Minimum Resale Price Maintenance Will Be Illegal Per Se Under New Maryland Law

On October 1, 2009, a new law will take effect in the State of Maryland, making it illegal for manufacturers, retailers, distributors, franchisees, or dealers to agree on a minimum resale price for products or services.  The new law is intended to make clear that, under the Maryland Antitrust Act, such arrangements (known as minimum resale price maintenance) will be illegal per se, and no mitigating factors will be considered.

The antitrust laws aim to preserve and promote competition among businesses.  Toward that end, certain "horizontal" agreements, such as agreements among competitors to charge uniform prices or to restrain the output that they produce, are defined as illegal per se.  When agreements are illegal per se, courts will not consider any facts that might justify the agreement -- instead, upon proof of the agreement, the defendant will be found to have violated the law, and will be liable for damages in civil suits and may be subject to criminal penalties (including jail time for the individuals who actually entered into the agreement).  Other types of arrangements, such as an agreement between a manufacturer and a distributor that the distributor will sell only in a designated area, are evaluated under the so-called rule of reason.  In a rule of reason case, the plaintiff will need to prove that the defendant's conduct has a substantial adverse effect on competition in the relevant market, and the court will entertain evidence and arguments from the defendant that the conduct has procompetitive justifications.

For more than 90 years, agreements calling for minimum resale price maintenance were illegal per se under federal antitrust law.  In 2007, however, the United States Supreme Court's decision in Leegin Creative Leather Products v. PSKS Inc. changed the legal landscape regarding resale price maintenance under federal law.  In Leegin, the Supreme Court held that the legality of "vertical" minimum price restraints (i.e., those between a supplier and its customer) will be evaluated under the rule of reason.

Like virtually all states, Maryland has its own antitrust laws, which generally apply to business conducted within the state's borders.  To a large extent, the Maryland Antitrust Act follows the federal antitrust laws, and conduct deemed illegal under federal law is likewise illegal under Maryland law.  The new statute, introduced as Senate Bill 239, marks a clear divergence between federal and state antitrust law.  The bill adds a new section to the Maryland Antitrust Act, to be codified in the Commercial Law Article, Section 11-204(b), which provides in relevant part: "...a contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade".

For example, assume that a manufacturer, ProductionCo, manufactures high end stereos that are sold under the ProductionCo trademark.  ProductionCo sells the stereo equipment directly to two Maryland retailers, VendCo and SalesCo, and charges each of them $600 per stereo.  VendCo employs highly trained salespeople, who have detailed knowledge of the differences between ProductionCo's stereos and the competition, and who are paid a yearly salary.  The salespeople spend hours with each potential customer, explaining the differences between the various stereos, and they promote ProductionCo's stereos as the best in the business.  VendCo charges the consumer $1,000 for a ProductionCo stereo.  SalesCo, on the other hand, employs cashiers only, who are paid minimum wage, have little to no interest in stereos, and respond to customer queries with blank stares.  Because SalesCo's costs are much lower than those of VendCo, SalesCo is able to, and does, sell a ProductionCo stereo for $800.  Market research shows that consumers are most likely to visit VendCo to learn about stereos, but they are most likely actually to buy a stereo from SalesCo.  Because VendCo actively promotes the sale of ProductionCo products to consumers, ProductionCo wants to protect VendCo's ability to stay in business.  To do that, ProductionCo enters into separate agreements with VendCo and SalesCo, by which each retailer agrees that it will charge consumers, at a minimum, $1,000 per ProductionCo stereo.  Under the federal antitrust laws, after the Leegin decision, the agreements are judged by the rule of reason standard, and could be deemed lawful.  Under Maryland antitrust law, however, the agreements are unlawful per se, and the reasons why ProductionCo entered into the agreements are irrelevant.

Manufacturers, wholesalers, distributors, and retailers that do business in Maryland need to take note of the new statute, and ensure that the agreements that they have in place are not in violation of state law.  For instance, if a manufacturer has taken advantage of the Leegin decision by entering into agreements with Maryland retailers that require the retailers to sell the manufacturer's product for at least a minimum price, the manufacturer and retailers should take immediate action to terminate the agreements.  Under Maryland law, as of October 1, 2009, such agreements will be illegal per se, and the resulting civil and criminal litigation can be very costly and time consuming.

If you have any questions regarding antitrust laws in Maryland, please contact Greg Garrett at 410.752.9767 or via email.