This morning the United States Supreme Court announced its decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (No. 06-480). See hyperlink to Supreme Court's Decision. Overruling its 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., the Court split five to four in concluding that the rule of reason, rather than the per se rule, is the appropriate standard for vertical minimum price restraints. Ten years ago, the Court partially repudiated Dr. Miles in State Oil Co. v. Kahn to extend the rule of reason to maximum resale price agreements. Today’s decision harmonizes the law of vertical restraints by extending the same analysis to minimum resale pricing agreements. It has important application for manufacturers, licensors of intellectual property and other sellers who believe they can best compete by imposing reasonable restrictions on downstream pricing activity.

Dr. Miles’ per se condemnation of resale price maintenance has long been criticized as conflating vertical pricing arrangements with price fixing among competitors. Resort to per se rules is confined to restraints that “always or almost always tend to restrict competition and decrease output.” The Court today observed that there are widelyrecognized efficiency justifications for a manufacturer’s use of resale price maintenance, such as encouraging retailers to invest in promotional and point-of-sale service and eliminating free riding by other resellers. While also noting the potential for resale price maintenance to exploit market power or facilitate horizontal price fixing, the Court concluded that the rule of reason is the proper standard to assess conduct that can have either procompetitive or anticompetitive effects.

Dr. Miles led to anomalous results in its application to business conduct. Since a manufacturer may lawfully refuse to deal, resale pricing policies could be announced unilaterally, and the manufacturer could lawfully terminate noncomplying resellers. However, if the manufacturer engaged in ambiguous conduct in enforcing its policies, that could become evidence of an agreement, thus converting lawful arrangements into per se unlawful ones. This distinction between lawful and unlawful results had no economic basis and simply imposed unwarranted risks on manufacturers.

The practical implications of today’s Leegin decision are significant but should not be overestimated in designing business strategies. Under federal law, it is now lawful for manufacturers to agree with resellers on resale prices or price levels, but only under certain circumstances. Such arrangements continue to be vulnerable under the new rule of reason standard where the manufacturer has market power or where the arrangement cannot be justified by economic efficiencies. Furthermore, the possibility that some state courts might not import Leegin under state law is aggravated by the nearly even split on the Supreme Court. However, Leegin is a noteworthy and welcome development for many manufacturers and licensors of intellectual property who have long been inhibited from competing by exerting reasonable downstream control over distribution practices of resellers and licensees.

Supreme Court Decision: