Resale Price Maintenance No Longer Per Se Illegal

For nearly 100 years, the United States Supreme Court has declared that an agreement between a manufacturer and a distributor or retailer to fix the middleman's minimum resale price is a per se violation of the antitrust laws because of its presumed anti-competitive effect.

"Per se illegality" means that a court does not consider the agreement's purpose, actual or intended effect on competition, or other competitive benefits. Thus, historically if a court found an agreement imposing resale price maintenance (RPM), the agreement was simply declared illegal.

On June 28, the Court discarded the per se rule for RPM. In Leegin v. Creation Leather Products, Inc., No. 06-480 (U.S. June 28, 2007), the Court held that RPM must be judged by the Rule of Reason, under which a court looks at a restraint's history, nature, purpose, effect and a host of other factors to determine legality.

The Court concluded that the economic effects of RPM are not always anti-competitive on balance and that RPM can often produce more vigorous competition between manufacturers as well as greater options for consumers. Thus, it found a blanket per se ban no longer appropriate.

It is important to emphasize that the Court did not hold that all RPM agreements are legal. It noted that even under the Rule of Reason, RPM may pose great risk to competition in at least three situations:

1. Where RPM facilitates a manufacturer cartel. If many manufacturers in an industry are using RPM, they could employ RPM to identify price-cutting manufacturers that benefit from their lower prices or to discourage a discounting manufacturer from cutting prices. So if a large number of manufacturers in an industry have adopted RPM, their RPM activities will be subject to greater antitrust scrutiny.
2. Where RPM is used to organize a cartel at the distributor or retailer level. For example, a group of retailers might collude to fix prices to consumers and then compel a manufacturer to assist the scheme with RPM agreements.
3. Where a manufacturer or retailer has dominant market power and uses RPM to entrench that power. Examples would include a dominant retailer that uses its buying power to demand RPM from a manufacturer to forestall cost-cutting innovations in distribution or a dominant manufacturer that couples its market power with RPM to give retailers an incentive not to sell the products of smaller rivals.

In short, the court does not appear troubled by RPM unless the manufacturer or middleman has market power or unless there is a horizontal dimension to the RPM behavior (agreements among manufacturers or among middlemen).

Manufacturers can also be encouraged that in many specific circumstances the courts have often upheld other vertical non-price restrictions under the Rule of Reason, such as exclusive distributor territories and restrictions on the territories in which or the customers to whom a middleman may sell. If the courts apply the same benign approach to RPM, it may well be broadly upheld except in the three situations described above.

However, the Court did not begin to answer all questions in this area and lower courts will be left to unravel many troublesome issues in the coming years.

In addition, other factors contribute to uncertainty about how widely RPM may now be safely used:

1. Congress has consistently rejected all legislative efforts to revise the per se rule for RPM. It may now consider legislation to reinstate the per se rule.
2. State legislatures may also consider proposals to uphold the per se rule. At one time, many states had fair trade laws that permitted RPM pursuant to a Congressional authorization. When that authorization was repealed, those state laws lapsed. Thus, there is clearly precedent for states developing their own legislative policy on RPM.
3. Each state has its own antitrust laws. Although many states model the interpretation of their laws on federal precedent, it remains to be seen if state courts will follow Leegin v. Creative Leather Products, Inc. in interpreting their own state laws.

Given the extreme fluidity of the situation, for the moment manufacturers should refrain from adopting dramatic new approaches to RPM that assume that all RPM agreements are valid. Any new RPM policies should be based only on careful legal advice.