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On Thursday, June 28, the U.S. Supreme Court issued an opinion in Leegin Creative Leather Products Inc. v. PSKS Ins., dba Kay’s Kloset, abandoning a 96 year-old ban on setting minimum-resale-price floors on products. In a 5-4 decision, the Supreme Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co., changing the legal rule by which certain vertical price restraints are to be judged. Under Dr. Miles, minimum-pricing floors were per se illegal; now, under Leegin, such practices are to be judged under the rule of reason. In a detailed opinion, the Supreme Court makes clear that setting a minimum-resale price is not necessarily legal, it’s simply not per se illegal. The court was careful to stress that such practices are to be examined under the rule of reason on a case-by-case basis, examining the specific circumstances surrounding each situation. Many corporations and businesses may view this as a victory granting manufacturers broader authority with regard to resale pricing practices. While the Supreme Court has certainly changed the standard under which such practices will be reviewed, it is far from a green light for manufacturers to control resale pricing floors. These pricing policies will be examined by the courts in the future and multiple factors will be taken into consideration in determining their legality, but many such pricing policies are likely to still be found to be illegal, particularly in concentrated markets. Therefore, manufacturers, corporations and businesses should tread lightly in relying on this opinion, viewing the case as a yellow light to proceed with extreme caution when establishing resale pricing policies with the advice of counsel. The facts of Leegin are as follows: PSKS, doing business as Kay’s Kloset, was a retailer of Brighton-brand products manufactured by Leegin. Leegin introduced the Brighton brand in 1995, and the brand’s popularity arose from a particular marketing strategy. Brighton accessories are sold only in independently owned stores that always offer the products at a set price while providing a high level of personal service. Leegin has sought to deal only with boutiques that agree not to sell its products below a set price. Kay’s Kloset, a suburban Dallas shop, began offering Brighton accessories in 1995; within four years, it was their best-selling line. When Kay’s Kloset began offering the goods at a discount, the manufacturer stopped shipping Brighton bags to the store. Contending that it often discounted the Brighton line to remain competitive in the Dallas market, 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. 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 Supreme Court precedent bound it to apply the per se rule. Before the Supreme Court, Leegin did not appeal the price-fixing charge, but only the fundamental question underlying the case: should resale price maintenance be automatically barred as per se illegal? Or, in the alternative, should such deals be examined on a case-by-case basis under a rule of reason to determine whether they are reasonable in that particular market under those specific circumstances? A slim majority of justices found the answer to be the latter – resale price maintenance deals should be reviewed on a case-by-case basis under the rule of reason. Many observers, including economists and antitrust theorists, have argued over the years that the per se rule against vertical minimum-price-fixing 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. For example, 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 Supreme 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. Leegin argued that their minimum-resale-pricing policy similarly provided pro-competitive effects. The company argued that its marketing approach – selling Brighton products through small boutiques that offer specially personalized service – does indeed benefit consumers because of the greater level of service given by the retailers. The per se rule, Leegin said, fails to take those circumstances into account. Justice Anthony Kennedy delivered the opinion of the court, with Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito joining. Kennedy noted that “a restraint must have ‘manifestly anticompetitive’ effects” to be per se illegal. Acknowledging the court’s recent rejections of “the rationales on which Dr. Miles was based,” the court overruled the 1911 case. The court relied on changing economic justifications and an examination of the potential pro-competitive effects of resale pricing policies to determine that resale price floors should not be deemed per se illegal. The court acknowledged that under some circumstances such policies can be pro-competitive and should not be illegal. However, the court also cautioned that not all such policies aid competition nor should all such policies be legal. The Supreme Court did not hold that resale price minimums are legal, merely that they should be examined on a case-by-case basis, allowing for select practices to be legal under certain circumstances. Justice Stephen Breyer wrote a strong dissenting opinion with Justices John Paul Stevens, David Souter and Ruth Bader Ginsburg joining, challenging the majority’s rejection of an almost 100-year precedent, upon which discounting retailers had relied. In order for a resale price maintenance program to pass the rule of reason test, a legitimate and persuasive pro-competitive justification must be given for the scheme. The majority opinion offers a non-exclusive list of such possible justifications, including providing a higher degree of service for a higher priced item, giving consumers a larger number of options with regard to price and service, and reducing the risk of “free-riding.” It is important to note that while the Supreme Court may have overruled the application of the per se rule to resale price maintenance, the rule of reason now applies to such practices, which has its own set of potential concerns for companies. By applying the rule of reason to these pricing practices, the Supreme Court has given greater authority and discretion to the lower courts in determining which practices are illegal and which practices are adequately justified. This could lead to inconsistencies in the circuits, requiring the Supreme Court to weigh in again on the issue. Businesses also need to consider the role and impact of state antitrust laws. The Supreme Court may have eliminated the per se rule for resale price maintenance, but that change in standards only applies to federal antitrust laws. Many states have their own state antitrust laws and while most states look to the federal antitrust laws for guidance, not all states do. Thus in some states, resale price maintenance may still be per se illegal under their state antitrust laws, unless the state law at issue is dependent on federal law. The Leegin case certainly ended the Supreme Court’s term with a bang by narrowly overruling a 96-year-old precedential opinion essentially based on the reasoning that the times have changed. In doing so, the doctrine of stare decisis may have been chipped away as well by a majority of the Supreme Court. 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 antitrust issues 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] dlapiper.com. 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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