Retailers, know your anti-trust law
August 10, 2010
Manufacturers now have more options in protecting "Main Street" retailers against large chains or Internet retailers, but only if extreme caution is employed, said a panel of attorneys at an Outdoor Retailer workshop on Wednesday.
The panel was an instructional presentation hosted by Summer Market organizers for show attendees at The Downtown Marriott in Salt Lake City.
In 2007, the Supreme Court ruled on a case that has become known as "Leegin" after the name of the defendants. In the case, the court ended over 100 years of legal precedent saying vertical agreements between manufacturers and retailers to fix minimum product prices was illegal.
Moving forward, the court decides whether such vertical agreements are illegal based on the "rule of reason," explained Kansas attorney Bob Coykendall. What that means is slightly ambiguous.
Parties are likely safe if there is no agreement to set minimum retail prices and an argument can be made that a policy increases, not hinders, competition in the marketplace, he said.
For example, if a manufacturer unilaterally demands a minimum retail price for its products without requiring consensus, it’s likely OK under a precedent known as "Colgate" after a 1919 decision, explained panelist John Eklund from Ohio.
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The new rule benefits manufacturers because it gives them more freedom in its dealings with retailers. Previously, every termination of a relationship with a buyer was a potential lawsuit, he added.
Panelist Mark Ostrau from California said minimum retail price policies are still illegal if pushed by a group of retailers, if a dominant retailer (like Cabela’s) forces it upon a manufacturer, a dominant manufacturer forces it upon retailers, if arguments cannot be made that the policy protects competition, or if most manufacturers within a product market all have Colgate Policies (which appears suspicious to a court), he said.
But a manufacturer needs a better explanation for having a minimum retail price policy than higher profits, Eklund said.
"The law protects consumers from policies that reduce competition and keep prices higher," he said.
It’s appropriate to implement policies that prevent retailers from low-balling your best customers and putting them out of business, but it’s not legal to prevent lower prices, he added.
Companies may not do anything to request agreement from other companies about minimum retail prices, and no form of punishment or coercion can be put on companies that do not comply, he said.
For example, if a retailer is no longer permitted to carry a certain brand because it violated a Colgate Policy, it cannot apologize and be forgiven at least not for a long period of time, he explained.
That means that while Colgate Policies appear an easy way out of the legal quagmire, a manufacturer must be willing to enforce them against its biggest and best buyers for it to be legal, Eklund said.
"You must be willing to cut them off long enough that it hurts you both," Ostrau added.
"Think hard about if a Colgate is right for you. It must be applied without exceptions," Eklund said.
But under Leegin, forbidding goods from being advertised under a certain price before a certain date is legal. Adjusting those advertising restrictions for different types of retailers is also legal.
That kind of activity can hamper Internet retailers in favor of protecting "Main Street" without dictating what items are actually sold for, he explained.
Panelist Tracy Ashmore from Denver added that such efforts to protect family-run retailers can also be used in marketing the same way sustainable practices or charitable contributions are used by companies in positive marketing.
A major complaint of small stores against Internet-based retailers, is that stores provide the customer with education and services to help them make purchasing decisions, but the customer then goes home and buys the product online for less, Eklund said.
One way to combat this is for manufacturers to offer incentives to store employees to learn about the products so store owners are not investing resources into training that doesn’t aid their bottom line, Ostrau suggested.
It should also be remembered post-Leegin that some states still forbid vertical agreements of any kind and the rule applies where the consumer makes their purchase. That means more freedom is still not to be had in some states, explained panelist Rafferty Jackson with VF Outdoor, Inc.
Backcountry.com is one of the nation’s largest Internet retailers of outdoor gear and is headquartered at Redstone Village. Spokesperson Marit Fischer said her company usually benefits from honoring minimum price requests made by manufacturers.
She said most vendors "do not hesitate to pull their inventory" from Internet retailers not honoring the requests. In that way, her company is held to the same standards as brick-and-mortar stores, she said.
Two of the three business models Backcountry.com employs involves selling aged inventory on closeout so minimum price demands are not applicable. When they are, Fischer said her company sees the benefit.
"It’s important to us to protect the integrity of the brands we work with, and to keep solid, trustworthy relationships with them. Court decision aside, we will continue to work directly with our vendors to ensure brand integrity," she said.
The suggested retail price also gives flexibility in pricing while allowing healthy profit margins, she added.
Fischer also pointed out that Park City has several vibrant specialty stores including Jans, Cole Sport and White Pine Touring.