RPM Litigation in the Wake of Leegin

Last year, in the landmark Leegin Creative Leather Products Inc v PSKS Inc decision,² the United States Supreme Court reversed the almost century-old per se rule of Dr Miles Medical Co v John D Park & Sons Co³ against resale price maintenance (RPM). In Dr Miles and its progeny, the Supreme Court had established an elaborate legal framework under which manufacturers were not permitted to 'agree' with their distributors on resale prices but were permitted to enforce resale prices set 'unilaterally'.⁴ The distinction between 'agreements' and 'unilateral policies' remained ill-defined, however, leading most large manufacturers to avoid anything that could be characterised as RPM, unilateral or not. Commentators often complained that RPM was a textbook case of over-deterrence.
The Leegin decision - in its adoption of a rule of reason approach to RPM, its endorsement of modern economic analysis (which sees RPM as largely benign), and its generally sceptical tone towards RPM claims - was seen by some as essentially bringing an end to RPM claims. Many commentators have argued that Leegin has rendered the RPM doctrine all but a dead letter.
Consistent with this view, widespread anecdotal evidence suggests that Leegin has led to the growing adoption of RPM policies by manufacturers, which no longer fear that RPM policies will expose them to litigation and treble damage claims. The Wall Street Journal, for example, in a recent front-page article argued that Leegin has 'potentially alter[ed] the face of US discount retailing'⁵ by lifting the de facto ban on RPM policies. The article cites a plaintiff in a pending RPM case (BabyAge.com, discussed below) who claims, for example, that almost a quarter of his suppliers, '100 of his 465 suppliers', have adopted RPM policies.
Despite this perhaps prevailing view, there is good reason to think that the RPM doctrine is not a dead letter. There may be continued, perhaps even increased, RPM litigation as more and more companies adopt such policies, regardless of the Supreme Court's scepticism of RPM claims. To take one prominent example, just months after the Leegin decision, plaintiffs brought a purported nationwide consumer class action in Tennessee against Leegin Creative Leather Products itself, making essentially the same allegations about the same company that the Supreme Court had all but rejected in Leegin. Although that case was recently dismissed on the pleadings, it points to plaintiffs' continuing willingness to litigate RPM cases and test the limits of Leegin.
To be sure, Leegin will probably lead to a significant change in the kinds of claims that are brought and in the issues that are the focus of litigation.
The progress of a few pending cases in the 14 months since the Leegin decision - including two cases involving the Leegin corporation itself - provides some insight into the strategies that parties will take in prosecuting and defending such claims and, in particular, how plaintiffs will attempt to avoid the strictures of Leegin.
We believe plaintiffs will argue that the economic theories that buttress the Supreme Court's decision in Leegin - and thus the basis for a rule of reason standard in RPM cases - do not apply to RPM policies that originate at the retailer level. Plaintiffs will seek to characterise RPM policies as originating with retailers rather than manufacturers and then argue that the per se rule still applies in that context, or at least that RPM originating with retailers is subject to heightened scrutiny.
In the end, the Leegin decision may simply shift the focus of litigation from whether an RPM practice is 'unilateral' or not, to the equally ephemeral factual question of whether the 'source' of an RPM practice was a manufacturer or its retailers. That may lead, once again, to the application of something close to a per se rule. Where plaintiffs cannot show that the policy originated with retailers, liability will be uncommon. But where plaintiffs can make such a showing, RPM practices may be treated as effectively per se illegal.

The impact of Leegin: market power and market definition

The most obvious impact of a rule of a reason standard is the requirement imposed by most courts that a plaintiff plead and prove that the defendant has market power in a relevant product market. Antitrust law assumes that '[w]ithout market power, a firm cannot have an adverse effect on competition'.⁶ Any effort by a firm in a competitive market to anti-competitively raise prices would just lead 'consumers [to] shop around to find a rival offering a better deal'.⁷
The market power requirement will greatly limit the scope of liability for RPM policies adopted by manufacturers. Most consumer goods companies, companies like the Leegin corporation, simply do not have market power. Leegin sells belts, shoes, purses, sunglasses and similar women's accessories for which there are literally countless substitutes. By any reasonable measure, Leegin is a tiny player in an enormously competitive market and has a market share of a few percentage points or less. Nonetheless, prior to the Leegin decision, the company had been found liable for treble damages because the Dr Miles per se rule ignored market power.
The impact of the rule of reason standard on RPM claims will be magnified by the Supreme Court's recent Twombly decision,⁸ which has put more teeth into antitrust pleading requirements. A number of courts have already read Twombly to require closer scrutiny of antitrust complaints not just with respect to antitrust conspiracy, but also with respect to pleading requirements like market power and market definition.⁹
The Tennessee case brought against the Leegin corporation (entitled Spahr v Leegin Creative Leather Products Inc)¹⁰ is a good example of this. In that case, the plaintiffs alleged a single-brand market of all 'Brighton-branded products' in an effort to establish market power. (Leegin's leading brand has been 'Brighton' for many years, and the company is now known as Brighton Collectibles Inc.) On a motion to dismiss, the court relied on Twombly for the principle that the allegations of an antitrust complaint require close scrutiny to ensure that the plaintiffs have viable claims, given the enormous expense and burden of antitrust litigation.¹¹ After taking a close look at the alleged market definition, the court dismissed the complaint with prejudice, finding the market definition facially implausible given the substitutes available for Leegin's products.¹² Market definition alone should mark the end of RPM complaints brought against the Leegin corporation, at the pleading stage.
Similar dismissals would be appropriate, on the pleadings, of challenges to RPM practices imposed by manufacturers in competitive industries.

The impact of Leegin: antitrust injury and anti-competitive effects

Even before Leegin, even under the per se rule, consumer class actions were very difficult to maintain in the RPM context. Class plaintiffs need to establish, first and foremost, that the entire class suffered injury, that is, that each class member was hurt by the alleged RPM. This typically requires, at a minimum, proof that each class member would have paid less in the absence of the defendants' RPM practices - a very difficult showing for a widely distributed product. Discovery and expert analysis is needed into the prices that each individual retailer would have otherwise charged. A further difficulty is created by manufacturer's suggested retail prices (MSRP), which are entirely legal and not subject to antitrust challenge in and of themselves. The reality is that many retailers price products at MSRP even without any manufacturer pricing agreement or policy. Consumers who bought from such retailers cannot establish injury. Thus, a broad class action is usually very difficult to maintain.¹³
In another case brought against the Leegin corporation, this one a consumer class action in Kansas state court, the court dismissed the case on this very ground.¹⁴ On summary judgment, the Kansas court held that the plaintiffs could not prove that every consumer who bought Leegin's products in the state would have paid less but for the RPM. In other words, the plaintiffs could not prove that each retailer would have charged a lower price absent Leegin's alleged conduct. Indeed, there was evidence that some retailers would have priced above MSRP in the absence of Leegin's pricing policy.
The Supreme Court's Leegin decision, however, raises the bar even higher for consumer class actions against manufacturer-imposed RPM practices. It is no longer enough merely to show that prices would have been lower, even if a class could prove that prices would have been lower across the board.
This is because the court accepted mainstream modern economic thinking, which holds that RPM policies imposed by manufacturers - and the resulting higher prices - are generally pro-competitive. Economists (and the Supreme Court) start from the fact that the extra revenue from higher retail prices goes to retailers and not to the manufacturer. If the manufacturer wants to raise prices for its own benefit, it would normally raise wholesale prices. Higher retail prices should actually hurt manufacturers by decreasing consumer demand. As the Supreme Court explained, 'a manufacturer has no incentive to overcompensate retailers with unjustified margins'.¹⁵ So, economists and the Supreme Court reason, a manufacturer must impose RPM only because it believes higher retail prices (and the additional revenue captured by retailers) will increase demand, that is, be pro-competitive. A manufacturer chooses RPM 'only if the increase in demand resulting from enhanced service will more than offset a negative impact of a higher retail price'.¹⁶ In other words, higher prices alone do not establish an antitrust violation in the RPM context. The Supreme Court held that a plaintiff would be 'mistaken in relying on pricing effects absent a further showing of anti-competitive conduct'.¹⁷ RPM is a rare situation in which higher prices are presumed to be pro-competitive. This is because the reduction of intra-brand competition among retailers and the resulting higher prices are expected to lead to increased inter-brand competition, to the ultimate benefit of consumers: 'Vertical price restraints tend to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer's position as against rival manufacturers.'¹⁸
Higher retail prices are the mechanism through which, according to the Supreme Court's rationale, a manufacturer achieves a pro-competitive outcome. The significance of this to litigation realities should not be underestimated. Most of the normal assumptions of antitrust litigation are turned on their head. Higher brand prices alone mean very little. A plaintiff needs to show that the challenged conduct had negative effects on the broader market, ie, that it reduced inter-brand competition and raised prices for other brands. Although the Supreme Court laid out one such potential scenario - where a manufacturer uses RPM 'to give retailers an incentive not to sell the products of smaller rivals or new entrants'¹⁹ - this requirement may be impossible to meet in most cases.
The situation may be quite similar for terminated dealers. A question that may be the subject of significant further litigation is what a terminated dealer needs to show to establish antitrust injury in an RPM case after Leegin. Under a rule of reason analysis, a terminated dealer can no longer rely merely on its own economic injury traced to anti-competitive RPM agreements. The terminated dealer would need to show that the challenged RPM practices also had anti-competitive effects on the broader market.

Plaintiffs' response: retailer-imposed RPM

Plaintiffs will argue, however, that there is a critical limitation on the Supreme Court's Leegin decision. They will point out that the economic rationale provided by the Supreme Court (as discussed above) applies only to RPM practices imposed by manufacturers; they do not apply to policies imposed by retailers. Unlike manufacturers, the retailers may have a direct and anti-competitive incentive to raise retail prices, as long as their prices will not be undercut by their competitors. A retailer cartel could use an RPM policy enforced by a manufacturer to implement a pricing fixing scheme and even extend the pricing controls to retailers who are not part of the cartel. An RPM policy can also serve the needs of a single, dominant retailer who can pressure a manufacturer into adopting an RPM policy and thus insulate itself from price competition. The Supreme Court recognised that higher brand prices can be suspect in and of themselves in the context of RPM policies instigated by 'cartels at the retailer level' or a 'dominant retailer'.²⁰ In other words, the Leegin decision places great focus on the motivation behind any set of RPM practices. An RPM agreement motivated by a manufacturer's unilateral desires will be analysed quite differently than the same agreement motivated by retailer desires. Although that makes good economic and theoretical sense, it makes RPM claims once again turn almost entirely on a highly fact specific and subjective inquiry.
Not surprisingly, since Leegin, plaintiffs have attempted to characterise the RPM practices they are challenging as originating at the retailer level rather than with the manufacturers. In some cases that has been a straight-forward exercise. In the BabyAge.com litigation discussed in the Wall Street Journal article, for example, the plaintiffs sued Babies 'R Us and numerous manufacturers that supply it. Plaintiffs allege that Babies 'R Us, as a dominant retailer, has forced its suppliers to adopt RPM policies and impose them on low-price retailers.²¹ Because the plaintiffs have characterised the RPM practices as driven by a retailer, Leegin does not seem so far to have limited the plaintiffs' claims to any significant degree.
Plaintiffs can find cases, predating Leegin, in the context of non-price vertical restraints, that suggest that where 'the source of the conspiracy is a combination of the distributors' - where retailers collectively force the manufacture to adopt a 'restraint' - a vertical restraint can be treated as 'horizontal', that is, as per se illegal.²² It is questionable, however, whether such cases are good law after Leegin, which suggests that even an RPM policy imposed by a retailer cartel should be judged under the rule of reason: 'To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel, it, too, would need to be held unlawful under the rule of reason.'²³ The Third Circuit in the Mack Truck case has recently read this language from Leegin to mean that even RPM practices adopted at the behest of a retailer cartel are still judged under the rule of reason.²⁴
Even if RPM practices instigated by retailers are subject to a rule of reason analysis under Leegin, the strictures of Leegin still may not fully apply. In the BabyAge.com case, for example, the court analysed only the market power of the dominant retailer, not that of each manufacturer defendant. Even more importantly, the BabyAge.com court accepted that higher prices alone could be anti-competitive in the context of a retailer-motivated RPM policy. If the BabyAge.com court is correct, that should provide enormous incentive for plaintiffs to characterise RPM practices as retailer-motivated.
In the Tennessee and Kansas Leegin cases,²⁵ the facts largely precluded plaintiffs from successfully arguing that the alleged RPM practices were instigated by Leegin's retailers. The plaintiffs instead sought to treat Leegin itself as a retailer, and then argue that the per se rule should still apply. They focused on the fact that Leegin owns and operates a small number of company-owned stores. This, the plaintiffs argued, not only made Leegin a retailer but also showed that Leegin adopted its alleged RPM policies with the (anti-competitive) motivations of a retailer rather than the (pro-competitive) motivations of a manufacturer. The plaintiffs' argument, of course, makes no economic sense. If a manufacturer like Leegin wants to raise retail prices to insulate company-owned stores from price competition, the best way to do that from the manufacturer's perspective would still be to raise wholesale prices. That would allow the manufacturer not only to protect the profits at its own stores but also to capture any increased revenue from sales at independent stores. A 'dual distribution' manufacturer (one with company-owned and independent retail stores) must have some other, pro-competitive motivation for using RPM. Both the Kansas and Tennessee courts rejected plaintiffs' theory based on the economics and based on a long line of cases holding that a dual distribution manufacturer should still be considered a manufacturer, and not a retailer, for purposes of antitrust analysis of vertical restraints.²⁶
Given the difficulty of turning manufacturers into retailers, plaintiffs in future RPM litigation can be expected to focus on characterising RPM practices as instigated by retailers, not manufacturers. This may not be as hard as it sounds. Pricing discussions between manufacturers and retailers are quite common. There are many entirely legitimate reasons for manufacturers and retailers to discuss pricing insights, policies, and experience - reasons that might have nothing to do with RPM. It is also quite common for retailers to complain to their suppliers about price cutting by competing retailers. Taken independently, communication about pricing or about price cutters are harmless. But taken together, such communications can be used to suggest that an RPM policy was actually imposed on the manufacturer to serve the interests of a group of retailers. These kinds of conversations between manufacturers and retailers will thus remain a major focus of RPM litigation. It should be noted that most of the RPM cases discussed above - Leegin, BabyAge.com, and Mack Truck - all involved tape recordings of pricing conversations between retailers and manufacturers.

* * *

For the better part of the last century, the focus of RPM litigation has been on whether the alleged RPM policy was 'unilateral' and thus legal or an 'agreement' and thus per se illegal. By drastically reducing the ability of a plaintiff to establish liability for an RPM agreement imposed by the manufacturer, the Leegin case greatly reduced the importance of the unilateral/agreement distinction. In its place, however, Leegin may have made RPM cases turn on an equally frustrating and difficult factual distinction: between RPM policies originating with retailers, and thus highly suspect, versus those originating with manufacturers, and thus presumably benign. The question of who was the 'source' of the RPM practice may not ultimately look all that different from the question of whether the RPM practice was 'unilateral' or not.

Notes

1 Mr Singla represents Brighton Collectibles Inc, formerly known as Leegin Creative Leather Products, in antitrust cases pending in Texas, Tennessee and Kansas challenging its alleged resale price maintenance policies.
2 127 S. Ct. 2705 (2007).
3 220 US 373 (1911).
4 See, eg, United States v Colgate & Co, 250 US 300 (1919).
5 Joseph Pereira, Price-Fixing Makes Comeback After Supreme Court Ruling, Wall Street Journal, 8 August 2008 at A1.
6 Ezzo's Invs Inc v Royal Beauty Supply Inc, 243 F.3d 980, 988 (6th Cir. 2001).
7 Murrow Furniture Galleries Inc v Thomasville Furniture Indus Inc, 889 F.2d 524, 528 (4th Cir. 1989).
8 Bell Atl Corp v Twombly, 127 S. Ct. 1955, 1966, 1971 (2007).
9 See, eg, Iqbal v Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) (Twombly 'obligates a pleader to amplify a claim with some factual allegation in those contexts where such amplification is needed to render the claim plausible').
10 No. 2:07-CV-187, 2008 WL 3914461 (E.D. Tenn. 20 August 2008).
11 Id. at *1-2, 9, 15.
12 Cf United States v EI du Pont de Nemours & Co, 351 US 377, 395 (1956) (relevant market consists of all 'commodities reasonably interchangeable by consumers for the same purposes').
13 See, eg, Gross v New Balance Athletic Shoe Inc, 955 F. Supp. 242 (S.D.N.Y. 1997) (dismissing RPM claims where plaintiffs did not allege that they and all class members had purchased from retailers in the alleged conspiracy).
14 O'Brien v Leegin Creative Leather Prods Inc, No. 04 CV 1668, slip op. (8th Judicial Dist., Sedgwick Cty. Kan. 9 July 2008).
15 Leegin at 2718-19.
16 Id. at 2719.
17 Id. at 2718.
18 Id. at 2715.
19 Id. at 2717.
20 Leegin, 127 S.Ct. at 2716-17. The other circumstance recognised by the Supreme Court in which higher prices in and of themselves would be cause for concern are RPM practices imposed by a 'manufacturer cartel'.
21 BabyAge.com Inc v Toys 'R Us Inc, 558 F. Supp. 2d 575 (E.D. Pa. 2008).
22 Red Diamond Supply Inc v Liquid Carbonic Corp, 637 F.2d 1001, 1004 (5th Cir. 1981). See also US v. Sealy Inc, 388 US 350, 352 (1967) (vertical restraint treated as horizontal because it was not 'the creature of' the manufacturer; rather, manufacturer was 'an instrumentality of the licensees').
23 Leegin, 127 S.Ct. at 2717.
24 See Toledo Mack Sales & Serv Inc v Mack Trucks Inc, 530 F.3d 204, 224-226 (3d Cir. 2008).
25 The Texas Leegin case has not been active since remand from the United States Supreme Court last year.
26 See, eg, Int'l Logistics Group, Ltd v Chrysler Corp, 884 F.2d 904, 906 (6th Cir. 1989).