Supreme Court Ruling Opens Door for Setting Minimum Resale Prices

July 02, 2007

The United States Supreme Court changed a 96 year course in evaluating whether suppliers can set minimum resale prices for their products.  On June 28, the Court held that a supplier's policy that set minimum resale prices for its luxury goods should be evaluated under a "rule of reason test" rather than automatically condemning the practice as per se illegal.  The Court's 5-4 decision is captioned Leegin Creative Leather Products, Inc. v. PSKS, Inc., dba Kay's Closet ... Kay's Shoes.  The business justification for the supplier's pricing policy in this case is consistent with business goals of many wineries, micro distillers and producers of other luxury goods that benefit from a retailer's skill and attention.  In Leegin, the supplier set minimum resale prices to give retailer's sufficient margin to employ sales personnel that could provide customer service and otherwise support its brand.  The supplier also urged the Court to consider that discounting can harm a brand image and reputation.  Rather than continue to reject the resale price policy outright, the Court was persuaded by a hefty record of economic literature showing that there can be significant procompetitive justifications for a supplier's resale price maintenance policies.  

The supplier - Leegin Creative Leather Products, Inc. - sold its Brighton line of goods only to specialty stores that offer great quality merchandise, superb service and significant brand support.  Under its pricing policy, Leegin refused to sell to retailers that discounted Brighton goods below suggested prices.  When Kay's Closet discounted the Brighton line, Leegin stopped selling to the store.  The lawsuit followed.  The trial and intermediate appellate courts sided with the retailer, finding that Leegin's pricing policy ran afoul of Section 1 of the Sherman Act under the 1911 decision Dr. Miles Medical Co. v. John D. Park & Sons Co., a venerable antitrust precedent that courts had followed for the last 96 years.  The 5-4 majority overruled the Dr. Miles, and its rule that a supplier's resale price maintenance policy was always per se illegal no matter its actual purpose or effect.

In evaluating the economic literature developed since that per se rule was adopted almost a hundred years ago, the Court acknowledged principles well-known to purveyors of fine wines, micro distilled spirits and other luxury goods.  Minimum price maintenance enhances brand value, allows suppliers to minimize intrabrand competition, and allows retailers sufficient margins to invest capital to create high quality buying experiences through fine showrooms, product demonstrations and knowledgeable sales staff.  The Court also recognized that vertical agreements setting minimum resale prices create temptations for unlawful behavior such as creation of manufacturer or retailer cartels that decrease output or reduce competition to increase price.  Yet despite the economic dangers, the Court held that a rule of reason analysis provided ample ammunition for courts to eliminate anticompetitive uses of resale price maintenance from the marketplace.

While Leegin does not give a green light to unfettered vertical resale price agreements, it does open up a significant and previously closed avenue for brand owners to consider when developing pricing strategies for their luxury brands.   The Supreme Court recognized that removing the bright-line Dr. Miles rule will in the short run increase uncertainty.  But as trial judges gain experience in evaluating whether a resale price agreement is procompetitive and legal or anticompetitive and illegal, the court cases will provide "more guidance to businesses." 

The Leegin decision itself refers to three "factors" that should be considered in the Rule of Reason analysis: 

1) the number of suppliers or retailers using resale price maintenance (the more subject to such agreements at either level, the more potential for an anticompetitive effect);

2)  whether retailers as opposed to the supplier are the source of the restraint, if so, it is more likely to be found illegal; and

3) whether there is a "dominant" supplier or retailer with market power that could be abused. 

Wineries, micro distillers and similar suppliers of high end goods may wish to consider how these factors would apply to their circumstances in evaluating the pros and cons of adopting a minimum resale pricing policy.