California Halts Online Cosmetic Price Controls

The State of California has blocked cosmetics firm, Bioelements, Inc. from engaging in what it calls "a blatant price-fixing scheme" in which it prohibited retailers from selling its products online at a discount. 

"Bioelements operated a blatant price-fixing scheme by requiring online retailers to sell its products at high prices," said California Attorney General Kamala Harris. "Price manipulation harms consumers, competition and our business community. We will continue to be vigilant in protecting our markets from these kinds of abuses." 

Bioelements markets its products to spas and beauty treatment establishments. It’s products are mostly designed to target complexion concerns and discourage skin aging.

Vertical price fixing

The settlement is one of the first applications of California's strict, pro-consumer antitrust law banning vertical price-fixing in the wake of a controversial 2007 U.S. Supreme Court decision that weakened federal law in this area. Vertical price-fixing occurs when companies along the distribution chain conspire to set the price of a product or service at an artificially high level. In California, prices must be set independently -- and competitively -- by distributors and retailers. 

Bioelements markets a line of human beauty-care products under its BIOELEMENTS trademark, offering skin products it claims have quasi-medicinal properties such as reducing wrinkles. These products -- known as "cosmesceuticals" because they supposedly merge the attributes of cosmetics and pharmaceuticals -- are sold at beauty salons across California, as well as on the Internet. 

An investigation initiated by Harris' predecessor as attorney general, Edmund G. Brown Jr., revealed evidence that since 2009, Bioelements had entered into dozens of contracts with other companies that required them to sell Bioelements' products online for at least as much as the retail prices prescribed by Bioelements. (There were no express pricing requirements for products sold in person or in shops.)

In doing so, Bioelements violated California's antitrust and unfair competition laws, Harris said. 

Settlement terms

Under the settlement, in the form of a stipulated court judgment signed by Riverside Superior Court Judge Harold W. Hopp, Bioelements is required to: 

• Permanently refrain from fixing resale prices for its merchandise 

• Inform distributors and retailers with whom Bioelements made price-fixing contracts that Bioelements considers the contracts void and will not try to enforce them 

• Pay a total of $51,000 in civil penalties and attorney fees. 

The 2007 U.S. Supreme Court decision Leegin Creative Leather Products, Inc. v. PSKS, Inc. sharply curtailed federal antitrust law pertaining to vertical price-fixing, but did not affect California's strict state antitrust law.

In the last three years, the California attorney general has sent two open letters to Congress urging passage of legislation reinstating federal safeguards against vertical price-fixing schemes like Bioelements'. In February 2010, the AG obtained an injunction under California law against another cosmetics company, DermaQuest, Inc., which halted a price-fixing scheme similar to Bioelements'.