Jeffrey Bradford in The Antitrust News: “Resale price maintenance after Leegin”

This article previously appeared in Antitrust News (March 200, Vol. 18, No. 1). It is reprinted with permission.

By Jeffrey D. Bradford

For almost a century, the antitrust laws strictly prohibited a supplier and its dealer from agreeing on a minimum resale price. That changed last summer when the United States Supreme Court decided Leegin Creative Leather Products, Inc. v. PSKS, Inc, 127 S. Ct. 2705 (2007).¹ In Leegin, the court held that minimum resale price maintenance (MRPM) agreements are not per se illegal under Section 1 of the Sherman Act. Instead, they must be evaluated on a case-by-case basis using the rule of reason.

In offering companies greater leeway to impose MRPM agreements under federal law, Leegin invited businesses to rethink their distribution policies. Considerable uncertainty remains, however, as to how federal courts will apply the rule of reason analysis to MPRM agreements after Leegin and whether North Carolina courts will follow Leegin in construing state antitrust law.

The Leegin Decision

Leegin Creative Leather Products is the manufacturer of “Brighton”-branded leather accessories for women. To establish Brighton as an upscale brand sold only in boutique stores, Leegin adopted a policy to sell the Brighton line only to retailers who agreed not to discount the Brighton products below Leegin’s suggested retail prices. PSKS, a clothing retailer doing business as Kay’s Closet, refused to abide by that agreement, and Leegin ceased selling to the store. Leegin, 127 S. Ct. at 2710—11.

PSKS then sued Leegin in the Eastern District of Texas alleging an unlawful restraint of trade in violation of Section 1 of the Sherman Act. The trial court excluded expert testimony proffered by Leegin as to the pro-competitive effects of its MRPM program, and PSKS ultimately prevailed at trial. Refusing to depart from the per se rule enunciated in Dr. Miles, the Fifth Circuit affirmed. Id. at 2712.

The Supreme Court granted certiorari and sided with Leegin. A five-member majority, in an opinion written by Justice Kennedy, rejected the century-old per se rule against MRPM agreements in favor of a rule of reason analysis.

The majority began by identifying the rule of reason as the “accepted standard for testing whether a practice restrains trade” for a Section 1 violation. Id. Any departure from the rule of reason, it stated, “must be based upon demonstrable economic effect.” Id. at 2713. Thus, the court’s use of per se rules (such as that in Dr. Miles) should be “confined to restraints … ‘that would always or almost always tend to restrict competition and decrease output.’” Id. Ultimately, the court concluded that MRPM–which can be pro or anti-competitive “depend[ing] on the circumstances”–is not such a restraint. Id. at 2717—18.

On its way to rejecting the per se ban formulated in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), the majority criticized one of the underlying rationales for that decision–the common-law rule against alienation. Leegin, 127 S. Ct. at 2714. The court found the doctrine “formalistic,” outdated, and “irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today.” Id.

As a further illustration of Dr. Miles’ antiquated reasoning, the majority noted Dr. Miles’ treatment of vertical agreements between manufacturers and distributors as having the same universally anti-competitive effects as horizontal agreements among competing manufacturers or distributors. In more recent decisions, the court “has rejected” this approach and now “formulates antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements.” Id. The majority also expressed concern about inconsistencies in antitrust law resulting from the Dr. Miles rule. Under the modern federal regime, vertical restrictions such as territorial limitations on dealers, and even maximum resale price maintenance, are evaluated under a rule of reason analysis, and companies have a right to refuse to deal with retailers that do not follow their suggested retail prices. Id. at 2721—23. Yet MRPM agreements remained strictly prohibited under Dr. Miles, despite growing evidence of the pro-competitive effects of such agreements. The court characterized such arbitrary “legal distinctions” as “traps for the unwary.” Id. at 2723.

Having rejected the obsolete ideological underpinnings of the Dr. Miles decision, the majority then considered the large body of economic and legal research, indicating that MRPM, in fact, enhances consumer efficiency and welfare. The court first acknowledged that “economics literature is replete with pro-competitive justifications for a manufacturer’s use of resale price maintenance.” Id. at 2714. Persuaded by this scholarship, the majority found that MRPM “can stimulate inter-brand competition–the competition among manufacturers selling different brands of the same type of product–by reducing intra-brand competition–the competition among retailers selling the same brand.” Id. at 2715. In other words, an ensured minimum retail price provides retailers with the economic incentive to invest in service and promote their supplier’s products (activities that increase consumer demand) without having to worry about low-price discounters free-riding on their efforts. Id. at 2715—16.

The court also agreed that MRPM helps new firms and brands gain market share while encouraging retailers to offer services that would not otherwise be provided. The end result is that consumers have more options in the marketplace.

However, as the court cautioned, “the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated.” Id. at 2717. The majority specifically identified manufacturer or retailer cartels and higher prices for consumers as possible dangers of MRPM. It also described several ways in which a manufacturer or retailer might utilize an MRPM agreement as an unlawful abuse of its market power. Nevertheless, the court concluded that the per se rule of Dr. Miles, which “would proscribe a significant amount of pro-competitive conduct,” was no longer justified under modern economic reality. Id. at 2717—18.

Finally, the majority found that principles of stare decisis did not require it to adhere to the old per se rule, as the legal and economic basis for that rule has eroded. Moreover, the Sherman Act’s prohibition of unlawful restraints on trade, like the common law, is meant to “evolve to meet the dynamics of present economic conditions.” Id. at 2720.

Evaluating a Minimum Resale Price Maintenance Program Under the Rule of Reason

In rejecting the per se rule against MRPM agreements, the Supreme Court offered some guidance for applying the rule of reason to resale price restraints. Companies considering adopting MRPM policies should carefully assess their policies in light of the signposts provided by the court.

For instance, the court identified the “number of manufacturers that make use of the practice in a given industry” as an important consideration. Id. at 2719. That is, the risks of anti-competitive effects are minimal were “only a few manufacturers lacking market power adopt the practice.” Id. By contrast, “[r]esale price maintenance should be subject to more careful scrutiny … if many competing manufacturers adopt the practice.” Id.

The court further noted that the “source of the restraint” may provide important instruction. Id. “If there is evidence retailers were the impetus for vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer.” Id. On the other hand, if a manufacturer acted “independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct.” Id.

Finally, the court identified the relative “market power” of the relevant manufacturers and/or retailers as an important (although not dispositive) consideration. Id. at 2720.

The lower courts will face significant challenges, procedurally and substantively, in balancing these factors, a point that did not escape the court’s attention. Nonetheless, the court expressed optimism that “[a]s courts gain experience considering the effects of [MPRM] by applying the rule of reason over the course of decisions,” they can devise a “litigation structure” meticulously crafted to “provide guidance to businesses,” “prohibit anti-competitive restraints” and “promote pro-competitive ones.”²

The Impact of Leegin on North Carolina Antitrust Law

Like most states, North Carolina has enacted a state counterpart to the federal statute prohibiting unlawful restraint on trade.³ Because Leegin alters only federal antitrust law and not its state-law counterparts, uncertainty exists as to whether North Carolina courts will follow Leegin or retain the per se rule of Dr. Miles.⁴ This uncertainty could shift the battleground over MRPM agreements to state court.⁵

North Carolina courts generally defer to federal precedent in interpreting North Carolina’s antitrust laws. See, e.g., Madison Cablevision, Inc. v. Morganton, 325 N.C. 634, 656, 386 S.E.2d 200, 213 (1989); Rose v. Vulcan Materials Co., 282 N.C. 643, 655, 194 S.E.2d 521, 530 (1973); North Carolina Steel, Inc. v. National Council on Comp. Ins., 123 N.C App. 163, 171, 472 S.E.2d 578, 582—83 (1996); see also Eli Lilly & Company v. Saunders, 216 N.C. 163, 4 S.E.2d 528, 532 (1939) (recognizing the per se ban set out in Dr. Miles). It reasonably follows that courts would take such an approach with Leegin. Nevertheless, federal precedent is not binding as to state law, and at least one North Carolina court has rejected federal antitrust precedent in an arguably analogous context. See Hyde v. Abbot Laboratories, Inc., 123 N.C. App. 572, 575—82, 473 S.E.2d 680, 683—86 (1996) (finding relevant only the federal precedent in effect at the time a state antitrust statute was passed in 1969, the court refused to follow a 1977 U.S. Supreme Court decision interpreting an analogous federal statute). Also, although not necessarily reflective of how a North Carolina court would rule on the issue, it is worth noting that the state of North Carolina argued as amici in Leegin to retain the Dr. Miles rule. See Wofford, supra note 4, at 2 n.11. To the extent this indicates a preference for the older rule, state enforcers could possibly take the same position in future civil suits involving MRPM agreements.

So what are the implications for North Carolina practitioners? As is often the case in the law, there is only one certainty: nothing is certain. Only time will tell whether and to what extent Leegin will be followed in the North Carolina courts.

End Notes

1. For further discussion of the Leegin decision, see, e.g., Marie L. Fiala & Scott A. Westrich, Leegin Creative Leather Products: What Does the New Rule of Reason Mean for Resale Price Maintenance Claims?, Antitrust Source, Vol. 6 Issue 6, Aug. 2007, http://www.abanet.org/antitrust/atsource/07/08/Aug07-Westrich8-6f.pdf ; Michael A. Lindsay, Resale Price Maintenance and the World After Leegin, Antitrust, Vol. 22, No. 1, Fall 2007
2. One such potential test case, Valuepest.com, Inc. v. Bayer Corp., et al., No. 07-1760, is currently pending before the United States Court of Appeals for the Fourth Circuit.
3. See N.C. Gen. St. ß 75-1 et seq. Section 75-1, for instance, declares illegal “[e]very contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce,” and section 75-2 provides that “[a]ny act, contract, combination in the form of trust, or conspiracy in restraint of trade or commerce which violates the principles of the common law” also violates section 75-1.
4. For an in-depth discussion of this issue on a national scale, see, e.g., M. Russell Wofford Jr. & Kristen C. Limarzi, The Reach of Leegin: Will the States Resuscitate Dr. Miles? The Antitrust Source, Volume 6 Issue 7, Oct. 2007, http://www.abanet.org/antitrust/at-source/07/10/Oct07-Wofford1018f.pdf.
5. There has been no North Carolina appellate business or court decision that has yet construed Leegin. However, since Leegin was decided, at least one North Carolina trial court has entered a consent judgment that seemingly follows the older Dr. Miles rule. See State of North Carolina v. McLeod Oil Co. et al., Wake County Superior Court, File No. 05 CVS 13975, Consent Judgment and Order of Dismissal (July 30, 2007). As this order lacked any meaningful legal analysis, it is unclear whether it represents an artifact of pre-Leegin jurisprudence or intent on the state’s part to continue to prosecute vertical price-fixing claims after Leegin.