SEMA eNews Vol. 10, No. 27, July 5, 2007

U.S. SUPREME COURT OVERTURNS 100-YEAR-OLD RULE MAKING MINIMUM RESALE PRICE AGREEMENTS AUTOMATICALLY ILLEGAL

On June 28, 2007, the Supreme Court decided to shift the playing field and overrule 100 years of legal precedent banning agreements between manufacturers and their resellers to set the minimum price charged by the resellers to their customers. The decision of the Court was very close—5 to 4—and the opinion makes clear that setting a minimum resale price is not now automatically legal. 

Instead, what the Court said, in a very detailed opinion, was that there are situations where resale price agreements would be illegal under the antitrust laws and courts must examine them closely to determine the effect such agreements have on competition.

Summary of the Case

In 1995, Leegin, a manufacturer of the Brighton brand of women's accessories, began selling its products to PSKS, a women's clothing store. PSKS began promoting the Brighton brand heavily and by 1999 the Brighton brand became PSKS' most profitable line. 

In 1997, Leegin implemented a resale price policy stating that it would only do business with retailers who followed the Leegin suggested retail prices. This new policy made clear that Leegin would not do business with retailers who discounted Brighton products. Later, Leegin also introduced a marketing initiative designed to provide incentives to Brighton retailers that created a separate section for the Brighton brand within their stores. To participate in this initiative, retailers had to pledge to "follow the Brighton Suggested Pricing Policy at all times."

In 2002, Leegin learned that PSKS had violated its pricing policy by placing all of its Brighton merchandise on sale. In response to this violation, Leegin suspended all shipments to PSKS. As a result of Leegin's actions, PSKS' profits decreased significantly.

A jury found that Leegin and its retailers had agreed to fix the retail prices of Brighton products, and awarded triple damages in the amount of $3.6 million to PSKS. Leegin appealed that judgment. In its appeal, Leegin did not challenge the jury's findings; rather, it challenged the court's application of the long-standing antitrust rule requiring courts to find that all agreements setting minimum resale prices were automatically illegal.

Historically, courts have classified certain trade restraints, including minimum resale price, market allocation and horizontal price-fixing agreements, as automatically or per se illegal. Under the per se rule, the restraint at issue, if proven is automatically illegal. Agreements fixing resale-price minimums have been illegal since the Supreme Court's decision in 1911 in a case known as “Dr. Miles.” In the years since, the Court has increasingly limited the application of the per se rule to vertical restrictions (between upstream and downstream firms).

On appeal, Leegin argued that instead of applying the per se rule, a more flexible standard, the rule of reason, should be applied to its agreement with PSKS to resell products at a set price. Applying the rule of reason would have allowed Leegin to explain its business reasons for setting resale prices and any procompetitive effects of its policy. 

The court or jury would then be allowed to assess the truthfulness of the business reasons offered by Leegin and to weigh the pro- and anti-competitive effects of the resale-price agreement on the market. To bolster its argument, Leegin pointed out that in recent rulings, the Supreme Court had not been uniformly applying the per se rule in price-fixing cases. 

The Appeals Court found that although the Supreme Court had not applied the per se rule consistently to all price-fixing arrangements, it had been consistent in applying the per se rule in vertical minimum price-fixing cases. Therefore, the court refused to apply the more flexible rule of reason and upheld the jury verdict. 

Leegin, probably emboldened by the many recent pro-defense Supreme Court antitrust decisions, asked the Court to take its case. A number of business groups joined Leegin in its request that the Supreme Court review and reverse the per se rule in Dr. Miles. These groups argued that application of the per se rule to resale price restraints "has no foundation in economic theory" because minimum resale pricing agreements often can have "substantial pro-competitive effects."  

The U.S. antitrust enforcement agencies also argued that the Court should overrule Dr. Miles. Thirty-Seven state attorneys general along with other groups, however, argued that the automatic illegality rule should still apply to minimum resale-price agreements.

The Decision

Last week the Supreme Court rejected PSKS' arguments and decided that agreements between suppliers and their resellers to fix the resale price should not be automatically illegal. The Court wrote that minimum-price agreements can benefit consumers by enabling retailers to invest in customer services without fear of being undercut by discount rivals, and by giving consumers more options to choose among low-price/low-service and high-price/high-service brands, or brands that fall in between. 

The Court explained that such pricing agreements should encourage retail services that increase competition between different brands, which is good for the consumer. Such agreements also could make it easier for new products to enter the market because competent retailers will be more willing to invest the effort and expense required to distribute a new product if they are able to charge a higher price. Although the Court acknowledged that there could also be negative effects on competition, it concluded that because such negative effects were possible was not enough reason to continue to treat minimum resale-price agreements as automatically illegal.

Watch Your Step—Resale Price Agreements are NOT Automatically Legal

Many businesses may think that this decision grants manufacturers a "free pass" regarding resale pricing practices. Businesses should beware and tread carefully. The Supreme Court has changed the legal standard that courts will use to examine such practices, but it is not a "green light" for all manufacturers seeking to control resale-price minimums. 

These pricing policies will be examined by the courts and a number of factors will be weighed in the decisions regarding their legality, but still many pricing agreements are likely to be found to be illegal. 

The Court explained that resale price agreements are dangerous and warned the lower courts "to be diligent in eliminating their anti-competitive uses from the market.” The Court gave examples of situations where such pricing agreements will be particularly treacherous, specifically when a large number of manufacturers in a given industry decide to use this practice, when there is evidence that pressure from the resellers was the impetus for the price minimums, or when the manufacturer implementing such an agreement is dominant, the Supreme Court warned that setting resale price floors is particularly dangerous. 

Also, most states have their own competition statutes and bodies of case law that cover resale price restraints. Some of these states require or encourage the local courts to interpret their antitrust laws like the federal courts, but not all states have that requirement. Remember: 37 state attorneys general advocated that the Supreme Court keep the per se rule for minimum-resale price agreements. Moreover, minimum-price agreements are currently illegal in Canada and many other countries. 

Businesses considering establishing resale price policies or agreements should proceed with extreme caution and consult with antitrust counsel experienced in such practices. Even companies with the best intentions can find themselves in the middle of costly and lengthy antitrust litigation or investigations. — Barbara T. Sicalides, Pepper Hamilton LLP

Barbara Sicalides, a partner in the Philadelphia and Washington, D.C., offices of Pepper Hamilton LLP, is vice chair of the firm's Commercial Litigation Practice Group and head of that group's Antitrust Section. Ms. Sicalides' practice covers the full range of antitrust litigation and counseling matters. She may be reached at sicalidesb@pepperlaw.com

 For additional information, Ms. Sicalides presented the SEMA webinar "MAP and Resale Price Policies (AKA Colgate Policies)" on April 26, 2007 which is available at: http://www.sema.org/main/semaorghome.aspx?id=57377

 

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