On June 28, 2007, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court in a 5-4 decision overturned a nearly century-old antitrust precedent that prohibited manufacturers from maintaining minimum resale prices for their products. Because economics literature “was replete” with “procompetitive justifications for a manufacturer’s use of resale price maintenance,” the Court concluded that continued treatment of such agreements as per se illegal under federal law was no longer appropriate. Those agreements instead will be considered illegal only if shown to have an overall adverse effect on competition in a particular area.

From a practical standpoint, what will this decision likely mean? Here are a few of the key takeaways:

1. This decision completes the trend in the Supreme Court since the mid-1970s to view all vertical restraints under a rule of reason analysis, rather than a per se standard of illegality, for federal antitrust liability.

2. Plaintiffs will be less likely to prevail in any federal antitrust challenges to resale price maintenance (RPM) agreements because of the expense and legal difficulty in proving a violation of the antitrust laws under a rule of reason analysis. It won’t be impossible, but very unlikely that plaintiffs will want to spend the time or money in federal court bringing antitrust challenges to RPM arrangements.

3. On a national level, Leegin will likely mean that the bulk of RPM challenges will be brought in state courts under state antitrust statutes that may still view RPM as per se illegal. Just as antitrust indirect purchaser actions moved to state courts after the Supreme Court closed the door on such actions in federal courts, so too will RPM cases be brought more often now in state courts.

4. On an international level, there will now be potential major inconsistencies in how the U.S. and some non-U.S. competition regimes will view RPM arrangements because several of them (such as Canada) may still review them under a per se standard of illegality and may even view them as criminal violations.

5. The decision further emphasizes that in the United States per se illegality under the antitrust laws will be reserved for horizontal agreements among competitors to fix prices or allocate markets or customers. RPM arrangements that are the result of collective decisions by dealers or by competing manufacturers may still be subject to potential per se liability.

Supreme Court Holds Resale Price Maintenance Agreements No Longer Per Se Illegal – Now Subject to the Rule of Reason On June 28, 2007, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court in a 5-4 decision overturned a nearly century-old antitrust precedent that prohibited manufacturers from maintaining minimum resale prices for their products. Because economics literature “was replete” with “procompetitive justifications for a manufacturer’s use of resale price maintenance,” the Court concluded that continued treatment of such agreements as per se illegal under federal law was no longer appropriate. Those agreements instead will be considered illegal only if shown to have an overall adverse effect on competition in a particular area.

From a practical standpoint, what will this decision likely mean? Here are a few of the key takeaways:

1. This decision completes the trend in the Supreme Court since the mid-1970s to view all vertical restraints under a rule of reason analysis, rather than a per se standard of illegality, for federal antitrust liability.

2. Plaintiffs will be less likely to prevail in any federal antitrust challenges to resale price maintenance (RPM) agreements because of the expense and legal difficulty in proving a violation of the antitrust laws under a rule of reason analysis. It won’t be impossible, but very unlikely that plaintiffs will want to spend the time or money in federal court bringing antitrust challenges to RPM arrangements.

3. On a national level, Leegin will likely mean that the bulk of RPM challenges will be brought in state courts under state antitrust statutes that may still view RPM as per se illegal. Just as antitrust indirect purchaser actions moved to state courts after the Supreme Court closed the door on such actions in federal courts, so too will RPM cases be brought more often now in state courts.

4. On an international level, there will now be potential major inconsistencies in how the U.S. and some non-U.S. competition regimes will view RPM arrangements because several of them (such as Canada) may still review them under a per se standard of illegality and may even view them as criminal violations.

5. The decision further emphasizes that in the United States per se illegality under the antitrust laws will be reserved for horizontal agreements among competitors to fix prices or allocate markets or customers. RPM arrangements that are the result of collective decisions by dealers or by competing manufacturers may still be subject to potential per se liability.

6. Manufacturers will not need to go through various distribution “contortions” to prevent intrabrand competition in a manner that still complies with the antitrust laws, such as creating exclusive territories, requiring profit-pass-throughs to discourage sales outside assigned territories, or refraining from “jaw-boning” or threatening dealers that discount below established prices.

7. If consumers experience increased prices, as warned by Justice Breyer in his dissent, this decision could become a political issue that might generate legislative efforts in Congress to overturn its impact, much in the same way that anti-gasoline-price-gouging legislation is currently before Congress.

Leegin is a landmark antitrust decision that could affect significantly the way manufacturers structure their distribution agreements, but companies should proceed with caution. Even though from a practical perspective the odds now strongly favor defendants in a federal antitrust RPM challenge, the Supreme Court acknowledged that courts remain free to find RPM agreements unlawful under a rule of reason analysis.

Case Background

Minimum RPM, or the practice of companies at one market level establishing minimum resale prices for their products or services at a lower market level, had been per se unlawful under the antitrust laws since the Supreme Court’s 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373 (1911). Under Dr. Miles, minimum RPM agreements, like other activities condemned as per se violations of the antitrust laws, such as horizontal price fixing, were considered inherently anticompetitive. Parties shown to have engaged in such conduct were not permitted to justify the agreements through an inquiry into whether they actually harmed (or helped) competition in a particular market, and they risked both liability for treble civil damages and, in theory, criminal penalties. Companies still wishing to control minimum prices of their products at lower distribution levels or preventing intrabrand competition through discounting sometimes created cumbersome arrangements, such as exclusive territories, profit-pass-through penalties for dealers that sold outside their territories, or sudden terminations for price discounters, rather than warning or jaw-boning with price discounters. Maximum RPM agreements have been subject to case-by-case analysis since 1997, when the Court similarly reversed a nearly 30-year-old precedent that had condemned them as per se illegal.

In 1997, Defendant Leegin Creative Leather Products Inc. (“Leegin”), a manufacturer of women’s fashion accessories, established a pricing policy with respect to its products that all retailers were to follow. When Plaintiff Kay’s Kloset, a women’s apparel retail store in Texas, refused to adhere to Leegin’s pricing policy, Leegin stopped selling its products to Kay’s Kloset. In response, Kay’s Kloset sued Leegin for violations of the antitrust laws, including the claim that Leegin’s pricing policy was an illegal minimum RPM agreement. The district court agreed with Kay’s Kloset, concluding that Leegin’s pricing policy was a per se violation of the antitrust laws as established by Dr. Miles. A jury returned a $3.6 million verdict against Leegin, which the United States Court of Appeals for the Fifth Circuit affirmed

Conclusions and Implications

Leegin will allow most companies in most market circumstances the long-desired flexibility under federal law to dictate minimum resale prices and to reduce inefficiencies in pricing policies. While some commentators have predicted Leegin may lead to retail price increases, others have noted that competition will still constrain the decisions of manufacturers who choose to set minimum resale prices.

In addition, although the decision to overrule Dr. Miles was expected, given the Supreme Court’s recent business-friendly rulings and trend in favor of rule of reason treatment, the Supreme Court did acknowledge that Leegin is merely the starting point for evaluating minimum RPM agreements, and left it to lower courts to apply the decision. In the words of the Supreme Court, lower courts, “as [they] gain experience considering the effects of these restraints,” must “establish litigation structure . . . to provide more guidance to businesses.” In addition, state antitrust enforcers, who argued against overruling Dr. Miles, may now seek more aggressively to enforce state statutes governing pricing activities, and private plaintiffs will most likely challenge RPM arrangements in state courts under state antitrust statutes. Additionally, companies conducting business in other countries should carefully review the competition laws in those countries to determine the legality of RPM arrangements and the potential condemnation of RPM under foreign laws.

While the Leegin decision has now brought analytical consistency to evaluating RPM arrangements under the federal antitrust laws, the legality of RPM arrangements will still be questionable in many states and many countries. The debate on the merits of RPM arrangements will likely continue, but federal courts will likely be much more hospitable to them as they apply the three guiding principles that the Supreme Court set forth in Leegin.