Vertical Restraints Enforcement at the FTC

The ALI-ABA Eleventh Annual Advanced Course on "Product Distribution and Marketing"

Snowbird, Utah

Date:
By: 
Christine A. Varney, Former Commissioner

* Commissioner, Federal Trade Commission. The views expressed are those of the Commissioner and do not necessarily reflect the views of the Federal Trade Commission or any other Commissioner or staff.

It is a pleasure to be here to discuss vertical restraints and the antitrust laws. You have already heard a great deal about the law and economics of resale price maintenance. I am not here to debate the law, nor to rehash the debate on this topic. Rather, I'd like to talk to you about the federal government's priorities in the vertical restraints area.

I have two messages for you today. First, the bottom line in our enforcement agenda today is that resale price maintenance agreements are unlawful per se and the Commission will enforce the law in this area. This may not seem like such a surprising position until you remember that, for most of the 1980's, there wasn't a single purely vertical federal enforcement action brought in this area. Under the leadership of former Chairman Steiger and Chairman Pitofsky, however, the FTC has restated its intention now intends to enforce the law in this area. You have heard, and will hear today, a great deal about legitimate reasons why manufacturers want to require that retailers adhere to certain minimum prices, such as preventing discounters from free- riding off the customer service and information provided by full-service retailers. The FTC's enforcement commitment does not mean that we will ignore legitimate business justifications raised in defense of such conduct; rather, we will consider such defenses in our prosecutorial discretion. The law, however, already lays out a path by which a manufacturer can unilaterally adopt a plan (known as a Colgate plan) to establish suggested resale prices in advance and lawfully terminate retailers who fail to adhere to those prices. Consequently, any business justification offered in support of a resale maintenance program must show not only why the program was necessary, but also why it could not be adequately handled unilaterally.

My second message is that we have begun to work more closely with the state Attorneys General on these cases. The State AG's have extensive experience in this area, and the FTC is determined to work closely with them to maximize our enforcement dollars. This new cooperation is reflected in two recent enforcement actions in the athletic and casual shoe industry, to which I will now turn.

The most recent case involved Reebok International Ltd. and its subsidiary, The Rockport Company, Inc. The FTC worked closely on this case with state Attorneys General, who simultaneously announced an agreement to settle similar allegations. Both the FTC and the state Attorneys General alleged that Reebok and Rockport fixed the resale prices of their products. The settlement prohibits both companies from fixing the prices at which dealers advertise or sell athletic or casual footwear products to consumers. The settlement also prohibits them from coercing or pressuring any dealer to maintain or adopt any resale price, or from attempting to secure their commitment to any resale price. The order requires Reebok and Rockport to inform their dealers in writing that dealers can advertise and sell Reebok and Rockport products at any price they choose, despite any suggested retail price established by the companies.

The settlement also prohibits the companies from instituting what has become known as a "structured termination" policy for a period of ten years. Structured termination policies, which purport to follow the dictates of Colgate, usually contain some type of initial suspension, say for 90 days, of retailers who violate an announced resale pricing policy, followed by complete termination if the retailer does not come into compliance with the pricing policy. The settlement prohibits Reebok and Rockport from notifying a dealer in advance that it is subject to partial or temporary suspension or termination if it sells or advertises the respondents' products below a company designated resale price, or that the dealer will be subject to some greater sanction if it continues or resumes selling or advertising the products below that designated resale price.

I know that this type of notification policy falls into the "gray" area of RPM jurisprudence and that it has been the subject of some attention from commentators. It does seem odd that a policy that gives retailers a warning would be illegal, while one that terminated retailers outright would not be. Putting aside the issue of whether such policies are unlawful in and of themselves, I would like to review our experience with such policies. We have found that structured termination policies, by their very nature, may generate price discussions between the manufacturer and the retailer who has received a warning or suspension. Those price discussions can turn into agreements to raise price. Think about it as a practical matter. You are a retailer and you have been temporarily suspended or given a warning by a manufacturer. You now face the real possibility of outright termination. What is the first thing you do? You call up the manufacturer and try to find out what you can do to stop the manufacturer from terminating you outright. No matter how often a manufacturer's antitrust compliance people tell the salespeople not to discuss pricing with retailers, any salesperson receiving such a call is going to inevitably want to tell the retailer what he or she needs to do to get out from under the threat of termination -- namely, raise prices by a certain amount, which potentially creates an unlawful resale price maintenance agreement! By contrast, a termination-only policy results in a clean, nontemporary break in the manufacturer-retailer relationship and thus may lead to fewer instances of such discussions. This explains why the Commission required, as "fencing-in" relief, that respondents agree not to adopt a "structured termination" policy for a ten-year period, while it did not take away respondents' ability to adopt a pure Colgate "termination-only" plan.

Let me turn now to the second case brought against an athletic shoe manufacturer. In April 1994, the Commission entered into a consent order that settled charges against Keds Corporation, alleging that it had agreed with some dealers to maintain resale prices on certain types of athletic and casual shoes. Here, again, the Commission worked in tandem with state Attorneys General and we announced our respective settlements together. The FTC consent order requires Keds to refrain from: fixing the prices at which any dealer may advertise or sell the product, coercing any dealer to adopt or adhere to any resale price, attempting to secure commitments from dealers about the prices at which they will advertise or sell the products, or requiring or even suggesting that dealers report other dealers who advertise or sell any Keds products below a suggested resale price. Also, the order requires Keds to inform its dealers that they are free to advertise and sell Keds products at prices of their own choosing. For five years, the order also requires that Keds incorporate a similar statement in any materials suggesting resale prices that it sends to dealers.

The Commission did not strip respondents of their Colgate rights -- that is their ability to announce and enforce a policy of unilaterally terminating dealers that deviate from suggested resale prices. The Commission has modified several outstanding RPM orders to set aside prohibitions against the exercise of a manufacturer's Colgate rights. In doing so, the Commission accepted respondents' reasoning that such policies are necessary to protect full-service dealers from "free-riding" by other dealers, and thereby to maintain the dealers' incentive to provide services that may be valuable in marketing the manufacturers' products. On the other hand, in one recent case, the Commission did strip a company of its Colgate rights. In Nintendo of America., Inc., the Commission alleged that Nintendo, the seller of the nation's top selling home video game equipment, had agreed with dealers to maintain resale prices on its video game hardware. In addition to the relief obtained in the Reebok and Keds settlements, the Commission prohibited Nintendo, for five years, from terminating dealers on the basis of the resale price they charge. Although I was not here at the time of the Nintendo matter, it is not merely a coincidence that the complaint also alleged that Nintendo accounted for more than 80% of all home video game equipment sales. The presence of market power makes vertical restraints far more suspect because of the potential for even nonprice restraints to have anticompetitive effects. Nintendo-like relief may also be appropriate in egregious situations where a manufacturer demonstrates a willful disregard of the law on per se vertical price restraints, for example, if a manufacturer continues to engage in unlawful RPM after repeated enforcement warnings.

Speaking of recidivists, I want to emphasize to you that the Commission is committed to enforcing the orders that it enters against companies in this area. In July of this year, Onkyo U.S.A. Corporation, a manufacturer of audio components, agreed to settle FTC charges that it violated a 1982 FTC order under which it agreed not to fix prices or engage in unlawful resale price maintenance. The complaint alleges that Onkyo sales representatives violated the terms of the order by: agreeing with a dealer to establish resale prices for the Onkyo products the dealer outlets sold to consumers; requesting that the dealer adhere to specified resale prices or price levels, informing the dealer that its prices were too low; directing the dealer to raise those prices, asking retailers to report other dealers who deviated from Onkyo's pricing policy; and responding to such deviations with threats and intimidation. Under the settlement, Onkyo would pay a $225,000 civil penalty violation of the original order.

While most of my discussion has turned on unlawful vertical price agreements, the Commission is quite concerned about vertical restraints that have their origins in concerted horizontal action, whether at the dealer or manufacturer level. Cartels of horizontal competitors are, of course, treated with great suspicion by the antitrust laws. Last year, the Commission issued final consent orders against two associations of retailers of juvenile products, Baby Furniture Plus Association, Inc. and the New England Juvenile Retailers Association. The consent orders settled charges that each separately threatened to boycott manufacturers that sold their products through a discount catalog. The Commission alleged in each of the complaints that the target was the New Hampshire Buyer's Service, which operates a mail-order catalogue with prices discounted 20 to 40% below specialty store prices. The Commission alleged that after the discount catalogue appeared retailer members of the associations met and agreed to send joint letters to certain manufacturers who advertised in the catalogue, complaining about the economic impact the catalogue was having on their individuals businesses and threatening that the association members would refuse to deal with those manufacturers that continued doing business with the catalogue.

I want to conclude by giving you a sense of the future of federal enforcement in the area of vertical restraints as I see it. I believe that unlawful vertical price restraints will remain the focus of future Commission enforcement actions in this area. We will be looking for clear evidence showing that manufacturers and retailers agreed on resale prices or price levels. Of particular interest will be vertical price restraints inspired by collusion among horizontal competitors, be it at the dealership level or the manufacturer level. But our staff has also begun looking at some nonprice vertical restraints. One nonpublic investigation has focused on a retailer with substantial clout as a buyer who sought to force manufacturers to cut off discounting to rival retailers. Of course, such a restraint would be judged under a full Rule of Reason analysis, which requires a detailed analysis of how this particular conduct affected the market. Nevertheless, it does demonstrate that enforcement in this area is not necessarily limited to vertical price restraints.

Conclusion

I hope that I have given you a sense of the Commission's priorities in the vertical restraints area. Although the law in this area is extremely complex, a thorough study of the relevant case law and an understanding of enforcement agencies' priorities in this area should provide a practitioner with substantial guidance in assisting clients.