Classic Antitrust Cases: Leegin and Resale-Price Maintenance Agreements

Resale Price MaintenanceSome antitrust questions are easy: Is price-fixing among competitors a Sherman Act violation? Yes, of course it is.

But there is one issue that is not only a common occurrence but also engenders great controversy among antitrust attorneys and commentators: Is price-fixing between manufacturers and distributors (or retailers) an antitrust violation? This is usually called a resale-price-maintenance agreement and it really isn’t clear if it violates the antitrust laws.

For many years, resale-price maintenance—called RPM by those in the know—was on the list of the most forbidden of antitrust conduct, a per se antitrust violation. It was up there with horizontal price fixing, market allocation, bid rigging, and certain group boycotts and tying arrangements.

There was a way around a violation, known as the Colgate exception, whereby a supplier would unilaterally develop a policy that its product must be sold at a certain price or it would terminate dealers. This well-known exception was based on the idea that, in most situations, companies had no obligation to deal with any particular company and could refuse to deal with distributors if they wanted. Of course, if the supplier entered a contract with the distributor to sell the supplier’s products at certain prices, that was an entirely different story. The antitrust law brought in the cavalry in those cases.

You can read my blog post about the Colgate exception here: The Colgate Doctrine and Other Alternatives to Resale-Price-Maintenance Agreements.

In 2007, the Supreme Court dramatically changed the landscape when it decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). The question presented to the Supreme Court in Leegin was whether to overrule an almost 100-year old precedent (Dr. Miles Medical Co.) that established the rule that resale-price maintenance was per se illegal under the Sherman Act.

Over the years, the Supreme Court had gradually backed away from per se antitrust liability for other types of vertical agreements. For example, the Court earlier changed course and applied the rule of reason instead of the per se rule to vertical price agreements that set maximum pricing and vertical agreements that did not involve prices. But until Leegin, minimum price agreements between a manufacturer and distributor (or retailer) were always considered per se antitrust violations.

Before delving into its substantive analysis, the Supreme Court interestingly noted that the existing per se rule developed from the common-law rule that a general restraint on alienation is ordinarily invalid. A resale-price-maintenance agreement is, in fact, a restraint on alienation because the supplier sells a good to a distributor and tells the distributor that it must sell that good at a price that is at least a certain amount. And, as the Supreme Court explained, concerns about restraints on alienation developed from property and real estate: “the rule arose from restrictions removing real property from the stream of commerce for generations.”

The Supreme Court didn’t believe this was a good justification: “We reaffirm that ‘the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today.”

The typical per se antitrust violation is conduct that rarely if ever has pro-competitive benefits. That is why the Supreme Court has seen fit to declare the actions per se illegal under the Sherman Act—there is little concern about deterring or prohibiting competitively beneficial activity. A rule-of-reason claim is complicated and expensive, so the per se shortcut saves a lot on administrative costs and incents plaintiffs to enforce the antitrust laws as private attorney generals.

The Supreme Court explained in Leegin that there is little dispute in economics or antitrust that resale-price maintenance does, in fact, have some pro-competitive virtues. So a per se prohibition here would likely deter competitively beneficial activity. The Court then created its own ledger of sorts and explained the pro-competitive benefits of RPM, then its potentially anticompetitive harm.

Because the Court ultimately concluded that resale-price-maintenance agreements will henceforth be adjudged under the rule-of-reason, you should really pay attention to these sections. The Court supplies a roadmap of factors that will either add or detract from an agreement’s likely legality.

Pro-Competitive Benefits of Resale-Price-Maintenance Agreements

The Supreme Court explained that, like other vertical restraints, these agreements “can stimulate interbrand competition—the competition among manufacturers selling different brands of the same type of product—by reducing intrabrand competition—the competition among retailers selling the same brand.” This is important, explained the Court, because the purpose of the antitrust laws is to protect interbrand competition (competition among manufacturers).

By using vertical-price restraints, a manufacturer can eliminate or at least reduce competition among distributors and retailers selling its product. This, in turn, can encourage the retailers “to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers.” It also can set up a market where consumers can choose among low-price and low-service brands, high-price and high-service brands, and everything in between.

Absent a resale-price-maintenance agreement, the Supreme Court explained that some discounting retailers can free ride on retailers that spend the money to furnish services (and therefore must charge a higher price to pay for those services).

The Leegin Court also explained that the RPM agreements can enhance interbrand competition by facilitating market entry for new firms and brands. That is, new manufacturers can use minimum-price restrictions to induce certain retailers to make the kind of investment in capital and labor that is required to distribute mostly unknown products to consumers.

If you are a manufacturer considering resale-price maintenance, you should analyze and document these and any other pro-competitive benefits.

Anticompetitive Harm of Resale-Price-Maintenance Agreements

These agreements, however, are not all sunshine and puppy dogs. There is a reason they are controversial and the Supreme Court also pointed out their anticompetitive risks. Many of these center on the risk that the agreements will support a cartel at either the retailer or supplier level.

For example, RPM agreements may facilitate a manufacturer cartel by assisting the cartel in identifying “price-cutting manufacturers who benefit from the lower prices they offer.” The arrangements could also organize cartels at the retailer level: A group of retailers could collude to fix prices, then compel one or more manufacturers to aid that conspiracy with resale price maintenance. In that case, retailers (perhaps online retailers, for example) with better distribution systems or lower cost structures couldn’t pass on those advantages to their customers in the form of lower prices.

The Leegin Court also explained that a powerful retailer or manufacturer could abuse RPM agreements. A dominant retailer, for example, could request resale-price maintenance to forestall innovation in distribution that lowers costs. And a manufacturer with market power could employ the practice to give retailers an incentive not to sell the products of smaller rivals or new entrants.

Are Resale-Price-Maintenance Agreements Illegal Under the Antitrust Laws?

It really does depend. There is a misconception out there that Leegin made these agreements legal. That isn’t true at all. The Court removed the per se label, which is significant, but like other vertical agreements that could restrain trade, a company employing an RPM agreement could face serious antitrust scrutiny.

The Leegin Court added some helpful hints about what agreements should face extra scrutiny: First, if competing manufacturers adopt the policy, courts should view them more carefully. Second, if retailers were the impetus for the RPM agreement, “there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant inefficient retailer.” Finally, the Supreme Court explained that the RPM agreement is of substantially less concern where the relevant entity lacks market power (which is a common theme for many antitrust violations).

The Supreme Court in Leegin, of course, spoke only about the federal antitrust laws. Many states maintain their per se prohibitions in their own antitrust statutes against vertical price-fixing. So if you are a national manufacturer, you really need to know state antitrust laws as well. For example, under California’s antitrust statute—the Cartwright Act—it appears that resale-price-maintenance agreements may still be per se unlawful (although the California Supreme Court has not definitively addressed it since Leegin). By contrast, in Minnesota, where its antitrust statute is interpreted consistently with federal antitrust law, it is unlikely that an RPM agreement is per se illegal under the Minnesota antitrust laws.

This is an area of great controversy at both the state and federal level. Indeed, after Leegin, there were legislative attempts to restore the per se rule to resale-price maintenance. The point is that it is a sensitive area.

If you are considering such a policy or believe you are harmed by resale-price maintenance, you should call an antitrust attorney. This area is an antitrust minefield. Many companies go forward without antitrust counsel; that is mistake.