The U.S. Supreme Court abandoned 96 years of precedent last Thursday, clearing the way for many manufacturers to impose price floors for retail sales of their products. Acknowledging a shift in modern economic theory that suggests that resale price maintenance often produces procompetitive effects, the Court ruled that vertical minimum resale price maintenance no longer should be treated as “per se” (i.e., automatically) unlawful in violation of the antitrust laws. Instead resale price maintenance henceforth will be evaluated under the more lenient “rule of reason” standard, which weighs the relevant conduct’s anticompetitive effects against its procompetitive effects in the circumstances of each particular case.

PSKS, the operator of a women’s clothing store, sued Leegin, a manufacturer of women’s accessories, claiming that Leegin engaged in “vertical” price fixing in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. The suit arose from a 1997 policy instituted by Leegin regarding its popular “Brighton” line of products, which stated that Leegin would do business only with retailers adhering to Leegin’s suggested retail prices for its Brighton products and required its retailers to “pledge” adherence to the policy. Upon learning that PSKS had violated Leegin’s pricing policy by placing the store’s entire line of Brighton products on sale, Leegin suspended all shipments of Brighton products to PSKS, resulting in lost sales and lost profits to PSKS. A jury in the Eastern District of Texas concluded that Leegin had agreed with retailers to fix the prices of Brighton products in violation of § 1 and awarded PSKS $1.2 million in damages, which were trebled pursuant to 15 U.S.C. § 15(a). The award was affirmed per curiam by the U.S. Court of Appeals for the Fifth Circuit. Leegin appealed, arguing that application of the per se rule to these circumstances should be abandoned, and the Supreme Court agreed.

The per se ban on vertical price fixing agreements between manufacturers and retailers had been in place since the Court’s ruling in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), in which the practice was deemed invalid as a “general restraint on The U.S. Supreme Court abandoned 96 years of precedent last Thursday, clearing the way for many manufacturers to impose price floors for retail sales of their products. Acknowledging a shift in modern economic theory that suggests that resale price maintenance often produces procompetitive effects, the Court ruled that vertical minimum resale price maintenance no longer should be treated as “per se” (i.e., automatically) unlawful in violation of the antitrust laws. Instead resale price maintenance henceforth will be evaluated under the more lenient “rule of reason” standard, which weighs the relevant conduct’s anticompetitive effects against its procompetitive effects in the circumstances of each particular case. PSKS, the operator of a women’s clothing store, sued Leegin, a manufacturer of women’s accessories, claiming that Leegin engaged in “vertical” price fixing in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. The suit arose from a 1997 policy instituted by Leegin regarding its popular “Brighton” line of products, which stated that Leegin would do business only with retailers adhering to Leegin’s suggested retail prices for its Brighton products and required its retailers to “pledge” adherence to the policy. Upon learning that PSKS had violated Leegin’s pricing policy by placing the store’s entire line of Brighton products on sale, Leegin suspended all shipments of Brighton products to PSKS, resulting in lost sales and lost profits to PSKS. A jury in the Eastern District of Texas concluded that Leegin had agreed with retailers to fix the prices of Brighton products in violation of § 1 and awarded PSKS $1.2 million in damages, which were trebled pursuant to 15 U.S.C. § 15(a). The award was affirmed per curiam by the U.S. Court of Appeals for the Fifth Circuit. Leegin appealed, arguing that application of the per se rule to these circumstances should be abandoned, and the Supreme Court agreed.

The per se ban on vertical price fixing agreements between manufacturers and retailers had been in place since the Court’s ruling in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), in which the practice was deemed invalid as a “general restraint on at least, the suggestion of a presumption of lawfulness in a unilaterally adopted manufacturer price-setting policy, based on the statement in Leegin that “in general, interests of the manufacturers and consumers are aligned with respect to retailer profit margins.” Id. at 16.

To be clear, however, Leegin does not bless and protect each and every instance of vertically imposed price fixing. To that end, both the majority and the dissent recited a litany of circumstances in which a price-setting policy likely would violate even the rule of reason. Among the circumstances identified by the majority were: facilitation of manufacturer cartel behavior, by assisting the cartel in identifying price-cutters; organization of cartels at the retailer level whereby retailers might collude to fix customer prices and then compel a manufacturer to aid in the arrangement with its own price-setting policies; insistence upon a price maintenance policy by a dominant retailer seeking to forestall innovation in distribution that decreases costs; and abusive imposition of price maintenance by a manufacturer with market power seeking to discourage retailers from selling the products of smaller rivals and new entrants. Id. at 12-14. These recitations offered direct guidance to the trial courts, encouraging them to ferret out the anticompetitive uses of vertical price maintenance by “devis[ing] rules over time for offering proof, or even presumptions where justified.” Id. at 19. Among the factors mentioned by the Court as relevant to this analysis are the source of the restraint (whether from manufacturers or retailers), the number of manufacturers in the industry using the practice, the concentration of the market, and the market share of the parties involved. Id. at 17-18.

The dissent, authored by Justice Stephen Breyer — a one-time professor of antitrust law, may provide further fuel for plaintiffs as an enunciation of the anticompetitive potential of vertical price restraints. In addition to the anticompetitive consequences described by the majority, the dissent questioned how frequently the free rider effect and other justifications for resale price maintenance truly occur in practice and noted that even the elimination of intrabrand price competition often may be anticompetitive in inhibiting discounting and efficient competition at the retailer level, at least in the absence of significant offsetting procompetitive benefits. Dissent slip op. at 4 (Breyer, J., dissenting).

In addition to the risk of private litigation under the rule of reason, manufacturers and retailers will have to assess the continuing threat of prosecution by state attorneys general for § 1 violations based on resale price maintenance agreements. Thirty-seven states joined in an amicus brief before the Supreme Court advocating retention of the per se rule, thus evidencing considerable hostility to resale price maintenance at the state level. Potential defendants might anticipate that these attorneys general will continue to be interested in prosecuting vertical price maintenance cases, even under the rule of reason. Further, where state law does not track federal law precisely, attorneys general in those states may assert that vertical price maintenance remains per se unlawful under state law.

Going forward, the impact of the Leegin decision and the abandonment of the flat prohibition against vertical price maintenance will be significant. Quite simply, manufacturers will have greater freedom to set resale prices in the absence of fear of a per se violation of § 1 of the Sherman Act. The decision also could have a substantial strategic effect on retailers – whether traditional, discounter or web-based. The Court’s ruling is likely to apply in a wide variety of other situations involving vertical price setting conduct, including efforts by patentees to control the sales prices of their licensees. Nevertheless, the rule of reason analysis and risk of state prosecution likely will provide a meaningful limitation on vertical price setting, and therefore an analysis of antitrust risk remains appropriate before proceeding with any new pricing strategy.