• Supreme Court Abandons Absolute Prohibition on Resale Price Maintenance Agreements, Opening Up New Commercial Possibilities for Manufacturers
  • July 6, 2007 | Author: William H. Roberts
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • Leegin Creative Leather Products, Inc. v. PSKS, Inc.

    For almost a century, the Supreme Court held that Section 1 of the Sherman Act placed an absolute prohibition on minimum resale price maintenance agreements, thus significantly limiting the ability of manufacturers to use such pricing arrangements to develop efficient, competitive distribution networks. However, on June 28, 2007, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court abandoned the per se rule first set forth in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1914), and decided instead that minimum resale price maintenance agreements should be, like many other economic arrangements, subject to a “rule of reason” analysis—a balancing of procompetitive justifications and anticompetitive harms. Although the Supreme Court’s decision in Leegin does not guarantee the legality of any particular resale price maintenance program, it opens the door for manufacturers to carefully develop and implement legal resale price maintenance programs that are designed to advance legitimate ends and that promote, rather than impede, consumer welfare.

    Background

    PSKS sold leather accessories manufactured by Leegin from its boutique in Lewisville, Texas. In order to differentiate Leegin products from other brands and to ensure that its customers received a high level of service, Leegin had adopted a strategy of selling only to retailers that promised not to sell Leegin’s products below suggested retail prices. Leegin further offered retailers special incentives to participate in its “Heart Store Program,” which required a pledge not to sell below Leegin’s suggested retail prices. PSKS’s boutique was at one point a member of the Heart Store Program, but had withdrawn in the late 1990s. Several years later, Leegin discovered that PSKS had been marking down Leegin’s entire line by 20% to undersell competing retailers. After PSKS refused Leegin’s request that it cease discounting, Leegin stopped selling its products to PSKS.

    PSKS sued Leegin in the United States District Court for the Northern District of Texas for (among other claims) a violation of Section 1 of the Sherman Act, alleging that Leegin and its retailers had “enter[ed] into agreements . . . to charge only those prices fixed by Leegin.” Although Leegin argued that its program was actually procompetitive, the district court determined that the per se rule against minimum resale price maintenance agreements was absolute and precluded any consideration of the program’s effects under the rule of reason.(1)  The jury found that Leegin had indeed agreed with its retailers to fix prices, and awarded PSKS damages of $1.2 million, trebled to $3.6 million. The Court of Appeals for the Fifth Circuit affirmed, concluding that the Supreme Court “has consistently applied the per se rule to [vertical minimum price-fixing] agreements.”

    In a 5–4 decision, the Supreme Court reversed, abandoned Dr. Miles, and instead held that minimum resale price agreements should be evaluated under the rule of reason. Justice Kennedy’s opinion, joined by the Chief Justice and Justices Scalia, Thomas, and Alito, drew heavily on modern economic literature that is “replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.” Because only those agreements that “always or almost always tend to restrict competition and decrease output” should be governed by a rule of per se illegality, the Court determined that it was appropriate to promulgate a new rule for minimum resale price agreements.

    Justice Breyer authored a dissent, joined by Justices Stevens, Souter, and Ginsburg, that expressed opposition to abandoning a well-settled precedent and unease with adopting yet another difficult-to-apply balancing test in lieu of the analytic simplicity of a brightline per se rule (despite the fact that such an analysis is commonplace under much antitrust analysis). Justice Breyer concluded that “[t]he only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence[.]”

    The Lessons of Leegin

    Leegin continues the Supreme Court’s trend toward the rationalization of the law governing resale price maintenance. Shortly after Dr. Miles, the Supreme Court recognized in United States v. Colgate & Co., 250 U.S. 300 (1919), that a manufacturer may unilaterally refuse to sell to a retailer that does not adhere to a minimum resale price, although the same manufacturer and retailer could not agree to a minimum resale price—even though the economic effects of unilateral and concerted price-fixing are generally the same.(2)  Decades later, in State Oil Co. v. Khan, 522 U.S. 3 (1997), the Supreme Court eliminated the per se rule against maximum resale price maintenance, and subjected such agreements to a rule of reason analysis. The Supreme Court also abrogated the per se prohibition on certain non-price vertical restraints in Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), and instead held that the legality of those, too, should be determined under the rule of reason.

    Leegin rests on the Court’s acknowledgment— buoyed by mounting economic evidence and argument—that minimum price resale maintenance programs may, in some circumstances, be procompetitive and efficient. Among the possible benefits, the Court recognized, for instance, that:

    1. Resale price floors may help eliminate “free riding” by low-price discount retailers which effectively co-opt the better service, product selection, and customer training offered by higher-price retailers. For example, a customer could investigate or test a product at a high-service, but higher-priced retailer, without purchase, and subsequently buy that product through a discounter.
    2. Similarly, a decrease in the ability of retailers to compete on the basis of price may spur an increase in customer service and product selection offered to differentiate one retailer from another.
    3. Assurance that other retailers will not sell at a lower price may encourage retailers to make investments in new products or lines that would be risky absent such a guarantee, thus increasing interbrand competition.
    4. Allowing agreed-upon price floors may increase customers’ ability to use price as a proxy for quality.

    However, the Court—and the dissenters—were also cognizant that “unlawful price fixing, designed solely to obtain monopoly profits, is an ever present temptation.” Improperly used, minimum resale price agreements could lead to a host of anticompetitive effects, such as:

    1. Facilitation of a manufacturer cartel by making deviations in price easier to identify at the retail level.
    2. Organization of a retailer-initiated horizontal cartel, in which a manufacturer is compelled to assist the arrangement by setting a minimum resale price. Under those circumstances, the resulting minimum price would not be an aid to competition, but would rather simply allow the retailers to capture a monopoly price.
    3. A powerful retailer could demand a minimum resale price to prevent competition from lower-cost distribution channels (e.g., internet sales).

    Moving Forward from Leegin

    Leegin must not be read too broadly as legitimating any and all forms of resale price maintenance. Leegin simply exposes minimum resale price maintenance agreements to a rule of reason analysis. The Court declined to offer, however, any firm presumptions or other rules that could guide businesses, lower courts, and the federal government in the application of this new standard. The Court identified a number of factors that may be relevant to the rule of reason inquiry, such as the specific nature of the restraint, the extent of the agreement’s economic effect, the number of manufacturers using a similar minimum resale price arrangement in the market, the manufacturer’s and retailers’ market power, and the source of the restraint (i.e., whether it was initiated by the manufacturer or by retailer pressure). Accordingly, depending on market conditions and evidence related to the development of the minimum resale price arrangement, a program identical to one which has already been deemed legal could instead be ruled invalid.

    Thus, any prospective minimum resale price maintenance program must be crafted and evaluated very carefully with the assistance of legal counsel.

    Second, minimum resale price maintenance could still be prohibited per se under state antitrust statutes, which have effect separate and apart from the Sherman Act. Although the Supreme Court’s decision in Leegin may be persuasive to a state court if it is forced to reconsider application of a per se rule under that state’s antitrust statute, it is not necessarily binding (and, in the past, many state Attorneys General have indicated hostility toward a softening of the regulation of vertical restraints.)

    Finally, minimum resale price maintenance agreements are still illegal under the laws of many foreign jurisdictions, which must be carefully studied before any minimum resale price arrangement is imposed on foreign retailers.

    In conclusion: what is the effect of Leegin? Some question whether Leegin will actually have a significant impact whatsoever. Manufacturers are already free to unilaterally terminate retailers that do not adhere to suggested minimum prices. Furthermore, in many markets, retailers with extraordinary buying power (usually discounters) will likely reject manufacturers’ attempts to control resale prices. (How would Wal-Mart and Home Depot respond?) Some commentators believe that the only real effect of Leegin will be to discourage lawsuits that allege a manufacturer was not acting unilaterally in terminating a discounting retailer, and instead was acting in concert with other retailers. Success in such actions was previously premised simply on proving an “agreement” instead of unilateral manufacturer activity, but the Supreme Court has now erected a very substantial hurdle a plaintiff must surmount.

    Notes

    1.  Leegin also argued that it had not “agreed” to a minimum resale price with retailers, but instead simply unilaterally refused to deal with retailers that would not abide by its pricing policies. Leegin abandoned that argument on appeal.

    2.  See Leegin, 2007 WL 1835892, at *12, citing Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 762–64 (1984).