Vertical Price Fixing: The Leegin Decision

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VERTICAL PRICE FIXING

Price fixing between or among parties at different levels of distribution, such as manufacturers and distributors trying to control retail price.

Vertical Price Fixing No Longer Per Se Unlawful (in USA)

In a controversial decision, the United States Supreme Court swept aside nearly a century of established antitrust precedent and held that vertical price fixing will no longer be deemed per se unlawful.
In Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, decided June 28, 2007, the Court concluded that an agreement between a manufacturer and its dealers establishing resale prices should now be judged under what is known as the Rule of Reason. Under that approach, a dealer wishing to challenge a resale price agreement must show that the agreement's purpose and effect is not only anticompetitive but also outweighs any precompetitive benefits to interbrand competition.

The Court overturned its 96-year old precedent, Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which prohibited manufacturers from requiring retailers to agree to adhere to minimum resale prices.
Manufacturers should not assume, however, that they are free to impose minimum resale prices. Unless and until state courts or legislatures decide otherwise, resale price maintenance is still unlawful per se under many state antitrust laws, and state attorneys general have actively worked together to bring class actions challenging such arrangements. Moreover, even under the Rule of Reason, vertical price fixing may be risky in concentrated markets. And it is possible that the Federal Trade Commission may interpret Section 5 of the FTC Act to prohibit RPM as an unfair act or practice or an unfair method of competition.

Writing for the majority in the Leegin case, Justice Anthony Kennedy called the Court's earlier decision in Dr. Miles "a flawed antitrust doctrine that serves the interests of lawyers." He asserted that the older rule required "manufacturers to choose second-best options to achieve sound business objectives."
Consumer advocates immediately decried the Leegin ruling, asserting that allowing minimum price floors would hurt upstart discounters and Internet resellers seeking to offer new, cheaper ways to distribute products. The four dissenting justices agreed that the holding will drive up retail prices.

"The only safe predictions to make about today's decision," Justice Breyer wrote in dissent, "are that it will likely raise the price of goods at retail and that it will createconsiderable legal turbulence."

As a practical matter, the Court's decision should give manufacturers of non-commodity and luxury goods more control over the resale prices of their products. While some believe that the Leegin ruling will not cause price increases at large discount retailers (because of their purchasing power over manufacturers), the case will make it harder for smaller boutiques that offer specialty or customized goods to discount prices without the manufacturer's approval.
Justice Kennedy dismissed this concern, saying that the principle that past decisions should be left alone ''does not compel our continued adherence'' in this instance because the economics literature suggest that the long-standing decision ''is inappropriate, and there is now widespread agreement'' that price floors can help promote competition. The dissenting Justices argued that changes in the economy since 1975, including the increasing concentration in the retail sector, actually strengthened the case for the per se rule.

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