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California Antitrust Case Demonstrates Need to Be Cognizant of State Laws

February 23, 2011

Companies that market products or services in multiple jurisdictions are aware that laws differ from place to place. A recent consent decree between the State of California and a manufacturer of beauty care products illustrates one difficulty that can confront such companies, particularly in the Internet age.

California sued Bioelements, Inc., contending that contracts with its distributors prescribing the minimum prices at which the distributors could sell Bioelements products online constituted per se violations of California's state antitrust law.1 (A per se antitrust violation is one that can be established merely by proving that particular acts occurred. A governmental enforcer or a private claimant need not show an impact on competition.) Rather than proceed to trial, Bioelements agreed to refrain in the future from controlling the prices at which distributors could resell its products, and to inform the existing distributors that they were no longer bound by the price control provisions in their contracts.2

This case would have been unremarkable a few years ago. The practice in question -- known as "vertical price-fixing," or "minimum resale price maintenance" (RPM) -- was held to be illegal per se under the federal antitrust laws in 1911.3 In 2007, however, the United States Supreme Court overruled that long-standing doctrine.4 RPM is now not per se legal under the federal antitrust laws; rather, its legality is judged under the "rule of reason" standard. A rule of reason case requires analysis of the competitive effects of challenged conduct, a far more in-depth and complicated inquiry than in a per se case. As a result, a practice long held to be illegal under federal law is now likely to be challenged less frequently and held illegal even less often. 

Individual states, however, are free to enact and enforce their own antitrust laws, and to apply their own standards, within limits. While the precise scope of extraterritorial application of those laws to conduct occurring in other states may present difficult legal issues, the states may -- at the very minimum -- regulate conduct occurring within their borders. Even this modest exercise of state power may be sufficient to create difficulties for companies that seek some control over the prices at which their products are sold.

Imagine a manufacturer that, like Bioelements, sells to the public through distributors that sell online. The manufacturer wishes to maintain the prices of its products above a certain point -- perhaps to maintain the image of the products as quality products; perhaps to prevent prospective customers from obtaining information about the products at conventional "brick and mortar" stores and then buying more inexpensively online. Under federal law, in most cases, this would no longer be illegal. But if the manufacturer sells to distributors in California, or in another state that still regards RPM as illegal per se, such restrictions would be impermissible, as a matter of state law. 

The Internet, of course, does not respect state boundaries. Online distributors in California may sell to consumers in Kansas through the same websites from which California residents make purchases. And if distributors can price at whatever levels they choose in California, those same prices will appear on computers in Kansas. The manufacturer's efforts to maintain its desired price levels in Kansas will thus be undermined by the lower prices that originate in California but are equally available to consumers all over the country. 

The manufacturer may be able to avoid this result, but the methods available to it may be costly, imperfect or even counterproductive. For example, under most circumstances, the manufacturer can legally agree with the California distributor that the distributor will sell only to California residents, but in order to ensure that residents of other states not view the lower California prices -- for which they don't qualify -- on their computer screens, the distributor would have to incur the trouble and expense of partitioning its website content by geography, something not all distributors might be willing to do. Or, the manufacturer might refrain entirely from selling to distributors in California, but even if the manufacturer sold only to out-of-state distributors, California might nevertheless argue that those distributors' online sales to California residents at prices set by the manufacturer violated California law. A manufacturer faced with this dilemma could reasonably conclude that its best choice is to refrain altogether from including price maintenance provisions in its distribution contracts. 

There is still debate among lawyers and economists regarding when RPM is anti-competitive and when it can have salutary effects. Regardless of one's opinion on this issue, however, it can fairly be argued that one state -- even one as large as California -- should not be able to dictate behavior nationwide, particularly when that behavior is not mandated by federal law. However, the Bioelements case presents a timely reminder that, unless and until state and federal laws conform -- in RPM and in other areas in which they currently diverge -- companies must continue to be mindful of the laws of all applicable jurisdictions.


1 Cartwright Act, Cal. Business & Professions Code §§ 16720 et seq.
2 California v. Bioelements, Inc., Case No. 10011659 (Cal. Super. Ct., Riverside Co. Jan. 11, 2011), available at http://oag.ca.gov/news/press_release?id=2028.
3 Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
4 Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). After remand from the Supreme Court, the lower court, employing a "rule of reason" standard, ruled against the Leegin plaintiff. On February 22, 2011, following that ruling, the Supreme Court denied the plaintiff's petition for certiorari, declining an invitation to elaborate on the factors the courts should employ in considering "rule of reason" challenges to RPM schemes.