Issue link: http://winesandvines.uberflip.com/i/246577
WINE M AR K E T ING Minimum resale price policy, price-cutters BY Suzanne DeGalan, Hinman & Carmichael LLP, San Francisco, Calif. A winery client of ours had a big problem in the marketplace. A well-known retailer was advertising the client's wines below wholesale cost to lure consumers into the store. But on arrival, consumers were told the wine had "sold out" and were offered alternate products — some of them the retailer's own private-label brands— as a substitute for the advertised wines. In addition to denigrating our client's brand, this below-cost tactic was creating serious issues with other retail customers who threatened to pull the brand because consumers believed they could get the wines cheaper elsewhere — and at a price the other retailers could not afford to offer. As it turned out, many of our supplier clients were facing the same dilemma, and almost all of our clients (including retail clients who could not match the prices advertised by the below-cost advertiser) had the same question: Is there anything we can do to stop this — or better yet prevent it in the first place? These clients had been told (often by their distributors) that any attempts to stop these unfair practices would violate antitrust laws forbidding agreements to set a minimum price for products and could also violate alcoholic beverage laws in those states that prohibited suppliers from discriminating among retailers. Was this true? Yes and no. While resale price maintenance is a tricky business and the law is still evolving in this area, it is possible to establish and maintain a minimum resale price policy that would stand up to legal challenges under federal and most state laws. Background Prior to 2007, any agreement between a supplier and reseller to set a minimum price threshold for a product was considered "per se," or automatically, illegal under federal antitrust laws. This changed when the U.S. Supreme Court held in Leegin Creative Leather Products Inc. v. PSKS Inc. that this type of price-fixing agreement may be legal so long as it does not unreasonably injure competition.1 In other words, rather than automati- cally finding such an arrangement illegal, courts were instructed to analyze the price policy in question under what is known as a "rule of reason" rather than finding a per se violation of law. Unfortunately, federal antitrust law does not preempt state antitrust law,2 and states are free to decide whether to continue making a vertical (between supplier and a downstream reseller) price-fixing agreement per se illegal. For example, California's Cartwright Act continues to make such arrangements illegal.3 Suppliers can avoid this result, however, by establishing a minimum resale price policy (known in legal circles as a "Colgate policy") that unilaterally announces a minimum resale price for the supplier's products. Under the long-standing doctrine established in United States v. Colgate & Co.,4 if a manufacturer unilaterally announces a sales policy and a reseller unilaterally decides to comply with that policy, there is no illegal "agreement" between manufacturer and reseller unless the manufacturer used coercive means to ensure compliance. Simply stated, the manufacturer can announce its resale prices in advance and refuse to deal with those who do not comply. The most important aspect of such a policy is the absence of an agreement, express or implied, between supplier and reseller. The policy must be one-sided and non-negotiable, and it cannot be adjusted to fit the circumstances of a particular reseller. 64 p r acti c al w i ne ry & v i ne yard FE BRUARY 20 14 Note, however, that while the price policy must be uniformly applied, this does not mean the policy will necessarily have the same effect upon differently situated resellers. If the resale price policy prohibits sales that are below cost rather than sales that are below a set dollar figure, for example, one reseller could be in violation of the policy for selling the product at a certain price while another reseller with a lower cost of doing business5 would not be in violation of the policy for selling the product at the same price. Also, a retailer that obtains a quantity discount and purchases a larger volume of product at a lower cost will naturally be able to offer the product at a lower retail price to consumers (while still selling the product above cost) than another retailer that paid more for the product. Suppliers that elect to prohibit sales below cost rather than below a set dollar figure should think in terms of similarly situated retailers— that is, retailers that paid the same amount for the product and have similar costs of doing business — when applying their resale price policy to various retail accounts. The policy must have at least one business rationale behind it, and the more business reasons asserted (and existing) as justification for adopting the policy, the better. It is important that the policy not simply be something that sits on a shelf, to be introduced to a single retailer upon that retailer's use of predatory pricing. Instead, the supplier should provide its policy to all retailers prior to its implementation, both to avoid any accusation of retailer discrimination and to make clear this is the producer's uniform policy throughout the marketplace, independent of the circumstances or its relationships with any single retailer. Here is suggested wording for a minimum resale price policy: Minimum resale price policy Dear Retailer, This letter serves as an announcement of our resale policy with respect to our products (specify brands defined, hereinafter "products") sold at retail throughout the United States. We do not and will not make our products available to retailers who price them below our minimum price, which is $00 (or, below producer's cost, which we define as the retailer's cost to purchase the products from the wholesaler plus the retailer's cost of doing business. (Some producers add additional anticompetitive and/or illegal practices, such as bait-and-switch tactics,6 that would