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.

Patent holders seeking to settle patent infringement cases are breathing a little easier today as a result of yesterday’s decision by the Supreme Court not to review the ruling of the Second Circuit Court of Appeals in Arkansas Carpenters Health and Welfare Fund v. Bayer AG (In re Ciprofloxacin Hydrochloride Antitrust Litig.), 05-2851-cv(L) (2d Cir. 2010) (“Cipro”).

The Supreme Court thereby leaves undisturbed the Second Circuit’s rule that payments by brand name pharmaceutical companies to generics in settlement of patent infringement litigation – pursuant to which the allegedly infringing generic agrees not to market its drug product prior to patent expiration – do not violate the antitrust laws unless the patent holder procured the patent by fraud on the Patent and Trademark Office or brought a baseless patent infringement lawsuit.

Notwithstanding a three-way split on this issue among federal courts of appeals, the Supreme Court was unpersuaded by petitioners’ argument to hear the case because such settlements allegedly cost government agencies and consumers billions of dollars per year in the form of higher drug prices.

The Cipro defendants argued that the issue was one of patent law, not antitrust law, and therefore the Supreme Court should not disturb the Second Circuit’s ruling on antitrust grounds.  The Supreme Court apparently accepted the defendants’ argument, although it gave no reasons for denying review.

Apple has piqued the interest of antitrust enforcers – again.

The U.S. Department of Justice and Federal Trade Commission are both interested in exploring whether Apple is now running afoul of antitrust laws by funneling media companies’ customers into the payment system for its iTunes store.

In the past year, the cutting edge computer maker has triggered government scrutiny for how it hires employees, negotiates with music companies, sets requirements for the applications that run on its iPhones, iPods, and iPads, and limits access of advertisers to its devices.  Steve Jobs’ company has now riled the publishing community – and once again attracted the interest of antitrust enforcers – with a business plan that may force publishers to pay 30 percent cut of revenue from all subscriptions they sell on Apple’s mobile devices.

Apple’s new program will change how publishers of “magazines, newspapers, video, music, etc.” sell their online publications.  Publishers will now pay Apple nearly a third of the revenue earned from subscriptions that publishers sell through Apple’s application store (or “app store”).  Apple will continue to allow companies to keep all the money from subscriptions publishers sell outside of Apple’s app store.  But at the same time, if a company wants to sell subscriptions to an Apple device, the publisher must guarantee that it is offering its lowest price to consumers who use the app store.  Also, Apple will share only minimal information about subscribers, while publishers often insist that they need detailed data about the people who buy their content to market more efficiently.  According to Steve Jobs, “Our philosophy is simple – When Apple brings a new subscriber to the app, Apple earns a 30 percent share: when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing.”

Or maybe it’s not so simple.  According to Rhapsody, a music company that sells subscriptions to its iPhone app through Apple’s store, “The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 percent monthly fee vs. a typical 2.5 percent credit card fee.”  Not content to merely complain, Rhapsody is also “collaborating with our market peers in determining an appropriate legal and business response.”

According to The Wall Street Journal, federal antitrust enforcers are also considering their options.  It is not yet clear whether the government will pursue a formal investigation, or which agency will take the lead.  Last year, the mere threat of government action prompted Apple to back down on two controversial rules.  One would have restricted which computer languages app developers can use to write computer code, and the other would have limited which mobile advertising networks could place ads on Apple’s mobile devices. 

While Apple’s iPhone has only a 16 percent share of the smartphone market, its users tend to buy more applications than users of other phones.  And, at least for the moment, Apple’s iPad dominates sales of tablet computers.  But whether or not antitrust enforcers act, Apple’s announcement has already triggered at least on market response:  Google has announced that it will start its own program to sell subscriptions, for just a 10 percent cut.

Rejecting claims of a horizontal price-fixing conspiracy, the U.S. Court of Appeals for the First Circuit has affirmed summary judgment against a class of Martha’s Vineyard residents suing gas station owners on the picturesque, emphatically low-key island that is best known as a summer colony.

The appeals court held that the plaintiffs in White v. R.M. Packer Co., Inc., failed to raise any fact question as to whether this was a case of an “agreement,” tacit or otherwise, to raise prices, or just permissible conscious parallelism.

The straightforward facts of the case could be lifted from a primer on antitrust law.   Like many other things, gas prices are high on the Vineyard – more than 56 cents per gallon higher than on Cape Cod, of which only 21 cents is attributable to higher transport costs.

Competition is also sharply limited.  There are only nine gas stations on the island, which has some 75,000 residents in the summer.  This is plenty, according to the Martha’s Vineyard Commission:  the commission hasn’t approved a permit for a new station in decades.  Gas is highly fungible, and stations post their prices for all – customers and rivals alike – to see.

Did the owners ever need to reach an “agreement” to raise prices?  While the case was “not economically implausible,” the court found the Vineyard market was “particularly conducive” to the maintenance of consciously parallel prices.  Plaintiffs failed to muster evidence that, in the words of the Supreme Court’s Monsanto decision, “tends to exclude the possibility of independent action.”  And the evidence plaintiffs did have – such as one owner, also a wholesaler, saying that if another station started “mucking around with prices one or two delivery trucks a week might not make it on the boat and they’ll get the idea real quick” – was dismissed as mere pressure from the wholesaler to his retail customer, not evidence of collusion. 

Plaintiffs’ other evidence of “plus factors” simply tended to confirm what most Vineyard residents know but put up with along with the other charms of island living:  the island’s gasoline market is oligopolistic and highly conducive to parallel pricing.  Plaintiffs failed, the court found, to explain how this pricing was a function of agreement rather than independent (or interdependent) decisions by station owners.