A recent New York state appeals court decision highlights the need for suppliers to continue exercising caution when adopting and implementing a resale price maintenance policy.

On May 8, 2012, the Appellate Division of the New York Supreme Court affirmed a lower court’s decision that Tempur-Pedic International’s (Tempur-Pedic) “Retail Partner Obligations and Advertising Policies” (the Policies) did not violate state law.  While a victory for a supplier trying to influence downstream prices for its products, this decision shows suppliers need to continue exercising caution when adopting resale price maintenance policies because of their potentially divergent treatment under federal and state law.

Background

Tempur-Pedic sells beds and bedding directly and through retailers.  In the past, Tempur-Pedic and its retailers signed the Policies, in which retailers agreed not to advertise discounts for Tempur-Pedic products.

On March 29, 2010, the New York Office of the Attorney General (NY AG) sued Tempur-Pedic over the Policies because they allegedly amounted to “price-fixing” and violated New York state law.  Specifically, the NY AG alleged Tempur-Pedic’s policies forbade retailers from setting prices below a range set by Tempur-Pedic, constituted illegal resale price maintenance and raised prices to consumers.  The lower court did not agree, however, and granted Tempur-Pedic’s motion to dismiss on January 14, 2011.

Appellate Division of the New York Supreme Court’s Decision

The Appellate Division of the New York Supreme Court affirmed the lower court’s ruling that New York state law does not make resale price maintenance agreements illegal as a matter of law.  Instead, the court ruled that New York state law merely makes resale price maintenance agreements unenforceable in New York state courts. 

The court then went on to rule that the NY AG had failed to provide sufficient evidence that Tempur-Pedic’s Policies amounted to resale price maintenance agreements.  The court ruled that  the Policies only restricted advertising, not resale prices, despite being signed by Tempur-Pedic and its retailers. 

The court also ruled that the evidence put forth by the NY AG did not show Tempur-Pedic and its retailers agreed to maintain resale prices.  Citing the Supreme Court of the United States’ 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., which held that federal antitrust law would no longer condemn resale price maintenance agreements as per se illegal, the court found that the evidence showed that Tempur-Pedic adopted its Policies and its retailers independently decided to observe their terms in order to continue receiving Tempur-Pedic’s products.   

Analysis

Despite Tempur-Pedic’s victory, suppliers trying to influence downstream prices for their  products should still exercise caution when adopting resale price maintenance policies because of their potentially divergent treatment under federal law, which no longer treats them as per se illegal, but analyzes them for their anticompetitive effects and precompetitive benefits, and state law, which in some states may still treat such agreements as per se illegal.

Also, the fact that the lower court and the appellate court found no price agreement existed between Tempur-Pedic and its retailers, despite many documents and responses to Civil Investigation Demands that in the past would have created a fact issue sufficient to get to a jury, may demonstrate that the heightened pleading requirements of the U.S. Supreme Court’s decisions in Bell Atlantic, Corp. v. Twombly and Ashcroft v. Iqbal could be having an effect on state courts.  Twombly created new antitrust pleading requirements, requiring plaintiffs to allege “plausible grounds to infer an agreement” and to plead a “context that raises a suggestion of a preceding agreement.”  Iqbal extended these pleading requirements beyond antitrust claims.

Some examples of documents Tempur-Pedic produced that arguably in the past would have enabled the NY AG’s complaint to survive a motion to dismiss include: a retailer e-mail to  Tempur-Pedic stating,“[a]s discussed, discounting by our competitors has become a growing concern” and a Tempur-Pedic phone representative’s response to an undercover NY AG investigator that Tempur-Pedic retailers will “give you the exact same price” and “[n]o matter where you go, it would be the same price. … It’s a fixed price.” 

While heightened pleading requirements may have helped Tempur-Pedic prevail to date, litigation is expensive and time consuming.  To avoid litigation, it is important for suppliers to set out clear guidelines for any resale price maintenance policies.  These guidelines include making clear that the policy is unilateral, limiting communications with resellers about the policy and then only to written communications, communicating a clear, pro-competitive purpose for the policy, explaining that retailers remain free to set their own selling prices, making clear that the supplier is not seeking and will not accept any agreements to comply with the policy, enforcing the policy as uniformly as possible, and explaining that the supplier is not soliciting and has no obligation to act on one reseller’s complaint of another reseller’s discounting in violation of the policy.

Conclusion

Even though Tempur-Pedic’s resale price maintenance policy has survived, it does not mean these types of policies are free from scrutiny.  While resale price maintenance programs are not per se illegal under federal antitrust law, they remain subject to potential attack under state law.  Given the evolving nature of state law on this topic, it is still important for suppliers to proceed with caution when implementing resale price maintenance policies.