The course correction a century in the making: Leegin Creative Leather Products, Inc. v. PSKS, Inc.

• Author: Komenda, Michael

Numerous sources pointed to the first full term of the Roberts Court as proof of a strong rightward tilt in the political orientation of the Supreme Court. (1) Drawing from disparate cases in areas ranging from election law (2) and free speech (3) to school segregation (4) and the stringency of court filing deadlines, (5) journalists, (6) public officials, (7) academics, (8) and advocacy groups (9) decried the 2006 Supreme Court Term as a full-frontal assault on democratic institutions and evidence that Chief Justice Roberts and Justice Alito were far more conservative than their confirmation hearings had suggested. Furthermore, various commentators suggested that the two newly appointed Justices had joined Justices Scalia, Kennedy, and Thomas in forming a five-Justice "conservative" majority that abandoned sound legal principles to reach politically conservative results. (10)

Last term, a closely divided Court decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (11) For 96 years, the Court had adhered to a rule of per se illegality for minimum resale price maintenance (RPM) on the grounds that it was a violation of the Sherman Act. (12) That is, it was illegal for any manufacturer to require its distributors to agree to sell its manufactured product at or above a set retail price floor, regardless of the agreement's impact on overall competition. In Leegin, however, a 5-to-4 majority of the Court overturned this "Dr. Miles rule" in favor of a broader "rule of reason" analysis that considers the likely competitive effects of potentially anticompetitive practices on a case-by-case basis. (13) Following the dissent's lead, various commentators condemned the ruling as a rejection of longstanding precedent in favor of business interests and at the expense of consumers. (14) To the contrary, the Court's decision was not only the economically appropriate outcome, it was consistent with the doctrine of stare decisis, the original understanding and text of the Sherman Act, and the ordinary deference extended to the political branches for those questions that do not require legal inquiry.

Leegin Creative Leather Products designs, manufactures, and distributes leather goods and women's fashion accessories under the brand name "Brighton." (15) Brighton products are sold at more than 5,000 locations, primarily small, independent boutiques and specialty stores. (16) Kay's Kloset, a women's apparel store owned and operated by PSKS, Inc., sold Brighton goods from 1995 until 2002. (17) Brighton was the store's most important brand and at one time accounted for nearly half of the store's profits. (18) Two years after Kay's began carrying Brighton products, Leegin initiated a pricing policy under which the company refused to sell Brighton goods to retailers that discounted the goods below suggested retail prices. (19) The policy was in harmony with Leegin's choice to distribute through smaller, independent retailers on the theory that those retailers provided customers more services and an overall shopping experience superior to that offered by large, impersonal discount stores. (20)

Leegin adopted the pricing policy so that its retailers would have sufficient profit margins to provide customers those services it regarded as key to its overall sales strategy. (21) The company had also expressed concern that heavy discounting by retailers harmed the Brighton brand image and reputation. (22) In late 2002, Leegin discovered that Kay's had marked down its entire Brighton inventory by 20 percent. It requested that Kay's cease discounting and, when Kay's refused, Leegin stopped selling to the store. (23) The loss of the Brighton brand had a significantly negative impact on Kay's subsequent sales. (24) Kay's parent company sued Leegin for violating section 1 of the Sherman Act, alleging that Leegin had entered into illegal agreements with its retailers to fix the prices of Brighton products. (25) A jury awarded PSKS $1.2 million in damages, which the court trebled. (26)

On appeal, Leegin claimed that an outcome-oriented rule of reason approach should be applied to PSKS's antitrust claims, arguing that the Supreme Court had not consistently applied the per se rule of RPM illegality established in Dr. Miles. (27) Alternatively, Leegin argued that its pricing policy did not result in any competitive harm and that it therefore qualified for an exception to the per se rule. (28) The United States Court of Appeals for the Fifth Circuit affirmed the jury verdict, holding that the Supreme Court had consistently applied the per se rule to minimum price-fixing agreements and, further, that this continued application was consistent with congressional intent. (29) The court likewise concluded that prior exceptions made to the per se rule did not apply, because they did not involve vertical minimum price fixing (that is, manufacturers setting the prices their distributors charge) and had occurred prior to the Supreme Court's reaffirmation of the per se rule's application to RPM in recent years. (30)

The Supreme Court reversed and remanded. In so doing, the Court overruled Dr. Miles and held that vertical price restraints should be judged by the rule of reason. (31) Writing for the majority, Justice Kennedy (32) declared that "[t]he rule of reason is the accepted standard for testing whether a practice restrains trade," (33) and that per se rules are confined to restraints "that would always or almost always tend to restrict competition and decrease output." (34) Citing prior antitrust cases, the Court noted that per se prohibitions are reserved for restraints that have "'manifestly anticompetitive' effects," (35) and "lack ... any redeeming virtue." (36) The majority also pointed to precedent holding that a per se rule is "appropriate only after courts have had considerable experience with the type of restraint at issue" (37) and "only if [courts] can predict with confidence that [the restraint] would be invalidated in all or almost all instances under the rule of reason." (38) Indeed, the Court had previously "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 [was] not immediately obvious." (39)

In addition, the majority contended that the original rationales for the per se rule had since been rejected by the Court, and that it was therefore necessary to revisit the appropriateness of per se rules for agreements to fix minimum resale prices. (40) The opinion noted that economics literature provides many competitive justifications for RPM that are barred by the per se rule. (41) Indeed, the Court asserted that most competitive justifications for minimum RPM, such as encouraging investment in services and facilitating market entry, are similar or identical to the justifications for other vertical restraints to which the Court already applies the rule of reason. (42) While conceding that RPM has the potential for serious anticompetitive uses, the majority asserted that "it cannot be stated with any degree of confidence that retail price maintenance always or almost always tends to restrict competition and decrease output," nor that efficient uses are either infrequent or hypothetical. (43)

The Court further found that maintaining the per se restriction was not justified by administrative convenience or the possibility of higher consumer prices. Preserving an inefficient and ill-reasoned rule simply for administrative convenience "suggests per se illegality is the rule rather than the exception," a misinterpretation of antitrust law. (44) Adhering to such a rationale "would undermine, if not overrule, the traditional 'demanding standards' for adopting per se rules." (45) Furthermore, the majority asserted, the per se rule may actually "increase the total cost of the antitrust system by prohibiting procompetitive conduct the antitrust laws should encourage." (46) Regarding the dissent's assertion that RPM likely results in higher prices, the Court noted that numerous forms of producer behavior may increase the price of the goods manufactured and that a per se rule cannot be justified by the possibility of higher prices "absent a further showing of anticompetitive conduct." (47) Additionally, such an argument misrepresents the aims of the manufacturer and "overlooks that, in general, the interests of manufacturers and consumers are aligned with respect to retailer profit margins." (48)

Despite the faulty reasoning of Dr. Miles and its status as an outlier among vertical restraint cases, the Court's opinion acknowledged the weight of longstanding precedent and the importance of maintaining settled law when deciding cases. (49) The majority contended, however, that stare decisis is not as significant in cases that consider the scope of the Sherman Act, which, from its inception, has been treated by the Court as a statute conferring common law making authority on courts "to meet the dynamics of present economic conditions." (50) Moreover, considering the early narrowing of Dr. Miles, (51) the nearly forty years of RPM legality subsequently established by congressional statute, (52) and the Court's holdings limiting and even overruling other...