The beginning of a new year is a natural time for change and re-evaluation. As a company looks to make improvements or address issues for the coming year, an area of concern may be the building and/or preservation of its brand reputation. Companies sometimes face erosion of brand reputation and/or customers satisfaction as a result of severe discounting by resellers. This problem seems to be more likely for manufacturers of brands built on premium or luxury and/or the need for strong customer service or support, among other things. To minimise discounting that is harmful to the brand, a company may wish to manage the resale prices charged by its resellers to their end customers.
Unfortunately, that desire may present some danger to the company; specifically, the danger that the arrangement between the company and its reseller could be found to constitute a form of price fixing – specifically, “vertical” price fixing, or an agreement between manufacturer and reseller to fix the price at which its products will be sold to end users.
Where such an agreement exists, the range of legal consequence runs from full condemnation (with the potential for significant penalty) to full permissibility. For example, some jurisdictions (including the EU), take the position that any attempt by a manufacturer to set minimum resale prices is a “hard-core” restriction of competition, and will therefore almost always be illegal. Other jurisdictions take a balancing approach – where the benefits of the arrangement are weighed against the potential harm to competition – declaring illegal only those arrangements that are overall more harmful to competition than they are beneficial.
The range of tools that a company may seek to utilise in managing resale prices can also vary – from an actual agreement (which will be automatically illegal in some jurisdictions), to alternate, non-agreement forms of policy. These include so-called “Colgate” policies – named after the U.S. Supreme Court case that permitted the approach – under which a manufacturer unilaterally (i.e., with no agreement) sets the minimum price its reseller may charge for designated products and refuses to do business with any reseller who does not follow the terms of the policy. Another oft-used alternate form includes the unilateral minimum advertised pricing policy (UMAP), which does not restrict the actual resale price, but does limit the price at which a reseller may advertise the manufacturer’s products. Still, some other companies utilise “suggested” or “recommended” resale prices without any agreement or true policy in place. Unfortunately, the permissibility of these non-agreement forms of policy or suggested price also varies from place to place.
Because the global mosaic of laws governing a manufacturer’s attempt to manage resale prices does not provide collectively consistent guidance, it is important that a company who uses or is considering implementation of such a policy keeps a few things in mind:
- Think about the necessity of any such policy. If there is no true business need and pro-competitive justification for the approach, implementing it may be needlessly risky.
- Think about the type of policy that will most effectively serve the company’s purpose. Whether a resale policy is appropriate and what form it takes will depend upon the company, its brand, the ultimate purpose it seeks to serve, and the location of the company and its resellers. For example, it may be that a restriction on advertised prices would be equally effective for serving a particular company’s purposes as a restriction on resale prices, but the restriction on advertised prices may present less legal risk in the jurisdiction(s) in question.
- Understand the law in the jurisdictions in which the company and its resellers operate. As noted above, the law can vary significantly by country and/or state. This can present challenges to a supra-national manufacturer seeking to implement a single policy and it may be necessary to take a country-by-country or state-by-state approach.
- Periodically re-evaluate the effectiveness of any approach used. Once a policy is in place, its effectiveness should be re-evaluated periodically. If the policy is not actually serving the goals it was implemented to serve, that also may present needless risk to the company.
Ultimately, whether a company should attempt to manage the resale price charged by its reseller will depend upon the particulars of that company and, possibly, its brand(s). Further, the permissibility of a resale pricing policy will vary by jurisdiction. However, under appropriate circumstances such policies can present an effective tool in protecting brands and ensuring end customers receive the high-quality support they need and expect.