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The Supreme Court will decide this term whether minimum resale price maintenance, a form of vertical price fixing, should continue to be deemed per se illegal. The Court in Leegin Creative Leather Products Inc. v. PSKS Inc. is likely to conclude that it should not. In a minimum resale price maintenance arrangement, parties at different levels of the distribution chain establish a price floor for the product by agreeing to the minimum price at which a retailer, wholesaler, or other purchaser may resell. The Court declared minimum RPM per se illegal under Section 1 of the Sherman Act back in 1911, in Dr. Miles Medical Co. v. John D. Park & Sons Co. Over the past 30 years, however, the rigid per se standard has fallen into disfavor in many other areas of antitrust law in which it traditionally has applied. Courts have increasingly opted for more flexible standards, which weigh an arrangement’s harms and benefits to the market. This trend away from per se analysis suggests that the Supreme Court will use Leegin as an opportunity to strike down per se analysis in yet another situation — minimum RPM. PER SE RULES Under a per se rule, the only relevant question is whether the defendant engaged in the suspect conduct. If so, the defendant will be deemed to have violated the antitrust laws, whether or not the specific conduct can be shown to have harmed competition. By contrast, the rule of reason — the other traditional mode of antitrust analysis — weighs anti-competitive harms against pro-competitive benefits. Only those acts having a net anti-competitive effect violate the antitrust laws under a rule-of-reason analysis. Since enactment of the federal antitrust laws in 1890, the courts have identified several types of conduct that warrant per se treatment, including horizontal price fixing, group boycotts, tying, and both minimum and maximum RPM. Beginning in the 1970s, however, the Supreme Court began to recognize that some conduct historically treated as per se illegal could serve legitimate, pro-competitive purposes. For this reason, the per se rule began to give way increasingly to the rule-of-reason standard. Bright-line rules of illegality in many cases have now succumbed to a more forgiving legal standard that eschews one-size-fits-all analyses. The per se rule prohibiting minimum RPM established in Dr. Miles rested to a large extent on the common-law rule against restraints on “alienability” (that is, the ability to convey property). In Dr. Miles, the Supreme Court found that restraints on alienability, such as minimum RPM, were “obnoxious to public policy” because after a manufacturer has “sold its product at prices satisfactory to itself, the public is entitled to whatever advantage may be derived from competition in the subsequent traffic.” (This common-law rule against restraints on alienability, however, no longer has much relevance to the modern approach to antitrust analysis and the underlying economic principles on which it is now solidly grounded.) In the late 1960s, the Supreme Court extended the per se rule against minimum RPM to maximum RPM — that is, setting a price ceiling above which a reseller cannot charge. Relatively soon afterward, the tide began to turn against per se analysis. In the late 1970s, in the seminal case of Continental T.V. Inc. v. GTE Sylvania Inc., the Court overturned then-recent precedent applying the per se rule to other vertical restraints on distribution, such as exclusive territory and customer restrictions. Since GTE, the rule of reason has governed vertical restraints on matters other than price. GTE recognizes that although vertical restraints imposed on wholesalers or retailers may restrain intrabrand competition, they often enhance interbrand competition — the primary concern of the antitrust laws. Although GTE does not extend rule-of-reason treatment to vertical price restraints, Justice Byron White’s concurrence in GTE notes, “The economic arguments in favor of allowing vertical nonprice restraints generally apply to vertical price restraints as well.” The trend toward limiting the per se rule continued through the 1980s and 1990s. The Supreme Court relaxed the per se rule as applied to group boycotts in the 1980s, applying the rule of reason to certain types of horizontal boycotts. And in 1997, in State Oil Co. v. Khan, the Court overturned its earlier decision that extended the per se rule to maximum RPM claims. Khan reasons that vertical restraints properly receive less scrutiny than horizontal restraints and have the potential to foster interbrand competition. For these and other reasons, Khan holds that vertical restraints fixing the maximum resale price should not be subject to per se condemnation. The issue now before the Supreme Court in Leegin will determine whether the trend in limiting the per se rule will continue. Recent history suggests it will. PRO-COMPETITIVE EFFECTS? In Leegin, the defendant, a manufacturer of high-end women’s handbags and accessories, imposed minimum resale price restrictions on its retailers. The plaintiff, a retailer, charged prices lower than the manufacturer’s mandated prices. The defendant responded by terminating the plaintiff as an authorized retailer. A jury found that the manufacturer had violated the antitrust laws by engaging in per se illegal minimum RPM. In its brief to the Court, Leegin argues that the per se rule established in Dr. Miles should be overturned. According to Leegin, resale price maintenance, even minimum RPM, can have pro-competitive effects, such as preventing retailers that discount from free-riding on the investment and efforts made by other retailers. For example, a brick-and-mortar store might provide showroom space and product demonstrations by knowledgeable sales personnel so that consumers can shop for big-screen TVs. But after determining which TV to buy, a consumer may decide to purchase the desired model from an online retailer because the online retailer, facing lower overhead costs, charges less than the brick-and-mortar retailer. Over time, brick-and-mortar retailers will have little incentive to invest as much in retailing services — which tend to increase sales, output, and competition between and among different brands — for fear that significant sales will be diverted to the free-riding retailers. Even absent the free-rider concern, Leegin argues that minimum RPM entices retailers to invest more energy in promoting the manufacturer’s products by ensuring the retailer an adequate profit margin. This guaranteed profit margin gives the retailer an incentive to provide the optimal retail services necessary to promote the brand as vigorously as possible and increase sales for the brand. A number of amici, including the Department of Justice, the Federal Trade Commission, and several prominent economists, have supported Leegin’s efforts to overturn the per se rule as applied to minimum RPM. The complaining retailer in the Supreme Court case, PSKS, relies largely on stare decisis and congressional intent as grounds for sustaining Dr. Miles. It argues that Congress has been well aware for quite some time that minimum RPM is per se unlawful, but has never passed legislation permitting minimum RPM. In fact, it argues, Congress has shown its disdain for RPM by passing the Consumer Goods Pricing Act of 1975, which removed a limited antitrust exemption for RPM. Similar arguments persuaded the Court in GTE to stop short of extending the rule of reason to RPM. But 20 years later in Khan, the Court gave little weight to arguments based on congressional inaction and intent, noting that a general presumption of leaving legislative change to Congress “has less force with respect to the Sherman Act in light of the accepted view that Congress expected the courts to give shape to the statute’s broad mandate by drawing on common-law tradition.” PSKS also asserts that minimum RPM will undoubtedly prevent efficient retailers from cutting prices for consumers, a primary concern of the antitrust laws. And even if the Court overturns Dr. Miles, PSKS argues, the conduct at issue still warrants per se condemnation as a form of horizontal price fixing, because Leegin serves as a dual distributor, selling products to PSKS at the wholesale level and in competition with PSKS at the retail level. Like Leegin, PSKS has received support from various amici. Consumer advocacy groups, discount retailers, and some economists have urged the Court to sustain Dr. Miles. And FTC Commissioner Pamela Harbour — one of two FTC commissioners who objected to the commission filing an amicus brief in the case — has submitted an open letter to the Court arguing that the per se rule is a necessary enforcement tool and that reversing Dr. Miles would result in higher consumer prices and contravene congressional intent. WHAT NOW? Most commentators expect that Dr. Miles‘ days are numbered. Prevailing economic views and the recent trends in antitrust jurisprudence suggest that the Court will eradicate the per se rule against minimum RPM. If the Court defies expectations and sustains Dr. Miles, manufacturers and suppliers will likely continue to try to influence resale price through indirect means, such as using manufacturer’s suggested resale price lists and refusing to do business with discounting retailers. These mechanisms for indirectly influencing resale price, however, tend to be clumsy and imperfect. And as a practical matter, parties trying to implement these mechanisms can easily stray from the legal path into illegal territory, which makes these strategies risky notwithstanding their purported legality. Significantly, if the Court eradicates the per se rule, this would not make minimum RPM per se lawful. Rather, it simply would mean that the rule of reason would govern such claims and, therefore, only those minimum RPM arrangements having on balance a net anti-competitive effect would be deemed illegal. Under this more flexible standard, parties wishing to enter into a minimum RPM arrangement should be ready, willing, and able to prove that the arrangement has legitimate business objectives and measurable pro-competitive benefits. Otherwise, significant antitrust exposure might still exist even under a rule-of-reason standard.
Peter M. Boyle is a partner and Sean M. Green an associate in the antitrust practice group of Kilpatrick Stockton in Washington, D.C.

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