June 29, 2007

SUPREME COURT DECIDES FUTURE OF

RESALE PRICE

MAINTENANCE

On Thursday, June 28, 2007, the Supreme Court issued an opinion in Leegin Creative Leather Products, Inc. v. PSKS, Ins., dba Kay’s Kloset abandoning a 96 year-old ban on setting minimum resale price floors
on products.

In a 5-4 decision, the Supreme Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), changing the legal rule by which certain vertical price restraints are to be judged. Under Dr. Miles, minimum pricing floors were per se illegal; now, under Leegin, such practices are to be judged under the rule of reason.

In a detailed opinion, the Court makes clear that setting a minimum resale price is not necessarily legal, it’s simply not per se illegal. Such practices are to be examined under the rule of reason on a case-by-case basis, examining the specific circumstances surrounding each situation.

When Establishing Resale Pricing Policies, Proceed with Extreme Caution

Many corporations and businesses may view this as a victory granting manufacturers broader authority with regard to resale pricing practices. While the Supreme Court has changed the standard under which such practices will be reviewed, it is far from a green light for manufacturers to control resale pricing floors. These pricing policies will be examined by the courts and multiple factors will be taken into consideration in determining their legality, but many such pricing policies are likely to still be found to be illegal. Manufacturers, corporations and businesses should tread lightly in relying on this opinion, viewing the case as a yellow light to proceed with extreme caution when establishing resale pricing policies.

Leegin Accused of Fixing Prices

PSKS, doing business as Kay’s Kloset, was a retailer of Brighton brand products manufactured by Leegin. Leegin introduced the Brighton brand in 1995 and the brand’s popularity arose from a particular marketing strategy. Brighton accessories are sold only in independently owned stores which always offer the products at a set price while providing a high level of personal service. Leegin has sought to deal only with boutiques that agree not to sell its products below a set price.

Kay's Kloset, a suburban Dallas shop, began offering Brighton accessories in 1995; within four years, it was their best-selling line. When Kay's Kloset began offering the goods at a discount, the manufacturer stopped shipping Brighton bags to the store.

Contending that it often discounted the Brighton line to remain competitive in the Dallas market, Kay’s Kloset claimed that Leegin violated Section 1 of the Sherman Act by entering into illegal agreements with other retailers to fix the price of Brighton products. PSKS sued Leegin for illegal price fixing and the loss of a substantial part of its business.

A jury sided with PSKS, and it was awarded $3.6 million (the jury’s award of $1.2 million in damages was automatically tripled under antitrust law). The Fifth Circuit upheld the verdict based on the per se rule against vertical minimum price fixing. In the company’s appeal to the Fifth Circuit, in New Orleans, Leegin urged application of the rule of reason, but the Court said Supreme Court precedent bound it to apply the per se rule.

Appeal Asked: Is Resale Price Maintenance
Per Se Illegal?

Before the Supreme Court, Leegin did not appeal the price fixing charge, but only the fundamental question underlying the case: should resale price maintenance be automatically barred as per se illegal? Or, in the alternative, should such deals be examined on a case-by-case basis to determine whether they are reasonable in that particular market under those specific circumstances? A slim majority of justices found the answer to be the latter – resale price maintenance deals should be reviewed on a case-by-case basis under the rule of reason.

Many observers, including economists and antitrust theorists, have argued over the years that the per se rule against vertical minimum price fixing is inconsistent with modern antitrust analysis. In recent years, the Supreme Court has gradually chipped away at the application of the per se rule to vertical restraints.

In Continental TV v. GTE Sylvania (1977), the Court reversed the per se rule against vertical non-price restraints, including territorial restrictions on dealers. In State Oil v. Khan (1997), the Supreme Court overturned the per se rule against maximum resale prices. In its reasoning in GTE Sylvania and Khan, the Court recognized that vertical maximum-price and non-price restraints can have pro-competitive effects on competition, benefiting consumers, which seems consistent with the purposes of the antitrust laws.

Leegin argued that their minimum resale pricing policy similarly provided pro-competitive effects. The company argued that its marketing approach—selling Brighton products through small boutiques that offer specially personalized service—does indeed benefit consumers because of the greater level of service given by the retailers. The per se rule, Leegin said, fails to take those circumstances into account.

Resale Price Maintenance under the Rule of Reason

Justice Anthony M. Kennedy delivered the opinion of the court, with Chief Justice John G. Roberts and Justices Antonin G. Scalia, Clarence Thomas, and Samuel B. Alito joining. Justice Kennedy noted that
“a restraint must have ‘manifestly anticompetitive’ effects” to be
per se illegal.

Acknowledging the Court’s recent rejections of “the rationales on which Dr. Miles was based,” the Court overruled the 1911 case. The Court relied on changing economic justifications and an examination of the potential procompetitive effects of resale pricing policies to determine that resale price floors should not be deemed per se illegal. The Court acknowledged that under some circumstances such policies can be procompetitive and should not be illegal. However, the Court also cautioned that not all such policies aid competition nor should all such policies be legal. The Supreme Court did not hold that resale price minimums are legal, merely that they should be examined on a case-by-case basis, allowing for select practices to be legal under certain circumstances.

Justice Stephen G. Breyer wrote a strong dissenting opinion with Justices John Paul Stevens, David H. Souter, and Ruth Bader Ginsburg joining, challenging the majority’s rejection of an almost hundred-year precedent, upon which discounting retailers had relied.