Supreme Court Considers Price Fixing Agreements

Franchisors and franchisees alike are awaiting a decision from the U.S. Supreme Court that could change the marketing and promotional practices of franchisors and distributors. In PSKS, Inc. d/b/a Kay's Kloset v. Leegin Creative Leather Products, Inc., the Supreme Court heard challenges to the application of the per se rule to vertical minimum price fixing agreements under antitrust law, and some commentators believe that the Court will overturn this requirement, which was adopted almost a century ago in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

In 1995, Leegin, a manufacturer of Brighton women's accessories, began selling its product to PSKS, a women's clothing and accessories specialty store. Shortly thereafter, Leegin instituted the 'Brighton Retail Pricing and Promotion Policy,' stating it would do business only with retailers that follow its suggested retail prices for Brighton products. Leegin made clear that it would not do business with retailers who engaged in discounting Brighton products. Leegin later introduced the 'Heart Store Program,' a marketing initiative designed to provide incentives to Brighton retailers to promote the brand within a separate section of their stores. To become a Brighton Heart Store, retailers had to pledge to 'follow the Brighton Suggested Retail Pricing Policy at all times.'

In late 2002, PSKS placed its entire line of Brighton products on sale. After learning of the violation of the pricing policy, Leegin suspended all shipments of Brighton products to PSKS. PSKS filed an action under '1 of the Sherman Antitrust Act. Applying the per se rule, the jury awarded PSKS $1.2 million, which was trebled by the court. The Fifth Circuit Court of Appeals affirmed. In March 2007, the case was argued before the U.S. Supreme Court to determine whether price floors such as Leegin's always should be treated as illegal under the existing per se rule, or evaluated under the rule of reason to determine if they are pro-competitive. Several themes were prevalent at oral argument.

One issue the Court raised was the reliance interest in maintaining the per se rule of Dr. Miles, under which a whole industry of large discount retail stores have flourished. The Dr. Miles rule has provided a simple, bright-line limitation on how manufacturers may structure their pricing policies to comport with antitrust laws and to facilitate competition. The Court expressed apprehension toward overturning a rule set forth almost a century ago and possibly thwarting the competition, discount prices, and consumer-friendly effects that have resulted from that rule. In addition, the Court discussed the dangers of resale price maintenance ('RPM') in the concentrated retail market as it exists today, in which price fixing is more likely to take place at the request of the dealer than the manufacturer. Consequently, overturning the per se rule may help facilitate horizontal cartels.

However, the Court was equally interested in discussing whether RPM is always anticompetitive and, if not, whether the rule of reason may be more applicable. Dr. Miles forecloses the courts from looking at whatever pro-competitive effects may come from RPM. Some of the pro-competitive effects that the Court acknowledged include more service and greater selection. Justice Antonin Scalia noted that low prices alone do not prove enhanced consumer welfare, and that some customers prefer to spend more on a product that is accompanied by additional services. He explained that under the current regime of the per se rule, if a retailer chooses to provide those services and selection, other retailers can 'free-ride' on their efforts, selling the same product from the same manufacturer at a lower price. Eliminating the per se rule could provide a greater incentive to manufacturers to encourage retailers to provide such services to customers. Furthermore, the Court questioned whether it should continue to apply the per se rule in cases of intrabrand competition, when its primary concern has been, historically, interbrand competition.

The Court also considered whether this question is no longer within its province to decide, but better determined by Congress. In the absence of Congressional action and potentially contrary to Congress' wishes, the Court questioned whether it should act to repeal the current rule.

Cynthia M. Klaus and Sejal Desai Winkelman are attorneys at Larkin Hoffman in Minneapolis. Klaus can be contacted at [email protected], and Winkelman can be contacted at [email protected].

Franchisors and franchisees alike are awaiting a decision from the U.S. Supreme Court that could change the marketing and promotional practices of franchisors and distributors. In PSKS, Inc. d/b/a Kay's Kloset v. Leegin Creative Leather Products, Inc., the Supreme Court heard challenges to the application of the per se rule to vertical minimum price fixing agreements under antitrust law, and some commentators believe that the Court will overturn this requirement, which was adopted almost a century ago in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

In 1995, Leegin, a manufacturer of Brighton women's accessories, began selling its product to PSKS, a women's clothing and accessories specialty store. Shortly thereafter, Leegin instituted the 'Brighton Retail Pricing and Promotion Policy,' stating it would do business only with retailers that follow its suggested retail prices for Brighton products. Leegin made clear that it would not do business with retailers who engaged in discounting Brighton products. Leegin later introduced the 'Heart Store Program,' a marketing initiative designed to provide incentives to Brighton retailers to promote the brand within a separate section of their stores. To become a Brighton Heart Store, retailers had to pledge to 'follow the Brighton Suggested Retail Pricing Policy at all times.'

In late 2002, PSKS placed its entire line of Brighton products on sale. After learning of the violation of the pricing policy, Leegin suspended all shipments of Brighton products to PSKS. PSKS filed an action under '1 of the Sherman Antitrust Act. Applying the per se rule, the jury awarded PSKS $1.2 million, which was trebled by the court. The Fifth Circuit Court of Appeals affirmed. In March 2007, the case was argued before the U.S. Supreme Court to determine whether price floors such as Leegin's always should be treated as illegal under the existing per se rule, or evaluated under the rule of reason to determine if they are pro-competitive. Several themes were prevalent at oral argument.

One issue the Court raised was the reliance interest in maintaining the per se rule of Dr. Miles, under which a whole industry of large discount retail stores have flourished. The Dr. Miles rule has provided a simple, bright-line limitation on how manufacturers may structure their pricing policies to comport with antitrust laws and to facilitate competition. The Court expressed apprehension toward overturning a rule set forth almost a century ago and possibly thwarting the competition, discount prices, and consumer-friendly effects that have resulted from that rule. In addition, the Court discussed the dangers of resale price maintenance ('RPM') in the concentrated retail market as it exists today, in which price fixing is more likely to take place at the request of the dealer than the manufacturer. Consequently, overturning the per se rule may help facilitate horizontal cartels.

However, the Court was equally interested in discussing whether RPM is always anticompetitive and, if not, whether the rule of reason may be more applicable. Dr. Miles forecloses the courts from looking at whatever pro-competitive effects may come from RPM. Some of the pro-competitive effects that the Court acknowledged include more service and greater selection. Justice Antonin Scalia noted that low prices alone do not prove enhanced consumer welfare, and that some customers prefer to spend more on a product that is accompanied by additional services. He explained that under the current regime of the per se rule, if a retailer chooses to provide those services and selection, other retailers can 'free-ride' on their efforts, selling the same product from the same manufacturer at a lower price. Eliminating the per se rule could provide a greater incentive to manufacturers to encourage retailers to provide such services to customers. Furthermore, the Court questioned whether it should continue to apply the per se rule in cases of intrabrand competition, when its primary concern has been, historically, interbrand competition.

The Court also considered whether this question is no longer within its province to decide, but better determined by Congress. In the absence of Congressional action and potentially contrary to Congress' wishes, the Court questioned whether it should act to repeal the current rule.

Cynthia M. Klaus and Sejal Desai Winkelman are attorneys at Larkin Hoffman in Minneapolis. Klaus can be contacted at [email protected], and Winkelman can be contacted at [email protected].