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On June 29, the U.S. Supreme Court overturned the per se prohibition on vertical restraints. Under this rule which has been in existence for 96 years since Dr. Miles Medical Company v. John D. Park & Sons, Co., resale price maintenance agreements were per se illegal. Under the per se rule no justification is allowed since the conduct “always or almost always tends to restrict competition and decrease output.”

In last month’s 5 to 4 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court held that resale price maintenance should be evaluated under the rule of reason standard rather than the per se standard. Under the rule of reason standard, courts are allowed to consider the pro-competitive and anti-competitive effects of conduct. Minimum price restraints, such as at issue in the Leegin case, may be justified according to the court by pro-competitive rationales. For instance, a manufacturer may want to impose minimum resale prices to guarantee sufficient return so that the retailers will invest in “tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers.” As a result, resale price maintenance may foster competition by keeping manufacturers in the business who might not otherwise be able to continue.

It also, according to the court, gives consumers more options since they have the ability to choose “among low-price, low-service brands; high-price, high-service brands; and brands that fall in between the two.” In antitrust terms, resale price maintenance can increase inter-brand competition by restricting intra-brand competition.

The case before the Supreme Court involved a challenge to the pricing policies of Leegin Creative Leather Products, a manufacturer of leather goods and accessories. Under its policies, retailers were prohibited from selling Leegin products below Leegin’s suggested retail prices. A retailer, PSKS, who was terminated by Leegin for violating its policy, sued alleging that Leegin had violated the antitrust laws by requiring it to sell at or above suggested retail prices. In accordance with the Dr. Miles case, the United States District Court for the Eastern District of Texas found that the Leegin resales price maintenance was per se illegal and entered judgment against Leegin for nearly $4 million. The Court of Appeals for the Fifth Circuit affirmed. The U.S. Supreme Court granted certiorari and, after considering the arguments, reversed.

In its decision, the court acknowledged that in some instances resale price maintenance may pose a threat to competition such as when it facilitates a manufacturer’s cartel. In such case, the restraints may assist the cartel in determining whether a manufacturer-member of the cartel is selling below the cartel’s agreed-upon prices since retail prices are easier to monitor than wholesale prices. The court also noted that resale price maintenance may “be used to organize cartels at the retail level.” In such cases, colluding retailers could solicit a manufacturer to enforce the price levels agreed upon by the retailer cartel. However, the court felt that these arguments confirmed that the resale price maintenance should be evaluated under the rule of reason standard, since the standard enables courts to consider anti-competitive effects as well as pro-competitive effects.

To distinguish between pro-competitive and anti-competitive effects, the court recommended that lower courts consider a number of factors including the number of manufacturers using the practice, the source of the restraint (whether initiated by retailers or the manufacturer), and the market power of the manufacturer or retailer. For instance, minimum retail price restraints imposed by several competing manufacturers in an oligopolistic market at the request of a retailer cartel, according to the court, would pose a serious threat to competition. On the other hand, a similar restraint imposed by a single manufacturer in a crowded market would not pose such a threat.

Notwithstanding the Dr. Miles decision, the courts had allowed manufacturers to support minimum prices in a number of instances. Since the Supreme Court’s 1919 decision in United States v. Colgate, “a manufacturer [could] now suggest resale prices and refuse to deal with distributors who do not follow them.” In addition, manufacturers have been able to use minimum advertised pricing programs to influence prices. Commonly seen television and print ads with “suggested manufacturer’s resale price” are examples.

While the Supreme Court decided the case on the basis of federal law, there are still a number of state laws to consider. The Leegin case only overturned the federal per se rule against vertical minimum price restraints. Many states still retain per se rules for violations of resale price maintenance under their antitrust laws. At this point is uncertain whether those states will follow the Leegin court’s lead in changing the standard. Because of this uncertainty under state law, from a practical standpoint companies should continue to rely on the previous rules allowing termination of distributors who do not follow suggested resale prices until such time as the states have had a chance to look at their own laws.