Delivering for Best-in-Class Wholesaler-Distributors
July 2011

Bioelements, Inc. markets a proprietary line of products at beauty salons across the United States and through a network of independent online retailers. In mid-2009, Bioelements entered into written contracts with several dozen California-based companies for the online retail sale of its products to the public. The contracts stated the retailer “shall not charge less than the Manufacturer’s Suggested Retail Price (MSRP)” when reselling Bioelements product, or the retailer is “prohibited from charging more or less than the Manufacturer’s Suggested Retail Price (MSRP).”

According to the California Attorney General, the state’s antitrust and unfair competition laws prohibit vertical price-fixing—namely, a supplier cannot require, or agree with, a reseller of the supplier’s products to resell at a minimum price (e.g., not below MSRP), or at a set price (MSRP). A wholesaler-distributor or other reseller must be free at all times to set the price independently, without influence from the supplier.

In December 2010, California filed suit against Bioelements for vertical price-fixing in violation of the Cartwright Act (the state antitrust law) and unfair competition law (People v. Bioelements, Inc., Cal. Superior Court). Less than a month later the parties entered into a settlement agreement in the form of a stipulated court order and permanent injunction that requires Bioelements to:

  • Permanently refrain from fixing resale prices for its products, including via any contracts, obligations or agreements of any kind, oral or written, that fix or set a standard or minimum resale price;
  • Advise its resellers that Bioelements disavows and will not enforce any agreement or understanding that purportedly obligates the reseller to maintain certain resale prices for Bioelements products; and
  • Advise Bioelements officers, directors, and employees of the terms of the permanent injunction.

Federal Antitrust Law Does Not Preempt State Law

The settlement is one of the first applications of California’s strict state antitrust law banning vertical price-fixing, in the wake of a 2007 U.S. Supreme Court decision that relaxed federal antitrust law in this area. In Leegin Creative Products, Inc. v. PSKS, Inc., the U.S. Supreme Court narrowly ruled (5-4) that vertical price-fixing agreements may not violate federal law if the agreements on balance have a pro-competitive effect. However, as this California case illustrates, conduct that may be acceptable under federal antitrust law may nevertheless violate a state’s antitrust law.