In line with the modern trend in antitrust jurisprudence, yesterday the Supreme Court reversed (5-4) a Fifth Circuit decision adhering to the longstanding rule set forth in Dr. Miles Medical Co. v. John D. Park & Sons Co. that vertical agreements (agreements between manufacturers and retailers or dealers) setting minimum resale prices are per se invalid. The Court held that manufacturers may now set minimum resale prices so long as they do not have a demonstrable anticompetitive effect. Agreements to set minimum prices will be evaluated under the Court’s rule of reason which weighs the pro-competitive benefits of an agreement with the anticompetitive harm.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the plaintiff retailer, PSKS, alleged that the defendant manufacturer, Leegin, violated § 1 of the Sherman Antitrust Act when it entered into agreements with retailers setting minimum prices for its products. PSKS alleged that it suffered damages when Leegin suspended shipments of its products after learning that PSKS placed Leegin’s products on sale. In the district court trial, the jury found that Leegin and its retailers agreed to fix minimum prices in violation of antitrust law and caused injury to PSKS, entitling PSKS to treble damages and attorney’s fees totaling $3,975,000.80. On appeal, Leegin argued that the court should apply the rule of reason, rather than the per se rule, to vertical minimum price fixing agreements. In support of its argument, Leegin emphasized the Supreme Court’s trend in antitrust law to revisit and reject per se rules in favor of the rule of reason. For example, in Continental T.V., Inc. v. GTE Sylvania Inc., the Court applied the rule of reason to a vertical non-price restriction agreement overruling prior case law. Likewise, in State Oil Co. v. Khan, the Court applied the rule of reason to a vertical agreement fixing a maximum resale price. The Fifth Circuit rejected Leegin’s argument holding itself bound to the 96-year-old Supreme Court precedent set forth in Dr. Miles.

Addressing the issue whether to re-evaluate the per se illegal status of vertical minimum price fixing agreements, the Supreme Court began by recognizing the rule of reason as the “accepted standard for testing whether a practice restrains trade in violation of § 1.” The Court re-examined the reasoning behind Dr. Miles, finding it based on irrelevant common law principles and “formalistic legal doctrine” rather than “demonstrable economic effect.” The Court retreated from the principle of stare decisis, which favors adherence to prior Supreme Court precedent primarily on the basis that it has treated the Sherman Act akin to a common-law statute which adapts to “modern understanding and greater experience.”

The Court recognized also that subsequent precedent, such as GTE and Khan, undermine the validity and efficiency of Dr. Miles, and it should therefore not remain law.

Under the rule of reason, the Court looks to several factors to distinguish between anticompetitive and procompetitive effects on trade. These factors include “specific information about the relevant business,” “the restraint’s history, nature, and effect,” and whether the businesses have market power. In contrast, the per se rule operates as an automatic prohibition on restraints that “would always or almost always tend to restrict competition and decrease output.”

The per se rule, according to the Court’s recent precedent, should only be applied in circumstances where courts can predict with confidence that the rule of reason would invalidate the restraint. After examining the various procompetitive advantages of resale price maintenance, such as interbrand competition, and acknowledging potential anticompetitive consequences, such as manufacturer cartels, the Court concluded that it could not assert with confidence that vertical minimum price restrictions always or almost always restrict competition and decrease output.

The Court rejected PSKS’s argument that the advantages in guiding business and minimizing litigation justify the per se rule, countering that the loss of procompetitive benefits burdens the antitrust system.

Although the Court was not completely convinced of the anticompetitive dangers of vertical minimum pricing agreements, the Court recognized that when applying the rule of reason, the courts must diligently identify and eliminate anticompetitive uses of vertical minimum price fixing. Due to the danger of facilitating a cartel, for example, the courts should use “more careful scrutiny” when many competing manufacturers adopt similar price fixing agreements.

Even though Leegin is a victory for manufacturers who are concerned about discounting practices of retailers and a potential victory for brick and mortar retailers over their internet competitors, the rule of reason will still invalidate agreements that result in an unreasonable restraint on competition. Rather than assume the invalidity of the agreement, the courts will examine the actual effect of the agreement on competition.

Although the rule of reason will provide a more realistic approach and allow manufacturers to more freely deal in their products, the multi-factor test will also create uncertainty and burden litigants who now have to engage myriad experts to examine the effects of these agreements in the marketplace. Consulting competent counsel with an understanding of the industry will be critical. Some also predict that the rule of reason will be hard to enforce thereby allowing unreasonable restraints on competition and will lead to increased prices for consumers. The Court, however, remains confident that as the courts gain experience in evaluating the effects of vertical minimum price agreements, they will establish a workable structure for litigation that will guide businesses in eliminating anticompetitive restraints on trade. If you have any questions regarding the matters discussed in this Advisory, please call or e-mail the Edwards Angell Palmer & Dodge LLP lawyer responsible for your affairs or: