InsideCounsel » March 2008
Pricing Puzzle
Manufacturers left perplexed about resale agreements in the wake of Leegin.
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.”
