Supreme Court Ends The Per Se Rule Of Illegality For Vertical Minimum Price Agreements

Leegin Creative Leather Products, Inc. v. PSKS, Inc.

On June 28, 2007, the Supreme Court, in a 5-4 decision, overturned the nearly century-old precedent of Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) and held that the Rule of Reason, not the per se rule of illegality, applies to vertical minimum price fixing agreements (also known as minimum resale price maintenance, or "RPM").

Background

The case arose from Leegin's termination of its retail distributor PSKS based on PSKS's violation of Leegin's minimum resale pricing policy on its Brighton line of women's accessories. A jury in the United States District Court for the Eastern District of Texas found that there was an unlawful vertical price fixing agreement and awarded PSKS $1.2 million in damages, which was then automatically trebled under the antitrust laws.

Leegin did not challenge the existence of a price fixing agreement but instead questioned the per se ban on vertical minimum price fixing agreements. The Fifth Circuit Court of Appeals rejected the manufacturer's argument and affirmed the jury verdict, holding that the trial court, under long-standing Supreme Court precedent, had correctly applied the per se rule to vertical minimum price fixing agreements.

The law

Section 1 of the Sherman Antitrust Act declares "[e]very contract ... in restraint of trade or commerce among the several States ... to be illegal." The Supreme Court held in the 1911 Dr. Miles decision that vertical price fixing is per se unlawful. Although per se analysis continued to apply with respect to vertical minimum price fixing agreements ever since 1911, the per se rule's applicability to all other types of vertical agreements with resellers had been abandoned by the courts over time, most recently in the Supreme Court's 1997 decision in State Oil Co. v. Khan (which held that the rule of reason, rather than the per se rule, applies to a vertical maximum price fixing).

The Supreme Court's Leegin decision

In the majority opinion, written by Justice Kennedy, the Court emphasized that the per se rule of presumptive illegality should be applied only where the conduct in question is so clearly harmful to competition that it would invariably be found unlawful in all or nearly all cases, even if the more detailed and case-specific rule of reason were used to judge it. While acknowledging a split in economic thought about the benefits of vertical minimum price agreements, the majority...