Supreme Court: Minimum Price Resale Agreements Allowed (updated)

The U.S. Supreme Court has made it easier for manufacturers to set minimum resale prices by overturning the per se" illegality of minimum resale price agreements.
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Instead, the Supreme Court ruled that challenges to minimum resale prices will be judged on a case-by-case basis by the "rule of reason," a more flexible legal doctrine that requires the challenger to prove price-setting was anticompetitive and did economic harm.
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"Per se" was a much stricter enforcement that assumed that minimum price setting agreements were on their face illegal, regardless of circumstances. By changing the judgment from "per se" to "rule of reason," the Supreme Court has made it more difficult for challengers of the law to win and less risky for manufacturers to set minimum prices, says Gene Zelek, leader of the antitrust and trade regulation practice at Freeborn & Peters LLP, Chicago, IL.
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The "rule of reason" has also governed practices such as supplier-defined reseller territories, confining reseller sales to particular locations or allocating reseller customers, Zelek says. It is also the same test that the Court determined 10 years ago applies to maximum resale price setting by agreement.
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"Although it was possible even before this decision to set minimum or exact resale prices by unilateral policy, the press attention generated by this case likely will spark substantially more interest in resale price programs," Zelek says.


Defining Anticompetitive

George Keeley, an attorney with Keeley, Kuenn & Reid, Chicago, IL, who wrote an advisory on the subject for the National Association of Wholesaler-Distributors, says that the ruling does not mean manufacturers have an unfettered right to push minimum prices down to a distributor or retailer. "It should be emphasized that the Court's decision still leaves minimum resale price restraints open to antitrust challenges," he says.

The Court, in the Leegin case, said that some "vertical price restraints" may have clear anticompetitive effects making them illegal under the "rule of reason" standard. A group of resellers, for example, could fix prices and compel a manufacturer to enforce the illegal arrangement by going along with the price-setting, according to NAW's advisory on the subject.

Or a manufacturer with market power may set prices to influence key resellers to not sell the products of a smaller rival or new market player.

"This conduct could facilitate a manufacturer price fixing cartel," the NAW advisory reads. "If a manufacturer adopts the resale price maintenance policy, without influence from its customers, the restraint is less likely to promote anticompetitive conduct at the resale level."

Stimulating Competition

In explaining its decision, the Court said that minimum resale price maintenance can stimulate competition among manufacturers selling different brands of the same type of product by reducing intrabrand competition among resellers offering the same brand.
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"A single manufacturer's use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer's position as against rival manufacturers," Justice Anthony Kennedy wrote for the court.
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"Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high service brands; and brands that fall in between."
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History of the Case
The Court was ruling in a case between a manufacturer of leather goods, Leegin Creative Leather Products Inc., and retailer Kay's Closet, owned by PSKS Inc. in Texas. Leegin designs, manufactures and distributes leather

goods and accessories.
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At issue in this case were belts sold under the brand name, "Brighton." The Brighton brand is sold across the U.S. in more than 5,000 retail establishments. Leegin asserted in its case that small retailers (such as Kay's Kloset) treat customers better, provide customers more services, and make the shopping experience more pleasant than do larger retailers.
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PSKS, operator of Kay's Kloset, first started purchasing Brighton from Leegin in 1995. It promoted the brand heavily, running Brighton advertisements and holding Brighton days in the store. Brighton was the store's most important brand and once accounted for 40-50% of its profits.
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In 1997, according to the Supreme Court opinion, Leegin instituted the "Brighton Retail Pricing and Promotion Policy," in which it refused to sell to retailers that discounted Brighton goods below suggested prices. The policy contained an exception for products the retailer did not plan to reorder. Leegin wrote to retailers:
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"We, at Leegin, choose to break away from the pack by selling at specialty stores .. that can offer the customer great quality merchandise, superb service, and support the Brighton product 365 days a year on a consistent basis. We realize that half the equation is Leegin producing great Brighton product and the other half is you, our retailer, creating great looking stores selling our products in a quality manner."
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It also expressed concern that discounting harmed Brighton's brand image and reputation.
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In December 2002, Leegin discovered Kay's Kloset had been marking down Brighton's line by 20% to compete with nearby retailers who also were undercutting suggested prices. Leegin suggested Kay's cease discounting. Kay's refused, so Leegin stopped selling to it. The loss had a considerable impact on Kay's Kloset sales.
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PSKS, owner of Kay's, sued Leegin, alleging it had violated antitrust laws. PSKS won in both district and appeals courts. The case was taken to the Supreme Court to reconsider the Sherman Act, which initially ruled that minimum price resale agreements were illegal.

Supreme Court Opinion: Leegin Creative Leather Products Inc. v. PSKS Inc. dba Kay's Kloset