Minimum Resale Price Policies - How to Control Price-Cutters

Over the course of the last two decades our firm has fielded many complaints from our supplier clients about retailers who sell their alcoholic beverage products below cost, a tactic that harms the supplier’s brands, discourages other retailers who are unable to match those prices from buying the products and devastates the supplier’s market pricing strategies.  Adding insult to injury, these below-cost price advertisements are often mere tactics intended to lure consumers to the store, where they are guided to other brands in lieu of the (now “sold out”) brand they saw in the advertisement.  These “bait and switch” tactics are especially pernicious when they show up in on-line price search engines. Until recently, suppliers assumed their hands were tied – retailers set their own prices, and suppliers are not allowed to dictate what those may be. Right?

Yes and no. While minimum resale price requirements are a tricky business and the law is still evolving in this area, it is possible to establish and maintain a minimum resale price policy that will stand up to legal challenges under federal and most state laws.

In 2007, the U.S. Supreme Court held in Leegin Creative Leather Products Inc. v. PSKS Inc. that an agreement between a supplier and reseller to set a minimum price threshold for a product may be legal so long as it does not unreasonably injure competition and in fact may actually encourage competition, depending on the circumstances. (The latter was certainly true for our supplier clients who had retail accounts unable to compete with the cost-cutting retailer.)

Unfortunately, the Leegin decision does not preempt state antitrust law, and states are free to decide whether to continue making such agreements illegal.

Suppliers can avoid this result, however, by establishing a minimum resale price policy that unilaterally announces a minimum resale price for the supplier’s products. Under the “Colgate policy” (named for the famous case that set the precedent), a doctrine established by the Supreme Court almost a century ago, it is perfectly legal for a manufacturer to announce its resale prices in advance and refuse to deal with those who do not wish to adhere to such prices. The most important aspect of this Colgate policy is the absence of an agreement, express or implied, between supplier and reseller. The policy must be one-sided and non-negotiable, and it cannot be adjusted to fit the circumstances of a particular reseller. The policy must have at least one business rationale behind it, and the supplier should provide its policy to all retailers prior to its implementation. In the short term this requires effort on the part of the supplier but in the long term this benefits the brand because it returns control of the brand in the marketplace to the supplier, where it belongs.

For more background and details on legal minimum price policies, as well as a sample resale price policy that prohibits below-retailer-cost pricing, read our recent article on this subject in Practical Winery & Vineyard.