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Resale Price Maintenance in the Aftermath of Leegin

25 June 2009

In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the US Supreme Court held that vertical agreements to fix minimum resale prices, also referred to as minimum resale price maintenance (RPM) agreements, are no longer per se violations of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1.  See 127 S. Ct. 2705, 2725 (2007) (overruling Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)). Now, under Leegin, minimum resale price agreements join a host of other restrictive conduct analyzed by the federal courts under the rule of reason, pursuant to which “the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.”  Id. at 2712 (quoting Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977)).

In overruling Dr. Miles, the Court emphasized severalprocompetitive justifications for a manufacturer’s use of retail price maintenance, including (i) the prospect that such agreements can stimulate interbrand competition by reducing intrabrand competition among retailers selling the same brand; (ii) the possibility that RPM can increase interbrand competition by facilitating market entry for new firms and brands; and (iii) the potential for RPM to increase interbrand competition by encouraging retail services that would not otherwise be provided.  Id. at 2714-16.

The Court’s rejection of the per se rule with respect to minimum RPM agreements does not, of course, mean that such agreements now are per se legal.  The Leegin Court identified categories of conduct in which RPM could prove anticompetitive under a rule of reason analysis:

  • A vertical minimum RPM agreement that facilitates either a manufacturer or retailer cartel.  Id. at 2716-17.
  • A dominant retailer might request RPM in order to prevent innovation in distribution that would decrease its competitors’ costs.  Id. at 2717.
  • A dominant manufacturer might use RPM in order to provide retailers with an incentive not to sell the products of its rivals or prospective new market entrants.  Id. at 2717.

In addition, notwithstanding Leegin, it remains to be seen how minimum RPM will fare under state laws.  Thirty-seven states jointly submitted an amicus brief in Leegin supporting continued per se illegality for minimum RPM.  See States’ Brief as Amici Curiae, Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007), available at http://www.naag.org/assets/files/pdf/amici.leegin.states.pdf.  Although a number of states have statutes requiring conformity with federal interpretation,1 and the case law of some states requires that they follow federal law,2 other states have a more permissive policy,3 and still other states have statutes outright prohibiting vertical price fixing.4  Some state enforcers have advocated a strategy for pursuing remedies against minimum RPM notwithstanding Leegin, including reliance on available state laws.  See, e.g., Robert L. Hubbard, Protecting Consumers Post-Leegin, Antitrust, Vol. 22, No. 1, Fall 2007, at 41-44.

In the two years since Leegin, the courts have not provided significant guidance on this issue, and reliance on state laws likely will yield varying standards.  See Hubbard, supra, at 44.  The Herman Miller case, in which the attorneys general of New York, Illinois and Michigan sued the furniture maker based on the company’s minimum advertised price (MAP) policy and obtained a consent decree, shows that some states will continue vigorous, if selective, enforcement against RPM even in Leegin’s wake.5  Thus, at least for the time being, companies cannot ignore the unsettled question of the states’ approaches to minimum RPM.

Manufacturers and dealers therefore should proceed with caution when considering whether to enter into minimum RPM agreements.  When a company has concluded that it is willing to bear the risk posed by the unsettled issue of state antitrust enforcement, the following guidelines may be of use in minimizing risk under a rule of reason analysis:

DO:

  • Enter into RPM agreements for your reasons:
    • Maximizing the effectiveness and efficiency of your distribution channels.
    • Supporting retailers’ incentives to invest in promoting your products.
    • Preventing free riding by non-value-adding discounters from undermining the dealer investments that your products require.
  • Cite these reasons in all internal documents and external communications that recommend or explain your company’s entry into RPM agreements.
  • Consider requiring business people to prepare such documents in draft for legal department review so that language that could be misconstrued to suggest an anticompetitive reason for the RPM can be removed while the document is still privileged.
  • Negotiate and discuss RPM agreements with one dealer at a time.

DON’T:

  • Enter into RPM agreements in response to dealer requests.
  • Suggest in internal documents or external communications that:
    • Your company has adopted RPM agreements in response to dealer requests or concerns, or to accommodate such requests or concerns;
    • Your company’s RPM agreements protect the interests of dealers; or
    • The RPM agreements will encourage dealers to sell your company’s products exclusively, or discourage them from carrying competitors’ products.
  • Create a forum for discussion of RPM among your dealers, or participate in any such discussion.
  • Enter into RPM agreements for products for which your company does not face significant competition, at least not without careful review of the need for the RPM agreements.

Endnotes:
1. See, e.g., Del. Code Ann., tit. 6, § 2113, Mass. Gen. Laws Ann. Ch. 93, § 1; Nev. Rev. Stat. § 598 A.050.
2. See, e.g., Johnson v. Microsoft Corp., 834 N.E.2d 791, 794-95 (Ohio 2005) (applying federal law to the question of indirect purchaser claims under Ohio’s antitrust statute, because “Ohio has long followed federal law in interpreting the Valentine Act”); City of Tuscaloosa v. Harcros Chems., 158 F.3d 548, 555 n.8 (11th Cir. 1998) (“Under Alabama law, federal antitrust law prescribes the terms of unlawful monopolies and restraints of trade as they should . . . be administered in Alabama”) (citations and internal quotations omitted); Drs. Steuer & Latham, P.A. v. National Med. Enters., 672 F. Supp. 1489, 1521 (D.S.C. 1987) (Granting summary judgment to defendants on state antitrust claims based on analysis of claims under federal law after observing that “South Carolina has long adhered to a policy of following federal precedents in matters relating to state trade regulation enforcement”) (citation omitted), aff’d, 846 F.2d 70 (4th Cir. 1988).
3. See, e.g., Ariz. Rev. Stat. Ann. § 44-1412; Fla. Stat. Ann. § 542.32; Tex. Bus. & Com. Code Ann. § 15.04.
4. See, e.g., Cal. Bus. & Prof. Code § 16720(e); Conn. Gen. Stat. § 35-28(a); N.Y. Gen. Bus. Law § 369-a.
5. New York v. Herman Miller, Inc., No.08 CV 2977 (S.D.N.Y., filed March 21, 2008).

Authors

  • Christopher J. Kelly
    T +1 650 331 2025
  • Paula Garrett Lin
    T +1 212 506 2215

Related People

  • Paula Garrett Lin
    T +1 212 506 2215
  • Christopher J. Kelly
    T +1 650 331 2025

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