Will Leegin Mark the End of an Era?

In Leegin Creative Leather Products Inc v PSKS the Supreme Court will consider whether to sustain or overrule the condemnation per se of minimum resale price agreements between a manufacturer and its customers, known as resale price maintenance (RPM).

Procedural History

In Dr Miles Medical Co v John D Park & Sons (1911) the Supreme Court held that it was illegal for a manufacturer and a retailer to agree on the resale prices that the retailer would charge. The Supreme Court reasoned that a restriction on the retailer's prices for goods that it owned would violate the centuries-old prohibition of restraints on alienation. The Supreme Court also found that an agreement between a manufacturer and a retailer was equivalent to a horizontal agreement between the retailers themselves and could "fare no better".

Afterwards, however, the Supreme Court held in United States v Colgate & Co (1919) that a manufacturer could legally establish a price that it wanted retailers to charge and announce that it would refuse to sell to any retailers that deviated from it - as long as this was wholly unilateral and the retailers did not verbally agree to the policy. The rationale was that a seller should be free to choose its own customers, and that without agreement there could be no violation of Section 1 of the Sherman Act.

Although there was an evident tension between Dr Miles and Colgate, for almost 60 years the Supreme Court failed to acknowledge it. The emphasis was on words of agreement rather than on competitive effects. Evidence of disagreement - that is, the fact that a retailer was coerced by a manufacturer's superior bargaining power or was terminated for non-performance - seemingly made it easier for a court to find the prohibited 'agreement'. And, since the outcome was based on formal criteria such as absence of agreement rather than economic effects, the logic was ultimately applied to non-price restrictions also. This led to new distinctions, such as the difference between the assignment of 'primary responsibility' for a sales territory and a restriction on sales out of territory.

The Supreme Court's 1977 decision in Continental TV Inc v GTE Sylvania(1) was the first to modify significantly the antitrust rules governing distribution. The Supreme Court declared that a restriction on dealer territories is not illegal per se. This ruling relied on relatively recent advances in economic learning to distinguish the effects of vertical agreements among manufacturers and retailers from the effects of horizontal agreements, and it recognized the pro-competitive and pro-consumer rationale for vertical restraints. Sylvania thus undermined the fundamental rationales of Dr Miles, but did not overrule it; in fact it went out of its way to draw a distinction between resale price restraints and the non-price restraint at issue in Sylvania.

Subsequent opinions in Monsanto Co v Spray-Rite Serv Corp(2) and Business Elecs Corp v Sharp Elecs Corp(3) reaffirmed the Supreme Court's recognition that non-price vertical restraints can be pro-competitive. The Supreme Court went further in State Oil Co v Khan(4) and held that agreements between a manufacturer and a retailer on maximum resale prices were subject to the rule of reason.

Many antitrust practitioners and industrial organization economists believe that this distinction between RPM and other vertical restraints is unjustified. The tensions between Dr Miles and Colgate have been eased, but not eliminated entirely. Dr Miles still stands, even though its intellectual foundations have been substantially undermined, and efforts to apply Colgate still emphasize form over substance. The Supreme Court has agreed to hear Leegin because it wants to consider the continued vitality of a prohibition on RPM per se.

Key Arguments

The key arguments in favour of overturning the per se rule on RPM briefs are as follows:

• The authority of the Dr Miles precedent has been undermined by subsequent Supreme Court decisions that rejected the premise upon which Dr Miles was based.
  
  
• There is no support among mainstream economists for the proposition that minimum RPM always, or almost always, has anti-competitive effects.
  
  
• The Colgate doctrine is almost impossible to implement. Summary termination of retailers who cut prices without discussion or opportunities to cure is seldom practical.
  
  
• The focus of a rule-of-reason inquiry into both non-price vertical restraints and RPM is appropriately on economic effects. In cases that involve RPM, the focus has been misdirected towards the nuances of communications between manufacturers and retailers because lower courts have been reluctant to apply the per se rule to conduct that can be benign.

These themes are included in the amicus brief for the United States, signed by the Antitrust Division of the Department of Justice and the Federal Trade Commission (three-to-two vote). The fact that these agencies support efforts to overturn Dr Miles is especially significant.

The key arguments for retaining the per se rule are as follows:

• Traditional stare decisis (ie, binding precedent) principles favour retention of the Dr Miles precedent, which has been endorsed by Congress and is efficient to administer.
  
  
• There is empirical evidence to show that RPM increases consumer prices. The offsetting benefits are supported only by speculation and, in any event, can be achieved in less restrictive ways.
  
  
• There are valid distinctions between price and non-price vertical restraints, and tensions in the law can best be addressed by modifying Colgate rather than overruling Dr Miles.

The Leegin Case

The Leegin Case was argued on March 26 2007 and explored each of the themes identified above. One thing that was perhaps surprising was the extent to which the justices seemed to invite speculation about the global effects (positive and negative) of overturning a longstanding precedent like Dr Miles. Neither side seemed to argue that the effects would be significant. Counsel supporting the petitioner stressed the need to eliminate the longstanding tension between Dr Miles and Colgate; counsel supporting the respondent stressed that such tensions resulted from the basic distinction between unilateral and collective action. The Supreme Court will resolve these issues later this year.

For further information on this topic please contact Thomas B Leary or Janet L McDavid at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (tbleary@hhlaw.com or jlmcdavid@hhlaw.com).

Endnotes

(1) 433 US 36 (1977).

(2) 465 US 752 (1984).

(3) 485 US 717 (1988).

(4) 522 US 3 (1997).