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More on Leegin Creative v. PSKS

On the final day of the Term, the Supreme Court decided the case of Leegin Creative v. PSKS. The following is an analysis of that decision by Mark Botti, a partner in Akin Gump’s DC office. Prior to joining Akin Gump this year, he served for 13 years in the Antitrust division of the Department of Justice.

Supreme Court Overrules Dr. Miles

On June 28, 2007, the U.S. Supreme Court issued one of its most noteworthy antitrust decisions in decades in Leegin Creative Leather Products, Inc. v. PSKS, Inc. The decision overrules the ninety-five-year-old per se rule set forth in Dr. Miles Medical Co. v. John D. Park & Sons Co. that it is illegal under § 1 of the Sherman Act, 15 U.S.C. § 1, for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods. The Court, in a 5-4 decision, held that all vertical price restraints are to be judged by the rule of reason. In doing so, it not only reversed a long-standing rule governing the relationship between manufacturers and retailers, but also discussed extensively how the principle of stare decisis applies to antitrust decisions of the federal courts.

Background

The Leegin case arose from a dispute between Leegin Creative Leather Products, Inc., a designer and manufacturer of fine leather goods, and PSKS, Inc., the owner and operator of a women’s apparel store. PSKS purchased from Leegin “Brighton” fine leather goods. The Brighton goods became PSKS’s most important brand and at times accounted for nearly 50 percent of its profits.


Leegin adopted a retail pricing and promotion policy, under which Leegin would refuse to sell Brighton goods to retailers who discounted those goods below the suggested retail prices. Leegin’s reason for adopting the policy included providing the specialty retail stores a sufficient profit margin to provide the customer with excellent service and to protect the brand’s image and reputation. Leegin later discovered PSKS had been marking down Brighton goods by 20 percent. PSKS refused to cease discounting, contending that nearby retailers were also undercutting Leegin’s suggested retail prices. Leegin stopped selling Brighton goods to PSKS. PSKS then sued Leegin, alleging violations of the antitrust laws by entering into agreements with retailers to charge only those prices fixed by Leegin.

At trial, Leegin planned to introduce expert testimony describing the pro-competitive effects of its pricing policy. The trial court, however, excluded the testimony, relying on the per se rule. The appellate court affirmed a jury award in favor of PSKS. The U.S. Supreme Court then granted certiorari to determine whether vertical minimum resale price maintenance agreements should continue to be treated as per se illegal.

Overview

Dr. Miles established a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices, holding that such agreements violate section 1 of the Sherman Act. That opinion, decided shortly after the enactment of the Sherman Act, reasoned that vertical price fixing benefited competing distributors rather than manufacturers, and should therefore be treated as equivalent to a horizontal price fixing agreement among distributors. In Leegin, the Supreme Court rejected this rationale for per se treatment. Instead, re-examining the underlying economic basis for resale price fixing, the Court said that while some such agreements may have anticompetitive effects, others would not, reflecting what the Court found were legitimate justifications for a manufacturer to use resale price maintenance. The Court thus overruled Dr. Miles, holding resale price maintenance agreements subject to the rule of reason, and inviting the lower courts to sort out the lawful from the unlawful in what could prove to be a torrent of new antitrust litigation.

The five Justices in the Leegin majority parted from the dissent principally on whether the doctrine of stare decisis compelled affirmance of Dr. Miles. In applying that doctrine, the two opinions (Justice Kennedy for the majority and Justice Breyer for the dissent) teased out subtle differences in their views on that doctrine and its applicability to minimum resale price agreements. Justice Kennedy viewed stare decisis as a doctrine of less force when, as in Leegin, the Court sits as a common law antitrust court giving force to the statutory authorization of the Sherman Act: “Just as the common law adapts to modern understanding and greater experience, so too does the Sherman Act’s prohibition on ‘restraint[s] of trade’ evolve to meet the dynamics of present economic condition.” Justice Breyer did not accept this distinction: “This is a statutory case.” But, even accepting the proposition that the Court was confronting a common law question, he chided the majority for its approach to stare decisis: “Common-law courts rarely overruled well-established earlier rules outright. . . . The reader should compare today’s ‘common-law’ decision with Justice Cardozo’s decision in Allegheny College v. National Cty. Bank of Jamestown, 246 N.Y. 369, 159 N.E. 173 (1927), and not a gradualism that does not characterize today’s decision.”

At bottom, the majority and dissent parted ways on the justifications for, and implications of, the decision. Both recognized significant economic arguments in favor of and against the applicability of the per se rule to minimum resale price maintenance. Justice Kennedy observed that if they were “considering the issue as an original matter” the rule of reason would be the appropriate standard, and Justice Breyer conceded that if the Court were “writing on a blank slate, I would find these questions difficult.”

They disagreed on whether anything had changed significantly since the decision in Dr. Miles. To Justice Kennedy, changes since the decision in Dr. Miles warranted a departure from stare decisis: “[T]here is now widespread agreement that resale price maintenance can have procompetitive effects.” (Emphasis supplied.) And, the Supreme Court’s “treatment of vertical restraints had progressed away from Dr. Miles‘ strict approach.” The majority determined that Dr. Miles required “manufacturers to choose second-best options to achieve sound business objectives.” Justice Breyer countered that “antitrust law cannot, and should not, precisely replicate economists’ (sometimes conflicting) views. That is because law, unlike economics, is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients.” The dissent did not dispute that economic analysis correctly identified procompetitive justifications for minimum resale price maintenance, but it questioned “how much” such benefit was being lost from application of the per se rule. As Justice Breyer read the literature, the most that could be said was that “sometimes” the per se rule impeded economic efficiency and that there was “some mild support for the majority’s position” but no “major change in circumstances.” More fundamentally, Justice Breyer observed, “[n]o one claims that the American economy has changed in ways that might support the majority.” The dissent declared flatly: “In sum, there is no relevant change.”

The majority saw little reliance on Dr. Miles and little harm from changing the rule. In essence, Justice Kennedy seems to believe that little will change with Dr. Miles off the books because “the narrowness of the rule has allowed manufacturers to set minimum resale prices in other ways.” After explaining that past congressional actions were not relevant to the stare decisis issue for a variety of reasons, he summarized authorities that reported little impact on consumers during periods of prior permissive approaches to vertical price restraints. Justice Breyer viewed the impact dramatically differently. In his view, Congress relied on the presence of the per se rule in earlier legislative actions, whether or not they mandated per se treatment of vertical resale price maintenance. Low-priced retailers, new distributors (including internet distributors), and other businesses had arranged their affairs in reliance on the rule. And, the dissent estimated the share of the majority’s “tiny fraction of manufacturers” who had ever employed resale price maintenance during prior permissive periods as equaling “just over $300 billion” in consumer’s purchases in today’s dollars. Where the majority decried the per se approach as favoring lawyers “by creating legal distinctions that operate as traps for the unwary,” the dissent saw workable legal rules that would have left the law settled and enforceable.

Implications

Leegin seems likely to have a direct impact on manufacturers, distributors, and retailers of goods. These parties may now consider resale price maintenance agreements in an effort to improve competitiveness and increase sales.

The magnitude of the change wrought by Leegin likely will turn on a number of factors. For example, will the Leegin decision lead to changed practices not only in the traditional distribution channels, such as the discounters at malls cited by Justice Breyer, but also, for example, in the terms and conditions that parties to intellectual property licenses negotiate? State laws are another source of potential constraint on changes in distribution practice.

Both the majority and dissent recognize that the decision does not settle this area of the law, with Justice Breyer predicting “considerable legal turbulence as lower courts seek to develop workable principles” and Justice Kennedy recognizing that federal courts will “gain experience . . . over the course of decisions. . . .” The majority opinion contains the seeds of future antitrust litigation in its description of the circumstances in which vertical price restraints could be anticompetitive. And, indeed, in speaking about the implications of applying the rule of reason to vertical price restraints, the majority urges the federal courts “to be diligent in eliminating their anticompetitive uses from the market.”

Time of course will tell more about the magnitude of the decision’s impact, but the direction, at least nominally, is clear. Justice Breyer is almost certainly correct that one safe prediction to make about the decision is “that it will likely raise the prices of goods at retail.” Whether that is a good or bad thing from an antitrust perspective will depend on how much those increased prices are the results of the potential anticompetitive effects of resale price maintenance (for example, by facilitating collusion among retailers) and on how much the higher prices consumers pay result in the positive “welfare effects” that Justice Kennedy cited in support of the majority decision and what one counts as the welfare effects underlying Justice Kennedy’s observation.