Vertical Price Agreements
Susannah Torpey: From a U.S. perspective, given the uncertainty of the law and the possible differences between state and federal law, companies should carefully assess the risks of cartels and abuse of dominance when considering implementing a policy of maintaining the resale price or entering into a resale price maintenance contract for products sold in the United States. For example, how would a resale price maintenance contract stimulate competition? What are the pro-competitive reasons for the resale price maintenance contract? Are there any illegal motives behind this decision, such as artificial price increases or the facilitation of a horizontal conspiracy? Companies should also be prepared to defend all agreements and policies for maintaining prices in resale with economic evidence. When can a company`s agreements with suppliers or customers create problems? In this episode of the Winston-Strawn competition podcast, cartel partners Molly Donovan and Susannah Torpey discuss vertical restrictions to help companies better understand where agreements or agreements at different levels of production, distribution or supply can raise cartel issues. Susannah Torpey: They are common and they are generally legal, but they can be anti-competitive and therefore must be judged according to a standard of reason. The same is true of other types of non-tariff restrictions, such as anti-governance rules, which recently attracted the attention of the legal community because they were at the center of the American Express case, decided by the U.S. Supreme Court in June 2018. Until the U.S. Supreme Court ruled in 2007 leegin Creative Leather Products, Inc.
v. PSKS, Inc. (Kay`s Closet), these agreements were in themselves breaches of the agreement. The Leegin Supreme Court reversed course and found that courts will generally analyze these agreements on the rule of reason. Susannah Torpey: The analysis is similar, but a recent Supreme Court decision, American Express, shows a difference. The first step in a review of the rules is for the applicant to demonstrate that the restriction has a significant anti-competitive effect that harms consumers. Whereas the plaintiffs could previously assert this burden by limiting damages, such as price increases, without necessarily having to demonstrate market power in a particular market, the court stated in American Express that, in the context of vertical withholding, the applicants must first demonstrate the existence of market power in a particular market. The reason for this is that the Tribunal has recognized that vertical restrictions often do not pose a threat to competition unless the agency imposing them has market power, which is not necessarily the case under horizontal restrictions. Vertical price agreements include agreements made by manufacturers to set minimum or maximum resale prices (i.e.
retail prices) for their products. Minimum prices are often referred to as resale prices. Direct agreements to maintain resale prices are inherently illegal in the United States and are subject to “severe nuclear restriction” in Europe. However, in both locations, it is possible for manufacturers to obtain de facto maintenance of the resale price indirectly – for example by refusing to deal with retailers who are deconstructing their products, or by offering discount programs that direct discounts towards a price level. These indirect funds are particularly difficult for courts to settle when vertical price agreements are combined with other vertical restrictions such as geographic exclusivity agreements. B, geographic exclusivity agreements, service and sharing agreements, advertising agreements, etc. Molly Donovan: So it seems that you categorize vertical restrictions into price-based restrictions and then restrictions that are not price-based. Susannah Torpey: The Texaco v. The Dagher case, which was decided by the Supreme Court in 2006, is an example of how relevant markets can vary depending on the nature of