Supreme Court Vendor Pricing Decision ‘Makes Perfect Sense,’ CEA Says

The ruling is a return to “reasonableness” in antitrust law, said CEA President Gary Shapiro. In the CE industry, “where sales training, industry marketing, and after-sales service are highly valued by manufacturers and reputable retailers, it makes perfect sense to consider these factors when evaluating a manufacturer’s requirement that threshold prices be maintained,” Shapiro said. The decision in Leegin v. PSKS, Inc. was the work of the court’s conservative majority. Justice Anthony Kennedy wrote the majority opinion, backed by Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito Jr. Justice Stephen Breyer wrote the dissent, backed by Justices John Stevens, David Souter and Ruth Ginsberg.

A 1911 case set the rule that it is per se illegal under the Sherman Act for a manufacturer to agree with a distributor to set the minimum price that the distributor can charge for the manufacturer’s goods. At issue in Leegin was whether to throw out the per se rule and allow resale price maintenance agreements to be judged by the rule of reason, the usual standard applied to check for violations, Kennedy said. The court has dropped the per se rule “for other vertical restraints a manufacturer imposes on its distributors,” he said: “Respected economic analysts, furthermore, conclude that vertical price restraints can have procompetitive effects.”

In deciding to let resale price maintenance agreements be judged by the rule of reason, the court was acting on a Texas case. Leegin Creative Leather Products Inc., a designer, maker and distributor of leather goods and accessories, found in 2002 that PSKS Inc., operator of Kay’s Kloset women’s apparel store in Lewisville, Tex., was marking down Leegin’s Brighton line of belts 20 percent. Kay’s Kloset claimed it discounted Brighton products to compete with nearby retailers also undercutting Leegin’s suggested prices. Still, Leegin demanded that Kay’s Kloset stop the discounting. Its request refused, Leegin stopped selling to the store.

PSKS responded by suing in U.S. District Court, Eastern Texas, alleging Leegin had violated antitrust laws by entering into agreements with retailers requiring them “to charge only those prices fixed by Leegin.” The court, citing the per se rule, disallowed Leegin’s expert testimony describing its pricing policy’s procompetitive effects, Kennedy wrote. The jury agreed with PSKS, awarding the retailer $1.2 million. The court trebled the damages and reimbursed PSKS for court costs, entering a judgment of $3.98 million against Leegin.

The 5th Circuit Court of Appeals affirmed the decision. On appeal, Leegin did not deny that it had entered into vertical price-fixing agreements with retailers, Kennedy said. “Rather, it contended that the rule of reason should have applied to those agreements,” he said. The Appeals Court rejected that argument. It held that the District Court did not abuse its discretion in excluding testimony by Leegin’s economic expert, “for the per se rule rendered irrelevant any procompetitive justifications for Leegin’s pricing policy,” Kennedy said.

The Supreme Court disagreed. Rule of reason is “the accepted standard for testing whether a practice restrains trade” in violation of the Sherman Act, Kennedy said. It requires a fact-finder to weigh all circumstances, including “specific information about the relevant business” and “the restraint’s history, nature and effect,” Kennedy said. “The rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and those with procompetitive effect that are in the consumer’s best interest.”

But when a restraint is deemed unlawful, “the need to study an individual restraint’s reasonableness in light of real market forces is eliminated,” Kennedy said. Per se rules apply only to restraints that always or almost always tend to restrict competition and decrease output, he said. Per se rules are “appropriate” only if courts “can predict with confidence that the restraint would be invalidated in all or almost all instances under the rule of reason,” Kennedy said.

Vertical retail-price agreements “have either procompetitive or anticompetitive effects, depending on the circumstances in which they were formed,” Kennedy said. “The limited empirical evidence available does not suggest efficient uses of the agreements are infrequent or hypothetical. A per se rule should not be adopted for administrative convenience alone. Such rules can be counterproductive, increasing the antitrust system’s total cost by prohibiting procompetitive conduct the antitrust laws should encourage. And a per se rule cannot be justified by the possibility of higher prices absent a further showing of anticompetitive conduct.”

In his dissent, Souter called the per se rule “one upon which the legal profession, business, and the public have relied for close to a century. Today, the Court holds that courts must determine the lawfulness of minimum resale price maintenance by applying, not a bright-line per se rule, but a circumstance-specific ‘rule of reason.'” The argument on which the court based its decision has been “well known in the antitrust literature for close to half a century,” Souter said. “Congress has repeatedly found in these arguments insufficient grounds” for overturning the per se rule, he said, adding that in his view, they do not warrant the Court’s now overturning so well-established a legal precedent.

“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles,” Souter said. “I do not believe that the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing.”