Case Study:
Leegin Creative Leather Products, Inc. v. PSKS, Inc., dba Kay’s Kloset, Kay’s Shoes
United State Supreme Court
Given its policy of refusing to sell to retailers that discount its goods below suggested prices, the petitioner (Leegin) stopped selling to the respondent’s (PSKS) store. PSKS filed suit, alleging, among other things, that Leegin violated the antitrust laws by entering into vertical agreements with its retailers to set minimum resale prices. The district court excluded expert testimony about the procompetitive effects of Leegin’s pricing policy on the ground that Dr. Miles Medical Co. v. John D. Park & Sons Co.7 makes it per se illegal under Section 1 of the Sherman Act for a manufacturer and its distributor to agree on the minimum price the distributor can charge for the manufacturer’s goods. At trial, PSKS alleged that Leegin and its retailers had agreed to fix prices, but Leegin argued that its pricing policy was lawful under Section 1 of the Sherman Act. The jury found for PSKS. On appeal, the Fifth Circuit declined to apply the rule of reason to Leegin’s vertical price-fixing agreements and affirmed, finding that the Dr. Miles per se rule rendered irrelevant any procompetitive justifications for Leegin’s policy.
Justice Kennedy
In Dr. Miles Medical Co. v. John Park & Sons Co., the Court reestablished the rule that it is per se illegal, under §1 of the Sherman Act, for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s good.
Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” The Court has never “taken a literal approach to [its] language.” Rather, the Court has repeated time and again that §1 “outlaw[s] only unreasonable restraints.”
The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of §1. Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. Appropriate factors to take into account include “specific information about the relevant business”and “the restraint’s history, nature, and effect.” Whether the businesses involved have market power is a further, significant consideration. In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest.
Resort to per se rules is confined to restraints “that would always or almost always tend to restrict competition and decrease output.” To justify a per se prohibition, a restraint must have “manifestly anticompetitive” effects, and lack any redeeming virtue
As a consequence, the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason. It should come as no surprise, then, that we have expressed reluctance to adopt per se rules with regard to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.
The Court has interpreted Dr. Miles Medical Co. v. John D. Park & Sons Co. as establishing a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices. In Dr. Miles the plaintiff, a manufacturer of medicines, sold its products only to distributors who agreed to resell them at set prices. The Court found the manufacturer’s control of resale prices to be unlawful. It relied on the common-law rule that “a general restraint upon alienation is ordinarily invalid.” The Court then explained that the agreements would advantage the distributors, not the manufacturer, and were analogous to a combination among competing distributors, which the law treated as void.
The reasoning of the Court’s more recent jurisprudence has rejected the rationales on which Dr. Miles was based. By relying on the common-law rule against restraints on alienation, the Court justified its decision based on “formalistic” legal doctrine rather than “demonstrable economic effect.” The Court in Dr. Miles relied on a treatise published in 1628 but failed to discuss in detail the business reasons that would motivate a manufacturer situated in 1911 to make use of vertical price restraints. Yet the Sherman Act’s use of “restraint of trade” invokes the common law itself . . . not merely the static content that the common law had assigned to the term in 1890. The general restraint on alienation, especially in the age when then Justice Hughes used the term, tended to evoke policy concerns extraneous to the question that controls here. Usually associated with land, not chattels, the rule arose from restrictions removing real property from the stream of commerce for generations. The Court should be cautious about putting dispositive weight on doctrines from antiquity but of slight relevance. We reaffirm that “the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today.”
Dr. Miles, furthermore, treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal combination among competing distributors. In later cases, however, the Court rejected the approach of reliance on rules governing horizontal restraints when defining rules applicable to vertical ones. Our recent cases formulate antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements, differences the Dr. Miles Court failed to consider. The judgment of the Court of Appeals is reversed in favor.
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