5 Reasons Manufacturers Should Not Rely on Retailers to Enforce Pricing Policies
By Ryan Marth, Robins Kaplan L.L.P
An old maxim holds that “if you want something done right, do it yourself.”1
Most manufacturers put a great deal of thought into their pricing policies. Many engage in significant efforts to suggest resale prices that give retailers the maximum incentives to promotion their products.
The benefits of an established pricing policy—one that does not violate state or federal antitrust laws—are clear. What is less clear, however, is the best way to monitor and enforce the price of your goods down the line.
In the pre-mobile-commerce era, many manufacturers relied on retailers to report violations of their pricing policies. These manufacturers assumed that retailers are likely monitoring competitor prices in the normal course of business. They probably also assumed that the retailers had the time and motivation to tell the manufacturer when someone undercuts them in violation of the manufacturer’s established pricing guidelines. In an environment where pressures on manufacturers are intense, margins are tight, and schedules are tighter, it was tempting to outsource the enforcement of pricing policies to others. Problem solved, right?
Not so fast! While this practice may have been practical—if legally risky—in the days before mobile commerce, it is becoming less of a viable business strategy. Oh, and it’s still legally risky. Below are five legal and business reasons why manufacturers should enforce their own pricing policies, making use of technological tools to do so in a fair and consistent manner.
1) You could face accusations of price fixing.
The line between a valid, unilateral pricing policy and a potentially suspect price agreement is often blurry. Even a carefully worded policy can raise red flags based on your conduct and the conduct of your customers.
In Leegin v. PSKS,2 the Supreme Court found that price agreements between manufacturers and retailers are judged under the “rule of reason.” This represented progress over earlier days when courts considered all such agreements illegal. The rule of reason analysis is still complex, however, such that agreements between manufacturers and retailers run the risk of being interpreted as illegal restraints of trade.
The Supreme Court specifically cautioned against agreements that aided retailers in fixing prices among themselves. Communications between retailers and the manufacturer can serve as evidence of this type of illegal arrangement. In antitrust law, an “agreement” can exist even in a “wink and nod” even if the parties never “signed on the dotted line” or even shook hands. Relying on your customers to monitor your pricing policy can expose you to investigations, lawsuits, and treble (triple) damages if the courts decide you facilitated an agreement among your retailers.
2) You could promote uneven and unfair enforcement.
Your minimum advertised price (MAP) or resale price maintenance (RPM) policies are only effective through thoughtful application. If you rely on retailers to report violations, it is unlikely that you will get the full picture. This is especially true in the mobile-commerce age when prices are changed automatically, with reverberations instantly felt throughout the e-commerce world, as competitors automatically match those prices. Moreover, these changes often occur late at night or on weekends when you or your retailers are not likely to be monitoring them. If you enforce your pricing policy unevenly, you will almost certainly hear accusations of favoritism.
One of the primary benefits of establishing a pricing policy is to encourage your retailers to promote your products. The best retailers market your products and present them in a way to serve your interests and the interests of your customers. Playing favorites through inconsistent enforcement of your pricing guidelines is a sure way to damage your relationship with some retailers.
Your retailers are a valuable resource. You can protect your business and your relationships by making sure you treat your retailers equally.
3) You could unknowingly be an accessory to eliminating competition.
Allowing your retailers or distributors to monitor your pricing policies can make you an unwitting tool in an illegal conspiracy to restrain trade. If a retailer cannot match the innovation and efficiency of a competitor, they may turn to you to protect them from having to compete fairly.
Even if the reporting retailer does not have a nefarious motive, communications between you and the retailers may look like an attempt by the retailer to maintain market dominance over an innovative competitor. If you take any action to penalize the competitor for violating your pricing policy, you could be accused of joining in a conspiracy to violate antitrust laws ― even if your action was otherwise legal.
And even if you do not have to defend a lawsuit, your involvement will likely subject you to a costly and burdensome subpoena. In short, you would be doing the retailer’s dirty work and exposing yourself to a lawsuit in the process.
4) You could inadvertently make your policy moot.
It is difficult or impossible to know how much energy your retailers will put into monitoring competitor prices. Many manufacturers rely on their retailers to enforce their pricing policies because they are so busy with other issues. Your retailers are, likewise, concerned with needs of their own. They may not have the time or resources to review all of their competitors and pinpoint violations of your policy.
Increasingly, online pricing, seasonal pricing, and limited offers can come and go in a flash. Even a concerned retailer is likely to miss violations of your policy. It only takes one undetected violation to destroy much of the value you gain from having an established unilateral pricing policy.
You are far better off monitoring your policy yourself, whether it be manually or through software that patrols and monitors it for you.
5) You could subject your retailer partners to lawsuits.
There are other legal reasons for manufacturers to avoid reliance on customers in maintaining pricing policies. If you cut off a retailer in response to a tip that it is violating your pricing policy, that retailer may seek legal recourse against the tipster. If the reporting retailer conveys its message improperly, the retailer you cut off may have a case for wrongful interference against the reporting retailer.
In such a case, you could find your business and your internal documents embroiled in the lawsuit and subject to examination by the rejected retailer and its attorneys. While a court would likely not hold you liable for the economic harm in this case, you would still see your time wasted and your business exposed unnecessarily, and may even find your relationship with the “compliant” retailer—i.e., the one you “trusted” to help enforce your policy—harmed as a result.
Just because a practice is common does not mean it is wise.
Relying on your retailers to inform you of pricing-policy violations is inadvisable. While it may save you time and energy in the short term, the potential for harm is enormous. You could face legal action, damage your relationships with customers, and see your brand value diminished. If time savings is a goal, a better strategy is to employ technology—rather than self-interested retailers—to monitor prices for you.
In the long run, you will be best served by finding a more consistent and reliable method to ensure compliance with your pricing policies. Look to an internal team to monitor retailer pricing, or look outward to a company that knows how to scour all sources to ensure policy compliance.
1The phrase likely originates from the 1807 French play by Charles-Guillaume Étienne, Bruis et Palaprat, where it appeared as “On n’est jamais servi si bien que par soi-même.”
2551 U.S. 877 (2007).