August 2, 2013
Practice Group(s):
Antitrust,
Competition & Trade
Regulation
How a Unilateral Policy Morphed into an
Illegal Resale Price Fixing Agreement
By Philip S. Van Der Weele and Anthony P. Badaracco
Two recent decisions in a California federal court case highlight the rocky shoals a supplier must
navigate to control the prices charged by the resellers of its products without violating antitrust laws.
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In Darush v. Revision, plaintiff, a former e-retailer of skin care products manufactured by defendant
Revision, including the popular Teamine Eye Complex, sued Revision and another of Revision’s
retailers, Lovely Skin, Inc. Plaintiff alleges that Revision stopped selling to it because plaintiff
refused to go along with a resale price fixing agreement between Revision and Lovely Skin, Inc.
Although proceeding in federal court, the lawsuit alleges a violation of California’s antitrust statute,
the Cartwright Act. The Cartwright Act generally tracks federal antitrust law but, as we shall see,
differs significantly from federal law in its treatment of resale price agreements.
Revision and Lovely Skin filed a motion to dismiss the complaint for failure to state a claim. The
court granted the motion in April 2013 (the “April Decision”), but permitted plaintiff to file an
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amended complaint. Revision and Lovely Skin then moved to dismiss the amended complaint, and
in July 2013 (the “July Decision”), the court denied the second motion to dismiss, sending the case
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into the costly process of discovery.
The court’s rulings highlight two important lessons for a supplier wishing to control the prices at
which its products are resold. First, a supplier must assume that any agreement between itself and a
reseller as to the resale price is automatically illegal, even though that is not the case under federal
antitrust law. Second, under both state and federal antitrust law, a supplier may still legally control
resale prices through a unilateral policy; however, a supplier should have ongoing legal guidance in
implementing and executing such a policy to ensure that the unilateral policy does not morph into an
automatically illegal agreement.
The first lesson on assuming the illegality of resale price agreements bears mention because suppliers
may have been lulled into a false sense of security about the legality of such agreements. That false
sense of security arose out of the Supreme Court’s decision in 2007 in Leegin,4 which overturned
nearly 100 years of federal antitrust law under which minimum resale price agreements had been
automatically (or “per se”) illegal. Leegin replaced that per se rule with the much more lenient “rule
of reason.” So, Leegin lulled many suppliers into thinking that they could safely enter into resale
price agreements.
Not so. The belief that Leegin immunizes minimum resale price agreements ignores state antitrust
laws. Although Leegin changed federal law, some states have continued to treat resale price
agreements as automatically illegal under their own state antitrust laws. One of those states is
California, the state in which Revision and Lovely Skin, a Nebraska corporation which resold
Revision’s products to consumers in California, were sued.
Consistent with past California state law cases, the California federal court in its April Decision in
Darush reaffirmed that, under California’s state antitrust law, a resale price fixing agreement is
automatically illegal.5 Accordingly, the court stated that if Darush’s complaint were amended to
How a Unilateral Policy Morphed into an Illegal Resale
Price Fixing Agreement
sufficiently allege a conspiracy, then Darush’s resale price fixing claims would be judged under
California’s per se standard.6
So, Darush first teaches any supplier that sells nationwide that the rule of automatic illegality for
resale price agreements is alive and well with respect to its sales into California and into the other
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states that continue to apply the per se rule.
Does this teaching mean that a supplier cannot control the resale prices of its products? Not at all.
Rather, it means that a supplier seeking to control resale prices should do so through a unilateral
policy rather than through agreements with its retailers. Such a unilateral policy should consist of the
supplier’s publishing a list of suggested resale prices to its resellers and simultaneously announcing
that the supplier will stop selling to any reseller who sells below those suggested prices. Such
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unilateral policies have been legal under federal and state antitrust law for nearly 100 years. Even if
a state law regards resale price agreements as automatically illegal, a unilateral policy means that no
agreement exists in the first place, and, absent an agreement, the state antitrust law does not apply.
The Darush court followed exactly this reasoning in its April Decision, dismissing the plaintiff’s
complaint. It found that plaintiff had alleged only that Revision had announced a unilateral policy and
had failed to adequately allege the existence of an agreement between Revision and Lovely Skin on
resale prices. The court noted that the Cartwright Act only applies to a “combination” involving “two
or more persons,” and ruled that “[i]f a seller does no more than announce a policy designed to
restrain trade, and declines to sell to those who fail to adhere to the policy, no illegal combination is
established.”9 An illegal agreement would exist only if “a supplier secures compliance with
announced policies . . . by means which go beyond mere announcement of policy and the refusal to
deal,” with the result of obtaining “the involuntary acquiescence of its dealers.”10
This last statement by the court—how a supplier’s efforts to secure compliance with the unilateral
policy can cause the legal policy to morph into an illegal agreement—flags the second lesson of
Darush. Having a properly drafted unilateral policy, which can be a simple, one-page document, is
not enough. A supplier must properly implement and execute the policy after it is announced, and that
takes training and ongoing legal guidance. After a supplier announces a minimum resale price policy,
it will inevitably receive complaints by some resellers (the “complainers”) about other resellers who
are selling below the suggested minimums (the “price cutters”). That is exactly what happened in
Darush. After Revision announced its minimum price policy, one of its retailers, Lovely Skin (now a
co-defendant), complained to Revision about a number of price cutters, including the prices on
plaintiff’s websites.
Revision, like any supplier receiving such complaints, faced a decision on whether and how to issue
two responsive communications: the communication back to the complainer, and the communication
to the price cutter. How a supplier manages these two lines of communication will determine whether
a legal unilateral policy morphs into a potentially illegal agreement. Judging solely by emails that are
part of the complaint in Darush that ultimately survived the motion to dismiss, it appears that Revision
chatted too much with Lovely Skin about Lovely Skin’s prices and about what Revision was doing to
combat price cutters. Here’s one example of an email from an account executive at Revision to the
owner of Lovely Skin:
I also want to let you know we continue to make amazing strides to combat the
Teamine Eye Complex price reductions on the internet. We have located many sites
and have either had them raise their price or discontinued shipping products to them
altogether … I know that you lowered your internet price on Teamine last year in
response to the increasingly discounted price of the product on the internet.
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How a Unilateral Policy Morphed into an Illegal Resale
Price Fixing Agreement
However, with our progress, as the price is rising, we would ask that you raise your
price accordingly … If you have any questions or would like specific actions on our
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internet accounts, I will be happy to forward you that information.
The court found that this, along with a series of other related communications, “provides sufficient
factual support to make plausible an agreement . . . to fix prices and eliminate retailers selling at a
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discount.” Accordingly, the court refused to dismiss the case at this stage.
Taken together, the court’s two decisions in Darush remind us that when it comes to a supplier’s
communications with complainers and price cutters, an ounce of legal prevention is worth many
pounds of legal cure.
Authors:
Philip S. Van Der Weele
phil.vanderweele@klgates.com
+1.503.226.5727
Anthony P. Badaracco
anthony.badaracco@klgates.com
+1.212.536.3973
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1
Alan Darush MD APC v. Revision LP, No. 2:12-cv-10296 (C.D. Cal.).
Alan Darush MD APC v. Revision LP, No. 12-cv-10296, 2013 WL 1749539 (Apr. 10, 2013).
3
Alan Darush MD APC v. Revision LP, No. 2:12-cv-10296, Dkt. No. 49 (C.D. Cal. July 16, 2013). In
deciding whether to grant the motions to dismiss, the court was required by law to assume that all of the
allegations in the complaint are true, and for purposes of this Alert, we will likewise assume that the
allegations are true. K&L Gates does not represent any of the parties involved in this lawsuit and is not
expressing any opinion as to whether the allegations are, indeed, true.
4
Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 51 U.S. 877 (2007). Under the rule of reason, a
plaintiff must prove that the resale price agreement has had an actual anticompetitive effect in a relevant
market. As a practical matter, plaintiffs rarely win rule of reason cases.
2
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How a Unilateral Policy Morphed into an Illegal Resale
Price Fixing Agreement
5
See April Decision. The court expressly rejected Revision’s argument that resale price agreements
should be judged under Leegin’s rule of reason, noting that California Supreme Court precedent made
resale price fixing agreements per se illegal and that “[u]ntil the California Supreme Court has given a
persuasive indication that it will” follow Leegin, federal courts are obligated to follow California
precedents interpreting California law. Id. at *6.
6
Id.
7
New York and Maryland, along with California, also regard resale price agreements as automatically
illegal. While many other states have yet to clearly state whether they will follow Leegin or continue to
apply the per se rule as a matter of state antitrust law, forty-one state attorneys general have written in
support of Congressional legislation that would repeal Leegin and restore the per se rule as a matter of
federal law.
8
These unilateral policies are sometimes called “Colgate” policies, named after the Supreme Court case
that established their legality. United States v. Colgate & Co., 250 U.S. 300 (1919).
9
April Decision, at *4 (citing Kolling v. Dow Jones & Co., 137 Cal. App. 3d 709, 187 Cal. Rptr. 797, 805
(Cal. App. 1st Dist. 1982)).
10
Id.
11
2d Am. Compl. (Doc. #34, filed April 29, 2013), Ex. B, at REVISION 000030.
12
July Decision, at 6. 4