Understanding all of the judicial precedents and legal standards that courts and antitrust regulators use today to interpret reseller pricing policies can be difficult. But if you wade through all of the legal language and decades of relevant case law, you’ll find a common theme that isn’t difficult at all to understand:
If a manufacturer or brand acts in good faith with its policy and does not try to fix prices or favor one reseller over another, that company will likely remain on the right side of the law.
This is because most of the laws and legal standards that relate to reseller pricing policies take the manufacturer-friendly viewpoint that unless a seller or regulator can prove a manufacturer is intentionally behaving in a way that is unfair to certain resellers or end-user customers, that company should not be deemed to be violating antitrust laws.
There are several exceptions to this, however. Manufacturers can inadvertently step over the line into “price-fixing,” “restraint of trade,” and other legal violations if they’re not careful in how they draft, implement, and enforce their reseller pricing policies. We’ll discuss those exceptions below.
But we want to begin this module on a reassuring note: If you follow the guidelines and best practices we’re laying out in this course, and avoid the legal pitfalls we’ve described, you can be confident that your company’s reseller pricing policy will stand up to legal challenges.
So, before we delve into the details of how the law affects reseller pricing policies, let’s briefly review the broad steps you can take when drafting and managing your policy to keep your company on the right side of the antitrust legal line.
5 Steps to Significantly Reduce the Chances Your Policy Will Result in Legal Troubles
1. Put the policy in writing.
The first step to clearing the antitrust hurdle is to draft and publish your reseller pricing policy, as opposed to simply verbally telling your retail channel what minimum advertised or resale prices you’ll allow for your products. A written policy will put your company on more solid legal footing in several ways. For example:
- You’ll be able to prove you’ve developed a policy and shared it with your resellers.
- You can reduce the chances that various individuals or departments in your company will enforce the policy differently at different times, or with different sellers, which could raise antitrust red flags.
- You can reduce the chances that an employee will respond to a reseller’s request by making an ad-hoc exception to your pricing policy, which could turn the policy into a de facto “agreement”—and a violation of antitrust law.
2. Draft the policy as a unilateral statement, not an agreement.
This principle is based on a 1919 Supreme Court case referred to as a “Colgate ruling.” You might hear reseller pricing policies referred to as “Colgate policies,” a term that comes from this case.
In this landmark antitrust ruling, the Supreme Court concluded that if both the manufacturer and reseller are “independent actors” free to make their own pricing decisions, then such a pricing policy would be entirely legal. And clearly, this would require the policy to be drafted as a one-way statement of the manufacturer’s goals and wishes—not as an agreement that bound both parties.
The Court’s reasoning worked like this: A manufacturer is free to establish reseller guidelines for pricing its products, and to let all retail partners know about those prices and the consequences for violating them. Each reseller is then free to make its own decisions about whether to follow those price guidelines or violate them and face the consequences. As long as both parties maintain that “independent actor” status—as long as they haven’t reached an agreement about setting prices—these unilateral policies will be legal.
Note: The law leaves more wiggle room for MAP than it does for MRP because a MAP policy by definition addresses only advertised prices, never the actual sale price. But creating a MAP policy built on a two-way agreement that you ask your resellers to sign could still put you at greater risk of antitrust scrutiny. So, 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.
3. Avoid discussing your pricing guidelines with resellers.
This guideline is more of a best practice, so think of it as a strong recommendation rather than an outright legal necessity. The law actually does allow manufacturers to speak with resale partners about the pricing minimums in their policies.
But a court or regulator could later determine that these discussions were illegal if they meet one of two standards for an antitrust violation:
- The manufacturer threatened the reseller about its discounted pricing.
or…
- The manufacturer and reseller reached an agreement about minimum pricing plans going forward.
It’s worth noting here that federal law is less strict when it comes to scrutinizing these manufacturer-reseller conversations than certain states’ laws—specifically California, New York, Illinois, Michigan, and Maryland. But if your company sells online, and any of your end-user customers or competitors are located in any of these states, your company could still face a challenge in these manufacturer-unfriendly legal jurisdictions.
This is why we regard it as a best practice to take the more defensive approach of discussing your pricing minimums with resellers as little as possible.
4. Make sure your policy treats all “competing” resellers consistently.
A basic requirement of keeping any reseller pricing policy is that the manufacturer enforces the policy consistently. But this leads to a common misconception.
In reality, manufacturers do not have to establish and enforce identical rules for all of their resellers—they must be consistent only with all resellers whose operations are substantially similar—or as the law describes it, “competing” resellers.
We’ll discuss this in more detail below, but the relevant law here is the Robinson-Patman Act, which was designed to prevent a manufacturer from favoring their larger retail partners at the expense of smaller, local sellers.
There are exceptions to this rule, but the general guideline works as follows. If you’re selling inventory to retailers who could be in direct competition with each other—and this would include two online sellers, regardless of where they’re located—you’ll need to treat those partners consistently.
If you’re selling to a bricks-and-mortar store and a pure-eCommerce company, however, you can offer discounts, rebates, incentives, and other types of support that only the physical store owner can take advantage of—and this would not be deemed an antitrust violation.
5. Implement a consistent plan for handling all reseller requests for exceptions.
One final best practice, which could dramatically reduce the chances of inadvertently tripping over the antitrust line, is to funnel your company’s communications regarding your pricing policy to a single point of contact.
You might call this person your MAP or MRP Administrator, your Director of Brand Protection, or some variation. But regardless of the title, part of this person’s job will be to field all inquiries, requests, suggestions, and complaints about your reseller pricing policy—to make sure you have an in-house expert ready to handle every reseller interaction regarding your policy, and that you’re answering consistently and within the boundaries of the policy every time.
What Current Law Says About Reseller Pricing Policies
It’s important to understand that antitrust-related laws are subjective, they’re open to different interpretations from one legal jurisdiction to the next, and they can and do change. What this means is that no manufacturer can ever be 100% certain that the reseller pricing policy it drafts and enforces will withstand any legal challenge.
But as we stated in the intro, this course module’s overall message is positive for a manufacturer trying to develop a reseller policy that will be fair and beneficial to its entire resale network. The bottom line is that antitrust laws aren’t filled with traps and secret pitfalls that manufacturers acting in good faith need to worry could ruin their businesses.
Let’s review how the US Supreme Court’s current interpretation of resale pricing law affects the most common types of policies—and discuss what it all means for your business.
1. MAP and MRP pricing agreements
In the 2007 Leegin case, the Supreme Court overturned its longstanding “per se illegal” rule regarding resale price agreements and substituted the more relaxed and manufacturer-friendly legal standard known as the “rule of reason.”
Let’s unpack those terms:
Per se illegal: An act that is illegal on its face.
Rule of reason: A trade practice that violates the Sherman Antitrust Act only if that practice can be proven to be an unreasonable restraint of trade, based on economic factors.
In other words, by transitioning from the “per se” standard to “rule of reason,” the Court now applies the following legal interpretation to antitrust matters: If a manufacturer and its resellers agree on minimum allowed advertised or even resale prices, this practice will be deemed lawful unless it can be demonstrated that the anti-competitive effects of the agreement outweigh the pro-competitive benefits.
What this means for your business:
Legally speaking, this means the typical MAP agreement, and even some MRP agreements, could withstand an antitrust challenge. But in practice, any agreement that establishes products’ actual sales prices will be at higher risk of scrutiny for price-fixing than a policy agreement that is limited only to advertised prices. With that in mind, a MAP agreement would be safer legally than would an MRP agreement, although each would be riskier to implement than a unilateral policy.
2. MAP and MRP unilateral policies
Following the Colgate ruling we discussed earlier, all US jurisdictions (federal and state) consider unilateral reseller pricing policies to be fully lawful. This is equally true of MAP and MRP policies.
In fact, because these policies are one-way statements—giving both manufacturer and reseller freedom to make their own decisions as “independent actors”—the law does not deem unilateral policies subject to either the rule of reason or the tougher scrutiny under the law of certain states.
What this means for your business:
Because of their insulation from antitrust risks, the best practice for manufacturers is to draft and enforce a unilateral policy—particularly for MRP but for MAP pricing programs as well.
An important exception to the “agreement vs. unilateral policy” guideline
So far, we’ve pointed out the added legal insulation you’ll gain by structuring your reseller policies as one-way statements rather than agreements. That is the case whether you’re planning to draft a MAP, MRP, or UP policy. When it comes to establishing pricing guidelines for your retail partners, you want to maintain the “independent actor” status for both your business and your resellers. That keeps the policy on the right side of the legal line.
But there is one key exception to this rule: your Authorized Dealer Program (ADP) can and should be written as a two-way agreement that every dealer must sign. This is because your ADP agreement will not be about pricing minimums specifically—but about your retail partners agreeing to abide by your other guidelines.
Authorized Dealer Program best practice:
But to avoid the risk of inadvertently raising an antitrust red flag, you’ll want to include a clause in your Authorized Dealer Agreement to the effect of:
Nothing in this agreement bounds the Dealer to abiding by the Company’s reseller pricing policy. That is a unilateral policy and the Dealer is free to follow or ignore those pricing guidelines.
This will protect your company from accidentally turning your one-way pricing policy into a de facto two-way agreement, by making your Dealer sign a contract stating they’ll follow all of your company’s guidelines—which would include your reseller pricing policy.
The Law Is on the Side of Brands Acting in Good Faith
While there can never be a guarantee that a frustrated reseller won’t bring an antitrust suit against your company, or that the jurisdiction’s regulators won’t pursue the charge, it’s worth keeping in mind that the standards regarding these laws have become more relaxed over time.
As one example, consider this statement in the Justice Department’s Antitrust Resource Manual: “Virtually all antitrust offenses likely to be prosecuted by a United States Attorney’s office will be governed by the per se rule.”
In other words, federal antitrust prosecutors are looking to punish clear and intentional violations of the law—price-fixing conspiracies, for example, and other overt conspiracies to harm the interests of one segment of resellers or customers to unfairly benefit another.
Of course, it’s also important to keep in mind that some state regulators have stricter rules in place. With most brands now operating at least partially online, that means you should follow this best practice:
Always design your reseller pricing policy to meet the legal standards of the most manufacturer-unfriendly jurisdiction where your products could eventually be sold.
When Can’t You Treat Different Resellers Differently?
As we noted above, the federal antitrust law known as the Robinson-Patman Act was designed primarily to protect smaller resellers from their larger (and presumably more powerful) competitors.
The law was written before the Internet era, when people did their shopping by visiting physical stores. The stated goal of the Act was to prevent a large reseller—say, a regional or even national department store chain with dozens of locations—from gaining an unfair edge in pricing or promotional allowances from a manufacturer that would allow it to undersell the smaller, local shops it was competing with.
Although today the Internet has largely leveled the playing field even for smaller retailers, this law is still in effect, which means manufacturers are still legally barred from engaging in the following types of price and promotional discrimination among their resellers.
1. When you’re selling the same inventory to competing resellers (“competitive injury”).
Before you worry that you’re violating antitrust law by treating one company in your distribution channel differently from others, you first need to ask yourself if these companies are in direct competition with each other. If not, then you’re probably on solid legal footing.
Here’s a key clause in the FTC’s summary of the law:
“The seller must allow all types of competing customers to receive the services and allowances involved in a particular plan or provide some other reasonable means of participation for those who cannot use the basic plan.”
Let’s say you are selling both to brick-and-mortar store owners and online-only retailers. And let’s say you want to offer discounts or promotions for any retail partner that places a large display of your products in its stores, or if the retailer requires its in-store sales reps to view your product training videos.
An e-tailer does not have the ability to offer your brand these services, but they would if they had a physical store. In this sense, as long as you offer these promotions or discounts to all of your resale partners, you will be on solid footing to offer promotional consideration to the physical store owners who take advantage of them.
2. When you’re selling products that are of “like grade and quality.”
Another way to step over the line into Robinson-Patman violation territory is if you are selling inventory that is “like grade and quality” to different competing resellers using different terms.
If you are not actually selling the same inventory to competitive resellers—but instead a higher-end or more expensive version of a product to some resellers than to others—then you are also on solid legal footing. But you cannot sell identical products, or products of like grade and quality, using different terms to competing resellers (with a couple of exceptions listed below).
What this means to your business:
The Robinson-Patman Act is the federal government’s attempt to prevent intra-brand discrimination—where a manufacturer or brand gives an unfair advantage to one wholesale partner over its competitors, or to one retailer in its channel over its competitors, which could result in harming those businesses that do not receive the same treatment.
But even if you are treating different resellers differently, there are legal defenses built into the Robinson-Patman Act to protect your business. Let’s discuss those.
When Can You Treat Different Resellers Differently?
Here are the two primary exceptions to rules against reseller price and promotional discrimination written into the Robinson-Patman Act.
1. “The price concession is given in good faith to meet a competitor’s price.”
Imagine a manufacturer were selling “like grade and quality” inventory at the same prices to all of its retailers across the country, when another manufacturer entered the market in one specific city or region and was able to sell similar products to retailers in that region for 20% less.
The manufacturer could be within its rights to lower its prices to retailers (or to give them other promotional concessions) in that one geographical area—while not offering the same discounts to its other retail partners elsewhere in the country. Here’s the legal reasoning: The manufacturer is treating specific retail partners differently from the rest of its channel because they are facing a unique competitive situation in that region.
2. “The price difference is justified by different costs in manufacture, sale, or delivery.”
Like the previous exception, this one applies whenever a manufacturer has to treat resellers differently because of the differences in costs to work with certain types of retail partners versus others.
For example, one reseller might agree to purchase a year’s worth of a manufacturer’s inventory upfront. This would obviously create costs for that reseller: warehousing, handling, inventory management, etc. As a result, the manufacturer might be within its rights under the Robinson-Patman Act’s “Cost Justification” defense to offer this partner different pricing or other allowances than it offers the rest of its channel.
What this means to your business:
If you can demonstrate that there are material differences between one group of your resale partners versus the others, and you can establish a good-faith case that you are not intentionally trying to undermine or unfairly benefit one partner over its competitors, you might have a solid defense against any Robinson-Patman legal action.
Time to see how much you’ve learned about the legal implications of reseller pricing policies.