Incentives & Promotions in the Fashion Arena: The FTC Weighs In

Many designers craft tactics to carefully differentiate their contract terms among retailers, from high-end, brick-and-mortar stores to Internet retailers and others. The Federal Trade Commission (FTC) recently updated its decades-old guidance on promotional allowances and how they may constitute price discrimination (available here). The FTC’s guidance confirms that designers should offer similar terms to competing retailers, including e-tailers, while long-standing options for tailored pricing remain firmly in place.

What areas of my business does the FTC’s guidance impact?

The US Robinson-Patman Act prohibits a seller from discriminating on price among competing buyers. Companies routinely grapple with tactics to leverage the available legal options to differentiate their pricing to various buyers, including the “cost-justification defense” and the “meeting-competition defense.” Some designers also use geographic or channel limitations to increase the ability to price dynamically.

The FTC’s recent guidance focuses solely on differentiation in promotional allowances, which often are central to a fashion company’s pricing strategies. Promotional allowances provide additional leverage during contract negotiations and may offer tools to implement unilateral resale price maintenance or minimum advertised pricing plans with retailers. The FTC’s latest guidance updated the agency’s recommendations for how sellers can avoid price discrimination when providing retailers with promotional allowance funds, promotional packaging, advertising, slotting allowances, and other promotional terms. The FTC specifically addressed how each of these components should apply to Internet retailers.

Why did the FTC issue this new guidance?

The FTC originally issued guidance in 1969 to help businesses comply with the price discrimination requirements of the Robinson-Patman Act as they apply to promotional allowances offered to retailers. This guidance, known as the “Fred Meyer Guides” for the Supreme Court case that spawned it, was last updated in 1991. Since then, litigation under the Robinson-Patman Act has significantly dwindled. The FTC’s last Robinson-Patman action against a manufacturer settled in 2000. Meanwhile, very few complaints have been filed by disappointed retailers over the last several decades. This has often allowed fashion companies to exert greater pricing flexibility.

The FTC updated its guidance predominantly to address how promotional allowances should be provided to Internet retailers consistent with Robinson-Patman’s requirements. The FTC’s comments indicate that the agency remains concerned about pricing fairness, even in the age of e-tailing and despite a dearth of enforcement in recent years. Yet the new recommendations largely leave in place the agency’s long-standing recommendations, reflecting the FTC’s strong preference to maintain continuity with the existing legal framework when dealing with new market realities. Notwithstanding the changes made, the FTC provided many new illustrative examples to assist businesses to design compliant strategies.

What are the most important aspects of the FTC’s guidance?

The FTC offered three key points:

1. Online retailers should be treated just like any competing retailer for purposes of price discrimination. The FTC takes the position, for example, that a designer must provide promotional allowances to e-tailers on proportionally equal terms and in ways that the e-tailer may reasonably be able to take advantage of some of the allowances.
2. Promotional allowances related to a product’s resale may receive greater scrutiny than those that facilitate the initial sale to the retailer. For instance, special packaging or promotions that help a designer sell its product to a particular retailer may be permissible, while special packaging that uniquely helps the designer promote a product to consumers may increase the risk of discrimination.
3. Promotional allowances should be offered as part of a comprehensive plan that includes all categories of retailer customers. Designers are best off avoiding ad-hoc decisions and, instead, crafting a promotional allowance plan that serves the company’s strategic priorities while managing the risks identified in the FTC’s guidance.

One area of pricing that the FTC did not address is whether resale price controls, such as minimum advertised pricing, must be applied equally to both brick-and-mortar and online stores. Recent case law indicates that this remains a gray area as companies grapple with how to maintain and promote the value of their products at the retail level.