The Supreme Court of the United States last June issued an unexpected and potentially groundbreaking decision in Leegin Creative Leather Products v. PSKS, Inc. This decision has the potential to have a large-scale affect on manufacturers, resellers, and consumers in the United States.
Leegin has given the manufacturer an additional defense from liability, creating a two-step defense with a Colgate-based policy. The first defense is that there is no agreement between the manufacturer and reseller (the traditional defense under Colgate). The second defense now available is that even if there was agreement, the practice is “reasonable” under the rule of reason. This added layer of defense, coupled with the Supreme Court’s positive treatment, should bolster comfort at the manufacturer and reseller level regarding price maintenance policies.
However, while Leegin attempts to remove some of the traps for the unwary that existed under Colgate, it may have created some of its own. Although a minimum resale price agreement could be legal under Leegin, this does not mean that every agreement will be legal. There is still the potential for liability for vertical price fixing violations if the practice fails
to meet the rule of reason test and harms competition.
Weighing the merits
Before a manufacturer employs pricing arrangements, it must determine what effects this decision will have on its market and competition as a whole. For the sake of argument, let’s assume a manufacturer determines that price maintenance will positively impact its bottom line and that the practice will not negatively affect competition. Before that manufacturer jumps head first into the price maintenance waters, there are still a number of factors that should be considered.
The manufacturer must gauge the impact stabilized resale price and margin will have on its consumers. The manufacturer must determine what the biggest consideration for its consumer is: price, service, or convenience. The answer to why consumers buy the manufacturer’s products will determine what the manufacturer must do to implement a successful price maintenance policy and whether such a policy is feasible. The Leegin decision has created the temptation of stable price and higher margin for manufacturers and resellers, but these draws must be weighed against the potential impact of higher prices on consumers. Stabilizing resale price, when done effectively, can drastically change the way a manufacturer does business.
Price stabilization and sustainable margin not only can increase the lifespan of a product but can also transform its sales from commodity sales to brand-equity based sales. Resellers can also benefit as a sustainable margin allows them to turn the sales tactic from price to service and knowledge, without the fear of free-riding. With the reseller making more profit, the issue becomes: what happens to the increased reseller margin? Do resellers simply make more money?
Higher prices are, by their nature, detrimental to sales. Therefore, the manufacturer must offset the increase in price by providing and making its resellers provide value to the consumer. If the manufacturer is going to ask for more, they must be willing to give more.
The Leegin decision has not so much created a new tool for the manufacturer as it has strengthened an existing one. Although price maintenance strategies are powerful tools, their impact and consequences must be weighed over the short and long term. The manufacturer must consider how it wants its products to compete in the marketplace and decide if the manufacturer’s product is best suited for a short lifecycle and price race to the bottom, or if the manufacturer is a quality leader who wants to move away from commodity sales. Vertical price maintenance is not for everyone, but used by the right manufacturer with an eye to the future, it can create new options for viable market share.
Christopher S. Finnerty is a corporate attorney in the Boston office of WolfBlock. Finnerty focuses on national and international distribution issues. He can be reached at email@example.com.