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Legal Update

New York State Attorney General Challenges Tempur-Pedic’s Retail Pricing Restrictions

9 April 2010
Mayer Brown Legal Update

In a series of articles and public statements, enforcement officials from the New York Attorney General’s office have warned that vertical agreements to fix minimum resale prices, also referred to as minimum resale price maintenance (RPM) agreements, may remain per se unlawful under existing New York law. The statements were made despite the US Supreme Court’s decision in Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), which held that RPM agreements were no longer per se violations of Section 1 of the Sherman Act.

Acting on those warnings, on March 29, 2010, the NY State Attorney General filed a Petition against Tempur-Pedic International, Inc. (Tempur-Pedic), a leading manufacturer of premium mattresses and pillows made from visco-elastic memory foam. The Petition alleged that RPM restrictions imposed by Tempur-Pedic violate New York law.

The Tempur-Pedic Petition raises several significant issues with respect to resale pricing practices under New York state law:

  • The Attorney General claims that the restrictions imposed by Tempur-Pedic violate Section 369(a) of the New York General Business Code rather than New York’s antitrust law, the Donnelly Act. Section 369(a) makes unenforceable “any contract provision that purports to restrain a vendee of a commodity from reselling . . . at less than the price stipulated by the vendor or producer.” It was enacted with the repeal of New York’s Fair Trade Law and has not historically been used to provide a means for recovering damages or restitution for injury resulting from retail price maintenance. The Attorney General’s reliance on this provision, rather than the Donnelly Act (New York’s analog to the Sherman Act), may signal an intention to rely upon a theory of per se illegality, the prospects for which are uncertain.
  • Under the Attorney General’s theory, the Uniform Commercial Code’s definition of “contract” governs whether a contract exists under Section 369(a). Consequently, “the parties’ course of dealings, the usage in trade, or otherwise” can represent evidence of an agreement.
  • The alleged agreement at issue in the Tempur-Pedic case purports to apply to restrictions on advertised prices, which have not always been treated the same as restrictions on selling prices.
  • The Tempur-Pedic case is being pursued in state, rather than federal court, so that the Attorney General may take advantage of a special proceeding for injunctive relief. According to the Attorney General, this procedural mechanism will allow “an expeditious means to enjoin fraudulent or illegal activity and obtain relief for its victims, including ex parte relief.” If there are no triable issues of fact, the Attorney General may request a summary determination of the merits of its petition, and any potential hearing on the merits will be subject to abridged rules of procedure and evidence.
  • Rather than seeking treble damages, the Attorney General seeks restitution and disgorgement from Tempur-Pedic. This decision has uncertain implications for the ability of private litigants in New York to bring suit or seek treble damages.

Overall, the Tempur-Pedic case indicates that companies relying on the rule of reason standard to govern minimum resale price maintenance under Leegin should not presume that the same standard will be applied at the state level. While one state (Maryland) has specifically rejected the Leegin standard through legislation, by some counts as many as 13 other states may still bar RPM. The importance of the Tempur-Pedic case should not be overlooked. Before instituting any pricing, or advertising program, careful consideration is still required.

For more information about the matters raised in this Alert, please contact at +1 312 701 7066, or at +1 212 506 2530.

Learn more about Mayer Brown’s Antitrust & Competition practice.

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