March 10, 2011

Supremes To Resale Price Maintenance: Your Name Is Leegin

The U.S. Supreme Court has told manufacturers engaged in resale price maintenance that they can continue to rely on its controversial 2007 opinion in PSKS Inc. v. Leegin Creative Leather Products, which struck down the Court’s long-standing precedent that such vertical price restraints are per se illegal.

After nearly four years of additional proceedings, the Supreme Court’s original Leegin decision has now proved fatal to the plaintiff’s antitrust complaint, which challenged a manufacturer’s resale price maintenance policy.  The Supreme Court has denied certiorari to the decision of the Fifth Circuit Court of Appeals affirming the dismissal of the Leegin complaint, which underwent a lingering death as the Supreme Court remanded the case to the lower courts, which dismissed the plaintiff’s claim under the more lenient rule of reason standard endorsed by the high court.

In its initial 2007 opinion, a fractured Supreme Court held that the practice of vertical resale price maintenance was not per se illegal under antitrust laws.  That decision overturned the nearly century-old precedent set by Dr. Miles Medical Co. v. John D. Park & Sons, which held that the practice automatically violated Section 1 of the Sherman Act.  Now, such activity must be examined under the rule of reason, a more lengthy and costly inquiry that examines procompetitive benefits of a specific policy and the context surrounding it. 

Both the Dr. Miles precedent – which had been heavily criticized by some antitrust commentators – and the 5-4 decision overturning it, over a vigorous dissent, were controversial.  Some antitrust commentators, economists, and judges had argued that there are valid justifications for resale price maintenance, such as maintaining the image of a particular brand.  The majority concluded in 2007 that “respected authorities in the economics literature suggest that the per se rule is inappropriate, and there is now widespread agreement that resale price maintenance can have procompetitive effects.”  However, the dissent authored by Justice Stephen Breyer, which was joined by Justice Ruth Bader Ginsburg and then-Justices John Paul Stevens and David Souter, emphasized the pro-consumer, low price effects of such a rule and argued for the importance of respecting precedent under the doctrine of stare decisis.  But the Court overturned the lower court ruling adhering to the Dr. Miles precedent and remanded the case to where it originated in the Fifth Circuit.

After the Supreme Court rejected the per se standard for vertical price fixing in its 2007 decision, the case returned to the lower courts, which considered the plaintiff’s antitrust claims under the more defendant-friendly rule of reason.  A Texas retailer, Kay’s Kloset, which was operated by PSKS, had attempted to price the goods of Brighton, Inc., which makes handbags and other goods, at a price lower than the manufacturer demanded.  The manufacturer argued that a higher price for its good at the retail level would enable the retailer to spend more money on promoting the brand in the store and educating the customers about its products.  The Fifth Circuit Court of Appeals affirmed the dismissal of the Kay’s Kloset’s case against Leegin in 2010, and the Supreme Court has now declined to grant certiorari.

Categories: Antitrust and Price Fixing, Antitrust Litigation

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