Resale Price Maintenance And The World After Leegin

In its final set of opinions for the 2006-07 term, the U.S. Supreme Court overruled a century-old rule against minimum resale price maintenance - and businesses may now want to reconsider their distribution policies as a result. Until the Supreme Court's June 28 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., any agreement permitting a manufacturer, supplier, or licensor to control the minimum price at which others would resell its products had been illegal "per se" - that is, automatically illegal, with no possible defense. Ten years ago, the Supreme Court eliminated that rule for maximum prices, and now the Supreme Court has done the same for minimum resale price agreements. Instead, all resale price agreements will now be judged by looking at their actual effects on competition.

Background

Back in 1911, the Supreme Court said in the Dr. Miles case that it was illegal for a supplier to restrain a reseller's pricing. But in the Colgate case eight years later, the Supreme Court also confirmed that there was no antitrust violation unless there was an "agreement" between the supplier and its reseller - because the Sherman Act only forbids agreements that restrain trade, not unilateral practices that may have the same practical effect. So a mere suggestion of a resale price - with no evidence of agreement - was not an "agreement" in restraint of trade; manufacturers were free to provide Manufacturer's Suggested Resale Prices (MSRPs) and other market intelligence to their resellers, as long as they didn't "agree" on a reselling price. Many manufacturers took this a step further and adopted what came to be called "Colgate policies": the manufacturer announced the minimum resale prices that it wanted to see and announced a policy that it would not deal with discounters. In other words, at any given time the reseller would be free to sell its existing inventory at whatever price it chose, but the manufacturer could refuse to resupply a reseller whom it discovered to be discounting below MSRP.

The Dr. Miles rule of per se illegality originally applied to nonprice vertical agreements that could have a significant effect on price, but the Supreme Court's 1977 GTE Sylvania case changed that. A nonprice restraint could provide a direct benefit to consumers (e.g., a requirement that a store have a minimum space devoted to the manufacturer's product, or that the store have a certain number of on-floor personnel trained in the manufacturer's product and able to provide information). Or it could simply provide an incentive for the reseller to provide a higher level of pre-sale services (for example, granting a reseller an exclusive territory might give the reseller a sufficient assurance that consumers would buy from that reseller, rather than going down the street to the discounter who had not borne the expense of providing pre-sale services). So the Supreme Court decided that nonprice vertical restraints should be evaluated under the "Rule of Reason." The Rule of Reason requires courts to examine the specific agreement and evaluate its actual effects on competition (in contrast to the per se approach, which conclusively presumes that the condemned conduct always or almost always has a net negative effect on competition...