Resale Price Maintenance: What Happened To Leegin Ten Years Later?

By James M. Mulcahy on July 20, 2017

After four decades, Continental T.V., Inc. v. GTE Sylvania’s[1] rational efficiency explanation for vertical restraints is a well-entrenched paradigm for analyzing both price and non-price distributional restraints. In 2007, Sylvania received its 30th anniversary reaffirmation and expanded reach in Leegin Creative Leather Products Inc. v PSKS, Inc.,[2] where a divided Court reversed a century-old precedent and completed the process of eliminating per se treatment of vertical restraints.[3]

It now is Leegin’s tenth anniversary. Following the Leegin decision ten years ago, many antitrust practitioners expressed the view that resale price maintenance, or RPM, programs thereafter would proliferate, especially when the manufacturer’s products were associated with a luxury brand and resold by retailers, distributors and franchisees.

But, has this happened? The answer unequivocally is “no.” Instead, Leegin, from a purely practical standpoint, has created great uncertainty within the antitrust legal community and even now – ten years later – the decision represents no more than rational economic theory and, perhaps, intellectual honesty.

This article explains why RPM programs have not proliferated during the past ten years. There are two principal reasons. First, Leegin has been diminished both by antithetical state action in California and Maryland, coupled with imperfect information about the antitrust treatment of vertical price fixing at the state level in most of the other states within the U.S. Second, and contrary to the anticipated expectations of the Leegin majority, the lower courts during the past ten years have not had the opportunity to “establish the litigation structure to ensure [that] the [rule of reason] operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses.[4]

For these reasons antitrust advisors have been reluctant to promote RPM other than for short periods of time and in isolated instances. As a result, Leegin has not meant much of anything for the lawfulness of RPM in the U.S.

A Short History of Vertical Restraints Culminating In the Leegin Decision

Non-price Restraints. Until 1967, courts were long hostile to non-price restraints but never quite condemned them per se. In the 1967 Schwinn decision, however, the Supreme Court adopted the idea, albeit in the context of economic contradiction.[5] It found exclusive territories per se illegal if the goods in question were sold to retailers but subject to the rule of reason treatment if the goods were sent on consignment.  This, of course, is a distinction without difference and is economically irrational.

Following the Schwinn decision, during the 1970s, economic irrationality became the subject of condemnation. Using conservative economic analysis, scholars and, later, courts began to employ a rational efficiency explanation for vertical restraints. This approach became the basis for a comprehensive claim that vertical restraints (both price and non-price) generally increase distribution efficiency, enhance interbrand competition, and thus improve consumer welfare.[6]

In 1977, in the Sylvania decision, the Supreme Court overruled Schwinn and made territorial exclusivity subject to rule of reason analysis in general.[7] The rational efficiency explanation was largely responsible for the Court’s Sylvania decision to overrule earlier precedent and apply the rule of reason to non-price distributional restraints.[8]

Vertical Price Restraints. Historically, courts also were long hostile to price restraints (both vertical and horizontal) and unequivocally did condemn them per se. In a classic “form-based” decision, RPM was declared per se illegal in the Supreme Court’s 1911 Dr. Miles decision because it involved agreement on price.[9] Except for the “fair trade” period between the passage of the Miller-Tydings Act of 1937 and its repeal (along with the clearly anticompetitive McGuire Act) in 1975, Dr. Miles governed agreements on minimum resale prices for nearly a century.

In its 1968 Albrecht decision, the Court carried this “form-based” analysis to its logical conclusion, finding that agreements specifying maximum resale prices were also per se illegal, even though on their face they benefited consumers.[10]

Beginning in the 1970s, the economic literature showed that vertical price restraints, like the vertical non-price restraints for which they were substitutes, could be pro-competitive under plausible conditions.[11] One might easily conclude that agreeing on maximum resale prices does not deserve per se condemnation under a consumer welfare standard, but Albrecht was not overruled until 1997.[12] Dr. Miles proved more resilient, but it too was finally overruled by the 2007 Leegin decision.

Nonetheless, notwithstanding the Leegin decision, there are two fundamental reasons why Leegin has failed to provide a safe harbor for manufacturers to influence retail prices through the use of RPM policies:

RPM Is Subject To The Rule Of Reason Under Federal Law, But In Some States RPM Still Is – Or May Still Be – Per Se Illegal

The federal antitrust statue – i.e., the Sherman Act – does not preempt supplemental antitrust legislation at the state level, even though the state antitrust laws may directly contradict the Leegin decision by continuing the per se condemnation of RPM. In California v ARC America Corp., the Supreme Court recognized that “Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies.”[13]

In other words, states may enact – and have enacted – their own antitrust laws to supplement federal antitrust laws. This means that the same RPM conduct can be found to be pro-competitive and reasonable under federal law, but conclusively anti-competitive and unreasonable under state law.

California Explicitly Has Rejected RPM By Statute

The prime example of this can be found by looking at RPM in California, which – at least until someone someday successfully challenges the California Supreme Court’s decision in Mailand v Burckle,[14] – – explicitly treats RPM as per se illegal pursuant to the Cartwright Act,[15] its antitrust statute.

The Cartwright Act, prohibits combinations that “prevent competition in [the] sale or purchase of . . . any commodity” or agreements “to keep the price of . . . [any] commodity . . . at a fixed or graduated figure.” [16] Unlike the Sherman Act, a vertical agreement to fix prices continues to be per se unlawful under the Cartwright Act.[17] Thus, notwithstanding the Supreme Court’s shift in the treatment of vertical restraints under the Sherman Act, the Leegin decision does not govern price fixing claims – whether horizontal or vertical – under the Cartwright Act.[18]

Even now, California explicitly condemns RPM both by statute and in Court decisions.[19]

Following Leegin, California’s attorney general, the California Court of Appeal and a California federal district court, interpreting California law, all have confirmed that RPM still is per se unlawful under California’s Cartwright Act. This happenstance means that the very same RPM policy and practice is both reasonable (federal law) and per se illegal (state law) in California at the same time. And, because in every instance a manufacturer or supplier must comply with both state and federal law, the Leegin decision is marginalized to the point of emasculation – at least in California.

California’s per se treatment of RPM is not likely to change any time soon. When asked to address the continued viability of the California Supreme Court’s per se treatment of vertical price fixing in Mailand, the California Court of Appeal made clear that, “notwithstanding a change of law under the Sherman Antitrust Act […,] we are bound to follow the law set forth by our Supreme Court applying state law.”[20] Simply stated, Mailand – not Leegin – “is the governing law of California.” [22] And, according to at least one California federal district court, “there is no indication that precedent is changing.” [22]

Most States Other Than California, Maryland And Kansas Have Not Identified Their Positions On Per Se Analysis Of Vertical Price Restrictions

Most of the individual states have enacted their own antitrust statues, which has created a non-trivial potential for inconsistency between federal and state antitrust law. It is correct that one-half of all current state antitrust statutes use language substantially similar to the federal antitrust statute (Section 1 of the Sherman Act).[23] Because these states have statues that purport to “harmonize” state and federal antitrust laws, one might be tempted to summarily conclude that, when asked to rule, the state courts in those venues will readily conclude that all of these state antitrust laws will, consistent with the Leegin Court, be interpreted so as to find that RPM no longer is per se illegal.

This may be found to be a stretch, but we just don’t know yet. For the past ten years, few of these state courts – and none of the other one-half of all states – have weighed in on this critical antitrust issue. This means that the respective state attorneys general are left to interpret this pricing practice, and it bears remembering that 37 state attorneys general submitted an amicus brief to the Supreme Court in Leegin advocating the continuation of Dr. Miles.

New York is a perfect example of this dynamic. New York’s attorney general has challenged RPM in court with some success, suggesting a potential willingness to attack RPM in the future even though the New York state courts have not explicitly declared RPM unlawful.[24]

Given this lack of certitude – and recognizing that sophisticated clients do not like surprises – for the past ten years, antitrust advisors consistently have cautioned their clients that, from a practical viewpoint, Leegin has not meant much of anything for the lawfulness of RPM agreements in the U.S.

Following Leegin, The Lower Courts Were Expected To Provide Guidance To Businesses By Deciding What Level Of Rule Of Reason Analysis Courts Should Employ, But This Has Not Happened

The Leegin Court made clear that vertical price (and non-price) restraints remain subject to the rule of reason, even though other prominent figures – notably, Robert Bork and Richard Posner – had argued that they were always procompetitive and thus should be per se legal.[25] This means that the Supreme Court still recognizes that RPM can in certain circumstances represent an anticompetitive restraint that must be eliminated. Therefore, under Leegin, courts still must distinguish anticompetitive RPM from procompetitive RPM.

Leegin did not decide what level of rule of reason scrutiny courts should employ when evaluating whether a specific RPM practice operates as an anticompetitive restraint.[26] Instead, the majority left it to the lower federal courts to establish and develop the appropriate “litigation structure to ensure the [rule of reason] operates to eliminate anticompetitive restraints…and to provide more guidance to businesses.”[27]The lower courts were explicitly authorized to “gain experience” by, among other things “devis[ing] rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones.”[28]

Ten years ago, following the Leegin decision, the consensus was that its legacy would show that the full implications of the case would depend largely on how lower courts, going forward, might interpret and apply the rule of reason. Business guidance from the lower courts was extremely important. If the Sylvania standard were adopted and courts therefore were required to conduct “full-blown” rule of reason analysis, then RPM would effectively become de facto legal, as rule of reason cases are notoriously expensive to litigate and virtually impossible for plaintiffs to win.

If, on the other hand, courts instead applied the “quick-look” (or abbreviated) rule of reason standard that is now frequently employed in horizontal restraint cases, then plaintiffs might be able to navigate through the obviously very difficult task of challenging RPM post Leegin.

Immediately following Leegin, most everyone was expecting that firms nationwide would initiate RPM programs and that federal courts would be inundated with legal challenges that would reverberate throughout the federal judicial system. Indeed, Justice Breyer, in his dissenting opinion in Leegin, joined by Justices Stevens, Souter and Ginsberg, sounded the alarm by writing that “[t]he 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”[29]

And so, have the lower courts then developed a litigation structure for evaluating RPM under an appropriate rule of reason schemata? Again, the answer unequivocally is “no.” It simply has not happened. But, the underlying reason for this does not fall in the lap of the lower federal courts. Tautology suggests that if businesses do not employ RPM strategies, then Leegin has no juridical gravitas, and the federal courts have nothing to decide. This is what has happened during the past ten years.  Therefore, today we are exactly where we were ten years ago.

Conclusion

Although RPM is no longer per se illegal under federal antitrust law, the legality of RPM under U.S. state antitrust law remains uncertain. There has been little case law to clarify state positions beyond the few states that have explicitly condemned the practice and whose attorneys generally have challenged it in state court.[30] This has created a “patchwork” dynamic that has chilled any optimism that RPM would become an easier tool for manufacturers to influence retail prices. It is particularly true when applied to manufacturers, suppliers and franchisors that have nationwide sales or market penetration focused on the more populous states – e.g., California.




* James M. Mulcahy is the managing partner of Mulcahy LLP, a boutique firm specializing in competition litigation. Mr. Mulcahy is a past co-chair of the State Bar Business Law Section Franchise Law Committee and currently serves as an appointed member of the Franchise and Distribution Law Advisory Commission of the State Bar of California Board of Legal Specialization. Filemon Carrillo is a third year law student at The George Washington University Law School and is a Summer Associate at Mulcahy, LLP. Mr. Carrillo serves as the Editor-in-Chief of The Federal Circuit Bar Journal, Volume 25.

[1] 433 U.S. 36 (1977).
[2] 127 S. Ct. 2705 (2007).
[3] Tying, an upstream-power vertical restraint, is subject to a modified per se rule, but that rule, because of the requirement that a plaintiff demonstrate market power and an economic basis for treating the tying and tied products as separate products, has been equated with a “structural rule of reason.” Lawrence A. Sullivan & Warren S. Grimes, THE LAW OF ANTITRUST: AN INTEGRATED HANDBOOK, at 419 (2d ed. 2006) (describing the rule governing tie-ins as a “modified per se rule”).
[4] Leegin, 127 S. Ct. 2705, 2720 (2007) (Emphasis supplied).
[5] United States v Arnold Schwinn & Co., 388 U.S. 365 (1967).
[6] See Robert Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 YALE L.J. 373 (1966).
[7] Continental T.V., Inc. v GTE Sylvania, Inc. 433 U.S. 36 (1977).
[8] 433 U.S. 36, 54-55 (1977).
[9] Dr. Miles Medical Co. v John D. Park & Sons Co., 220 U.S. 373 (1911).
[10] Albrecht v Herald Co., 390 U.S. 145 (1968).
[11] See Brief of Amici Curiae Economists in Support of Petitioner, Leegin Creative Leather Products, Inc. v PSKS, Inc., (S. Ct. 2007).
[12] State Oil v Kahn, 527 U.S. 3 (1997).
[13] 490 U.S. 93, 102 (1989).
[14] 20 Cal. 2d 367 (Cal. 1978).
[15] §§16720(c) and (e)2.
[16] Cartwright Act §§ 16720(c) and (e)(2).
[17] Mailand v. Burckle, 20 Cal. 3d 367 (1978).
[18] See Alsheikh v. Superior Court, 2013 Cal. App. Unpub. LEXIS 7187, *7. (Cal. App. 2d Dist. 2013).
[19] Mailand v Burckle, 20 Cal. 3d 367 (1978); Alsheikh v Superior Court, 2013 Cal. App. Unpub. LEXIS 7187 *7 (Cal. App. 2d Dist. 2013). Cal. Bus. & Prof. Code § 16720(b) (West through 2017 Reg. Sess.); See Darush MD APC v Revision LP, No. 12-cv-10296, 2013 WL 1749539 (C.D. Cal. Apr. 10, 2013); People v Denmaquest Inc., No. RG 10497526 (Cal. Super. Ct. Feb. 23, 2010) (consent judgment); People v Bioelements Inc. No. 10011659, WL 486328 (Cal. Super. Ct. Jan. 11, 2011) (complaint and consent judgment). One other state – Maryland – has also explicitly rejected Leegin, through legislation enacted in 2009. Md. Code Ann., Com. Law § 11-204 (West through 2017 Reg. Sess).
[20] Id.
[21] Id. at *3. See also Darush v. Revision LP, 2013 U.S. Dist. LEXIS 60084 at *16 (“Under current California Supreme Court precedent, vertical price restrains are per se unlawful under the Cartwright Act,” and “[t]here is no indication that precedent is changing”).
[22] Id.
[23] See e.g., the Illinois, Michigan, Delaware and Connecticut antitrust statutes. 740 Ill. Comp. Stat. Ann. 10/11; Mich. Comp. Laws. Ann. §445.784(2); Del. Code. Ann. Tit. 6, §2103; Conn. Gen. Stat. Ann. §35-26.
[24] See, State v Herman Miller, Inc., No. 08-2977 (S.D.N.Y. March 21, 2008; People v Tempur-Pedic Int’l., Inc., 95 A.D.3d 539 (N.Y. App. Div. 2012).
[25] Robert H. Bork, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF at 406 (Basic Books 1978).
[26] 127 S. Ct. at 2720.
[27] Id. (emphasis supplied).
[28] Id.
[29] Leegin, 127 S. Ct. 2705, 2737.
[30] Kansas did enact a statute explicitly following Leegin and declaring RPM subject to rule of reason analysis. Kan. Stat. Ann. §50-163(b) (2017 Reg. Sess.) The Kansas Legislature did so after the Kansas Supreme Court found RPM to be per se unlawful. O’Brien v Leegin Creative Leather Products Inc. 294 Kan. 318 (2012). No other state has passed similar legislation.

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