On August 20, 2008 the US District Court in the Eastern District of Tennessee issued an opinion further defining the legal requirements necessary to plead a vertical resale price maintenance cause of action in Spahr v. Leegin Creative Leather Products, Inc., 2008 WL 3914461 (E.D. Tenn. 2008) ("Spahr").  Spahr comes in the aftermath of the watershed antitrust cases Bell Atlantic Corp v. Twombly, 127 S.Ct. 1955 (2007) and Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007) ("Leegin").

In Spahr, a class of retailers sued a product manufacturer, Leegin Creative Leather Products, Inc., alleging that its minimum resale pricing policy was unlawful under antitrust laws.  The primary issue before the court was whether a manufacturer that is also a distributor of its own products should be judged under a rule of reason or per se analysis.

Before coming to its decision, the court first discussed Twombly and its application to the case.  In Twombly, the US Supreme Court established heightened pleading requirements for antitrust cases, noting that an "allegation of parallel conduct and bare assertion of conspiracy will not suffice."  127 S.Ct. at 1966.  To withstand a motion to dismiss for failure to state a cause of action, an antitrust claim must contain "enough factual matter (taken as true) to suggest that an agreement was made."  Id. at 1965.  The court in Spahr recognized that this is a "threshold of plausibility."  Spahr, at *2.

Noting that the pleading requirements are more stringent in antitrust cases, the Spahr court then turned to the requirements necessary for asserting a vertical resale price maintenance claim, examining the U.S. Supreme Court’s 2007 holding in Leegin.  In Leegin, the Supreme Court overruled its holding in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), that resale price maintenance is per se unlawful.  Leegin held that vertical resale price maintenance restraints must instead be analyzed using a rule of reason analysis rather than the per se rule:  "The vertical agreements establishing minimum resale prices can have either pro-competitive or anti-competitive effects, depending upon the circumstances in which they are formed."  Leegin, 127 S.Ct. at 2717.  Under the rule of reason, "the fact finder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition."  Leegin, 127 S. Ct. at 2712.  The factors a court must look to are specific information about the relevant business, the restraint’s history, nature and effect, and whether the businesses involved have market power.  Id.  The per se rule was left intact by the Court for allegations of horizontal conspiracies.

After examining Twombly and Leegin, the court in Spahr turned to defendant Leegin’s motion to dismiss.  Leegin alleged plaintiffs failed to state a claim because its allegations could not survive a rule of reason analysis.  Spahr, at *4.  Leegin emphasized that there was no allegation of a relevant market or anti-competitive effects.  Id.  Plaintiffs responded that the complaint alleged both a horizontal price fixing conspiracy and a prima facie case of vertical price fixing.  Id. at *5.  Plaintiffs’ reasoning was that the conspiracy was horizontal and simultaneously vertical because Leegin was a manufacturer and distributor of its own products.  Id.

The distinction between horizontal and vertical conspiracies is significant because a horizontal antitrust conspiracy is per se unlawful, whereas a vertical resale price maintenance conspiracy is analyzed under the rule of reason.  Plaintiffs may have pled enough for a horizontal conspiracy, but did the complaint properly plead a vertical resale price maintenance claim under Leegin‘s rule of reason, in light of Twombly‘s heightened pleading requirements?

Plaintiffs argued that Leegin’s additional participation as retailer in the market, also known as "dual distribution," transitioned Leegin’s vertical resale price maintenance policy into a horizontal restraint, avoiding Leegin‘s rule of reason and making it per se unlawful.  Spahr, at *4.  However, the court rejected this reasoning.  Spahr, at *7.  The court found that based on prior case law in the Sixth Circuit, International Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904 (6th Cit. 1989), the rule of reason is the appropriate analysis because Leegin operated in a "dual distribution" situation.  Id.

In International Logistics, another dual distribution case, the Sixth Circuit found that examining the nature of the restraint was essential:  In that case, Chrysler’s marketing policies were vertical non-price restraints not directed towards or designed to impose restraints at the same competitive level even through Chrysler, the manufacturer, was also a distributor.  Because the policy was considered vertical, a dual distribution company in such a situation must be analyzed under the rule of reason "in the same manner as other vertical restraints."  International Logistics, 884 F.2d at 906.

The court in Spahr noted that a per se analysis is appropriate, and a vertical restraint can be characterized as horizontal, only where the source of the conspiracy is a combination of the distributors.  (citing Red Diamond Supply, Inc. v. Liquid Carbonic Corp., 637 F.2d 1001, 1004 (5th Cir. 1981).  In Spahr, Leegin’s policy, as a manufacturer, was imposed on the retailers vertically, making the agreement vertical under the reasoning set forth in International Logistics.

After determining the rule of reason was the appropriate analysis for Leegin, the court then turned to the allegations of the complaint, using the Twombly standard to determine whether the complaint failed to properly allege the relevant market and anti-competitive effect.  Id. at *8-*9.  Examining the complaint, the court held that plaintiffs failed to define the relevant product market and also failed to allege sufficient facts demonstrating an anticompetitive effect.  Id. at*8-*11.

The case is currently under review with the Sixth Circuit Court of Appeal.

Authored by:

Angela J. Clifford

(213) 617-4218