Last week, a U.S. District Judge wrote what may be the final chapter in a landmark case that redefined the antitrust laws governing price fixing agreements between manufacturers/wholesalers and retailers. On remand from the United States Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., Judge T. John Ward of the Eastern District of Texas held that the plaintiff retailer failed to state a vertical price-fixing claim under the legal test mandated by the Supreme Court.
In 2007, the Supreme Court reversed a nearly century-old precedent that had made minimum resale price maintenance agreements per se illegal. Minimum resale price maintenance agreements are agreements whereby a manufacturer/wholesaler and retailer agree on a minimum price at which the retailer can resell a product to end consumers. Under the per se rule, such agreements were illegal on their face. That is, if a trier of fact found that such an agreement existed, the defendant would be automatically liable. Given the harshness of the per se rule, it applies only to agreements that always or almost always tend to harm competition. The Supreme Court found that minimum resale price maintenance agreements do not meet this criteria, and therefore, must be examined under a more flexible antitrust standard—the “rule of reason.” Under this standard, the finder of fact must weigh the competitive harms from an agreement against the competitive benefits. The agreement is only illegal if the competitive harms outweigh the competitive benefits. This standard is highly fact specific and substantially more beneficial to defendants than the per se standard.
In this case, the plaintiff retailer, PSKS, originally filed suit after Leegin, the manufacturer and wholesaler of high-end women’s handbags and accessories, terminated its rights to sell Leegin products because PSKS was discounting them below Leegin’s required retail price. Under the then-operative per se rule against resale price maintenance agreements, a jury found Leegin liable and awarded PSKS $ 4 million in damages and attorneys fees. The Supreme Court reversed and remanded, dispensing with the per se rule that had governed minimum resale price maintenance agreements since 1911. In light of the Court’s decision, PSKS filed an amended complaint alleging that Leegin had violated the law even under the rule of reason. The lower court disagreed.
Under the rule of reason, the plaintiff must prove harm to competition in a relevant market. Thus, the plaintiff must allege facts sufficient to define the scope of the market. The district court held that PSKS failed to carry this burden. PSKS first attempted to define the market very narrowly, as the retail market for Leegin’s products. The court rejected this claim because a single brand cannot constitute a relevant market. Alternatively, PSKS attempted to define the market as the “wholesale sale of brand-name women’s accessories to independent retailers.” The district court rejected this market definition on a number of grounds. First, the court found there was no reason to limit the market to the “wholesale sale” of women’s products, as markets are not defined by distribution level, but rather, by consumers’ willingness to substitute one product for another as the result of a price increase. Second, PSKS failed to show why the market should be limited to “brand-name” products, as it had not alleged facts sufficient to show that consumers did not perceive brand-name women’s handbags as interchangeable with unbranded handbags. Third, the court held that “women’s accessories” is too broad and vague to constitute a market. Because PSKS failed to define a relevant market, the court found that it could not assess the alleged harm to competition as required under a rule of reason analysis.
To escape the difficulties of proving its case under the rule of reason, PSKS also alleged that, because Leegin operated as both a wholesaler and retailer of its products, Leegin had engaged in a horizontal price-fixing agreement. Horizontal agreements are agreements between companies that compete at the same distribution level. Horizontal agreements regarding minimum retail prices remain per se illegal. The court found PSKS’s horizontal price-fixing claim both procedurally deficient and legally meritless. Procedurally, PSKS could not raise the issue because it failed to do so in its original complaint. Regardless, the court rejected the claim on the merits because it is well established that pricing agreements between “dual distributors,” such as Leegin, and retailers are not purely horizontal and therefore are evaluated under the rule of reason.
The district court’s dismissal of the case reflects the significant benefit to defendants of the Supreme Court’s decision to abandon the per se rule in exchange for the rule of reason. Nevertheless, manufacturers and wholesalers should still proceed with caution when contracting with retailers regarding pricing. For example, states have their own antitrust laws, which do not coincide in all instances with federal antitrust law. Indeed, attorneys general for New York and California have announced that they will still enforce the per se rule against resale price maintenance agreements under their states’ laws. Moreover, the Antitrust Subcommittee of the Senate Judiciary Committee is considering legislation that would repeal the Supreme Court’s decision and again make agreements that set minimum resale prices per se illegal. The proposed legislation is sponsored by Senator Herb Kohl of Wisconsin. He proposed an identical bill in 2007, which was co-sponsored by then Senators Hillary Rodham Clinton and Joe Biden. That bill did not make it out of committee before the end of the last Congressional session, but it was introduced again this past January