Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Antitrust is a complex, ambiguous and controversial area of law, and it covers a lot more than mere monopolies. It should be a serious concern to all businesses, not just because severe financial penalties may be incurred for violations, but also because things like price fixing, price discrimination and predatory pricing can result in criminal prosecution. In business, many people either aren’t sufficiently aware of antitrust laws — in which case they may commit all sorts of illegal acts in their attempts to control or influence the market prices of their products without even realizing they are violating the law — or they are acutely aware of antitrust dangers to the point of paranoia, afraid to even discuss prices unless done in whispered tones in a darkened parking lot. Fortunately, there exists a happy medium between these two extremes. There are some legally acceptable techniques by which a manufacturer or distributor can influence retail prices of their products, although such strategies must be carefully designed, implemented and monitored. Some refer to these techniques as loopholes in antitrust protection. But in reality they are legitimate methods by which one can artfully navigate around antitrust prohibitions. Influencing prices may sound like code for a price-fixing conspiracy in which a bunch of greedy tycoons gets together and secretly agrees to inflate prices so that consumers pay exorbitant fees and the pockets of the fat cats are further stuffed. Historically, this may have been true — and it’s why antitrust laws were first enacted. For most businesses, however, trying to influence prices at which their products are sold at retail isn’t always so sinister. Instead, it’s often a matter of basic business survival. Manufacturers and distributors, for example, may seek to influence prices in the market by trying to get their various retailers’ prices to be maintained at or above a certain level. They don’t want their retailers to compete against each other by slashing prices back and forth because the ultimate effect is that each retailer’s profit margin is eroded. And when retailers aren’t satisfied with their profit margins on a given product, they won’t push for that product. Rather, they will push to sell the products where they can make the most profit. To illustrate, no store owner wants to sell a product for $1,000 if the profit margin is only $10, or 1 percent. The owner would rather sell a $300 product with a $60, or 20 percent, profit margin. Manufacturers and distributors fear sinking retail-level profit margins on their products because stores will often remove such low-margin products from their shelves altogether. Plummeting prices at the retail level are often the result of competition, such as when dealers find themselves in the middle of a price war to attract customers. The result is that the retail price of a product gets whittled down as the competitors try to out-price each other. (Low prices, of course, are a wonderful thing for consumers. But the benefit is often short-lived since such continually discounted products often get displaced from stores altogether.) Some manufacturers and distributors also want to maintain retail product prices at or above certain levels in order to maintain a brand’s high-end image under the theory that higher-priced products create the impression of value in a consumer’s mind. The Tiffany’s brand wouldn’t be so valuable, for example, if the company sold deeply discounted products under the same luxury brand name. If a manufacturer of luxury-goods produces a product, it certainly doesn’t want the price to be deeply discounted because discount prices suggest that the product isn’t desirable. For manufacturers, the most common means of seeking to influence prices is the use of an MSRP, which stands for manufacturer’s suggested retail price. An MSRP is often affixed to a product and is also sometimes stated on a list of prices given by a manufacturer to its distributors and retailers. In calculating an MSRP, a manufacturer will try to maximize the profit for itself — while keeping its distributors and retailers happy — and at the same time provide an attractive price to consumers. Imagine a company, TV Inc., that manufactures flat-screen television sets. Let’s say the company’s per-unit cost is $500. TV Inc. sells the flat-screen televisions to its distributor at $600 per set, ensuring itself a 20 percent profit margin. TV Inc.’s distributor then sells the flat screen TVs to various retailers at $720 per unit, ensuring a 20 percent profit for itself (perhaps 10 percent covers its costs, leaving only 10 percent as the actual profit.) The retailers then sell the flat-screen TVs to consumers at the MSRP of $1,000, which would give the retailer a $280 profit, or 28 percent profit margin (again, perhaps only half of that will be true profit.) Retailers, however, will often sell products below the MSRP, to give consumers the impression that they’re getting a bargain. In addition, they may run rebates, special promotions and discounts or guarantee to meet any competitor’s price (known as a “meet comp”). Sometimes, manufacturers will offer a manufacturer’s rebate by mailing rebate checks directly to consumer purchasers. It is essential to note that an MSRP is only a suggested price. It has no binding effect whatsoever. Distributors and dealers are free to price and advertise the products at whatever price they want. An MSRP, however, does serve as a valuable benchmark from which the distributors and dealers will set their prices. An MSRP, in and of itself, is perfectly legal. An antitrust violation requires an agreement between two or more parties to fix prices (according to Section 1 of the Sherman Act,) and the MSRP is only suggested. The problem for businesses, however, is that an “agreement” is construed very broadly. If a manufacturer so much as demands that a retailer use the MSRP and the retailer implements it, this action alone could be enough to constitute an illegal price-fixing agreement. A UMRP, or unilateral minimum retail price, occurs when a manufacturer or distributor states to retailers the minimum retail prices for its products. It can be an excellent tool. For example, imagine that a stereo manufacturer, ABC Stereo Inc., states in a written policy to its retailers that it wants its one of its models sold to consumers at no less than $500, another one at no less than $700 and a third at no less than $1,200. Like an MSRP, a UMRP has no binding effect. It is merely a unilateral “policy” or “suggestion” by the manufacturer. If a retailer violates the UMRP policy, the manufacturer cannot claim breach of contract. Its only recourse is to stop selling that product (or all of its products) to the retailer. If the manufacturer does not enforce its own policy by cutting off retailers who violate the UMRP, the policy ceases to have any effect in the retail market and angry retailers will likely complain to the manufacturer, ignore the policy themselves or stop selling that product. As a general rule of law — and absent the existence of a contract to the contrary — it is perfectly legal for a manufacturer or distributor to refuse to sell some or all of its products to a given outlet. This threat of being cut off from certain products is, in part, the only motivation for a retailer to abide by such a UMRP policy, particularly if the brand is popular among consumers. The other reason a retailer would want to abide by a manufacturer’s UMRP policy is that by maintaining higher prices — along with every other retailer of those products — the profit margins will be higher. So long as all the retailers abide by the policy, everyone is happy because the retailers know they will not wind up in a price war over that product. This is why you can find a particular product priced the same at every retailer, such as a newly issued DVD movie for $24.99 wherever it is sold. Some argue that this amounts to an illegal price-fixing conspiracy. It’s not, however, because there is no actual agreement — the key element to a finding of illegal price fixing. A UMRP is legal because it’s a unilateral policy where the manufacturer or distributor specifically states words in its UMRP policy to the effect that it’s only a suggested price policy. It is dangerously easy, however, for a manufacturer or distributor to cross the line from a legal UMRP to one that violates antitrust laws. In other words, a legally acceptable unilateral policy can quickly become an illegal agreement. Courts have held, for example, that if a manufacturer or distributor threatens to terminate a retailer for failing to adhere to a UMRP, and the retailer then reluctantly adheres to the policy to prevent being cut off, the manufacturer can be found guilty of imposing an illegal agreement by means of coercion. Thus, in enforcing a UMRP, companies must be extremely careful to avoid any type of agreement (always remembering that the law’s concept of an agreement for antitrust purposes is far more liberally construed than one’s normal concept). If a retailer violates the policy, a manufacturer or distributor should not communicate in any way whatsoever with that retailer about its failure to comply with the UMRP. Instead, the company should merely send a notice to the retailer stating that the company has decided to terminate or suspend that retailer (a suspension could be “until further notice” or until a review period has expired, such as 60 or 90 days). To protect against having a permissible UMRP turn into an illegal breach of antitrust laws, a business may also want to do several things: � Appoint a single person who understands antitrust laws and who can work well with counsel to handle all UMRP issues that may arise from outside parties. The company should also expressly prohibit all other employees from communicating with outside parties on UMRP issues (and, in particular, warn against employees speaking to a dealer about the non-compliance of another dealer, which could help set up a conspiracy argument). � Issue an introductory letter with the written UMRP policy, which specifically reinforces the message that the company has created a “unilateral” minimum retail price “policy” with “suggested” prices. The letter will also remind retailers that they remain free to sell the products at whatever prices they want. � Avoid any mention of specific consequences that may arise in the event a retailer doesn’t abide by such policy (that is, do not threaten termination or suspension for failure to abide by the UMRP since doing so could set up an argument for an illegal agreement through coercion). A MAP, or minimum advertising pricing, policy is similar to a UMRP in the sense that it is a non-binding policy as opposed to an agreement. But while a UMRP policy seeks to maintain pricing levels at the retail level, a MAP policy seeks to maintain pricing levels in advertising. When a manufacturer or distributor issues a MAP to its retail customers, the intent is to ensure that its products are advertised at or above certain prices. For example, a guitar maker may issue a policy to all of its retailers stating that it doesn’t want a new guitar model advertised below $1,500. Retailers remain free to sell the product at whatever price they want. But if all retailers follow a manufacturer’s MAP, this (like a UMRP) has the effect of preventing price wars and maintaining profit margins. A MAP is only safe legally if it applies to co-op advertising — ads funded in part by a manufacturer or distributor on the one hand and a retailer on the other. The retailer must still be allowed to advertise products at whatever price they want if the retailer is the one paying for an ad. A MAP may be applied to all forms of advertising such as newspaper inserts, fliers, billboards, radio and even the Internet. But it should never be applied to in-store advertising such as price tags on products. In addition, retailers must be free to price and sell products at whatever price they desire. A MAP should also not be punitive in nature, such as threatening termination or threatening to cancel all co-op marketing funds in the event of non-compliance. It’s legally safer to offer an added bonus, such as additional marketing funds, to those retailers that adhere to the MAP. A consignment is where one party gives its goods to another for resale and only gets paid when those goods are purchased by a third party. Historically, a seller was free to set the price at which its products were sold at consignment. But courts began to view such arrangements with skepticism, realizing that powerful sellers could coerce their consignees to adhere to whatever pricing the seller demanded, creating what courts have considered to be illegal price-fixing agreements through coercion. Thus, manufacturers and distributors are advised to only use a consignment arrangement where there are justifications other than price for such an arrangement. In addition, the consignor should ensure that the consignee is treated like a true agent, as opposed to a totally separate, independent entity. If the consignee is the bigger, more powerful party, antitrust concerns are greatly diminished for the manufacturer or distributor. Antitrust law can be a lot less frightening for manufacturers and distributors once they realize that there are some legally acceptable methods that allow them to maintain some influence over the prices of their products at the retail level. Retailers often beg manufacturers or distributors to offer some type of price protection to protect their profit margins. While a manufacturer cannot legally protect prices per se, it can implement policies that can help to prevent price wars and brand erosion. Such policies can benefit the manufacturer, distributor and retailer alike. Michael Baroni is the general counsel and corporate secretary at BSH Home Appliances Corporation in Huntington Beach.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.