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Supreme Court Changes Antitrust Analysis

Leegin v. Creative Leather Products, Inc. v. PSKS, Inc.
August 21, 2007

On June 28, 2007 the U.S. Supreme Court issued a decision which has fundamentally altered the antitrust landscape for companies considering implementing resale price maintenance (RPM) policies. In Leegin Creative Leather Products, Inc. v PSKS, Inc. (Leegin), the Supreme Court overruled a nearly century-old holding from Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), that RPM policies are per se illegal pursuant to Section 1 of the Sherman Act.

These policies now will be analyzed under the more subjective “rule of reason” analysis. The rule of reason is a legal analysis by which a court, or the FTC, balances the pro-competitive features of a restrictive business practice against its anticompetitive effects in order to decide whether or not the practice should be prohibited. In per se violation cases, on the other hand, there is no balancing of the competitive effects of the practice – it is simply considered illegal.

The Case

In Leegin, the petitioner, Leegin Creative Leather Products, was in the business of designing, manufacturing, and distributing leather goods and accessories under the brand name “Brighton.” In 1997, Leegin instituted what it referred to as the “Brighton Retail Pricing and Promotion Policy,” in which it refused to sell to retailers that discounted Brighton goods below Leegin’s suggested retail prices. Leegin’s rationale was that it only sold to small retailers that treat customers better, provide customers with more services, and make their shopping experience more satisfactory than larger, more impersonal retailers, and this policy would give its retailers sufficient margins to achieve this goal. The policy also alleviated Leegin’s concern that discounts harmed Brighton’s brand image and reputation.

One of Leegin’s retailers, Kay’s Kloset, refused to follow the policy and had been marking down Brighton’s entire line by 20 percent. After Leegin withdrew its products from Kay’s Kloset for violating the policy, the store’s operator, PSKS, Inc., filed suit against Leegin for antitrust violations. The district court excluded the testimony of an expert witness Leegin wished to present regarding the pro-competitive effects of its pricing policy, relying on the per se rule against RPM policies established in Dr. Miles, and the jury eventually found for PSKS. The Fifth Circuit Court of Appeals affirmed.

The Decision

The Supreme Court examined the possible pro-competitive justifications for RPM policies, such as encouraging new entrants to the market and increased consumer services that would result from enhanced interbrand competition. The court concluded that RPM policies are not always anticompetitive. It stated that RPM policies can have either pro-competitive or anticompetitive effects, depending upon the circumstances under which they are formed. The court warned, however, that RPM policies still have “economic dangers,” and courts will need to be diligent in eliminating their anticompetitive effects from the market.

Resale Price Maintenance Not Automatically Legal

It is important to understand that this decision is not a “green light” to implement RPM policies. These policies are still risky from an antitrust point of view. Courts will continue to examine the circumstances of each case to determine whether an antitrust violation exists, and the results of this analysis can be difficult to predict.

Some of the factors that will affect this analysis are: (1) the degree of concentration in the relevant product markets at the manufacturer, distributor and retailer levels; (2) whether the retailer or the manufacturer is the source of the restraint; (3) whether similar RPM agreements are commonly used in the industry; and, (4) whether the RPM agreements arise from collusive behavior among competing manufacturers and retailers. Clearly, the decision has taken minimum RPM out of the automatically illegal category. However, as the list of factors indicates, the legality of a minimum RPM agreement will be a very specific fact-dependent task. Before implementing such a policy it is important to carefully weigh the risks involved.

If you have any questions or would like additional information, please contact Jennifer Cotner (608-284-2659 or jcotner@gklaw.com), Kevin O’Connor (608-284-2600 or koconnor@gklaw.com) or another member of Godfrey & Kahn’s Antitrust Team.

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