On June 28, 2007, adding another chapter to this term’s pro-business antitrust rulings, the U.S. Supreme Court in Leegin Creative Leather Products v. PSKS, Inc. 2007 WL 1835892 (Jun. 28, 2007) overruled the almost 100-year old precedent established in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) (Dr. Miles), which held that it was per se illegal under Section 1 of the Sherman Act for a manufacturer and a retailer to agree on resale prices that the retailer would charge. The holding in Leegin now subjects resale price maintenance, or vertical price restraints, to a "rule of reason" analysis, which examines the legality of the pricing restraint on a case-by-case basis, and which requires the fact finder to weigh the totality of the circumstances, including specific information about the relevant business, and the restraint’s history, nature, and effect.
Background
Leegin is a manufacturer, designer and distributor of leather goods and accessories. In 1991, Leegin began selling belts, and later other accessories, under the "Brighton" brand name. Brighton was sold nationwide in over 5,000 retail establishments, primarily small, independent boutiques and specialty stores. Leegin sought to provide consumers a different experience and level of support than would be found in a big-box retailer or large department store.
PSKS, Inc. (PSKS) operated Kay’s Kloset (Kay’s), a women’s apparel store in Lewisville, Texas. Kay’s bought from about 75 different manufacturers and was selling the Leegin brand. It promoted the brand heavily, running advertisements and having special "Brighton days" in the store. Kay’s became a destination retailer in its area for Brighton brand products.
In 1997, Leegin began a retail pricing and promotion policy where it refused to sell to retailers that discounted Brighton goods below suggested prices. Leegin adopted the policy to give its retailers sufficient margins to provide customers the level of service that Leegin felt was central to its distribution strategy. Leegin also perceived discounting as harmful to the brand’s image and reputation.
One year later, Leegin developed a marketing strategy called the "Heart Store Program." To become a Heart Store, retailers pledged to sell Brighton at Leegin’s suggested retail prices. Kay’s became a Heart Store, but lost this status when Leegin became dissatisfied with the attractiveness of the store. Nevertheless, Kay’s continued to increase its sales of Brighton products.
In December 2002, Leegin discovered that Kay’s was marking down the Brighton line by 20 percent, competing with other retailers who also were not following Leegin’s suggested retail prices. Leegin requested that Kay’s stop discounting; Kay’s refused, and Leegin stopped selling to Kay’s. The loss of the brand had a considerable negative impact on Kay’s sales.
PSKS sued Leegin in U.S. District Court alleging that Leegin violated Section 1 of the Sherman Act because it "entered into agreements with retailers to charge only those prices fixed by Leegin."
Leegin planned to introduce expert testimony describing the procompetitive effects of its pricing policy, but the district court denied this request, relying on the per se rule of Dr. Miles. At trial, PSKS argued that the Heart Store program, among other things, demonstrated that Leegin and its retailers had agreed to fix prices. Leegin responded that it simply was engaging in a unilateral pricing policy that could not violate Section 1 because it didn’t involve concerted action.
The jury agreed with PSKS and awarded damages of $1.2 million, which was trebled to over $3.9 million. On appeal, the Fifth Circuit Court of Appeals affirmed, ruling that the district court did not abuse its discretion by excluding the testimony of Leegin’s economic expert, for the per se rule of Dr. Miles rendered irrelevant any procompetitive justifications for Leegin’s pricing policy. On appeal, Supreme Court reversed and remanded.
Implications of the Ruling
Leegin will likely allow manufacturers more freedom and flexibility in their discussions with retailers. However, Leegin does not provide carte blanche for manufacturers to engage in resale price maintenance. What the ruling does is change the standard under which these practices will be analyzed, thus bringing it in sync with other acceptable restraints that some manufacturers may impose on dealers. Resale price maintenance may still violate Section 1, and would still be subject to treble damages and attorneys’ fees. The manufacturer must still provide a reasonable, procompetitive justification for the practice, and now has an opportunity in court to advance reasons why the pricing policy is good for competition. It is likely that time, and litigation, will test the scope and boundaries of the type of conduct that will be held to violate Section 1 under a rule of reason analysis.
The ruling may also impact the dynamics of litigation. Per se cases are easier for plaintiffs to bring, and require a narrower scope of discovery than rule of reason cases. For that reason they are cheaper to litigate, require less pre-filing investigation, and give the plaintiff significantly increased settlement leverage.
While meritorious cases can now still be brought, the cost and timetable of getting relief (or a settlement) are less favorable to the plaintiff than before. While Leegin thus now protects against the "false positives" of the per se rule, it also will have the effect of suppressing litigation over some of the "true positives" because it has magnified the transaction costs of such litigation for plaintiffs.
The typical justification for per se rules is that the claim is so frequently a true injury to competition (i.e., so few "false positives"), that it is better policy to just impose a per se rule across the board so as to lessen the litigation-cost drag on corrective action being taken. The question Leegin leaves us to "wait and see" is whether the increased litigation-cost drag on corrective action will end up discouraging too many of the kind of meritorious claims that in a perfect world should be brought.
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