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Supreme Court Approves Greater Supplier Control Over Minimum Resale Pricing

NAW Legal Advisory - July 2007

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 interbrand 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 intrabrand 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.”

This decision applies only to Federal antitrust law. 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. Thirty-seven states filed an amicus brief urging the Supreme Court to retain the per se illegality of these arrangements

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