State Attorneys General Intensify Post-Leegin Assault on RPM

Antitrust Update

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Two recent state enforcement actions that rely solely on state law to attack the practice of minimum resale price maintenance (RPM) provide the latest indication that states are eschewing federal antitrust law in their increasingly vigorous efforts to police RPM agreements in the aftermath of the Supreme Court’s decision in Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

On March 29, 2010, New York’s Attorney General (NYAG) filed a complaint against Tempur-Pedic International, Inc. (Tempur-Pedic) in New York Supreme Court seeking injunctive relief, restitution, and disgorgement, among other things, in connection with Tempur-Pedic’s alleged RPM policy (the Complaint). The NYAG alleges that Tempur-Pedic implemented an RPM policy in “a series of letters to all accounts from its president” stating that Tempur-Pedic “will not do business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic,” as well as in its Retail Partner Agreement, which prohibited discounting practices such as “[f]ree gifts with purchase,” “[n]o sales tax,” and “[g]ift cards, rebates, coupons or other ‘in-store credits.’”

The Complaint does not assert claims against Tempur-Pedic under the Sherman Act or under New York’s antitrust statute, the Donnelly Act. That fact is itself quite significant. It suggests that the NYAG may view the Sherman Act, after Leegin, as inhospitable to claims regarding RPM, and likewise may reveal a reluctance on the part of the NYAG to raise a similar challenge under the Donnelly Act, which has long been construed in light of federal precedent. Instead, the Complaint seeks relief under New York Executive Law § 63(12) (“Section 63(12)”), which permits the NYAG to obtain equitable relief where the defendant is “engage[d] in repeated fraud or illegal acts.” The NYAG asserts that it is entitled to relief under Section 63(12) because Tempur-Pedic, by promulgating and enforcing an RPM policy, violated New York General Business Law § 369-a (“Section 369-a”), which, according to the NYAG, “provides that a vendor or producer cannot set the minimum price at which its product can be resold.” By bringing a claim under Sections 63(12) and 369-a, the NYAG arguably will not have to demonstrate that Tempur-Pedic possesses market power in order to justify the prohibition of its RPM policy.

A close look at Section 369-a, however, reveals potential weaknesses in the NYAG’s legal theory. Section 369-a provides 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.” Section 369-a thus states that a contract provision regarding RPM shall be unenforceable; it does not necessarily state that RPM is positively “illegal,” which is the standard applicable to the NYAG’s claims under Section 63(12). For example, a manufacturer who terminates a distributor for violations of an RPM policy may face a breach of contract action brought by the affected distributor. In that circumstance, Section 369-a would bar the manufacturer from raising, as an affirmative defense, that the distributor’s violation of the RPM policy provided just cause for termination. In Tempur-Pedic, the NYAG has posited a different interpretation of Section 369-a, i.e., that the statute would, in effect, render the same manufacturer liable for damages and/or subject to civil penalties. The plain language of the statute does not unequivocally support such an interpretation. In any event, the NYAG’s claims against Tempur-Pedic appear to present an issue of first impression under New York law, and the State’s legal theory could ultimately prove durable.1

Separately, in February 2010, California’s Attorney General (CAAG) filed a complaint and stipulated final judgment in California state court in an RPM case against DermaQuest Inc. (DermaQuest), a California-based manufacturer of skin care products. In its complaint, the CAAG alleged that a restrictive clause in contracts between DermaQuest and wholesalers, which required wholesalers to represent and warrant to DermaQuest that their retail customers would not resell products below the manufacturer’s minimum price, constituted a per se violation of California’s antitrust statute, the Cartwright Act, and amounted to unfair competition under Section 17206 of California’s unfair competition law. As with the NYAG’s Tempur-Pedic action, the CAAG’s complaint does not assert any violation of federal antitrust law. Nonetheless, under the stipulated final judgment, DermaQuest agreed, among other things, to disavow all current RPM agreements, refrain from entering into RPM agreements in the future, and pay civil penalties.

It bears emphasis that neither Tempur-Pedic nor DermaQuest has been litigated to a verdict, so it remains uncertain how courts will decide novel theories raised by these various state laws. Viewed, however, in the broader context of Maryland’s post-Leegin enactment of a law prohibiting RPM agreements as per se unlawful,2 these cases are a clear warning shot that state Attorneys General are actively looking for and pursuing appropriate vehicles to test the limits of Leegin. Accordingly, companies considering implementation or alteration of an RPM policy would do well by proceeding with extreme caution.

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1See generally J. Mitnick, J. Lavelle, W. Reiss, O. Smith, “On Life Support from Leeginaire’s Disease: Can the States Resuscitate Dr. Miles?” Antitrust, Summer 2008.

2See generally Sidley Antitrust Update, “Leegin Under Siege: Maryland Law, Other Initiatives Push Return of Per Se Rule Against Resale Price Maintenance,” April 30, 2009, available athttp://www.sidley.com/sidleyupdates/Detail.aspx?news=4008

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