On June 28, 2007, the Supreme Court overruled the nearly century-old precedent established in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which treated outright minimum resale price maintenance as a per se violation of Section 1 of the Sherman Act. Under Dr. Miles, manufacturers have been barred from entering into bilateral minimum resale pricing agreements with their distributors, thus giving rise to the widespread practice of publishing "suggested" rather than required resale prices. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Court declared in a 5-4 decision that minimum resale price maintenance agreements often benefit competition.1 Accordingly, the Court held that, hereafter, such agreements will be evaluated under the so-called antitrust "rule of reason," which allows full consideration of the competitive pros and cons of a particular arrangement.
Defendant Leegin Creative Leather Products, Inc. ("Leegin") is a manufacturer of woman's fashion accessories, and one of its products uses the brand name "Brighton." Leegin sold its Brighton products mostly to boutiques and small specialty stores. Plaintiff PSKS, Inc. ("PSKS") operated one such store called Kay's Kloset. In 1997, Leegin instituted a unilateral resale pricing policy whereby it refused to sell to retailers that discounted its Brighton products below a suggested retail price. A year later Leegin also instituted its Heart Store Program, which identified a store as a "Heart Store" if the store pledged to sell Brighton products at Leegin's suggested resale price. The stated purpose of these pricing policies was to enhance brand image and reputation by ensuring its retailers would have sufficient margins to provide consumers point-of-sale services.
In 2002, Leegin discovered that Kay's Kloset, which was not a Heart Store at the time, had been discounting Brighton products below Leegin's suggested retail price. In response, Leegin stopped selling to the store. PSKS sued Leegin, and a jury found that Leegin's Heart Store Program was an illegal vertical price fixing agreement that harmed PSKS. On appeal, Leegin did not contest that it had entered into a vertical price fixing agreement with its retailers. Rather, it asserted that, under modern antitrust principles, such an agreement should be analyzed under the rule of reason rather than held per se unlawful under Section 1 of the Sherman Act. The Court of Appeals for the Fifth Circuit upheld the jury verdict, holding that Leegin's vertical price fixing agreement was per se unlawful under Dr. Miles.
The Majority Leegin Opinion
The Supreme Court reversed the Fifth Circuit's decision, and overruled Dr. Miles, holding that the rule of reason, not the per se rule, applies to minimum resale price maintenance agreements. Justice Kennedy wrote the majority opinion, joined by Chief Justice Roberts and Justices Scalia, Thomas and Alito.
The Court held that the per se rule is reserved for those restraints on trade "that would always or almost always tend to restrict competition and decrease output."2 According to the Court, although minimum resale price maintenance agreements between a manufacturer and its distributors will almost always reduce intrabrand competition, protecting interbrand competition is the primary purpose of antitrust laws.3 The Supreme Court found that "the economics literature is replete" with examples of how minimum resale price maintenance can benefit interbrand competition.4
One of the major examples is the elimination of "free riding," under which no-frills discounting dealers of a particular product take advantage of the educational and other value-added efforts of full service dealers of the same product. In such situations, a would-be customer gathers information about the product from the high end dealer (which has invested resources to provide such services), but then makes the actual purchase from the discounter. Allowing a manufacturer to impose minimum resale prices gives the manufacturer a tool to motivate its dealers to invest the resources necessary to compete better with products made by other companies without fear of being undercut by dealers who have not made such investments, thus encouraging interbrand competition. For a manufacturer pursuing a value-added, rather than a pure discount, strategy such flexibility can be helpful. Furthermore, according to the Court, minimum price maintenance allows entry of new products into the marketplace because retailers willing to sell unknown products are more likely to recoup their investment without having to compete with discounters.
The Court warned, however, that minimum resale price maintenance arrangements can harm competition in certain circumstances, and therefore may be subject to sanction as violations of the Sherman Act even under the rule of reason. For example, a minimum resale pricing arrangement, especially one suggested to a manufacturer collectively by a group of dealers, could be a pretext for a dealer cartel. Likewise, common adoption of resale price maintenance schemes by major manufacturer competitors in a given market could be an enforcement mechanism for a horizontal price fixing scheme among those manufacturers. The Leegin Court warned the lower courts "to be diligent in eliminating [these] anticompetitive uses [of such arrangements] in the market." The Court identified three factors that might indicate a minimum resale price maintenance agreement is anti-competitive: (1) numerous manufacturers in a given industry adopt minimum resale price maintenance agreements with their retailers, (2) retailers, rather than the manufacturer, are the impetus of the policy, and (3) the manufacturer or retailer, whichever is the impetus for the policy, has market power.5
Justice Breyer wrote the dissent, joined by Justices Stevens, Souter and Ginsburg. The four dissenting Justices admitted there are circumstances when minimum resale price maintenance will benefit competition, but found that the benefits occur too infrequently to justify overturning the nearly century-old precedent of Dr. Miles.6 The dissent found that Dr. Miles has been relied upon in countless business decisions in the marketplace, and that there have been no changes in the American economy or in economic theory that would justify overruling such an ingrained precedent. The dissent believed the decision will likely cause consumer prices to increase, and force lower courts to struggle with an increase in litigation and the burden of assessing the competitive effects of minimum resale price maintenance. Therefore, the dissent did not believe there was sufficient justification to depart from the doctrine of stare decisis.
Under Dr. Miles, bilateral minimum price maintenance agreements between manufacturers and distributors were per se unlawful. To have any control over the resale price of their products, manufacturers were required to unilaterally set their suggested retail prices and unilaterally refuse to do business with discounting retailers. Shortly after deciding Dr. Miles, the Supreme Court found such unilateral policies to be lawful in United States v. Colgate & Co., 250 U.S. 300, 307-08 (1919). However, case law has not clearly established what constitutes a unilateral Colgate policy as opposed to a bilateral vertical price fixing agreement. Any manufacturer that ventured into the grey area risked being found to have entered into a per se illegal vertical price fixing agreement.
As a result of Leegin, manufacturers may now lawfully enter into explicit bilateral price fixing agreements with their distributors so long as the benefit to interbrand competition outweighs the potential anticompetitive effect. However, manufacturers that institute minimum resale price maintenance still face antitrust risk, and should avoid entering into any agreements falling into the problematic categories noted above, or that otherwise might be said to reduce interbrand competition. Also, companies with significant market share (an indirect indicator of market power) should proceed cautiously in establishing such programs. Particularly in the immediate aftermath of the decision, as the lower courts assess the contours of permissible arrangements, companies contemplating adopting such programs should work closely with antitrust counsel to manage the risk.