Leegin – Resale Price Maintenance: The End of An Era?
We will know soon whether the Supreme Court will overrule an almost century old case that held that vertical price fi xing arrangements are automatically a violation of the Sherman Act. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court will have the opportunity to decide whether vertical minimum resale price maintenance policies should be judged by a per se or “rule of reason” analysis. PSKS, a retail women’s clothing store, sued Leegin Creative Leather Products for engaging in unlawful vertical price fi xing in violation of Section 1 of the Sherman Act. Leegin is a California manufacturer of the Brighton line of women’s fashion accessories. At issue was Leegin’s “Brighton Retail Pricing and Promotion Policy,” which provided that Leegin would do business only with retailers that adhered to Leegin’s suggested retail prices for its Brighton products. In 2002, Leegin suspended all shipments of Brighton products to PSKS because PSKS had discounted Brighton products in violation of Leegin’s pricing policy. As a result, PSKS, which carried a signifi cant inventory of the Brighton line, lost sales and profits.
A jury found in favor of PSKS and the district court awarded the retailer treble damages of $3.6 million. In addition, Leegin was ordered to pay $375,000 in attorneys’ fees and costs. Leegin appealed the jury’s award to the Court of Appeals for the Fifth Circuit. In its appeal, Leegin argued that the jury should not have applied the per se rule of price fi xing. According to Leegin, the per se approach had not been consistently applied and the more appropriate test is the “rule of reason.” The Fifth Circuit, in an unpublished opinion, rejected Leegin’s argument. In affi rming the jury verdict, the court applied the law of Dr. Miles Medical Co. v. John D. Park & Sons Co., which held that agreements between suppliers and distributors as to minimum resale prices are automatically deemed unlawful under Section 1.
In appealing the Fifth Circuit’s decision, Leegin contends that the Supreme Court should overrule its Dr. Miles decision because resale price maintenance can have pro-competitive effects, including “enhanc[ing] interbrand competition and consumer welfare.” Leegin further argues that the “per se rule against resale price maintenance squarely confl icts with [the Supreme Court’s] modern antitrust jurisprudence.” Leegin maintains that the Court has rejected the per se rule in favor of the “rule of reason” approach in many situations, including for “maximum” resale price maintenance, because the rigid per se approach is inconsistent with modern economic theory. In comparison, PSKS argues that not only does stare decisis apply but that minimum price maintenance prevents retailers from reducing prices for consumers – who the antitrust laws were enacted to protect.
On March 26, 2007, the Supreme Court heard oral arguments. Many commentators predict that the Supreme Court will continue its trend of abandoning the rigid per se rule and adopt the more lenient “rule of reason” approach, particularly in light of amicus support for that result from the Solicitor General on behalf of both of the federal antitrust enforcement agencies. On the other hand, 37 state attorneys- general appeared in the case and at oral argument as amici supporting retention of the per se rule. Indeed, one uncertainty hanging over this case is whether, even if Dr. Miles is overruled, the per se rule against minimum RPM could remain applicable under some state enforcers’ and state courts’ interpretations of state antitrust laws.
Weyerhauser – Similar Standards Apply to Predatory Bidding and Predatory Pricing
On February 20, 2007, the Supreme Court decided the issue of whether antitrust violations based on predatory bidding by a dominant buyer of inputs should be analyzed under the same framework as predatory pricing on the selling side. In Weyerhauser Co. v. Ross-Simmons Hardwood Co., 127 S.Ct. 1069 (2007), the Court unanimously held that the test for determining liability for predatory pricing also applies to predatory bidding.
In Weyerhauser, Ross-Simmons, a hardwood-lumber sawmill company, sued Weyerhauser, a competing company, for monopolization and attempted monopolization under Section 2 of the Sherman Act. In its complaint, Ross-Simmons alleged that Weyerhauser was trying to drive other companies out of the lumber business by engaging in predatory bidding. Specifi cally, Ross-Simmons alleged that Weyerhauser was buying more logs than it needed and at prices that were higher than necessary.
At trial, the district court instructed the jury that buying more logs than needed and paying unnecessarily high prices for them can constitute anticompetitive conduct under the Sherman Act. The jury found for Ross-Simmons and awarded it almost $79 million in damages. Weyerhauser appealed to the Ninth Circuit. In its appeal, Weyerhauser argued that the rule in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. should apply in a predatory bidding case. The Brooke Group decision, however, involved the converse: predatory pricing on the selling side. In Brooke Group, the Supreme Court established two prerequisites to recovery on a predatory pricing claim:
(1) defendant sold its product at a price level too low to cover its costs and
(2) the alleged predator has “a dangerous probability of recouping its investment in below-cost pricing.”
On appeal, the Ninth Circuit affi rmed and held that Brooke Group only applies to “sell-side predatory pricing,” not “buy-side predatory bidding.” The Ninth Circuit opined that to prevail in a predatory bidding case, the plaintiff “need not show that the defendant operated at a loss and that a dangerous probability of the defendant’s recoupment of those losses existed.” Weyerhauser appealed to the Supreme Court, arguing that the rule of Brooke Group should apply in the analytically similar predatory bidding case. The Court agreed. In its opinion, the Court expressly held that Brooke Group should apply in both predatory pricing and predatory bidding cases. Because Ross-Simmons conceded it had not satisfi ed the Brooke Group standard, its predatory bidding theory failed and therefore the jury’s verdict could not be sustained. In light of the Weyerhauser decision, competitive buying will be less likely viewed as unlawful anticompetitive conduct. In fact, in its opinion, the Court expressed doubt as to the ultimate success of any plaintiff’s predatory purchasing case.
Credit Suisse – Implied Immunity in Securities Offerings
The Supreme Court will also consider the applicability of implied antitrust immunity in the context of underwritten public securities offerings. In Credit Suisse First Boston Ltd. v. Billing, plaintiffs brought a class action on behalf of purchasers of shares of technology stocks against ten leading investment banks that had underwritten initial public offerings of securities. According to the plaintiffs, the defendants engaged in an unlawful conspiracy to manipulate the aftermarket prices of approximately 900 technology stocks sold in initial public offerings. Specifi cally, plaintiffs alleged that defendants entered into an agreement to impose “tie-in” arrangements and required “laddering” arrangements in violation of Section 1 of the Sherman Act.
In response to these allegations, defendants argued that their strict regulation by the Securities Exchange Commission (“SEC”) and the potential confl ict between securities regulations and antitrust laws implied an immunity from antitrust liability for defendants’ regulated activities in the public securities markets.
The district court dismissed plaintiffs’ complaint, agreeing with defendants’ implied immunity arguments. In dismissing the complaint, the court noted that the SEC had the authority to regulate initial public offering allocation and underwriter commission practices. Signifi cantly, the district court found that “the [SEC] explicitly permits much of the conduct alleged.” On appeal, the Second Circuit disagreed. In its opinion, the Second Circuit recognized that although “[n]ot all underwriter manipulations are prohibited” by the securities laws, “[a]mong the impermissible manipulation practices regulated by the SEC” are tie-in arrangements.
The Second Circuit further explained that implied immunity would only apply in two different situations:
(1) where there exists “pervasive regulation” or
(2) where there exists specifi c confl icts between antitrust laws and a regulatory regime.
The court declined to fi nd either situation present in this case. It rejected defendants’ confl ict argument, reasoning that there was no evidence of Congressional intent to repeal the antitrust laws and immunize defendants’ allegedly unlawful tie-in agreements. The Second Circuit also rejected defendants’ “pervasiveness” claim. Accordingly, the court rejected the implied immunity doctrine argument and remanded the case.
On appeal to the Supreme Court, defendants argue that they operate in a market that the SEC regulates extensively and therefore the underwriters are immune from antitrust liability. In response, plaintiffs contend that tie-in arrangements, such as those at issue, are unlawful and the SEC could never authorize them. Plaintiffs further argue that, in this context, Congress created no express exemption to the application of antitrust laws.
In deciding Credit Suisse, the Supreme Court will presumably articulate the standard for applying the doctrine of implied immunity in a private damages action where there exists a potential confl ict between with the securities laws and the antitrust laws. The decision is expected to be signifi cant in that it will provide important guidance on antitrust immunity generally and for the securities industry in particular.