On June 28, 2007, 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 overruled a nearly 100 year old antitrust decision by holding that vertical agreements to institute minimum resale price maintenance ("RPM") are not per se illegal. Courts must now judge such agreements on a caseby- case basis under a rule of reason. The implications of this decision should cause both manufacturers and retailers to examine their pricing policies.
The Court based its decision in large part on the current dominant economic theory, which suggests that RPM agreements can actually benefit consumers in a number of ways. Notwithstanding the pro-competitive benefits the Court cited, it also took note of the anti-competitive risks associated with permitting RPM agreements. In balancing the pro-and anticompetitive effects of RPM agreements, the Court decided that a bright-line per se rule was outdated, based on flawed notions, economically unsophisticated, and potentially detrimental to consumers. The Court concluded that an ad-hoc rule of reason analysis should be applied to each RPM agreement to determine whether the actual pro-competitive effects outweigh the actual anti-competitive effects. Because the Court abandoned a bright-line rule, it is unclear how lower courts will decide RPM cases. That said, the Leegin decision did supply a number of factors that likely will guide lower courts’ analysis of RPM cases, and thus should also guide manufacturers’ decisions whether and how to institute RPM policies.
The following are a few of the most important factors that the Court set forth in Leegin. First, in markets with few competitors, RPM agreements are more likely to be anti-competitive, but in markets with many competitors, of which only a few of them use RPM agreements, such agreements are less likely to be anti-competitive. Second, if retailers encouraged the manufacturer to establish RMP agreements, then the anti-competitiveness of such agreements is apparent. Finally, the market power of a manufacturer instituting RPM agreements may be dispositive as to the legality of the agreement.
As a practical matter it may be difficult to draw clear lines regarding which restrictions would be deemed acceptable under a rule of reason analysis. First, it is often difficult in any rule of reason antitrust case to determine the manufacturer’s relevant market. Although economic analysis and modeling can provide guidance, it may take a significant investment of time and money. Of course, even if a manufacturer takes the time and spends the money to determine its relevant market, there is no guarantee that a court will agree with the manufacturer’s determination.
Second, it is unclear how to measure the degree of competition in the relevant market required for a RPM agreement to be found legal. It is equally unclear how courts would determine when too many competitors have implemented RPM agreements regardless of the number of competitors in the market. Further, if the last RPM agreement implemented by a competitor indicates that too many such agreements exist in the market, is only that last agreement struck down as illegal? The lack of clarity on these issues compounds uncertainty of legality and will force manufacturers to make educated guesses how lower courts will analyze the relevant market, the number of competitors in that market, and the impact of the desired RPM policy.
Finally, and perhaps most difficult, the Court’s decision in Leegin does not offer guidance into the degree of market power that a manufacturer must possess before its RPM policy will be illegal. Even if a manufacturer correctly defines the relevant market, accurately identifies the number of competitors in that market and establishes whether those competitors have implemented RPM policies, the manufacturer nevertheless has to determine whether it has too much market power to institute its desired RPM policies. Thus, although the Court in Leegin set forth a number of factors that should be addressed, it did not give guidance as to how courts should weigh and assess those factors.
Going forward, one thing is very clear: the Court’s decision opens the opportunity for litigation over RPM agreements. By replacing a per se rule with a rule of reason test, courts will be forced to evaluate each RPM agreement’s pro- and anti-competitive effects. At a bare minimum, before implementing any RPM agreement, a manufacturer should attempt to assess (1) its relevant market, (2) the number of competitors in that market, and (3) its market power.
The positive news with respect to Leegin is that manufacturers who do not have significant market power now have an opportunity to consider reasonable restrictions on downstream parties. In particularly competitive markets, there may be an opportunity to enforce carefully crafted resale price restrictions that will permit a manufacturer to build legitimate and substantial brand identity and market presence.
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