Pricing Puzzle

It didn't take long for Congress to politicize the Supreme Court's landmark June 2007 antitrust decision in Leegin Creative Leather Prods. Inc. v. PSKS. Outraged at the court's reversal of the century-old rule that minimum resale price maintenance (RPM) was per se illegal, consumer advocates in the Senate prompted a Judiciary subcommittee hearing on the subject on July 31, barely one month after Leegin came down. Minimum RPM plans are agreements between entities at different levels of the distribution chain that set the price resellers can charge their downstream customers.

"It remains to be seen whether the arguments that prevailed in the Supreme Court will pass muster with Congress," says Michael Lockerby, a partner at Foley & Lardner.

What looks increasingly certain, however, is that these arguments will be tested severely. Before year's end, a powerful senatorial group consisting of Hillary Clinton (D-N.Y.), Joseph Biden (D-Del.) and Herb Kohl (D-Wis.) introduced the Discount Pricing Consumer Protection Act (DPCPA). If passed, the legislation would restore the per se rule.

"RPM agreements [would] again be automatically deemed to be unreasonable restraints of trade without serious inquiry into the harm they cause or the business reason for their use," Lockerby says.

Arguably, then, manufacturers interested in prohibiting discounting are in the lurch as to their course of action in the post-Leegin era. But it would be wrong to blame this on the DPCPA's emergence alone.

"The decision did not give an automatic green light to manufacturers and franchisers that want to prohibit discounting," Lockerby says. "At best the Supreme Court handed out the antitrust equivalent of a flashing yellow light to resale price maintenance."


Complex Fix
The court did so by deciding that RPM is subject to the "Rule of Reason." The court developed this rule in 1911 in Standard Oil Co. of New Jersey v. United States. It states that only combinations and contracts that unreasonably restrain trade offend antitrust laws.

Until Leegin, RPM was not subject to that rule. "Instead, it was subject to the per se rule which meant that manufacturers and franchisers who entered into minimum RPM agreements with dealers, distributors, franchisees and other retailers would automatically face treble damages under the Sherman Act's prohibition against unreasonable restraint of trade," Lockerby says. "But Leegin gives such manufacturers the chance to tell their side of the story by way of establishing that their RPM agreements are not unreasonable restraints of trade."

In other words, it's not as if Leegin gave manufacturers carte blanche to prohibit discounting. "It's not yet clear exactly what Leegin means because cases interpreting it have not worked their way through the system," says Wayne Mack, a partner at Duane Morris. And there are other uncertainties. Thirty-eight state attorneys general intervened in Leegin, urging the court to retain the per se approach.

"The overwhelming majority of states, including California and New York, have statutes that prohibit RPM agreements," Mack says. Some state statutes are quite broadly worded, prohibiting agreements to "maintain" or "regulate" prices. Hawaii, for example, prohibits "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce," but also expressly declares it illegal to "fix, control or maintain, the price of any commodity."

"It's important to remember that Leegin is not binding on state courts interpreting state law and some state courts may not follow the Supreme Court in interpreting their own antitrust legislation," Mack says.

Further complicating matters is the fact that Leegin did not change the rule on all types of price fixing.Difficult Distinctions
Notably Leegin applied only to vertical restraints, not price fixing among entities at the same level of distribution. This latter type of price fixing is known as horizontal price fixing and remains per se unlawful under the Sherman Act.

Suppliers wishing to prevent discounting cannot simply assume that restrictions imposed on dealers, distributors and franchisees are vertical," Lockerby says.

Making the distinction is particularly difficult when suppliers engage in "dual distribution." This occurs when manufacturers sell products through independent outlets as well as directly through their own retail establishments.
While Leegin now applies the Rule of Reason to vertical price restraints, the rule has applied to non-price restraints since the Supreme Court's 1977 ruling in GTE Sylvania Inc. v. Consumers Union. Leegin doesn't change that.

"Vertical non-price restraints, such as those designating exclusive territories, may be nearly as effective as price restraints in preventing discounting," Lockerby says.

In addition Leegin did not change the rules regarding other antitrust offenses such as monopolization and conspiracy. This means manufacturers that prohibit discounting can run afoul of the law even though their policies comply with Leegin.

Finally, the Supreme Court's 1919 decision in United States v. Colgate allows manufacturers to unilaterally announce an RPM policy and then refuse to do business with resellers who fail to comply.

"According to Colgate, an antitrust violation occurs only when there has been an agreement between supplier and purchaser or a conscious commitment to a common scheme for an illegal purpose," says Stephen Bolerjack, of counsel at Dykema Gossett.


Political Push
Whether the DPCPA passes or Leegin remains the law of the land, ascertaining when price fixing is illegal will continue to be difficult. The legislation is before the Senate Judiciary Committee, and many observers believe its powerful sponsors give the DPCPA a reasonable chance of passing.

"The push behind this legislation will go on for a while," says Bolerjack, who testified at the July 31 hearing. "I don't know whether that will occur now or after the 2008 election results. But none of that changes the fact that Leegin is a very reasoned, logical decision that represents the next step in what has been a 30-year evolution of antitrust law in the Supreme Court."

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Julius Melnitzer

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