In a 5-4 decision issued on June 28, 2007, the United States Supreme Court overruled a nearly century-old precedent and held that vertical agreements between a supplier and its distributor or retailer on the minimum resale prices for the supplier’s products will be evaluated under the antitrust rule of reason, not the per se rule. In Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), the Court held that such agreements are per se violations of section 1 of the Sherman Act, 15 U.S.C. § 1 (1997). The Court’s recent decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 75 U.S.L.W. 4643 (U.S. June 28, 2007) (No. 06-480) 2007 WL 2835892, overrules Dr. Miles and brings the law on minimum vertical resale price agreements in line with both non-price vertical restraints and maximum vertical resale price agreements, which have been subject only to the rule of reason since the Court’s decision in State Oil v. Kahn, 522 U.S. 3 (1997).
Leegin Creative Leather Products, Inc. (Leegin) designs, manufactures, and distributes leather goods and accessories under the “Brighton” name through a variety of boutiques, specialty stores, and other small retailers. It does so based on its belief that small retailers will promote its products more effectively than others by offering a variety of customer services that are absent at other channels.
PSKS, Inc. (PSKS) sold Brighton products through a store called Kay’s Kloset. Along with other Brighton retailers, Kay’s Kloset first became subject to a policy under which Leegin suggested minimum retail prices for its products and declined to deal with those who did not adhere to those prices. It later briefly participated in an additional Leegin policy under which retailers agreed to sell at Leegin’s suggested prices in return for various incentives. Leegin emphasized that it adopted both of these policies in order to provide retailers with sufficient margins to provide the customer services Leegin considered essential to its distribution and to maintain the brand image and reputation of Brighton products.
Leegin discovered that Kay’s Kloset was substantially discounting the Brighton line and demanded that Kay’s Kloset cease doing so. When Kay’s Kloset refused, Leegin stopped dealing with the store. As a result, PSKS sued Leegin, contending that Leegin’s policy and conduct involved a per se unlawful minimum resale price maintenance agreement under section 1 of the Sherman Act.
Leegin asserted that it had unilaterally established and implemented a lawful policy under United States v. Colgate & Co., 250 U.S. 300 (1919). Decided only eight years after Dr. Miles, Colgate generally allows a supplier unilaterally to adopt and enforce a policy of refusing to deal with discounters except in aid of a monopoly. Id. at 307. PSKS, on the other hand, argued that the policy was not unilateral, but based on a series of agreements that Leegin had with its retailers, and thus per se illegal. At trial, Leegin sought to introduce expert testimony to demonstrate the procompetitive effects of its pricing policy. The District Court excluded this testimony, determining that it was irrelevant because, if an agreement was found to exist, the per se rule under Dr. Miles would apply.
PSKS prevailed at trial and was awarded treble damages and attorney’s fees and costs. “On appeal, Leegin did not dispute that it had entered into vertical price-fixing agreements with its retailers. Rather, it contended that the rule of reason should have applied to those agreements.” 2007 WL 2835892, at *4. The Court of Appeals (Fifth Circuit) rejected that argument, relying on Dr. Miles. The Supreme Court then granted certiorari “to determine whether vertical minimum resale price agreements should continue to be treated as per se unlawful.” Id. In an opinion by Justice Kennedy, a majority of five Justices concluded that Dr. Miles should be overruled and that the rule of reason should apply to such agreements. Accordingly, the Court reversed the Court of Appeals’ judgment and remanded the case for further proceedings consistent with its decision.
The Supreme Court’s Opinion
Consistent with several of the Court’s decisions over recent decades, the majority opinion asserts that “[t]he rule of reason is the accepted standard for testing whether a practice restrains trade in violation of §1.” Id. It adds: “As a consequence, the per se rule is appropriate only after courts had considerable experience with the type of restraint at issue, . . ., and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason . . . .” Id. at *5 (emphasis added). That is, per se categorizations are reserved for restraints “that would always or almost always tend to restrict competition and decrease output.” Id. quoting Bus. Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717, 723 (1988).
The majority opinion emphasizes that “[v]ertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed.” Id. at *8. For example, it recognizes that such agreements may stimulate interbrand competition by encouraging retailers to provide services and promotional efforts on behalf of a supplier’s products, by giving consumers greater choices as to product quality, service, and price, and by preventing discounting retailers from “free riding” on services provided by others.
Id. at *7. At the same time, it recognizes the such agreements may also be used to obtain monopoly profits or to facilitate cartels at the supplier or retailer levels. Id. at *8. However, it concludes on balance that “[a]s the [per se] rule would proscribe a significant amount of procompetitive conduct, these agreements appear ill suited for per se condemnation.” Id. at *9.
Notably, the Supreme Court explicitly recognized the tension between the effects of the Colgate decision and application of a per se rule:
The manufacturer has a number of legitimate options to achieve benefits similar to those provided by vertical price restraints. A manufacturer can exercise its Colgate right to refuse to deal with retailers that do not follow its suggested prices. See 250 U. S., at 307. The economic effects of unilateral and concerted price setting are in general the same.
See 2007 WL 2835892, at *12. As a result of this dichotomy, prior to Leegin, suppliers seeking to implement a resale pricing policy have spent considerable time and effort seeking to establish that those programs were not the subject of an explicit agreement or even tacit understanding between them and their distributors.
The majority opinion buttresses its position by concluding that the premises upon which Dr. Miles was based no longer apply. Specifically, it concludes that application of the common law rule against restraints on alienation has been rejected in the case of vertical non-price restrictions (See, e.g., Cont’l. T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (l977)) and should not apply in the case of vertical price restraints either. 2007 WL2835892 at *5-6. Indeed, it emphasizes that vertical price restraints may be preferable from a competitive standpoint to reliance on Colgate or on vertical non-price restraints in some instances. Id. at *12-13. The majority also rejected the premise in Dr. Miles that a supplier’s vertical agreements with its distributors should be viewed essentially the same as a horizontal agreement among those distributors and should be similarly condemned. Id. at *6.
The dissenting opinion by Justice Breyer recognizes that vertical resale price agreements may have both procompetitive and anticompetitive effects. Id. at *16-18. It concludes, however, that the arguments in favor of applying the rule of reason have been “well known in the antitrust literature for close to half a century” and are insufficient to justify overturning a long-established precedent. Id. at *15.
The practical impact of Leegin will depend in substantial part on how the courts ultimately apply the rule of reason in the context of vertical minimum resale pricing agreements. The case should not be read as an unconditional green light to engage in vertical minimum resale pricing agreements or other policies. Instead, firms implementing these agreements or policies should continue to proceed with caution.
Several points regarding the impact of Leegin warrant mention now:
- Resale price maintenance will continue to be subject to challenge, and we expect many challenges to be brought by private plaintiffs. Assessing the actual impact that a vertical minimum resale pricing agreement or policy has will be a fact-driven analysis, and thus it may be difficult to dispose of a case quickly (i.e., through summary judgment)
- Factors considered in the rule of reason analysis including the following:
- the origins of the policy--those imposed on a supplier by a group of competing distributors will likely either remain subject to the per se rule or will fail to pass scrutiny under the rule of reason; policies driven by a manufacturing cartel will face similar scrutiny
- the supplier's market power--the greater the supplier’s market power, the greater the potential impact on interbrand competition and the greater the antitrust risks; a small company such as Leegin, participating in a near atomistic industry at both the manufacturing and retail level, probably has relatively little antitrust risk because it could be very difficult to establish that its resale pricing agreements or policies cause anticompetitive harm under these circumstances; conversely, the risks will be higher for companies that have a significant share in a more concentrated industry
- the number of competing suppliers that adopt similar programs--the more suppliers that adopt such a program and the greater the percentage of interbrand competition affected by the programs, the greater the risks
- the business justifications for the policy--a justification that promotes interbrand competition will be important, and
- whether the supplier's internal and external communications are consistent with those justifications--the justifications will be less persuasive if they are inconsistent with the suppliers' other actions and statements.
- It is unclear what impact the decision will have on state law and, specifically, whether minimum vertical resale price agreements will remain per se unlawful in some states-- many state laws mirror federal law and say that they will be construed in accordance with federal law, but it is unclear whether this will be true in every case.
- By shifting the focus of the analysis to the actual competitive effects, as opposed to the existence of an agreement in applying Colgate, companies should be able to structure and enforce their policies (unilateral or not) in a manner more consistent with normal business relationships. Currently, policies relying on Colgate often have strict communications guidelines that make it difficult for a supplier to have a natural relationship with its distributors and retailers. Now, suppliers who choose to discontinue relying on Colgate may no longer feel so pressured to take some of the rigid positions (e.g., termination of a discounter without warning) that were widely viewed as required to maximize the possibility of fitting within the parameters of Colgate.
- Of course, suppliers who don't want to take the risk that their program will be held unlawful under the rule of reason may still try to avoid a finding of an agreement under Colgate in order to avoid application of federal antitrust law altogether, but many or most will likely not do that.
- There conceivably may be legislative attempts to overrule Leegin at the federal or state level.
- It is unclear whether the decision will apply fully to protect "dual distributor" suppliers who sell their products both at wholesale (to distributors subject to the policy) and at retail-- Parties challenging a pricing program may assert that minimum resale price restrictions imposed by a supplier who is also a retailer are in effect "horizontal" and should remain subject to the per se rule; the Court declined to address that issue in Leegin. Today, most dual-distributor relationships are viewed as vertical; however a court that does not like the Leegin decision may seek to limit it to purely vertical situations.
- The decision will presumably not protect horizontal agreements among competing suppliers to impose minimum resale prices (they will presumably remain per se illegal), nor will it directly impact foreign law on resale price agreements.
- The decision will clearly provide a more flexible legal standard of review for minimum resale pricing programs but will not eliminate all risks for the reasons indicated above.