Under Section 1 of the Sherman Act, which prohibits unreasonable restraints of trade, certain agreements are automatically deemed to be per se unlawful.1 The adverse consequences of violating the per se rule include liability for treble damages and attorneys’ fees in civil suits. Some manufacturers and franchisors therefore breathed a sigh of relief when the Supreme Court overturned the per se rule against resale price maintenance (RPM), also known as “vertical” minimum price-fixing, in the case of Leegin Creative Prods., Inc. v. PSKS, Inc., __ U.S. __, 127 S. Ct. 2705 (2007). Nearly one year to the day after the Supreme Court’s June 28, 2007 landmark decision in Leegin, a federal appeals court in Philadelphia ruled that a district court had erred by granting summary judgment on a dealer’s claim of an unlawful conspiracy to fix minimum resale prices. Toledo Mack Truck Sales & Service, Inc. v. Mack Trucks, Inc., 2008 U.S. App. LEXIS 12741 (3d Cir. June 17, 2008).
For manufacturers and franchisors that want to prevent discounting by dealers, distributors, franchisees, and other retailers, the Third Circuit’s decision in Mack Trucks contains at least three important lessons:
The plaintiff in Mack Trucks was an authorized dealer of heavy-duty trucks that, before its termination as an authorized dealer, had aggressively sought to make sales of Mack Trucks throughout the country by undercutting the prices of other dealers. Mack Trucks’ dealer agreement assigned a territory known as an area of responsibility (AOR) but did not grant an exclusive territory to the plaintiff or any other authorized dealer. As a result, Mack Truck dealers were — under their dealer agreements — free to make sales throughout the country.
Although the dealer agreements did not prohibit extra-territorial sales, the plaintiff in Mack Trucks alleged that dealers had entered into a “gentlemen’s agreement” whereby they would not sell outside their AORs and would not compete with one another on the basis of price. At trial, these allegations were supported by statements attributed to other dealers and by testimony of a former employee of Mack Trucks.
At trial, the plaintiff also introduced evidence that Mack Trucks had joined in this conspiracy by adopting an informal policy against out-of-AOR sales. There also was evidence that Mack Trucks had adopted an official policy of denying sales assistance on out-of-AOR sales, and that this policy was the result of an agreement between Mack Trucks and its National Distributor Advisory Council to prevent dealers from making sales outside their AORs.
Based on this evidence, the Third Circuit found a horizontal agreement among the dealers that was per se unlawful under Leegin. See 2008 U.S. App. LEXIS 12741, *39 (“A horizontal cartel … among competing retailers that … reduces competition in order to increase price is, and ought to be, per se unlawful.”), citing Leegin, 127 S. Ct. at 2717. Evaluating Mack Trucks’ alleged participation in the conspiracy under the Rule of Reason, the Third Circuit found that Leegin supported finding an antitrust violation because “[i]f there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel ....” Id. at *53, citing Leegin, 127 S. Ct. at 2719. Evidence that Mack Trucks had market power in relevant product and geographic markets was yet another basis upon which it could be held liable for violating Sherman Act Section 1 even under the Rule of Reason, the Third Circuit held. Id.
The Mack Trucks decision suggests that manufacturers and franchisors may want to consider adopting the best practices for risk avoidance set forth in a prior Legal News Alert, “Mixed Signals” From Washington? Senators Propose Restoring Automatic Treble Damages for Manufacturers and Franchisors That Prohibit Discounting (http://www.foley.com/publications/pub_detail.aspx?pubid=4623). These best practices include obtaining the advice of counsel as to whether restrictions imposed on dealers, distributors, and franchisees are truly “vertical.” This can be particularly complicated where suppliers engage in “dual distribution.”2 Other best practices include having counsel analyze whether a the pricing policy adopted by the manufacturer or franchisor is truly “unilateral” and therefore not concerted action that violates Sherman Act Section 1 under the Colgate doctrine.3 Last but not least, manufacturers and franchisors should consider whether the concerns that prompt them to want to police discounting can be addressed through vertical non-price restraints — such as grants of territorial exclusivity. Manufacturers and franchisors that wish to adopt such vertical non-price restraints may first need to amend and renegotiate their underlying agreements with distributors, dealers, or franchisees.
1 Under the per se rule, certain restraints of trade are automatically deemed to be unreasonable in violation of Sherman Act Section 1 “without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5 (1958); Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
2 Dual distribution includes situations where manufacturers whose products are sold through independent dealers, distributors, or retailers also own some retail outlets or otherwise “sell direct.” It also includes situations where franchisors operate “company stores” in addition to licensing franchisees to offer goods and services under the franchisor’s trademark. Depending upon which U.S. Circuit Court of Appeals has jurisdiction over the parties, counsel may need to verify that the impetus for RPM came from the top down (in other words, from the franchisor or manufacturer) rather than from franchisees, dealers, and distributors — and that it benefits primarily the supplier through increased interbrand competition. See, e.g., Int’l Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 906 (6th Cir. 1989); Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215, 1231 (8th Cir. 1987); Midwestern Waffles, Inc. v. Waffle House, Inc., 734 F.2d 705, 721 (11th Cir. 1984); Donald B. Rice Tire Co. v. Michelin Tire Corp., 638 F.2d 15, 16-17 (4th Cir. 1981).
Legal News Alert is part of our ongoing commitment to providing up-to-the minute information about pressing concerns or industry issues affecting our distribution and franchise clients and our colleagues.
Please contact the following attorneys for additional information on this or other distribution and franchise-related matters:
Roberta F. Howell
Michael J. Lockerby