control actual resale pricing (as opposed to only advertised pricing). Regulators might allow such policies based on a legal principle different from the one applied to MAP.
If these resale policies are drafted unilaterally—as opposed to two-way agreements—then regulators and the courts view them not as multiple parties conspiring to fix prices but instead as independent actors each exercising their own rights.
In other words, as long as both parties (manufacturer and reseller) are free to make unilateral and independent decisions—without negotiations, threats, agreements, or other types of collusion that could be deemed price fixing—a Minimum Resale Price (MRP) policy or Unilateral Price (UP) policy probably does not violate the law.
This legal reasoning dates back a century to the 1919 Supreme Court case US v. Colgate. (Some UP policies are today called Colgate Policies.) According to the ruling in that case, the court determined that as long as both manufacturers and resellers were free to act independently, such a policy would not violate price-fixing law. Here’s how they explained their thinking:
- The product manufacturer has a legal right to unilaterally determine which companies it will do business with, and under what circumstances.
- The reseller has a right to decide—also unilaterally—at what price it will advertise and sell products.
- If a reseller advertises or sells products below the prices written in the manufacturer’s unilateral policy, that manufacturer has the right to unilaterally refuse to continue doing business with that reseller.
The law is concerned with preventing price fixing and collusion among the parties in the supply chain bringing products to market. Using this logic, as long as a manufacturer drafts and enforces its pricing policy unilaterally, and as long as its resellers also act unilaterally (whether that means following the manufacturer’s guidelines or not), then the law will probably deem the policy itself as legal.
Important Legal Standards and Principles to Understand
When it comes to questions of legality about reseller pricing policies, you’ll often find lawyers, regulators, and brand protection experts referring to a few key legal standards. These are important principles to understand, because they should inform how your company drafts, discusses, and enforces whichever reseller pricing policy you choose to implement. So here’s a brief overview of the most relevant principles.
The Rule of Reason
To this point, we’ve discussed MAP and MRP policies only as one-way, or unilateral, statements. The manufacturer drafts its minimum-price guidelines in policy form and distributes the policy to its resale partners, and those resellers are free to abide by those guidelines or not.
But there is another way to implement a reseller-pricing program: as a two-way agreement signed by both manufacturer and reseller.
The courts had long viewed such agreements—often called Resale Price Maintenance (RPM) agreements—as illegal price fixing. In fact, they considered these agreements “per se” antitrust violations, meaning they were intrinsically against the law.
But more recently the courts have moved to the manufacturer-friendly legal standard known as the “rule of reason.” A 2007 Supreme Court case known as Leegin Creative Leather Products, Inc. v. PSKS, Inc.essentially overruled the century-old legal view that minimum price agreements were per se illegal, and decided instead that these cases should be subject to the rule of reason.
What this means is that the courts deem a practice under legal review—in this case, implementing a MAP, MRP or other resale price policy—as lawful unless it can be shown to be unreasonably anticompetitive. The legal standard for assessing that is to weigh the practice’s pro-competitive benefits and justifications against its anticompetitive effects.
The good news for manufacturers and brand owners is that, by applying the rule of reason to resale pricing agreements, in most cases (unless a complainant can show egregious anticompetitive effects) having such an agreement in place will not put a company in antitrust legal jeopardy.
Caution:It’s important to note, though, that although they are subject to the rule of reason, MRP agreements in particular are still considered per se illegal in several state jurisdictions. These include California, Illinois, Maryland, Michigan, and New York. Given that virtually any manufacturer or brand owner today might find its products reaching any jurisdiction, the antitrust experts advise structuring your reseller pricing policy as unilateral—not as a two-way agreement.
The “Independent Actors” Standard
As we pointed out above, the legality of a reseller pricing policy can sometimes rest on whether or not a regulator or court views the policy as recognizing two separate parties, each able to exercise its own rights.
In the 1919 Colgate case, the Supreme Court held that as long as such a policy remains unilateral—with both manufacturer and reseller free to make whatever business decisions they choose—that policy would be legal.
But even if you are crafting a MAP or MRP policy as a one-way statement to your resale channel—as opposed to trying to develop a two-way agreement—you still need to keep this “independent actors” standard in mind as you write your policy’s language.
This is because any clause or verbiage in your policy that could be construed as demanding adherence, or trying to coerce your resale partners, could turn your unilateral policy into an agreement in the eyes of the law. And that—while possibly still legal—will put your company under greater antitrust scrutiny.
An Antitrust Cheat Sheet of Key Terms and Concepts
Now let’s quickly review some of the important legal concepts you need to know about antitrust law.
Colgate
This refers to the 1919 Supreme Court case (US v. Colgate), in which the court determined that if a reseller policy were written unilaterally, and both parties were free to act as they choose, then the policy would be legal.
Today, Colgate is also sometimes used to describe a unilateral price policy itself—a Colgate policy.
Leegin
Leegin refers to the 2007 Supreme Court case (Leegin Creative Leather Products v. PSKS)that overturned the longstanding legal standard that resale price agreements are “per se” illegal and replaced it with the more relaxed “rule of reason” standard.
In practice, after the Leegin case, resale price agreements could withstand an antitrust legal challenge, as long as the court does not find the anticompetitive effects of the agreement outweigh its pro-competitive benefits.
“Independent Actors” standard
This is the legal standard arising out of the 1919 Colgate case, and it holds that as long as a resale pricing policy treats both parties—manufacturer and reseller—as independent actors, the policy does not constitute collusion, price fixing, or other violations of antitrust law.
“Per Se” Illegal
This is a legal standard that states an act or practice is deemed illegal on its face or intrinsically.
US federal law long held that minimum resale price agreements were per se violations of antitrust law. In other words, the mere fact that a manufacturer and reseller signed a contract agreeing on minimum resale prices for products meant that these companies were guilty of illegal price fixing.
The Leegin case in 2007, however, found that not all price agreements constituted antitrust violations and replaced the per se standard with the more manufacturer-friendly “rule of reason.”
“Rule of Reason”
This is a legal doctrine used to interpret the Sherman Antitrust Act, and it holds that a trade practice violates antitrust law only if it creates an unreasonable restraint of trade.
Legal Pitfalls to Avoid with Your MAP or MRP Policy
1. DON’T STRUCTURE YOUR POLICY AS A TWO-WAY AGREEMENT
Instead, structure your policy as a unilateral statement.
As we’ve pointed out above, the law does allow resale-pricing policies (both MAP and MRP) to be crafted as agreements that both manufacturer and reseller must sign. But the legal risk of an actual agreement is still far higher than if you publish your policy as a unilateral statement.
This advice goes for both MAP and MRP policies. MAP is less likely than MRP to be subject to antitrust scrutiny even in agreement form—because MAP reflects only advertised prices and therefore cannot be said to establish an agreement for actual resale pricing.
Still, to stay on the safe side, it’s best to structure even your MAP policy as a unilateral set of guidelines rather than an agreement.
2. DON’T CONFER WITH YOUR RESALE CHANNEL WHEN DEVELOPING YOUR POLICY
The legal language of the federal Sherman Antitrust Act (still in effect, amazingly, even though it was passed in 1890) deems illegal such practices as a “conspiracy in restraint of trade.”
And although the US Supreme Court has removed some of the law’s teeth—by ruling for example that not every restraint of trade is on its face illegal, only those that are unreasonable—regulators still have discretion as to what they deem a conspiracy.
The simple act of talking with your big retailers about where to set your MRP or MAP minimum prices before drafting your policy could be deemed a violation of antitrust law.
3. AVOID REFERENCING PRICING WHEN COMMUNICATING WITH RESELLERS WHO HAVE VIOLATED YOUR POLICY
When communicating with a retail partner that has violated your policy, do not describe the infraction as a “pricing” violation but rather as a violation of your “branding guidelines”—especially if you are communicating in writing.
This might sound like an academic legal point, but it could help an antitrust regulator or court to view your policy enforcement in a slightly more positive light. Here’s why.
When you refer in your message to a policy violator that they’ve disobeyed your “pricing” guidelines and will need to take the following steps to get back into your company’s good graces as a retailer in good standing, the law could perceive that as stepping very close to the line in establishing a pricing agreement. As we’ve been explaining throughout this module, that’s risky legal territory.
Much safer and smarter, then, to refer only to offenses against your MAP or MRP—even if they are clearly price-related—as “branding-guideline violations” or “violations of your retailer policy guidelines.”
4. DON’T ENFORCE YOUR POLICY INCONSISTENTLY
This might be one of the easiest traps for a manufacturer to fall into. It can happen completely innocently.
Imagine your company discovers one of your major retail partners is advertising your products below your MAP-approved prices—maybe for the second or third time. Your MAP policy is very clear on such violations: The first instance gets a warning, but the second triggers some penalty, maybe withholding inventory from the violator for a period of time. Your company already gave this retailer a warning, but when your in-house brand protection rep calls the retailer this time, the rep begs for forgiveness and promises never to do it again.
Now, if your colleague agrees, and lets this second violation go with a second warning, your company could have unknowingly committed an illegal act. By granting this type of favorable treatment to one retailer over another when it comes to enforcing your pricing policy, an antitrust court could view your behavior as price fixing or otherwise conspiring to restrain the trade of other retailers.
It might be completely innocent, just a matter of your brand protection rep not wanting to unduly punish a contrite retail partner. But you need to be careful, because it could still be illegal.
5. DON’T JUST GRAB A MAP TEMPLATE FROM THE INTERNET AND COPY IT
This is one of the most common mistakes manufacturers and brand owners make when rolling out their reseller pricing programs.
Some companies grab the wrong template to copy—a MAP policy, for example, when what their company needs is an MRP. Others include legal language inappropriate to their company’s specific situation, or even outright illegal, because they don’t know where the legal lines are (and neither did the company whose MAP template they copied).
Although you can find plenty of existing reseller policy documents online, and although a lot of the language in these policies might read like standard legal boilerplate, deploying a policy for your company requires a thorough understanding of both the legal and business nuances of attempting to influence the advertising and selling practices of your resale channel.