Price fixing: It's more tricky than you think

Thursday, August 31, 2006

Q. If a manufacturer requires that dealers not sell their products for less than the suggested retail price, is that price-fixing?
A. Under federal antitrust laws, price-fixing is an agreement among two or more parties with respect to prices. An illegal price-fixing agreement may be either "horizontal" or "vertical." A horizontal agreement is an agreement among parties at the same level of the distribution chain, such as two retail dealers. A vertical agreement is an agreement between entities at different levels of the distribution chain, such as a manufacturer and a distributor. The key is that a price-fixing violation requires an agreement. If the parties act independently of each other, and not in accordance with an agreement, there is no antitrust violation.
Although a manufacturer may not enter into agreements with distributors or dealers regarding minimum prices, it may legally establish a policy that its products should not be sold below the suggested retail price. Dealers may legally decide, independently, to abide by the manufacturer's policy. Finally, it is not illegal for a manufacturer to terminate its relationship with a dealer who does not "independently" abide by the minimum price policy.
The requirement that the parties must act independently of each other is the reason that minimum prices are always described as "suggested retail prices." The phrase implies that the manufacturer is simply making a "suggestion" regarding price, not forcing dealers to agree to abide by a minimum price policy.
To dealers, of course, it is meaningless to say that they are free to decide "independently" whether or not to honor the manufacturer's minimum price policy, if the effect of not honoring the policy is that they will no longer be able to obtain the manufacturer's products. Although there is no formal agreement with the manufacturer, and dealers are theoretically free to sell at whatever price they choose, the threat of losing access to the manufacturer's products will almost always ensure that dealers will not discount the products. Under current law, it is not illegal for a manufacturer to enforce a minimum price policy in this way.

Tim Webster is a healthcare attorney with the law firm Brown & Fortunato. Reach him at 806-345-6320 or