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March 25, 2015

Setting Prices — A Pandora’s Box


By David L. Cahn, Esq., Whiteford Taylor & Preston LLP, Baltimore, Maryland

Over the past several months, a number of our retailer members have reached out to NSSF with their concerns regarding the ideas of establishing “minimum resale prices” or “minimum advertised prices” between manufacturers and themselves. The basis for the discussion behind these issues has much to do with competition between the evolving and expanding Internet trade in firearms, ammunition and related accessories versus those involved in traditional, brick-and-mortar establishments. To help our retailers better understand these very serious issues and their legal ramifications, NSSF provides the following article by attorney David L. Cahn of Whiteford Taylor & Preston LLP.

Minimum Resale Price Maintenance — Retailers Can Advocate, but not Coerce

Traditional or “main street” retailers in a wide variety of industries have been challenged and, in some cases, destroyed by competition from Internet retail channels, or “eTailers.” This is because Internet sellers generally have lower overhead costs, which allow them to charge less for a variety of consumer goods. Particularly for industries such as the shooting sports, in which the customer services in-person retailers provide can be of critical importance, the ability of customers to “browse” at the shop and then buy online can be devastating to the viability of traditional retail.

There may be a temptation for traditional gun retail shops to jointly pressure domestic gun manufacturers and gun importers to promulgate and enforce minimum “resale price maintenance” (RPM) policies. Such policies typically require retailers not to sell specific products below a specified price or face the manufacturer ceasing sales to the offending retailer or refusing to provide promotional allowances or other supports. Failing that, the retailers want manufacturers to adopt “minimum advertised price” (MAP) policies, which would prevent eTailers from promoting low prices on their websites and therefore dampen the flow of Internet purchases. While retailers’ desires in this regard are understandable, banding together to force manufacturers to utilize such pricing policies would most likely be a violation of U.S. antitrust laws that could expose the participating retailers and their trade association to serious legal liability.

Individual Manufacturers Have Freedom to Use Minimum Resale Price Maintenance

The antitrust laws are intended to ensure free and open competition. These laws, such as the U.S. Sherman Act and the Federal Trade Commission Act and similar laws in many states, prohibit contracts, combinations, conspiracies and other agreements that “unreasonably restrain” competition.

Agreements between businesses are “vertical” in nature if the parties are not operating at the same level of distribution, such as between a gun manufacturer or importer and a federally licensed firearms retailer. Agreements between businesses that operate at the same level of distribution, such as among dealers, are “horizontal” in nature. Generally speaking, antitrust laws are most concerned with horizontal agreements, particularly ones that will result in higher prices paid by consumers or a reduction in available supply (which usually results in higher prices). However, an antitrust law violation can exist where a group of horizontal competitors jointly forces their common supplier to take a certain action that keeps prices at or above a certain level.

In most of the world outside of North America, it is always a violation of the antitrust or “competition” laws for a manufacturer (or importer) of goods to enforce RPM policies. However, in 2007 the U.S. Supreme Court ruled in the case of Leegin Creative Leather Products Inc. v. PSKS that product manufacturers do not automatically (or “per se“) violate U.S. antitrust laws if they require retailers to sell their branded products at or above specific price levels and if they require each retailer to sign an RPM agreement. Instead, U.S. courts are required to examine whether a manufacturer’s use and enforcement of minimum resale pricing agreements would lead to a substantial increase in prices or decreased availability of products of a particular type (such as handguns of a certain caliber), without a sole focus on competition among retailers to sell one particular manufacturer’s brand. So a single manufacturer’s use of RPM methods is generally not an antitrust concern unless the manufacturer has “market power,” meaning a market share sufficient to cause an increase (or decrease) in overall consumer prices by changing its pricing practices.

However, in its Leegin Creative Products decision the U.S. Supreme Court emphasized that a horizontal cartel among competing retailers that reduces competition in order to increase price is per se unlawful. To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate RPM among the retailers, it is a violation of the antitrust laws. This is especially true when there is widespread adoption and enforcement of RPM policies across an industry.

The Supreme Court majority in Leegin was 5 to 4, and the dissenting justices were highly suspicious that allowing manufacturers to enforce RPM policies would facilitate horizontal arrangements that increase consumer prices. Mainly because of that fear, certain states still treat RPM as either being an absolute, per se violation of the state’s antitrust law (California and Maryland) or as being unenforceable against the dealer and is not good cause to terminate a dealership (New York).

Use of Collective Action to Force Industry Adoption of Resale Price Maintenance is Very Risky

A single manufacturer may decide to issue and enforce minimum resale price maintenance (RPM) policy for any reason, including demands or pressure from its largest dealers, as long as the decision solely concerns that manufacturer’s products. But if such a campaign is part of coordinated program to force widespread industry adoption of RPM, then it clearly changes to a conspiracy by competing retailers to reduce overall competition and increase prices, and is in the nature of a “group boycott” that is per se unlawful — even if the group of retailers do not have the market power, on their own, to maintain prices at desired levels.

For example, in the decision of Carpet Group International v. Oriental Rug Importers Ass’n, Inc. (2000), the Third Circuit Court of Appeals determined that oriental rug importers and their trade association would have violated antitrust law by coercing rug manufacturers and retailers to not patronize the plaintiff’s trade shows, at which the manufacturers could bypass the importers and deal directly with retailers. That court held that because “the only rationale for the [trade association’s actions] was the elimination of additional, lower cost, higher quality or more innovative output from the market,” it was not necessary for the members of the trade association to have the collective market power to destroy the trade show operator’s business. Rather, by substantially weakening the trade show operator, the trade show and its members were liable.

The analogy clearly holds to collective action to force most gun manufacturers to issue and enforce RPM policies. Those actions, whether taken through a trade association or through a looser confederation of gun dealers, would be per se violations of U.S. antitrust laws and could result in criminal actions against the participants in such a conspiracy.

Moreover, in just the past two years the Federal Trade Commission (FTC) has forced several different trade associations to change policies that discouraged competition between competitors. The consent decrees that the associations entered into with the FTC have imposed significant penalties on the associations themselves, particularly in terms of ongoing compliance costs. The complaints that generated these actions did not clearly show that the policies actually decreased competition or increased consumer prices — only that they had the tendency to do so. A trade association whose primary purpose is to maintain consumer pricing levels and eliminate discounting would clearly be in the FTC’s cross-hairs from inception.

So What are Dealers to Do?

There are some actions that retail dealers can take collectively to try to improve their situation:

1. Legislative action — There is widespread concern among traditional retails, owners of retail commercial real estate and even some labor groups that the growth of Internet retailing is bad for communities. The decrease in retail jobs and the increase in retail space vacancies may eventually result in the abandonment of commercial districts and a decrease in the vibrancy of community life. Congress has the power to change antitrust laws to allow traditional retailers to engage in collective action, and it can alter market conditions by taxing the shipping of packages from businesses to residents in such a manner as to raise Internet sellers’ cost structures. Gun dealers can join groups such as the National Retail Federation and the National Federation of Independent Businesses (NFIB) that lobby Congress to pass such pro-retailer laws. Such lobbying efforts are immune from antitrust liability.

2. Education — Retailers can tell their stories of how Internet sales have impacted their businesses, including through live, in-person forums with manufacturers’ representatives and other industry participants. In the shooting sports industry this advocacy could include articles and advertisements in consumer-facing media, explaining the real danger to sportsmen that the Internet is decreasing profit margins so much that their favorite full-service local dealer may be on its way to extinction. Retailers can also write articles for “industry-facing” publications that manufacturers’ executives are likely to read, such as in SHOT Business magazine.

3. Individual Actions — Retailers can communicate with each other over whether a specific manufacturer is enforcing an RPM policy and can complain to that manufacturer about lack of enforcement. Retailers can prominently display RPM-protected products in their stores and make more vigorous efforts to sell them. Acting individually, dealers can decide to no longer stock the products of those manufacturers who refuse to issue or enforce an RPM policy and can publicize why they have taken that action. If enough dealers are willing to sacrifice short-term profits for the “cause” of retailer survival, then their individual decisions could persuade manufacturers to adopt and enforce RPM.

Conclusion

There are no easy answers for traditional retailers trying to compete with Internet sellers. It is understandable that retailers wish to raise awareness of the challenges in competing with eTailers, and there are major public policy concerns with the deterioration of in-person commerce. However, groups of competitors (or their trade associations) cannot collectively compel increases in consumer prices or suppress price competition. To do so is to risk significant monetary liability and even a jail sentence.

David L. Cahn can be reached at DCahn@wtplaw.com.

You may also be interested in: Facts That Help You Sell: What’s Your Competition Doing?