Leegin: Challenge Or Opportunity For Cross-Border Trade?

Monday, October 1, 2007 - 01:00

Designer blue jeans. PING custom-fit golf clubs. Brietling watches. Producers of these and other high-end consumer goods have at one time or another tried to insist that retailers adhere to minimum resale prices in order to preserve their images in the marketplace.1 For 96 years, those manufacturers have faced a Hobson's Choice in the United States: impose an inflexible, unilaterally determined resale pricing policy, or have no policy at all. In Canada, the U.S.'s largest trading partner, those same manufacturers have been denied the opportunity to control, or even attempt to control, resale prices through anything more forceful than a mere suggestion about the resale price. For companies that do business in the United States and Canada, managing these legal differences raised some difficult issues, but at least the rules in both countries were fairly straightforward. Recent developments suggest that this may no longer be the case.

For years, both U.S. and Canadian antitrust law regarded agreements between manufacturers and retailers on resale prices - so-called vertical agreements - as no more defensible than horizontal agreements between retailers fixing prices. The law in each country forbade both as per se illegal, irrespective of the agreement's effect (or potential effect) on competition. A peculiarity in U.S. law known as the Colgate doctrine (after the Supreme Court case from which it flows), allowed more latitude where a manufacturer unilaterally imposed resale prices on its retailers, the absence of an agreement putting it outside the scope of the Sherman Act's Section 1. Individual states largely followed suit in interpreting their own state antitrust laws.

Canadian law went even further, making any form of manufacturer coercion, or even attempted coercion, on resale prices a per se criminal offence. In Canada, unlike the U.S., whether the parties agreed on vertical resale price maintenance was immaterial.

The differences between the U.S. and Canadian approaches to resale price maintenance, or RPM, widened this year with the U.S. Supreme Court's decision in Leegin Creative Leather Prods., Inc. v. PSKS, Inc. In Leegin , the Court overturned the 96-year-old rule making vertical agreements on resale prices per se illegal, mandating instead a case-by-case "rule of reason" inquiry into the competitive effects of such agreements. Since courts and legislatures in the 50 U.S. states retain the right to determine how they will treat RPM, no one can say what the law throughout the U.S. will be. While Leegin offers new opportunities to reformulate retail pricing policies, real and potential conflicts of international and state law make the footing potentially treacherous for U.S. companies with cross-border activities.

U.S. Law Before Leegin

No U.S. statute specifically addresses RPM. Courts have analyzed such conduct under Section 1 of the Sherman Act, which prohibits "[e]very contract, combination or conspiracy, in restraint of trade . . . ." 15 U.S.C. 1. A 1911 case known as Dr. Miles seemingly prohibited all restrictions on minimum resale prices, deeming them per se illegal. Eight years later, however, the Supreme Court provided a loophole in the Colgate doctrine: a manufacturer could refuse to do business with dealers who sold below a suggested retail price, provided there was no agreement with retailers about what those prices might be. Manufacturers following these guidelines were insulated from antitrust liability for concerted action since the absence of an agreement meant that no "contract, combination or conspiracy" could exist. Since 1919, therefore, businesses have been able to avoid antitrust liability for resale price maintenance not by acting in ways that preserved competition among retailers of the same branded product, but by negating the Sherman Act's "agreement" requirement under Section 1.

Canadian Law On Resale Price Maintenance

Unlike the United States, the Canadian Competition Act expressly prohibits RPM, whether imposed unilaterally or by agreement. Section 61 of the Competition Act prohibits two forms of RPM, both of which are actively enforced, per se criminal offences punishable by an unlimited fine and/or up to five years' imprisonment.

The Competition Act prohibits any "agreement, threat, promise or any like means" that seeks to increase or avoid a reduction of the price at which another person supplies, offers to supply or advertises a product in Canada. As such, Canadian law prohibits any coercion (successful or not) to increase or maintain resale prices, including where such coercion takes the form of incentives (as is commonly the case in the United States with cooperative marketing programs). Canadian law does allow suppliers to suggest resale prices, and to appeal to their retailers to accept such prices. Suppliers must, however, make it clear that the retailers have no obligation to follow the suggestion, and that the retailers run no risk of retaliation should they choose not to follow it. In short, Canadian law permits suggestions concerning resale prices, provided they are just that - suggestions. Combined with any sort of "carrot or stick," suggestions cross the line and become per se illegal.

The Competition Act also prohibits refusals to supply or discrimination against any other person carrying on business in Canada due to that person's low pricing policy. Such discrimination can take many forms, including delaying order fulfillment, charging higher prices to discounters, refusing to grant widely available discounts or rebates to discounters, and imposing different payment terms for discounters. The Competition Act sets out limited defenses to this form of RPM, in particular allowing sellers to refuse to supply persons who have engaged in certain conduct, like loss leading or misleading advertising.

Section 61 of the Competition Act has long been criticized as overly restrictive and, as a result, potentially anti-competitive. A 2002 parliamentary report ( A Plan to Modernize Canada's Competition Regime , authored by the Standing Committee on Industry, Science and Technology) recommended the decriminalization of vertical price maintenance, including abandonment of the per se standard. Despite this recommendation, subsequent proposed amendments to the Competition Act were silent on the subject, even while proposing decriminalization of other pricing practices such as price discrimination and predatory pricing. More recently, the Canadian government appointed in June a Competition Policy Review Panel to evaluate Canada's competition laws, including how they relate to similar laws in other jurisdictions. The Panel's appointment provides a timely opportunity to consider modernizing Canada's treatment of RPM to take account of the potential pro-competitive benefits identified by the U.S. Supreme Court in Leegin .

The Leegin Decision

In Leegin , the Supreme Court overruled its decision in Dr. Miles and concluded that vertical RPM agreements were no longer per se illegal. The Court held that such agreements should be evaluated under the rule of reason, by looking at the competitive impact of such agreements on a case-by-case basis. Recognizing that antitrust law restricts the per se rule of illegality to those restraints on trade "that would almost always tend to restrict competition and decrease output," the Court found that economic studies justified the more liberal, case-by-case rule of reason for vertical agreements on RPM. More specifically, the Court recognized that, while such agreements can have an anti-competitive effect in some cases, they can also have pro-competitive effects by promoting inter-brand competition and creating incentives for retailers to enhance services offered at sale. Despite the Dr. Miles rule's longevity, the Court concluded that businesses may now strike RPM agreements so long as those agreements can withstand analysis under the rule of reason - i.e., so long as they are, on balance, pro-competitive.

Leegin does not, however, necessarily change state law on RPM. Only 17 states mandate following federal precedent in construing their own antitrust statutes, and would presumably follow Leegin as well. Other states either consider federal precedent only persuasive, or have not expressed a preference for it at all. While Leegin does provide greater flexibility to businesses considering RPM, the vagaries of state law make the implementation of new policies in the United States more complex than one might think. Combined with the divergence that exists between U.S. and Canadian law, the complexities associated with RPM policies far exceed what one might expect just from reading Leegin .

The Current Divide Between U.S. And Canadian Law

Before Leegin , U.S. and Canadian law differed principally on the unilateral imposition of RPM: U.S. law tended to permit it; Canadian law did not. Because U.S. practice focused almost exclusively on Section 1 of the Sherman Act, antitrust liability hinged on whether the loophole created by Colgate applied: i.e., no agreement, no antitrust liability. Meanwhile, Canadian law prohibited, and continues to prohibit, any attempt to influence prices, whether unilateral or by agreement, that goes beyond the mere suggestion of resale prices.

Leegin widens the gap between U.S. and Canadian law on vertical RPM. In addition to the difference created by the Colgate doctrine, vertical resale price agreements that are now subject to the rule of reason in the United States remain per se offenses in Canada. As such, companies carrying on business in both the United States and Canada that are considering the implementation of resale pricing policies structured to comply with the new rule of reason regime in the United States risk committing a per se criminal offense in Canada. On the other hand, companies attempting to comply with Canadian law risk putting themselves at a competitive disadvantage in the United States if RPM is used as a competitive tool by their competitors. While affording greater flexibility in respect of RPM, Leegin doesn't exactly light the way through this legal thicket.

Companies with cross-border sales have several options to navigate the RPM minefields after Leegin.

The most aggressive option ignores Canadian law, and implements a U.S.-compliant pricing policy in both countries. While allowing the maximum level of business flexibility in the United States, this option would still have to be defensible on the rule of reason in the United States, pass muster under state laws (some of which may not afford the same flexibility as federal law post- Leegin ) and would risk criminal liability under Canadian law.

At the other extreme, a company could adopt a "Canadian-style," non-binding, suggested resale pricing policy. Such a policy would comply with Canadian law, but it could also put a company at a competitive disadvantage in the United States if some of its retailers choose not to accept the recommended resale prices.

Between these two extremes, a company could adopt a policy compliant with Leegin , but limit its scope to the United States, with mere resale price suggestions in Canada.

None of these options is perfect. The growing difference in U.S. and Canadian law, in fact, highlights the importance at the front end of selecting retailers committed to the marketing strategy that the manufacturer wants to pursue. By avoiding non-premium retailers from the outset, companies can forestall the headaches that arise when retailers seek to undermine a product's premium position in the marketplace.

Conclusion

Despite the cross-border hurdles it may erect, Leegin does offer the benefit of increased flexibility for companies conducting business in the United States. As the Court noted, a wealth of economic literature points to the potential pro-competitive effects of vertical resale price maintenance, and justifies using the rule of reason.

Critics of Canada's RPM laws will welcome Leegin as further support for their view that Section 61 of their own Competition Act is outdated. The Competition Policy Review Panel's appointment provides these critics with a timely forum to make their case for changing Canada's approach to vertical RPM to take account of its potential pro-competitive benefits.

In the meantime, however, the immediate effects of Leegin include a widened gap between U.S. and Canadian law in relation to vertical RPM, and uncertainty as to the extent to which the U.S. states will adopt the rule-of-reason approach mandated by the Supreme Court. So while Leegin presents significant opportunities for companies that stand to benefit from a more flexible approach to vertical RPM, such companies should carefully think through their policies in this regard to factor in the complexities arising from the different standards that continue to exist in Canada and within certain U.S. states.

1 See Brief for PING, Inc. as Amici Curiae Supporting Petitioner , Leegin Creative Leather Prods., Inc. v. PSKS, Inc. 127 S.Ct. 2705 (June 28, 2007) (No. 06-480); Penner Brietling v. USA, Inc., 124 F.3d 212 (9th Cir. 1997); The Jeanery, Inc. v. James Jeans, Inc., 849 F.2d 1148 (9th Cir. 1988).

M. Russell Wofford, Jr. is a partner with the Business Litigiation Practice Group in King& Spalding's Atlanta office. Jonathan R. Chally is an associate with the group. Jeffry Brown is a partner with the Competition Law Group of Stikeman Elliott's Ottawa office.

Please email the authors at rwofford@kslaw.com, jchally@kslaw.com or jbrown@stikeman.com with questions about this article.