Price-Fixing Do's and Don't's|
Although I specialize in intellectual property law, we are often asked whether a company can include minimum pricing requirement in its contracts with distributors or retailers. What most of our clients do not realize is that Montana has an anti-price-fixing statute that is more strict than the federal anti-price-fixing statute. Although the federal statute requires a conspiracy (i.e., an agreement between two or more people) to fix prices in order for such conduct to be illegal, the Montana statute strictly prohibits any price fixing, regardless of whether a conspiracy exists. Smith v. Video Lottery Consultants, Inc., 858 P.2d 11 (Mont. 1993).
Mont. Code Ann. Section 30-14-205 prohibits entering into an agreement for the purpose of fixing the price or regulating the production of an article of commerce, but it also prohibits (a) limiting production, (b) increasing or reducing the price of products, (c) preventing competition in the distribution or sale of products, and (d) fixing a standard or figure whereby the price of a product is in any way controlled, if any of the above actions results in a restriction in trade. The Montana statute also prohibits creating a monopoly in the manufacture, sale or transportation of a product, including entering into an agreement that binds any person not to manufacture, sell or transport a product below a common standard or figure (such as a manufacturer's suggested retail price) or that otherwise "settles" the price of a product so as to preclude unrestricted competition.
In June of 2007, the U.S. Supreme Court held in Leegin Creative Leather Products v. PSKS, Inc., 551 U.S. 877 (2007), that vertical price fixing may be legal under the federal anti-price-fixing statute. In Leegin, the manufacturer (Leegin) adopted a policy that it would do business only with retailers that followed its suggested retail prices. Leegin discontinued shipment of product to one of its retailers after discovering that the retailer was selling product for less than the manufacturer's suggested retail price. The retailer filed suit, claiming that Leegin's actions violated federal law.
The case eventually made its way to the U.S. Supreme Court, where the majority held that vertical price fixing (as opposed to horizontal price fixing) is not longer per se illegal under federal law; that is,
the Court held that in determining whether vertical price fixing schemes are illegal, courts should apply a "rule of reason." Specifically, courts should consider the number of manufacturers in a given industry that use resale price maintenance, the reasoning being that if the practice is not widespread, then consumers are not prejudiced because they can obtain products from manufacturers not engaged in price fixing. Second, courts should consider the source of the price restraint; if the impetus for the restraint originated with the retailers, then the practice would be viewed as more anticompetitive than if it had originated with the manufacturer. Third, courts should taken into consideration the relative market power of the manufacturers and/or retailers involved, the thought being that the greater the market power of the players involved, the more likely their conduct is anticompetitive. In short, courts are to take a look at the entirety of the circumstances to determine whether a particular vertical price fixing situation actually adversely affects commerce.
The definition of a "vertical" price fixing arrangement is one in which a party higher up in the distribution chain (usually the manufacturer) has an agreement with a party further down the distribution chain (as in a distributor or retailer). A "horizontal" price fixing arrangement is one where players on a similar level (for example, a group of manufacturers) agree to fix prices. The Leegin case did not address horizontal price fixing arrangements, and such agreements are generally considered to be per se illegal under federal law.
Despite the fact that the Leegin case opened the door to some vertical price fixing arrangements and may make it permissible, under certain circumstances, for manufacturers to require their distributors and/or retailers to adopt suggested minimum prices, companies doing business in Montana must keep in mind that the Montana anti-price-fixing statute is more restrictive than the federal statute, and Montana courts may not be willing to go as far as the U.S. Supreme Court did in Leegin. To avoid the potential for liability, we advise our clients not to include minimum pricing clauses in their distributorship and/or retailer agreements and instead to include a fairly broad termination clause that would allow them to terminate a price-cutting distributor or retailer for other reasons.