Are Resale-Price-Maintenance Agreements Per Se Illegal Under California Antitrust Law?

Golden Gate Bridge CaliforniaIn an earlier blog post, we discussed Leegin and the controversial issue of resale-price maintenance agreements under the federal antitrust laws. I’ve also written about these agreements here. As you might recall, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet), the US Supreme Court reversed a nearly 100-year-old precedent and held that resale-price maintenance agreements are no longer per se illegal. They are instead subject to the rule of reason.

But what many people don’t realize is that there is another layer of antitrust laws that govern market behavior—state antitrust law. A few years ago, I co-authored an article with Jeffrey Shohet about this topic. In many instances, state antitrust law directly follows federal antitrust law, so state antitrust law doesn’t come into play. (Of course, it will matter for indirect purchaser class actions, but that’s an entirely different topic).

For many states, however, the local antitrust law deviates from federal law—sometimes in important ways. If you are doing business in such a state—and many companies do business nationally, of course—you must understand the content of state antitrust law. Two examples of states with unique antitrust laws and precedent are California, with its Cartwright Act, and New York, with its Donnelly Act.

California and the Cartwright Act

This blog post is about California and the Cartwright Act. Although my practice, particularly my antitrust practice, is national, I am located in San Diego, California and concentrate a little extra on California.

As I’ve mentioned before, the Supreme Court’s decision in Leegin to remove resale-price maintenance from the limited category of per se antitrust violations was quite controversial and created some backlash. There were attempts in Congress to overturn the ruling and many states have reaffirmed that the agreements are still per se illegal under their state antitrust laws, even though federal antitrust law shifted course.

The Supreme Court decided Leegin in 2007. It is 2015, of course. So you’d think by now we would have a good idea whether each state would follow or depart from Leegin with regard to whether to treat resale-price maintenance agreements as per se antitrust violations.

But that is not the case in California, under the Cartwright Act. Indeed, it is an open question.

Here’s the situation in California:

In 1978, the California Supreme Court issued a decision called Mailand v. Burckle, which held that vertical price fixing is a per se violation of the Cartwright Act. This was consistent with federal antitrust law at the time, as the law before Leegin was that vertical price fixing was a per se violation under the Sherman Act.

The problem is that the California Supreme Court has not spoken on the issue since the US Supreme Court decided Leegin. Although the California Supreme Court relied at least in part on federal antitrust law in its Mailand decision, it also relied on state law.

The result is that there is, necessarily, some uncertainty as to whether the California Supreme Court will follow Leegin or maintain the per se antitrust liability for resale-price maintenance agreements. The interaction of Leegin and Mailand is such that the answer is not conclusive either way. Of course, advocates for either side of the issue can make strong arguments. But, in the end, nobody really knows until the California Supreme Court acts on it.

There have been a couple state and federal courts in California that have reiterated that Mailand is still good law, meaning per se antitrust liability applies to resale price maintenance in California. And although not binding as law, the California Attorney General has initiated claims against entities with vertical price restraints.

For most national businesses and many regional businesses, California is a substantial and important market.

Should those businesses enter resale-price maintenance agreements?

First, you must remember that the question isn’t whether resale-price maintenance agreements are legal or illegal. The question is whether they are per se illegal under the Cartwright Act and the Sherman Act. For example, if your company has market power or other competitors are also entering these agreements, you should discuss with an antitrust attorney whether there is a risk that your agreement might create problems even under the rule of reason standard.

Second, you could read the briefs on both sides of the issue of whether the California Supreme Court should continue to hold that resale-price maintenance agreements are per se violations, determine which is more persuasive, and act based upon that conclusion. But I think that would be foolish. The issue is close enough that the result could land on either side. And, really, from a practical perspective, the California Supreme Court has sufficient discretion to do what it wants to do here. Basing your decision on such an analysis is too risky.

Third, you could assume that, consistent with current California Supreme Court precedent, resale-price maintenance agreements are per se illegal under the Cartwright Act. I would advise most clients to go this route. If you go forward despite this assumption, you could be the party that ends up in the California Supreme Court and they could decide in your favor. But that is a long and expensive road.

At this stage, there is sufficient legal support for both private plaintiffs and the California Attorney General to embroil parties to resale-price maintenance agreements in litigation or investigations.

Of course, if the resale-price maintenance agreements are particularly important to your business and you have the resources to challenge it, you might go forward with them and, if challenged, bring your case to the California Supreme Court.

In fact, I think many people would thank you. Then we’d at least know the answer.