LEEGIN CREATIVE LEATHER PRODUCTS, INC. v. PSKS, INC.
Leegin Creative Leather Products, a manufacturer of women's accessories, entered into vertical minimum price agreements with its retailers. The agreements required the retailers to charge no less than certain minimum prices for Leegin products. According to Leegin, the price minimums were intended to encourage competition among retailers in customer service and product promotion. When one retailer, PSKS, discounted Leegin products below the minimum, Leegin dropped the retailer. PSKS sued, arguing that Leegin was violating Section 1 of the Sherman Act by engaging in anticompetitive price fixing. Under the Supreme Court's 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., mandatory minimum price agreements are per se illegal under the Act - that is, they are automatically illegal regardless of the circumstances.
Leegin argued that this rule was based on outdated economics. It contended that a better legal analysis would be the "rule of reason," under which price minimums would be held illegal only in cases where they could be shown to be anticompetitive. Both the District Court and U.S. Court of Appeals for the Fifth Circuit rejected these arguments. The courts felt compelled to follow the Supreme Court's rule in the Dr. Miles case, under which Leegin's practices were illegal regardless of the economic arguments put forward by the company.
Is it per se illegal under Section 1 of the Sherman Act for a manufacturer to set mandatory minimum prices for its products?
Legal provision: Sherman
No. The Court ruled 5-4 that "Dr. Miles should be overruled and that vertical price restraints are to be judged by the rule of reason." Justice Anthony Kennedy's majority opinion held that Dr. Miles had erred by treating vertical minimum price agreements between manufacturers and retailers as analogous to horizontal price-fixing agreements between sellers. The Court cited evidence from the economic literature that vertical minimum price agreements are rarely anticompetitive and can often function to increase interbrand competition. The Court acknowledged that in some cases vertical price minimums might facilitate manufacturer cartels, but it held that instances where the price agreements are abused for illegal anticompetitive purposes can be determined on a case-by-case basis under the rule of reason. The mere fact that vertical price minimums may lead to higher prices for goods cannot reflect negatively on its legality under the Sherman Act, because there are many legitimate business decisions that may ultimately result in higher prices. The majority also acknowledged that the principle of stare decisis would weigh against overruling the nearly 100-year-old precedent in Dr. Miles, but it held that the Sherman Act is to be treated as a "common-law statute," which must be allowed to evolve in the courts as economic knowledge and circumstances change. The dissenters, in an opinion authored by Justice Stephen Breyer, saw no change in circumstances that would justify overruling Dr. Miles, and they argued that the reliance of the business community on that decision supported adherence to stare decisis.
Argument of Theodore B. Olson
Chief Justice Roberts: We'll hear argument first this morning in case 06-480, Leegin Creative Leather Products versus PSKS Incorporated.
Mr. Olson: Mr. Chief Justice, and may it please the Court:
The per se illegality rule for resale price maintenance is widely recognized to be outdated, misguided and anticompetitive.
It should be replaced with the same rule of reason standard that applies to other forms of vertically imposed marketing restrictions.
The Sherman Act bars only unreasonable restraints of trade and the court presumptively applies a rule of reason analysis to determine whether a restraint is unreasonable.
Per se rules should be rare and imposed only where the court is virtually certain based upon considerable economic experience that a practice is nearly invariably anticompetitive.
Vertical minimum retail... resale price maintenance are plainly not invariably anticompetitive.
In fact, a broad consensus of economists and decisions of this Court recognize that vertical restraints promote interbrand competition, which is the goal of the antitrust laws and are rarely, if ever, anticompetitive.
Justice Ginsburg: There was an argument made, Mr. Olson, that it is somewhat difficult to distinguish vertical from horizontal in this context, that in fact, the agreement that the manufacturer made with the dealers was more successful in getting a horizontal accord among the dealers than if the dealers had attempted it themselves, in which case some might have held back.
Mr. Olson: Well, the economists who have looked at the use of resale price maintenance have said that that would very rarely, if ever, be the case.
It certainly could not be the case in this industry in connection with this participant in the marketplace.
There are something like 5,000 dealers that the Brighton products are sold through.
There are thousands and thousands of other competing dealers, hundreds of products.
What the Court has said repeatedly is that programs such as this may promote interbrand competition, perhaps--
Justice Stevens: Mr. Olson, suppose just the dealers in New York, the retail dealers agreed among themselves on the price.
Would that be lawful?
Mr. Olson: --No.
I think that that would be covered by a horizontal prohibition, Justice Stevens.
Justice Stevens: Would you say that it's per se unlawful?
Mr. Olson: I think it would be, as horizontal restraint among competing dealers, it could be a per se violation under horizontal rules if it was... if it was... involved the manufacturer in some way, it could be dealt with by the rule of reason.
Justice Stevens: Why should that be any different from the arrangement where those dealers all got together in the convention and recommended to the manufacturer that he impose a vertical restraint of precisely the same dimensions?
Mr. Olson: What this Court said in Sylvania, and said again in the State Oil versus Khan, is that the manufacturer has very, very little incentive to increase--
Justice Stevens: --No, but I'm asking what if he did, why should you draw a distinction?
Mr. Olson: --Because the motivation for the arrangement, if it comes from a manufacturer... you're suggesting a hypothetical in which all of the dealers in a particular area would get together to impose this on a manufacturer.
I think it's very unrealistic that that would happen.
Justice Stevens: No.
They just passed a resolution asking the manufacturer to impose this vertical restraint and ways to do it.
Should that be different from one in which the manufacturer does it independently?
Mr. Olson: I think that if the manufacturer makes a decision, whether it's because dealers would like to see that happen or not, as this Court said in Business Electronic versus Sharp Electronics, there's of course relationships between the dealers and the manufacturers, that the dealers may have an interest in doing this, because they may find for the same reason that the manufacturer does that it promotes the sales of products.
The record is clear in this case that this was an effective strategy for the Brighton company, the Brighton Leegin company that's manufacturing the Brighton products, to enter a very difficult and highly competitive marketplace, and it was successful.
Chief Justice Roberts: Maybe, Mr. Olson, you could give us an example where the rule of reason would find a violation in this situation?
Mr. Olson: Well, it might be a situation, the economists have written about this, say that it would be very rare, and would require retailers with a strong powerful market power to impose a situation where the manufacturer would do that to help facilitate a horizontal cartel.
That certainly was not involved in this case, and that would probably be found to violate the rule of reason.
In addition, it would probably be unlawful under the horizontal rules established by this Court.
That was not an issue in this case.
The economists say that that would very seldom happen.
Justice Breyer: You say very.
I know the Chicago school tends to want rule of reason and so forth.
Professor Sherer is an economist, isn't he?
Worked at the FTC for a long time.
A good expert in the field.
He points out the drug industry after you got rid of... after you got rid of resale price maintenance, the margins fell 40 percent.
The drug stores it went down 20 percent.
He says with blue jeans, alone, it saved American consumers $200 million to get rid of it.
And his conclusion is, as in the uniform enforcement of resale price maintenance, the restraints can impose massive anti-consumer benefits.
Mr. Olson: Well--
Justice Breyer: What that sounds like is that if at least he, who is an economist, thinks if you get rid of Dr. Miles, every American will pay far more for the goods that they buy at retail.
Now that's one economist, of course.
There are other whose think differently.
So how should we decide this?
Mr. Olson: --Well--
Justice Breyer: Should we overturn Dr. Miles and run that risk?
Mr. Olson: --In, in the vast majority of the economist whose have looked at this have come out to the opposite conclusion, Justice Breyer.
Justice Breyer: We're supposed to count economists?
Mr. Olson: --No.
I think that--
Justice Breyer: Is that how we decide it?
Mr. Olson: --But what this Court... what this Court has repeatedly said, that under circumstances such as this where there's a consensus among leading respected economists, that is one factor.
There's another factor--
Justice Breyer: Well, I haven't seen a consensus.
Isn't, doesn't Sherer and all these people, doesn't that point of view count, too?
Mr. Olson: --This is one factor that the Court should consider and the Court has considered in the past when dealing with something that the Court itself has said, is an anachronistic and chronologically schizoid rule, to have a rule of reason for certain vertical restraints and a fixed, rigid, per se rule with respect to other vertical restraints.
The Court... the Court itself has made those pronouncements.
The enforcing agencies have changed their view with respect... and they are here today, the Antitrust Division and the Federal Trade Commission, all of whom have announced that they believe that it is very rare for a rule such as this, for an arrangement such as this to be anticompetitive.
Justice Ginsburg: But it was not so long ago that the Department of Justice took a different view.
And of all of the vertical restraints, this is the only one where Congress has been a player.
I mean, Congress allowed the fair trade laws to operate.
And then it withdrew that.
There's no other restraint where they are has been congressional action, where the argument could be made, well, Congress is well aware of this, the Court should allow them to make the change, if they so will.
Mr. Olson: Essentially, the same argument was made in the Sylvania... at the time of the Sylvania case.
The same argument was made just a term or two go in connection with the Illinois Tool case that dealt with tying arrangements.
The same argument was made in State Oil versus Khan.
This Court has construed the antitrust laws as an expression by Congress that the courts should be aware of the dynamic potential in the marketplace--
Justice Ginsburg: But in those cases you didn't have the counterpart to Miller-Tydings and McGuire.
That's what makes this... this one different in terms of congressional intention.
Mr. Olson: --The repeal of those statutes, Justice Ginsburg, repealed per se legality rules.
It was not a congressional expression against the rule of reason--
Justice Stevens: No, but there was in the patent case, though, Mr. Olson.
We relied on the fact that the patent law changed.
Mr. Olson: --Yes, you did.
Justice Stevens: Yes.
Mr. Olson: And that was a, that was one factor, however, Justice Stevens.
I think, as I read that opinion, the Court was also concerned with the fact that the, the per se rule which... and the Court said the same thing just a few weeks ago in the Weyerhaeuser case... to the extent there's practices that can be procompetitive, the Court should not set a low threshold of illegality, especially low per se illegality threshold.
There were... there have been... it is worth emphasizing that the Court has repeatedly said we don't want per se rules when we don't have a substantial body of economic experience that shows us that this practice--
Chief Justice Roberts: What about... what about the reliance interest, though?
I mean, hasn't a whole industry of discount stores developed in reliance on the Dr. Miles rule?
And don't we need to be concerned about the disruption to that established practice?
Mr. Olson: --There's really no evidence that the marketplace as it exists today is a result of the Dr. Miles rule of 1911, Chief Justice--
Justice Souter: Isn't there evidence that the, basically that the rise of the Wal-Marts and the Targets is correlated with the demise of fair trade?
So... that there's that correlation.
Mr. Olson: --Actually I looked into that, Justice Souter.
And me, my limited historical research is that the... those discounters were coming on strong before 1975 which is when the, the consumer price, whatever it was, act was passed in response to that.
There are... the evidence basically shows that... and this Court has said... that it's interbrand competition that ultimately produces lower prices.
Justice Breyer: Well, I don't know.
We have... you talked about... just for fun I got out of the library a book by Professor B. S. Yamey, called resale price maintenance where he has five economists... now maybe you're not going to count them as economists.
Now I didn't find in that book a single argument that isn't also in your briefs, nor did I find in your brief as single argument that isn't in the book.
There's one interesting thing about the book.
It was written in 1966.
So I guess my question is what's changed?
Now I know two things have changed.
One is there's evidence in Canada, Britain, and in the states that were under Miller-Tydings, that when you got rid of resale price maintenance, prices went down.
And the second thing that's changed is there's far more concentration, I gather, today in the retail side of the market than there are used to be, a factor which makes resale price maintenance dangerous because it's more likely to take place at the request of the dealers.
Now, I see those two changes.
My question to you is looking at Yamey's book which is called Resale Price Maintenance, so you might have found even it even on Google, and... what's changed?
Mr. Olson: Well, a number of things have changed.
The... the number of respected individuals, notwithstanding that book, who have looked at it and have focused on the marketplace, have said that because it allows... it increases the possibility of interbrand competition, it can provide incentives for dealers to provide service, differences in the products.
And other things that have happened since then, are this Court's decision in the Sylvania case, which... which involved an elaborate analysis of vertical restrictions and found that they are largely procompetitive and undermine the ruling... the reason for a per se rule.
This Court's decision in State Oil versus Khan, and the other cases that this Court is very well aware of where per se rules have systematically been dismantled because they are artificial themselves in the marketplace.
Justice Kennedy: Mr. Olson, does brand competition generally help retailers, or is this a question that can't be answered?
Mr. Olson: --Did you say inter--
Justice Kennedy: Interbrand, interbrand competition?
Do retailers like interbrand competition?
Mr. Olson: --Well, I don't know that... I don't know whether people like competition.
But the antitrust laws like competition and this Court likes competition.
And this Court has said that interbrand--
Justice Kennedy: Well, but we're talking about inter... we're talking about retailers.
It, it seems to me at the outset of the argument, you... you acknowledged, and I think it is the general rule... that if the retailers themselves have this resale price maintenance, it is invalid.
Well, if the manufacturer does this just for the convenience of the retailers, and that's... many of the examples in your brief, it is for the convenience and for the benefit of the retailers, then why shouldn't there be a per se rule?
Why should we allow the manufacturer to do something we that wouldn't allow the retailers to do, if it's for the retailers?
Mr. Olson: --Well, the manufacturer is very unlikely to do this for the convenience of the retailers, to... because it's in the interest of the manufacturer to have the retail price as low as possible so that the manufacturer will sell as many of the manufacturers' products as possible.
Justice Scalia: If... if, if indeed that's, that's what he's aiming at, low price.
Is it the object of the... is the sole object of the Sherman Act to produce low prices?
Mr. Olson: No.
Justice Scalia: I thought it was consumer welfare.
Mr. Olson: Yes, yes, it is.
Justice Scalia: And I thought some consumers would prefer more service at a higher price.
Mr. Olson: Precisely.
Justice Scalia: So the mere fact that it would increase prices doesn't prove anything.
It doesn't prove that it's serving consumer welfare.
If, in fact, it's giving the consumer a choice of more service at a somewhat higher price, that would enhance consumer welfare, so long as there are competitive products at a lower price, wouldn't it?
Mr. Olson: That's... that's absolutely correct.
Justice Scalia: So I don't know why, why we should have to focus our entire attention on whether it's going to... going to produce higher prices or not.
The market out there has different goods at different prices which have different qualities that attract different consumers.
Mr. Olson: I... I agree completely.
I would like to reserve the balance of my time for rebuttal, but let me say that that's what this Court has said over and over again.
If you... the purpose of the antitrust laws is not price, but it's competition, because competition between competing manufacturers give the consumers more choice.
Some people may want the cheapest product.
Some people may want the product that's more available to them.
They may wish the return policy or the warranty policy or the repair policy that the dealer provides.
And in this marketplace particularly, that system of providing competition is consistent with the antitrust laws and has produced success in the marketplace.
Justice Ginsburg: Mr. Olson, before you sit down, there's just one thing that wasn't covered in your argument or in the brief, but the complaint alleged in this case that Leegin allowed certain favored dealers to discount; not this plaintiff, but others were allowed to discount.
And if that were true, as a matter of fact, then that would be a... a plain violation of antitrust law, wouldn't it?
Mr. Olson: This... but the case was never litigated on that basis.
It wasn't considered on that basis in the Court of Appeals.
It came up sort of as a late thought in the opposition to the petition for certiorari.
But that is not this case.
The case was litigated on the per se rule of Dr. Miles.
Chief Justice Roberts: Thank you, Mr. Olson.
Justice Ginsburg: --in the complaint,.
Argument of Thomas G. Hungar
Chief Justice Roberts: Thank you, Mr. Olson.
Mr. Hungar: Thank you Mr. Chief Justice, and may it please the Court.
The same considerations that led this Court in Sylvania and State Oil to reject outmoded per se rules compel that same result here.
The Dr. Miles rule conflicts with this Court's modern antitrust jurisprudence in three fatal--
Justice Breyer: Maybe I'll put my question, which is really just one for this.
I understand perfectly that the per se rule is a result of balancing differ things.
Of course, resale price maintenance does raise prices, and it is very often anticompetitive.
Of course, sometimes, there are good reasons for it that might help consumers.
Now, in addition, you need clear rules.
Now those three sets of things require a balance.
And we have a hundred years of history where this Court and Congress and others have balanced those three sets of considerations, and they've come out one way.
Now, the Department of Justice wants to rebalance them and come out the other way.
There are good arguments on both sides.
Why should we overrule a case that's 96 years old, in the absence of any... any... congressional indication that that's a good idea, when it's simply a question in a difficult area of people reaching a slightly different weight on some these three sets of things?
Mr. Hungar: --Several reasons, Your Honor.
It's not... it's not a close question whether this Court under its modern antitrust jurisprudence as an initial matter would impose a per se rule in this context.
There is economic... there is consensus among the respected economists--
Justice Breyer: I would think it is quite a close question.
Mr. Hungar: --I don't think you, Your Honor.
Justice Breyer: All right, even so.
Mr. Hungar: --Given that this Court's test, the question this Court's modern cases ask, in distinguishing between the rule of reason and the per se rule, is whether the challenged conduct is always or almost always anticompetitive.
That's what the Court has said.
Justice Breyer: Price fixing, horizontal, I guess, or territorial divisions, we should overturn those too.
Mr. Hungar: Certainly not, Your Honor.
Because that, that is almost always anticompetitive in our experience and in the experience of the courts.
But the same is not true in the resale price maintenance context.
Dr. Miles has foreclosed the courts from conducting the kind of analysis that would actually look into this question.
But the empirical data that are available would suggest that anticompetitive explanations for resale price maintenance do not have very much explanatory power.
When you actually look at the cases that have been litigated, they involve manufacturers without market power, unconcentrated markets, no evidence in the vast majority of those cases of any cartelization going on.
So the anticompetitive explanations, while certainly valid in some cases, do not appear to explain most of the resale price maintenance that has been litigated.
It's true that resale price maintenance can but does not always result in price increases, but, as Justice Scalia pointed out, price is not the only thing that consumers care about.
And there is widespread consensus in the economic literature and in this Court's recent cases that price-based vertical restraints, just like non-price based vertical restraints, while they generally reduce intrabrand competition, generally enhance interbrand competition.
In Monsanto and Business Electronics, this Court made clear that price vertical restraints, like minimum resale price maintenance, frequently, in fact usually, have the same or similar effects to the non-price vertical restraints to which this Court now applies rule of reason analysis.
So the reason in--
Justice Stevens: Wouldn't your argument also apply to a conspiracy among the New York dealers in this product just to fix prices?
Because there's plenty of interbrand competition, I think.
I don't think you can say it's absolutely clear that that would always be anti-competitive because they would also agree to provide additional services.
Mr. Hungar: --No, Your Honor, because horizontal... the important thing to keep in mind is that the incentive of the manufacturer when the manufacturer--
Justice Stevens: I'm talking about a case in which it's the dealers who want to agree to provide extra services at higher prices as their method of better serving the public and they all agree that they have to be conscious about the competition from other brands.
Why can we be absolutely certain that's always going to be harmful to the consumer?
Mr. Hungar: --Your Honor, the reason why we know that is always or almost always harmful is that the incentive at a horizontal level of a retailer cartel, just like the incentives of the participants in a manufacturing cartel--
Justice Stevens: They might be precisely the same as the manufacturers: We think we'll make more, all make more money if we concentrate on service rather than price.
Mr. Hungar: --No, Your Honor, because the manufacturer's incentive is not to increase the profits of the retailers, but the retailers when they get together obviously have a very different incentive, which is not to benefit the manufacturer.
Justice Breyer: What you say is right.
What you say there is right.
I feel I'm back in 1966.
The argument against that is, we don't know which way the push comes.
The large retailers, Home Depot, whatever they are, huge retailers, they want... or maybe it isn't the discounters, it's some other ones.
We don't know which way.
You're throwing it into court.
You're throwing it before 12 people who may or may not work this thing out.
So the argument against what you're saying is not logic.
It's empirical and administrative.
Mr. Hungar: Your Honor--
Justice Breyer: That's what it was.
That's what it is now, I guess.
Mr. Hungar: --Your Honor, in State Oil the same argument was made.
The argument was made that, while we don't have compelling empirical evidence that Albrecht results in harm to the economy, we don't have compelling empirical evidence that resale price maintenance, maximum resale price maintenance, is generally pro-competitive, and in the absence of such empirical evidence there's no basis for overturning precedent.
This Court unanimously--
Justice Souter: We do have empirical evidence, though, don't we, that the decision of this case is going to be very significant in the sort of battle between Wal-Mart and the Main Street stores; and why should this Court in effect take a shot in the dark at resolving that, as distinct from leaving it to Congress, which is in a position to know more about where the shot is going to land than we are?
Mr. Hungar: --This Court... I'm sorry.
There's no empirical evidence that I'm aware of about what impact eliminating Dr. Miles would have on the Wal-Marts of the world.
Justice Souter: That's my point.
But it seems to me there is a body of some empirical evidence that the success of the Wal-Marts and the Targets and the Home Depots was a success which was correlated with the elimination of price maintenance by the States.
Mr. Hungar: I don't think so, Your Honor.
In fact, as Mr. Olson pointed out, the K-Marts of the world began during the fair trade era.
Justice Souter: They began, but they have flourished in the post-fair trade era.
Mr. Hungar: Yes, Your Honor, but I think considerations likes the opening up of international trade and the development of markets like China to supply low-cost goods have a lot more to do with the success of the Wal-Marts of the world than a rule like Dr. Miles.
Remember, it's perfectly legal under current law for manufacturers to impose the same sort of constraints as long as they do it by fiat and unilateral enforcement rather than by agreement.
So the suggestion that somehow this is going to revolutionize the economy if Dr. Miles is overruled is simply unsupportable.
Chief Justice Roberts: Well then, what's the great benefit then in changing the rule if it's perfectly legal to achieve the same result already?
Mr. Hungar: As the Ping amicus brief, the Ping Golf Club Manufacturer amicus brief, indicates it's extremely expensive and inefficient to follow the Colgate regime, that for those manufacturers for whom resale price maintenance would be in effect a strategy like Leegin it's more efficient to do it in many circumstances by agreement, rather than the disruption that is entailed when you terminate a dealer without further discussion for discounting one item in order to keep your policy in place.
Justice Souter: But doesn't that answer your argument that there isn't reason to believe that there is going to be disruption if Dr. Miles goes, because now it's going to be easy?
Mr. Hungar: Your Honor, in 1945 during the height of the fair trade era the FTC did a study which concluded only about 5 percent of the economy was affected by fair trade.
And the fair trade regime, remember, is a different and more extreme regime.
There it was per se legality, not rule of reason.
So it's just... there's just no basis for these assertions that somehow the economy is going to be massively changed.
But it is also perfectly clear and undisputed that there are circumstances in which it is more efficient for a manufacturer to adopt resale price maintenance.
It will enhance its ability to compete and it will provide consumers more of what they want, and that is a good thing and the antitrust laws should not automatically foreclose that merely because in a small percentage of cases it is conceivable that there can be anticompetitive effects.
Justice Souter: Isn't it fair to say that there is reason to believe that there may be a massive reorientation in the retail economy if Dr. Miles goes?
And that gets to my problem, why should we be the people to make a guess as opposed to the Congress as the institution to make the guess?
Mr. Hungar: I'm not aware of any reason to believe that, Your Honor, based on the historical record and based on the modern realities.
The Wal-Marts of the world have succeeded because of their discounting strategy.
That's not going to change, and manufacturers have an incentive to have their goods sold through those stores and that's not going to change either in the vast majority of cases.
And With respect--
Justice Ginsburg: If the rule of reason is the one that applies, I gathered, perhaps incorrectly, from Mr. Olson's remarks that this would be... this case would be thrown out on summary judgment, it would never get to trial.
How do you think the rule of reason would operate if it were the rubric under which this case were to be decided?
Mr. Hungar: --Your Honor, I think it would operate as it does usually, which is the plaintiff would be required to establish an anticompetitive effect resulting from the challenged conduct, and once that burden is overcome the defendant would be required to come up with some legitimate business justification, some pro-competitive results that outweigh that.
And only if they could do that would they succeed.
Justice Ginsburg: Well, that's the formula, but I take it from what you said and Mr. Olson said that the plaintiff could never get across the first threshold?
Mr. Hungar: We don't agree with that, Your Honor.
In cases where resale price maintenance is being used to facilitate cartelization, either at the manufacturer or the retail level, the plaintiff could prevail.
Also in, for example, in an oligopolistic market.
Justice Ginsburg: But in this case, this case has none of those features.
Mr. Hungar: Well, right.
Justice Ginsburg: Leegin loses under the rule of reason, right?
Mr. Hungar: We don't know that.
It seems likely to assume that, though, and that's not a bad thing.
Leegin is obviously not dominant in the market.
It's obviously not going to succeed unless what it is offering at a higher price is what consumers want, and that is a good thing under the antitrust laws.
Chief Justice Roberts: Thank you, Mr. Hungar.
Mr. Hungar: Thank you.
Argument of Robert W. Coykendall
Chief Justice Roberts: Mr. Coykendall.
Mr. Coykendall: Thank you, Mr. Chief Justice, and may it please the Court: As recently as last month, this Court restated a guiding principle of antitrust jurisprudence: Discouraging price cuts and depriving consumers of low prices is bad antitrust policy.
RPM prohibits price--
Justice Scalia: Is that right?
I mean, You really think that antitrust policy means when... any arrangement that produces a higher price is bad?
Mr. Coykendall: --Well, we aren't talking about any arrangement--
Justice Scalia: I mean, a lot of consumers want, you know, extended warranties.
They want show rooms where they can go and look at things.
All of which costs more money.
And where you can not have resale price maintenance the customers... or you have the free rider problem.
The customers shop at the place that has the big show room, likes at all the product there, and goes and buys it from somebody else who has not incurred that expense.
Now, I just don't think that all the customers want is cheap.
I think they want other things besides cheap.
I think they want service.
I think they want selection.
I think they want the ability to view goods and so forth.
Why do you discount all of those things?
Mr. Coykendall: --I don't discount all those things.
All those things are available under our current regime where we have a per se prohibition against resale price maintenance.
Justice Scalia: Well, they aren't available.
This company thought that it could provide higher service if it could assure its retailers that they would not be undercut by people who are not providing that kind of service.
Mr. Coykendall: And there's no question that even the plaintiff in this case was providing that service.
He was providing it more efficiently and he just wanted to pass those efficiencies on.
Justice Scalia: I don't, I don't know that there's no question about that.
There's certainly no question that this company was successful in breaking into a difficult market with its strategy of assuring its retailers a cushion so that they could provide the service.
Mr. Coykendall: The record shows that with this specific company, most of the growth of its sales occurred before it established a resale price maintenance policy.
So there are no demonstrated benefits from this company of imposing and enforcing a resale price maintenance policy.
Chief Justice Roberts: What is your main objection to... I mean, it's hard to propose a rule of reason.
Why, why can't the rule of reason work to promote the objectives you've just articulated?
Mr. Coykendall: Well, as a practical matter for someone in my position, or plaintiff's position, it's impossible for a small dealer to muster the resources in order to put forth--
Chief Justice Roberts: For a small dealer.
But as we've already heard, the dealers who engage in the discount policy are places like Target and Wal-Mart.
Those aren't small dealers.
Those are behemoths in the retailing industry.
Mr. Coykendall: --I would suggest that those are not the people that really are being protected by this particular per se prohibition.
It is the small mom and pop operation like my client that wants to innovate and expand and pass on efficiencies and compete with the big discounters who might have power of their own in order to secure discounts.
Justice Alito: So you don't agree with the argument that we've heard this morning that the transformation of American retailing since the 1970s and the rise of the large-scale low-price retailers has anything to do with the end of the fair trade laws and that overruling Dr. Miles would reverse that?
Mr. Coykendall: No, I absolutely agree with that.
But it's resale price maintenance that enables these initiators, these small companies, these small operations, to grow and innovate, achieve the efficiencies, and pass those on, attract customers by reducing prices.
And all that is stopped by imposition of a resale price--
Justice Alito: Is there anything to suggest that the large-scale low-price retailers who were supposedly dependent on Dr. Miles are... support its retention?
Have they filed amicus briefs here or otherwise suggested that this is essential to their continuing operation?
Mr. Coykendall: --Again, the large-scale dominant players in the retail industry have their own market power.
They don't need the protection of the per se rule in order to enforce them.
It's the next generation that this rule really aims to protect.
Justice Scalia: I don't understand that.
I mean, if it was really the case that they were going to be losing, losing profits, I think they would have been here.
I mean, we talk about the Wal-Marts and the Targets.
They're not here on amicus briefs because they're... what they're selling is cheap.
They are selling price, and people who want low price and for whom that's of value above all other things are going to continue to go to those stores.
So they're not going to be harmed by the fact that some manufacturers want to provide not just the low price... of course, they'll try to keep the price as low as possible... but service.
I just don't see what, what harm can possibly come, so long as there's no market dominance, from allowing some people to make their money on service and... rather than cheap price.
Mr. Coykendall: Well, again I would suggest that under this current system the way it is we have both the full service providers of complete service that offer goods at a certain price and we have discounters selling those same goods.
There is currently a mix of service and price that better serves the economy than just having one cookie cutter... a one size fits all approach that you would have with resale price maintenance.
Justice Kennedy: Well, I thought the per se rule was the cookie cutter approach.
Mr. Coykendall: Well, in terms of prohibiting price or in terms of, yes, prohibiting price fixing, that's true.
But it permits stores to have full price and full service and charge high prices for that service, and it permits discounters to reduce price, reduce service and cater to those customers who want the goods with lower service.
Justice Breyer: The Internet... is it... you would have said fourty years ago, or I think we are in this argument, you would have said that it's the large discounters, the growing discounters, the Walgreen's of the world who want to get rid of retail price maintenance, it's there to help the mom and pops.
They're in now, they're big, and they may want to maintain resale prices because they may want to extract the extra profit, while the Internet little company comes in and says I can get it to you cheaper.
Now I can imagine circumstances like you say.
I can imagine they're not like you say.
I don't know.
And so what should I do if I really don't know?
Mr. Coykendall: Well, there is no doubt that resale price maintenance raises prices to consumers.
The only economic doubt is whether there are any redeeming effects of those prices; and that's where the economic dispute of this is.
Chief Justice Roberts: Well, I thought the Ping brief that was referenced earlier made a point that it made, the prices may be... resale price... the current Dr. Miles rule may result in increased prices because of the inefficiencies for those retailers, or of those manufacturers who want to establish a regime where something other than price is important, and they have to do that unilaterally, which increases inefficiencies.
Mr. Coykendall: Well, Your Honor, I would suggest that, first of all, eliminating the per se rule would not decrease the inefficiencies of the Colgate doctrine.
If they want to impose resale price maintenance in order to avoid even a rule of reasoned approach, they would have to go--
Justice Ginsburg: Even with the tremendous anomaly that the employer... that the... the manufacturer cannot do this by agreement, but he can do it just unilaterally and terminate any dealers that won't go along?
Those two sit uncomfortably with each other.
Colgate seems to say you can achieve the same end but we're not going to let you do it by agreement, you have to do it on your own, and then you have to do the draconian thing of terminating the dealer.
Mr. Coykendall: --I believe that anomaly really lies at the heart of the Sherman Antitrust Act which is aimed at contracts, combinations and conspiracies.
Unilateral conduct isn't reached by that, it's the price of being in a fair country.
People can deal in ways that they want to with this particular issue.
But again, eliminating the per se rule will not help Ping out if they want to maintain their retail price maintenance as legal, as unilateral.
They'll still have to go through these same machinations.
Chief Justice Roberts: Why is that?
Why can't... eliminating the rule, I thought the whole point was they would just put in their contracts, you have to sell it at this price, and they could enforce the contracts, rather than having to have these machinations of making sure they don't do anything that looks like an agreement with their retailers.
Mr. Coykendall: Well, again, then they would be subject to a rule of reason analysis and the uncertainties occasioned with that as to whether this contract is lawful.
If they want to avoid that, then of course, they would have to stick with the Colgate doctrine.
Your Honor, this particular case, we have clear evidence that RPM was used to facilitate a horizontal retailer cartel.
We have evidence in the briefs that Leegin would gather its dealers in a dealer meeting, discuss the policy, agree to changes, and reach a consensus, and then enforce that policy against everyone.
One of the evils of resale price maintenance is specifically this: It does facilitate the formation of cartels.
Justice Stevens: Yeah, but the conspiracy that it facilitated was just with intrabrand competition.
There wasn't conspiracy that affected interbrand competition.
Mr. Coykendall: Retail--
Justice Stevens: So I'm not sure that economically it makes any difference whether the dealers are the one who decide to do it or the manufacturer was, or they all did it at the same time.
Mr. Coykendall: --Horizontal conspiracies, even among a single brand, has always been a per se violation of the antitrust law.
You can look back at the--
Justice Stevens: No, but if we say the rule or reason should apply to all cases that just affect intrabrand competition, I'm not sure why we should keep this outmoded rule about horizontal conspiracies that only affect intrabrand competition.
Mr. Coykendall: --There you're striking really at the heart of the... the heart of the Sherman Act, et al., holding that horizontal conspiracies, which nobody believes promote competition, could be justified under the same thinking.
Justice Scalia: No, but it's a totally... I cannot imagine why a horizontal conspiracy among dealers could ever produce consumer welfare.
It will be a horizontal conspiracy to get more money out of the consumer; but whereas the manufacturer who wants to impose resale price maintenance, his interest isn't to give the retailer as much... more money than the retailer is now making.
He's going to try to keep their margin just as low as it ever was, so that he can sell as many of his products as possible consistent with his desire to sell his product by attaching to it more service, better warranty, more showrooms, whatever.
You know, horizontal conspiracy, the incentives are entirely different.
When you're dealing with a manufacturer, it seems to me his incentive is still to keep the price as low as possible consistent with the additional good that he wants to give consumers to attract those consumers to his product.
Mr. Coykendall: In this particular case there is a complete alignment of incentives, because the manufacturer was also a retailer competing in this market.
He has the incentive to increase retailer profits.
Justice Scalia: Well, if that's the case and if that makes a difference, the rule of reason would allow you to make that argument.
But you... but you want to say it's bad across the board for everybody.
If indeed there's something peculiar about this case, the rule of reason would allow you to argue that.
Mr. Coykendall: Well, Your Honor, we would suggest that the horizontal conspiracy between Leegin as a retailer and the other retailers offering his products is more than just a rule of reason approach.
That would be per se illegal under this Court's precedents.
Retail price maintenance also has the problem we discussed earlier of perpetuating incumbent forms of distribution at the expense of the innovative and more efficient distribution means.
Retailers, in retail competition matters, retailers should be entitled to innovate, pass efficiencies along to customers in the form of lower prices, attract new customers, and grow in that manner.
Justice Ginsburg: Mr. Coykendall, the... on the question... you alleged in the complaint that there was some discounting allowed by, how do you pronounce it, Leegin?
Mr. Coykendall: Leegin.
Justice Ginsburg: Leegin.
And Mr. Olson says that that wasn't pursued at trial; is that correct?
Mr. Coykendall: That particular aspect was referred to; it wasn't pursued as a separate part of this.
Prior to trial, the judge did rule that the Dr. Miles line of cases applied and the conduct would be judged under the per se rule.
So certain aspects with respect to the horizontal conspiracy and the differences in discounts... I mean, developed that much.
Justice Ginsburg: Suppose you were to lose, you would still have that claim, I take it?
Mr. Coykendall: Well, yes.
We would suggest the record is sufficient that on remand the instruction given the jury as to the standard by which their conduct could be judged could be sustained as a per se violation under the rules related to horizontal conspiracies as well.
And again, I would suggest that perhaps if the Court doesn't reach that, it should remand to the Fifth Circuit for them to consider whether that is a possibility.
Resale price maintenance can distort consumer choice.
The retailers... so the person comes into the store... the retailers can exercise pressure to influence the selection of higher margin products over ones that may better fit the consumer needs.
That is an evil of resale price maintenance, whether or not it does promote efficiencies.
And if resale price maintenance does act as it is theorized, to increase retailer services, some consumers will be worse off, they'll be paying for services they don't want.
There are alternatives to RPM.
Justice Scalia: I don't suppose there's any... I don't suppose there's any way to protect against the fallout to the consumer, is there?
I mean if indeed, if indeed a store presses on a consumer a product that's more expensive than what he needs or... and what he wants, is this a real argument against this, that there's some stupid consumers whose can be conned?
I mean, whatever rule we adopt, that's going to be the situation.
Mr. Coykendall: Well, if... what you're doing is you're building in this high margin that gives the retailer an incentive to do that.
If there is no resale price maintenance so that margin isn't guaranteed, the incentive disappears.
What is clear is that retail... resale price maintenance is a blunt instrument to achieve any economies.
Justice Scalia: You're assuming that the... that the retailer has a higher margin on the resale price good.
Why do you assume that?
Mr. Coykendall: That's the only incentive, the only reason for imposing resale prices--
Justice Scalia: He's only going to be given the thing if he does the kind of additional service that the manufacturer wants.
That's the whole purpose of it.
And the manufacturer is going to try to keep his margin just as low as he can consistent with the... you know... consistent with selling as many products as he can.
Mr. Coykendall: --Well, there are more efficient ways than RPM to achieve any benefits of efficiency, such as contracts with the retailers to provide those additional demand creating services.
He could pay the retailers to provide those services.
He could provide those services directly, I would suggest.
Chief Justice Roberts: Why would you argue that those are more efficient than resale price maintenance?
Mr. Coykendall: The resale price maintenance amounts to nothing more than throwing money at the problem.
You're guaranteeing a margin and you're hoping that it's going to be used somehow for the consumer's benefit, and you've got no guarantee that any dealer is going to use the margin that they're guaranteed in any way to service the consumers.
And I would suggest that in geographically isolated areas--
Chief Justice Roberts: Well, you can add the contractual provisions you were talking about to a contract that has a minimum resale price.
The minimum resale price is to take away the incentive from the retailer not to carry through on the non-price aspects.
Mr. Coykendall: --If you have a contract requiring those services, you don't need the minimum resale price.
That's just completely unnecessary.
And that would prohibit the efficient dealer from passing on those efficiencies to its consumers.
Justice Kennedy: Does that presume a contract in which the retailer has a separate charge for the service?
Mr. Coykendall: It could be.
It may not.
Justice Kennedy: If not, I don't see how that would work under your rule.
Mr. Coykendall: Well, under... the idea is the manufacturer chooses to deal with only those dealers that offer this particular service.
They sign a contract to provide that service.
If they don't want to provide that service, they don't sign the contract, these don't get the goods.
It's as simple as that.
If the question is providing a larger margin to the dealer, the most efficient way is for the manufacturer simply to lower their wholesale price, and the margin the dealer receives is higher.
Again, if there are other efficiencies, they might be achieved by exclusive territories as permitted by Sylvania or by the Colgate doctrine.
I would suggest the experience of the 30 years following the elimination of the fair trade laws have shown the wisdom of the Dr. Miles decision which places faith in the free market system.
This Court should continue to honor its precedents and respect the will of Congress by adhering to the Dr. Miles rule.
Chief Justice Roberts: Your reference to the will of Congress, they haven't enacted legislation that supports the result you seek.
Mr. Coykendall: Your Honor, as this Court observed in Sylvania, Congress by repealing the Miller-Tydings McGuire Act did indicate its support for the per se rule.
I believe the Court should adhere to that holding as well.
Argument of Barbara D. Underwood
Chief Justice Roberts: Thank you, counsel.
Ms Underwood: Mr. Chief Justice, and may it please the Court:
When a manufacturer agrees with its retailers to fix a minimum resale price, the whole point of the agreement is to prevent price competition among retailers, to prevent discounts.
For almost 100 years the Court has interpreted Section 1 of the Sherman Act to prohibit such price fixing agreements.
Any change in that fundamental understanding of the statute should be made by Congress and not by this Court.
The per se rule against resale price maintenance is different in at least three ways from other antitrust rules that this Court has overturned.
First, unlike the other rules, it alone has been settled law for a century, reaffirmed over and over again by this Court.
Chief Justice Roberts: Well, it's also been settled law for 90 years under the Colgate doctrine that manufacturers can achieve the same results, albeit more inefficiently.
Doesn't it make sense to allow them to adopt the most efficient means to an end that is already completely legal?
Ms Underwood: No.
That tension that you... that supposed anomaly that you described is simply a result of the fact that the antitrust rule... law does not prohibit all anticompetitive behavior.
It prohibits agreements that are anti... that restrain competition.
And so it will often be the case that it is possible for somebody unilaterally to do something that has the same effect as an agreement, or approximately the same effect, as the antitrust law simply draws that line because of a different value, a value in preserving--
the independent action of individuals.
It is, however--
Justice Scalia: I'm not sure it's often the case.
Give me some other examples where you can achieve the same industry-wide effect unilaterally.
Ms Underwood: --Well, as you have observed, virtually any vertical restriction could be accomplished by having the manufacturer integrate the retailing function and become one entity instead of two entities.
Then the possibility of conspiracy or agreement is eliminated and the manufacturer, if he simply integrates the whole function, is... can fix prices, fix his, what are in effect his own prices and be outside the reach of the antitrust laws.
There are other reasons why a manufacturer might not find it convenient to do that integration, but it is certainly possible by ceasing to be multiple entities and to become one entity to avoid the prohibitions of the antitrust law.
It is also... so, this is old and well settled.
Unlike the Schwinn rule against territorial restraints which was overturned only 10 years after it was established, or the Albrecht rule against maximum resale price maintenance which was overturned 29 years after it was established, this has a much more settled pedigree in the law and expectations have grown up around it.
Second, it was endorsed and relied on by Congress, not enacted by Congress but endorsed and relied on by Congress, when Congress repealed the fair trade laws in 1975 by amending the very statute this Court is now asked to interpret.
Justice Scalia: Were they relying on Dr. Miles or were they relying on us?
That's the question.
Ms Underwood: They were relying--
Justice Scalia: They left the situation where it was, which is that the antitrust law is as determined by this Court, and we had shown our willingness to update the antitrust law when sound economic doctrine suggests is necessary.
Ms Underwood: --No.
The legislative history described in some detail in the Antitrust Institute's brief shows that actually they were returning the law to the per se rule against resale price maintenance because they thought resale price maintenance was bad and should be prohibited.
This is... it is also true that--
Chief Justice Roberts: But of course, they could always pass a law saying that if their intent is so clear.
They didn't do that here.
Ms Underwood: --That's true, they did not do that here and I'm not suggesting that they did, only that, uniquely among the rules that this Court has established in the antitrust area, this rule has received the repeated attention of Congress; and so the Court's deference to Congress and reluctance to overturn the rule should be at its peek as compared with those other rules.
And third, price is different.
This Court has said that price competition is the central nervous system of the economy.
Other restraints, to be sure, might indirectly affect price, but not with the same absolute force.
Territorial restraints don't absolutely prevent price competition because customers can travel or order by phone, mail, or Internet, and indeed under territorial restraints there are often multiple retailers in a particular territory who can compete.
Maximum price maintenance doesn't prevent competition at all unless, as the Court noted in Khan, it's really Minimum resale price maintenance in disguise, in which case the Court in Khan said it's illegal.
Manufacturers can of course pay retailers for the services that enhance the product that are being advanced as the pro-competition benefit of resale price maintenance.
But the question for this Court is whether the manufacturer should be allowed to use a price-fixing agreement to make that payment to buy those services, and that's not a question of fact for a jury to decide in a rule of reason trial.
That's a question of statutory interpretation for this Court.
It's a question really of what kind of currency a manufacturer can use to buy those retailer services.
It's also true that the claim that price-fixing works to induce those services is both debatable and untested.
The retailers have no obligations to provide services under the retail price maintenance agreement at issue in this case and in other cases.
Chief Justice Roberts: But they could.
I mean, you could easily write the agreement saying you have to charge this much and because you have to charge this much you also have to provide the training, the service, whatever the non-price inducements are.
Ms Underwood: You could.
You could also require those things without resale price maintenance and then the retailer would be free to decide to raise the price to pay for that or to provide it so efficiently that he could in effect engage--
Chief Justice Roberts: But then the retailer, but then the retailer might have a real incentive not to do a good job on the service because they really want to market it for price, not for service.
Ms Underwood: --That really depends, doesn't it, on what the consumers in the market want, and if it's correct, if the manufacturer... if the claim on behalf of the manufacturer here is correct that what the customers want is service, the retailers are in at least as good a position to identify that fact as not.
I think the point--
Chief Justice Roberts: Well, but there you have the free rider problem, which is you go to the fancy show room, you figure out what you want, and then you buy it at the discount store.
Ms Underwood: --Yes.
That's at its peak, perhaps, when you're talking about electronics.
When the shopping experience alone is what is thought to be the benefit, which is often the case, you can't free ride on that.
You either shop in the place where you like to shop or you shop... or you have a different shopping experience in Target.
Justice Scalia: But some manufacturers want their product associated with excellent service, high warranty, and all of that.
And there is no way to get that uniformly for that product without this kind of agreement.
Ms Underwood: Yes, there is.
The manufacturer can contract for it.
The manufacturer can decline to deal with people who don't provide it.
The very same point that was being made earlier.
I think that the point here is that permitting resale price maintenance would be such a drastic change in the longstanding settled interpretation of the Sherman Act that it doesn't really qualify as the kind of common law evolution that this Court has said is appropriate ordinarily in making antitrust rules under the Sherman Act.
If that change is to be made at all, it should be made by Congress and not by this Court.
Justice Stevens: Am I correct on the congressional point that there was a period when Congress would have prohibited the Solicitor General from making the argument he made today?
Ms Underwood: Yes, there was such a period.
And this Court noted that fact in--
Justice Stevens: So there was a legislative expression of a position on this particular issue?
Ms Underwood: --There was a legislative expression of position on this particular issue.
Chief Justice Roberts: And that no longer is applicable?
Ms Underwood: That is... the Solicitor General is no longer barred from making that argument, as is evidenced today.
Justice Scalia: I guess Congress changed its mind then.
Ms Underwood: --No, I think Congress found it unnecessary or perhaps questioned the wisdom or constitutionality of barring the Solicitor General from making particular arguments.
Justice Scalia: I find it hard to believe that.
Ms Underwood: But Congress has consistently... well, and the repeal... the reason the repeal of the Miller-Tydings Act seems particularly relevant is that it is indeed... it was an amendment to this statute that this Court is being asked to interpret, so it sheds some light on the on the meaning of this statute as it stands.
Justice Ginsburg: As Mr. Olson pointed out, under the fair trade laws this was per se legal.
So that's kind of a different thing.
Ms Underwood: Yes.
But when Congress repealed that, there were considerable... there was considerable expression of legislative history, for those who find legislative history helpful, that declared opposition to resale price maintenance, not simply that it was sometimes helpful and sometimes hurtful.
So to the extent Congress's intent can be gleaned from that legislative history, it was an intent to return to the regime of per se illegality.
Justice Ginsburg: Maybe on the year by year, don't spend any money on, maybe Congress decided that wasn't an appropriate technique, but Congress has used that after, hasn't it, in other cases?
Ms Underwood: It has, but I would question the wisdom of that technique as a method of expressing Congress's views.
The fact that Congress went so far as to use it once suggests a very strong view indeed.
Rebuttal of Theodore B. Olson
Chief Justice Roberts: Thank you, Ms. Underwood.
Mr. Olson, you have 3 minutes remaining.
Mr. Olson: The Respondent and its amici seem to recognize that what this Court said in State Oil versus Khan, that a vertical restraint imposed by a single manufacturer or wholesaler may stimulate interbrand competition even as it reduces intrabrand competition and, by the way, it enhances intrabrand competition on matters of service and availability and other things in addition to price.
The Respondent and their amici seem to have acknowledged these pro-competitive factors but say you should do it by a contract with 5,000 different retailers, which you then have to go out and enforce, or you have to do it under a Colgate system, which the Ping brief demonstrates it's a blunt instrument, it requires terminating retailers with which you had a relationship for years, it prohibits even talking to the loyal retailers to fix small problems.
Justice Stevens: But you're just giving them an additional ground for termination.
Mr. Olson: Pardon me?
Justice Stevens: You're just giving, you're just suggesting we should give them an additional ground for termination.
Mr. Olson: No.
What we're suggesting is that the agreement is something, the details can be worked out.
The manufacturer can... and the Ping brief explains this.
The manufacturer can go to the retailer and say: Look, maybe you didn't get it right, your sales person said the wrong thing; let's fix it, because we want to be dealing together.
The antitrust laws... in other word, what the Respondent and its amici want or they suggest forward integration, so you just acquire all your retailers.
The benefits of these type of arrangements provide the consumers with choices.
It stimulates interbrand competition.
It promotes intrabrand competition on things other than price.
It provides consumers with more choices.
It ultimately gives more freedom to the manufacturer to stimulate the sale of its products, to enter the marketplace.
These are things that the Court has said, and provides a more varied marketplace.
The court has repeatedly said that the presumptive rule is a rule of reason.
Per se rules should be crossed out or not adopted unless they're dealing with a practice which is invariably anticompetitive.
This practice, as acknowledged, is procompetitive.
It provides many opportunities, and it is irrational for vertical restrictions to exist in this world in the non-price area or the maximum price area as subject to the rule of reason and the minimum retail price maintenance under a rigid per se rule that cannot be changed.
And as this Court has repeatedly held, Congress intended by the use of restraint of trade and the unreasonable restraint of trade for this court to continue to breathe life into the restrictions of the antitrust laws in the benefit of the consumer and in the benefit of competition, eliminating rigid per se rules which make it unlawful for a manufacturer to do something that's rational in the marketplace, to give consumer choices, or to do it in some indirect way that is a lawyer's dream and an entrepreneur's nightmare makes no sense at all.
For all those reasons, the rule of reason in this area, as in the other areas, should replace the per se rule which is rigid and anticompetitive at the end of the day.
Chief Justice Roberts: Thank you, Mr. Olson.
The case is submitted.
Argument of Speaker
Mr. Coykendall: Justice Kennedy has the opinion of the court in two cases this morning.
Argument of Justice Kennedy
Mr. Kennedy: The first case I have to announce is the opinion for the court in 06-480; Leegin Creative Leather Products, Inc. v. PSKS, Inc. Section 1 of the Sherman Act prohibits every contract, combination of conspiracy in restraint of trade.
The usual way to determine whether a particular business practice violates Section 1 is to ask whether it is unreasonable under all the circumstances of the individual case.
In this case the court considers a particular type of restraint, a vertical price restraint or resale price maintenance and the issue is whether the restraint should be judged by the usual rule or reason, or should be always illegal and that latter option is referred to as a rule of per se illegality.
In a case called Dr. Miles Medical Co. v. John D. Park & Sons Co. decided almost a century ago in 1911.
The court established the rules of these types of vertical price restraint are per se illegal under Section 1 of the Sherman Act and the petitioner now asked us to disavow that per se rule.
The petitioner Leegin Creative Leather Products, Inc. sells a variety of women’s fashion accessories and the brand name for those is Brighton.
Now pursuing to the pricing policy Leegin refused to sell to retailers the discounted Brighton goods below the suggested retailer prices.
The respondent is PSKS, Inc. it operates Kay’s Closet, women’s apparel store in Louisville, Texas.
Kay’s Closet sold the Brighton brand for several years but then Leegin stopped selling to the store after discovered the Kay’s Closet had been marking down the prices on Brighton’s entire line.
PSKS sued alleging that Leegin’s pricing policy in fact was in agreement with its retailers to set minimum resale prices and the Jury agreed with PSKS and awarded PSKS $1.2 million which was then trebled by the District Court.
The Court of Appeals for the Fifth Circuit affirmed based on the per se rule established by Dr. Miles it rejected Leegin’s argument that the rule of the reason should have applied to the resale price maintenance agreements.
We now conclude that the rule of reason not the per se rule should be applied to vertical price restraint and we does overrule Dr. Miles and we reverse the Court of Appeals.
Now each side of the debates can find sources to support its position, it suffices to stay here that economic literature is replete with pro-competitive justifications for a manufacture’s use of resale price maintenance.
The few recent studies documenting the competitive effects of resale price maintenance also cast doubt on the conclusion that the practice meets the criteria for per se rule.
The justifications for the vertical price restraints are similar to those for other vertical restraints.
Minimum resale price maintenance can stimulate inter brand competition by encouraging retailers to invest in services and promotional efforts that aid the manufacturers position as against rival manufacturers.
Resale price maintenance also has the potential to give consumers more options so that they can choose a low price, low service brands or high price high service brands and brands that fall somewhere in between.
Absent vertical price restraints, retail services that enhance inter brand competition might be underprovided.
Well vertical agreement setting minimum resale prices can have pro-competitive justification they may have anticompetitive effects in other cases.
Resale price maintenance for example may facilitate a manufacturer or distributor cartel.
Resale price maintenance can also be abused by a powerful manufacturer or retailer.
Not withstanding these risk that can not always be stated with any degree of confidence that resale price maintenance always or almost always tends to restrict competition and decrease output whether court considering the issue as an original matter.
Now the rule of reason not a per se rule of unlawfulness would be the appropriate standard, we did not write on a clean slate of course.
The decision in Dr. Miles as I indicated is almost a century old so there is an argument for it's retention on the basis of stare decisis alone.
Stare decisis is not a significant in this case however because the issue before us is the scope of the Sherman act.
The court has treated this statute as a common law statute and Stare decisis we conclude does not compel our continued adherence to the per se rule against vertical price restraints.
In the antitrust context the fact that a decision has been “called into serious question” justifies our reevaluation of it and we have overruled our precedents when later cases have undermined their doctrinal underpinnings.
The Court’s treatment of vertical restraints has progressed away from Dr. Miles’ strict approach we distanced ourselves from the opinion’s rational in various cases.
The Court following a common-law approach has continued to temper, limit, or overrule once strict prohibitions on vertical restraints.
In 1977, the Court overturned the per se rule for vertical non-price restraints, adopted the rule of reason in its stead.
Continuing in this direction in two cases in the 1980’s the Court defined legal rules to limit the reach of Dr. Miles.
Most recently in 1997, after examining the issue of vertical maximum price-fixing agreements in light of commentary and real experience the Court overruled a 29-year-old precedent treating those agreements as per se illegal.
So the Dr. Miles Rule is inconsistent with the theory of these cases and also inconsistent with the principal framework.
It makes little economic sense when analyzed with our other cases on vertical restraints.
It's a flawed antitrust document which serves the interest of lawyers by creating legal distinctions that operates its traps for the unwary more than the interests of consumers, by requiring manufacturers to choose second-best options to achieve sound business objectives.
For these reasons the Court’s decision in Dr. Miles, is now overruled.
Vertical price restraints are to be judged according to the rule of reason.
We reverse the judgment of the Court of Appeals for the Fifth Circuit.
Justice Breyer has filed a dissenting opinion in which Justices Stevens, Souter and Ginsburg have joined.
Argument of Justice Breyer
Mr. Breyer: As Justice Kennedy said, Justice Stevens, Souter, Ginsburg and I filed the dissenting opinion I just want to emphasize one point here and it is Stare decisis that the legal rule that prohibits vertical price fixing it comes from the case called Dr. Miles is nearly a 100-years-old.
It's well known to those in the law and in the business.
This court and lower courts have followed it consistently for decades.
None of the information the majority relies upon to overrule it is it all new I doubt it.
Stare decisis doesn’t apply to antitrust read the baseball antitrust case.
On Monday in the Campaign Finance case, several members of today’s majority pointed to stare decisis consideration and they listed them and they said in that case they believe it justified overturning of recent precedent.
If you read those factors you will find that every single one of them in this case are views for keeping our 96-years-old Dr. Miles alive because the majority abandoned stare decisis without justification.
I respectfully dissent.