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Recent Developments on Vertical Price Restraints under New York law

By: Amanda H. Freyre and Fusae Nara, Pillsbury Winthrop Shaw Pittman LLP

In a landmark case, the Supreme Court held that minimum retail price maintenance agreements are no longer per se illegal under federal law.  Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).  Although these agreements are subject to the rule of reason under federal law, many states continue to prohibit vertical price agreements, finding them per se illegal.

New York state antitrust law has generally mirrored federal antitrust law; however, § 369-a of New York’s General Business law has made unclear whether vertical price agreements should be analyzed under the rule of reason, or whether they should be considered per se illegal. 

Interpretation of New York antitrust law after Leegin

New York’s antitrust law, codified in the Donnelly Act, has traditionally followed the federal interpretation of the Sherman Act.  Anheuser-Busch, Inc. v. Abrams, 520 N.E.2d 535 (N.Y. 1988).   Historically, under the Sherman Act, minimum resale price maintenance agreements were illegal per se.  In Leegin, the Supreme Court held that that such agreements were no longer per se illegal and now would be judged under the rule of reason.  Leegin, 551 U.S. 877.  Although New York antitrust law has generally been interpreted as its federal counterpart, a New York statute, entitled “Price-fixing prohibited,” states that “[a]ny contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable or actionable at law.”  N.Y. Gen. Bus. § 369-a. 

Relying on § 369-a, the New York Attorney General and at least one private entity have recently challenged the legality of vertical price restraints in New York, arguing that the statute evidences a state policy against such agreements.  Meanwhile, manufacturers have argued that the language of the statute does not prohibit vertical price agreements. 

In People v. Tempur-pedic, a manufacturer notified retailers in a memorandum, of a new minimum retail price policy for sale of its products.  The memorandum stated that Tempur-Pedic would suspend doing business with any retailer that did not implement the suggested prices.  People v. Tempur-pedic Int’l, Inc., 916 N.Y.S.2d 900, 903 (N.Y. Sup. Ct. 2011).  Nevertheless, the manufacturer specifically stated that the policy was a unilateral decision, that the policy was not negotiable, and that it did not want, nor would it accept an agreement from any retailer.  Id. at 904.  The New York Attorney General argued that the policy was an illegal agreement under § 369-a, and that the policy was incorporated into its Retail Partner Obligations and Advertising Policies agreement (“RPOAP”).  Id. at 904.

First, the New York Supreme Court determined that the RPOAP pertained only to advertising, and that the pricing memorandum was not incorporated into the signed agreement.  Id. at 908.  On appeal, the First Department agreed that “advertising agreements cannot be the subject of a vertical retail price maintenance claim because they do not restrain resale prices, but merely restrict advertising.”  People v. Tempur-Pedic Int’l., Inc., 944 N.Y.S.2d 518, 519 (N.Y. App. Div. 1st Dep’t 2012). 

Second, even if a contract existed between the parties, the New York Supreme Court stated that there was no violation under § 369-a because “contracts for resale price restraints are unenforceable and not actionable, but not illegal.”  Tempur-pedic, 916 N.Y.S.2d 900, 902 (N.Y. Sup. Ct. 2011), aff’d, People v. Tempur-Pedic Int’l., Inc., 944 N.Y.S.2d 518 (N.Y. App. Div. 1st Dep’t 2012) (stating that an action to enforce a minimum resale price agreement was not maintainable).

Third, the court determined § 369-a was inapplicable to the manufacturer’s policy because no agreement between the parties existed on price restraints.  Tempur-Pedic, 916 N.Y.S.2d 900, 906 (N.Y. Sup Ct. 2011).  Because the retailers had independently decided to yield to the pricing scheme to continue selling the manufacturer’s products, there was no intent to be bound and no meeting of the minds.  Id. at 902.  Put another way, merely adhering to a suggested retail price did not establish an agreement. The court suggested, however, that an implicit contract would be formed if a manufacturer successfully employed coercive tactics or threats to achieve compliance. 

Federal court interpretation of New York antitrust law

Applying New York law, a Federal court determined that § 369-a does not establish a per se rule making vertical retail price maintenance agreements illegal, in New York.  In Worldhomecenter.com v. KWC, the plaintiff was a private internet retailer, and alleged that the manufacturer’s Internet Advertising Policy (IAP) was a vertical resale price agreement and therefore an illegal restraint of trade under the Donnelly Act.  Worldhomecenter.com Inc. v. KWC Am. Inc., No. 10 Civ. 7781, 2011 WL 2565284, at *1 (S.D.N.Y. Sept. 15, 2011).  To plead a violation of the Donnelly Act, the plaintiff needed to allege that the manufacturer’s conduct was anticompetitive under either the rule of reason or the per se rule against vertical price restraints.  Id. at *3.  Thus, the court had to determine whether the per se rule against vertical price restraints was still applicable in New York.

The advertising policy prohibited retailers from advertising the products below a certain price on the internet.  Id. The court found that contracts between supplier and seller to set prices are unenforceable, but not illegal in New York under § 369-a.  Id. at *4 (citing Tempur-Pedic, 916 N.Y.S.2d 900 (N.Y. Sup. Ct. 2011)).  Even if contracts restricting price were illegal, the court held that advertising restrictions are not antitrust violations because they are not actually price restrictions.  KWC, 2011 WL 2565284, at *5.  The court further stated § 369-a did not apply because the plaintiff was subjected to a unilateral policy restricting advertising, rather than a party to a contract on prices.  Id. at *8. 

The plaintiff in KWC argued that there was no distinction between retail prices and advertised prices on the Internet because prohibiting price advertisements effectively restricted the resale price.  Id. at *5.  The plaintiff claimed that Internet retailers are bound by the advertised price because they are unable to communicate sale prices directly to customers.  Id.  The court found that these retailers nevertheless have opportunities to offer lower prices through phone, email, and other forms of communication.  Id.  Accordingly, the manufacturer did not prevent plaintiff from selling its products at whatever price the retailer wished.  Id. 

Finally, the court held that the advertisement policy was not a violation of the Donnelly Act because no agreement was actually formed: the Donnelly Act proscribes only concerted action in the form of contract, agreement, or arrangement.  Id. at *6.  In fact, a manufacturer’s independent, unilateral acts to set minimum resale prices, without seeking agreement from its retailers, do not amount to a contract.  Id. (citing Tempur-Pedic, 916 N.Y.S.2d 900 (N.Y. Sup. Ct. 2011)).  Had the plaintiffs alleged sufficient facts to suggest that the manufacturer had made agreements with other distributors, the court may have found a violation of the Donnelly Act.  KWC, 2011 WL 2565284, at *6.

Conclusion

In sum, recent New York decisions have helped to clarify Leegin’s influence on the New York courts.  First, the Appellate Division agreed that vertical price restraints are not unlawful in New York, but rather unenforceable.  Furthermore, in response to the Attorney General’s argument that it can ask the court to enjoin unenforceable contracts, the court determined that policies created by manufacturers are not agreements.  Instead, absent any facts indicating a meeting of the minds between the parties, these policies are unilateral actions by the manufacturers.  Finally, agreements restricting advertisements are not considered price restraints and, thus, do not violate the Donnelly Act.