North Carolina Business Litigation Report

Fourth Circuit Rules No Vertical Price Fixing In Manufacturers' Sale Of Pesticide

The Fourth Circuit held today that the manner in which manufacturers of pest control products sold their products to consumers did not constitute illegal resale price maintenance.  The decision in Valupest.com of Charlotte, Inc. v. Bayer Corprejected Plaintiffs' argument that an antitrust stalwart, United States v. General Electric Co., 272 U.S. 476 (1926) had been overruled by a recent decision of the Supreme Court, Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007).

Both Defendant Bayer Corporation, which sells a termite killer called Premise, and Defendant BASF, with a competing product called Termidor, sold their products through distributors.  The distributors sold Premise and Termidor at prices set by the manufacturers to the "pest management professionals ("PMPs"), who provide pest control services to homeowners and other individual customers."  The Plaintiffs making the antitrust claim were three of the PMPs.

For those who need a refresher on this aspect of antitrust law, which included me, the General Electric case held that a manufacturer selling its product directly to consumers through agents is not liable for vertical price fixing.  The rationale of the decision was that when a manufacturer sells through a genuine agent, there is no "contract, combination" or "conspiracy" to violate Section 1 of the Sherman Act.

In Leegin, the Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which had held that resale price maintenance agreements were per se unlawful.  In other words, during the long era during which Dr. Miles held sway, such agreements did not require proof that they unreasonably restrained trade.  They were presumed to do so.  The Leegin decision abolished the per se rule and held that such restraints were subject to the rule of reason, because of "a growing consensus in economic theory that vertical pricing agreements, while sometimes anti-competitive, can often have procompetitive effects."

Plaintiffs in Valupest.com argued that Leegin effectively overruled General Electric, and that Leegin dictated a rule of reason analysis even if there was a true principal-agent relationship between a manufacturer and its distributors.  The Fourth Circuit exterminated that argument, saying that Leegin had presented an entirely different question of the proper analysis to be applied after it had been established that there was in fact a retail price maintenance agreement.  It noted that Leegin had not mentioned the General Electric decision at all, and that the Supreme Court had said in another case that it "does not normally overturn . . . earlier authority sub silentio."

The Fourth Circuit then evaluated the validity of the principal-agent relationships in place between the pesticide manufacturers and their distributors, and found them to be well on the acceptable "General Electric side of the line."  The distributors bore the risk of loss, the agency sales method had been used for legitimate business reasons, and there was no evidence that the agency agreements were the product of coercion. 

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Mack Sperling
Brooks Pierce, LLP
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