On January 14, 2011 the New York Supreme Court issued its eagerly anticipated resale price maintenance (RPM) decision in a case filed by the New York Attorney General’s Office (AG) against the mattress manufacturer Tempur-Pedic. The New York court struck a blow to the AG’s often-repeated and forceful position that New York law barred automatically any and all minimum resale price agreements.

The AG claimed that Tempur-Pedic entered into RPM agreements that required retailers to charge prices dictated by the mattress manufacturer. The AG’s complaint does not include claims under the federal antitrust statute – the Sherman Act – or under New York’s antitrust statute – the Donnelly Act. Specifically, the case challenged Tempur-Pedic’s resale price policy and its separate minimum advertised price policy, under Section 369-a of the New York General Business Law and Section 63(12) of the New York Executive Law. Section 369-a makes unenforceable “any contract provision that purports to restrain a vendee of a commodity from reselling ... at less than the price stipulated by the vendor or producer.”

It is likely that the AG did not bring a federal antitrust claim because of earlier unsuccessful federal private litigation in the 11th Circuit challenging Tempur-Pedic’s resale pricing practices and because of Leegin Creative Leather Products, Inc. v. PSKS, Inc., 552 U.S. 877 (2007). As a quick refresher, in Leegin the U.S. Supreme Court decided that, under the Sherman Act, RPM was no longer automatically illegal and that instead courts would conduct a balancing test of the pro-competitive and anti-competitive effects of any challenged RPM arrangement.

The complaint alleged that Tempur-Pedic’s Retail Partner Agreements with its authorized retailers prohibited discounting, offering free gifts with purchases, rebates, coupons, free gift cards, or other in-store credit. The AG alleged that Tempur-Pedic sent letters to its accounts stating the company would “not do business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic” and that the retailers monitored the prices of their competitors and reported prices below the manufacturer’s suggested price to Tempur-Pedic.

The AG argued, as it did in its numerous earlier public comments, that Section 369-a, which applies to contracts or agreements, does more than simply make RPM provisions unenforceable. Instead, it affirmatively “provides that a vendor or producer cannot set a minimum price at which its product can be resold.” Plus, the AG argued that the Uniform Commercial Code’s definition of a “contract” governs whether a contract exists under Section 369-a. Under this theory, the AG could base its claims against Tempur-Pedic on the company’s course of dealings with its retailers to prove the existence of an agreement.1

The New York court rejected the AG’s arguments and held that New York law does not prevent a vendor from insisting that retailers use the prices specified by the vendor or otherwise restrain the reseller’s right to discount the resale price. The court concluded that RPM does not constitute “an illegal act” and that the text of the statute itself clearly did not bar all RPM. Because the court found that the language of the statute was clear, it refused to consider the title of the statute – “Price Fixing Prohibited” – or look any more deeply into the intent of the New York legislature. The court stated “[t]here is no ambiguity in the text of General Business Law §369-a. Contracts for resale price restraints are unenforceable and not actionable, but not illegal.”

The court also rejected the AG’s arguments that Tempur-Pedic’s advertised price agreement violated Section 369-a. The court noted that the advertised policy did not prohibit discounts, rebates, promotional items or coupons; instead the policy only barred the advertisement of these types of promotions “in conjunction with Tempur-Pedic products.” Although Tempur-Pedic’s advertised pricing program was part of a contract with its retailers (not a unilateral policy), the court found the advertising restriction was not a retail price agreement. Thus, because the advertised price policy did not actually bar discounting, the court found that it could not be illegal under Section 369-a.

On the same day as the Tempur-Pedic decision, California’s Office of the Attorney General announced that it settled a dispute with a Colorado cosmetics company that prohibited retailers from selling its products over the Internet at a discount. California alleged that Bioelements’ president lives and works in California and that since 2009, Bioelements contracted with dozens of resellers requiring them to sell Bioelements products online for at least the manufacturer’s suggested retail price. Under its settlement with California, Bioelements must pay $51,000 in civil penalties and attorney fees as well as refrain from fixing resale prices and inform its distributors the contracts at issue are void. In February 2010, California entered into a similar settlement with another cosmetics company, DermaQuest, Inc.

Despite the passage of more than three years since the Supreme Court’s decision, it is unclear what effect Leegin will have, particularly on state antitrust laws and the cases filed alleging claims under those laws. While many states try to interpret their antitrust laws in conformity with federal law, some states specifically prohibit RPM agreements. Furthermore, there is pending federal legislation to overrule Leegin as a misinterpretation of the Sherman Act.