Yesterday, in its last business decision of the term, the Supreme Court overruled a nearly century-old rule treating resale price maintenance agreements as per se violations of the antitrust laws. In Leegin Creative Leather Products, Inc., v. PSKS, Inc., a 5-4 decision written by Justice Kennedy, the Court ruled that minimum resale price maintenance agreements—agreements between manufacturers and distributors to resell a product at or above a set price—will now be examined under the “rule of reason,” a method of analysis that weighs procompetitive benefits against anticompetitive effects. In reaching this result, the Court expressly overruled its 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons.

Background 

Leegin Creative Leather Products, Inc. (“Leegin”) designs, manufactures, and distributes leather accessories for women under the “Brighton” brand name. Its products are sold by over 5,000 retailers, mostly boutiques, throughout the United States. Through its “Brighton Retail Pricing and Promotion Policy” Leegin refused to sell to retailers that discounted Brighton goods below the suggested resale price. In addition, through its “Heart Store Program,” Leegin provided certain benefits to designated “Heart Stores” that agreed only to sell at Leegin’s suggested prices. Leegin adopted the policies to give its retailers sufficient margins to provide the customer service Leegin sought from its retailers and to preserve the image of the Brighton brand.

PSKS, Inc. (“PSKS”) operated Kay’s Kloset, a women’s apparel store in Texas. Kay’s Kloset sold Brighton products and was a Heart Store. Leegin, however, discovered that Kay’s Kloset had discounted Brighton’s entire line by 20 percent. When Kay’s Kloset refused to stop discounting, Leegin terminated its sales to the retailer. PSKS sued, alleging that the Heart Store program evidenced an agreement between Leegin and its retailers to fix prices. A jury found that the parties had indeed reached an agreement regarding resale prices and awarded PSKS $3,975,000.00. Bound by the Dr. Miles rule, the Fifth Circuit upheld the jury verdict.

The Supreme Court’s Opinion 

In overruling Dr. Miles’ per se prohibition, the Court found that its more recent jurisprudence has rejected the rationales on which Dr. Miles was based—the common-law rule against restraints on alienation and the belief that vertical price fixing is equally as anticompetitive as horizontal price fixing.

The common-law rule against restraints on alienability prohibits a manufacturer from controlling a retailer’s decisions after the manufacturer has parted with the product. Justice Kennedy concluded that the current Court should not put “dispositive weight on doctrines from antiquity but of slight relevance.” The Court also dismissed Dr. Miles’ failure to treat horizontal and vertical agreements differently, as the Court has come to do since 1911.

The Court’s Economic Analysis

Having undercut the original support for Dr. Miles, the Court examined the potential procompetitive effects that could justify rule of reason treatment. The Court found that the justification for vertical price restraints is similar to that of vertical non-price restraints: the reduction in intrabrand competition can stimulate interbrand competition. As the Court has held, the primary purpose of the antitrust laws is to protect interbrand competition.

The Court explained that declaring vertical price restraints per se illegal could undercut interbrand competition in three ways.

First, if resale price maintenance is per se illegal, discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate. That is, consumers may educate themselves about a product at a store that has invested in nice showrooms, product demonstrations, and/or knowledgeable and friendly salespeople only to purchase from a discounter who has made no such investment.

Second, resale price maintenance can increase interbrand competition by facilitating market entry for new brands. Resale price maintenance, the Court reasoned, can create profit margins for retailers of new brands that will induce retailers to aggressively market the new products so manufacturers can achieve brand recognition.

Third, resale price maintenance can increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. Fixed resale prices provide higher margins for the retailer. Offering a retailer a guaranteed margin and threatening termination if the retailer does not meet expectations may be the most efficient way for a manufacturer to contract for the level of distribution services it wants from its retailers.

Though resale price maintenance has potential procompetitive benefits, it can also have anticompetitive effects. The Court observed that the agreements can be used to facilitate a horizontal agreement at the manufacturer or the retail level. Also, a manufacturer with market power could use resale price agreements with retailers to foreclose its competitors from the needed distribution market by inducing retailers not to sell the products of smaller rivals or new entrants.

After reviewing the possible effects of resale price maintenance and recognizing the risks of unlawful conduct, the Court concluded that resale price maintenance does not always or almost always tend to restrict competition. Therefore, per se treatment of such agreements is inappropriate.

The Court rejected the petitioner’s arguments that the per se rule against resale price maintenance should remain for administrative convenience and because vertical price restraints can lead to higher prices. These arguments would treat per se illegality as the rule rather than the exception. Furthermore, the Court noted: “[a] manufacturer has no incentive to overcompensate retailers with unjustified margins.” Thus, the Court reasoned, most manufacturers instituting resale price maintenance agreements will do so for procompetitive reasons.

The Court’s Stare Decisis Analysis

Recognizing that it did not write on a “clean slate,” the Court addressed whether stare decisis compelled adherence to Dr. Miles. It found stare decisis less compelling in this context than in others because the Court has always treated the Sherman Act as a common-law statute. Furthermore, the treatment of vertical restraints has progressed away from per se rules. In its efforts to “temper, limit, or overrule once strict prohibitions on vertical restraints,” the Court has in fact created a number of imperfect methods of achieving the goals of resale price maintenance. For example, under United States v. Colgate, a manufacturer can unilaterally announce a suggested resale price and refuse to deal with non-compliant retailers. Under Continental T.V v. GTE Sylvania, Inc, a manufacturer, subject only to the rule of reason, can engage in non-price vertical restraints. The Court noted that “[i]f we were to decide the procompetitive effects of resale price maintenance were insufficient to overrule Dr. Miles, then cases such as Colgate and GTE Sylvania themselves would be called into question.” By treating resale price maintenance agreements under the rule of reason, the law will no longer require manufacturers “to choose second-best options to achieve sound business objectives.”

The Court also dispensed with the argument that Congress has shown its intent to preserve Dr. Miles. The argument is premised on the Consumer Pricing Act of 1975. The Consumer Pricing Act repealed a federal antitrust exemption that made vertical price fixing per se legal under the Sherman Act in states that had passed fair trade laws—laws that protected small retailers against large volume discounters. The Court reasoned that the purpose of the repeal was not to make resale price maintenance per se illegal but to stop making it per se legal. The repeal placed resale price maintenance agreements back within the ambit of Section 1 of the Sherman Act, allowing the Court to develop the law in the common law tradition.

The majority also notes that during this exemption period in which resale price maintenance was permissible in some states, only a tiny fraction of manufacturers actually used it, indicating that a shift to the rule of reason will not likely have a significant impact on prices. The majority believes that “[t]o the extent consumers demand cheap goods, judging vertical price restraints under the rule of reason will not prevent the market from providing them.”

Justice Breyer dissented in an opinion joined by Justices Stevens, Souter, and Ginsburg. Justice Breyer conceded that resale price maintenance can have procompetitive benefits but points to the period preceding the Consumer Pricing Act, when resale price maintenance was temporarily exempt from federal scrutiny in 36 states, for empirical evidence that abandoning the per se rule against resale price maintenance will raise consumer prices. The dissent also relied heavily on stare decisis, believing “every stare decisis concern this Court has ever mentioned counsels against overruling [Dr. Miles].” The dissent concluded that the “only safe predictions about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles.”

Leegin’s Importance

By treating vertical price restraints under the rule of reason, Leegin gives manufacturers more control over how their products are sold, allowing them to achieve directly what they have had to do indirectly. Now, rather than announcing a price unilaterally and refusing to deal with known discounters or to create non-price vertical restraints such as exclusive retail territories or minimum advertised pricing policies, manufacturers with sufficient procompetitive justifications can directly contract with retailers regarding resale prices. The alternatives have proven burdensome for years, and Leegin eliminates the need to rely on “traps for the unwary.” Indeed, Leegin itself fell into such a trap, having to argue at the trial court that its pricing policy and subsequent refusal to deal with PSKS was unilateral and lawful under Colgate. The jury disagreed, and Leegin was faced with the burden of treble damages.

Though the ruling affords some additional latitude to manufacturers, it does not mean that all resale price maintenance agreements will be legal. Under the rule of reason, a manufacturer defendant will have the opportunity to present its procompetitive justifications for the conduct. Manufacturers imposing resale prices on retailers should work closely with legal counsel to try to justify their actions. Additionally, manufacturers will still have to be aware of prevailing state antitrust laws. Not all states follow federal precedent in interpreting their own antitrust statutes and many state courts that have declared resale price maintenance agreements as per se violations of state statutes may continue to do so.

Manufacturers with market power will also need to consult with legal counsel before implementing a resale price maintenance agreement to protect against possible Sherman Act claims. As the Court indicated, one anticompetitive concern is that manufacturers with market power could use resale price maintenance agreements to deny smaller rivals or entrants access necessary distribution systems, which could expose a manufacturer with market power to liability under the rule of reason and perhaps monopolization or attempted monopolization claims as well.