Rewriting the law of resale price maintenance: the Kodak decision and transaction cost economics.

• Author: Taney, Frank X.

INTRODUCTION

On June 8, 1092, the Supreme Court decided Eastman Kodak Co. v. Image Technical Services.(1) The decision quickly sent a shudder through the world of antitrust,(2) and has been both praised(3) and vehemently condemned.(4) Much has already been written about Kodak's potential for changing the antitrust landscape in terms of franchise relationships,(5) summary judgment in antitrust cases,(6) implementation of the "rule of reason" test,(7) antitrust analysis of tie-in arrangements,(8) and the role of Chicago School economics in antitrust jurisprudence.(9)

The purpose of this Comment, however, is to demonstrate and predict how the Kodak decision and the Court's apparent acceptance of the transaction cost economics perspective (10) could lead to a change in courts' treatment of resale price maintenance (RPM).(11) RPM refers to arrangements by which a manufacturer may attempt to control the final retail price charged for its products by retailers or distributors.(12) As most common employed by manufacturers, this practice involves a price floor.(13) Although RPM is currently illegal per se,(14) this Comment, using the same transaction cost methodology employed by the Supreme Court in Kodak, advances a justification for RPM as a tool for market entry.

Part I of this Comment traces the development of the antitrust treatment of RPM and the problems courts have faced in specifying what varieties of price maintenance activities violate the antitrust laws. Part I also demonstrates how the current antitrust treatment of RPM, the cartel paradigm, which assumes that RPM arrangements are anticompetitive, is unsatisfactory in several respects.

Part II presents two differing conceptions of economics and antitrust - the Chicago School and transaction cost economics - upon which procompetitive justifications for RPM could be built. This Part outlines the fundamental features and differences between these two paradigms. Part III explores the Chicago School's previous attempt to justify RPM - the free-rider hypothesis. Part III also examines why the free-rider hypothesis failed to gain acceptance.

Part IV predicts that transaction cost economics can succeed in encouraging acceptance of RPM where the Chicago School failed. The discussion first examines the Kodak decision, focusing on how the court clears the way for an increased reliance on transaction cost methodology in antitrust. This Part then advances a transaction-cost-based justification for RPM that is particularly well-situated for acceptance by the courts: RPM as a tool for market entry. This Comment concludes with a brief examination of political and economic factors that might affect acceptance of a transaction-cost-based justification of RPM as a tool for market entry.

1. A BRIEF HISTORY OF RPM

   1. The Cartel Paradigm Becomes Entrenched

      1. Per Se Illegality of RPM

         Section 1 of the Sherman Antitrust Act of 1890(15) provides 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."(16) Courts have consistently construed this language to prohibit only "unreasonable" restraints of trade.(17) Yet as the authors of the Sherman Act suspected, and as the courts have often found, defining the precise boundaries of the Act's coverage often proves to be difficult.(18)

         Despite the conceptual difficulties inherent in determining which practices constitute "unreasonable" restraints of trade the Supreme Court settled on an apparently clear-cut and easily administrable rule of law for cases of RPM: per se illegality.(19) Under the per se approach, once a court identifies a given course of conduct or restraint as falling within a proscribed category, it finds a violation of the Sherman Act, regardless of the actual effects of the conduct and despite any benefits that the conduct produces.(20) Courts purportedly reserve per se illegality for privately created market restraints that lack ... any redeeming virtue" and that have the most "pernicious effect on competition."(21) Courts justify per se rules as labor saving, since a court applying a per se rule need not make a detailed inquiry into the effects of the conduct at issue.(22)

         In Dr. Miles Medical, the Court relied on two arguments in applying the per se illegality rule to RPM. First, it adopted the common-law rule that RPM agreements were unreasonable restraints on alienation.(23) The court cited Lord Coke for the proposition that "if a man be possessed of any ... chattel ... and give his whole interest of property therein, upon condition that the donee or vendee shall not alien the same, the same is void, because his whole interest and property is out of him, so as he hath no possibility of reverter.'"(24) The Court viewed the defendant's attempts to control the retail prices of its goods as analogous to the situation discussed by Lord Coke.(25) Second, the Dr. Miles Medical Court criticized the defendant's RPM arrangements as being "injurious to the public interest," and as "having for their sole purpose the destruction of competition and the fixing of prices."26 In making this second argument, the Court refused to entertain the notion that an RPM program could involve either procompetitive purposes or effects.(27) Instead, the Court took the view that RPM was invariably a tool of either retailer (28) or manufacturer(29) cartels that desired a mechanism to keep prices artificially high and to control competition. This is the paradigmatic cartel explanation of RPM which has been accepted consistently in modern cases,(30) and continues to dominate the government's current enforcement patterns and attitudes toward RPM.(31)

         The per se approach, both as generally applied and as adopted in the area of RPM, contrasts directly with the other main judicial tool of inquiry in antitrust cases: the rule of reason approach. The rule of reason inquiry allows defendants to justify their actions based on procompetitive effects.(32) A fact-finder applying the rule of reason weighs all the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition."(33) As the rule of reason test has evolved, courts have engaged in detailed analyses of the market share possessed by particular companies, the concentration of particular industries, the ability of companies to affect prices and outputs in relevant markets, and the definition of relevant markets.(34)

      2. Subsequent Problems with Application of the Per Se Rule

         At one conceptual level, application of the per se rule against RPM is straightforward: if a company "agrees" with other market participants to maintain prices, the company - and the other participants - have violated the Sherman Act. A major source of difficulty arises, however, when a court must determine if the manufacturer, through its actions, has entered into an actual RPM "agreement" with other market participants. Because section 1 of the Sherman Act prohibits only contracts, combinations, and conspiracies (35) which restrain trade, "it is not unlawful for a single firm, acting alone, to fix prices. Fixing prices is illegal only when there are [at least! two parties and an agreement."(36) Given this statutory backdrop, courts attempting to apply the per se rule to RPM have faced the unenviable task of defining the precise meaning of the term "agreement" and the permissible limits on a manufacturer's efforts to maintain prices. The courts have struggled with this task, and it is not at all clear that their solutions are well-conceived. In addition, as the following discussion illustrates, legislative efforts to resolve the problems reflect congressional confusion as to the proper scope of the Sherman Act with regard to RPM.

         In United States v. Colgate & Co.,(37) the Supreme Court created a significant exception to the per se illegality rule established by Dr. Miles Medical.(38) In Colgate, the Court held that a manufacturer's unilateral decision that it would not deal with stores that undercut its posted retail prices did not run afoul of the Sherman Act.(39) The Court stressed the fact that the record lacked any evidence indicating that Colgate had entered into any contracts with dealers "whereby ... the manufacturer, and [the retailers], bound themselves to enhance and maintain prices."(40) According to the Court, this holding merely affirmed the principle that a "manufacturer ... can sell to whom[ever] he pleases.'"(41)

         Thus, after Colgate, the critical inquiry in the area of RPM was whether the manufacturer maintained prices by way of an "agreement" between itself and a retailer or other downstream supplier.(42) Although the Colgate decision clearly had the potential to gut the per se illegality rule, the Court subsequently eased plaintiffs' burdens by inferring the existence of RPM agreements from a manufacturer's "course of dealing."(43)

         In United States v. Parke, Davis & Co.,(44) the Supreme Court essentially eliminated the practical value that the Colgate exception held for manufacturers. In Parke, Davis, the Court ruled that a manufacturer may not threaten, intimidate, warn or use other means that affect adherence to his resale prices."(45) The company violated the Court's formulation by supplying the names of price-cutting retailers to wholesalers, who then refused to deal with the retailers, and by advocating adherence to its RPM program to various retailers and wholesalers.(46) After Parke, Davis a manufacturer could do no more than publish a list of desired prices and refuse to deal with noncomplying retailers.(47) Subsequent applications of the Parke, Davis decision forced manufacturers to choose their words and actions very carefully to avoid liability under the Sherman Act for their RPM programs.(48)

         Judicial intolerance of vertical market restraints reached its zenith with United...