The Supreme Court in the United States has recently overturned a 96 year old precedent that resale price maintenance (RPM) is per se illegal. The precedent was set in Dr Miles Medical Co. v John D Park & Sons Co., 220 U.S. 373 (1911).
Whilst the economics literature has said for some time that RPM can be pro as well as anti-competitive, this is a major shift in antitrust law in the United States and it begs the question when and what type of RPM is going to be allowed and will the trend towards allowing RPM be followed in Australia? If so, the potential commercial impacts are huge.
In the case of Leegin Creative Leather Products, Inc. v PSKS, Inc., No. 06-480 at 6 (2007), the facts are straightforward: Leegin refused to sell to retailers that sold its products below a minimum resale price. As a result of this policy, Leegin stopped selling its goods to PSKS who filed a federal lawsuit against Leegin. The trial Court found that Leegin’s minimum resale price policies were per se illegal under the rule established by the Supreme Court decision in Dr Miles. The US Court of Appeals agreed.
Application of per se rule
However, the Supreme Court overruled its decision from 1911 in Dr Miles and held that RPM is not the kind of practice that fits the per se rule. The Court noted that the per se rule should only apply to trade restraints that ‘always or almost always tend to restrain competition and decrease output’.1 In addition, a restraint condemned by the per se rule must have manifestly anti-competitive effects and lack any redeeming value. As a consequence, the per se rule is only appropriate if Courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason. This is a legal approach used by competition authorities or the Courts where an attempt is made to evaluate the pro-competitive features of a restrictive business practice against its anti-competitive effects in order to decide whether or not the practice should be prohibited.
Having set the standard for a per se illegality at a high level, the Court then explained why RPM does not meet this stringent test. The Court noted that the ‘economics literature is replete with pro-competitive justifications for a manufacturer’s use of resale price maintenance’2. The Court cited a number of journal articles and books from the last 30 years that all carry roughly the same message that RPM can have positive as well as negative effects. Clearly, if there are many cases in which RPM may have positive effects then RPM does not ‘have manifestly anti-competitive effects and lack any redeeming value’.
RPM can have pro-competitive and/or anti-competitive effects
The Court gave a number of possible justifications for RPM that mirror the justifications for other vertical restraints:
- RPM can stimulate interbrand competition - the competition among manufacturers selling different brands of the same type of product - by reducing intrabrand competition - the competition among retailers to sell the same brand. For example, if there is less intrabrand price competition, retailers will invest more in services or promotional efforts that aid the manufacturer.
- RPM has the potential to give consumers more options so that they can choose among low-price, lowservice brands and high-price, high-service brands.
The Court also recognised that RPM can have anti-competitive effects:
- RPM might facilitate a manufacturer cartel by identifying price-cutting manufacturers.
- RPM might also facilitate a retailer cartel if retailers compel a manufacturer to institute RPM.
- RPM can be abused by a powerful manufacturer or retailer. For example, a manufacturer with market power might use RPM to give retailers an incentive not to sell the products of rivals.
The Court gave some advice on how to establish whether RPM was anti-competitive or not:
- The source of a restraint is useful information. If a manufacturer is the impetus for RPM then it is very unlikely that the RPM is being used to facilitate a retailer cartel since this would not usually be in the manufacturer's interest.
- A cartel will only usually be successful when almost all firms are in the cartel. Therefore, when only a few manufacturers lacking market power adopt RPM, it is unlikely that it is facilitating a manufacturer cartel. Similarly, a retailer cartel is unlikely when only a single manufacturer in a competitive market uses RPM.
Consequences for Australia
Part IV of the Trade Practices Act 1974 (Cth) imposes a per se ban on RPM although it may be authorised. The ACCC may authorise a corporation to engage in RPM if the public benefits outweigh the anti-competitive detriment of the RPM. After the Supreme Court’s decision, it is clearly much easier to engage in procompetitive RPM in the US than in Australia since in the US, firms will not have to apply for authorisation, though they may have to show ex-post that the RPM had pro-competitive benefits.
The Supreme Court’s decision may encourage more firms in Australia to apply for authorisation to engage in RPM, especially where the private and public benefit from RPM is great. The Government should now consider changing the Trade Practices Act so that RPM is subject to a substantial lessening of competition test like other restrictive trade practices covered by the Trade Practices Act.
1 Leegin Creative Leather Products, Inc. V PSKS, Inc., No. 06-480 at 6 (2007)
2 Ibid at 9.
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