A Roadmap to Minimum Advertised Price Policies
© 2013 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.Run a Google search for the phrase "minimum advertised price policy" and you will find hundreds of sample policies, posted on a variety of manufacturers' websites. Interest in minimum advertised price ("MAP") policies has skyrocketed in recent years. Why? The answer dates back to a watershed antitrust decision issued by the United States Supreme Court six years ago.
In Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the Supreme Court overruled a century-old precedent and held that minimum resale price maintenance ("RPM") is not per se illegal under Section 1 of the Sherman Act and should instead be subject to the antitrust rule of reason (which requires a case-by-case analysis of whether a challenged practice unreasonably restrains competition). After Leegin, one might have expected RPM provisions to appear in franchise and distribution agreements with regularity, but that did not happen. Instead, Leegin has had a decidedly small impact on actual business practices in the franchise world.
For good reason: In the wake of Leegin, several states—including New York, Illinois, Michigan, Maryland, and California—have stated that minimum RPM remains per se illegal under their state antitrust laws. See generally Michael A. Lindsay, Overview of State RPM, Antitrust Source (April 2011). Moreover, Congress has also proposed (and continues to debate) legislation to overturn Leegin. See, e.g., Discount Pricing Consumer Protection Act of 2011, H.R. 3406, 112th Cong. (1st Sess. 2011).
The uncertainty created by the current patchwork of state laws that deem minimum RPM agreements per se illegal, as well as a desire to protect brand image and ameliorate "free riding" by internet and other discounters, have caused MAP policies to proliferate in recent years. As this has occurred, courts have been asked to determine whether and how MAP policies should be analyzed in light of Leegin.
What is a MAP Policy?
MAP policies impose restrictions on the price at which a product or service may be advertised, without restricting the actual sales price. MAP policies usually concern only off-site advertising, such as in flyers or brochures. They do not restrict the in-store advertising or sales price offered at a retailer's "brick and mortar" locations. Often, manufacturers implementing MAP policies also provide retailers with some cooperative advertising funds to contribute to the costs of advertising.
Although RPM may be per se illegal under certain state laws, MAP policies are generally analyzed under the antitrust rule of reason. As long as a retailer remains free to sell a product at any price, the restriction on advertising is deemed to be a non-price restraint. See, e.g., Lake Hill Motors, Inc. v. Jim Bennett Yacht Sales, Inc., 246 F.3d 752, 757 (5th Cir. 2001) (applying the rule of reason to a dealer's challenge to Yamaha's cooperative advertising program, which reimbursed dealers for advertising only if the advertising stated either Yamaha's suggested resale price or no price at all); Cranfill v. Scott & Fetzer Co., 773 F. Supp. 943, 951 (E.D. Tex. 1991) (holding that the rule of reason applies where a dealer admittedly could charge any price for a product).
Some courts have relied on the fact that advertising restrictions are funded, at least in part, by the manufacturer through cooperative or other advertising funds, and that retailers remain free to advertise discounts with their own funds. See, e.g., In the Matter of American Cyanamid Co., 123 F.T.C. 1257, 1265 (1997); The Advertising Checking Bureau, Inc., 109 F.T.C. 146, 147 (1987). Courts have also dismissed challenges to MAP policies on the ground that the manufacturer instituted and implemented the policy unilaterally, and therefore, there was no agreement or conspiracy that would trigger liability for vertical price-fixing. See, e.g., Holabird Sports Discounters v. Tennis Tutor, Inc., 993 F.2d 228, 1993 WL 147470 (4th Cir. 1993) (affirming a district court's grant of summary judgment for a defendant that unilaterally imposed a restriction on advertising in certain regional and national publications).
Cases and enforcement actions involving MAP policies are relatively rare. In the most high-profile case concerning MAP, the Federal Trade Commission ("FTC") challenged MAP policies issued by five major compact disk ("CD") distributors and entered into consent agreements with each of the distributors. See In re Sony Entertainment, Inc., No. C-3971, 2000 WL 1257796 (FTC Aug. 30, 2000). The result was largely dictated by the facts of the case: because the MAP policies were implemented by all five distributors at or about the same time, and apparently at the urging of retailers that were concerned about "discounters," the FTC viewed the policies as horizontal agreements that were per se illegal. Moreover, the MAP policies each prohibited all advertising below a certain price, including in-store advertising as well as advertising paid for entirely by the retailers. Although the facts of the CD MAP case were unique, the clear lesson is that a MAP policy should be unilateral and should apply only to off-site advertising to which the manufacturer contributes funding.
MAP Policies in the Internet Age
Whether and how the standard rules for MAP policies may apply in the digital age are topics of some debate and litigation. Starting around the time of Leegin, Worldhomecenter.com ("WHC"), an online retailer of home improvement products, filed several lawsuits against manufacturers with MAP policies. In each case, WHC asserted that internet retailers were different because they did not have a "brick and mortar" location; therefore, advertising on the WHC website was akin to advertising in its "store."
In Worldhomecenter.com, Inc. v. LD. Kichler Co., 2007 WL 963206 (E.D. N.Y. March 31, 2007), the district court denied a motion to dismiss federal and state antitrust claims challenging an internet MAP ("IMAP") policy that restricted the prices at which products could be advertised on the internet. The court was convinced by WHC's argument that "essentially, the advertised price is the retail price for an internet shopper. Thus, although facially the IMAP restricts only advertised prices, construing Plaintiff's allegations as true, it has the concomitant effect of restricting retail prices for internet retailers as well." Id. at *5. See also WorldHomeCenter.com v. Thermasol, 2006 WL 1896344, at *1-2 (E.D.N.Y. July 10, 2006) (denying a motion to dismiss federal and state antitrust claims where WHC alleged that the MAP policy posed a significant obstacle to the distribution of Thermasol products at lower prices over the internet, and that the policy was instituted in response to complaints by traditional "brick and mortar" distributors about the impact of internet discounters).
Other courts have reached the opposite conclusion. For example, in WorldHomeCenter.com, Inc. v. Franke Consumer Prods., Inc., 2011 WL 2565284 (S.D.N.Y. June 22, 2011), the court granted a motion to dismiss state antitrust and other claims arising out of Franke's Unilateral Suggested MAP policy ("USMAP"). The court reasoned,
Unlike the prior cases cited by Plaintiff where an advertising policy was held to restrain prices, the USMAP policy here provides internet retailers with more than one way to communicate lower prices to clients, either by allowing customers to call or email for a price quote or by offering a coupon to be applied at checkout . . . Further, the policy applies to all retailers, not just online sellers. While the Court recognizes that the policy may burden internet retailers slightly more than "brick and mortar" sellers, Franke offers internet retailers viable strategies to provide online customers with reduced prices.
Id. at *5.
Similarly, in WorldHomeCenter.com, Inc. v. KWC America, Inc., 2011 WL 4352390 (S.D.N.Y. Sept. 15, 2011), the court granted a motion to dismiss a state antitrust challenge to an Internet Advertising Policy ("IAP"), for two reasons: First, the IAP provided that "actual prices charged customers may be provided by telephone, e-mail response, and product purchase confirmation webpages or communications;" Id. at *5. Second, the IAP is a unilateral policy, without any evidence of any agreement, which is a prerequisite for a vertical price-fixing antitrust claim. Id. at *7; see also WorldHomeCenter.com, Inc. v. PLC Lighting, Inc., 851 F. Supp. 2d 494, 502 (S.D.N.Y. 2011) (granting motion to dismiss and rejecting claim that UMAP policy was per se unlawful price-fixing).
Even though MAP policies are generally upheld under the rule of reason, the cases discussed above illustrate that it is important to draft and implement these policies with care. Some guiding principles follow:
Advertising Only. A MAP policy should expressly state that the policy in no way limits a retailer's right to set its own prices. Including provisions that allow internet retailers to communicate an actual sales price in a different manner—such as "Call for Pricing" or "Add to Cart to See Price"—can be a critical component of any MAP policy.
No Agreement. MAP policies should expressly state that they are unilateral and do not constitute an agreement. Questions may arise when traditional "brick and mortar" retailers encourage or support the adoption of an IMAP policy. Manufacturers should resist the temptation to implement a MAP policy in response to complaints from retailers about a discounting competitor.
Broad Application. Policies that apply to all off-site advertising, no matter what form, are more likely to be upheld than policies that are specifically directed at internet retailers.
Advertising Funds. Restrictions on advertising are more likely to be upheld if the manufacturer funds the advertising in whole or in part. Whether funding is an actual requirement before imposing MAP restrictions, and what ratio of funding should be provided (full or partial), remain unclear from the case law. Interestingly, the MAP policies in the recent WorldHomeCenter.com cases, discussed above, did not provide for any funding, and the courts did not mention this as a required element for a MAP policy.
Clarity. A MAP policy should be user-friendly and easy to understand. It should include a Frequently Asked Questions guide to clarify how the policy works.