Kansas Supreme Court Upends Resale Price Maintenance and Kansas Rule of Reason Standard New York Appellate Court Holds that Resale Price Maintenance Is Not Automatically Illegal

For nearly a century, federal antitrust law (the Sherman Act) prohibited resale price maintenance (RPM or vertical price fixing) agreements as a per se illegal form of price-fixing. See 15 U.S.C. § 1 (1997). In 2007, however, the Supreme Court’s Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (Leegin I), held that RPM arrangements are not illegal per se under the Sherman Act. In so doing, the Court overturned Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). Instead, RPM agreements are subject to "rule of reason" analysis, which allows RPM if its procompetitive benefits outweigh its anticompetitive effects.1

Despite the passage of almost five years since the Supreme Court’s decision, it is unclear what, if any, long-term effect Leegin I will have, particularly with respect to state antitrust laws and the cases filed alleging claims under those laws. While many states interpret their antitrust laws in conformity with federal law, some states specifically prohibit RPM agreements, including states like Maryland that enacted per se statutes in response to Leegin I.2 Furthermore, the attorneys general of a number of states – most prominently New York and California – have taken the position that their state antitrust statutes continue to condemn RPM as per se illegal even after the Leegin I decision.

In the past week, there have been two significant developments in the evolving law governing RPM. On the one hand, the Kansas Supreme Court held that RPM is per se unlawful under Kansas state law, and adopted a slew of unusual and pro-plaintiff positions. On the other hand, the New York intermediate appellate court rejected the New York attorney general’s arguments that New York law condemns RPM as per se unlawful.

The Kansas Case

On May 4, 2012, in one of the remaining cases challenging Leegin’s alleged RPM practices, O’Brien v. Leegin Creative Leather Products, Inc., No. 101,000 (Leegin II), the Kansas Supreme Court has made one thing clear – RPM is per se illegal in Kansas.

Leegin is a manufacturer and retailer of fashion accessories, including handbags, belts, wallets, and luggage. Leegin markets its accessories through company-owned and independent retail stores. The court described a variety of RPM programs requiring the retailer to acknowledge that non-compliance was grounds for termination or to commit to selling products for the suggested retail price.

The plaintiffs, a class of consumers who purchased Leegin accessories, presented the testimony of an expert economist who, among other things, found no evidence that a cartel existed among Leegin’s retailers or that the retailers requested implementation of the RPM programs. Plaintiffs’ expert also concluded that Leegin’s RPM agreements "necessarily raised the price at which consumers may purchase its products" and that these higher prices were not offset by benefits to competition or consumers. The plaintiffs argued that Leegin was engaged in vertical price fixing and horizontal price fixing agreements by virtue of its role as a dual distributor with company-owned stores, and that both forms of price fixing are per se illegal under Kansas state antitrust law.

Leegin, relying on Leegin I and Kansas courts’ historical reliance on federal antitrust law as persuasive, among other things, argued that Leegin I and the rule of reason should apply and that Plaintiffs failed to demonstrate the requisite antitrust injury. Seventeen Leegin retailers submitted affidavits that they would not discount regardless of whether a RPM policy was in place. Further, the class representative testified that she owns numerous other brands of accessories, thus admitting that Leegin had substantial competition in Kansas.

First, with respect to the standard applicable to Leegin’s RPM programs, the Kansas Supreme Court made clear that the Kansas antitrust statutes do not expressly reference the rule of reason and proceeded to overrule more than 60 years of Kansas case law by holding that the rule of reason does not apply to vertical price fixing, and, arguably, does not apply to vertical restraints more broadly. Although the only restraints at issue in Leegin II were RPM arrangements, the court overruled two earlier Kansas Supreme Court decisions, both of which analyzed the non-price vertical restraints at issue under the rule of reason.

Second, the court read the antitrust injury requirement so broadly that antitrust plaintiffs in Kansas need not produce evidence of actual impact, i.e., evidence that they themselves were actually overcharged as the result of the illegal conduct. Instead, the Kansas Supreme Court held that expert testimony based on academic theory and economic literature regarding the general effect of vertical price fixing alone was sufficient to create a genuine issue of material fact with respect to antitrust injury.

Third, the Kansas court left open the possibility that the RPM agreements of manufacturers with downstream operations that compete with their resellers could be treated as horizontal, rather than vertical, price fixing. The Kansas Supreme Court acknowledged that every federal appellate court has rejected this view, but declined to follow this weight of authority.

Thus, in one fell swoop, the Kansas Supreme Court apparently rejected three basic rules of federal antitrust law. Even if later courts soften the court’s ruling in other respects, Leegin II clearly makes RPM agreements per se illegal in Kansas, further complicating manufacturers’ efforts to manage through agreements the resale price of their products. After Leegin II, for manufacturers that do not want to sell through discounters, the safest course is to use clearly and carefully written and consistently applied unilateral resale pricing policies.

The New York Case

The New York courts have taken the opposite tack, rejecting the attempts of the state attorney general to establish New York as a jurisdiction categorically banning RPM. The New York attorney general (NYAG) launched a series of high-profile investigations of alleged RPM agreements under New York state law and brought a civil enforcement action against Tempur-Pedic for allegedly maintaining illegal RPM agreements with retailers. However, on May 8, 2012, the New York Supreme Court Appellate Division (the intermediate appellate court) delivered a significant blow to the NYAG’s efforts to curb RPM, holding that RPM policies are not per se unlawful under New York law and affirming the dismissal of the case against Tempur-Pedic. See People v. Tempur-Pedic Int’l, Inc., 2012 N.Y. App. Div. LEXIS 3528 (May 8, 2012).

In its lawsuit, the NYAG claimed that Tempur-Pedic entered into RPM agreements that required retailers to charge prices dictated by the mattress manufacturer. Specifically, the NYAG charged that Tempur-Pedic’s resale price policy and its separate minimum advertised price agreement were automatically illegal under Section 369-a of the New York General Business Law. Section 369-a provides that "any contract provision that purports to restrain a vendee of a commodity from reselling ... at less than the price stipulated by the vendor or producer" is unenforceable.

The complaint alleged that Tempur-Pedic’s Retail Partner Agreements with its authorized retailers barred discounting, offering free gifts with purchases, rebates, coupons, free gift cards, or other in-store credit. The NYAG claimed that Tempur-Pedic sent letters to its accounts stating the company would "not do business with any retailer that charges retail prices that differ from the prices set by Tempur-Pedic" and that retailers monitored the prices of their competitors and reported prices below the manufacturer’s suggested price to Tempur-Pedic.

The New York state trial court dismissed the complaint against Tempur-Pedic. See People v. Tempur-Pedic Int’l., Inc., 30 Misc. 3d 986, 916 N.Y.S.2d 900 (2011). The NYAG appealed. The appellate court, in a brief opinion, rejected all of the NYAG’s arguments and affirmed the dismissal of the case. The court "first found that [N.Y.] General Business Law § 369-a does not make RPMs illegal as a matter of law" because "there is nothing in the [statute’s] text to declare those contract provisions to be illegal or unlawful; rather the statute provides that such provisions are simply unenforceable in the courts of this state." The appellate court noted that multiple federal district courts had similarly construed Section 369-a, citing, for example, WorldHomeCenter.com, Inc. v Franke Consumer Prods., 2011 WL 2565284, 2011 US Dist LEXIS 67798 (S.D.N.Y. 2011)

. In the alternative, even assuming that New York law absolutely forbids RPM agreements, the court found that the NYAG had failed to demonstrate the existence of an RPM arrangement. The court rejected the NYAG’s contention that Tempur-Pedic’s minimum advertised pricing policy constituted an RPM agreement as "[a]dvertising agreements cannot be the subject of a vertical RPM claim, because they do not restrain resale prices, but merely restrict advertising." The court further concluded that "[i]n any event, the evidence [NYAG] tendered did not support a conclusion that RPM agreements were reached between Tempur-Pedic and its retailers, but merely that Tempur-Pedic enacted its minimum price policy and that its retailers independently determined to acquiesce to the pricing scheme in order to continue carrying Tempur-Pedic’s products."

While the Tempur-Pedic case is the first appellate test of the NYAG’s position, it is significant that New York’s highest court – the Court of Appeals – has not yet weighed in. Until there is a ruling from the New York Court of Appeals, there remains a risk that a different appellate panel, either state of federal, could still agree with the NYAG that New York categorically prohibits RPM agreements. Nevertheless, there is a growing tide of case law holding that New York law, like federal law, does not treat RPM agreements as per se illegal.