Related Practices

Supreme Court Opens Door to Resale Price Maintenance

June 29, 2007

On June 29th, the US Supreme Court issued a decision that will change the way many manufacturers do business with the companies that distribute their products.  Overturning a century-old precedent, the Court ruled in Leegin Creative Leather Products, Inc. v. PSKS, Inc. that federal antitrust law permits manufacturers to set minimum prices for retailers – provided the price floor stimulates competition with other brands of the same product.

Almost a hundred years ago, the Supreme Court ruled that the federal antitrust laws categorically prohibit a manufacturer from requiring a distributor to agree to charge a minimum retail price.  In Leegin, however, the Court adopted a case-by-case or “rule of reason” approach to such agreements, recognizing that they may promote competition at the retail level among different brands.  As a result, the door is open for manufacturers to include in their distribution agreements a requirement that distributors charge a minimum retail price.  This ruling is the latest in a series cutting back on so-called “per se rules” against business practices.  For example, in 1997, the Court applied a rule-of-reason analysis to maximum resale price maintenance, allowing manufacturers to cap the price distributors can charge, unless the distributors can show the cap reduces overall competition.  In 1977, the Court had ruled that non-price restrictions on distributors (such as limiting them to defined territories) must be judged under the rule of reason.

The Court did not adopt a rule that minimum resale price agreements are per se legal.  To the contrary, the Court said that in some circumstances, such agreements may violate the federal antitrust laws.  It also bears emphasizing that even when a manufacturer cannot lawfully obtain a distributor’s agreement to charge a particular price, it can still announce suggested retail prices and unilaterally terminate any distributor who sells below the suggested price.  That was the rule when resale price maintenance was unlawful per se, although it was one of the most complicated and hard-to-apply antitrust rules for most businesses.

Whether a minimum resale price agreement passes antitrust muster under federal antitrust law now depends on a variety of factors.  As the Court recognized, vertical price restraints can stimulate interbrand competition among manufacturers by encouraging retailers to invest in point-of-sale services.  Vertical restraints can prevent “free-riding” – for example, when a consumer takes advantage of product demonstrations by knowledgeable employees at a showroom, and then buys the product at a lower price from a retailer that sells only over the Internet.  On the other hand, the Court expressed concern that retailers might agree with each other to fix prices to consumers, and then pressure a manufacturer to support this anticompetitive agreement by setting minimum retail prices.

The June 29th decision dramatically changes federal antitrust law.  The decision does not, however, necessarily change the antitrust laws of the states and territories, all of which have until now outlawed minimum resale price maintenance by statute or court decision.  How state courts and legislatures will react to the decision is not at all clear.  Although many likely will follow the Supreme Court’s lead, the 5-4 split decision included an extensive dissenting opinion that may embolden some states to reject the new federal rule, as many did when the US Supreme Court interpreted federal antitrust law to bar damages actions by indirect purchasers.  One thing is clear: navigating these complex waters will be difficult while the states react and federal courts flesh out the new rule.

Steptoe & Johnson LLP stands ready to provide practical advice about how this important decision could affect your business.  Steptoe has a comprehensive antitrust and competition law practice, including extensive experience advising companies in a wide variety of industries about how to comply with US and foreign antitrust laws