MSRP Price Monitoring

This document analyzes issues involving price control between manufacturers and the retailers who sell their products. Web Defense Systems assists our clients in four ways in regards to pricing: (1) we monitor the internet and gather data to determine the price that a client’s products are being sold at by its resellers; (2) we gather data to determine the price that competitive products are being sold for by our client’s competitors or retailers; (3) we analyze the data to help the client determine the most beneficial pricing of its products and related business decisions; (4) with input from the client’s attorney, we help our clients understand what they may do, within the scope of anti-trust law, to control the pricing of their products without being guilty of price-fixing, which is against the law in the United States and many other countries.

Let’s begin with an overview. For many companies that manufacture products, it has always been important that its various retailers are all selling its products at the same price to the end consumer, or at least above a minimum retail price set by the manufacturer. The rationale for this preference by manufacturers might include:

  1. The manufacturer’s desire to have its products be considered “high-end” products, unavailable at cheap prices;
  2. Ensuring that as many retailers as possible sell the products, rather than just a regression to the retailer who is willing to go the cheapest;
  3. Making it fair for consumers, so that consumers will have no reason to complain when discovering they paid more for the same product than another consumer at another store;
  4. Giving the retailer enough margin to advertise the manufacturer’s products; and
  5. Manufacturers know that the more frequently their products are sold below the MSRP, the more likely it becomes that consumers won’t take an anchor price seriously. In other words, they’ll come to expect a sale and therefore a small discount below the MSRP won’t be appealing.

Beyond these five reasons, the age of the internet and related technologies has brought about three incredibly powerful additional reasons that make price control even more important for manufacturers:

  1. Millions of manufacturers are now selling their products on their own websites in addition to having retailers sell the same products. Simply put, manufacturers are now competing with their resellers on the internet. And most manufacturers would want not want their own products to be sold for less by someone else.
  2. Whereas ten or twenty years ago, price comparison shopping meant that consumers had to get in the car and drive from store to store, there are now technologies that allow price comparison shopping to be performed by consumers in a matter of seconds. The most obvious of these technologies is of course the internet, as consumers can easily browse different retailers. Or consumers can simply use a search engine to look for different retailers selling the product and then buy from the retailer with the best price.
  3. But beyond the internet, there are now smartphone applications that make comparison shopping unfairly easy! For example, EBay recently purchased a company called Red Laser. Red Laser is a smartphone application that allows consumers to scan the barcode of an item while at a store, and then the app immediately determines if it’s selling cheaper elsewhere. Amazon and Google have similar tools. Can you imagine the frustration of the owner of a boutique store (a television retailer, for example) seeing a customer come into the store as a result of the owner’s own marketing, see the consumer test out a product and like it, but then see the consumer use his smartphone to realize he can save a few dollars by driving down the street or just ordering online with the click of a button!

Therefore, with both manufacturers and retailers potentially negatively impacted by seeing the pricing for identical products scattered across the pricing spectrum, what can Web Defense Systems do to help our clients? First and foremost, we can help to keep them out of jail! And jail (or at least a massive fine by the government or a lawsuit by a retailer) is actually a possibility because price fixing is illegal in the United States – or at least it was until 2007. Here’s where things get complicated…

In the United States, the field of anti-trust law is not as clear-cut as one would like. Some laws are not only difficult to interpret, but precedents have frequently changed or even contradicted each other. And yet, penalties for anti-trust violations in general, and price control specifically, can be harsh. In that respect, let’s start with the difference between horizontal price control (almost always illegal) and vertical price control (potentially legal). Horizontal price control is, in layman’s terms, any type of collusion between competitors to keep the pricing of a product at a certain level. This is obviously not good for the consumer, considered price fixing, and can be punishable as a criminal federal offense.

On the other hand, vertical price control is something that Web Defense Systems can helps our clients attain, subject to the law of the land and obviously the client’s preferences. Vertical price control is the attempt by a manufacturer to keep its retailers (resellers) selling its products above a certain price. Prior to 2007, this was more or less illegal, and had been since 1911. However, a recent court case changed things. In the 2007 case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., the U.S. Supreme Court ruled that vertical price control is not always illegal. The issue, said the court, should be judged by the “rule of reason.”  In other words, a manufacturer or producer may request its resellers to sell at a certain price if their rationale is reasonable. Such reasonable rationale may be that the price control allows the reseller to provide a higher quality of service to its customers, that retailers will have more money to spend marketing the product, or that the manufacturer only wants its products in the stores of higher end retailers.

In other words, Leegin vs PSKS gives manufacturers a legal precedent from the highest court in the land to control the pricing of its retailers. But Web Defense Systems does not recommend our clients use this precedent blindly and without regard to possible anti-trust violations. There are three reasons for our caution:

  1. The action by a manufacturer to simply discontinue selling its products to a retailer who sells below a MSRP is probably legal, primarily as a result of Leegin vs PSKS. However, manufacturers should be cautious about going a step further, such as asking retailers to sign a contract demanding the MSRP will be honored; nor should the manufacturer carelessly send cease and desist letters when a retailer goes below the MSRP. The law is less clear on these types of actions, and less likely to protect a manufacturer who uses the Leegin vs PSKS case’s precedent so recklessly.
  2. Knowing that the law was just modified by the Supreme Court in 2007, there is no guarantee that a lower court will uphold it, particularly if the case is slightly different than Leegin vs PSKS. And no manufacturer wants to deal with going all the way to the Supreme Court to win its case. Civil actions have been successfully brought against manufacturers for price control under antitrust law, and the Supreme Court’s ruling in “Leegin Creative Leather Products, Inc. v. PSKS, Inc.” does not mean such suits won’t occur again.
  3. A few paragraphs earlier, we discussed how many manufacturers now sell their products on their own website as a result of the enormous scope of the internet. While we have been able to find no court case or legal ruling that specifically deals with this, the issue is interesting… In cases where a manufacturer asks a retailer to sell its products at or above a MSRP, but the manufacturer is also selling from its website, the question must be asked: is the manufacturer performing vertical price control as the maker of its products (legal)? Or is this horizontal price control as a competitor (illegal, a federal offense under the Sherman Act)? Prediction: if it hasn’t happened already, the courts will decide just such a case in the next few years (and by all means, please alert us if you know about one currently taking place).

To conclude, the laws regarding vertical price control are more than a little gray, and so Web Defense Systems does not instruct our clients to blindly demand that all of its retailers sell at a MSRP. An attorney must be consulted. However, there is clearly some wiggle room for our clients (primarily as a result of Leegin vs PSKS). As a result, a major focus of the processes developed by Web Defense Systems has been to find ways to closely monitor the prices at which our clients’ goods are sold by their resellers. We have methods of tracking this data that are not only effective, but cost feasible. Once we collect the data, we can analyze it and work with the client to make a wise decision on how to deal with its pricing and its retailers. Please click here contact us to discuss how we can help you with this type of price tracking.

DISCLAIMER: The purpose of the information within this document is not to provide legal advice. Rather, the purpose of this document is to explain the rationale behind actions that Web Defense Systems takes on behalf of those clients who use WDS to monitor the prices at which their retailers / resellers sell their products. As explained above, the field of vertical price control is complicated. A lawyer with expertise in the area of anti-trust law should be consulted before potentially illegal actions that could be considered price fixing are taken. We are not lawyers, the preceding information is not legal advice and it should not be used as such.