Delivering for Best-in-Class Wholesaler-Distributors
June 2008

In a sharply divided 5-4 decision, the U.S. Supreme Court has overruled its own 1911 decision in the Dr. Miles case and held that a manufacturer does not necessarily violate the antitrust laws by establishing a minimum resale price for its products and enforcing the policy by terminating a wholesaler-distributor or other reseller who sells below the minimum price. (Leegin Creative Products, Inc. v. PSKS, Inc. d/b/a Kay’s Kloset…Kay’s Shoes, Docket No. 06-480)

The Court ruled that “vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed.” Thus, these agreements should no longer be per se (or automatically) unlawful, as previously ruled in the Dr. Miles case. Rather, courts should apply the “rule of reason” standard to decide, on a case-by-case basis, whether a particular vertical price restraint violates federal antitrust law. It should be emphasized that the Court’s decision still leaves vertical minimum resale price restraints open to antitrust challenge under federal and state antitrust laws.

Any Questions?

Not surprisingly, this court decision has raised some real world questions among wholesaler-distributors which are addressed below.

Q1. After the Leegin decision, will a manufacturer’s minimum resale price agreement always be legal?

A. No. To be lawful under the federal antitrust law, the minimum resale price agreement will be evaluated by the courts (and juries) under the so-called “rule of reason”.

Q2. So what’s the “rule of reason”?

A. The rule of reason standard is, to say the least, somewhat amorphous. As one court noted, applying this rule requires a business and its economic experts to “ramble through the wilds of economic theory.”

The jury weighs all of the circumstances of a case in deciding whether or not a particular restrictive practice imposes an unreasonable restraint on competition. Factors considered include specific information about the relevant business and the restraint’s history, nature and effect. Whether the businesses involved have market power – the ability to raise prices above competitive levels – is a further, significant consideration.

Q3. Well it could be very difficult for a business (manufacturer or wholesaler-distributor) to predict how a court or jury will decide a particular case using this “rule of reason”.

A. Undoubtedly true. In the Leegin decision, dissenting Justice Breyer predicted that the Court’s ruling will likely “create considerable legal turbulence” as the trial courts gain experience examining the effect of these price restraints on competition, using the “rule of reason” standard. Legal turbulence can be translated to uncertainty for businesses.

Q4. What if a manufacturer asks me to agree not to resell its products below a minimum price, and I choose not to agree to the request. What are the consequences?

A. The manufacturer may decide to sell to you anyway and you are free to resell the products at any price you wish. Alternatively, the manufacturer could decide to terminate your distributor agreement (if there is one) and cease selling to you.

Q5. As a wholesaler-distributor, would agreeing to a lawful minimum resale price agreement help me or hurt me?

A. There is no pat answer to this question. Whether an agreement is beneficial or detrimental will depend on the specific circumstances in your case, including the manufacturer involved, the particulars of the policy, whether it’s uniformly applied, your competitive position vis-à-vis other resellers, etc. A manufacturer’s policy could benefit you for some products in the line yet disadvantage you for other products.

Q6. What if I agree to (or submit to) the manufacturer’s minimum resale price request and I nevertheless sell below that price

A. You are in breach of your agreement with the manufacturer and the manufacturer can pursue remedies for breach, including cancelling you as a distributor.

Q7. Does the manufacturer have to set a uniform minimum resale price that applies equally to all its wholesaler-distributors?

A. The Supreme Court in Leegin did not address this question because it was not an issue in the case.

Q8. Well shouldn’t I be concerned if a manufacturer sets a minimum resale price for me, and one of my competitors has a lower one, or none at all?

A. Yes. You should be concerned because your ability to compete for a customer’s business could be restrained or eliminated. This type of unequal treatment by a manufacturer among its competing distributors would no doubt reduce intrabrand competition (i.e., the competition among competing distributors selling the same manufacturer’s product). However, the primary purpose of the federal antitrust laws according to the Supreme Court is to protect interbrand competition (i.e., the competition among manufacturers and resellers selling different brands of the same type of product) from destructive restraints or agreements. Your hypothetical unequal treatment scenario by a single manufacturer may not harm interbrand competition at all.

Q9. What if I got together with one or more of the wholesaler-distributors handling the same manufacturer’s line and we go to the manufacturer and ask that he impose a minimum resale price on us. Is this legally advisable?

A. No. The Supreme Court in Leegin recognized that in some cases minimum resale price agreements may have clear anticompetitive effects which could render them unlawful under the rule of reason standard. One example cited by the Court – a group of wholesaler-distributors collude to fix prices and in furtherance of this illegal cartel request or compel a manufacturer (or several manufacturers) to aid in enforcing the cartel by “imposing” a minimum resale price on them. This scenario would deserve heightened legal scrutiny by the courts.

Q10. What if several manufacturers who compete with each other adopt similar minimum resale pricing practices?

A. This situation also raises antitrust concerns. Adoption of similar minimum resale pricing practices among competing manufacturers, whether by express agreement or not, deserves heightened legal scrutiny because such conduct could facilitate a price fixing cartel at the manufacturer level. If a manufacturer decides to adopt a minimum resale price policy, without influence from its distributors/customers or its competitors, the restraint will be less likely to promote anticompetitive conduct.

Q11. What if the manufacturer also sells directly to a national account, in competition with me and I’m restricted by the manufacturer to sell that account at no less than a minimum resale price. The manufacturer could sell the national account below my minimum. I either lose the sale or violate the minimum resale price policy. Is this legal under Leegin?

A. The Leegin case did not address this scenario. Although it was alleged that Leegin had a dual role as a manufacturer and retailer (Leegin had an ownership interest in 71 retail stores that sold Leegin products and these stores competed with independent retailers also selling Leegin products subject to the minimum resale price policy), the Supreme Court declined consideration, stating that this issue was not properly raised in the trial court.

Q12. Did the Leegin case involve a MAP (minimum advertised price) program?

A. No. A minimum advertised price program is typically incorporated into a manufacturer’s cooperative advertising program. Coop dollars are made available to a distributor to advertise the manufacturer’s products, provided the distributor does not use these funds to advertise a resale price lower than the minimum set by the manufacturer. These policies are generally lawful if they do not limit the distributor’s ability to advertise any price as long as the distributor uses his own funds to pay for the ad.

Q13. Does federal antitrust law preempt state antitrust laws concerning the legality of minimum resale price agreements?

A. No. A practice may be OK federally and unlawful under state antitrust law. Some states interpret their antitrust laws to be consistent with federal law and others do not. It remains to be seen whether state courts will follow the Leegin decision when interpreting state statutory and common law applicable to minimum resale price agreements. It should be noted that 37 states urged the Supreme Court (without success) to keep minimum resale price agreements illegal.