Sunday, March 30, 2008

Herman Miller Contends That Consent Decree Allows it to Continue Minimum Resale Pricing Policy

State AG Investigation - New York's Attorney General launched an investigation of Herman Miller Inc.'s pricing policies in 2003, and the investigation was joined by Illinois and Michigan.

The chair manufacturer's policies prohibit retailers from advertising or otherwise disclosing to consumers a price of less than $949 for its popular Aeron chair. If retailers advertised a price below $949, the company would deny shipments to the retailer.

Complaint Filed - The state AGs filed a complaint, New York v. Herman Miller Inc., No. 08cv02977 (S.D.N.Y. Mar. 21, 2008), alleging that the minimum pricing constituted anti-competitive conduct that harmed consumers, denying them the benefits of unrestrained price competition and access to price information in violation of federal and state antitrust laws.

Consent Decree - Driven in part by the Leegin Creative Leather Products v. PSKS, Inc. decision by the Supreme Court, the states agreed to settle the lawsuit in a consent decree entered on March 25, 2008. Under the terms of the agreement, Herman Miller agreed to pay the states $750,000, and agreed to certain restrictions on its pricing policies. The consent decree prevents Herman Miller from, inter alia:

  • Fixing, maintain, or stabilizing prices or facilitating an agreement to do so;
  • Communicating resale prices of one dealer to another dealer;
  • Cutting supplies to a retailer in order to coerce the retailer to agree or commit to comply with the suggested retail price, except that it may cut supplies for "lawful business reasons";
  • Attempting to coerce retailers to comply with the MSRP policy by threatening to cut supplies, or by cutting supplies and offering to restore them within less than one year; and
  • Conditioning the receipt of cooperative advertising or other promotional funds on compliance with the MSRP policy.

Herman Miller is also required to notify retailers that they are "always free . . . to advertise and sell Herman Miller for the Home products at whatever price you wish."

Herman Miller's Interpretation - A key provision of the settlement is the exception that Herman Miller may cut supplies to retailers who fail to stick to the $949 minimum price if it does so for "lawful business reasons." A Herman Miller spokesman stated that "[i]t remains our contention that the law says we can have a minimum advertised pricing policy and that we can enforce that unilaterally." He also stated that, under the terms of the decree, the company can "state and enforce our policy, but we cannot have communication to get [retailers] to abide by the policy. After [2010], we can go back to operating just as we have been."

Consistency with Leegin - Herman Miller's interpretation of the law may be correct under Leegin, which found that resale maintenance is not per se unlawful, but is subject to a rule of reason analysis that permits resale price maintenance if there is a legitimate business justification for the strategy. In Leegin, a leather-products manufacturer refused to sell to retailers who sold products below suggested minimum prices. The court recognized several potential justifications for resale price maintenance, such as facilitating interbrand competition, encouraging investment in services and promotional efforts, facilitating market entry for new firms, and providing consumers more options between low-price, low-service brands and high-price, high-service brands. As the Leegin court mentioned, the question of resale price maintenance has arisen in recent years when brick-and-mortar stores have faced competition by low-priced internet retailers, who lack a showroom and offer more limited customer service.

The Herman Miller settlement appears to be consistent with the Colgate doctrine, under which manufacturers can unilaterally announce that it will refuse to make sales to retailers who sell below a certain price. See U.S. v. Colgate & Co., 250 U.S. 300 (1919). The Colgate doctrine recognizes that a unilateral policy is not a price-fixing agreement. If Herman Miller resumed communications with retailers seeking agreement to comply with the policy, however, the doctrine would not apply.

While Herman Miller agreed to pay a significant fine, its continuing assertion that its policies are lawful may be correct under Leegin. But Herman Miller had a strong incentive to settle in the face of uncertainty regarding what types of resale price maintenance agreements will pass muster under Leegin, and in the face of the State AGs' continued enforcement efforts. The State AGs' inclusion of the "lawful business reasons" exception in the consent decree, however, suggests that the State Attorneys Generals recognized that certain aspects of Herman Miller's policies may be permitted under Leegin.

In sum, the decree demonstrates that, even after Leegin, government agencies are not willing to drop all enforcement efforts directed at resale price maintenance agreements, though the contours of the Leegin doctrine remain unclear.

Related Post: State Resale Price Maintenance Laws and Leegin

Tuesday, March 25, 2008

California Court Permits Class Action to Proceed Against Retailers That Didn’t Label Artificially Colored Salmon

A class action against various retail grocers alleged that the undisclosed addition of color to salmon misled consumers about its origin, quality, freshness, and flavor. Reversing the lower courts' dismissal of plaintiffs' claims, the California Supreme Court found that the allegations were not insufficient as a matter of law, and could proceed.

Without the coloring, farm-raised salmon would have a grayish tint, but the pinkish hue added to the fish makes it resemble wild salmon, which consumers prefer. Plaintiffs sued under California's Unfair Competition Law and Consumer Legal Remedies Act.

Defendants included Albertson's, Safeway, Kroger, Trader Joe's, Whole Foods, Costco, and others. They responded that the claims were preempted by federal law. Federal regulations permit the use of the color additives, but require disclosure of their use to consumers. While the trial and appellate courts agreed with defendants that the state law claims were preempted by the federal Food, Drug, and Cosmetic Act ("FDCA"), the California Supreme Court disagreed, finding that plaintiffs did not seek to enforce violations of the FDCA, but to enforce state disclosure requirements that were identical to the FDCA's requirements.

A more detailed discussion of the case is available at the Class Action Defense Blog, here. The case is
Farm Raised Salmon Cases
, ___ Cal.4th ___, 72 Cal.Rptr.3d 112, 116 (Cal. 2008) (slip op .pdf).

For retailers, the case serves as a reminder of the importance of complying with disclosure and labeling requirements, as potential liability for failure to comply may result in liability that substantially exceeds the potential penalties specified in the federal regulatory scheme.

Thursday, March 20, 2008

Hannaford and Sweetwater Face Class Action Lawsuits Over Data Breach

On March 18, two federal class action lawsuits were filed against Delhaize, the parent company of Hannaford and Sweetwater supermarkets. These filings were made only one day after the two retail grocery chains announced that hackers had accessed 4.2 million customer credit card numbers.

Plaintiffs filed suit in Florida, where Sweetwater operates, and in Maine, where Hannaford operates. See Dobryniewski v. Delhaize America, Inc. et al, No. 2:2008cv00235 (M.D. Fla. filed Mar. 18, 2008); Ryan v. Delhaize America, Inc. et al., No. 1:08-cv-00086 (D. Maine filed Mar. 18, 2008). According to their press release, the attorneys who filed the Maine suit also represented plaintiffs in the recent TJX settlement. Their complaint is available here as a .pdf.

Additional suits were filed on March 19 in Virginia, see Ferguson v. Delhaize, No. 3:2008cv00177 (E.D. Va. filed Mar. 19, 2008), on March 20 in Concord, New Hampshire, see Nenni v. Hannaford Bros., No. 1:2008cv00106 (D.N.H. filed Mar. 20, 2008), and on March 21 in Tampa, see Grimsdale v. Delhaize, No. 8:2008cv00538 (M.D. Fla. Mar. 21, 2008).

Hackers accessed the information during the card authorization process, which may not have been properly encrypted, according to media reports.

The lawsuits allege, inter alia, that the retailers negligently handled customers' private data, were negligent in failing to alert customers of the security breach in a timely manner, violated state unfair trade practices statutes, breached implied contracts to protect customers' information, and breached fiduciary duties customers.

UPDATED 3/25/08.

Useful Link: FTC Guide - Protecting Personal Information, A Guide for Business (.pdf)

Related Post: Supermarkets Hit by Data Security Breach

Tuesday, March 18, 2008

Supermarkets Hit by Data Security Breach

Customer Data Exposed - Delhaize-owned Hannaford Bros and Sweetbay grocery store chains announced on Monday that a computer hacker stole its customers' debit and credit card numbers and expiration dates. About 4.2 million cards were affected, and 1,800 cases of fraud have been linked to the breach so far, including use of the card data in Houston, Detroit, San Francisco, France, and Brazil. (Reuters).

Recent Security Breaches Involving Other Merchants - This is the latest of numerous security lapses in the last few years involving exposure of private consumer information, including several lapses by retailers or consumer goods companies. On March 3, 2008, for example, Kraft reported the theft of a company laptop containing 20,000 names and possibly social security numbers of employees. On January 4, 2008, Sears admitted that customer purchase data had been inadvertently exposed to online visitors. A $5 million class action complaint was filed against Sears for alleged privacy violations, as well as breach of contract, breach of fiduciary duty, and a violation of the Illinois Consumer Fraud Act statute. On April 15, 2007, the Attorney General of Texas filed a complaint (.pdf) against CVS pharmacy for alleged improper disposal of customers' personal information.

TJX Breach - In January 2007, the largest known theft of credit card numbers in history was revealed involving stores owned by TJX (which owns TJ Maxx, Marshalls, and other chains). Over 100 million accounts may have been compromised. Reports state that hackers were able to access data over a poorly-encrypted wireless network used to transmit data through the air from hand-held devices. Using that information, thieves were able to hack into TJX's central database. In response to the breach, some states have passed legislation imposing new restrictions on the handling of consumer information and requiring disclosure and notification after a breach. TJX set aside $250-million for related costs, and some estimates suggest that total costs over the next few years could rise to $1 billion. TJX paid $40.9 million in a settlement with Visa, set up a $107 million reserve fund for a settlement with a coalition of banks, and reached a settlement in a class action case brought by customers.

The proposed TJX consumer settlement offered vouchers, reimbursement, credit monitoring, identity theft insurance, and a special one-day sale. The 455,000 customers who made a return without a receipt are eligible for the credit monitoring and insurance, along with reimbursement for certain costs related to the breach. The vast majority of customers will likely get nothing (other than the 15% off one-day sale). Those who had out-of-pocket expenses related to the breach but did not make a return without a receipt are eligible for vouchers of up to $60.

The low value of the settlement to customers is consistent with the lack of success consumers have had in similar data security cases. There are several problems plaintiffs have faced in such lawsuits. First, many individuals whose information is compromised have not been subjected to identity fraud, and their damages are therefore difficult to prove. Second, even if a plaintiff has been the victim of identity fraud, it is difficult to establish that any particular exposure of the confidential information caused the identity fraud. Most of the thieves of electronic data are never caught, making it difficult to trace the flow of information.

Conclusion - Retailers should ensure that they have adequate security in place to prevent breaches and exposure of customer information. Retailers should comply with applicable regulations regarding security and disclsoure, and limit customer data that is collected and retained, as this will help limit potential liability. When data breaches occur, retailers can be subjected to bad publicity and substantial liability, but if the incident is handled properly, bad publicity and damages can be contained. TJX, for example, has seen its stock fully recover to above pre-breach levels, and their one-day sale may offer positive publicity and help restore customer goodwill.

Monday, March 10, 2008

U.K. Offers Cash Rewards for Antitrust Informants

The U.K.'s Office of Fair Trading ("OFT") on February 29 began offering rewards of up to 100,000 pounds (almost $200,000) to informants who provide information about price fixing and illegal cartels, according to media reports and the OFT's press release. The rewards are being offered as part of an 18-month pilot program, which, if successful, may be made permanent. The OFT has become the second regulator to implement such a reward program, with South Korea's Fair Trade Commission being the first.

Potential Affects on U.S. Antitrust Enforcement -

The OFT's program may affect antitrust enforcement in the United States in at least two ways.

First, in an age of global commerce and competition, antitrust violations that are first unearthed in the U.K. may lead to the discovery of similar violations in the United States.

Second, if the program is successful, it could lead to the adoption of a similar program here. The U.S. already rewards informants under the false claims act for reporting fraud against the government. Similarly, the U.S. DOJ already offers a successful leniency program for companies that cooperate with authorities by providing information about illegal antitrust activity, as I noted in an earlier post. In a February 29 speech, for example, Assistant Attorney General Thomas O. Barnett described the leniency program as "an extraordinarily effective tool in detecting and prosecuting cartels."

If Congress wanted to become more aggressive in enforcing the antitrust laws, then the enactment of a reward program similar to the U.K.'s may be a logical and effective step, especially if the U.K.'s program proves successful.

Related Post: Chocolate-Makers Allegedly Fixed Prices

Sunday, March 2, 2008

State Resale Price Maintenance Laws and Leegin

State laws governing resale price maintenance have gained in importance after last year's Supreme Court's decision in Leegin Creative Leather Products v. PSKS (.pdf), which weakened the applicable federal standard. Leegin applied a rule of reason analysis to vertical price restraints rather than a per se rule.

Chart of State RPM Laws - A useful chart that will assist in understanding applicable state laws governing resale price maintenance is available (.pdf) from the ABA's most recent Antitrust magazine, as mentioned by the Antitrust & Competition Policy Blog. The chart includes not only the numerous applicable state statutes, but also the varying case law interpreting the statutes.

Sources of Confusion - For those not familiar with the controversy surrounding resale price maintenance, I previously posted Daniel Kotchen's article discussing how Leegin has affected trade promotion management programs. As he discussed in his article, Leegin has caused significant confusion and uncertainty among consumer goods manufacturers for several reasons. First, Leegin is not binding on state courts. While most states are likely to follow Leegin, their interpretation of the various state laws may vary. Second, the rule of reason analysis is inherently less certain than a per se analysis, opening the door for price maintenance agreements, but only in certain situations. Third, there is pending legislation that, if passed, would overturn Leegin. Legislation sponsored by Senator Herb Kohl and co-sponsored by Senators Biden and Clinton would reinstate the per se prohibition on such price agreements. See Discount Consumer Protection Act, S. 2261. With the legislation pending, it may make long-term planning difficult for manufacturers.

While Leegin presents an opportunity to manufacturers by offering greater flexibility, it also presents greater challenges in designing appropriate programs, which will almost certainly require the involvement of legal counsel.

For more detail, there is an article regarding Leegin and pricing in Inside Counsel magazine's March issue.

Related post: Developing Legally-Compliant Trade Promotion Management Programs; FTC's Nine West Order Explores Resale Price Maintenance Under Leegin


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