One of the most significant developments in U.S. antitrust law in years has come upon the horizon: the much criticized, nearly 100 year old rule holding that minimum resale price maintenance ("RPM") is per se illegal is in jeopardy. This per se rule was adopted in Dr. Miles Med. Co., Inc. v. John D. Park & Sons.1 and could be overturned by the Supreme Court which on December 7, 2006, granted a petition for writ of certiorari. The Court has also granted leave to manufacturers associations and economists to file amicus curiae briefs.
In PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2 the Fifth Circuit upheld a judgment for plaintiff on the basis that stare decisis required application of the per se rule against RPM. The lower court ordered defendant Leegin, a manufacturer of women’s accessories sold under the brand name Brighton, 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 also ordered to pay another $375,000 for attorneys’ fees and costs. On appeal, Leegin did not challenge the jury’s finding that it entered into price-fixing agreements with retailers. Instead, it challenged the application of the per se rule and argued that RPM agreements should be evaluated under the more relaxed rule of reason.
After the Fifth Circuit issued a writ of mandate sending the case back to the lower court, Leegin submitted an application to recall and stay the mandate pending the filing and disposition of a petition for a writ of certiorari. The court granted the Application on August 28, 2006. On October 4, 2006, Leegin filed the petition.3 The petition urges the Court overrule the per se rule, or in the alternative, to limit the per se rule to apply only where there is a clear likelihood of anticompetitive effects. By granting Leegin’s petition for a writ of certiorari, the Court has sent a strong signal that it will reconsider the application of the per se rule to RPM. Groups such as the National Association of Manufacturers have also been granted leave to file amicus briefs supporting the petition.
Leading up to this case, the Supreme Court has suggested that it would one day overturn the rule in Dr. Miles. Eight years after Dr. Miles was decided, the Court held in United States v. Colgate that only if there is agreement on resale price, as opposed to a unilateral policy, is RPM per se illegal.4 In 1967, in Schwinn, 5 the Court expanded the per se rule to nonprice vertical restrictions, but overturned this decision some years later in Continental T.V.6 Almost a decade after Continental T.V., the Court held in Business Electronics that the per se rule should only apply to vertical restrictions where there is an agreement on price or price levels.7 Nearly another decade later, the Court, in State Oil v. Khan,8 overturned yet another vertical restraint case, Albrecht,9 thereby rejecting the application of the per se rule to maximum resale price maintenance agreements. Thus, by increasingly limiting the application of the per se rule to vertical restrictions over the years, the Court has sent signals that it would one day limit the rule with respect to minimum resale price maintenance.
Leegin’s petition to the Supreme Court presents more developed arguments for abrogating the per se illegal rule for RPM agreements. The rule adopted in Dr. Miles, Leegin emphasizes, was not grounded in economic theory or justified by empirical evidence. Instead, without considering the competitive effects of an agreement between a manufacturer and its distributors establishing minimum resale prices for the manufacturer’s goods, the Supreme Court relied in Dr. Miles on the "antiquated" common law rule against restraints on alienation to hold that such an agreement is a per se violation of the Sherman Act.10 Since then, the courts’ have "blindly" applied Dr. Miles under the doctrine of stare decisis. Leegin criticizes the courts’ lack of regard for whether an RPM agreement has a real anticompetitive effect on the market, whether the defendant had market power or whether the defendant had a legitimate procompetitive purpose for its practice. Recalling the Court’s decision in Khan, where the Court overturned past precedent,11 and held that the per se rule was inappropriate for maximum resale price agreements,12 Leegin analogizes that, like in Khan, Dr. Miles should be expunged because stare decisis in not an inexorable command and there is a competing interest to recognize and adapt to changed circumstances and the lessons of accumulated experience.
Furthermore, Leegin argues, the Court should overturn the per se rule against RPM because the common law and the Sherman Act were meant to be adapted to modern conditions. Neither should inaction by Congress prevent the Court from overturning the rule. Congress has never outlawed RPM, Leegin argues, so its failure to legislatively overrule the rule in Dr. Miles and its other acts short of repealing the rule is no reason “to freeze in place the per se rules that existed in 1911. Note, however, that in 1983 Congress did prohibit the DOJ from using any funds to support efforts to overturn the RPM per se rule.13
At the crux of Leegin’s arguments for why a per se rule against RPM is wrong is that the premise in Dr. Miles is inconsistent with the Supreme Court’s modern antitrust analyses.14 The law on RPM should, Leegin argues, be made consistent with the legal standards applied to all other vertical restraints. According to other, later decisions of the Supreme Court, antitrust per se rules are appropriate, Leegin submits, only for conduct that always or almost always tends to restrict competition. According to "modern" economic analysis RPM does not meet this condition because the practice often has substantial competition-enhancing effects.15
More particularly, Leegin observes that per se treatment has been rejected for vertical nonprice16 and vertical maximum price17 restraints for insufficient economic justification. Leegin argues that so too should per se treatment be rejected for RPM because economists and legal scholars have reached "an unusually strong consensus" that RPM has a number of procompetitive uses and effects that, if permitted by the antitrust laws, could enhance consumer welfare.18 Thus, the courts, Leegin continues, should no longer assume that RPM limits intrabrand price competition, raises retailers’ margins, raises retailers’ prices, and are therefore harmful to consumers. Quoting from the Court’s decision in Continental T.V., Leegin asserts that economists have identified a number of ways in which manufacturers can use such restrictions to compete more effectively against other manufacturers, and that manufacturers entering new markets can use RPM agreements to induce competent and aggressive retailers to make the kind of investment in capital and labor that is often required in the distribution of products unknown to the consumer. Quoting also from Robert Bork, Leegin further contends that RPM will not enable retailers to enjoy fat retail margins because “[n]o manufacturer or supplier will ever use resale price maintenance or reseller market division for the purpose of giving the resellers a greater-than-competitive return … The manufacturer shares with the consumer the desire to have distribution done at the lowest possible cost consistent with effectiveness."19
In addition, Leegin directly addresses the distinction that has been made in the treatment of price and nonprice restraints under the Sherman Act and criticizes this distinction as largely illusory. Leegin contends, referencing another Supreme Court decision, that the economic effect of price and nonprice restrictions is in many cases similar or identical.20 Interestingly, Leegin acknowledges in a footnote that RPM may lead to higher retail prices. It claims, however, that according to empirical analysis, RPM can in some circumstances result in lower prices. For example, if RPM enables a manufacturer to compete more effectively and thereby expand its sales and output, it may achieve efficiencies in manufacturing or distribution that could allow it to lower its unit costs and prices.21
Offering additional reasons why RPM agreements should not be considered per se unlawful, Leegin asserts that if manufacturers were permitted by the antitrust laws to use RPM, they would do so for procompetitive purposes, such as providing incentives to stock and promote the manufacturer’s products. Price restrictions would help manufacturers compete on product quality by giving retailers an incentive to compete on service. RPM could help new entrants break into the marketplace, encourage retailers to purchase more of its products or introduce new or more innovative products, enhancing interbrand competition and benefiting consumers. Leegin does concede that manufacturers have other tools to achieve their desired mix of price and service promotion, such as through unilateral “Colgate” policies22 and through contracting for exclusive territories or for particular distribution services. It criticizes these tools as not cost-free and contends that "a legal regime that forces businesses to select second-best tools to achieve their competitive ends is inherently insufficient.”23 Colgate policies are no cure, Leegin asserts, because firms can cross a line between enforcing a unilateral policy and a per se illegal contract, as Leegin did in this case.
Many antitrust commentators agree that there is a good chance that after nearly 100 years, Dr. Miles will be overturned or at least, RPM agreements will be subjected to a "quick-look" analysis and scrutinized more carefully only when the manufacturer has market power or there is a clear likelihood of anticompetitive effects. This could lead to the enactment of state statutes prohibiting RPM as per se illegal, or to some Congressional action, but this would not be the first time this has happened. All the same, it may indeed be time the sun set on Dr. Miles.
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1 220 U.S. 373 (1911). Justice Holmes wrote a vigorous dissent in which he rejected the majority’s approach and argued that the public would be best served in most circumstances if the company were allowed to carry out its plan to establish minimum resale prices.
2 No. 04-41243, 2006 U.S. App. LEXIS 6879 (5th Cir. Mar. 20, 2006).
3 The petition for a writ of certiorari is available on the ABA Antitrust Section, Franchising and Distribution Committee webpage at http://www.abanet.org/antitrust/at-committees/at-df/pdf/knowledge-database/Leegin-Cert-Petition.pdf
4 United States. v. Colgate & Co., 250 U.S. 300 (1919) (holding that a manufacturer may unilaterally announce a suggested resale price and terminate noncompliant dealers).
5 United States v. Arnold, Schwinn & Co., 3488 U.S.
6Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 47-48 (1977).
7 Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988) (holding that an agreement between a manufacturer and distributor to terminate a "price cutter," without a further agreement on the price or price levels to be charged by the remaining dealer, was not a per se illegal restraint because there was no agreement on price or price levels). The Court planted a seed of doubt about the longevity of the rule in Dr. Miles when it explained that while RPM agreements may raise intrabrand prices, by doing so, they help achieve the benefits identified in Continental T.V.: "All vertical restraints … have the potential to allow dealers to increase ‘prices’ and can be characterized as intended to achieve just that. In fact, vertical nonprice restraints only accomplish the benefits identified in [Continental T.V.] because they reduce intrabrand price competition to the point where the dealer’s profit margin permits provision of the desired services." (id. at 728).
8 State Oil Co. v. Khan, 522 U.S. 3 (1997).
8 Albrecht v. Herald Co., 390 U.S. 145, 152 (1968).
10 See Business Electronics, supra note 8 (noting that the per se rule which once applied to nonprice restraints was based on the "ancient rule against restraints on alienation").
11 Albrecht supra note 10.
12 Khan supra note 9.
13 After the Solicitor General had filed, in May 1983, an amicus brief in support of the petitioner in Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984), urging the Court to abandon the per se rule against vertical price-fixing, Congress prohibited the Department of Justice from use of funds “for any activity, the purpose of which is to overturn or alter the per se prohibition on resale price maintenance in effect under the Federal antitrust laws.” Section 510 of the Departments of Commerce, Justice, State, the Judiciary and Related Agencies Appropriations Act, 97 Stat. 1101,1102. The Act was signed by the President on November 28, 1983, and the Solicitor General thereafter informed the clerk of the Supreme Court by letter that the per se rule would not be addressed in oral argument. William F. Baxter, then the Assistant Attorney General for the Antitrust Division, argued for the government on December 5, 1983, and the Court’s decision, affirming Monsanto’s liability for vertical price-fixing, was filed March 20, 1984.
14 Leegin refers to Continental T.V., supra note 7 at 47-48 (rejecting the per se rule against vertical nonprice restraints and explaining that the "great weight of scholarly opinion ha[d] been critical of the rule"); Khan, supra note 9 at 18 (unanimously overturning the per se rule against vertical maximum price-fixing because there was "insufficient economic justification" for the rule); Illinois Tool Works, Inc. v. Independent Ink, Inc., 126 S. Ct. 1281, 1290-91 (2006) (unanimously overturning the presumption of per se illegality of a tying arrangement involving a patented product because it was inconsistent with economic analysis).
15 Business Electronics, supra note 8 at 723 (1988); Continental T.V., supra note 7 (explaining in dicta that "[p]er se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive.").
16 Continental T.V., id.
17 Khan, supra note 9, overruling Albrecht, supra note 10.
18 Petition at 10, citing among other authorities, ABA Antitrust Section, Antitrust Law and Economics of Product Distribution 76 (2006) (the “bulk of the economic literature on RPM …suggests that RPM is more likely to be used to enhance efficiency than for anticompetitive purposes.”)
19 Petition at 12; Robert H. Bork, The Antitrust Paradox 289, 290 (1978).
20 Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984).
21 Petition at 13, n. 5, citing Thomas R. Overstreet, Jr., Bureau of Econ. and Fed. Trade Comm’n., Resale Price Maintenance: Economic Theories and Empirical Evidence 164 (1983).
22 See Colgate, supra note 5.
23 Petition at 22.