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On March 27, the U.S. Supreme Court heard oral arguments in one of the most important cases for consumers in years. Leegin Creative Leather Product Inc. v. PSKS Inc. is an antitrust case dealing with vertical minimum price-fixing. The case requires the justices to examine its long standing per se rule against vertical minimum price-fixing, dating back to 1911. The rule, established almost five decades ago, forbids companies from requiring a minimum retail price for their goods. The “suggested” retail price should be just that, a suggestion. The case has drawn considerable interest from consumer advocacy groups, economists, state attorneys general, retailers, manufacturers and the federal government. The Department of Justice, which is supporting Leegin, said it is time to finally drop the rule after 46 years that any such price mandate is automatically illegal. The antitrust bar is anxiously watching to see what the court will do. In the case, PSKS, doing business as Kay’s Kloset, was a retailer of Brighton brand products manufactured by Leegin. Kay’s Kloset claimed that Leegin violated Section 1 of the Sherman Act by entering into illegal agreements with other retailers to fix the price of Brighton products. Kay’s Kloset, a suburban Dallas shop, was started by Phil and Kay Smith in 1986. They began offering Brighton accessories in 1995, and within four years it was their best-selling line. Leegin, which introduced the Brighton brand in 1991, said its popularity arose from the focus on independently owned stores that would provide the accessories at a set price and provide personal service; Leegin has tried to deal only with boutiques that agree not to sell its products below a set price. When Kay’s Kloset began offering the goods at a discount, the manufacturer stopped shipping Brighton bags to them. Kay’s Kloset contended that it would often discount the Brighton line to remain competitive in the Dallas region. PSKS sued Leegin for illegal price-fixing and the loss of a substantial part of its business. A jury sided with PSKS, and it was awarded $3.6 million (the jury’s award of $1.2 million in damages was automatically tripled under antitrust law). The 5th U.S. Circuit Court of Appeals upheld the verdict based on the per se rule against vertical minimum price fixing. In the company’s appeal to the 5th Circuit, Leegin urged application of the rule of reason, but the court said it was bound by Supreme Court precedent to apply the per se rule. Now, at the Supreme Court, Leegin is not appealing the price-fixing charge, but rather only the fundamental question of whether resale price maintenance should be automatically barred as per se illegal or whether, in the alternative, such deals should be examined on a case-by-case basis to determine if they are reasonable in that particular market under those specific circumstances. Dr. Miles Medical Co. v. John D. Park & Sons Co. established the per se rule against vertical minimum price-fixing. In that case, the court said the medical company could not force shops to sell its potions at set prices. Many people, including economists and antitrust theorists, have argued over the years that the per se rule of Dr. Miles is inconsistent with modern antitrust analysis. In recent years, the Supreme Court has gradually chipped away at the application of the per se rule to vertical restraints. In Continental TV v. GTE Sylvania the court reversed the per se rule against vertical nonprice restraints, including territorial restrictions on dealers. In State Oil v. Khan the court overturned the per se rule against maximum resale prices. In its reasoning in GTE Sylvania and Khan, the court recognized that vertical maximum-price and nonprice restraints can have pro-competitive effects on competition, benefiting consumers, which seems consistent with the purposes of the antitrust laws. Because of potential pro-competitive effects, these restraints are evaluated under the rule of reason, rather than being per se illegal. The Leegin case examines whether vertical minimum price restraints should similarly be examined under the rule of reason and many antitrust experts and economists believe that it should be analyzed using that balancing test. While this case has drawn attention from a wide variety of interest groups, attorneys and economists, they are split on their support. Supporters of Leegin include the Bush administration, economists of the Chicago School and the Department of Justice, who say that in today’s market, minimum price arrangements are not automatically bad for consumers because it results in lower prices. CTIA, the Wireless Association, whose members sell mobile phones, also supports Leegin and argues that sometimes such deals can serve consumers. On the other side of the argument, Burlington Coat Factory, a discount retailer, is siding with Kay’s Kloset and urging the court to continue to bar minimum-price arrangements. Thirty-seven state attorneys general, led by New York, agree that the Dr. Miles prohibition should be upheld. New York Solicitor General Barbara Underwood argued in a “friend of the court” brief that allowing minimum-price arrangements would raise costs for consumers. It is a toss up as to how the Supreme Court will decide, although some clues to the thoughts of the justices can be gleaned by their questions and reactions during oral arguments on March 27. The per se rule was defended not only by the attorneys for Kay’s Kloset and a coalition of 37 states, but Justices Stephen Breyer, John Paul Stevens, Ruth Bader Ginsburg and David Souter all seemed to defend the continued application of the per se rule as well. Stevens specialized in antitrust law when he practiced, as did Breyer, who taught antitrust at Harvard Law School. The four justices focused on the impact to consumers and questioned the impact of permitting anti-price-cutting agreements. They suggested that it is up to Congress, not the court, to reject the fundamental principle of antitrust law established by the Supreme Court in Dr. Miles. This, of course, raises the question of why Congress should be examining the possible reversal of a prior Supreme Court decision, rather than the court itself. On the other side, Justice Antonin Scalia, who also taught antitrust law, appeared to assist the attorney for Leegin, Theodore Olson, in his argument that the per se rule should be overturned without congressional intervention. After responding to opening questions from Breyer and others arguing that retail prices would increase if Leegin won its appeal, Olson fielded questions from Scalia which established that the overall purpose of the Sherman Act is consumer welfare, not necessarily just reducing prices. Scalia also pointed out that some consumers may “prefer more service at a higher price,” and an increase in price doesn’t prove anything if consumer choice and welfare is enhanced, which is certainly an interesting perspective to apply to increased prices generally. Indeed, Leegin had marketed its Brighton line to small boutiques that could offer such increased personalized service, and Leegin required those retailers to accept its no-discount policy. Leegin did not argue that this was not price fixing, but instead argued that consumers benefited from the extra service that the retailers provided, as Scalia correctly noted. In that sense, the per se rule would not take those exceptional circumstances into account. The attorneys for Kay’s Kloset, on the other hand, argued that the per se rule against minimum resale price maintenance should be maintained and was different from other per se violations the court had recently overturned, as it is the “central nervous system of the economy.” Despite indications of the leanings of some justices, the outcome of the case is still anyone’s guess, as the antitrust world awaits the decision. Justice Samuel Alito and Chief Justice John Roberts appeared inclined to overturn the per se rule, without congressional intervention, aligning with Scalia. But Justice Anthony Kennedy, recently cast as the swing vote generally on the court after Justice Sandra Day O’Connor’s retirement, asked questions that did not indicate any leaning, and Justice Clarence Thomas typically did not ask any questions at all during the argument. Procedurally, if the court does overturn the per se rule, the Leegin case will be remanded to be evaluated and possibly re-tried under the rule of reason test. Whatever the outcome, the decision will have an immense impact on manufacturers, retailers, consumers and the antitrust world. Stay tuned. CARL W. HITTINGER is a partner in the litigation group at DLA Piper in its Philadelphia office, where he concentrates his practice in complex commercial litigation with particular emphasis on antitrust and unfair competition matters. Hittinger is also a frequent lecturer and writer on antitrustissues and has extensive experience counseling clients on all aspects of civil and criminal antitrust law. He can be reached at 215-656- 2449 or [email protected]. LESLI C. ESPOSITO is a senior associate with DLA Piper in Philadelphia where she focuses her litigation practice on antitrust and unfair competition matters. She was formerly a senior attorney with the Federal Trade Commission’s bureau of competition.

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