The U.S. Supreme Court recently agreed to hear Leegin Creative Leather Products, Inc. v. PSKS, Inc., and many believe the Court may overturn an established rule of per se – or automatic – illegality under U.S. antitrust law. In particular, Leegin presents the Court with the opportunity to reject the rule, first established in 1911, that dooms any agreement or arrangement that sets the minimum price that must be charged by resellers of a product. Such so-called “minimum resale price fixing” arrangements are typically between a manufacturer and its distributors or retailers or between a franchisor and its franchisees. They are among the last of a series of activities once condemned as “naked restraints of trade” and thus unlawful without any proof other than establishing that the conduct had occurred.

Should the Supreme Court reject per se illegality for minimum resale price fixing, it will continue the trend, begun in the late 1970s, of limiting per se illegal conduct under the antitrust laws. (Other examples of conduct that were once per se unlawful under antitrust laws include restrictions imposed by manufacturers regarding territories in which or persons to whom products could be resold by distributors or retailers, boycotts, and maximum resale price fixing.) In that event, the Court would not validate such conduct as a matter of law. Rather, the Court would likely require that minimum resale price fixing, like other conduct formerly held to be per se illegal, now be evaluated under the so-called “rule of reason.” Under the rule of reason, a plaintiff must do three things to establish a violation of the antitrust laws. First, an antitrust plaintiff must fully analyze and properly define the relevant market or markets that are affected by a minimum resale price fixing arrangement. Second, an antitrust plaintiff must prove that such conduct has resulted in an unreasonable restraint of trade in the relevant market or markets. Finally, an antitrust plaintiff must demonstrate that the anticompetitive effects of the conduct are not outweighed by any pro-competitive effects – such as enhanced efficiencies or increased interbrand competition – argued by the defendant. The practical consequence of review under the rule of reason is that significantly fewer cases involving minimum resale price fixing arrangements will likely be found to violate the antitrust laws. Litigating such cases, moreover, will be far more difficult and costly since antitrust liability, which is automatic in per se cases once the minimum resale price fixing is established, will now require extensive proof including, in most cases, expert economic testimony.

Movement to rule of reason analysis in minimum resale price-fixing arrangements would constitute an important step in the Court’s gradual dismantling of per se antitrust illegality, which had its beginnings in the 1911 case of Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373. In Dr. Miles, the Court held that resale price fixing arrangements of any type (whether setting minimum or maximum resale prices) were per se illegal. That rule remained in full force and effect until 1997, except during the period from 1937 to 1975, during which Congress passed legislation that allowed individual states (as opposed to the federal government) to enact “fair trade laws” to prevent large retailers from disadvantaging smaller competitors by offering the same products at significantly discounted prices.

In 1997, following the so-called “new economic learning” of the late 1970s and the corresponding adoption of rule of reason analysis with respect to territorial customer restrictions imposed by manufacturers, the Supreme Court held in State Oil Co. v. Khan, 522 U.S. 3, that arrangements setting maximum resale prices were no longer per se illegal. Instead, maximum resale price fixing arrangements were to undergo rule of reason scrutiny. The Kahn decision, however, left undisturbed the per se illegality of minimum resale price fixing. The Leegin case now sets the stage for the Court to eliminate per se illegality in this realm as well.

The facts of Leegin squarely frame the issue. There, Leegin, the manufacturer, agreed to sell retailers (including plaintiff PSKS) its women’s accessories only if the retailers pledged to follow Leegin’s suggested pricing policy at all times. When PSKS begin selling Leegin’s products below the suggested retail prices, Leegin stopped further shipments to PSKS. Shortly thereafter, PSKS filed suit alleging that Leegin’s actions toward it were the result of a minimum resale price fixing scheme that was per se unlawful under Section 1 of the Sherman Act. In response, Leegin argued that its policy should be evaluated under the rule of reason and attempted to offer expert testimony that its conduct was, in fact, pro-competitive. The trial court rejected the argument and refused to allow the expert testimony, ruling that both were irrelevant as a matter of law under the binding precedent of the Dr. Miles case. As a result, the jury found Leegin liable for unlawful minimum resale price fixing and awarded PSKS damages of $1.2 million, which were automatically trebled to $3.6 million as required by the antitrust laws.

On appeal, the U.S. Court of Appeals for the Fifth Circuit was sympathetic to Leegin’s arguments, but felt bound by precedent to affirm the trial court’s actions and the jury’s verdict. Leegin then sought Supreme Court review. In so doing, Leegin argued that the rationale underpinning the nearly century- old Dr. Miles case had been undermined and superseded by the new economic learning and rule of reason analysis. On December 7, 2006, the Supreme Court granted Leegin’s petition for review, thereby agreeing to hear the case. Oral argument before the Court will take place in March 2007, and a decision is expected by the end of June.

If, as is widely believed, the Supreme Court granted review in Leegin to reverse the longstanding rule of per se illegality for minimum resale price-fixing arrangements, the impact on manufacturers, distributors, retailers (particularly “big box” discounters), franchisors, franchisees, and consumers will be direct and immediate. Only time will tell whether that impact turns out to be positive or negative.