Spring Conference Keynote Speaker Highlights

Much has been written about the sharp increase over the past decade in promotional allowances, discounts, markdowns, fixed fees, and other investments – commonly known as “trade spend” or “trade funds” – consumer good manufacturers make with retailers, wholesalers, and distributors (collectively “retailers”). Trade spend has grown from an estimated 13% of manufacturer gross sales in 1997 to 17% of gross sales in 2007. 

Trade spend increases have led to a fundamental industry challenge: manufacturer brand and pricing strategies have become more difficult to execute, as trade spend increases enable aggressive retail pricing tactics that may not align with brand objectives. Given this challenge, manufacturers are now more focused than ever on managing trade spend to better align brand strategies with trade execution. 

Efforts to manage trade spend arise within a complicated and changing legal framework that governs how trade can be deployed with retailers. This article addresses an important question in which legal issues intersect with core business objectives that are particularly important given the industry focus on trade spend management: 

To better execute brand strategies within retail accounts, can manufacturers legally – under federal antitrust laws – condition trade funds on retailers maintaining retail prices above a minimum price threshold? 

Last summer, the Supreme Court issued an important decision that provides significantly more flexibility under federal law for consumer good manufacturers to influence retail prices. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court held that agreements between manufacturers and retailers that set minimum retail prices would no longer be considered per se illegal under federal antitrust law – i.e., illegal on their face. Rather, these agreements will now be assessed under federal law using a more flexible “rule of reason” analysis, an analysis that incorporates an agreement’s business justifications and market effects. 

Leegin will likely spawn new strategies designed to better align retail prices with brand objectives. One new strategy could involve manufacturers conditioning trade funds on retailers maintaining retail prices above minimum thresholds – referred to as a “conditional allowance” strategy. For instance, a manufacturer could offer a retailer $100 in promotional allowances provided that a product’s retail price does not go below a price floor. Any pricing below the floor would lead to a $10 reduction in promotional allowances. 

Prior to Leegin, federal antitrust enforcers disagreed as to whether a conditional allowance strategy constituted per se unlawful resale price maintenance or should be assessed using the more flexible rule of reason analysis. Leegin has resolved this debate in favor of the rule of reason analysis. Accordingly, the legality of a conditional allowance strategy under federal law now depends on two fundamental considerations by a court, both of which are discussed below: (1) whether a legitimate business justification for the strategy exists and (2) whether the strategy led to higher retail prices within a product category. 

First, a court will consider whether a legitimate business justification for the strategy exists – i.e., a justification that enhances a product’s ability to compete on the basis of service, quality, or price. Examples of business justifications for a conditional allowance strategy that a court may view as competition enhancing include: 

Encourage Product Support Investments: 
A conditional allowance strategy may be necessary to encourage retailers to invest in product-support services, such as in-store demonstrations of product functionality or attributes. Without a conditional allowance strategy, a retailer may not invest in any support services because its investment may benefit competitors that (a) make no similar investment, (b) free ride off the retailer’s effort to pique consumer interest in the product, and (c) undercut the retailer’s price. A conditional allowance strategy would encourage a retailer to invest in product support services by reducing or eliminating a competitor’s incentive to free-ride off the retailer’s investment. 

Reverse Base Sales Declines 
A conditional allowance strategy may be necessary to reverse a trend in which a product’s percentage of base (non-promoted) sales volume is declining and promoted volume is increasing. Deep retail discounts in the market encourage consumers to purchase a product only when sold on promotion. Accordingly, the more trade funds are used to support low promoted pricing, the more consumers will wait for a promotion to purchase a product. A trend in which a product’s base volume is declining and promoted volume is increasing threatens the long-term viability of the product: each year, a manufacturer will have to spend more in trade funds to support continued growth of the product. A conditional allowance strategy can help prevent or reverse base sales declines by encouraging retailers to use trade funds to support activities that build base business – such as special merchandising, shelf placement, distribution, or shopper marketing – rather than simply using trade funds to discount price. 
Support Brand Positioning: 
A conditional allowance strategy can help differentiate a product from lower quality competing products by encouraging retail prices that reflect the quality difference between the products. Considering that consumer perception of product quality is determined in part by retail prices, encouraging differentiated retail prices can enhance competition on the basis of product quality. 

Second, a court will consider whether a conditional allowance strategy led to higher retail prices throughout a category, including the prices of competing products. Higher retail prices for the majority of product sales within a category may be viewed by a court as an “anticompetitive effect” of a conditional allowance strategy. A court would balance any such anticompetitive effect against legitimate business justifications to determine the legality under federal law of the strategy. Absent any anticompetitive effect, and assuming the existence of a legitimate business justification, a court would almost certainly deem a conditional allowance strategy legal under federal law. 

Finally, manufacturers and retailers need to consider state laws before implementing or participating in a conditional allowance strategy. Individual states have their own antitrust laws. States tend to follow legal developments of federal antitrust laws, as state antitrust laws tend to be modeled after federal law. Therefore, most states will likely adopt the principles of Leegin in assessing agreements between manufacturers and retailers to set minimum retail prices. But certain states may reject the Leegin decision and continue to view such agreements as per se unlawful. It is thus important for manufacturers and retailers to work closely with counsel to structure conditional allowance strategies to maximize the likelihood that any state that rejects Leegin nonetheless assesses the strategy using the rule of reason analysis, as some flexibility exists to shape the legal framework such a state uses to assess the strategy. 

In late 2007, Senator Kohl introduced a bill to the Senate, which was co-sponsored by Senator Biden and Senator Clinton, that would reinstate the per se prohibition on minimum price agreements between manufacturers and retailers. 

See the Discount Consumer Protection Act, S. 2261 (available at www.govtrack.us/congress/bill.xpd?bill=s110-2261). If this bill is enacted into law, it would effectively reverse the Supreme Court’s Leegin decision. Industry stakeholders should track developments of the bill throughout 2008. 

This article was originally published in the GMA’s Forum magazine. 

Biography 

Daniel A. Kotchen is managing partner with Kotchen LLC, a law firm based in Washington, D.C. that specializes in representing stakeholders in the consumer goods and retail industry. To learn more about Kotchen LLC, including a consumer goods and retail industry litigation blog, go to www.kotchen.com. Mr. Kotchen can be contacted by e-mail at dkotchen@kotchen.com. 
IFBA Top to Top Draws Record Numbers 

The fifth annual IFBA Top to Top Executive Business Conference posted record attendance of registrants; topping 300 people in total attendance at their three-day event hosted at Caesars Palace, Las Vegas, NV on May 2-4. 

Some 54 manufacturer companies with 108 paying principals joined together with 56 IFBA and other NARMS member companies with 141 attendee registrants. Using a combination company/individual registration fee structure for the first time, the conference saw income grow by nearly 50% significantly from past years; fed also in part by a moderately successful Top to Top sponsor and advertising campaign. 

Unlike bygone days, hosting any event in Las Vegas turns out to be an expensive proposition but the great turnout to the 2008 IFBA event kept planners from over thinking their decision to follow the Food Marketing Institute’s (FMI) to Las Vegas from their traditional downtown Chicago location. Now with FMI moving on to Dallas with an educational focus; planning the next Top to Top is back to square one. 

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