Yesterday, Department of Justice Assistant Attorney General Christine Varney used a speech to the National Association of Attorneys General to reaffirm the DOJ's commitment to a closer cooperation with the state enforcers. She also devoted a major portion of her remarks to offering a framework for applying the rule of reason to minimum vertical price fixing claims. Since the Supreme Court's 2007 decision in Leegin Creative Leather Products v. PSKS, Inc., 551 U.S. 877 (2007), replaced the per se standard for minimum RPM with a rule of reason analysis, there has been uncertainty and significant debate about how to apply the rule of reason in this area.
The Federal Trade Commission, not the DOJ, however, traditionally has been the primary federal enforcer in the vertical area. Indeed, the last DOJ RPM consent agreements date back to the mid-1990s under AAG Anne Bingaman. Given this lack of DOJ enforcement even when minimum RPM was per se unlawful, it is interesting to consider the implications of renewed DOJ attention to this area, especially since there appears to be so little evidence of systemic or significant problems. At a minimum, Ms. Varney's remarks can be seen as a further effort to signal a more activist DOJ as well as to deliver on promised transparency with respect to enforcement decisions.
Ms. Varney's analysis of how to approach RPM cases draws extensively on the majority opinion in Leegin, noting the Court's view that interbrand competition will ordinarily place limits on the exploitation of intrabrand market power. She then cited the four circumstances identified by the Court where the use of RPM might be anticompetitive: (1) when used by a manufacturer cartel to identify members that are cheating on a price-fixing agreement; (2) when used to organize a retailer cartel by coercing manufacturers to eliminate price cutting; (3) when used by a dominant retailer to protect it from retailers with "better distribution systems and lower cost structures," thereby forestalling innovation in distribution; and (4) when used by a manufacturer with market power to give retailers an incentive not to sell the products of smaller rivals or new entrants. She then noted the five potential procompetitive effects of RPM identified in Leegin: increasing interbrand competition, preventing free riding, promoting competition on customer service, permitting a cost effective alternative to service contracts, and "facilitating market entry for new firms and brands" by guaranteeing favorable margins to retailers.
Ms. Varney summarized the Court's guidance on the rule of reason:
First, "more careful scrutiny" is merited if RPM has widespread use by a number of manufacturers in an industry. Second, the source of the restraint is important because there is a greater likelihood that the restraint is anticompetitive if retailers coerced the manufacturer to adopt it. And third, the degree of market power enjoyed by the manufacturer or retailer is important.
She then discussed how a "structured" rule of reason could be applied to four generally accepted theories of anticompetitive effects: Manufacturer collusion, manufacturer exclusion, retailer collusion, and retailer exclusion. She commented:
The greater concern with RPM for the Leegin Court and many economists is when RPM results from retailer coercion. All five potential procompetitive uses of RPM identified in Leegin involve benefits to manufacturers, not retailers. As the Leegin majority stated: “If there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer.” Consequently, a plaintiff presenting substantial evidence that retailer coercion was responsible for RPM has gone a long way toward making a prima facie showing of anticompetitive effects."
A potentially controversial suggestion in her remarks is that the burden should be shifted to the defendant once plaintiff makes a preliminary showing of "the existence of the agreement and scope of its operation" along with the presence of "structural conditions" under which RPM is likely to be anticompetitive. Ms. Varney concluded her speech by stating that she would not rule out the possibility that Leegin's critics were correct in saying that efforts to develop a rule of reason framework would provide unsuccessful or that "evidence will show that the actual uses of RPM are almost always harmful."