A step back from substantive competition policy convergence: the international implications of Leegin Creative Leather Products, Inc. v. PSKS, Inc.

• Author: Krea, Nicole Q.

"Designer blue jeans. PING[R] custom-fit golf clubs. Brietling watches. Producers of these and other high-end consumer goods have at one time or another tried to insist that retailers adhere to minimum resale prices in order to preserve their images in the marketplace. For 96 years, those manufacturers have faced a Hobson's Choice in the United States: impose an inflexible, unilaterally determined resale pricing policy, or have no policy at all. In Canada, the U.S.'s largest trading partner, those same manufacturers have been denied the opportunity to control, or even attempt to control, resale prices through anything more forceful than a mere suggestion about the resale price. For companies that do business in the United States and Canada, managing these legal differences raised some difficult issues, but at least the rules in both countries were fairly straightforward. Recent developments suggest that this may no longer be the case." (2)

1. Introduction

   In a speech before the Antitrust 1996 Conference, Former Federal Trade Commissioner Roscoe B. Starek, III commented on the trend of many of the U.S.'s trading partners to enact new antitrust laws, stating that "[a]ny firm engaged in international transactions ignores these developments at its peril." (3) These words of caution gained even more relevance when, on June 28, 2007, the United States Supreme Court decided Leegin Creative Leather Products, Inc. v. PSKS, Inc., (4) in which the Court overturned nearly a century of antitrust law in the area of minimum resale price maintenance (RPM). (5)

   As a result of Leegin, United States federal courts now evaluate minimum RPM under a "rule of reason," as opposed to the longstanding rule of per se illegality. (6) This decision places United States RPM policy at odds with the policies of many important trading partners, including Canada and the European Union (EU). (7)

   In the wake of Leegin, companies engaged in cross-border transactions face a great deal of uncertainty regarding how to take advantage of the increased freedom afforded by this new United States policy. (8) A company either undertakes to manage different pricing policies in each jurisdiction, risks the threat of prosecution in certain jurisdictions, or follows the strictest policy in all jurisdictions-none of which are ideal options. (9)

   This Note will examine the potential complications of the fact that Leegin now sets the United States at odds with many of its major trading partners in the area of RPM, and the ramifications of that divide. (10) Part II.A reviews the development of United States antitrust law in the area of RPM. (11) Part II.B discusses the details of the Leegin decision, and Part II.C addresses both federal and state reaction to the outcome of the case. (12)

   Part II.D then explores international competition law and the implications of Leegin in a global sense, focusing on the interplay between United States antitrust laws and the laws of both Canada and the EU. (13) Parts II.D.1-2 focus on the substantive antitrust law on RPM in Canada and the EU. (14) Part II.D.3 discusses the mechanics of the exposure of a United States company when engaging in practices that violate foreign antitrust laws. (15) Part II.E then surveys the general trend toward harmonization of international antitrust policy and the efforts of jurisdictions such as Canada and the EU to conform with United States practices. (16)

   Part III analyzes the challenges posed by the divergence of United States and international law, and the possibilities for resolution. (17) Part III.A focuses specifically on the options available to companies engaged in cross-border trade and interested in taking advantage of the new federal law in the United States. (18) Part III.B examines the likelihood for resolution and convergence of substantive law on minimum RPM. (19) Part III.B.1 discusses the potential that the states or Congress will overturn Leegin in the United States. (20) Part III.B.2 evaluates the possibility that either Canada or the EU will modify their laws to align with the United States. (21) Part III.B.3 explains that, because of the focus on international convergence of competition policy, the United States domestic response to Leegin will likely play a role in determining the actions of Canada and the EU. (22)

   This Note concludes by asserting that the recent emphasis on convergence will likely motivate Canada and the EU to reconsider their RPM policies in light of the Leegin decision, though the uncertainty in the domestic application of Leegin will likely require a waiting period for both the United States and foreign jurisdictions to observe the effects of this precedent. (23)

2. History

   1. Development of United States Antitrust Law in the Area of Resale Price Maintenance

      Antitrust law in the United States is largely based on the Sherman Act of 1890. (24) Con gress enacted the Sherman Act, which effectively prohibits monopolies and contracts that unreasonably interfere with free trade, to promote competition in commerce. (25) Minimum RPM is one type of trade restraint regulated by section 1 of the Sherman Act, which makes illegal "every contract ... or conspiracy, in restraint of trade or commerce ...." (26) Though it is possible to interpret that language to render all contracts in any context unlawful, the Supreme Court has never taken such a "literal approach." (27)

      While the Sherman Act sets the basic framework, actual enforcement under the statute arises primarily through judicial interpretations. (28) Based on the common-law standard that a restraint on alienation is void if unreasonable, courts traditionally applied the rule of reason when testing whether a practice restrains trade in violation of the Sherman Act. (29) Nevertheless, some types of restraints are deemed per se unlawful. (30) Courts evaluated minimum RPM under the rule of reason until 1911, when the Supreme Court decided Dr. Miles Medical Co. v. John D. Park & Sons Co., holding that vertical RPM is per se illegal under both the Sherman Act and at common law. (31) The Court stated that "agreements or combinations between dealers, having for their sole purpose the destruction of competition and the fixing of prices, are injurious to the public interest and void." (32)

      Only eight years later, the Court limited the effects of its strict holding in Dr. Miles when it decided United States v. Colgate & Co. (33) In Colgate, the Court held that a manufacturer has the right to exercise unilaterally its discretion as to with whom it will deal, and can refuse to deal with distributors that do not follow pricing suggestions. (34) The Court distinguished Colgate from Dr. Miles by reasoning that Dr. Miles involved contracts that prevented dealers from freely exercising the right to sell, whereas Colgate involved no such contracts. (35)

   2. The Leegin Decision

      Beginning with Colgate, and for the next several decades, the Supreme Court chipped away at the foundation of Dr. Miles, finally overruling that precedent in its 5-4 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (36) Leegin Creative Leather Products (Leegin) designed, manufactured, and distributed women's fashion accessories under the brand name "Brighton" to over five thousand small boutiques and specialty stores across the United States. (37) Kay's Kloset was one such specialty store that sold Brighton goods. (38)

      In 1997, Leegin instituted the "Brighton Retail Pricing and Promotion Policy," through which Leegin refused to sell to retailers who discounted Brighton goods below suggested prices. (39) In December 2002, Leegin discovered Kay's Kloset had been marking down Brighton's entire line by twenty percent. (40) When Kay's Kloset refused to stop discounting, Leegin refused to continue selling to the store. (41)

      PSKS sued Leegin for engaging in the then-prohibited practice of minimum RPM. (42) The District Court for the Eastern District of Texas refused to allow Leegin to introduce evidence of the pro-competitive effects of its pricing policy, relying on the Dr. Miles per se rule. (43) The Supreme Court, however, displaced the per se rule and promulgated a new "rule of reason," allowing parties to introduce evidence that a particular pricing policy is not anti-competitive. (44)

      Having set aside the Dr. Miles precedent as based on "doctrines from antiquity but of slight relevance," the Court engaged in an extensive discussion regarding the effects of RPM on competition. (45) The majority conceded that "each side of the debate can find sources to support its position." (46) While espousing the benefits of a rule of reason, the majority did acknowledge that per se rules may decrease administrative costs. (47) Rule of reason cases have traditionally been lengthy and inefficient, and companies relying on the rule often run the risk of violating the Sherman Act. (48)

   3. Obstacles to National Implementation of Leegin

      1. State Resistance

      It is important to note that the states have their own antitrust laws, and litigants may sue under either federal or state law. (49) In fact, states have historically been the more rigorous enforcers of antitrust principles. (50) While many state antitrust statutes require interpretations to be consistent with federal case law where practicable, (51) a significant minority of states are relatively unbound by federal precedent, and even those that do follow federal case law can often deviate if federal law varies from state objectives. (52) Independent of federal precedent, thirteen states have codified the rule that minimum RPM is per se illegal. (53)

      New York submitted an amicus brief on behalf of thirty-seven states to the United States Supreme Court, supporting the Leegin respondents' position that the Supreme Court should preserve the per se rule against minimum RPM. (54) Now that Leegin has set the rule of reason as binding federal precedent, that rule directly conflicts with the laws of those...