Can a manufacturer prohibit retailers and distributors from discounting its goods? Before 2007, the answer was “no;” however, the law changed radically in 2007, when the U.S Supreme Court overturned almost 100 years of precedent and ruled in Leegin Creative Leather Products, Inc v. PSKS Inc. that minimum resale price (MRP) plans are not automatically illegal under the antitrust laws. If a MRP plan promotes competition, the MRP plan can be legal.
How can a policy that prohibits discounted sales promote competition? Manufacturers argue that the MRP policy enables them to offer better service to consumers, as opposed to the minimal service offered by discounters who take a “free ride” on the brand’s reputation. For example, a consumer can learn about the benefits of a product from a retailer that invests in showrooms, offers product demonstrations and hires knowledgeable employees. In contrast, the discounter offers little, if any, of these extras. Manufacturers fear that the consumer will learn about the product from the authorized retailer, and then will buy from the discounter. This can cause high-service retailers to go out of business. MRP plans, therefore, give consumers more options so they can choose between low-price low-service brands, high-price high-service brands, and those that fall in between.
The new rule announced by Leegin is that a plan can be lawful if its pro-competitive benefits outweigh the anti-competitive harms. This means that manufacturers must carefully analyze their market to determine the lawfulness of a proposed MRP plan. They should consult with their attorneys before undertaking any MRP plan.
It is not always just manufacturers that drive the creation of a MRP plan. In fact, a manufacturer may not oppose discounting of its product by retailers, as long as the manufacturer receives its full wholesale price. The greater concern is when the MRP plan results from retailer pressure. Dominant retailers may oppose price competition from discount or internet retailers and can compel a manufacturer to institute a MRP plan. This pressure may be deemed anti-competitive and will not be protected by the Leegin decision.
After Leegin, some manufactures began to ban discounted sales by eBay, Amazon and others. Discounters complained that Leegin was hurting their businesses. Consequently, there was sentiment to change the Leegin decision. Several bills were introduced in Congress to restore the illegality of MRP plans. Action on those bills is pending.
Some state governments have also been active in their opposition to Leegin. Each state has its own antitrust laws. California and New York announced that their state antitrust laws would not be bound by the Leegin decision and filed suit against manufacturers who had imposed MRP restrictions. Other states probably will follow the examples of New York and California.
Manufacturers who are considering MRP plans should consider several factors, including:
- Does the MRP plan encourage customer service and 1. competition?
- Does the manufacturer have a substantial share of the 2. market?
- Is the impetus for the MRP plan coming from retailers?3.
- What is the antitrust rule in their state regarding MRP 4. plans?
Manufacturers should analyze the market and obtain careful legal advice before considering a MRP plan.