The US Supreme Court, in a 5-4 decision, has overturned its longstanding holding that vertical minimum resale price maintenance agreements are per se illegal. The case, Leegin Creative Leather Products, Inc. v. PSKS, Inc., __ S.Ct. __, No. 06-480, 2007 WL 1835892 (June 28, 2007), reverses the 96-year precedent established by the high court's decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), in which the Court held that it is per se illegal under Section 1 of the Sherman Act, 15 U.S.C. §1, for a manufacturer to agree with its distributors to set minimum resale prices.
In Leegin, the owner of a Texas retail boutique, Kay's Kloset, filed suit in the US District Court for the Eastern District of Texas after a supplier (Leegin) refused to continue supplying the boutique with its popular line of high-end leather goods and accessories. Leegin terminated its relationship with Kay's when it discovered that Kay's was discounting its products up to 20 percent below the suggested retail prices. Leegin's official pricing policy, which it provided to its retailers, was to refuse to sell to retailers that did not honor suggested prices.
The District Court, in a decision upheld by the Court of Appeals for the Fifth Circuit, relied upon Dr. Miles in holding that Leegin had entered into a per se illegal vertical minimum resale price agreement, and therefore precluded Leegin from introducing at trial expert testimony about procompetitive efficiencies achieved through its pricing policy. The Supreme Court reversed and overturned Dr. Miles, holding vertical minimum resale price agreements are properly examined under the rule of reason, whereby courts consider the procompetitive effects of a challenged restraint in determining its overall effect upon competition.
Justice Kennedy, writing for the majority, noted that "economics literature is replete with procompetitive justifications for a manufacturer's use of resale price maintenance" including: (i) stimulating interbrand competition by reducing intrabrand competition; (ii) eliminating free-riding by retailers that undersell rivals by offering fewer point-of-sale services; (iii) facilitating market entry by new firms and brands; and (iv) increasing interbrand competition by encouraging retailer services. The Court also pointed out the potential harms to competition that are posed by resale price maintenance agreements including: (i) facilitating manufacturer cartels and retailer cartels; (ii) forestalling innovation in distribution; and (iii) allowing manufacturers to pressure retailers to boycott products of smaller rivals.
Following this decision, manufacturers and their wholesalers and distributors will enjoy broader latitude to enter into agreements governing the minimum prices at which goods may be resold. Such agreements have not, however, been made per se lawful by this case. Instead, they still may be challenged under the rule of reason. Therefore, care still must be taken in negotiating vertical pricing agreements, particularly by manufacturers with dominant market shares that grant them market power. It is also important to note that the case changes per se treatment only of vertical pricing agreements (between a manufacturer and its distributors); horizontal pricing agreements between competing firms remain per se unlawful and will continue to be prosecuted as criminal offenses.