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SUPREME COURT DOCKET REPORT
OCTOBER TERM 2006
DECISION ALERT


October Term, 2006

June 28, 2007

Today--among the final opinions of the current term--the Supreme Court issued one decision, described below, of interest to the business community.


Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480 (previously discussed in the December 7, 2006 docket report). The century-old case of Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), held that an agreement between a manufacturer and its retailers establishing a minimum resale price for the manufacturer's products constitutes a per se violation of Section 1 of the Sherman Act, 15 U.S.C. 1. In a 5-4 decision, the Court today overruled Dr. Miles, holding that the legality of vertical minimum price restraints should be decided under the so-called "rule of reason," pursuant to which courts evaluate allegedly anticompetitive conduct on a case-by-case basis.

In 1997, Leegin Creative Leather Products, Inc. ("Leegin")--a small, family-owned business that manufactures women's accessories and retails its products exclusively in boutique stores--entered into price maintenance agreements with its retailers. Leegin hoped that the agreements would increase its retailers' resale profits, enabling them to invest in Leegin product promotion and customer service, and thus increase the manufacturer's share of the crowded women's accessories market. Relying on Dr. Miles, one of Leegin's retailers sued Leegin under Section 1 of the Sherman Act. The Fifth Circuit upheld the district court's decision to instruct the jury that Leegin's retail policy was per se illegal. See PSKS, Inc. v. Leegin Creative Leather Products, Inc., 171 Fed. Appx. 464, 466 (5th Cir. 2006).

Writing for the Court, Justice Kennedy reasoned that per se rules are "appropriate only after courts have had considerable experience with the type of restraint at issue, and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason."  Slip op. at 6 (citations omitted). Because the available economic theory suggests numerous procompetitive justifications for vertical price restraints, and because the available data "do[] not suggest [that] efficient uses of [vertical price] agreements are infrequent or hypothetical," the Court did not have "any degree of confidence" that such restraints are almost always anticompetitive in effect. Id. at 14. It noted that vertical price minimums can be used to stimulate interbrand competition--the "primary" purpose of antitrust laws--by blocking "discounting retailers [that] free ride on retailers who furnish services and then capture some of the increased demand those services generate," id. at 10, "facilitating market entry for new firms and brands," and "encouraging retailer services that would not be provided even absent free riding," id. at 11-12. Even the likelihood that resale price maintenance tends to result in higher prices was deemed an insufficient justification for the per se rule. The Court pointed out that obtaining higher-quality inputs or spending on publicity "can lead to higher prices, but "no one would think these actions violate the Sherman Act" for that reason. Id. at 17. The Court rejected arguments that a per se rule should nonetheless be favored for administrative convenience or to keep prices down even in the absence of conduct harming interbrand competition. Finally, the Court declined to adopt arguments--favored by the dissenters--that stare decisis counseled against overruling Dr. Miles; it reasoned that "[j]ust as the common law "adapts to modern understanding and greater experience," so does Section 1 "evolve to meet the dynamics of present economic conditions."  Id. at 20.

Today's decision is of significant interest to all members of the business community. Businesses now may maximize the competitiveness of their distribution channels by protecting value-adding dealers from opportunistic free riding. Antitrust plaintiffs, on the other hand, will now bear the burden of proving minimum resale price maintenance agreements anticompetitive, as they do with all other vertical restraints. Just as with the Court's decision last year in Illinois Tool Works Inc. v. Independent Ink, Inc., today's decision helps bring modern antitrust law into line with economic reality.


 


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