The Leegin Case: Antitrust Prohibition On Minimum Resale Price Maintenance Subject To The Rule Of Reason

Saturday, September 1, 2007 - 00:00

Editor: Mr. Delacourt, would you tell our readers something about your background and professional experience?

Delacourt: I am currently in private practice with the law firm of Kelley Drye & Warren LLP, where I specialize in antitrust law. Prior to joining the firm, I served as Chief Antitrust Counsel of the Federal Trade Commission's Office of Policy Planning ("OPP"). OPP is somewhat of a hybrid entity that, in terms of organizational structure, is a sub-unit of the Chairman's Office. The office's primary role is to take the lead in developing the Chairman's policy priorities. However, we also got our hands dirty implementing those priorities. In FTC-speak, we were "on the complaint counsel side of the Part III wall" - meaning that, once a complaint was filed, we worked side by side with litigating staff, rather than being walled off from the matter with the five FTC Commissioners and their advisors.

Editor: How did you come to Kelley Drye? What were the things that attracted you to the firm?

Delacourt: When I departed from the FTC, I joined the firm then known as Collier Shannon Scott, based on the strength of its antitrust practice. A short time later, Washington-based Collier Shannon merged with New York-based Kelley Drye. The merger blended two firms with high professional standards and compatible corporate cultures, resulting in a single entity with greater scale and a broader portfolio of legal expertise. This was particularly advantageous for the firm's antitrust practice, as it gave the combined firm a deeper bench and the benefit of complimentary strengths in certain areas.

Editor: Please tell us about your practice. How has it evolved over the course of your career?

Delacourt: The most significant recent change in my career has been the move from government to the private bar. My current practice touches on all of the elements of a diverse antitrust portfolio, ranging from governmental investigations and mergers to litigation and counseling. I have also endeavored to develop a niche in soliciting so-called "competition advocacy" from the federal enforcement agencies. The role of competition advocacy - which may take the form of written comments, a letter to a key legislator, or even oral testimony - is similar to that of an amicus brief, and basically provides the antitrust enforcement agencies an opportunity to express support for, or opposition to, a proposed law or regulation that will have a substantial impact on consumers. In my view, it is an underutilized tool that private parties often overlook.

Editor: As an antitrust lawyer, you have been following the case of Leegin Creative Leather Products, Inc. v PSKS, Inc. carefully. For starters, would you provide us with the background here?

Delacourt: In Leegin, the Supreme Court was called upon to reconsider - and ultimately overturned - the longstanding antitrust prohibition on minimum resale price maintenance ("RPM"). Almost 100 years ago, in the venerable case of Dr. Miles Medical Co. v. John D. Park & Sons Co., the Court held that an agreement between a manufacturer and a retailer that requires the retailer to charge end-user consumers a pre-established minimum price - characterized by some as "vertical price fixing" - constitutes a per se violation of Section 1 of the Sherman Act. Putting this in context requires a brief explanation of this provision.

Section 1 of the Sherman Act prohibits "[e]very contract, combination . . . or conspiracy" in restraint of trade. Reading this provision literally would lead to absurd results, as virtually every contract restrains trade in some way. Consequently, courts have developed two categories of analysis. Where there is consensus that a certain type of agreement will almost always restrain competition in a manner that harms consumers - such as agreements to fix prices, restrict output, or divide markets - the agreement falls into the per se category, and is condemned automatically without further analysis. All other agreements fall into the more lenient rule of reason category and are only condemned as unlawful if their anticompetitive harms outweigh their procompetitive benefits.

Companies that rely on minimum RPM as a key component of their distribution strategy - typically, manufacturers of luxury goods and products requiring significant sales or service support - have long sought to circumvent the per se prohibition imposed by Dr. Miles. One time-honored approach is to adopt a Colgate policy. Such a policy takes its name from United States v. Colgate & Co., in which the Supreme Court held that a company may lawfully decide with whom it will, and will not, do business. Pursuant to a Colgate policy, a company announces a minimum resale price and unilaterally terminates any retailer that sells below that price without further negotiation or discussion. By acting unilaterally, the company avoids satisfying one of the fundamental requirements of a Sherman Act Section 1 claim: the existence of an agreement.

Editor: What was the policy that Leegin sought to impose on the retailers with whom it dealt?

Delacourt: The particular product at issue in the Supreme Court case was a line of women's fashion accessories that sold under the brand name "Brighton." Leegin contended that it had unilaterally announced minimum resale prices for the Brighton line and that, consistent with Colgate, it terminated plaintiff PSKS, one of its retailers, for failure to comply.

Editor: And the response of PSKS?

Delacourt: When terminated by Leegin, PSKS - the operator of Kay's Kloset, a women's apparel store - contended that Leegin's establishment of minimum resale prices was not unilateral, but rather was the product of communications and negotiations that constituted an agreement for Section 1 purposes. These facts demonstrate one of the major weaknesses of a Colgate policy, which is that it will often be difficult for a defendant to demonstrate that its resale price-setting conduct was truly unilateral.

Editor: What was determined at the trial level?

Delacourt: The jury agreed with PSKS's version of the disputed events. After concluding that there was an agreement, and that Leegin had engaged in minimum RPM in violation of the Dr. Miles rule, the jury awarded $1.2 million in damages. The district court subsequently trebled this amount.

Editor: And on appeal to the Fifth Circuit?

Delacourt: On appeal, Leegin did not dispute the finding that it had entered into an agreement with PSKS. Instead, it argued that the agreement should be subject to rule of reason rather than the per se rule, which would have allowed Leegin to present evidence of the agreement's procompetitive benefits. Citing Dr. Miles, the Fifth Circuit held that its hands were tied, and affirmed the district court.

Editor: Would you take us through the Supreme Court's reasoning in its decision on Leegin?

Delacourt: Although the Court expressly overturned Dr. Miles, rather than carefully whittling away at its foundations, it nevertheless emphasized the continuing importance of stare decisis. As the majority explained, the case involved a statutory interpretation of the Sherman Act, and ordinarily there is a strong presumption in favor of letting well settled statutory interpretations stand. However, the Sherman Act has always been regarded as a common law statute, the requirements of which evolve over time to reflect the state of the art in economic thinking.

Continuing with this reasoning, the Court then turned to a variety of sources of state of the art economic thinking on minimum RPM, ranging from an amicus brief filed by leading economists to the FTC and the Department of Justice, and concluded that per se treatment was no longer appropriate. Historically, antitrust courts have reserved such treatment for practices that "always or almost always tend to restrict competition." Since Dr. Miles, however, a consensus has emerged that, in many circumstances, minimum RPM can actually increase competition. For example, minimum RPM can promote inter brand competition - the primary objective of the antitrust laws - by ensuring retailers the margin they need to provide product information, customer service, and an enhanced in-store experience, while simultaneously protecting them from "free-riding" discounters.

Editor: Would you share with us your thoughts on the implications of the Supreme Court decision?

Delacourt: The Court's decision does not mean that minimum RPM is always lawful, but rather that it will now be subject to the rule of reason. While the Court did not provide a road map for this analysis, it did provide some guidance by identifying three specific "red flag" situations in which minimum RPM presents particularly serious antitrust concerns. These include when: (1) a significant number of manufacturers in a particular market adopt the practice, (2) a manufacturer adopts the practice at the behest of its retailers, or (3) the practice is adopted by a manufacturer with significant market power.

An equally important consideration to bear in mind is that the Leegin decision only addresses the status of minimum RPM under federal antitrust law. Some states - including states with large consumer markets, like California (whose antitrust statute, the Cartwright Act, is not necessarily interpreted in conformity with federal law) - may not follow suit. Furthermore, the fact that 37 states signed onto an amicus brief urging the Court to retain the Dr. Miles rule suggests that this may not be an isolated problem.

Editor: As you know, our readership consists of general counsel and the members of corporate legal departments. What should we be calling to the attention of our corporate counsel readership?

Delacourt: Because of lingering uncertainty regarding the treatment of minimum RPM under the rule of reason and potentially conflicting state law, I would advise corporate legal departments to think carefully before scrapping their existing Colgate policies. There are two exceptions to this rule.

The first is if the company distributes its products within a limited geographic footprint, and can confirm that the antitrust law of the applicable states closely tracks federal Sherman Act case law. In such situations, the Leegin decision alone reduces the antitrust risk associated with minimum RPM to an acceptable level.

The second is if the company is extremely dissatisfied with the performance of its Colgate policy or other minimum RPM work-arounds ( e.g., a minimum advertised price, or "MAP," policy). For example, a company that finds that other efforts have not put a dent in free riding by Internet discounters, who continue to snap up sales without providing the retail-level sales support or in-store experience that the company's products demand, may feel that a move to more aggressive and direct minimum RPM is worth the risk post- Leegin, despite the fact that it may entail an investment in legal resources to defend the practice in court. However, it is worth noting that this investment may be substantial, as rule of reason cases are extremely fact intensive and do not lend themselves to resolution at an early stage, such as summary judgment.

Please email the interviewee at jdelacourt@kelleydrye.com with questions about this interview.