Can cruise lines legally dictate price?

Mark Pestronk

Q: When cruise lines send commission contracts to my agency, the agreements always contain these two clauses that appear legally incompatible: First, we are not allowed to sell to the public at rates that are lower than the cruise lines’ own public rates. Second, we are not the cruise line’s agent but rather the passenger’s agent. Well, if we are not the cruise line’s agent, how does the cruise line have a legal right to dictate the prices at which we sell cruises? For example, why can’t we advertise a 5% discount on all cruises? With enough volume, we might still make money by rebating half the standard commission of 10%. Why can’t we give the entire commission away on cheap cruises in order to attract a clientele to which we can sell up?

A: A supplier’s or manufacturer’s dictation of the prices at which a retailer may sell is called resale price maintenance (RPM). That practice was always illegal under U.S. antitrust laws until a Supreme Court case in 2007.

In the case of Leegin Creative Leather Products Inc. v. PSKS Inc., the manufacturer of Brighton leather products had prohibited retailers from discounting its goods. The court held that the practice was no longer always illegal but that it was illegal only if the anti-competitive effects outweigh the pro-competitive effects, and each case would be judged on its merits.

For cruises, the lines’ arguments would be that prohibiting discounting maintains the luxury-oriented image of the brand, encourages service competition and keeps small travel sellers in business, so all parties benefit in the long run and thus the practice is pro-competitive. As far as I know, there has been no litigation challenging these RPM clauses.

However, there is a catch for the cruise lines. Some states take a more stringent view of RPM. For example, Maryland and California have their own state anti-RPM statutes under which RPM is always considered illegal, and those states have sued manufacturers of goods that impose RPM rules. In New York, Illinois and a few other states, RPM arrangements are unenforceable.

So, the cruise lines with RPM clauses in their contracts are always at some risk. Ironically, their own contracts contain a key to overcoming these risks.

When a company acts as a sales agent for a supplier, a supplier is always legally free to prohibit discounting by the agent. This is called the “agency exception” to the antitrust law. So, if the cruise line did away with the clauses stating that the travel agency is not an agent of the cruise line, there would probably be no genuine antitrust issue because the line could defend by citing the agency exception.

In reality, “no agent” clauses in cruise line contracts make no sense anyway. After all, travel agencies can sell cruises via the computer and thereby bind the cruise line, just as they can for airlines, hotels and car rental companies. This right to bind the supplier to a sale is the essence of agency under the law. 

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