U.S. Supreme Court Holds That Vertical Price Restraints Are No Longer Per Se Unlawful

On June 28, 2007, the United States Supreme Court overruled 96-year-old precedent governing Sherman Act standards on resale price maintenance. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, the Court held that resale price maintenance agreements are not per se unlawful under section 1 of the Sherman Act, which prohibits agreements in restraint of trade. Instead, vertical price restraints, like other vertical restraints, are subject to the "rule of reason," requiring courts to assess their competitive effects on a case-by-case basis to determine whether the restraints "unreasonably" restrain trade. Price fixing agreements among competitors (horizontal agreements) remain per se unlawful.

In its 1911 decision in Dr. Miles, the Court held that resale price agreements, like price agreements among competitors, were per se unlawful. Relying on the Court's 1919 Colgate decision, which held that a manufacturer had the right to refuse to deal with a reseller of its products, many manufacturers and distributors have established Manufacturer Suggested Retail Prices (MSRPs), and some have adopted policies of refusing to continue to sell to retailers who sell below such prices.

Despite the risks of litigation entailed by the per se rule against vertical minimum price restraints and court decisions that have implied per se unlawful agreements based on conduct to coerce compliance with MSRPs, Leegin elected to exercise extensive control over the minimum prices charged by the retail distributors of its products. Leegin, a manufacturer of leather products, chose to avoid mass retail outlets, instead selling its "Brighton" products principally in independent, small boutiques and specialty stores. It sought a high level of customer service, suggested retail prices and adopted a policy of refusing to sell to discounters. Leegin further implemented a program providing special incentives to retailers who pledged to sell at Leegin's suggested prices. PSKS owned a store in Texas that had been part of this program, but withdrew from it, sold Leegin's Brighton products at a discount, was terminated by Leegin and sued. The District Court refused to allow Leegin to present economic testimony on procompetitive reasons for its conduct, finding the per se rule against vertical minimum price restraints applied, and the Court of Appeals affirmed.

In a 5-4 decision, the Supreme Court overruled its 1911 decision in Dr. Miles and held that vertical price...