12. What are the commonly recognized types of “vertical restraint”?
Vertical restraint is an arrangement or agreement between members of a supply chain (such as manufacturers, wholesalers, distributors, or retailers) to fix the price or supply of goods. The following are common types of vertical restraint:
• Resale Restraint (Vertical Price Fixing & Price Maintenance) – Under the Sherman Act § 1, an agreement among manufacturers or distributors of a product to control the retail price for a product is an illegal restraint of trade. A manufacturer controlling the final price of a product is known as “vertical price fixing”. A manufacturer controlling the maximum price at which distributors can resale a product is known as “price maintenance”. Both of these types of agreements have a tendency to reduce competition and harm consumers. Vertical price fixing involving an agreement among competitors is a naked restraint of trade and is per se illegal. Resale price maintenance, on the other hand, is not generally considered a naked restraint of trade. As such, a court examining such a relationship will apply the rule of reason to determine if the restraint is anticompetitive and therefore illegal.
⁃ Note: Under the Colgate Doctrine, a manufacturer may simply announce its prices and refuse to deal with those who fail to comply with this price structure. However, a manufacturer’s attempt at retail price maintenance is illegal if there is coercion or pressure other than the announced policy and its implementation.
⁃ Example: ABC Corp Manufactures widgets. 123 Corp is a wholesaler of ABC’s widgets. ABC Corp enters into an agreement to force 123 Corp to resell its widget at a specific price. This is price maintenance and is subject to a rule of reason analysis. If ABC Corp attempts to enter into an agreement with a final retailer regarding the sale price of the good, this would be price fixing and is per se illegal.
⁃ Discussion: How do you feel about the practice of establishing a price among members of the supply chain? Why do you think vertical price fixing is generally per se illegal, while vertical price maintenance is only illegal if there is an anticompetitive effect? Can you think of pro-competitive justifications for these types of agreements?
⁃ Practice Question: ABC Corp is a manufacturer of a special line of car accessories. ABC Corp sells through distributors to retailers. ABC Corp routinely encourages distributors to sell products at a 40% markup, but this is not mandatory. ABC knows that a manufacturer will not be able to charge much more than this, as ABC Corp retains the right to approve all retailers carrying its products. These retailers must agree to charge a specific price for the product in order to carry the product. Are there any legal issues with either of these arrangements?