Overruling a Nearly Century-Old Precedent: Why Leegin Got It Right

• Author: Julie M. Olszewski
• Position: .D. Candidate, The University of Iowa College of Law, 2009
• Pages: 03

J.D. Candidate, The University of Iowa College of Law, 2009; B.B.A., Western Michigan University, 2001. I thank Professor Herb Hovenkamp, Scott Mendel, and Michael Lockerby for sharing their time and thoughts on the Leegin decision. I am grateful to the editors and writers of Volumes 93 and 94 of the Iowa Law Review for all of their editorial assistance. Finally, I am most grateful to my family and friends for their unending support.

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I Introduction

The Roberts Court made its mark on the law of minimum resale price maintenance ("RPM") in 2007 with its five-four decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc.¹ In one landmark decision, the Court overturned ninety-six years of precedent that had condemned minimum price restraints to per se illegal status. The Leegin decision declared that courts should no longer judge minimum price restraints under a per se illegal standard, but instead should judge them under the typical standard for antitrust lawsuits-the rule of reason.² As one would expect in any case overturning century-old precedent, the reactions to the decision ranged across the entire spectrum of possibilities.³

This Note discusses the impact of the Leegin decision on the law of resale price maintenance. Part II reviews the history of minimum price restraints. Part III elaborates on this Note's position that the Court correctly decided Leegin and has led the law of minimum price restraints to a standard that will prove beneficial for consumers and manufacturers. Part IV examines some practicalities associated with applying the rule of reason to minimum price restraints. Finally, Part V concludes that Leegin enables both thorough legal analysis of the procompetitive benefits associated with resale price maintenance and the realization of those benefits by consumers and manufacturers alike. Page 378

II History of Minimum Price Restraints

A The Sherman Act and EarlyJudicial Interpretations

Congress passed the Sherman Act in 1890, providing in § 1 that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal."⁴ Modern jurisprudence interprets the statute to prohibit only those contracts that unreasonably restrain trade because every contract, to a certain extent, restrains trade.⁵ one restraint the Sherman Act addresses is the establishment of minimum resale prices between manufacturers and distributors.⁶ Antitrust literature often refers to this restraint as minimum price fixing, minimum price restraints, minimum resale price maintenance, or RPM.⁷

In 1908, the Supreme Court had an opportunity to apply the Act to minimum price restraints in Bobbs-Merrill Co. v. Straus⁸ Bobbs-Merrillinvolved a copyright owner who sold his book containing not only a standard copyright notice printed inside the book, but also a clause that purported to set a minimum resale price for future sales of the book.⁹ The copyright owner sought to enforce the minimum resale price against a retailer that sold the book at a lower price.¹⁰ In doing so, the copyright owner relied heavily on a copyright theory that borrowed extensively from patent law.11 The Supreme Court decided against the copyright owner and held that a copyright does not grant the owner the right to limit future sales of a copyrighted work after it is sold by the owner.¹² While the decision laid some foundational work in copyright law, it did not shed light on the interpretation of the still relatively new antitrust statute. Page 379

1. Dr Miles's Per Se Illegal Standard for Minimum Price Restraints

In 1911, the Supreme Court decided Dr. Miles Medical Co. v. John D. Park & Sons Co.,¹³ establishing a precedent that would last for nearly a century.14 Dr. Miles Medical Company ("Dr. Miles") developed and manufactured medicines.¹⁵ The company had contracts with both wholesalers and retailers that purported to establish minimum resale prices.¹⁶ Dr. Miles asserted two grounds for the validity of these contracts.¹⁷ The first argument was that trade-secret holders should have similar rights as patent holders to control the distribution of products.¹⁸ The Court found no such parallel statutory right for trade secrets.¹⁹ The second argument addressed the right of a manufacturer to control the sales of its products.²⁰ The Court again found no such right and condemned Dr. Miles's contracts that established minimum resale prices because they "create[d] a combination for . . . prohibited purposes."²¹ over time, courts have interpreted Dr. Miles as the authority for per se illegal treatment of minimum price restraints.²²

2. The Colgate Doctrine: An Exception to the Per Se Illegal Standard for Minimum Price Restraints

Less than ten years later, in 1918, the Court handed down United States v. colgate,²³ a case that seemed to pull back on the position taken in Dr. Miles. In colgate, the Court held that a manufacturer has the right to do Page 380 business with those that it sees fit and the right to "announce in advance the circumstances under which he will refuse to sell."²⁴ Instead of finding such behavior per se illegal, Colgate established that a manufacturer may take unilateral action in establishing a minimum resale price and may cease selling its products to a retailer that sells below that minimum price.²⁵ The Court further illuminated the distinction between Colgate and Dr. Miles in a case two years later after a lower court had incorrectly interpreted Colgate:

We had no intention [in Colgate] to overrule or modify the doctrine of [ Dr. Miles.] It seems unnecessary to dwell upon the obvious difference . . . . In [ Colgate,] the manufacturer but exercises his independent discretion concerning his customers and there is no contract or combination which imposes any limitation on the purchaser. In [ Dr. Miles,] the parties are combined through agreements designed to . . . destroy competition and restrain the free and natural flow of trade amongst the states.²⁶

Colgate carved out a path for manufacturers to achieve legally the benefits of a minimum RPM program through unilateral action. Unilateral action can include setting a minimum resale price, which is legal unless the manufacturer and distributor agree to the condition.²⁷ The progeny of Colgate focused on how courts could distinguish between unilateral action and an agreement. Within five years of Colgate, the Court explained that courts could imply such an agreement based on the parties' actions or by mere cooperation between them.²⁸ Approximately twenty years later, courts could find such an agreement by drawing inferences from a manufacturer's actions taken to secure adherence to minimum prices if those actions went beyond just stopping sales to a retailer.²⁹ In recent history, the Court addressed the doctrine again, requiring direct or circumstantial evidence- Page 381 "something more"-to show that there was an agreement and that the manufacturer's actions were not merely unilateral.³⁰

The legal framework of the Colgate doctrine has persevered for almost ninety years. Manufacturers have retained the right to choose with whom they will do business and under what conditions, including the establishment of a minimum price, so long as courts cannot infer an implied agreement between the manufacturer and the retailer. This has provided manufacturers with a workable-albeit cumbersome and risky-alternative to explicit minimum RPM agreements. Although the Court altered the treatment of other forms of vertical restraints over the next thirty years,³¹ its treatment of minimum RPM as per se illegal-notwithstanding the Colgate doctrine-remained static, until Leegin's reinvention of RPM jurisprudence in 2007.

B initial congressional interpretations affecting Resale Price Maintenance

Congress made its first mark on the evolution of RPM in 1937 with the Miller-Tydings Fair Trade Act.³² It allowed states to opt out of the Dr. Miles rule of per se illegality for minimum RPM by enacting their own fair-trade laws.³³ Those states that passed fair-trade laws made minimum RPM legal.34 Those that did not pass such laws held manufacturers...