Antitrust Practice - Supreme Court Decision in Leegin Relaxes Scrutiny Applied to Resale Price Maintenance
The U.S. Supreme Court has issued a decision impacting a supplier’s ability to manage resale prices and abolishing a 100-year-old precedent that condemned vertical pricing restraints as per se illegal activity.
In Leegin Creative Leather Prods. v. PSKS , Inc. d/b/a Kay’s Kloset,* the Supreme Court overruled the 1911 holding in Dr. Miles Medical Co. v. John D. Part & Sons Co.,** which condemned as per se illegal agreements between a supplier and its distributor concerning the minimum price the distributor can charge for that supplier’s goods. By overturning Dr.Miles, the Court’s holding in Leegin now permits more effective interbrand competition by deciding that vertical price restraints will be judged under the rule of reason.
In its decision, the Court accepted economic arguments that permissible restraints on intrabrand competition (between distributors or retailers) can promote interbrand competition between distinct products (such as between Leegin’s brand product and the brands of competing leather goods suppliers). The Court also found that vertical price restraints can prevent discounting retailers from “free riding” on retailers which furnish services or promotional efforts that aid the supplier’s position as against rival suppliers. In holding that vertical price restraints may have some procompetitive benefits, the Court cautioned against unfettered immunity from Section 1 liability for vertical restraints.
Leegin warns that parties engaging in minimum resale price policies that unduly restrain competition remain liable for antitrust violations. The Court noted that the prohibition against unlawful price fixing—designed solely to obtain monopoly profits, facilitate a supplier or retail cartel, or allow a powerful supplier or retailer to abuse their position in the market—must not be “ignored or underestimated.” But in admonishing parties to avoid abusive pricing relationships, Leegin opens possibilities for enhancing consumer benefits in areas other than low prices—such as service and brand selection.
One point to be kept in mind by suppliers that are considering adopting new resale price maintenance policies is that some states still have state laws that may prohibit resale price maintenance. Even though Leegin relaxes the standards for evaluating resale pricing agreements—allowing manufacturers to offer procompetitive justifications for pricing policies—not all pricing arrangements will pass antitrust scrutiny. Importantly, parties who engage in questionable pricing activities remain potentially liable for antitrust violations at both the federal and state level.
If you have any questions on how this decision may affect a current or future issue for your operations, please contact one of our antitrust experts.
* __ S.Ct. __, 2007 WL 1835892 (U.S.) (June 28, 2007)
** 220 U.S. 373 (1911)