In Leegin Creative Leather Products v. PSKS, Inc.,the United States Supreme Court, reversing a century old rule, held that it is no longer per se illegal for a manufacturer to establish vertical minimum resale price maintenance arrangements with retailers of its products.

The plaintiff-retailer in Leegin argued that the defendant-manufacturer’s establishment of a policy of refusing to sell its goods to retailers who discounted them below levels set by the manufacturer was per seillegal under § 1 of the Sherman Act. Relying on long-standing precedent, the District Court agreed and, accordingly, did not permit evidence of any procompetitive effects of the defendant’s policy. The plaintiff was awarded a multimillion dollar judgment, which was affirmed on appeal.

The Supreme Court, in a 5 to 4 decision, ruled that per serules should only be applied with respect to restraints that “always or almost always” tend to restrain competition. Because the Court concluded that vertical minimum resale price agreements do not have such an anticompetitive effect, it held that application of a per se rule was not appropriate. Among other things, the Court found that the economic literature was “replete” with procompetitive justifications for resale price maintenance agreements and that such agreements could, among other things, promote interbrand competition, facilitate market entry for new competitors, and incentivize retailers to provide enhanced services to support sales of goods to which such agreements apply.

While recognizing that vertical price restraints also could have anticompetitive effects, especially when imposed by market-powerful manufacturers or when foisted upon a manufacturer by retailers, the Court determined that, under the “rule of reason” test, courts were well equipped to prohibit vertical resale price maintenance agreements that impose unreasonable restraints on competition. (Leegin Creative Leather Products, Inc. v. PSKS, Inc., ___ S.Ct. ___, 2007 WL 1835892 (June 28, 2007))