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II. Background
A. Leegin: Ordinary Dispute and Doctrinal Shift
Leegin was brought as a private antitrust suit alleging resale price maintenance in violation of § 1 of the Sherman Act under the Dr. Miles per se rule.
This type of suit is relatively common under this body of law.
The defendant, Leegin Creative Leather Products, Inc. (“Leegin”) produces premium leather goods under the “Brighton” brand name.
Leegin requires its retailers to sell at or above a particular minimum retail price as a condition of continued wholesale purchasing.
Retail stores operated by PSKS, Inc. (“PSKS”) began discounting below these prices, and Leegin refused to supply its goods to PSKS because they refused to stop discounting.
At trial, Leegin defended its minimum retail price practice by defining it as a unilateral policy, permitted under the Colgate doctrine,
as opposed to a bilateral agreement.
However, the jury found Leegin's pricing plan to be in fact a bilateral agreement, so the Colgate unilateral pricing exception offered Leegin no protection from the Dr. Miles rule of per se illegality.
On appeal, Leegin argued that minimum resale price maintenance can have procompetitive effects and therefore should not be considered illegal per se.
The Supreme Court agreed with Leegin that there was no longer justification for the Dr. Miles rule that minimum resale price maintenance is illegalper se, and held that these agreements should be judged by a rule of reason standard instead.
The Court further held that the rationale for using a per se standard in Dr. Miles is flawed, and instead required an economic analysis to determine whether pricing restraints are so likely to have an anticompetitive effect as to justify an irrefutable per se presumption.
The Court continued by analyzing the economics of minimum resale price maintenance, noting that “economics literature is replete with procompetitive justifications,”
and as such, the presumption of anticompetitive effect necessary to support a per se rule cannot be established.
In overruling Dr. Miles, the Court rationalized its failure to follow precedent by explaining that “the Sherman Act [is] a common-law statute” that must adapt to “the dynamics of present economic conditions.”
B. Development of Resale Price Maintenance Law: Moving Towards Leegin
The Sherman Act of 1890, 15 U.S.C. § 1, provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is . . . illegal.”
Early Sherman Act cases established that horizontal price agreements, where two competing companies agree on a price to charge, were illegal regardless of claims of reasonableness.
The Supreme Court in Dr. Miles Medical Co. v. John D. Park & Sons Co.held that the Sherman Act also applied to vertical resale price agreements, .
The Dr. Miles Court found these resale price maintenance agreements comparable to “a general restraint upon alienation,” and therefore illegalper se.
Under this standard, the arguable benefits of a price arrangement are irrelevant and the arrangement is irrefutably presumed anticompetitive.
Given the potential harshness of the Dr. Miles rule, the Supreme Court carved out an exception in United States v. Colgate & Co.
Under the Colgate doctrine, the Court allows use of unilateral resale price maintenance, where the manufacturer acts alone to set retail prices without any agreements and enforces the prices by discontinuing sales to non-conforming retailers.
More recent cases have reaffirmed and expounded the Colgate rule. While Colgate has provided an avenue for businesses to legally implement resale price maintenance, policies claiming to be unilateral, and therefore falling under the Colgate rule, are often disputed as to whether they are truly unilateral or actually represent proscribed bilateral agreements. Frequently courts have struggled to ascertain the existence of agreements and whether those agreements amounted to minimum resale price agreements.
For several decades, from the 1930s until 1975, minimum resale price maintenance was legal in several states under the respective state fair trade laws, first exclusively in intrastate commerce, and then also in interstate commerce under the Miller-Tydings Act of 1937.
Over time though, fair trade laws gradually lost favor and began being repealed by states, culminating in the Consumer Goods Pricing Act of 1975 that expressly repealed the Miller-Tydings Act and ended state-legalized minimum resale price maintenance.
The free trade period is notable as it provided empirical data useful for analyzing the impacts of minimum resale price maintenance.
Following that period, the Supreme Court, in reviewing agreements between manufacturers and retailers regarding non-price constraints or maximum resale prices, moved away from per se prohibitions to case-by-case analysis based on a rule of reason standard. When a manufacturer restricts a retailer in areas other than setting prices,
this is a non-price vertical restraint. In Continental T.V., Inc. v. GTE Sylvania Inc.,
the Court held that such non-price vertical restraints were not per se illegal under the Sherman Act.
Another type of vertical agreement is a maximum resale price agreement, which establishes the highest price that a retailer may set. In State Oil Co. v. Khan,
the Court overruled the per serule and held that vertical maximum price agreements should be judged under a rule of reason framework.
The Khan Court began by holding that per se rules should be used only when the restraint has a “predictable and pernicious anticompetitive effect.”
The Court went on to determine that maximum price agreements do not have a clear anticompetitive effect
and found stare decisis should not impede the evolving interpretation of the Sherman Act.
This rationale in Khan directly foreshadows the later Leegin analysis.
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