Supreme Court Leegin Decision Offers Little Clarity 10 Years Later

10 August 2017 Bloomberg BNA Publication
Author(s): Elizabeth A. N. Haas

The Supreme Court’s decision 10 years ago that some types of price restraints were not automatically illegal showed the court’s increased reliance on the rule of reason, a burden-shifting framework, to determine anticompetitive behavior. But the evolution of the case law since then has not been forthcoming.

Most attorneys who have attended a CLE touching on antitrust law or product distribution in the past decade have probably heard reference made to the now infamous Leegin decision. ( See Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007).)

In Leegin, the U.S. Supreme Court held that minimum resale price maintenance agreements — in which manufacturers agree with their distributors on the minimum price at which the distributor may sell the manufacturer’s products — are not per se unlawful under federal antitrust law and should instead be evaluated under a rule of reason analysis like other vertical restraints. In so opining, the Leegin court expressly reversed century-old precedent holding that such agreements were per se unlawful. ( See id. at 907 (overruling Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)).)

The Leegin decision, holding that the minimum resale price maintenance practice is no longer per se unlawful at the federal level, does not mean that such an agreement is presumptively lawful or that it will be deemed acceptable (i.e., on the whole pro-competitive, rather than anticompetitive) if subjected to a rule of reason analysis for the particular product and relevant market.

This article explores the extent to which federal courts have substantively engaged on the issue, conducted a rule of reason analysis, and provided guidance on the circumstances under which a minimum resale price maintenance agreement could be found lawful. As addressed further below, there is a dearth of post- Leegin authority on this point, which suggests that businesses should closely evaluate the antitrust risks associated with minimum resale price maintenance before implementing such a policy.

Overview of Leegin

The Supreme Court in Leegin outlined the required rule of reason analysis, explaining that a court evaluating a minimum resale price maintenance agreement must determine whether an agreement constitutes an unreasonable restraint on competition, taking into account “specific information about the relevant business” and “the restraint’s history, nature, and effect.” ( Id. at 885.)

In conducting the rule of reason analysis, a court is to weigh the pro-competitive benefits of a restraint on trade against its anticompetitive consequences. In order to do so, the plaintiff must first identify a relevant market and show actual anticompetitive effects of the agreement on that market. ( See id.; see also PSKS, Inc. v. Leegin Creative Leather Prods., 2009 U.S. Dist. LEXIS 28505, at *5-14 (E.D. Tex. Apr. 6, 2009) (on remand).) Proof of anticompetitive effects can be shown by demonstrating that the restraint is facially anticompetitive or that the agreement raised prices or reduced output or quality. ( Id. at 885)

The Leegin decision listed certain factors that might warrant greater scrutiny of minimum resale price maintenance agreements. (S ee id. at 897-98.) For instance, where many manufacturers in the industry adopt such agreements, the risk of anticompetitive results is greater. Likewise, if the retailers provide the impetus for the agreement, rather than a manufacturer independently adopting the policy, that too creates greater cause for concern. Similarly, if the manufacturer or retailer driving the minimum resale price maintenance has market power (i.e., has the ability to raise prices above those that would prevail in a competitive market), the risk of anticompetitive effect is higher.

In Leegin, the Supreme Court outlined the rule of reason analysis, listed relevant factors, and opined generally about the potential pro-competitive effects of minimum resale price maintenance agreements on inter-brand competition (see id. at 889-892), but the court did not decide whether the agreement at issue in Leegin would pass muster under a rule of reason evaluation.

The Supreme Court, and subsequently the court of appeals, remanded Leeginto the district court for proceedings consistent with a rule of reason analysis. Although the Leegin district court structured its analysis under the rule of reason framework (2009 U.S. Dist. LEXIS 28505, at *4-5), it only had the opportunity to address the sufficiency of the revised complaint under the rule of reason standard. ( See id. at *2-5 (explaining that, due to change in standard established by the Supreme Court, PSKS was permitted to amend its complaint to attempt to allege an antitrust claim under the rule of reason).)

The lower court did not address the merits because it dismissed PSKS’s amended complaint on the grounds that it failed to allege a tenable relevant product market, was too late in raising its horizontal restraint claims, and had abandoned its state law claims. ( Id. at *23, affirmed by PSKS, Inc. v. Leegin Creative Leather Prods., Inc., 615 F.3d 412 (5th Cir. 2010).) Therefore, Leeginitself offers little in the way of concrete guidance to manufacturers and retailers evaluating whether to adopt a minimum resale price maintenance policy.

The World After Leegin

Relatively few cases have analyzed and tested the practical scope of the Leegindecision in the past 10 years. In fact, it appears that no federal court has yet to conduct a full rule of reason analysis on the merits to determine whether a minimum resale price maintenance agreement might be lawful under a particular set of circumstances. To be sure, courts have considered antitrust claims based on minimum resale price maintenance, but several claims have been dismissed before the merits were addressed for failure to identify a relevant market or to sufficiently allege anticompetitive effect. ( See, e.g., Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327 (11th Cir. 2010) (dismissing claim for failure to plead sufficient facts to allege that visco-elastic foam mattresses are a distinct submarket); see also, e.g., Spahr v. Leegin Creative Leather Prods., 2008 U.S. Dist. LEXIS 90079 (E.D. Tenn. Aug. 20, 2008) (dismissing claim for failure to identify relevant product market and failure to allege anticompetitive effect of the minimum resale price maintenance).)

Several other cases have been decided on other grounds, thereby obviating the need for a rule of reason analysis. ( See, e.g., of Charlotte, Inc. v. Bayer Corp., 561 F.3d 282 (4th Cir. 2009) (upholding summary judgment dismissal of claim based on minimum resale price maintenance because there were genuine agency relationships between the manufacturers and distributors, and therefore no “agreement for antitrust purposes” to evaluate under the rule of reason standard set by Leegin); see also, e.g., United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015) (holding that “the relevant ‘agreement in restraint of trade’” was “the [horizontal] price-fixing conspiracy identified by the district court, not Apple’s vertical contracts with the Publisher Defendants” and that “[h]ow the law might treat Apple’s vertical agreements in the absence of a finding that Apple agreed to create the horizontal restraint is irrelevant”).)

Other cases have generally addressed Leegin and the rule of reason standard, but did not reach, or have not yet reached, the merits of the rule of reason analysis. ( See, e.g., McDonough v. Toys “R” Us, Inc., 638 F. Supp. 2d 461, 479 (E.D. Pa. 2009) (holding at class certification stage that resale price maintenance-based claim could be proven by common evidence, but lawsuit subsequently settled before merits of claim could be addressed); see also, e.g., In re Disposable Contact Lens Antitrust, 215 F. Supp. 3d 1272 (M.D. Fla. 2016) (denying motion to dismiss and allowing vertical minimum resale price maintenance claim to proceed, though case has not yet reached merits).)

The post- Leegin appellate decision that has most directly addressed the rule of reason analysis of a vertical minimum resale price maintenance agreement,Toledo Mack, is fairly unremarkable. The court in Toledo Mack reversed the district court and found that there was sufficient evidence to send the claim to the jury, but did so based primarily on factors specifically identified in Leegin as likely to support a claim under the rule of reason standard (e.g., that the retailers were the impetus of the restraint). ( Toledo Mack Sales & Serv. v. Mack Trucks, Inc., 530 F.3d 204, 225-227 (3d Cir. 2008) (reversing district court’s dismissal of claim based on vertical resale price maintenance and assessing evidence underLeegin’s rule of reason standard); but see Toledo Mack Sales & Serv. v. Mack Trucks, Inc., 386 Fed. App’x 214 (3d Cir. 2010) (affirming district court’s evidentiary rulings and upholding jury verdict rejecting plaintiff’s minimum resale price maintenance claims).)

Beyond the dearth of federal authority applying rule of reason in the minimum resale price maintenance agreement context, state law further complicates matters. Some states have either expressly rejected Leegin or have been reluctant to revisit pre- Leegin decisions under state antitrust law prohibiting minimum resale price maintenance agreements.

For example, courts applying California law have continued to follow pre- Leegindecisions interpreting the Cartwright Act and prohibiting minimum resale price maintenance agreements. ( See, e.g., Darush v. Revision LP, 2013 U.S. Dist. LEXIS 60084, at *17 (C.D. Cal. Apr. 10, 2013) (“simply because the Supreme Court has changed course regarding the Sherman Act [in Leegin] does not mean the California Supreme Court will regarding the Cartwright Act. Until the California Supreme Court has given a persuasive indication that it will, the Court cannot simply disregard its decision.”).) California’s attorney general has consistently taken the position that Leegin did not affect California’s state antitrust law and has successfully challenged vertical minimum resale price maintenance agreements. ( See, e.g., California v. Bioelements, Inc., Cal. Super. Ct., Riverside Cty., No. 10011659, Jan. 11, 2011, 100 Antitrust & Trade Reg. Rep. (BNA) 54 (Jan. 21, 2011); see also, e.g., California v. DermaQuest, Inc., 98 Antitrust & Trade Reg. Rep. (BNA) 316 (Mar. 12, 2010).)

New York’s attorney general has sought to enjoin minimum resale price maintenance agreements as per se illegal despite Leegin and other contrary precedent, albeit with less success. ( SeePeople v. Tempur-Pedic Int’l, Inc., 95 A.D.3d 539 (N.Y. App. Div. 2012) (rejecting AG’s attempt to enjoin agreement);, Inc. v. PLC Lighting, Inc., 851 F. Supp. 2d 494 (S.D.N.Y. July 5, 2011) (agreeing with defendant that, per Leegin, the rule of reason and not the per se rule applies to plaintiff’s Donnelly Act claim).)

Maryland has expressly rejected Leegin, amending its antitrust statute to treat minimum resale price agreements as a per se violation. ( See Md. Code Ann., Comm. Law § 11-204(a)(1) (“Prohibited conduct. — A person may not: … By contract, combination, or conspiracy with one or more other persons, unreasonably restrain trade or commerce.”); seealso 2009 Md. ALS 43 (adding Md. Code Ann., Comm. Law § 11-204(b), which states that “For purposes of subsection (a)(1) of this section, a contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade or commerce”).)

Thus, businesses considering minimum resale price maintenance agreements have little to guide them in assessing whether a particular agreement will be found lawful under the rule of reason framework and still run the risk that certain states would deem such an agreement per se unlawful.

Practical Considerations

When deciding whether to adopt a minimum resale price maintenance policy, a company should stringently evaluate the pro-competitive effect of the policy at the outset knowing that it will have the burden of proof on the issue if the policy is ever challenged. A company should consider: (1) the pro-competitive reasons for entering into the agreement; (2) whether the manufacturer and its retailers are using minimum resale price maintenance as a way to facilitate a horizontal conspiracy or artificially elevate prices; (3) whether the agreement was initiated by the manufacturer unilaterally or at the behest of its retailers; and (4) the market power for both the manufacturer and its retailers.

If a company is unable to prove that the pro-competitive effects of the agreement outweigh the anticompetitive ones, it could be exposed to significant monetary penalties, damages, attorney’s fees, injunctive relief, and consent decrees. Even if a company is ultimately successful on the merits, defending against claims for minimum resale price maintenance can be very time-consuming and expensive. Further, as noted herein, minimum resale price maintenance remains per se illegal under some state antitrust laws. This risk of exposure may deter many manufacturers from entering minimum resale price maintenance agreements in the absence of clearer guidance from the courts.

If a business is unwilling to be the test case for the full-blown rule of reason analysis of a minimum resale price maintenance agreement, or otherwise risk running afoul of state laws that outright prohibit minimum resale price maintenance agreements, other options are available to consider.

A manufacturer might prefer to adopt a minimum advertised price (“MAP”) policy or a minimum resale price policy, known as a Colgate policy.

A MAP policy is a unilateral sales policy which prohibits a retailer from advertising prices of certain products below a certain price. Notably, the retailer remains free to sell the item below that advertised price.

Colgate policy is premised on the notion that a company can choose to do business with whoever it sees fit. Under a Colgate policy, a manufacturer unilaterally suggests a minimum resale price for the sale of its product and refuses to do business with any company that does not follow that minimum resale price (which may involve ending a relationship with a reseller). However, both Colgate and MAP policies come with their own risks, so it is prudent to involve antitrust counsel when assessing whether to adopt either approach.

This article was originally published in Bloomberg BNA on August 10, 2017. Read this version here. Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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