Distribution, Competition, and Antitrust / IP Law

Price Erosion and Restricting Online Distribution Rights

English: Vegetables reseller at rue Mouffetard...

An early vegetables reseller. (Photo credit: Wikipedia)

A reader who works with clients who sell online asked me to address online distribution restrictions.  This is more-or-less the reverse of the question I addressed in “Can My Supplier Refuse to Sell Products to Me?”  As always, I offer general thoughts here, not specific legal advice.

First, to frame the issue a bit further – if you sell products online, particularly through third-party sites such as Amazon, eBay, etc., then you very well may have concerns about controlling not only product quality and service but also price.  Many online sellers are seeing price erosion caused by multiple distributors or resellers, and they want to know what they can do about it.

Before getting to the several possibilities below, keep in mind that if you – or anyone in your distribution chain – is a monopolist or near-monopolist, many of these possibilities may be problematic.  It’s often more difficult than you might think to figure out if a firm is a monopolist, but you can use market share as a sort of rough proxy.  A share above 40% starts putting you in the potential yellow zone.  A share above 60%-70% is often (though not always) evidence of monopoly power.

But let’s assume that neither you, nor your supplier (to the extent you have one), has a market share close to these levels.  In that case, what can you do to control product distribution – and particularly product pricing – on third-party Internet sites?

Exclusive distribution

First, you can be appointed (or appoint yourself) as the exclusive distributor of the product.  You can define the rights as they best work for your business.  You could have the exclusive rights to:

  • Distribute product anywhere;
  • Distribute product online; or
  • Distribute product on certain third-party sites (like Amazon).

By having exclusive distribution rights, you can of course maintain better control over product pricing.  (Note – I’m not talking here about actual price agreements – only the natural result of having a limited distribution network.)

Online distribution “territories”

You can appoint distributors, sub-distributors, or resellers for limited purposes – for example, you can have a single authorized sub-distributor for Amazon, another for eBay, etc.  Again, by limiting your distributors, you should see less intra-brand price competition.  Because the antitrust laws are designed to encourage inter-brand competition, a loss of intra-brand competition is not usually a matter of significant (or indeed any) concern.

Minimum advertised price programs

If you use a number of sub-distributors, or if you are one of many sub-distributors, you can use minimum advertised price (“MAP”) programs.  These do not limit actual consumer pricing (e.g., the pricing in an online checkout cart), but they impose limits on what prices can be advertised.  Sometimes advertising coop dollars are awarded for compliance with the program and withheld for non-compliance.  It is important to properly structure any MAP program.  If structured properly, they are lawful throughout the country.

Resale price agreements

This one is a little tricky.  Under federal law, agreements on resale prices are no longer per se unlawful.  They can still be condemned if they are anti-competitive, but it is usually quite difficult to establish that they are.

The problem is that at least several states still consider agreements on minimum resale prices to be per se unlawful.  So before entering into such agreements, you need to consider whether you are going to be selling or distributing products in those states.  If you’re selling on a national platform like Amazon, you may have to assume that you will be selling in all 50 states.

Price discrimination

Can you offer (or be offered) different (e.g., better) pricing than other distributors or sub-distributors?  Maybe, maybe not — there is a complex law called the Robinson-Patman Act that governs such price “discrimination.”  The law makes discrimination unlawful, but there are many exceptions, and I don’t have space to get into all of them here.

Terminations for price

If your sub-distributor is pricing product in a way you don’t like, you can always terminate him/her (putting aside any contract rights he may have).  However, it is very important that you make a clean termination – promises, commitments, and suggestions followed by a reinstatement can amount to an agreement, which again may still be per se unlawful in several states.


There are a number of options for limiting online distribution to maintain better control over product placement and pricing.  Keep in mind, however, that you should never agree on such options with your competitors – or else you may have a horizontal agreement on pricing, which can be extremely problematic.

Is Resale Price Maintenance Illegal Under New York Law?

In People v. Tempur-Pedic International, Inc. (May 8, 2012), the appellate division of the New York Supreme Court affirmed a trial court’s decision dismissing the New York Attorney General’s complaint and finding  that Tempur-Pedic had not violated New York General Business Law Section 369-a by entering into Resale Price Maintenance (RPM) agreements with its retailers.

The appellate court agreed with the trial court that Section 369-a does not make RPM illegal as a matter of law — it only provides that RPM agreements will not be enforceable or actionable at law.  In other words, manufacturers cannot enforce RPM agreements under New York law, but they do not violate the law by entering into such agreements.

The appellate court also found that the Attorney General did not actually establish any RPM agreements, but merely that Tempur-Pedic had enacted its minimum price policy and that retailers independently decided to acquiesce to the pricing scheme in order to continue carrying Tempur-Pedic products.  An agreement as to advertising (apparently a sort of coop advertising program) could not be the subject of a vertical RPM claim, the court ruled, because such an agreement does not restrain resale prices, but merely restricts advertising.

This decision largely keeps New York law consistent with federal law and many other states’ laws — although New York is somewhat unique in not allowing the parties to RPM agreements to enforce them in court.

Are Minimum Advertised Price Programs Good or Bad? (Continued)

Sorry for the delay in posting.

Returning to the article linked below, I’ll briefly address some more criticisms of Minimum Advertised Price (MAP) programs.

6. MAP pricing hurts customers, because it makes it harder for an end user to compare prices among a variety of dealers.  There may be a cost to consumers from MAP programs, but it has to be weighed against the manufacturer’s avoided costs.  MAP programs can, at least in theory, address the problem of free-riding.  For example, an Internet-only dealer might be able to offer slightly lower pricing because it has no brick-and-mortar costs.  But it might also be able to do so because it is not making an investment in the brand or product and is relying upon the investment of other dealers, who might not make such investments if they fear low advertised prices.  In that case, the manufacturer’s business may be hurt.

7. MAP pricing makes purchasing more time-consuming for end users.  The idea here is that MAP programs prohibit prominently displayed website pricing, but allow “shopping cart” pricing.  To see the true price, a consumer has to jump through a few hoops.  This is generally true, but how much effort does it really take to click the mouse a few times?

8. MAP pricing may hurt a manufacturer’s sales.  Here, Mr. Pierce mentions implementation costs and enforcement costs, but these are likely to be small.  He also  argues that MAP programs can tip competitors off and allow them to undercut pricing.  But if MAP programs truly were not in the economic interests of manufacturers, why would manufacturers ever want to use them?  Additionally, whether MAP programs really make pricing more transparent to competitors is not entirely clear.  In any event, lower pricing is generally good for consumers.

9. Browsing in a store is no different than advertising online.  In a brick-and-mortar store, consumers can just browse various competing items and see their prices.  Why shouldn’t they be allowed to do that online?  The answer is that a properly structured MAP program does not interfere with actual online “shopping cart” pricing.  It may impose certain restrictions on site-wide price advertising.  It is not clear whether or not this restraint is more significant than a restraint prohibiting brick-and-mortar stores from advertising prices below $X on street signs or in a newspaper but allowing independent store pricing inside the store.

10. MAP pricing can be circumvented.  Dealers can use instant rebates, coupons, and other incentives to offer special deals that may avoid the precise terms of a MAP program.  This is also true — and is a factor to be weighed by a manufacturer when considering whether it is worthwhile to institute a MAP program.  However, it is not an indictment of MAP programs per se.

Obscure New York Law Does Not Render Resale Price Maintenance Illegal

This is from a few months back, but I haven’t mentioned it yet on this blog.

Resale Price Maintenance (RPM) is no longer per se unlawful under federal law.  Nor is it per se lawful.  Since Leegin, 551 U.S. 877 (2007), some states have been stepping up their own RPM enforcement efforts.  New York, for one, had been advocating that New York law automatically barred RPM agreements.

In making this argument, The New York Attorney General did not rely upon the Donnelly Act, New York’s version of the Sherman Act, but rather upon Section 369-a of the N.Y. General Business Law and Section 63(12) of the N.Y. Executive Law.  The AG’s arguments were rejected in New York v. Tempur-Pedic Int’l, No. 0400837 (N.Y. Super. Ct., Jan. 14, 2011).  The court held that Section 369-A makes contracts for resale price maintenance unenforceable and not actionable, but not illegal.  The court also held that Tempur-Pedic’s minimum advertised pricing program was not a retail price agreement.  This despite the fact that the program was part of a contract with retailers, and n0t a unilateral policy.

Tempur-Pedic aside, it remains generally advisable to structure MAP programs as unilateral policies, rather than agreements, precisely to avoid debates about whether or not RPM agreements are involved.

Are Minimum Advertised Price Programs Good or Bad?

In a previous post, I linked to an article laying out a number of criticisms of Minimum Advertised Price (MAP) programs.

I won’t address each and every one of the numerous critcisms, but starting in this post I will briefly address some of them.

1. MAP programs discriminate against the online sales channel: it’s not obvious what Mr. Pierce means by this criticism.  Perhaps he is referring to the difficulties of determining whether or not an online price is “advertised” or not (see my previous post).  In any event, generally speaking, cooperative advertising incentives need to be reasonably available to all distributors or dealers.

2. Successful online dealers have significant costs: Undoubtedly true.  And if a MAP program were justified on the grounds that e-commerce is cheap and therefore needs price controls, it might be objectionable.  But MAP programs rarely are so justified.

3. Manufacturers should not protect inefficient dealers: All things being equal, cheaper distribution is better distribution.  But MAP programs do not necessarily prevent cheaper distribution.  They prevent the advertising of prices below a certain threshold — or, more precisely, in most cases, present such advertising if the dealer wants to receive some advertising coop monies.  Would manufacturers really want to keep distribution costs up?

4. MAP pricing is not automatically legal: The author appears to be conflating MAP pricing and resale price maintenance (RPM).  It is certainly true, however, that RPM is not per se lawful.

5. MAP pricing may facilitate unlawful collusion: This is a potential danger, and requires that MAP programs be structured appropriately.  Usually, however, this potential danger can be mitigated adequately.

I’ll address more of the criticisms in an upcoming post.

Minimum Advertised Price Programs and the Internet

Minimum Advertised Price (MAP) programs should be directed at advertised prices, not actual prices.  That distinction is relatively straightforward in the case of brick-and-mortar retailers.  In that case, actual, in-store prices are not subject to the program, but prices advertised in magazines, or on television or radio, are.

Internet sales present a murkier picture.  It is not always easy to distinguish between advertised prices and actual prices on websites.  For example, what if a website receives advertising co-op money, but links to pages with discount pricing that do not receive co-op money?  Can the Internet retailer undercut MAP pricing on that other web page?

Similarly, is there a difference between “advertising” a price in a box at the top of a webpage, but “listing” a price in connection with an order at the bottom of a webpage?  Does it make a difference if the latter price is only visible after a customer indicates he or she wants to buy the item (i.e., after he or she fills the shopping cart)?

And what about online retailers who come up with creative ways to offer discounts, such as by e-mailing coupons to customers, or offering free shipping at a discount on a product not covered by a MAP policy?  In that case, can the manufacturer deny co-op funds?

There are no easy answers to these questions.  The law is sparse and unsettled.   Companies that sell on the Internet should thus be careful, and exercise appropriate judgment, about the structure of Internet MAP programs.

In an upcoming post, I will start to address some criticisms of MAP programs that are presented in this interesting piece.

Minimum Advertised Price Programs

Under federal law, it is no longer per se illegal for a manufacturer to agree on resale prices with its distributor.  State laws still vary, however, and even under federal law the practice can be unlawful under a detailed market analysis that weighs all the pro-competitive and anti-competitive effects of the resale price maintenance.

However, manufacturers and distributors can avoid these complexities if they do not agree on resale prices, but agree on minimum advertised prices.  The distributors are free to set their own prices, but if they want advertising co-op funds (or other benefits), then they cannot advertise lower prices.

I’ll post more on MAP programs in a bit.


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