For almost 100 years it has been illegal for a manufacturer to dictate minimum prices to its distributors. That changed on June 28, 2007 when the U.S. Supreme Court opened the door to allowing manufacturers to set a floor on the resale price at which its distributors or retailers may sell the manufacturer’s products. The venerable precedent of Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which prohibited minimum resale price maintenance, fell by the wayside.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, ___, 2007 WL 1835892 (June 28, 2007), the Court examined the economic arguments regarding the competitive effects of minimum resale price maintenance. The five-member majority ruled that resale price arrangements are not to be considered illegal per se, but are to be evaluated on a case-by-case basis under the more complex “Rule of Reason.” Under this standard, a court must consider business reasons and economic evidence about the pricing program and can only impose antitrust liability where it is shown that the arrangement’s adverse effects on competition outweigh its pro-competitive benefits. The Supreme Court’s new opinion does not grant manufacturers a free pass to insert minimum price restrictions into distribution and sales agreements; careful evaluation of the competitive environment and legitimate business reasons are required. However, the Court’s reversal of Dr. Miles means that antitrust regulators and courts must view such policies within a broader context and manufacturers can utilize them with substantially reduced risk of antitrust scrutiny or liability.

A Discounting Boutique Is Cut Off by the Manufacturer and Wins a Big Verdict

In Leegin, a boutique shop sued a manufacturer of leather goods and accessories after the manufacturer cut off sales to the boutique because of retail discounting below the manufacturer’s required prices. At trial, the manufacturer attempted to introduce expert testimony about the pro-competitive benefits of its pricing and distribution strategy. The court would not permit the jury to hear this evidence because of the Dr. Miles rule that minimum resale price maintenance agreements were automatically illegal. The jury awarded damages of $1.2 million to the boutique and the Fifth Circuit Court of Appeals affirmed the verdict. The manufacturer appealed to the Supreme Court.

The Supreme Court Takes Back the Verdict

The Supreme Court took the manufacturer’s case to revisit the rationale of the 1911 Dr. Miles rule. The Court determined that Dr. Miles has little continuing value given the many changes in the economy over the last century. The Court also was persuaded by the building body of economic and legal research showing that resale price maintenance can in fact enhance efficiency and consumer welfare. Thus, the strict ban on the practice is no longer appropriate. Although the Dr. Miles decision had rested in great part on a common law rule with ancient roots, dating to the 1600s, the Court also recognized that federal antitrust law since Dr. Miles has viewed vertical relationships between manufacturers and distributors or retailers with less suspicion, no longer putting them on the same plane as horizontal agreements between competing distributors.

The Court explained that the “economics literature is replete with pro-competitive justifications for a manufacturer’s use of resale price maintenance.” Among others, the Court pointed to studies showing that such arrangements can promote upstream competition between manufacturers selling competing brands of goods—so-called “interbrand competition”—because it provides the economic incentive to retailers that are dealing with end consumers to invest in services and promotion of the manufacturer’s goods. In addition, without the ability to have the manufacturer control a retailer’s resale price, retailers would be reluctant to promote goods out of concern that a low-price discounter will “free ride” on those efforts. Furthermore, the Court explained that controlling the resale price, and ensuring the reseller’s margin, may enhance a manufacturer’s ability to induce “competent and aggressive” resellers to market its product. In light of these potential benefits, the Court reasoned that the Dr. Miles rule that such arrangements were simply deemed per se unlawful could no longer be justified.

The Future

The Supreme Court’s ruling is helpful to manufacturers because it brings the minimum price issue into line with other vertical distribution programs, which courts analyze within the framework of actual effects (positive or negative) on competition with other brands. The Leegin rule should permit manufacturers to more consistently implement their pricing and distribution programs.

Although the Supreme Court has now ruled that minimum resale price arrangements do not automatically violate the antitrust laws, the Leegin case should not be viewed as a wholesale endorsement of such arrangements or to authorize manufacturers to implement these provisions without analysis of their particular effects. As with other vertical distribution arrangements, minimum resale price restrictions will still be subject to antitrust challenge if they lack a legitimate competitive purpose. Of note, the Supreme Court acknowledged circumstances where minimum resale price arrangements present economic dangers and set forth a few guideposts warranting consideration. First, if the practices are widespread among competing manufacturers in a particular industry, they warrant more careful scrutiny as consumers may be harmed due to a lack of low cost retailers across a product line. Second, the Court suggested that the history of the arrangement can be significant. Where retailers are the driving force behind minimum resale price arrangements, that may serve cartel-like behavior among retailers, rather than promoting interbrand competition among manufacturers. Thus, caution and articulation of legitimate business reasons and competitive effects is warranted when considering whether to implement such a pricing policy. This is particularly true in the short term as we can expect the contours of Leegin to be tested in the courts.

As a practical matter, however, the risk of suit has been reduced, because the potential antitrust plaintiff now has the additional burden of showing that a particular arrangement has actual detrimental effects on interbrand competition that outweigh any efficiency or other competitive gains. This gives manufacturers more flexibility in creating, harmonizing, and implementing their distribution policies and programs.