Continuing a 30-year trend of limiting the types of business conduct deemed automatically (or per se) unlawful under the antitrust laws, the U.S. Supreme Court ruled that agreements requiring retailers to adhere to a manufacturer’s minimum resale prices are no longer per se illegal, and instead should be evaluated under the rule of reason. Leegin Creative Leather Products, Inc. v. PSKS, Inc. (June 29, 2007). In so doing, the Court overturned a precedent that for nearly a century had deemed such agreements unlawful on their face.

Under the rule of reason, minimum resale price fixing agreements (also known as “minimum resale price maintenance”) will now be examined on a case-by-case basis within relevant geographic and product markets that must be clearly defined and proved by the plaintiff. In each case, a full analysis will be conducted (often with testimony from economic experts retained by both sides) to determine whether, within such markets, the particular arrangement has anticompetitive effects and, if so, whether they are outweighed by any legitimate business justifications or potential procompetitive effects.

Prior to 1977, virtually all vertical restraints — price and non-price alike — were deemed unreasonable restraints on alienation, and thus per se unlawful under Section 1 of the Sherman Act. This included maximum and minimum resale price maintenance, as well as agreements that restricted the customers to whom, or the geographic areas into which, products could be resold. In 1977, however, the Supreme Court opened the first crack in the application of the per se rule to vertical restraints, ruling that agreements containing customer or territorial restrictions on the resale of a manufacturer’s products may have legitimate business justifications or long-term procompetitive effects, and thus should be judged under the rule of reason. The rationale of these non-price vertical restraint cases was that manufacturers have a legitimate business interest in 1) maintaining the quality image of their products by permitting those products to be resold only by retailers willing to provide enhanced service to customers, and 2) preventing discount retailers, who do not provide such enhanced customer service, to “free-ride” on the efforts of those retailers who do provide this service. Such quality- and service-based competition, the Court stated, could well foster new entry into the relevant markets and, most importantly, stimulate interbrand competition (i.e., competition among different brands of products), which the Court stressed is more important to the ultimate goals of the antitrust laws than the competition that exists among resellers of the same brand of a product (so-called “intra-brand competition”). The Court, however, limited its ruling to vertical agreements not affecting price, since for many years prior to 1977 brought the Court’s own decisions had consistently placed price competition on a lofty pedestal, referring to price as the economy’s “central nervous system.”

Twenty years later, however, in 1997, a far more business-friendly Supreme Court, in State Oil Co. v. Khan, concluded that vertical agreements setting maximum resale prices should no longer be deemed per se unlawful and must also be governed by the rule of reason. The Court reasoned that allowing manufacturers to prohibit retailers from selling products at above the suggested retail price was a legitimate means of preventing possible price gouging by certain retailers that could harm the customers’ image of the manufacturer’s products, and could also give rise to the types of procompetitive benefits the Court had referred to 20 years earlier in the context of nonprice vertical restraints. The Court specifically noted, however, that its 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., holding agreements that established minimum resale prices to be per se illegal, remained good law.

Now, yet another 10 years later, the Court’s decision in Leegin has finally lowered the curtain on applying the per se rule to vertical restraints of all types. The facts of the case were quite simple. Leegin, a manufacturer of women’s accessories, agreed to do business only with retailers that pledged to follow Leegin’s suggested pricing policy at all times. When PSKS began selling Leegin’s products below the manufacturer’s suggested retail prices, Leegin stopped shipments to PSKS. Thereafter, PSKS filed suit, alleging that its termination by Leegin was the result of a per se unlawful vertical minimum price-fixing arrangement. At trial, Leegin attempted to introduce expert economic testimony regarding the business justifications and procompetitive effects of its pricing policy. The trial court excluded that expert evidence, ruling that under Dr. Miles, Leegin’s minimum resale price-fixing (the fact of which Leegin did not dispute) was per se unlawful and, consequently, expert testimony of businesses justifications and potential procompetitive benefits was irrelevant. The jury then found Leegin liable, and awarded PSKS treble damages of $3.6 million. On appeal, the U.S. Court of Appeals for the Fifth Circuit, while sympathetic to Leegin’s arguments, felt duty-bound to affirm, based on the precedent established almost 100 years earlier in the Dr. Miles case.

In a 5-4 opinion, authored by Justice Kennedy, the Supreme Court reversed the judgments of the District Court and the Fifth Circuit. The Court held that because minimum resale price maintenance arrangements may, like non-price vertical restraints and maximum resale price maintenance, stimulate inter-brand competition, reduce unwanted “free-riding,” and foster new market entry, the procompetitive effects of such policies, and the manufacturer’s business justifications for adopting them, could well offset any anticompetitive effects (such as facilitating cartel behavior or abuse by powerful manufacturers). The Court thus concluded that because such agreements do not “always or almost always tend to restrict competition and decrease output,” they should be analyzed under the rule of reason, not the more restrictive per se rule, which the Court emphasized should be reserved solely for the most egregious anticompetitive behavior.

In dissent, Justice Breyer, joined by Justices Stevens, Souter, and Ginsburg, argued strenuously that there existed no changed circumstances that would justify the Court to abandon the rule of stare décisis and overrule one of its own cases that had been the law of the land for nearly a century. This was particularly so, the dissent argued, given the fact that the theoretical procompetitive effects of minimum resale price maintenance arrangements occur only rarely; the fact that the anticompetitive effects of such arrangements (i.e., the elimination of retail price competition for the products subject to such policies) are clear and immediate; and the fact that the costs involved in litigating these type of cases under the rule of reason will be significantly higher than had been the case under the per se rule.

It is important to stress that the Supreme Court’s decision in Leegin does not establish that minimum resale price maintenance arrangements will always be lawful, only that such arrangements are no longer automatically unlawful. Additionally, this decision does not affect — in any way — the continued per se illegality of certain horizontal agreements or conspiracies among competitors, such as price-fixing agreements and agreements dividing or allocating customers or geographic territories. What the Leegin decision does ensure, however, is that minimum vertical price-fixing cases will be far more complex and costly to litigate, and that the results of these cases will be far more uncertain than had been the case for nearly 100 years. Indeed, given the increased costs and the difficulty any antitrust plaintiff faces in proving an antitrust violation under the rule of reason, coupled with the potential procompetitive effects that the Supreme Court’s majority sees in vertical restraints, the practical effect of Leegin may well be that many cases that ordinarily would have resulted in liability under the per se rule will now either not be brought to court or will result in verdicts for the defendant.