Under the Colgate doctrine, a "preannouncement" of unilateral terms and conditions on which a manufacturer will deal and the circumstances under which it will refuse to deal does not involve the element of "agreement" essential under Section 1 of the Sherman Act.  United States v. Colgate & Co., 250 U.S. 300 (1919).  One term and condition may be that the price at which the goods are resold to consumers be no less than a price designated by the manufacturer.  By contrast, an agreement between a manufacturer and a distributor that fixes the minimum resale price to consumers, constitutes illegal minimum resale price fixing, a "per se" or automatic violation of federal and state antitrust laws.

In PSKS, Inc. v. Leegin Creative Leather Products, Inc., No. 04-41243, 2006 U.S. App. LEXIS 6879 (5th Cir. Mar. 20, 2006), defendant Leegin, a manufacturer of women’s accessories sold under the brand name Brighton, was ordered to pay $3.6 million in trebled damages to plaintiff PSKS, Inc., a women’s clothing and accessories store doing business as Kay’s Kloset in the Lewisville, Texas area.  Leegin was ordered to pay another $375,000 for attorneys’ fees and costs. The Fifth Circuit, in an unpublished decision, affirmed that the per se standard of liability applies to vertical minimum price fixing and rejected Leegin’s argument that a lesser standard of liability, the rule of reason, should apply.  The case also stands as an important lesson to manufacturers implementing manufacturer’s suggested resale price ("MSRP") policies.

Like many manufacturers concerned with brand image and product merchandising, Leegin established a MSRP policy which, since the Supreme Court’s decision 87 years ago in Colgate, has been sanctioned as a lawful exercise of a manufacturer’s right to preannounce the terms and conditions on which it will deal and the circumstances under which it will refuse to deal. But the drafters of Leegin’s MSRP policy did not pass the Colgate test.  The policy suggested joint, concerted action to fix minimum resale prices by stating "in order to accomplish this goal, our companies must work together".  The policy again failed to listen to the teachings of Colgate in soliciting agreement from retailers where it stated, "The spirit of our philosophy is that you not make a practice of promoting Brighton ‘on sale’…In fact we ask that you exclude Brighton from your ‘storewide’ sales and that you not attempt to attract consumers into your stores by promoting Brighton sale incentives."

These clauses serve as shining examples of how a policy conceived to benefit from the protection afforded under the Colgate doctrine can, if not drafted and supervised with due care and expertise, swiftly squander that protection.  A MSRP policy that contains statements like Leegin’s creates a dangerous inference of concerted unlawful conduct.  That inference creates a genuine issue of fact that a manufacturer has engaged in unlawful price fixing and defeats a motion for summary judgment.

Leegin’s implementation of it was also less than stellar. Among the evidence presented to the jury which led to its finding against Leegin was that Leegin’s sales representatives assured PSKS’ representative that a competitor of PSKS had agreed to Leegin’s policy and no longer would discount Brighton products.  In another conversation with PSKS, Leegin’s sales representative told PSKS "we don’t want people to discount, we want people to sell Brighton at regular price."  Leegin also demanded that signs promoting the sale of Brighton products be removed and threatened the loss of the Brighton product line if they were not.  When PSKS refused to adhere to Leegin’s policy, Leegin cut off supply but informed them that the action was subject to review if plaintiff would indicate agreement to adhere to Leegin’s policy in the future.

Section 1 of the Sherman Act requires that there be a "contract, combination…or conspiracy" between the manufacturer and other distributors in order to establish a violation.  Independent action is not proscribed.  However, a manufacturer violates Section 1 if it goes beyond mere preannouncement of a MSRP and the simple refusal to deal, and employs "other means" which effect adherence to its minimum resale prices.  United States v. Parke, Davis & Co., 362 U.S. 29, 44 (1960). In Parke, Davis, the Supreme Court determined that an unlawful combination is not just such as arises from a price maintenance agreement, express or implied.  Such a combination also occurs if the manufacturer secures adherence to its suggested prices by means which go beyond its mere declination to sell to a customer that will not observe its announced policy.  Such other means include threats of termination and other coercive actions taken after a distributor fails to conform to a manufacturer’s predetermined prices.  See Yentsch v. Texaco, Inc., 630 F.2d 46, 53 (2d Cir. 1980); Carlson Machine Tools, Inc. v. American Tool, Inc., 678 F.2d 1253, 1261 (5^th Cir. 1982).  Leegin’s threats to terminate PSKS if it did not comply, assurance that others were adhering to its policy, and repeated solicitations of PSKS’ adherence constituted "other means" as meant in Parke, Davis.

Often, a manufacturer may learn that a distributor is not in compliance with its MSRP from another distributor.  In Monsanto, the Supreme Court held that to violate Section 1, "something more" than proof of termination following competitor complaints must be shown to support an inference of concerted action. Monsanto Co. v. Spray-Rite Service Co., 465 U.S. 752, 764 (1984).  Evidence that tends to prove that the termination was effected in furtherance of a conspiracy with other distributors to fix prices satisfies this requirement.  It is thus incumbent upon the manufacturer to be in a position to demonstrate that it acted unilaterally, in its own economic self-interest, when terminating a distributor upon a competitor complaint.  See Big Apple BMW Inc. v. BMW North America, Inc., 974 F.2d 1358, 1363 (3d Cir. 1992) (summary judgment of Section 1 claim overturned where defendant’s agent admitted it was the distributors who wanted the plaintiff’s dealership application terminated, not the defendant).  While a manufacturer and a distributor can be in agreement, for their independent reasons and apart from an unlawful objective, that a "price-cutter" should be terminated, this is dangerous.  Should the terminated dealer be able to present any evidence of a further agreement on the price to be charged by remaining dealers, a Section 1 claim may succeed. Business Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717, 726-27 (1988).

PSKS was able to present such evidence. Leegin solicited agreement from retailers to its MSRP policy when it introduced the "Heart Store Program", a marketing initiative designed to provide incentives to retailers.  To become a Heart Store, retailers "had to pledge", the Fifth Circuit wrote, to follow the Brighton Suggested Pricing Policy at all times."  PSKS v. Leegin at LEXIS *3-*4.  No materials concerning the Heart Store Program were filed with the Court, but if they did require that retailers "pledge" to abide by Leegin’s MSRP, and some of its distributors were participating in the Heart Store Program, this would constitute direct evidence of a price-fixing agreement and would tend to exclude the possibility that Leegin acted independently in terminating PSKS.

PSKS v. Leegin teaches that it is critical for manufacturers operating MSRP policies to ensure that they are drafted in strict accordance with Colgate, and to reduce contacts with distributors to writing and to a minimum.  The manufacturer should have a single designate, preferably someone from the legal department, handle MSRP matters.  Otherwise, it may unknowingly create evidence that can be used against it that it did "something more" than what Colgate permits.

On appeal, Leegin did not challenge the jury’s finding that it entered into price fixing agreements. Most likely, this was because of the amount and weight of PSKS’ evidence.  Rather, Leegin challenged the standard of per se illegality.  The Fifth Circuit rejected Leegin’s arguments.  It noted that the per se rule standard for minimum vertical price fixing has stood for 95 years since its establishment by the Supreme Court in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 373 (1911).  The court also rejected Leegin’s claim that it fell within one of the few exceptions to the per se rule, finding that the authorities on which Leegin relied were distinguishable and decided before the Supreme Court’s more recent decisions reaffirming Dr. Miles. See Business Elec.; Monsanto; and State Oil v. Khan, 522 U.S. 3 (1997).  Likewise, the court rejected Leegin’s arguments that the jury was not permitted, in error, to consider either that Leegin’s pricing practices were procompetitive or its expert testimony regarding economic conditions.  Neither, the court held, are relevant where the per se rule applies because competitive harm is presumed.

Finally, Leegin also challenged PSKS’ showing of antitrust injury, a standing question, and the lower court’s calculation of damages.  The Fifth Circuit affirmed that PSKS suffered antitrust injury as PSKS’ refusal to follow Leegin’s pricing policy resulted in inability to obtain its bestselling and most profitable product line, and that this injury was the type the antitrust laws were intended to prevent. PSKS v. Leegin at LEXIS *9, citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1997). The Fifth Circuit found no error in the calculation of damages and declined to revise the jury’s award. Leegin’s failure to succeed on these issues underscores the need for a manufacturer to be prepared to pass the Colgate test the first time – there may be no re-take.

Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com