United States Supreme Court Overrules Century Old Ban On Minimum Resale Price Agreements.

By Mohammad A. Syed (“Mo”)*
King and Ballow (USA)

INTRODUCTION

In 2007 the United State Supreme Court overruled the century-old “per se” rule against minimum resale price maintenance (RPM) agreements in the Leegin case.(1) Businesses are well advised to reevaluate their distribution policies in light of this important decision.

BACKGROUND

The Sherman Act, a federal antitrust statute, and the many state antitrust laws that are modeled on the Sherman Act contain language prohibiting every agreement in restraint of trade or commerce. The Supreme Court has interpreted this language to prohibit only unreasonable restraints and employs two modes of analysis to determine whether a particular restraint should be considered unreasonable. “[M]ost antitrust claims are analyzed under a ‘rule of reason,’ according to which the finder of fact . . . tak[es] into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.”(2) “Some types of restraints, however, have such predictable and pernicious anticompetitive effect, and such limited potential for procompetitive benefit, that they are deemed unlawful per se.”(3) Early cases reserved per se condemnation for both horizontal and vertical price fixing arrangements. However, this was later expanded to other practices.

Today, there “is often no bright line” separating rule of reason from per se analysis; the rule of reason encompasses a range of analysis, extending from an abbreviated “quick look” to a “plenary market examination,” and even where the rule of reason is not applied, “a ‘considerable inquiry into market conditions’ may be required before the application of any so-called ‘per se’ condemnation is justified.”(4)

The rule of per se illegality against vertical price fixing (i.e., agreements between buyers and sellers setting the resale price) was established by the Supreme Court in 1911 in the Dr. Miles case.(5) That decision was based, inter alia, on the Court’s application of the common law rule against restraints on alienation and its concern that minimum resale price maintenance could achieve the same purpose as an agreement among the buyers themselves to fix the prices at which they would resell.

Subsequently, in the Colgate case, (6) the Court clarified that the Sherman Act does not apply to sellers’ unilateral refusals to deal with buyers that fail to charge the resale prices suggested by the sellers, thereby permitting sellers to exercise substantial influence over resale prices so long as they avoid entering into bilateral agreements to this effect. As such, manufacturers were free to provide Manufacturer’s Suggested Resale Prices (MSRPs) and other market intelligence to their resellers as long as they did not “agree” on a reselling price. The Colgate doctrine was unsuccessfully challenged, on the ground that it was tantamount to minimum resale price maintenance, in the Russell Stover case,(7) and then was squarely reaffirmed by the Supreme Court in the Monsanto case.(8)

At one time, the rule of per se illegality applied not only to minimum resale price maintenance, but to most vertical resale restraints between buyers and sellers, including both price restraints and non-price restraints.(9) Incrementally, however, the Supreme Court has abandoned this standard, except for the per se rule against minimum resale price maintenance, in favor of the rule of reason, under which the procompetitive effects of a restraint are weighed against the anticompetitive effects. The Court has “ma[d]e clear that departure from the rule of reason standard must be based upon demonstrable economic effect rather than—as in Schwinn—upon formalistic line drawing.”(10)

The chief reason for this about-face was the recognition that vertical resale restraints simultaneously have the potential to reduce competition between resellers of the same brand (“intrabrand competition”) while stimulating competition between different brands (“interbrand competition”) by stimulating resellers of each brand to compete harder.(11) Manufacturers and other sellers impose vertical restraints “to induce retailers to engage in promotional activities or to provide service and repair facilities necessary to the efficient marketing of their products” which otherwise, “[b]ecause of market imperfections such as the so-called ‘free rider’ effect, . . . might not be provided . ..”(12) Thus, the Court overruled application of the per se rule to such non-price resale restraints as location clauses, territorial restraints and customer restraints, holding that these restraints should be judged under the rule of reason. (13)

Addressing price-related vertical restraints, the Court has held that the rule of per se illegality does not apply to bona fide consignment sales, maximum resale price maintenance, or agreements between a buyer and a seller for the seller to stop doing business with buyers that resell below a particular price. (14) At the same time, lower courts have declined to apply the per se rule to agreements against advertising at prices that are less than an agreed level. (15)

THE PARTIES AND THE CONTROVERSY

Leegin was a small start-up manufacturer of women’s accessories such as handbags, shoes, and jewelry with reseller agreements. It was trying to compete with larger, established manufacturers and with department stores and other retails chains. Leegin adopted a Retail Pricing and Promotion Policy stating that it would sell its Brighton-branded products only to retailers that followed Leegin’s MSRPs. Leegin required all its retailers to “pledge” their compliance with the pricing policy. PSKS initially pledged to comply with the pricing policy, but then broke its promise by discounting the entire Brighton line. Leegin stopped selling to PSKS, thereby causing its sales to decline. PSKS filed a lawsuit alleging violations of federal antitrust law and won at the trial court level.

THE SUPREME COURT DECISION

The Supreme Court rejected the per se illegality of minimum resale price agreements. First, the Court observed that minimum resale price agreements can have procompetitive benefits that outweigh the anticompetitive harms and did not merit being “per se” illegal like other agreements that always injure competition. For example, by assuring resellers that they will not face discount price competition from other resellers of the same brand, minimum RPM agreements encourage retailers to invest in services or promotional efforts to sell that brand against competing brands. Further, where one retailer provides high quality customer service and promotional services, RPM prevents other retailers from “free riding” off of these services. RPM might also provide new entrants to a market assistance in competing against entrenched brands by enabling resellers to provide pre-sale services.

Second, the Court found that the doctrinal basis for the Dr. Miles decision had been eroded by intervening case law and the economic basis of the Dr. Miles case had been shown to be flawed. The Court also observed that the United States Congress intended for the antitrust laws to evolve much like the common law has evolved as courts gain knowledge and experience.

GUIDANCE FROM LEEGIN

By removing some, but not all legal risks, the Leegin decision makes possible a range of business opportunities that the Dr. Miles rule had not permitted for a century. Businesses now face many choices that they must consider in light of the relevant state laws and the market conditions for the products concerned (16).

First, for a number of suppliers, discounting does not present a predicament and they can go about doing business as usual without any changes. Second, since Leegin reduces the legal risk if a unilateral policy setting minimum resale price restraints inadvertently becomes an agreement, some companies might continue such unilateral policies. Third, some companies that have previously refrained from adopting unilateral policies setting minimum resale price restraints might consider doing so.

Fourth, because agreements on selling price are now judged under a rule of reason, it is very likely that agreements on advertised price will also be similarly treated. Thus, companies that seek to control resellers prices by offering reimbursements for advertisements that contain prices at or above MSRP will not face per se condemnation.

Fifth, long-term distribution agreements that previously could not be conditioned on compliance with the supplier’s announced MSRP might be revised. In the past, a Colgate policy, only helped sellers at the end of the term, when they were deciding whether to renew or terminate distribution agreements. Companies that have not had a Colgate policy because they could not enforce it might re-assess their policy.

Lastly, revisions might be made to agreements that contain provisions reserving the reseller’s right to set its own price. Sellers might contemplate deleting these provisions, or adding provisions requiring the resellers to sell at or above the MSRP. They may even reserve the right to require a minimum RPM and at the same time permit the reseller to terminate if the seller exercises that right.

The Leegin decision may well cause more manufacturers to create or strengthen minimum resale pricing programs, and this will present challenges and opportunities for resellers, including dealers, licensees, and franchisees. Ultimately, the question now is, whether the anticompetitive effect of the vertical restraint in question substantially outweighs the procompetitive effect for which the restraint is reasonably necessary. It is a very fact specific inquiry. It is important to note that not all minimum RPM agreements are now per se legal. Purely vertical minimum RPM might be unlawful where the manufacturer or retailer has market power. For example, a dominant retailer might request resale price maintenance to forestall innovation in distribution that decreases costs, or a manufacturer with market power might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants. Both these scenarios would be illegal.

Also, noteworthy is the fact that federal law is not the only source of antitrust claims. Almost all of the 50 states have their own antitrust laws. Leegin was concerned only with a claim arising under Section 1 of the Sherman Act. Thirty-seven states joined together in a friend-of-the-court brief to urge the Court to preserve the Dr. Miles rule. As a matter of policy, many states fashion the implementation of their antitrust laws in conformity with judicial interpretations of similar federal laws. However, it is possible that some states will reject Leegin and continue to hold minimum RPM per se illegal.

Footnotes:
(1) Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007).
(2) State Oil Co. v. Khan, 522 U.S. 3 (1997).
(3) Id.
(4) California Dental Ass’n v. FTC, 526 U.S. 756, 779 (1999), quoting National Collegiate Athletic Ass’n, 468 U.S. 85, 104, n. 26 (1984).
(5) Dr. Miles Medical Co. v. John D. Park & Sons Co, 220 U.S. 373 (1911).
(6) United States v. Colgate & Co., 250 U.S. 300 (1919).
(7) Russell Stover Candies, Inc. v. FTC, 718 F.2d 256 (8th Cir. 1983).
(8) Monsanto Co. v. Spray- Rite Service Co., 465 U.S. 752, 762-63 (1984).
(9) See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 380 (1967).
(10) Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 58-59 (1977).
(11) Id. at 51-52.
(12) Id. at 55.
(13) Id. at 36.
(14) Simpson v. Union Oil Co., 377 U.S. 13 (1964); State Oil Co. v. Khan, 522 U.S. 3 (1997); Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988).
(15) See, e.g., Illinois Corporate Travel, Inc. v. American Airlines, Inc., 806 F.2d 722, 728-29 (7th Cir. 1986), cert. denied, 495 U.S. 919 (1990); see also In re Advertising Checking Bureau, 109 F.T.C. 146 (1987).
(16) For a detailed discussion of the pros and cons of various strategies please consult the article RESALE PRICE MAINTENANCE AND THE WORLD AFTER LEEGIN, By Michael A. Lindsay, 22 Antitrust ABA 32. (Antitrust, Fall 2007).

Mohammad A. Syed is an attorney in the Antitrust Section at King and Ballow in Nashville, TN. His biography may be seen on http://www.kingballow.com/kb/attorneys/msyed.htm.