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.

CADE’s possible new commissioners
Ministry of Justice announces names

By Guilherme Ribas

The Minister of Justice Tarso Genro has suggested to the Brazilian President Lula da Silva the appointment of four attorneys to replace 4 (out of 7) CADE’s commissioners who will leave the government next July and August:

- Arthur Badin will probably be the next President of CADE. He is ex-Chief of Cabinet at SDE and current General-Attorney of CADE. Badin’s foremost qualities are his organizational abilities and good management skills, he has been responsible for the first leniency agreements in Brazil and is recognized for his courageous and combative nature, fundamental qualities in the enforcement of decisions taken by CADE.

- Carlos Ragazzo has been General-Coordinator for Antitrust Affairs at SEAE (Ministry of Finance) since 2003.

- Olavo Chinaglia is a specialist in economic law and has been working as an antitrust lawyer since 1998.

- Vinícius Carvalho is Chief of Cabinet at the Secretariat for Human Rights (Ministry of Justice) and has worked at CADE at the department in charge of monitoring CADE’s decisions.

The Brazilian President may accept the suggestions and forward them for approval by the Brazilian Senate.

Commissioners Elizabeth Farina (President), Luís Fernando Rigato Vasconcellos, Luiz Carlos Prado and Ricardo Cueva are all leaving CADE.

If you want more information, please write to guilhermeribas@felsberg.com.br.

CADE has a new Commissioner
Enéas Souza replaced Luis Schuartz

By Paulo Buzanelli

On April 22, the Senate unanimously approved economist Enéas de Souza for the position of CADE commissioner, in place of attorney Luis Fernando Schuartz.

The new board member holds a Masters degree from the UNICAMP University and has occupied numerous positions in the government.

If you want more information, please write to paulobuzanelli@felsberg.com.br.

Chamber’ Special Commission approves antitrust law reform

By Guilherme Ribas

On May 28, the Chamber of Deputies’ Special Commission, created to examine the antitrust law (Law 8,884/94) reform bills, approved the proposed bill prepared by Deputy Ciro Gomes, the main aspects of which are outlined as follows:

1) The SDE's Antitrust Department shall be incorporated into CADE. The first shall be named General Superintendency, and the second, Administrative Tribunal for Economic Defense.
2) Extension of the CADE commissioners’ mandates from two (2) to four (4) years.
3) The prior examination of merger filings.
4) Change in the notification thresholds.

The wording of the bill shall now go to the Chamber’s Assembly for approval, and from there shall move on to the Senate.

If you want more information, please write to guilhermeribas@felsberg.com.br.

Oi/Brasil Telecom merger filed with CADE

By Guilherme Ieno Costa

The formation of the largest telecommunications company in the country is in the hands of CADE. Following extensive debate on the alteration of the General Granting Plan, currently passing under the scrutiny of other government departments such as the National Telecommunications Agency (ANATEL), the antitrust agencies and ANATEL itself should be preparing to make a statement upon the impact which the operation may have on the relevant markets involved.

We have taken part in a debate on the changes to the General Granting Plan, organized by Site e Consultoria Teleco which also welcomed Ex-Minister Juarez Quadros do Nascimento, the Presidents of the Telcomp and ABRAFIX associations, as well as the Ex-President of ANATEL, Renato Navarro Guerreiro. More information can be found at the following links: http://www.teleco.com.br/emdebate.asp and http://www.teleco.com.br/emdebate/guilhermeicosta01.asp

If you want more information, please write to guilhermecosta@felsberg.com.br.

SDE publishes 2007 Report
Increase in dawn raids

By Marina Bleeke

The report about SDE’s activities in 2007 may be found by clicking on: http://www.mj.gov.br.

The following points deserve special attention:

- SDE estimates that the termination of the exclusivity agreements between Odebrecht and equipment suppliers, on the bid for the construction of hydroelectric power stations on the River Madeira, in the North of Brazil, will result in savings of R$16.4 billion over the next 30 years. The pressure made by SDE and CADE resulted in the execution of a settlement agreement with Odebrecht at the end of 2007.

- In 2007, SDE carried out 84 search and seizure orders related to cartel investigations cartels. Between 2003 and 2005, there had been 11, and, in 2006, 19.

If you want more information, please write to marinableeke@felsberg.com.br.

Digital convergence
CADE publishes report

By Guilherme Ribas and Guilherme Ieno Costa

Commissioner Luiz Carlos Prado has published the report on the public hearings on digital convergence undertaken by CADE last year. This is obligatory reading for anyone wishing to bring themselves up to date on the overseas experience and the proposals for alterations to the Brazilian regulatory standard concerning the phenomena of digital convergence.

http://www.cade.gov.br/Publicacoes/relatconvdig-290508.pdf

If you want more information, please write to guilhermeribas@felsberg.com.br e guilhermecosta@felsberg.com.br.

Highlights - Decision

April

- SDE suggested to CADE that Siemens VDO should be convicted for attempting to form a cartel.

- SEAE and SDE recommended that CADE should approve, without restrictions, the acquisition of Matte Leão by Coca-Cola.

- SEAE and SDE recommended that CADE should approve, without restrictions, the acquisition of DM Indústria Farmacêutica by Hypermarcas.

- CADE approved Nike’s acquisition of Umbro.

- CADE imposed restrictions on the asset exchange transaction between International Paper and Votorantim Papel e Celulose. International Paper may not sign exclusivity agreements with distributors of A4 paper.

- CADE approved the sale of the ‘Vision’ network of pharmacies to the ‘Drogasil’ network of pharmacies.

- SDE raided companies operating in the fuel resale market in Cuiabá, in Mato Grosso state, following the accusation of the possible formation of a cartel.

- CADE approved the acquisition of Companhia Metalúrgica Prada by CSN and advised the Secretariat for Foreign Trade (SECEX) to study the reduction of the import tax of metal sheets.

- CADE approved without restrictions Google’s acquisition of Double Click

May

- CADE approved without restrictions the association of Vale and the Korean iron and steel company Dongkuk Steel Mill for the incorporation of the Companhia Siderúrgica de Pecém (CSP) iron and steel company, in Ceará.

- CADE approved without restrictions the distribution agreement signed between Vulcabrás and Adidas.

- SDE suggested to CADE that White Martins, AGA, Air Liquide, Air Products and IBG should be convicted for the formation of a cartel in the hospital and industrial gases market.

- SEAE and SDE suggested to CADE that restrictions should be imposed on the association between White Martins and Air Liquide for the construction of an industrial gases manufacturing factory for Companhia Siderúrgica do Atlântico (CSA).

- CADE approved without restrictions the entry of Vale do Rio Doce and the Nippon Steel Corporation into the control block of Usiminas.

- SDE recommended to CADE that restrictions should be imposed on the sales model adopted by Clube dos Treze (Brazilian soccer association).

- SDE opened an investigation against AMBEV in view of possible market dominance abuse  and prohibited the company from using new 630 millimeter bottles for the Skol and Bohemia beers.

Merger Filings (April/May 2008)

Textiles and Leather Products
Vulcabras/Adidas
TF/TF Publicidade/TF Licenciamento/Grupo A.M.C.

Information Technology and Telecommunications
Datasul/Tools
Logicalis/Promon
Tivit/Open Concept

Financial Services
BBI/Agora
JPMorgan Chase/Bear Stearns.

Communications and Entertainment
Livraria Saraiva/Livraria Siciliano
RIM, JRM, ZRM/Sulamericana

Mineral Extraction
VMN/Codelco
Vale/Nibrasco

Non-Metalic Mineral Products
Polimix/Tupi
VCB/Qualimat

Essential Services and Infrastructure
Petrobrás/Mitsui
Petrobrás/LIGHT/Ecoluz
UTC/AirSense.
TBLE/CEM

Automobile Industry and Transport
Fiat Powertrian/Tritec/Chrysler
Shipping Pool/Heidmar

Transport and Storage
Varig/Air Europa
Tecon/CDI
Cosan/Rezende Barbosa
Iron/SSG
GIF Mercury/Saleb/Kadon

Chemicals and Petrochemicals
Petrobrás/PDVSA do Brasil
BMS/MBaulé
AAC/Authentix

Beverages
Recofarma/Illy

Security Services
Honeywell/SPH

Foodstuffs
Monticiano/Morrinhos
Adria/Vitarella
Danone/Só-Nata

Electro-electronics
GL/HDL

Electrical Energy
EATE/ALUPAR

Iron and Steel
Plansee/GTPAC

Civil Construction
Bracor/Primav
Andritz/GE

Mechanics
BMS/MBaulé

Pharmaceuticals and Hygiene Products
Nordic Capital/Bristol-Myers

Events

• International Business Transactions with Brazil’ book launched

Guilherme Ribas has written the “Merger Control in Brazil - The Current Regime, the Latest Improvements and the Proposed Reform" chapter in this book that has been organized by IBRADEMP, and which was launched at the New York Stock Exchange on June 11.

• Events

“Multi-jurisdiction M&As in an Era of Globalization – the case Telecom Italia-Telefónia”
Speaker: Marco Botta (European University Institute - Florence);
Date: June 12, 10.30am;
Location: Mackenzie Law School
Organization: Mackenzie Law School

5th Seminar on Consumer Law
Organization: IBRAC
Date: June 19, 8.00am - 4.45pm
Location: FAAP University, Rua Alagoas, 903 – Pacaembu – SP

“Global competition defense rights as from the 7th ICN Conference – Quioto”
Speaker: Patrícia Araújo (CADE)
Date: June 20, 10.30am
Location: Mackenzie Law School
Organization: Mackenzie Law School

“Results and Improvement – 4 years at CADE”
Speaker: Elizabeth Farina
Date: June 23, 10.00am
Location: Walter Maria Laudísio Auditorium, Rua Benjamim Constant, 75 – Centro – SP
Organization: OAB/SP (Antitrust Commission)