Living with 'Leegin': The Demise Of 'Dr. Miles' And The 'Per Se' Rule Against Minimum Resale Price Maintenance

Overruling a nearly 100 year-old precedent, in a 5-4 decision, the Supreme Court has ruled that agreements setting minimum retail prices and other minimum resale prices no longer are per se illegal under the US federal antitrust laws, and instead, must be "judged by the rule of reason" on a case-by-case basis. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 550 U.S. __ (decided June 28, 2007), overruling Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

The facts were simple. Leegin, a maker of leather goods and accessories, asked retailers to agree to charge specified resale prices. When PSKS refused to stop discounting, Leegin terminated the relationship. A jury awarded nearly $4 million and on appeal the manufacturer did not dispute that it had entered into resale price maintenance agreements with its retailers. The Fifth Circuit affirmed on the authority of Dr. Miles, and the Supreme Court granted certiorari to reconsider the per se rule.

In an opinion written by Justice Kennedy, joined by the Chief Justice and Justices Scalia, Thomas, and Alito, the Court noted that there are three principal justifications for resale price maintenance: (1) combating the "free riding" that discourages dealers from providing services that consumers want (and, presumably, that manufacturers want); (2) facilitating entry by new brands; and (3) encouraging even dealers not threatened by free riding to provide more services, by overcoming the difficulty and inefficiency of requiring such services through contract. The Court criticized the reasoning of Dr. Miles, observing that it was based, by way of a 1628 treatise, on the common law rule against restraints on alienation, and that the decision erroneously analogized vertical restraints to horizontal agreements among dealers. The Court also rejected the argument that Dr. Miles should be retained on the ground of stare decisis, responding that: (1) the Sherman Act is akin to the common law and equally dynamic; (2) Dr. Miles already has been limited by subsequent cases; (3) Dr. Miles was inconsistent with cases (particularly United States v. Colgate & Co., 250 U.S. 300 (1919)) permitting manufacturers to achieve the same end through different but less efficient means; and (4) non-price vertical restraints, such as territorial restraints, have a similar impact to resale price maintenance but have been subject to a different standard.

The most crucial part of the opinion for many is what the Court had to say about how the rule of reason should be applied to resale price maintenance agreements in the future. The Court pointed out that resale price maintenance may, in fact, have anticompetitive effects when it is "designed solely to obtain monopoly profits" by "facilitat[ing] a manufacturer cartel" or "organiz[ing] cartels at the retailer [or other dealer] level." The Court held: "A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful." This is not...