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III. Analysis
A. Rule of Reason Standard: Providing Greater Access to Resale Price Maintenance
The former rule of per se illegality for minimum resale price maintenance resulted in uniform outcomes with all bilateral minimum price agreements being held illegal regardless of justification.
In contrast, the new rule of reason standard relies on case-by-case judgments.
Accordingly, the impact of the new rule will depend on how the lower courts apply it.
In the Leegin opinion, the Supreme Court gave some indications of what it viewed as the boundaries of proper behaviors
and provided a general summary of the rule:
Under [the rule of reason], the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. Appropriate factors to take into account include specific information about the relevant business and the restraint's history, nature, and effect. Whether the businesses involved have market power is a further, significant consideration. In its design and function the rule distinguishes between restraints with anticompetitive effect[s] that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.
The rule of reason standard has been extensively applied in Sherman Act § 1 cases concerning other sorts of restraints.
These shifts to a rule of reason from a per se standard in the judgment of non-price vertical restraints are especially helpful in anticipating how the rule will be implemented in the minimum resale price maintenance context.
In analyzing the Leegin rule of reason, it is appropriate to begin with a review of case law applying the new decision.
1. Early Indicators in Post-Leegin Lower Court Decisions
In the months following the Leegin decision, the federal courts have begun applying the decision in antitrust cases. The U.S. District Court for the Southern District of Ohio applied the Leegin rule to an allegation of vertical price fixing in Total Benefits Planning Agency Inc. v. Anthem Blue Cross & Blue Shield.
In Total Benefits, the court held that the plaintiff failed to properly state an antitrust claim and therefore dismissed the claim, but in the process cited a test for applying the rule of reason. The U.S. District Court for the District of Alaska also recently relied on Leegin for the proposition that vertical price restraints must pass a rule of reason analysis, but the court did not apply this analysis to its end conclusion, finding the behavior in the case did not rise to the level of resale price maintenance.
Given the results of these cases, no substantial conclusions on lower court application can be drawn until a case presents conduct previously proscribed under the per serule, permitting the rule of reason to alter the outcome of the case. Nevertheless, we can turn to the Leegin decision for guidance on how the rule should be applied.2. Guidance on the Rule of Reason Provided by Leegin
As reviewed in this section, the Supreme Court in Leegin made several statements explaining how the rule of reason should be applied to minimum resale price maintenance. On an economic policy level, the Court explained three procompetitive effects that can justify use of minimum resale price maintenance.
First, minimum resale price maintenance can be used to “encourage[] retailers to invest in services . . . or promotional efforts that aid the manufacturer's position as against rival manufacturers.”
Second, restrictions can prevent free riding, which occurs when the customers of low-cost, low-service retailers obtain benefits from services of a high cost retailer without paying for them. Lastly, minimum resale price maintenance can facilitate the incubation of new products on the market, allowing investment in product reputation by preventing fierce price wars. Manufacturers who are able to justify their resale price maintenance programs using one of these three recognized procompetitive effects will have a higher likelihood of having their programs upheld under a rule of reason analysis.
The Court went further to explain situational factors indicative of minimum resale price maintenance policies that are either proper or improper under the rule of reason.
These factors include market power of manufacturers or retailers, the fraction of competitors in a single market that have adopted policies, and the involvement of retailers in initiating the agreements.
Each of these factors will be examined in turn below.
The presence or absence of manufacturer market power is a factor, as “[a] manufacturer with market power . . . might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants.”
Market power of the retailer is also a factor, as a powerful retailer “might request resale price maintenance to forestall innovation in distribution that decreases costs.”
In contrast, “[i]f a retailer lacks market power, manufacturers likely can sell their goods through rival retailers.”
The second situational factor the Leegin Court suggested is the proportion of competing firms in a given marketplace making use of minimum resale price maintenance agreements.
These agreements are more likely to have anticompetitive effects if used extensively in a market, and the Court stated they “should be subject to more careful scrutiny . . . if many competing manufacturers adopt the practice.”
In particular, with light usage of resale price maintenance, “there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers.”
Similar competitive pressures discourage retail cartels
in markets where resale price maintenance is rare.
A third and final factor the Leegin Court suggested is the involvement of retailers in initiating the minimum resale price maintenance policy.
The Court emphasized that when vertical restraints are used to implement retail cartels, they should be treated the same as horizontal restraints, which are still considered per se Evidence that retailers advocated for the minimum resale price policy suggests an impermissible restraint.
However, if “a manufacturer adopted the policy independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct.”
Together, these three factors provide guidance on procompetitive justifications that courts should consider under the rule of reason as well as situations where careful judicial attention is warranted.
In considering the Leegin case, amici curiae urged the Court to adopt intermediate standards between a rule of reason and a per se prohibition.
Such intermediate standards could address particular practices known to have anticompetitive effects.
The Court rejected this approach, however, and stressed that the factors it listed are only part of a rule of reason analysis.
3. Lessons from the Rule of Reason Elsewhere in Sherman Act Jurisprudence
In moving to a rule of reason standard in Leegin, the Supreme Court was not inventing a new standard but rather adopting one that “is the accepted standard for testing whether a practice restrains trade in violation of [Sherman Act] section 1.”
This is not to say per serules are altogether gone, as per seprohibitions remain against practices such as horizontal price fixing and agreeing to divide markets, but the Court views these per serules as the exception.
A shift from a per se rule to a rule of reason for a particular type of restraint is not novel, and the Supreme Court made a similar shift for non-price vertical restraints in 1977
and for vertical maximum price restraints in 1997.
Yet, in the case of maximum price restraints, very little case law exists invalidating restraints under the rule of reason.
Because maximum price restraints, by definition, force prices down, establishing how the restraint harms competition is difficult.
In contrast to maximum price restraints, the rule of reason standard for non-price vertical restraints established in GTE Sylvania has been applied in a number of cases.
Even so, the courts are split on whether to apply single or multi-step tests when applying the rule of reason in this context.
Some circuits apply a holistic balancing test, where all competitive factors are weighed.
Other circuits use a two-step balancing test, where the plaintiff must first meet a threshold requirement-demonstrating the defendant has market power with respect to the product-before the court will weigh competitive factors.
Lastly, still other circuits employ a three-step test, sequentially seeking: (1) proof from the plaintiff of “an actual adverse effect on competition”; (2) proof from the defendant of a procompetitive justification; and (3) proof from the plaintiff of a less restrictive means to accomplish the procompetitive effect.
It remains to be seen whether these variations of applied rule of reason tests will become standard for minimum resale price maintenance cases. Early indications show that they will become standard. For example, the Total Benefits court, acting post-Leegin, pointed to a similar three-step test as applicable to minimum pricing cases.
In any case, the test a court applies will affect how difficult it will be for a minimum resale price maintenance plaintiff to meet its burden of proof. In particular, while market power
is always a rule of reason factor,
tests requiring its demonstration as a threshold issue give market power more weight compared to other factors. Affording market power such weight is consistent with the Leegin opinion.
Some evidence suggests that evaluation under a rule of reason standard can result in a practice beingde facto legal.
This has been the result of the application of the rule of reason in the vertical maximum price context.
Briefs supporting the respondent-retailer in Leegin cite the high cost of rule of reason litigation as discouraging otherwise meritorious claims.
Therefore, it is reasonable to expect that a greater fraction
of minimum resale price maintenance programs will go unchallenged under the Leegin rule of reason.4. Online Retailers in Rule of Reason: Facing More Restrictions
The preceding sections have analyzed the Leegin rule of reason standard. This section focuses on questions of how minimum resale price maintenance under the new standard may affect online retailers. First, this section will discuss the three procompetitive impacts listed by the Supreme Court in Leegin: providing a margin for provision of services, preventing free riding by discounters on full service retailers, and allowing for incubation of new products.
Next, this section will review the situational factors
the Court suggests for informing rule of reason analysis. Finally, this section will analyze the general impact of minimum resale price maintenance in a market.
When the Court discusses minimum resale price maintenance as a tool to provide margins that promote provision of services, it speaks of “fine showrooms, . . . product demonstrations, or . . . knowledgeable employees,”
which immediately brings to mind a traditional brick-and-mortar store. While it is certainly possible for one online retail store to offer more services than another,
perhaps by providing detailed product information websites and a knowledgeably staffed hotline, it is hard to envision these services comparing to the cost of traditional retail services. At minimum, allowing manufacturers to adopt minimum resale price policies to provide a margin for the provision of services disfavors retail channel diversity, as such a margin must be adequate for the most efficient retailer in the least efficient channel.
Online retailers may have lower overhead and greater efficiency, so they stand to lose under this analysis.
The Supreme Court further provides that combating free riding is a procompetitive use of minimum resale price maintenance.
Online retailers are often accused of free riding on the services provided by their traditional brick-and-mortar competitors.
The free riding concern is not without critics, including economists and others who are skeptical of how often it actually occurs.
It is also conceivable that some free riding occurs in the opposite direction, with consumers using the information resources of an online retailer before purchasing from a local brick-and-mortar retailer.
Nevertheless, free riding is a plausible justification for resale price maintenance policies adverse to online retailers.
The new product protection procompetitive rationale
also has e-commerce implications. In particular, as e-commerce allows manufacturers to connect with distant customers, direct sales from manufacturer to end consumer are more feasible. Resale price maintenance is inapplicable to products sold directly from manufacturer to consumer,
allowing the manufacturer to freely set prices necessary to assist a product launch. If a manufacturer can protect the price of a new product without resorting to direct sales, it may be encouraged to introduce more new products in traditional retail channels, reducing the number of products appearing exclusively on Internet direct sales sites. In the general case, both traditional and online retailers are likely to find utility in protective margins as they insert the product into inventory and undertake promotion of the product. As such, the new product protection rationale does not seem to be particularly problematic for the ordinary online retailer.
Among the situational factors the Supreme Court highlights for examination by lower courts,
both lack of market power and lack of concentrated resale price maintenance policies support an inference of an allowable restraint. Market power is difficult to establish,
and few industries have high concentrations of minimum price maintenance.
With some circuits favoring market power as a threshold issue,
difficulty with market power demonstration may be particularly problematic for a complaining retailer, resulting in many minimum resale price maintenance agreements being upheld. Accordingly, both online and traditional discount retailers can expect to be impacted as fewer minimum resale price maintenance policies are invalidated.
The other situational factor, the suspect nature of retailer-induced resale price maintenance,
should operate to the benefit of online retailers. Conceivably, traditional retailers might pressure manufacturers for minimum resale price maintenance to combat their online competitors. Online retailers should not be overly concerned about this possibility due to the Court's recognition of the problematic nature of retailer induced vertical restraints and their similarity to per seillegal horizontal restraints.
Regardless of how these particular factors impact online retailers, the most basic market effect of minimum resale price maintenance is higher prices for consumers.
Notably, the Leegin majority expends more effort explaining why higher prices might not be bad than it does disputing the contention that higher prices will occur. While it is possible to envision situations where demand for a higher-priced product will not decrease,
higher prices will lead to less items purchased by consumers in the aggregate.
As a result, online retailers would be burdened both by reduced access to price competition, if directly restricted by price policies, and by reduced budgets of customers the retailer has in common with price-restricted businesses and industries. Accordingly, should enough resale price maintenance policies be implemented to cause these higher prices, an adverse impact on discount online retailers will occur.
Discount online retailers competing on price are harmed by policies that reduce their ability to set prices. The Leegin rule of reason standard makes minimum resale price maintenance policies adverse to these retailers legally available to manufacturers. If enough manufacturers elect to implement these policies, online discounting, and thus, online retailing in general stand to be greatly reduced.
B. Predictions of Real-World Usage of Resale Price Maintenance
While manufacturers may enjoy much broader legal access to minimum resale price maintenance policies as a result of the Supreme Court's decision in Leegin, this decision does not mean that manufactures will elect to implement these policies. Indeed, a number of factors, as discussed in this section, support the conclusion that such policies will not see widespread use. If true, this outcome would prevent Leegin from greatly harming discount e-commerce. First, history from the fair trade period suggests many companies will not implement such policies.
Second, the previous availability of resale price maintenance under the Colgate doctrine reduces the scope of new options Leegin affords suppliers.
Finally, substantial marketplace and efficiency incentives exist discouraging manufacturers from using resale price maintenance.
1. Evidence From Fair Trade History
During the fair trade period, minimum resale price maintenance was legal in many states.
The Supreme Court in Leegin points out that during the peak of resale price maintenance, only one percent of manufacturers used this practice, affecting between four and ten percent of retail goods.
While this is strong evidence that resale price maintenance is a special-case business tool, Justice Stephen Breyer, in his dissent, observes that ten percent of retail sales still amounts to $300 billion in goods.
Arguably, this history provides assurance that minimum resale price maintenance is not likely to become the norm, but it does not conclusively foreclose the possibility that these policies will harm online retailers.
2. Colgate Utilization: Minimum Resale Price Maintenance is Already Available
Unilateral resale price maintenance has been legal under Colgate almost as long as bilateral resale price maintenance was illegal under Dr. Miles.
It is reasonable to conclude that at least some manufacturers desiring a uniform retail price have already been enforcing one under Colgate. As the facts of Leegin demonstrate, unilateral programs always run the risk of being found bilateral.
The implementation of a legally effective unilateral program can also be quite costly.
In the end, Colgate utilization is most likely suggestive of the types of companies most interested in using minimum resale price maintenance policies.
3. Disincentives to Resale Price Maintenance
Both inherent efficiency considerations and the realities of the modern retail marketplace create substantial disincentives to implementation of resale price maintenance. First, even if consumer free riding is an issue for a given product, the interests of the manufacturer may not be sufficiently aligned with the retailers to cause the manufacturer to take action. The consumer is not free riding off the manufacturer, but is instead free riding off a retailer, thereby imposing a cost on the retailer. If this retailer continues to sell the product, the cost will not be passed on to the manufacturer,
who still derives the benefit from the discounter's sale. In effect, this is a form of price discrimination, allowing the manufacturer to capture the sales of marginal consumers who would otherwise go elsewhere. The manufacturer is effectively free riding off its own higher-end retailers.
More importantly, pricing efficiency disfavors resale price maintenance.
The Supreme Court notes in Leegin that “[t]he difference between the price a manufacturer charges retailers and the price retailers charge consumers represents part of the manufacturer's cost of distribution, which, like any other cost, the manufacturer usually desires to minimize.”
The court further explains that “retailers, not the manufacturer, gain from higher retail prices.”
Retailers are inherently closer to consumers and are therefore in a better position to respond to market changes. When the manufacturer acts as a central pricing authority, there is a risk of a sluggish response to changes in market conditions, harming sales in a dynamic market.
The speed at which fast systems move information between parties comes at a cost. Due to these pricing efficiency concerns, competition among retailers is a valuable tool to the overall competitiveness of the brand. For this reason, manufacturers may prefer to leave retail pricing decisions to the retailers.
Additionally, some conditions in the present-day retailing market discourage the use of minimum resale price maintenance. In particular, large discount retailers such as Wal-Mart have sizable market power.
Specifically, Wal-Mart has a history of opposition to resale price maintenance dating back to at least 1982 when executive S. Robson Walton expressed concern that overruling the per se rule could damage the young business.
In the present day, Wal-Mart is no longer a developing business, but one with a reputation for demanding efficiency and low cost from its suppliers.
Wal-Mart has a professed interest in driving the price down for the end user,
in contrast to a retailer who might pad margins via resale price maintenance. It would be reasonable to expect Wal-Mart to be hostile to resale price maintenance, potentially to the extent of refusing to carry products under such agreements. While manufacturers are not fond of Wal-Mart's policies, few are willing to give up the major retail channel Wal-Mart represents.
Online retailers selling the same products as Wal-Mart and other large discount retailers have reason to be less concerned about resale price maintenance as those discounters exert pressure on manufacturers. This, combined with other marketplace and business efficiency factors, reduces the practical impact of a legal rule more favorable to minimum resale price maintenance.
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