United States: Other People’s Prices

Is an agreement between a manufacturer and a retailer limiting the minimum price at which the retailer may resell a competing manufacturer’s product unlawful? Not necessarily.

In a hotly-disputed 5-4 decision that was not issued until nearly two years after the oral argument, the Supreme Court of Texas reversed an intermediate appellate court and threw out a jury verdict against The Coca-Cola Company and some of its bottlers in a case alleging that the bottlers had fixed the retail prices of competing brands in violation of Texas antitrust law (which follows federal law). Coca-Cola Co. v. Harmar Bottling Co., 2006-2 Trade Cas. (CCH) ¶ 75,464 (Tex., Oct. 20, 2006).

The Coca-Cola bottlers had entered into promotional agree ments with retailers which, among other things, required the retailers to price the bottlers’ products by a specified amount below competing products during the promotions (which lasted from 42 weeks up to a full 52 weeks a year). As a result, when the wholesale price that the retailer paid for competing products was less than the price it paid for the Coca-Cola bottler’s product, the retailer sometimes "had to charge" consumers more for the competing products than it "otherwise would have" charged, in order to maintain the specified differential.

The result, at times, was a higher price for the competing products at the retailer’s store. However, the majority held that the plaintiffs, who were bottlers of the competing products, had failed to prove an effect on overall competition in any relevant market since consumers could avoid the higher prices at one store by "going down the street" to another store. Although "consumers may have paid more on occasion in a particular store, there is no evidence that [the agreements] caused consumers to pay higher prices generally."

The dissent asserted that a manufacturer "paying retailers to raise its competitors’ prices is price-fixing, pure and simple." The dissent took the position that agreements setting a floor on resale prices are per se unlawful even if they result in some price variation, and because "the sole purpose of these agreements was to keep the price of all competing soft drinks higher than they otherwise would have been, they were illegal per se."

Note, however, that the per se rule against minimum resale price maintenance will be revisited this year by the United States Supreme Court in the Leegin case, in which the Court took the unusual step of issuing a stay prior to granting the certiorari petition. Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 04-41243, cert. granted, Dec. 7, 2006.

Note too that the Coca-Cola bottlers did not require retailers to price competing brands at any specified price, but only to price the Coca-Cola products, which of course were the products being promoted, lower than competing brands. Cf. Sun-Drop Bottling Co. v. Coca- Cola Bottling Co., 604 F. Supp. 1197, 1199 (W.D.N.C. 1985) (addressing requirement that "[o]ur brands must be the exclusive soft drinks with a reduced retail"). Such a practice does not necessarily elevate the price of any brand, although it could have the effect of elevating the retail price of any competing brands having much lower wholesale prices, as acknowledged by the Court.

It also should be pointed out that in reaching its decision, the Court refused to apply Texas competition law to competitive injury alleged to have occurred in other states, a holding that may have important implications of its own in future cases brought under Texas law but claiming out-of-state harm. Compare Southwestern Bell Telephone Co. v. Superior Payphones, LTD., 2006-1 Trade Cas. (CCH) ¶ 75,165 (Tex. Ct. App., 13th Dist., Feb. 23, 2006).

So, why is this case noteworthy and how much reliance should one place on a 5-4 decision of the Texas Supreme Court? There have been relatively few new cases in this area, yet advice on promotional activity is being requested and provided every day, raising the level of interest in this case. As for reliance, the Court’s majority held that evidence of harm to competition was "missing in this case," but presumably if such evidence had been presented, the Court would have affirmed the court below under the rule of reason. Moreover, four Justices were prepared to condemn the agreements as per se unlawful. Bottom line: While Coca-Cola and its bottlers won this appeal, the decision should be approached with caution, regardless of how the Supreme Court decides the Leegin case.

Copyright © 2007, Mayer Brown LLP and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

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