Leegin Creative Leather Products, Inc. v. PSKS, Inc.

PETITIONER: Leegin Creative Leather Products, Inc.
RESPONDENT: PSKS, Inc., dba Kay's Kloset . . . Kay's Shoes
LOCATION: United States Court of Appeals for the Ninth Circuit

DOCKET NO.: 06-480
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 551 US 877 (2007)
GRANTED: Dec 07, 2006
ARGUED: Mar 26, 2007
DECIDED: Jun 28, 2007

ADVOCATES:
Barbara D. Underwood - Solicitor General, New York, on behalf of New York et al. as amicus curiae, supporting the respondent
Robert W. Coykendall - argued the cause for the respondent
Thomas G. Hungar - Deputy Solicitor General, Department of Justice, on behalf of the United States, as amicus curiae, supporting the petitioner
Theodore B. Olson - argued the cause for the petitioner

Facts of the case

Leegin Creative Leather Products, a manufacturer of women's accessories, entered into vertical minimum price agreements with its retailers. The agreements required the retailers to charge no less than certain minimum prices for Leegin products. According to Leegin, the price minimums were intended to encourage competition among retailers in customer service and product promotion. When one retailer, PSKS, discounted Leegin products below the minimum, Leegin dropped the retailer. PSKS sued, arguing that Leegin was violating Section 1 of the Sherman Act by engaging in anticompetitive price fixing. Under the Supreme Court's 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., mandatory minimum price agreements are per se illegal under the Act - that is, they are automatically illegal regardless of the circumstances.

Leegin argued that this rule was based on outdated economics. It contended that a better legal analysis would be the "rule of reason," under which price minimums would be held illegal only in cases where they could be shown to be anticompetitive. Both the District Court and U.S. Court of Appeals for the Fifth Circuit rejected these arguments. The courts felt compelled to follow the Supreme Court's rule in the Dr. Miles case, under which Leegin's practices were illegal regardless of the economic arguments put forward by the company.

Question

Is it per se illegal under Section 1 of the Sherman Act for a manufacturer to set mandatory minimum prices for its products?

Media for Leegin Creative Leather Products, Inc. v. PSKS, Inc.

Audio Transcription for Oral Argument - March 26, 2007 in Leegin Creative Leather Products, Inc. v. PSKS, Inc.

Audio Transcription for Opinion Announcement - June 28, 2007 in Leegin Creative Leather Products, Inc. v. PSKS, Inc.

John G. Roberts, Jr.:

Justice Kennedy has the opinion of the court in two cases this morning.

Anthony M. Kennedy:

The first case I have to announce is the opinion for the court in 06-480; Leegin Creative Leather Products, Inc. v. PSKS, Inc. Section 1 of the Sherman Act prohibits every contract, combination of conspiracy in restraint of trade.

The usual way to determine whether a particular business practice violates Section 1 is to ask whether it is unreasonable under all the circumstances of the individual case.

In this case the court considers a particular type of restraint, a vertical price restraint or resale price maintenance and the issue is whether the restraint should be judged by the usual rule or reason, or should be always illegal and that latter option is referred to as a rule of per se illegality.

In a case called Dr. Miles Medical Co. v. John D. Park & Sons Co. decided almost a century ago in 1911.

The court established the rules of these types of vertical price restraint are per se illegal under Section 1 of the Sherman Act and the petitioner now asked us to disavow that per se rule.

The petitioner Leegin Creative Leather Products, Inc. sells a variety of women’s fashion accessories and the brand name for those is Brighton.

Now pursuing to the pricing policy Leegin refused to sell to retailers the discounted Brighton goods below the suggested retailer prices.

The respondent is PSKS, Inc. it operates Kay’s Closet, women’s apparel store in Louisville, Texas.

Kay’s Closet sold the Brighton brand for several years but then Leegin stopped selling to the store after discovered the Kay’s Closet had been marking down the prices on Brighton’s entire line.

PSKS sued alleging that Leegin’s pricing policy in fact was in agreement with its retailers to set minimum resale prices and the Jury agreed with PSKS and awarded PSKS $1.2 million which was then trebled by the District Court.

The Court of Appeals for the Fifth Circuit affirmed based on the per se rule established by Dr. Miles it rejected Leegin’s argument that the rule of the reason should have applied to the resale price maintenance agreements.

We now conclude that the rule of reason not the per se rule should be applied to vertical price restraint and we does overrule Dr. Miles and we reverse the Court of Appeals.

Now each side of the debates can find sources to support its position, it suffices to stay here that economic literature is replete with pro-competitive justifications for a manufacture’s use of resale price maintenance.

The few recent studies documenting the competitive effects of resale price maintenance also cast doubt on the conclusion that the practice meets the criteria for per se rule.

The justifications for the vertical price restraints are similar to those for other vertical restraints.

Minimum resale price maintenance can stimulate inter brand competition by encouraging retailers to invest in services and promotional efforts that aid the manufacturers position as against rival manufacturers.

Resale price maintenance also has the potential to give consumers more options so that they can choose a low price, low service brands or high price high service brands and brands that fall somewhere in between.

Absent vertical price restraints, retail services that enhance inter brand competition might be underprovided.

Well vertical agreement setting minimum resale prices can have pro-competitive justification they may have anticompetitive effects in other cases.

Resale price maintenance for example may facilitate a manufacturer or distributor cartel.

Resale price maintenance can also be abused by a powerful manufacturer or retailer.

Not withstanding these risk that can not always be stated with any degree of confidence that resale price maintenance always or almost always tends to restrict competition and decrease output whether court considering the issue as an original matter.

Now the rule of reason not a per se rule of unlawfulness would be the appropriate standard, we did not write on a clean slate of course.

The decision in Dr. Miles as I indicated is almost a century old so there is an argument for it's retention on the basis of stare decisis alone.

Stare decisis is not a significant in this case however because the issue before us is the scope of the Sherman act.

The court has treated this statute as a common law statute and Stare decisis we conclude does not compel our continued adherence to the per se rule against vertical price restraints.

In the antitrust context the fact that a decision has been “called into serious question” justifies our reevaluation of it and we have overruled our precedents when later cases have undermined their doctrinal underpinnings.

The Court’s treatment of vertical restraints has progressed away from Dr. Miles’ strict approach we distanced ourselves from the opinion’s rational in various cases.

The Court following a common-law approach has continued to temper, limit, or overrule once strict prohibitions on vertical restraints.