In a 5-4 decision issued on June 28, 2007, the U.S. Supreme Court overruled a nearly century-old precedent and held that vertical agreements between a supplier and its wholesale customer on the minimum resale prices for the supplier’s products will be evaluated under the antitrust rule of reason, not the per se rule. In Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), the Court held that such agreements were per se violations of Section 1 of the Sherman Act. The Court’s recent decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., overrules Dr. Miles and brings the law on minimum vertical resale price agreements in line with both non-price vertical agreements and maximum vertical resale price agreements, which have been subject only to the rule of reason for many years.

Background

Leegin manufactures and sells leather goods and accessories through a variety of small retailers based on its belief that small retailers will promote its products more effectively than others by offering a variety of customer services that others will not. PSKS sold these products subject to Leegin policies or agreements designed to maintain minimum retail prices for its products. Leegin emphasized that it adopted these requirements to provide retailers with sufficient margins to offer the customer services Leegin considered essential to its distribution and to maintain the brand image and reputation of its products. When it discovered that PSKS’ store was substantially discounting Leegin products, Leegin stopped dealing with the store. As a result, PSKS sued Leegin, contending that Leegin’s conduct involved a per se unlawful minimum resale price maintenance agreement under Section 1 of the Sherman Act. At trial, the District Court excluded Leegin’s proposed expert testimony regarding the procompetitive effects of its pricing policy, determining that it was irrelevant because, if an agreement was found to exist, the per se rule under Dr. Miles would apply. PSKS prevailed at trial. On appeal, Leegin conceded that it had entered into minimum resale price agreements but contended that the rule of reason should have applied to those agreements. The Court of Appeals rejected that argument, relying on Dr. Miles. In a 5-4 opinion by Justice Kennedy, the U.S. Supreme Court concluded that Dr. Miles should be overruled and that the rule of reason should apply to such agreements.

The Supreme Court’s Opinion

Consistent with several of the Court’s decisions over recent decades, the Court’s majority opinion asserts that the rule of reason is the accepted standard for antitrust review under Section 1 of the Sherman Act and that the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue and “can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason.” The majority opinion emphasizes that vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed. For example, it recognizes that such agreements may stimulate interbrand competition by encouraging retailers to provide services and promotional efforts on behalf of a supplier’s products, by giving consumers greater choices as to product quality, service, and price, and by preventing discounting retailers from “free riding” on services provided by others. It also recognizes that such agreements may be used to obtain monopoly profits or to facilitate cartels at the supplier or retailer levels. However, it concludes that because the per se rule would prohibit a significant amount of procompetitive conduct, minimum resale price agreements should be subject to antitrust review only under the rule of reason.

The dissenting opinion by Justice Breyer recognizes that vertical resale price agreements may have both procompetitive and anticompetitive effects. It concludes, however, that the arguments in favor of applying the rule of reason have long been known and are insufficient to justify overturning a long-established precedent.

Leegin’s Implications

  • Prior to Leegin, many suppliers had sought to avoid per se liability for minimum resale price policies by adopting and enforcing them unilaterally (as opposed to pursuant to an agreement) under the Supreme Court’s Colgate doctrine. By shifting the focus to the actual competitive effects of the policy rather than the issue of whether an agreement exists, Leegin will allow suppliers to maintain a more normal business relationship with their reseller customers. Beyond that the practical impact of Leegin will depend in substantial part on how the courts ultimately apply the rule of reason in the context of vertical minimum resale pricing agreements. Life science companies implementing such agreements should continue to proceed with caution for several reasons: 
  • Resale price maintenance will continue to be subject to challenge in cases that may be difficult to dispose of quickly through summary judgment due to the fact-specific analysis under the rule of reason. Factors such as the origins of the policy, the supplier’s market power, the number of compelling suppliers that adopt similar programs, and the business justifications for the policy will be critical to the analysis. 
  • It is unclear whether all states will follow Leegin or whether minimum vertical resale price agreements will remain per se unlawful under some state law. Indeed, several state attorneys general have indicated opposition to the new rule. 
  • There may be legislative attempts to overrule Leegin at the federal or state level. 
  • It is unclear whether the decision will apply fully to protect "dual distributor" suppliers who sell their products both at wholesale (to distributors subject to the policy) and at retail. 
  • The decision will not protect horizontal agreements among competing suppliers (or distributors) to impose minimum resale prices, nor will it directly impact foreign law on resale price agreements.