High Court Hears Arguments on Per Se Illegality of Resale Price Maintenance

This posting was written by John Scorza, CCH Washington Correspondent.

In an oral argument on March 26, the U.S. Supreme Court was urged to overturn a longstanding precedent and rule that agreements between manufacturers and retailers setting minimum resale prices for the manufacturer’s products should not be considered per se illegal.

The dispute before the court involves Leegin Creative Leather Products Inc, a manufacturer of women’s handbags and other accessories, and PSKS Inc., the owner of a shop that sold Leegin’s goods.

Leegin established a policy of refusing to sell to retailers that would not charge Leegin’s suggested retail prices. After learning that the shop owned by PSKS was offering Leegin’s products at a discount, Leegin tried to persuade PSKS to charge Leegin’s minimum price. PSKS sued, claiming resale price maintenance.

Relying on a 1911 Supreme Court case – Dr. Miles Medical Co. v. John D. Park & Son (230 U.S. 373)– the U.S. Court of Appeals in New Orleans held that resale price maintenance is per se unlawful and upheld an award of nearly $4 million (2006-1 CCH Trade Cases ¶75,166).

Leegin’s lawyer told the Supreme Court that Dr. Miles should be overturned. “The per se rule for resale price maintenance is widely recognized to be outdated, misguided and anticompetitive,” Theodore B. Olson told the court.

Per Se Illegality v. Rule of Reason

Olson argued that the per se rule should be replaced with the rule of reason, which would allow courts to consider the effects of a challenged practice on a case-by-case basis. A majority of economists, Olson said, as well as the Antitrust Division and the Federal Trade Commission, support Leegin’s position.

Again citing economists, Olson argued that minimum resale price maintenance agreements can lead to increased competition among manufacturers of different brands and encourage dealers to differentiate the products they sell through means other than price, such as superior service.

Justice Antonin Scalia was receptive to that argument, noting that some customers would prefer more service at a higher price. “I don’t think that all the customers want is ‘cheap,’” Scalia remarked. Olson concurred, saying the purpose of the antitrust laws is competition, not low prices.

Arguing for Leegin on behalf of the federal government, Deputy Solicitor General Thomas G. Hungar echoed some of Olson’s arguments. “It’s true that retail 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,” Hungar said.

“Bad Antitrust Policy”

Representing PSKS, Robert W. Coykendall told the court, “Discouraging price cuts and depriving consumers of low prices is bad antitrust policy.” Coykendall argued that Dr. Miles protects small businesses by allowing them to charge less than the manufacturer’s suggested price and thereby compete with large discount stores.

Retailers should be entitled to pass efficiencies on to consumers in the form of lower prices, he said. “There is no doubt that retail price maintenance raises prices to consumers,” Coykendall said.

Coykendall, joined by New York Solicitor General Barbara D. Underwood, argued that Congress has indicated its support for the Dr. Miles rule and that Congress, not the court, should change the longstanding rule. “This Court should continue to honor its precedents and respect the will of Congress by adhering to the Dr. Miles rule,” Coykendall said.

The case is Leegin Creative Leather Products Inc. v. PSKS Inc., No. 04-480, cert. granted December 7, 2006.