In Major Antitrust Decision, Supreme Court Overrules 1911 Precedent to Declare Vertical Minimum Price Restraints to Be Governed by Rule of Reason
On June 28, 2007, in a five to four decision, the United States Supreme Court continued its overhaul of antitrust law by overruling its 1911 decision in Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373. In Dr. Miles, the Court had declared that all agreements between manufacturers and dealers or distributors to fix minimum resale prices were per se illegal under Section 1 of the Sherman Act. After last Thursday’s decision in Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,1 such agreements regarding minimum resale price are no longer per se illegal, but will be examined under the “rule of reason,” to determine whether there are procompetitive aspects of the agreements that outweigh their anticompetitive effects. Many had anticipated that the Court would rule as it did in Leegin. In prior decisions, the Court had declared that all non-price vertical restraints2 and all vertical restraints to fix maximum resale prices3 would be analyzed under the rule of reason.
In Leegin, defendant Leegin Creative Leather Products (“Leegin”) manufactured, distributed, and marketed leather goods and accessories under the Brighton brand. It sold its merchandise primarily through small, independent retail outlets. Leegin believed that small retailers offered better service and a better overall purchasing experience to the customer than large national chains. Plaintiff PSKS operated Kay’s Kloset clothing stores. Leegin introduced a policy under which it refused to sell to retailers who sold its products below suggested prices. It wanted its retailers to earn a sufficient margin to cover the cost of providing better customer service. Leegin then asked its retailers to pledge to sell its products at suggested prices. Kay’s Kloset refused to stop discounting; Leegin therefore stopped selling its Brighton line to the store. The retailer sued based upon the per se rule of Dr. Miles and prevailed both in the trial court and before the Fifth Circuit, winning a verdict of $1.2 million (trebled under the antitrust laws).
The case attracted much attention. The U.S. Department of Justice and Federal Trade Commission filed a brief supporting reversal of Dr. Miles. The New York Antitrust Bureau opposed reversal. FTC Commissioner Pamela Harbour wrote an open letter to the Court urging it not to overrule Dr. Miles. Several industry groups, including CTIA-The Wireless Association, the National Association of Manufacturers, and the American Petroleum Institute, filed briefs in support of Leegin.
In the majority decision, the Supreme Court focused on whether minimum resale price maintenance met the Court’s current test for per se prohibitions – that is, whether the restraint always or almost always tends to restrict competition and decrease output. The Court began by concluding that the reasons originally offered in Dr. Miles for per se treatment were no longer valid. Next, the Court concluded that there were at least two possible procompetitive justifications for allowing companies to set a minimum resale price. First, a minimum price can help ensure that retailers provide services that enhance interbrand competition. Second, a minimum price may enable new companies and brands to enter the market. Given these potential procompetitive effects, the Court concluded that per se treatment was inappropriate.
The impact of Leegin remains unclear. The Court offered little guidance to trial courts in applying the rule of reason in future cases. The Court did suggest that courts should scrutinize restraints more carefully if they are adopted by many manufacturers in the same market or if they are adopted at the behest of retailers; that such restraints are not likely to have anticompetitive effects unless the manufacturer (or the retailer) has market power; and that lower courts could “devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones.” Companies should anticipate a period of adjustment as trial courts begin to apply Leegin. Although plaintiffs may face a higher burden under the rule of reason, that burden may be met in an appropriate case, and the consequences of violating the antitrust laws remain severe, including treble damages and attorneys fees.
Many states have declared minimum resale price restraints to be per se unlawful. It remains to be seen how many will choose to continue per se treatment despite Leegin. Leegin may also provoke a legislative backlash. Accordingly, prudent manufacturers, distributors, and retailers should seek guidance as to the state of the law in each of the jurisdictions in which they do business. Members of Davis Wright Tremaine’s antitrust and distribution counseling practice groups are ready to assist.
2 Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).
3 State Oil v. Khan, 522 U.S. 3 (1997).