In a decision sure to cause both manufacturers and retailers to examine their resale pricing policies, on June 28, 2007, the United States Supreme Court overruled the nearly 100 year old rule that agreements to establish minimum resale prices constitute per se violations of section 1 of the Sherman Act. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., 550 U.S. __, (2007), overruling, Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373 (1911), the Supreme Court, in a 5-4 decision, held that the legality of resale price maintenance agreements, like other vertical restraints, should be judged on a case-by-case basis under the "rule of reason" test.
The facts in Leegin were fairly straightforward. The plaintiff, PSKS, was a suburban Dallas boutique who sold defendant Leegin's Brighton brand of leather products. When PSKS began selling the Brighton products at discounts below the suggested minimum prices established by Leegin, Leegin stopped selling to PSKS. PSKS sued alleging that Leegin had ceased selling to it because it refused to enter an illegal vertical pricing agreement, and a jury awarded PSKS close to 4 million dollars. On appeal, the verdict was upheld by the 5th Circuit based on the Dr. Miles rule and Leegin asked the Supreme Court to reverse Dr. Miles. The appeal drew a great deal of attention and number of amicus briefs, including briefs from both the DOJ and FTC, urging the Court to overturn Dr. Miles and from numerous industry groups urging that Dr. Miles be upheld.
Writing for the majority, Justice Kennedy cited the gradual erosion over the years of per se treatment on other vertical restrictions, such as non-price restraints and maximum price agreements. The Court also noted that like those arrangements, resale price maintenance agreements afford a number of pro-competitive benefits, namely, the encouragement of retailers to provide better services to consumers, the enhancement of interbrand competition and facilitation of entry of new companies and brands. Although the Court acknowledged that resale price maintenance agreements also can have a number of potentially anticompetitive effects, the Court found it could not conclude that such arrangements "always or almost always tend to restrict competition and decrease output." Accordingly the Court overruled Dr. Miles and held that vertical price restraints should be evaluated under the rule of reason.
Prior to Leegin, manufacturers were able to dictate minimum prices and refuse to sell to retailers who did not follow the pricing policies so long as there was no agreement on the pricing. Now, the focus no longer will be on the existence or non-existence of an agreement but rather upon whether an arrangement is primarily pro- or anticompetive. The challenge for businesses is to implement only those policies that they believe courts will subsequently approve.
Fortunately, the Supreme Court did provide some examples of situations where restraints create the greatest risks and therefore should be scrutinized more closely. For example, courts should look at the number of manufacturers within a given market that adopt such policies. The more competing manufacturers that have such policies in a given market, the more carefully the court should scrutinize the arrangements since multiple similar policies could indicate a horizontal cartel and could deprive consumers of meaningful options. Courts also should examine the source of the challenged policy. If there is evidence that a minimum pricing policy was instituted at the behest of retailers, it's more likely either that the restraint is part of a horizontal retailer cartel or designed to protect dominant but inefficient retailers. Finally, the court should look at the concentration of a particular market and the market power of the company imposing the restraint because a dominant player or players in a highly concentrated market is more likely to use a resale pricing policy as a means of depriving competitors of distribution outlets.
The Supreme Court posited that "[a]s courts gain experience considering the effects of [minimum pricing] restraints by applying the rule of reason approach, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses." Unfortunately, until such rules are developed, there inevitably will be some uncertainty as to what is and is not permissible, and businesses and their counsel will need to examine all potential restraints carefully in order not to cross the somewhat blurry line of illegality.
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