United States: Amendment Re-Aligns Kansas' State Antitrust Law With Sherman Act Standards—Almost

Nearly a year ago the Kansas Supreme Court issued a ruling that boldly separated Kansas, and its state antitrust law, from prevailing federal antitrust precedent in matters of resale price agreements. However, in April 2013, the legislature amended the Kansas antitrust law, so that it now applies a “rule of reasonableness” to resale price agreements.

In O'Brien v. Leegin Creative Leather Products, Inc., 277 P.3d 1062 (May 4, 2012), the Kansas Supreme Court applied the state's antitrust statute (which states that an "arrangement, contract, agreement, trust or combination" that is "designed to advance, reduce or control price" or "tends to" have that effect, is sufficient to establish an antitrust violation) must be read literally, and that the "rule of reason of federal jurisprudence does not apply". An initial attempt to reverse the decision by legislation failed.

In April 2013, the legislature returned to the subject and adopted amendments, signed into law on April 18, 2013. As amended, the Kansas Restraint of Trade Act applies a "rule of reasonableness" to vertical price agreements and, in addition  provides that the act should be "construed in harmony" with federal antitrust law and precedents, except for matters involving indirect purchasers, intrastate commerce, and other exceptions.

In broad terms, the amended statute means that manufacturers and re-sellers do not have to worry about carving out Kansas purchasers from maximum or minimum resale price policies or agreements that would pass muster under the federal Sherman Act Rule of Reason, or arguing that the O'Brien decision has an unconstitutional dimension because of possible effects on interstate commerce.

Since the decision in State Oil v. Khan, 522 U.S. 3 (1997). federal antitrust standards applicable to resale price agreements place vertical maximum price agreements under the Rule of Reason. No case has applied that ruling to invalidate maximum price restrictions.  Since the US Supreme Court decision in Leegin Creative Leather Products v. PSKS, Inc., 551 U.S. 877 (2007), the same approach has been applied under federal law to vertical minimum price agreements. While certain state regulators have stated that the ruling does not change their state antitrust law and brought cases challenging minimum price restrictions, and Maryland has enacted new legislation precluding reliance on the 2007 decision, the federal-state conflict has not resulted in substantial litigation, basically one action in New York, two consent decrees in California, and the Kansas O'Brien decision.

As for the Kansas amendment, its legislative history indicates that the  statute's "rule of reasonableness" does not precisely mirror federal Rule of Reason analysis. It may allow both sides to use a broader range of facts and arguments to challenge the "reasonableness" of a vertical price agreement, beyond considerations of market power, or a tendency to raise prices or reduce output, which are common features of the federal standard.

Moreover, a number of state Attorneys General continue to claim that they are looking for the "right case" to challenge a minimum price agreement. There is some consensus that given budget constraints, the focus will be on cases that are "clear cut" (as the California consent decrees were), and not on situations in which the minimum price arrangement is based on factual and economic rationales that would call for detailed analysis and argument and might be seen as "procompetitive".

Thus, manufacturers and wholesalers using resale price agreements should continue to seek early guidance from experienced counsel in order to minimize the risk of regulatory (or private litigation) challenges and to take steps ensuring that  the business case for such agreements is consistent with robust competition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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