Now, Post-Leegin, manufacturers (mostly of luxury goods such as cigars) are at less risk to set minimum prices that retailers (or other distributors and resellers) may charge for their products. The ruling does not mean that manufacturers have an unfettered right to require minimum prices to a distributor or a retailer. In fact, the Court stated that some “vertical price restraints” may have anticompetitive effects which would deem them illegal under the “rule of reason.”
The business justification for the manufacturer’s pricing policy in this case is consistent with business goals of many cigar makers and producers of other luxury goods that benefit from a retailer’s skill and training as a tobacconist. In fact, certain online retailers that are well-known and respected authorized resellers will also benefit for a number of reasons. First, as discussed more fully below, top tier online retailers may be benefit in the same ways that traditional brick and mortar tobacconist may benefit from minimum pricing policies.
By way of background, the practicality of this case came to mind recently during a discussion with several retailers (both B&M and online). The online retailer enlightened me to the fact that there are an increasing number of online discounters who are not authorized retailers of cigar brands. These online sites pop up and disappear under various names and offer incredible discounts on certain cigars. They are generally started and run by non-tobacconist that have little, if any, professional or personal relationships with cigar companies. All they are concerned with is pushing ill-kept cigars or discontinued lines without any concern for the consumer’s palate or eventual distaste. Because of the deep discounts offered by these websites, legitimate traditional brick and mortar stores, and authorized online retailers (both discounters and non-discounters) cannot effectively compete. True tobacconists care about their relationships with manufacturers and serving cigar consumers such that they will have return business for many years to come. Worse still, the general public does not understand why these non-authorized retailers can offer such deep discounts and may attribute their bad experiences with non-authorized retailers to all online retailers. This is unfortunate, because many of today’s best brick and mortar tobacconists also have a thriving online presence.
In evaluating the economic literature developed since that per se rule was adopted almost a hundred years ago, the Court acknowledged principles well-known to purveyors of premium cigars and other luxury goods. Minimum price maintenance enhances brand value, allows suppliers to minimize intrabrand competition, and allows retailers sufficient margins to invest capital to create high quality buying experiences through fine showrooms, product demonstrations and knowledgeable sales staff. The Court also recognized that vertical agreements setting minimum resale prices create temptations for unlawful behavior such as creation of manufacturer or retailer cartels that decrease output or reduce competition to increase price. Yet despite the economic dangers, the Court held that a rule of reason analysis provided ample ammunition for courts to eliminate anticompetitive uses of resale price maintenance from the marketplace. The Court’s rationale is also applied to online retailers. While counter-intuitive to some, online retailers (many of which are owned and operated by brick and mortar tobacconists) could benefit from the increased margins to reinvest capital to create higher quality online buying experiences, hiring additional highly trained tobacconist, or otherwise increase a brand’s strength in the marketplace.
Thus, apart from the benefits to retailers, manufacturers now have another arrow in their legal quiver to fight against non-authorized sales of their products. Since non-authorized cigar discounters can destroy a brand’s strength in the market place, controlled discounting by authorized retailers, distributors, and other resellers can help control a brand’s identity and in some instances increase brand awareness and satisfaction.
In changing the 90 year old law, the Supremes also reasoned that some minimum resale price maintenance could stimulate competition between manufacturers. For instance, one example that the Court provided was that consumers would have more choices among low-price, low-service brands, high-price, high service brands, and the many brands that might fall somewhere in the middle. In the context of cigar reselling, under the rule of reason, it is reasonable to assume that cigar companies that focus on the low end market will continue to prosper by establishing a low price; in other words, service product with less competition from better known (and generally more expensive brands). Manufacturers that spend more time and resources to create a higher quality product can now demand that their products be sold at a minimum price that reflects the extra expense. In doing so, the higher minimum price will set them apart from lesser priced and thus lesser quality products. This will send a clear message to consumers that the higher retail price reflects quality. Manufacturers and retailers could still agree to the occasional price discount for whatever market reason is appropriate. Consumers would recognize that the discount is minimal, or otherwise limited in time and authorized by the manufacturer. In the context of today’s marketplace, discounting is good if it is conducted in a manner wherein the brand’s strength and identity is protected.
The flexibility of the “rule of reason” should be embraced since it rejects the per se rule and allows manufacturers to better control the environment in which their brand is sold. Rather than fear this, retailers, distributors and other resellers should work with manufacturers to maximize the selling experience for consumers while insuring that customer satisfaction and profit margins remain robust for all involved. There is nothing in the Supreme Court’s decision that prohibits discounting. Rather, the rule acknowledges that manufacturers and retailers can agree to certain minimum pricing agreements which ensure that both will benefit and that consumers will have ample selections of competing products at differing price points.
About the author
Frank Herrera is the editor of Cigarlaw.com a blog about trademark disputes in the cigar industry. He started the blog with the intention of educating cigar consumers, retailers, manufacturers, and everyone else about this fascinating area of law. The blog receives hits from around the world. Mr. Herrera is the Chairman of the Intellectual Property and Internet law group at Quintairos Prieto Wood & Boyer, P.A. He represents many small boutique cigar manufacturers with their intellectual property matters and other corporate matters.