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Legal Update

Legislative Issue Update - October 2007

Antitrust Commission Recommends Repeal of Robinson-Patman Act

Over the last three years, the Antitrust Modernization Commission (“Commission”) has undertaken a comprehensive review of U.S. antitrust laws and the policies and practices of the Department of Justice’s Antitrust Division and Federal Trade Commission in implementing those laws. In concluding its work, the Commission sent its Report and Recommendations to the President and Congress. The members of the Commission were appointed by the President and the respective majority and minority Leadership of the House of Representatives and Senate with the goal of ensuring fair and equitable representation of various points of view in the Commission. The Commission members were aided by many hours of hearings as well as input from academia and the public.

One subject studied by the Commission was the Robinson-Patman Act (“RPA”), the Federal price discrimination law enacted 1936. The Report recommends the repeal of the RPA, with the Commission stating:

“The Commission recommends that Congress finally repeal the Robinson-Patman Act (RPA). This law, enacted in 1936, appears antithetical to core antitrust principles. Its repeal or substantial overhaul has been recommended in three prior reports, in 1955, 1969 and 1977. That is because the RPA protects competitors over competition and punishes the very price discounting and innovation in distribution methods that the antitrust laws otherwise encourage. At the same time, it is not clear that the RPA actually effectively protects the small business constituents that it was meant to benefit. Continued existence of the RPA also makes it difficult for the United States to advocate against the adoption and use of similar laws against U.S. companies operating in other jurisdictions. Small business is adequately protected from truly anticompetitive behavior by application of the Sherman Act.”

The Report notes that civil enforcement of the RPA recently has been mostly unsuccessful. Specifically, the Federal Trade Commission has issued only one RPA complaint since 1992; and of 200 reported cases by private parties with RPA claims filed in Federal court in the last 10 years only 3 jury verdicts in favor of plaintiffs were affirmed on appeal, and one of those was reversed by the U.S. Supreme Court.

The Commission’s full report is available at: http://www.amc.gov/report_recommendation/toc.htm.

Supreme Court Approves Greater Supplier Control Over Minimum Resale Pricing

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 antitrust law. It should be emphasized that the Court’s decision still leaves vertical minimum resale price restraints open to antitrust challenge.

The dissenting opinion authored by Justice Breyer predicted that the Court’s ruling “will likely raise the price of goods at retail and that it will create considerable legal turbulence” as the trial courts gain experience in examining the effects of these restraints on competition, using the “rule of reason” standard.

Rule of Reason Standard

The rule of reason standard is somewhat amorphous. 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.

The Court was not convinced by the argument that a manufacturer would use vertical price restraints to set too high a minimum resale price for its products, thus saddling consumers with inflated prices. Competition from other brands will keep the manufacturer from setting the minimum too high. Moreover, the manufacturer has no incentive to overcompensate wholesaler-distributors with higher margins when doing so will reduce the manufacturer’s competitiveness and market share.

In reaching its decision, the Court found that permitting a manufacturer to control the minimum price at which its good are resold may promote consumer welfare and interbrand competition (the competition among manufacturers selling different brands of the same type of product) even though it may reduce intrabrand competition (the competition among wholesaler-distributors or other resellers selling the same brand). According to the Court, the primary purpose of the antitrust laws is to protect interbrand competition. It is this competition that gives consumers more options and brands from which to choose and which facilitates market entry for new firms and brands. Resale price maintenance will also encourage a wholesaler-distributor to invest capital in the distribution of new products and brands, according to the Court.

These restraints will also help prevent discounting resellers from taking a “free ride” on full service resellers who invest in pre- and post-sale services to promote a manufacturer’s product line. The free-riding reseller saves money by not investing in services and may reduce its resale price, undercutting the full service reseller. The danger avoided, according to the Court, is a cutback in services to a level lower than consumers would otherwise prefer.

Resale Price Restraints Not Automatically Lawful

The Court recognized that in some cases vertical price restraints may have clear anticompetitive effects which could render them unlawful under the rule of reason standard. For example, a group of resellers might collude to fix prices and compel a manufacturer to aid enforcement of the unlawful arrangement by “imposing” a minimum resale price on them. Or a manufacturer with market power might use vertical price restraints to influence key resellers not to sell the products of a smaller rival or new market entrant.

Adoption of similar resale pricing practices among competing manufacturers deserves scrutiny because this conduct could facilitate a manufacturer price fixing cartel. If a manufacturer adopts the resale price maintenance policy, without influence from its customers, the restraint is less likely to promote anticompetitive conduct at the resale level.

The case arose in a dispute between Leegin, a manufacturer of women’s accessories, and one of its retailers (PSKS) who sold Leegin products at up to 20% below the minimum resale price established by Leegin. Leegin then halted all shipments to PSKS. The retailer sued Leegin claiming the agreed-to minimum price restraints violated the antitrust laws. A jury agreed and assessed $3.6 million in damages plus attorney’s fees. The 5th Circuit Court of Appeals affirmed.

Conclusion

Over the years the Supreme Court has abandoned the per se rule, in favor of the rule of reason standard, for use in judging the legality of non-price vertical restraints that limit resale of products to manufacturer-specified territories or customers (1977), and vertical maximum resale price restraints (1997). With the demise of the Dr. Miles precedent, minimum resale price restraints will only violate antitrust law if found unlawful using the rule of reason standard. Bringing such a challenge in court is a formidable undertaking—as one scholar has noted, litigating a rule of reason case is “one of the most costly procedures in antitrust practice.”

Finally, one issue the Court did not address in this case was Leegin’s alleged dual role as a manufacturer and retailer (Leegin had an ownership interest in seventy-one retail stores that sold Leegin products and these stores competed with independent retailers also selling Leegin products). Since this issue was not raised in the lower courts, the Court declined consideration.

The Court’s decision may be viewed at: http://www.supremecourtus.gov/opinions/06pdf/06-480.pdf