June 28, 2007
On June 28, the Supreme Court of the United States held in Leegin Creative Leather Products, Inc. v. PSKS, Inc. that resale price agreements should be evaluated under the rule of reason to determine whether there is a violation of Section 1 of the Sherman Act. Justice Kennedy’s opinion expressly overruled the 96-year-old rule of Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which provided that resale price maintenance agreements were per se unlawful.
The Court explained that “[t]he rule of reason is the accepted standard for testing whether a practice restrains trade in violation of §1,” and that per se rules should be limited to restraints that “always or almost always tend to restrict competition and decrease output.” The Court held that resale price maintenance agreements do not meet that condition, noting that “economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.”
The Court noted that resale price maintenance can stimulate interbrand competition (that is, competition among manufacturers selling different brands of the same type of product) by reducing intrabrand price competition (that is, competition among retailers selling the same brand). In particular, resale price maintenance can increase interbrand competition by encouraging retailer services that might not be provided because of market imperfections, such as free-rider problems. Resale price maintenance can also “increase interbrand competition by facilitating market entry for new firms and brands.”
Despite the procompetitive justifications for resale price maintenance, the Court stated that such agreements “may have anticompetitive effects” in certain cases, and it cautioned that “the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated.” The Court nevertheless concluded that such anticompetitive effects could be appropriately addressed under the rule of reason.
Resale Price Maintenance Under the Rule of Reason
The Court’s opinion provides significant guidance for companies that might be assessing how their use of resale price maintenance might be judged under the rule of reason.
First, the Court stated that the risks of anticompetitive effects are small where a minimum resale price restraint is adopted by just one manufacturer or “only a few manufacturers.” The Court explained that, “[a]s a general matter, . . . a single manufacturer will desire to set minimum resale prices only if the ‘increase in demand resulting from enhanced service . . . will more than offset a negative impact on demand of a higher retail price.’” Furthermore, “[w]hen only a few manufacturers lacking market power adopt the practice, there is little likelihood that it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers.” In contrast, the Court stated that “[r]esale price maintenance should be subject to more careful scrutiny . . . if many competing manufacturers adopt the practice.”
Second, the Court stated that “[t]he source of the restraint may also be an important consideration.” In particular, “[i]f there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer.” In contrast, if a manufacturer adopted the resale price maintenance policy “independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct.”
Third, the Court pointed to the existence of market power by a manufacturer or retailer as an important consideration. “If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers. And if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets.”
The Court suggested that “[a]s courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions,” they can establish a “litigation structure,” rules for offering proof, or presumptions “to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones.”
Gibson Dunn’s Theodore B. Olson, Michael L. Denger, Joshua Lipton, and Amir C. Tayrani briefed the case on behalf of Leegin, and Mr. Olson presented oral argument in the Supreme Court.
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