Mythbusters — OEMs setting prices

February 2022

By Michael G. Charapp
Charapp & Weiss LLP

Dealers are facing increased pressure from their OEMs to limit selling prices of certain vehicles – usually new model battery electric vehicles (BEVs) – to MSRP. Dealers, who for years have struggled to eke out a profit in competition with other dealers, feel they should be free to sell at whatever price they can get.  After all, they reason, MSRP is “SUGGESTED.” They argue that any agreement they would have with their competitors could land them in jail for price fixing, so how can OEMs fix prices?

The answer comes from a U.S. Supreme Court case decided in 2007. That an OEM may not impose price restraints on its dealers is a myth that is busted.

A Texas retailer, Kat’s Kloset, sold purses known as “Brighton bags” at a discount. The California manufacturer refused to continue to supply the retailer because the shop violated the manufacturer’s policy against discounting. A Texas jury ruled that the supplier had engaged in unlawful resale price maintenance and awarded $4 million to Kat’s Kloset.  A federal appeals court upheld the decision. The United States Supreme Court agreed to review that.

Resale price maintenance, a form of price fixing, had been a “per se” violation of the anti-trust laws for nearly a century, dating back to the 1911 U.S. Supreme Court ruling in Dr. Miles Medical Company v. John. D. Park & Sons. For a per se violation, a jury only has to find that the price fixing took place to find that the law was violated. It need not determine whether there was an unreasonable impact on competition.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc. d/b/a Kat’s Kloset, the Court ruled that the century old doctrine prohibiting suppliers from imposing price restrictions on products they sell under the per se doctrine of the anti-trust laws is no longer the law.  The court ruled that such restraints must be considered by the rule of reason to determine anti-competitive impact.

What does this mean for the car business today? Franchisor price restrictions are not automatically illegal.  If a dealer wants to challenge such a restriction, a court must now consider the policy on a case by case basis to determine the impact on competition, a very stringent test.  That is especially the case for BEVs where the OEM will argue that what they consider price gouging will negatively affect the OEM’s attempt to build its BEV acceptance in a very competitive market.

Dealers – horizontal competitors – may not agree on selling prices or terms because those agreements are still per se violations of the antitrust laws. But price restrictions imposed by an OEM on its dealers – vertical price restraints -- are not per se illegal, and OEMs will use them as they see fit to limit prices at which vehicles may be sold or to prohibit advertising at discount prices.