Client Alert

On the last day of the 2006-2007 term of court, the Supreme Court issued its long-awaited opinion in Leegin Creative Leather Products, Inc. v. PSKS, Inc. By a vote of 5-4, the Court held that minimum vertical price fixing is no longer per se unlawful under the Sherman Act, but rather should be analyzed under the rule of reason.

The Court's decision reverses the 1911 case Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). The opinion is available here.

Below are the relevant portions of the Court's syllabus explaining why resale price maintenance should be governed by the rule of reason:

Because the reasons upon which Dr. Miles relied do not justify a per se rule, it is necessary to examine, in the first instance, the economic effects of vertical agreements to fix minimum resale prices and to determine whether the per se rule is nonetheless appropriate. Were this Court considering the issue as an original matter, the rule of reason, not a per se rule of unlawfulness, would be the appropriate standard to judge vertical price restraints.

Economic literature is replete with procompetitive justifications for a manufacturer's use of resale price maintenance, and the few recent studies on the subject also cast doubt on the conclusion that the practice meets the criteria for a per se rule...

Setting minimum resale price may also have anticompetitive effects ... Thus, the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated. Notwithstanding the risks of unlawful conduct, it cannot be stated with any degree of confidence that retail price maintenance "always or almost always tend[s] to restrict competition and decrease output."...

The rule of reason is designed and used to ascertain whether transactions are anticompetitive or procompetitive. This standard principle applies to vertical price restraints. As courts gain experience with these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses.

The Court's opinion raises many questions. What types of resale price maintenance agreements would be unlawful under the rule of reason? There is no case law on this issue because for the last 96 years such agreements have been treated as per se unlawful. Given this uncertainty, is it still necessary to follow the Colgate doctrine?

The Court's decision also raises the academic question of when is it appropriate to overturn established precedent under stare decisis. Traditionally, long-standing decisions of statutory interpretation are not overruled because if the Court's interpretation was wrong, Congress would have amend the governing statute. In Leegin, the Court explained why it was appropriate in this case to overturn a long-standing decision of statutory interpretation:

Stare decisis does not compel continued adherence to the per se rule here. Because the Sherman Act is treated as common-law statute, its prohibition on "restraint[s] of trade" evolves to meet the dynamics of present economic conditions. The rule of reason's case-by-case adjudication implements this common-law approach.... In addition, this Court has overruled [its] precedents when subsequent cases have undermined their doctrinal underpinnings."... It is not surprising that the Court has distanced itself from Dr. Miles' rationales, for the case was decided not long after the Sherman Act was enacted.

In his dissent, Justice Beyer disagreed:

The Court justifies its departure from ordinary considerations of stare decisis by pointing to a set of arguments well known in the antitrust literature for close to half a century. Congress has repeatedly found in these arguments insufficient grounds for overturning the per se rule. And, in my view, they do not warrant the Court's now overturning so well-established a legal precedent.

Now that the Supreme Court has overruled such a well-established legal precedent as Dr. Miles, the question becomes what next? When are resale price maintenance agreements anticompetitive? What procompetitive justifications are necessary to counterbalance any anticompetitive effects under the rule of reason? What becomes of the Colgate doctrine? Does my company have sufficient market power to cause concern under the rule of reason? How do you define the relevant market in my industry?

Please contact the Womble Carlyle attorney with whom you usually work, or any of the following attorneys, if you want to discuss any of these issues.

Mark Poovey - (336) 721-3641
Jason Hicks  - (336) 728-7032
Jim Phillips - (336) 721-3658

Please check Womble Carlyle's Antitrust and Distribution Law Blog for more updates on the impact of the Supreme Court's decision in Leegin.