Just days ago, the United States Supreme Court abandoned its longstanding and absolute ban on agreements between suppliers and dealers that set the price at which dealers may resell a product. In Leegin Creative Leather Products v. PSKS, Inc., the Supreme Court held that vertical price restraints are no longer per se illegal under Section 1 of the Sherman Act and should instead be evaluated under the “rule of reason” standard. Unlike the per se standard, the rule of reason standard requires courts to consider a range of facts and circumstances before deciding whether challenged conduct should be prohibited as imposing an unreasonable restraint on competition.
The Leegin case involved a challenge to a policy of Leegin Creative Leather Products, Inc., a manufacturer of leather goods and accessories. Leegin maintained a policy of doing business only with retailers who charged its suggested retail prices. In late 2002, when Leegin discovered that PSKS’s retail store (Kay’s Closet) had been selling Leegin’s products below its suggested retail price it suspended all sales to PSKS. PSKS responded by suing under the Sherman Act, claiming that Leegin had violated the antitrust laws by entering into illegal agreements with retailers in restraint of trade. At trial, the United States District Court for the Eastern District of Texas entered a judgment against Leegin in the amount of nearly $4 million.
The Court of Appeals for the Fifth Circuit, relying heavily on precedent from Dr. Miles Medical Co. v. John D. Park and Sons Co., affirmed the lower court’s judgment. In Dr. Miles, decided in 1911, the Supreme Court found that resale price maintenance agreements are per se illegal under Section 1 of the Sherman Act. Arguing that the per se rule from Dr. Miles was inconsistent with modern antitrust jurisprudence, Leegin petitioned the Supreme Court, which granted certiorari to consider whether Dr. Miles should be overruled.
Writing for the 5-4 majority, Justice Kennedy stated that a per se standard is justified only when “courts can predict with confidence that [the conduct] would be invalidated in all or almost all instances under the rule of reason.” The Dr. Miles doctrine, he concluded, no longer deserved such confidence because there were sufficient reasons to believe that resale price maintenances could be procompetitive.
For example, a single manufacturer’s enforcement of minimum resale prices may be designed to allow retailers of its products to invest in services or promotional efforts that aid the manufacturer’s position against rival manufacturers. Likewise, consumers have more options because they are able to choose “among low-price, low-service brands; high-price, high-service brands" and brands that fall in between.” In short, price restraints within a brand may promote competition between brands.
The Court acknowledged that in some circumstances resale price maintenance may threaten competition by facilitating a manufacturer cartel. Specifically, the restraints may assist the cartel in identifying price-cutting manufacturers who benefit from the lower prices they offer. Also, resale price maintenance may discourage a manufacturer from cutting prices to retailers, which could adversely affect consumers.
Given the mixed effect of resale price maintenance, the Court held that continuing to apply the per se rule would “proscribe a significant amount of procompetitive conduct,” making per se prohibition on resale price maintenance inappropriate. Instead, courts must evaluate a retail pricing policy under the rule of reason, which requires courts to balance the procompetitve and anticompetive effects of a challenged conduct. To determine whether a given retail pricing policy passes the rule of reason analysis, courts may consider the following factors: the number of manufacturers adopting retail price floor policies, their market power, and the source of the restraint.
Going forward, a supplier should not read Leegin to authorize every resale price floor policy. Rather, a supplier should only consider adopting a resale pricing policy after considering the procompetitve and anticompetitive effects of such a policy. But suppliers must in any event proceed with caution because even a pricing plan that passes muster under the Sherman Act may still run afoul of state antitrust and dealership laws, several of which prohibit resale price maintenance either by statute or under case law.