In a very recent decision, the United States Supreme Court has dramatically lessened the restrictions on manufacturers and other suppliers to set minimum resale prices for distributors and other resellers. In so doing, the Supreme Court overruled 96 years of precedent that strictly prohibited suppliers from imposing minimum resale prices. Leegin Creative Leather Products, Inc. v. PSKS, Inc. dba Kay’s Kloset … Kay’s Shoes, 127 S.Ct. 2705 (June 28, 2007).
In Leegin, the Supreme Court held that minimum resale price restrictions are no longer “per se” unlawful and, instead, may be justified by pro-competitive business reasons. This change in the law may provide tremendous opportunities for manufacturers and other suppliers who previously were handcuffed by the antitrust laws in their ability to address distribution channel conflicts caused by the discounting practices of some distributors or dealers.
The Leegin case involved a manufacturer’s distribution of women’s fashion accessories. Leegin adopted a policy of refusing to sell to retailers that discounted below suggested retail prices. Leegin adopted the policy to give its retailers sufficient margins to provide customers the service deemed central to Leegin’s distribution strategy, and due to concerns that discounting harmed Leegin’s brand image and reputation.
Leegin discovered that one of its retailers, Kay’s Kloset, had been marking down the entire Leegin product line by 20%. After Kay’s Kloset refused to cease the discounting, Leegin stopped selling to the store. Kay’s Kloset then sued Leegin in a United States district court alleging that Leegin violated the antitrust laws by entering into agreements with retailers to fix prices. The jury found in favor of Kay’s Kloset and awarded it $1.2 million in damages. Under the antitrust laws the court then trebled the damage amount and awarded Kay’s Kloset its attorneys’ fees and costs, entering final judgment against Leegin for almost $4 million.
The U.S. Court of Appeals affirmed the judgment, adhering to almost 100 years of judicial precedent in holding that Leegin’s enforcement of its minimum resale price restrictions was per se unlawful regardless of the reasons underlying the restrictions. The Supreme Court, however, remarkably reversed the decision and remanded the case back to the district court for further proceedings.
The Supreme Court noted that in many circumstances where a manufacturer or supplier faces competition from other brands and products, there may be pro-competitive justifications for manufacturers to maintain resale prices and control discounting, including: 1) to encourage retailers to invest in providing customer service or promotional efforts that aid the manufacturer’s position against rival manufacturers, 2) to discourage “free riding” by uncooperative retailers and 3) to facilitate market entry for new firms or brands. While the Supreme Court acknowledged that some anti-competitive risks are inherent with vertical price fixing—including that some manufacturers might use price fixing as a means to obtain monopoly profits—the Court expressed the opinion that these risks would be outweighed by pro-competitive justifications in many instances and that U.S. federal courts should not continue to automatically strike down all vertical price maintenance arrangements as unlawful.
Consequently, the Supreme Court ruled that all vertical resale price restrictions now would be subject to a “Rule of Reason” analysis. Under this standard, the restriction is legal unless a plaintiff can show that the anti-competitive effects of the restriction outweigh its pro-competitive justifications. (In contrast, “horizontal” pricing arrangements between competitors remain per se unlawful.)
While it is somewhat premature to predict how courts will apply the Leegin decision, it appears that manufacturers and other suppliers will have far greater flexibility in establishing and enforcing minimum resale pricing policies and similar arrangements. While Leegin did not declare that all such restrictions will be legal, under a Rule of Reason standard, the costs and other burdens facing a plaintiff to successfully challenge vertical pricing restrictions will be significantly higher than under the prior per se standard. Moreover, in any market where robust intrabrand competition exists, it may be extremely difficult for a plaintiff to ever prove sufficient injury to competition to outweigh the pro-competitive justifications which the Supreme Court recognized often support resale price maintenance arrangements.
Given this significant change in the law, manufacturers and other suppliers should evaluate whether their distribution systems would benefit from resale pricing or discount advertising limitations. For example, channel conflict from discounting often occurs where suppliers have appointed non-exclusive distributors or dealers, including in traditional and internet-based distribution systems. In some instances, a minimum (and/or maximum) pricing or advertising policy might lead to more efficient distribution of products or services.
Of course, suppliers must be cognizant of other laws – state and federal – as well as contractual limitations, in enacting or enforcing new pricing or advertising policies. However, with appropriate legal assistance, manufacturers and other suppliers should now be in a much a better position to efficiently and lawfully adopt and enforce resale pricing restrictions, as a method to optimize a product distribution.