In a 5-4 decision June 28, 2007, the U.S. Supreme Court overturned the per se rule on minimum resale price agreements established in the Dr. Miles case in 1911, holding that minimum resale price agreements are subject to “rule of reason” analysis.
Leegin Creative Leather Products Inc. v. PSKS Inc., No. 06-480, involved a clothing manufacturer that stopped shipping a line of clothing to a boutique because the boutique was discounting in direct defiance of the manufacturer’s pricing policy. The boutique successfully sued the manufacturer for violating Section 1 of the Sherman Act and was awarded about $4 million. The trial judge excluded key expert testimony about the consumer benefits of the manufacturer’s pricing policies on the ground they were per se or automatically illegal under Dr. Miles Medical Co. v. John D. Park & Sons Co. The U.S. Court of Appeals for the Fifth Circuit affirmed.
The Supreme Court reversed the lower court decisions, concluding that the more flexible rule of reason approach was more appropriate in evaluating resale price maintenance. The court emphasized that these vertical agreements may increase interbrand competition by, for example, encouraging resellers to invest more in service and marketing and giving consumers more options between low-service and high-service brands. In addition, the court concluded that adopting the rule of reason would be consistent with the way the court evaluates most other vertical restraints. Both the majority and dissenting opinions devoted much attention to the doctrine of stare decisis, ultimately splitting by one vote on whether it compelled adherence to a century-old precedent.
The Supreme Court’s ruling in Leegin will give manufacturers substantially more control over the prices resellers charge for their products and will make it easier to prevent discounting. Combined with the tougher pleading standards announced by the court last month in Bell Atlantic Corp. v. Twombly, this decision should deter terminated discounters from suing for treble damages. Nevertheless, the opinion does not immunize vertical pricing agreements from antitrust scrutiny. Plaintiffs may seek to connect resale price agreements to horizontal conspiracies among resellers or producers, which remain per se illegal. Even if purely vertical, minimum resale price agreements that have anticompetitive effects not outweighed by procompetitive justifications, such as those imposed by a dominant manufacturer or retailer, still risk condemnation under the rule of reason. And the battleground may shift to those states and jurisdictions outside the U.S. that may still follow a rule of per se illegality.
This is the Supreme Court's last antitrust case this term and the last of an unbroken string of nine pro-defendant antitrust rulings by the court since Trinko in 2004. The difference is that Leegin is the first close decision and the first reflecting the court’s general ideological divide; all others were unanimous or nearly so.