On December 7, 2006 the United States Supreme Court agreed to hear a challenge to the long established principle that vertical minimum price maintenance agreements are illegal per se. The case is Leegin Creative Leather Products, Inc. v PSKS, Inc. d/b/a Kay’s Kloset…Kay’s Shoes, SCT. 06-480.

Background
Leegin Creative Leather Products, Inc. manufactures and sells women’s fashion accessories under the “Brighton” brand focusing on boutique stores offering a level of service and personal attention that it contends is not available in department stores and mass merchandisers. In addition, Leegin shared common ownership with Brighton Retail, a company that owned fifty Brighton only retail stores, and with Corazon, a company that owned twenty-one retail stores in four states. Several of the Brighton stores were in the Dallas, Texas area, and at least one of them competed directly with Kay’s Kloset.

In 1997 Leegin instituted the “Brighton Retail Pricing and Promotion Policy” in which Leegin stated it would only do business with retailers following its suggested retail prices for Brighton products and made it clear that it would not do business with retailers who engaged in discounting Brighton products they intended to reorder. The policy permitted retailers to discount products that they did not intend to reorder. Leegin’s reasons for adopting this policy were twofold. First, Leegin believed that putting products on and off “sale” degraded a manufacturer’s brand by causing customers to feel cheated if they bought when the products weren’t on sale. Instead Leegin adopted what it called an everyday “fair price” approach. Second, the pricing policy was designed to develop the Brighton brand by giving retailers incentives to provide special attention and service to Brighton customers.

In late 2002, after learning Kays’ Kloset violated the pricing policy by placing its entire line of Brighton products on sale, Leegin suspended all shipments of Brighton products to Kay’s Kloset.
Kay’s Kloset sued Leegin claiming that it entered into per se illegal agreements with retailers to fix prices for Brighton products and terminated Kay’s Kloset as a result of those agreements. The jury agreed and assessed antitrust damages of $1.2 million which were trebled plus attorney’s fees. The Fifth Circuit Court of Appeals affirmed.

VERTICAL MINIMUM PRICE MAINTENANCE
In 1911 the U.S. Supreme Court held that a vertical agreement between a manufacturer and its retailers establishing minimum resale prices for its products constituted a per se violation of the Sherman Act (Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373). When a violation is deemed to be “per se” the court is not required to inquire into whether or not the scheme has any actual effect on competition. However, where the alleged activity does not constitute a per se violation it is judged on a case by case basis under a “rule of reason” test and the plaintiff must show that the defendant’s actions suppressed competition in the relevant market.

Over the years, the Supreme Court has overturned the per se rule against non-price vertical restraints involving territorial and customers restrictions (Cont’l T.V. Inc. v GTE Sylvania, Inc., 433 U.S. 373 (1977). And, in State Oil Co. v. Khan, 522 U.S. 3 (1997) the Court held that vertical maximum price restraints are to be judged under the rule of reason test.

Leegin maintains that its program was an attempt to bring new products and services to consumers and to use small retailers to compete against prominent national brands sold through larger outlets. Leegin argues that its vertical minimum pricing plan should be judged under the rule of reason test and urges the Court to overturn the per se rule handed down in Dr. Miles. The rule, according to Leegin, is outdated, overly broad, conflicts with the Court’s decisions in GTE Sylvania and Khan and fails to recognize that such vertical restrictions may promote interbrand competition by allowing the seller to achieve certain efficiencies in the market place such as inducing retailers to make investments of capital, provide promotional programs and to service the customer.

Kay’s Kloset’s argument primarily raises two issues for the Court to consider. First, Leegin was not only the manufacturer of the product but also a retailer (through Leegin’s ownership interest in Brighton Retail) and therefore was an active participant in a horizontal conspiracy among competing retailers to fix the price of the products. Second, Congress has had several opportunities to overturn the per se rule but has not done so.

In support of its second argument Kay’s Kloset cites several instances where Congress had the opportunity to eliminate or modify the per se prohibition against vertical minimum retail price maintenance or chose to affirm the prohibition. For example, in 1975 Congress passed the Consumer Goods Pricing Act which repealed so called “fair trade” laws-state laws that permitted a manufacturer to specify the minimum resale price for its products. In doing so, Congress noted that such laws resulted in an 18-20% price increase in fair traded goods and business failures in fair traded states were 50% higher than in non-fair trade states. More recently Congress established the Antitrust Modernization Commission, which according to Kay’s Kloset, decided in January, 2005 that there was no need to change the existing rule.

CONCLUSION
A decision to overturn the rule making vertical minimum price maintenance agreements per se illegal would shift to the manufacturer (or other product sellers) the ability to control the marketing of its products to wholesaler-distributors and retailers. Any such plans would be judged under the rule of reason test on a case by case basis and require proof that the plan had an greater adverse effect on interbrand competition than it did on intrabrand competition.

This case will be watched closely by the business community and a decision should be forthcoming in 2007 perhaps as early as June.

The Chicago law firm of Keeley, Kuenn & Reid, practices in the areas of corporate law, antitrust and trade association law, employment law and regulatory matters. George Keeley serves as SEDA General Counsel. He has written numerous articles on topics such as antitrust compliance, employment law, strategic alliances and other business related matters.