Supreme Court Charts New Course On Minimum Resale Price Agreements
 

Abandoning a 96-year old rule, the United States Supreme Court recently announced that minimum resale price agreements between manufacturers and retailers would no longer be presumed to constitute illegal price fixing. Instead, courts are to analyze such agreements under the so-called “rule of reason,” which allows the agreement’s proponents to offer evidence that the agreement actually promotes, not defeats, competition in the marketplace.

The Court offered a number of cautionary comments about such agreements. First, it noted that resale price maintenance agreements may be subject to greater scrutiny if they are adopted by many competing manufacturers. Second, it suggested that if retailers, not manufacturers, were the impetus for the agreement in the first instance, then there is a greater likelihood that the agreement is being used to facilitate a retail cartel or to support a dominant, inefficient retailer. Third, it opined that, absent market power, a dominant manufacturer or retailer is unlikely to be able to abuse resale price maintenance agreements so as to stifle competition. Nevertheless, the Court left it to the federal trial and appellate courts to establish the “litigation structure to ensure that the rule [of reason analysis of resale price maintenance agreements] operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses.”

Litigation over resale price maintenance agreements may well become an active area. If you are asked to sign such an agreement or wish to consider adopting one, Walter & Haverfield’s antitrust lawyers are available to consult with you about the potential pro- and anti-competitive concerns and to advise you as to the propriety of the agreement in question.

At issue in Leegin Creative Leather Products, Inc. v. PSKS, Inc. was an agreement by a manufacturer under which retailers were required to adhere to minimum pricing specifications. Failure to abide by the agreement would result in the manufacturer discontinuing sales to the retailer. After the retailer instituted a twenty-percent discount for the entire line of goods, the manufacturer stopped selling to the retailer, and litigation followed.

Relying on a rule established by the Supreme Court in 1911, the retailer argued that the terms of the manufacturer’s agreement constituted a per se violation of § 1 of the Sherman Act, which prohibits “every contract, combination . . . or conspiracy, in restraint of trade or commerce among the several States.” The manufacturer attempted to offer evidence at trial that the minimum-pricing agreement did not restrain trade or commerce, but actually promoted it. The trial court, relying on the per se rule, declined to admit the manufacturer’s evidence of pro-competitiveness. The Court of Appeal agreed that evidence of the pro-competitive effect of the agreement was properly excluded at trial, in light of the per se rule.

The Supreme Court, in a 5-4 decision written by Justice Anthony Kennedy, considered all of the various factors that led the Court to adopt the per se rule and determined that it was appropriate to abandon the presumption of illegality in favor of rule of reason analysis. Although resale price maintenance agreements continue to pose the threat of collusion between manufacturers and retailers to stifle competition, the Court, relying on the body of antitrust case law it has developed since 1911 and “respected economic analysis,” determined that evidence of the pro-competitive effect of a resale price maintenance agreement, such as stimulation of intrabrand competition and enhancement of the service aspect of a sale, should be considered by a court weighing the propriety of a resale price maintenance agreement.

Ultimately, while manufacturers and retailers will have more flexibility in retail pricing strategies, companies still will need to evaluate with their counsel any anticompetitive risks, such as market dominance of one of the parties. Companies will also want to consider and document how the procompetitive benefits outweigh the potential anticompetitive effects, in particular how the arrangement promotes competition between brands and is likely to increase competition in the market for the product. As the federal trial and appellate courts begin to develop the "litigation structure" the Supreme Court spoke of, agreements will need to be carefully scrutinized to ensure that they will survive scrutiny.

For more information on these or other business law issues, please contact one of the attorneys in Walter & Haverfield's Business Litigation Group:
 

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