United States: Supreme Court Ends The Per Se Rule Of Illegality For Vertical Minimum Price Agreements

On June 28, 2007, the Supreme Court, in a 5-4 decision, overturned the nearly century-old precedent of Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) and held that the Rule of Reason, not the per se rule of illegality, applies to vertical minimum price fixing agreements (also known as minimum resale price maintenance, or "RPM").

Background

The case arose from Leegin's termination of its retail distributor PSKS based on PSKS's violation of Leegin's minimum resale pricing policy on its Brighton line of women's accessories. A jury in the United States District Court for the Eastern District of Texas found that there was an unlawful vertical price fixing agreement and awarded PSKS $1.2 million in damages, which was then automatically trebled under the antitrust laws.

Leegin did not challenge the existence of a price fixing agreement but instead questioned the per se ban on vertical minimum price fixing agreements. The Fifth Circuit Court of Appeals rejected the manufacturer's argument and affirmed the jury verdict, holding that the trial court, under long-standing Supreme Court precedent, had correctly applied the per se rule to vertical minimum price fixing agreements.

The law

Section 1 of the Sherman Antitrust Act declares "[e]very contract ... in restraint of trade or commerce among the several States ... to be illegal." The Supreme Court held in the 1911 Dr. Miles decision that vertical price fixing is per se unlawful. Although per se analysis continued to apply with respect to vertical minimum price fixing agreements ever since 1911, the per se rule's applicability to all other types of vertical agreements with resellers had been abandoned by the courts over time, most recently in the Supreme Court's 1997 decision in State Oil Co. v. Khan (which held that the rule of reason, rather than the per se rule, applies to a vertical maximum price fixing).

The Supreme Court's Leegin decision

In the majority opinion, written by Justice Kennedy, the Court emphasized that the per se rule of presumptive illegality should be applied only where the conduct in question is so clearly harmful to competition that it would invariably be found unlawful in all or nearly all cases, even if the more detailed and case-specific rule of reason were used to judge it. While acknowledging a split in economic thought about the benefits of vertical minimum price agreements, the majority opinion stressed the widely-held opinion that such agreements were often pro-competitive, and Justice Kennedy pointed out that even the economic experts with substantial concerns about RPM did not appear to agree that resale price maintenance was invariably anticompetitive. Legitimate objectives, such as preventing dealer free riding on the efforts of more full service dealers, providing the desired level of point of sale and post-sale services to consumers, and encouraging the entry of new brands into the marketplace, were cited as examples on which both camps of economic thought agreed that RPM could be pro-competitive.

Notwithstanding its rejection of the per se rule, the majority opinion did list instances in which vertical minimum price agreements could be anticompetitive and might still be found to be unlawful. The first example was of a vertical price restraint imposed by a manufacturer in response to demands by competing resellers. The Court characterized such an agreement as nothing more than a horizontal dealer cartel, effectuated through a manufacturer, which would--and should, the Court emphasized--remain per se unlawful. Second, an RPM program imposed by a manufacturer to carry out an implied agreement among competing manufacturers to raise or maintain price levels across their industry would also remain subject to the strict rule of per se illegality. Similarly the imposition of such agreements by a manufacturer with market power or even a single retailer with market power, exerting influence on a manufacturer, could present significant anticompetitive harms and justify invalidation.

In dissent, Justice Breyer took issue with many of the economic justifications for RPM cited in the majority opinion. He also questioned the ability of the courts to accurately weigh the pro-competitive and anticompetitive effects of particular vertical minimum price agreements, in applying rule of reason analysis in a given case, suggesting that case outcomes could become highly variable and unpredictable. Finally, Justice Breyer objected to the majority's willingness-on what he saw as less than compelling evidence of a need for change-to abandon a century-old bright-line rule of decision for the uncertain future of the rule of reason process.

Bottom line: remaining legal risks in establishing minimum reseller price programs

While Leegin has dramatically opened up new grounds for manufacturers to defend minimum pricing policies, it is important to note that companies should not establish such policies on the assumption that all antitrust risks have now been removed The Court did not declare minimum resale price maintenance to be lawful; it only changed the test for determining whether RPM is lawful or unlawful.

Before establishing a minimum resale price maintenance program, clients are advised to consult with antitrust counsel, and to keep the following important points in mind:

• Whose Idea is It? Plaintiffs seeking to challenge a minimum pricing agreement affecting retailers can still do so if they can prove that a group of retailers have colluded or persuaded a manufacturer to establish the RPM policy, and have used the manufacturer as the means to enforce the arrangement. Retailer-initiated RPM schemes remain highly suspect and, if proven, could result in a finding that the program is a per se violation of the antitrust laws. Programs originating with manufacturers, to advance the manufacturers' own business interests, are less likely to be successfully challenged.

• Does Market Power Make a Difference? The Leegin decision makes it clear that manufacturers or retailers with substantial market share remain subject to challenge for initiating such pricing policies. This is so, said the Court, because price maintenance programs can be used by dominant firms to exclude competition at either the manufacturer level (for example, by using RPM to induce resellers not to carry competitive manufacturers' products) or at the retailer level (where a dominant retailer uses an RPM agreement with a manufacturer to keep highly desirable products away from its retail competitors). In either case, the Court noted, RPM can be an element of an unlawful scheme to maintain a dominant market position.

• How Does the Supreme Court's Decision Affect State Antitrust Laws? U.S Supreme Court decisions interpreting federal law are not binding on state courts. State antitrust laws on vertical price fixing, including those in states such as California and New York, may continue to be interpreted by state courts to allow for the continuing imposition of per se illegality on such agreements, substantially complicating the ability of manufacturers to establish such arrangements, regardless of the shift in federal law to a more permissive standard. Even in states whose courts might ultimately decide to follow the reasoning of Leegin, state legislatures could step in and mandate per se treatment, much as they did in enacting laws allowing indirect purchaser suits after the Supreme Court's Illinois Brick decision, barring indirect purchaser suits in federal court.

• What About Resale Price Programs in the Rest of the World? International law on vertical price fixing is also unaffected by the Leegin decision. Agreements setting resale prices remain per se unlawful in the European Union, and in many other major markets throughout the world. Companies considering adoption of resale price programs must carefully limit their geographic coverage, to avoid prosecution in these many other jurisdictions. The penalties in the EU and many other national antitrust regimes for these violations can be quite severe. Experienced antitrust counsel should be consulted before implementing any RPM program that affects resellers in foreign jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.