New York Attorney General Andrew Cuomo recently brought suit against Tempur-Pedic, the maker of luxury foam mattresses, for conduct that allegedly amounts to vertical price-fixing. The state’s complaint alleges that Tempur-Pedic secured agreements from its retailers to prohibit any discounting of the mattresses by means of its imposition of a draconian Minimum Advertised Price (“MAP”) policy. The lawsuit represents the latest effort by state officials to combat practices that are arguably allowed under federal law.

The Growing Popularity of Resale Price Maintenance Policies

As the economy has struggled, and discounters have proliferated, makers of high-end consumer products have sought to discourage unrestrained discounting of their products. Such discounters may free-ride off the work of brand-name retailers that provide extensive marketing, sales, and service support for the products that discounters often cannot match. The classic example of this problem in action is the consumer who shops brand-name electronics at a major retailer, taking time to compare features and ask questions of sales staff, who then exits the store to buy the same product online through a discounter. A common strategy to combat this is for the manufacturer to impose a MAP policy, under which the manufacturer unilaterally suggests a retail price coupled with a refusal to deal with any authorized reseller who advertises prices lower than the manufacturer’s suggested price or who sells the product for resale.

MAP policies have enjoyed a resurgence thanks to a landmark 2007 decision of the United States Supreme Court. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007). In Leegin the Court overturned nearly a century of antitrust precedent when it held that Resale Price Maintenance (“RPM”) agreements between manufacturers and retailers about what price to charge are no longer considered per se illegal under federal antitrust law, but should instead be analyzed under the so-called “rule of reason.” The decision gave additional breathing room to manufacturers concerned about whether a MAP policy created the appearance of collusion with retailers to fix prices. Under the rule of reason analysis articulated in Leegin, the plaintiff bears the burden of showing that the RPM agreement or MAP policy, as implemented, has harmed or is likely to harm competition. The Court held that, when reviewing the manufacturer’s actions under the rule of reason analysis, courts should attempt to determine whether a given RPM agreement would stimulate or harm competition by looking at such factors as the history of the restraint, the nature of the restraint, and whether the businesses involved have market power, among other factors, rather than focusing only on the presence of an agreement or the appearance of collusion.

Nevertheless, by doing away with the per se illegality rule in this context, the Leegin decision greatly hindered the Federal Trade Commission enforcement program, which has been reflected in a dearth of federal RPM cases in the last two years. The decision was broadly unpopular in the states, as well as with Congress, which have characterized it as harming consumers by permitting manufacturers to adopt policies that artificially inflate prices. Maryland has passed legislation to ban the practice, and other states are considering doing the same. Congress has also been moving a bill that would legislatively overrule the Leegin case.1

The New York Tempur-Pedic Complaint

As these statutory “fixes” wind their way through the state and federal legislatures, state attorneys general are looking at aggressive enforcement under existing state laws to rein in abusive RPM-related practices. New York’s challenge to Tempur-Pedic’s Retail Price Policy is the most recent example.

The New York Complaint (“Complaint”), filed at the end of March 2010, attacks the Retail Price Policy and implementation practices of premium mattress manufacturer, Tempur-Pedic. According to the Complaint, through its unilaterally adopted “Retail Price Policy,” Tempur-Pedic engaged in price fixing, prohibited by New York law. The Complaint seeks injunctive relief, restitution, and disgorgement of all profits that Tempur-Pedic received due to its anti-discounting policies.

The core allegations are founded on N.Y. Gen. Bus. Law § 369(a), which states that “[a]ny contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable or actionable at law.” While the language appears on its face to say that such “contract” provisions are not “enforceable,” Attorney General Cuomo takes the position that the law affirmatively bans RPM agreements between a manufacturer and seller. In the state’s view, violation of this ban gives rise to liability for statutory penalties.

According to the Complaint and accompanying filings, Tempur-Pedic’s Retail Price Policy contains a litany of provisions that reflect a comprehensive choking off of any ability by Tempur-Pedic retailers to provide any consumer incentive or discount on the mattress. Practices banned under the Policy allegedly include providing discounts such as “free gifts with purchase” valued over $100, offering no sales tax, and providing gift cards, coupons, rebates, or in-store credits and cash equivalent offers that could be applied to Tempur-Pedic products. The Policy also allegedly banned offers of money back in return for old bedding (i.e., “Trade-in Sales”) and offers of free mattress foundations.

The Complaint alleges that not only did Tempur-Pedic aggressively police retailers to ensure compliance with its policy, it actively encouraged a posse of its retailers to report on violators. It would stop doing business with any retailer found in willful violation of the policy.

Thus, the Complaint alleges, while retailers did not formally “agree” or “contract” to refrain from discounting, they all knew that any attempt to discount would be the end of their business with Tempur-Pedic, thus creating a de facto agreement.

Implications of Tempur-Pedic Case for the Permissibility of MAP Policies

Although the Leegin case has hindered federal administrative enforcement regarding resale price maintenance, it has been met with fierce opposition from more than half of the nation’s attorneys general (including the New York Attorney General), state legislatures, and Congress, causing substantial uncertainty regarding the contours of permissible vertical RPM.

Even RPM policies that comply in writing with state and federal law can give rise to antitrust liability if implemented improperly. New York’s complaint against Tempur-Pedic alleges that the company policy, along with its draconian enforcement practices, together constituted a de facto price-fixing “agreement,” rather than a permissible, unilaterally imposed RPM policy. Not only did Tempur-Pedic’s Retail Price Policy drastically restrict discounting, giving retailers little flexibility with respect to pricing and free offers, both Tempur-Pedic and its retailers assiduously monitored compliance with the policy, turning what was a unilateral policy into a de facto agreement not to deviate from prescribed minimum prices.

Why it matters: There are several key lessons from this case for manufacturers and retailers. First, compliance with state laws in the area of RPM policies is as important as compliance with federal law. The states will be aggressively policing the issue and looking for high-profile targets. Second, RPM policies must provide some degree of flexibility for discounting or other consumer incentives. Highly restrictive policies that ban all discounting are likely to run into trouble. Third, manufacturers should take care not to enter into “agreements” with retailers, whether by contract or by course of conduct, that definitively set minimum resale prices. Fourth, policies should be uniform in application and even-handedly administered. Special exceptions for some retailers but not others can create additional risks.