We all know it is somehow illegal for a manufacturer, or distributor, to fix the prices at which its products will eventually be resold. This is not always clear, as a tile distributor recently learned in federal court.

The facts of the case are relatively simple: Distributor X began dealing a manufacturer’s products in 1969. This went smoothly until 2002, when the mill began receiving complaints from other distributors in the geographical area of Distributor X.

The complaints concerned the fact that although Distributor X was purchasing the products at the same price as the others, it was reselling them to retailers at prices well below that of the other distributors.

The manufacturer went to Distributor X and asked it to raise its prices. They did not discuss specific pricing, and although Distributor X listened, it did not raise its prices. It should be noted, at no time did the manufacturer ever distribute a suggested resale or list price.

The mill then went to the complaining distributors and discussed the possibility of terminating Distributor X. The concerns of the manufacturer both for the large volume it would lose in the event of such a termination, and what efforts the complaining distributors would take to make up this lost volume, were also discussed. In response, the complaining distributors said if Distributor X was terminated, they would re-emphasize the manufacturer’s products and would do a sales marketing blitz to recapture the lost sales.

Following these discussions, the mill sent a letter to Distributor X stating it had “decided to consolidate our distribution channels…and have made the difficult decision to cease our direct sales to your company.” This letter provided for a 60-day period after which no more orders would be accepted.

Distributor X immediately sued the manufacturer in federal district court. In its lawsuit, Distributor X claimed it had been terminated as a result of an illegal conspiracy to fix prices, a violation of the Sherman Anti-Trust Act.

The “facts” of the case, as noted above, were not disputed by the manufacturer or the other distributors. Do these facts, however, actually create what is known as a “per se violation” of the anti-trust law, requiring no further evidence, or do they simply illustrate a normal, allowable, course of business, as business is typically done in the United States?

The federal circuit court of appeals, where the case eventually ended up, examined the manufacturer’s motion for dismissal, claiming its actions as stated in the agreed to facts, without further evidence, did not constitute a violation of the law as Distributor X had claimed.

In its analysis, the appeals court noted there were two separate and distinct conspiracy theories it must consider: One being whether there was a “horizontal” agreement to fix prices, and the other being whether there was a “vertical” conspiracy to set the prices.

A horizontal agreement to fix prices, the court noted is in fact per se illegal, meaning no further proof, beyond the agreement itself, is necessary to find a violation. It simply requires a combination of sellers—the complaining distributors—to agree to fix prices of a certain product—the defendant’s.

A vertical conspiracy is also illegal if it is determined there is some agreement between a manufacturer and a distributor to fix prices at any specific level.

Next time, we’ll look at how the courts determined this case and their decision as to whether these facts constitute a violation of our anti-trust laws, or do they simply constitute an allowable “business decision.”