A Year of Living With Leegin

It has been just over a year since the Supreme Court issued its decision in Leegin Creative Leather Products Inc v PSKS Inc1 on 28 June 2007. Leegin reinterpreted the federal Sherman Act, the principal United States antitrust statute, by ending its per se prohibition against vertical resale price maintenance (RPM) arrangements that the Supreme Court had judicially declared nearly a century earlier.
All sides of the debate over RPM saw Leegin as a watershed, and hoped for, or dreaded, rapid change in response to the ruling. On the one hand, business groups and some economists hoped Leegin would serve as a harbinger encouraging states to drop their parallel, per se prohibition of RPM arrangements. Consumer advocates and discount retailers, on the other hand, feared that large numbers of franchisors and other suppliers would treat Leegin as a green light to adopt, participate in, or enforce RPM programmes.
One year into the post-Leegin era, it now seems that little has changed, or will change fast, in regard to franchise and distribution arrangements. States have not been persuaded of the wisdom of allowing any RPM arrangements, have not backed off their condemnation of RPM, and are pushing Congress to restore the per se rule legislatively.
In the meantime, whether as the result of these potential hurdles or the practicalities of the situation, it does not appear that there are any widespread efforts by franchisors and suppliers to incorporate express RPM elements in their distribution arrangements, with the occasional newsworthy exception.

Differing legal status of RPM under state and federal law

Leegin only changed the treatment given to vertical RPM arrangements by federal courts, and even then did not make vertical RPM legal, simply not illegal per se. Federal courts can still invalidate vertical RPM arrangements if they find them to cause an 'unreasonable' restraint of trade in fact, after evaluating the purpose, origins, and effect of the prohibition in light of market conditions. And they can still be condemned as per se unlawful if they mask a horizontal price-fixing conspiracy, especially one demanded by a cartel of franchisees or distributors.
In the meantime, the United States is a federal system in which state antitrust laws are not pre-empted by the federal statutes. RPM arrangements have been declared unlawful per se under the majority of state antitrust regimes. Indeed, in many states, the per se condemnation was judicially imposed in efforts to harmonise state law with the analogous federal Sherman Act, as long interpreted. Even in this situation, state courts will not necessarily reverse their decisions merely because the United States Supreme Court reversed its decision. In some states, statutes specifically prohibit RPM and this cannot be changed by judicial reinterpretation.
Will there be lobbying efforts to change state laws that still prohibit RPM as a per se violation of state antitrust law? Such efforts will undoubtedly be made. A note in the Harvard Law Review argues, for example, that Leegin merely transfers power from the federal judiciary to states to declare positive law regarding the legality of RPM, whether by statute or judicial decisions, and urges states to 'look beyond claims that minimum RPM will increase prices or consumers and instead examine the practice's general welfare effects'.2 Of course, the prohibition against RPM in state statutes may not reflect mere deference to the long-standing federal rule prohibiting RPM; it may reflect the legislative clout of consumers seeking assurances that prices will not be artificially raised, and local businesses that do not want their hands tied when deciding how to dispose of inventories they have purchased.
Equally, discount merchants, consumer groups and state attorney generals generally applauded proposed federal legislation, the Discount Pricing Consumer Protection Act, when it was introduced on 30 October 2007.3 Thirty-five state attorney generals sent a joint letter to the Senate and House Judiciary Committees in support of the Act on 14 May 2008, requesting 'immediate consideration and approval of this important legislation'.4 Even with this support the Act has not progressed legislatively, and the federal/state split remains.

Franchisors and other suppliers are not rushing towards RPM

With continuing uncertainty in the legal arena, most franchisors and manufacturers have not yet pushed the edges of the envelope with their franchisees or dealers. Where people think they have observed such movement, there is usually something else going on. For example, in a post to Public Citizen's Consumer Law & Policy blog, one blogger complained that Leegin was being relied upon by suppliers to prevent sales of their products at a discount on the internet, where comparison price shopping is extremely common.5 The two examples the blogger cited involved suppliers who brought suit to enjoin sales of their products on eBay, alleging in part that the sellers were violating pricing restrictions to which they were bound.6 Yet neither case appears to have involved an express RPM arrangement; instead, one supplier sought to enforce a distribution channel restriction that prohibited dealers from selling on the internet at all; the other involved a minimum advertised price (MAP) plan that dictated how much the item should be advertised for. Both suppliers cited Leegin in their moving papers as justification for maintaining retail prices at a supplier-specified minimum price level, but both cases settled without the courts addressing any RPM issues.
Similarly, an article on the front page of the 18 August 2008 Wall Street Journal, suggests that Leegin had inspired new price-fixing programmes by manufacturers. The article principally relies upon a case in which an internet retailer of maternity and children's products alleges that 100 of its 465 suppliers now dictate minimum prices - but, as that suit was filed in 2005, two years before Leegin was decided, the decision itself cannot have served as the impetus for the challenged arrangements.7
What, then, to make of this spring's ruling by the Federal Trade Commission (FTC) that modified its consent decree with Nine West, entered into in 2000, which previously prohibited Nine West from 'fixing, controlling, or maintaining' its dealers' resale prices for 10 years?8 The ruling eliminated the restriction - but did not approve any specific plan that that the shoe retailer might come up with. It eliminated the restriction because of the change in law, because Nine West had a small market share in an industry with virtually no entry barriers, and because Nine West, rather than its dealers, was the source of the RPM proposal. However, the FTC noted it was not approving Nine West's RPM practices, as Nine West had not yet adopted them or shown them to be pro-competitive, and instead would monitor any RPM arrangements Nine West were to adopt.
The ruling is noteworthy principally because there are not many similar, public, prominent efforts to be free of old restrictions. The fact is that most franchisors will not be in a position to even consider RPM arrangements for many years - their existing contracts often specifically provide that the franchisees will set their own prices, and many of these contracts are long-term, lasting five, 10, or even 20 years.
In any event, ahead of any change to state laws or policies, it does not appear that a significant number of suppliers or franchise systems are actively announcing RPM programmes, or promoting themselves as protecting dealers from being undercut on price through some form of express RPM arrangement. Indeed, rather than attempting to defend under the principles of Leegin, the threat of state enforcement activities brought about a very hasty abandonment of alleged RPM arrangements by the makers of the Aeron chair.9 Perhaps large franchise systems and manufacturers are concerned that any rush in the direction of widespread RPM adoption would force the hand of legislators towards keeping the state prohibition and restoring the federal prohibition. Or perhaps they are concerned that doing so will draw even greater ire from state regulators and consumers. Another possibility is that their existing programmes of restricted distribution - whether channel restrictions, location clauses, or MAP commitments - already promote necessary brand investment, without the need for an express RPM programme.

Application of Leegin

Were they to adopt RPM arrangements, franchisors and suppliers will also risk trying to prove that their programme originated from the top, rather than from concerted demands of its dealers, franchisees and distributors. Leegin had cautioned that '[...] a horizontal cartel among [...] competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful' and that RPM arrangements resulting from the demands of such cartels must be ruled unlawful. Of course, dealers and franchisees alleging the supplier participated in horizontal conspiracies with their rivals face many hurdles in bringing such allegations to trial. In another major 2007 decision, Bell Atlantic v Twombly,10 the Supreme Court required plaintiffs to allege in their complaints, even before the opportunity to take discovery,11 'enough factual matters (taken as true) to suggest that an agreement was made' between the franchisor and the allegedly conspiring franchisees.
Yet some claims survive, and will survive. Notably, in Toledo Mack Sales & Service Inc v Mack Trucks Inc,12 the United States Court of Appeals for the Third Circuit reversed a trial court's grant of summary judgment dismissing an RPM claim. Toledo Mack involved the distribution of heavy-duty trucks. Mack Trucks appoints dealers for various territories; it assigns each dealer an area of responsibility, but does not grant exclusivity to any dealer. So long as a dealer meets its territorial responsibilities, the dealer can sell anywhere else it wants to. Toledo, an authorised dealer, aggressively sought to expand its sales by offering discounted trucks Including in other dealers' areas. Numerous dealers and their National Dealers' Advisory Council complained to Mack. Mack then adopted an official policy that, for the first time, denied sales assistance for any out-of-area sales. Toledo claimed Mack took these actions to support the 'gentleman's agreement' among its dealer body that they would avoid out-of-area sales and discounting. The trial judge found that, on these facts, Mack could not be deemed to join a dealer conspiracy, as Mack had independent motives to rope in dealers selling out-of-area. Reversing, the Third Circuit ruled that Toledo had provided sufficient evidence to go forward to trial, because '[i]t is readily apparent that, if there were an agreement among Mack dealers as alleged, it involved horizontal competitors colluding to control prices and therefore, would be per se unlawful', while a jury could conclude that Mack participated in the dealer conspiracy when Mack's change in its policies on areas of responsibility, according to a Mack witness, 'came about to a large extent because of the voice of the distributor organisation'. Thus, 'consistent with Leegin, Toledo produced evidence that the agreement was the result of dealer pressure'.
Then there is the trial court's 20 May 2008 ruling in Babyage.com v Toys 'R' Us Inc, denying a motion to dismiss a claim that a dominant retailer successfully coerced numerous suppliers of 'high-end' baby and maternity products to agree to fix prices, so as to prevent discount competition from internet sellers. The trial court found that by alleging facts that 'suggest' that the suppliers adopted parallel RPM systems, that adopting RPM might have been against each manufacturer's independent economic self-interest, that the dominant retailer had enough clout to successfully threaten to retaliate against the suppliers if they did not pursue RPM, and the suppliers acquiesced in those demands, the plaintiffs met their Twombly burden. As to Leegin, the trial court cited it only for the proposition that 'harm to intrabrand competition is cognizable when brought about by the demands of a "dominant" retailer, one that has market power in the retail sales market and [...] upon whom each manufacturer depends for a large portion of its sales'.

Conclusion

It is, of course, early in the post-Leegin era, and its effects will be evolving for years to come. If any suppliers have adopted RPM programmes, they must first find their way into practice, and it will be years before courts and juries adjudicate whether they are reasonable in practice. Still, based on the first year of cases, it does not seem too early to say that RPM arrangements should still be approached with extreme caution. Suppliers with market power, or in industries where many suppliers adopt RPM arrangements, seem at considerable risk of having the programmes ruled unreasonable; suppliers without market power seem at considerable risk of having the programme invalidated per se as the by-product of demands of dealer cartels or powerful retailers. Ultimately the arrangements seem rarely to justify taking on those risks, inasmuch as other, non-price routes may adequately serve any legitimate ends claimed for RPM programmes.

Notes

1 551 US ____, 127 S. Ct. 2705 (2007).
2 Note, The Supreme Court - Leading Cases, 121 HARV.L.REV. 185, 430 (2007).
3 S. 2261, 110th Cong. (introduced 30 October 2007).
4 The letter is available at www.naag.org/assets/files/pdf/signons/antitrust.AG_Letter_Supporting_S2261.pdf.
5 Greg Beck, 'How the Leegin Decision Will Hurt Consumers on the Internet', 6 July 2007, available at http://pubcit.typepad.com/clpblog/2007/07/how-the-Leegin-.html.
6 Colon v Innovate! Technology Inc, Case No. 07-cv-21349 (SDFla); Merle Norman Cosmetics Inc v Labarbera, Case No. 07-cv-60811 (SDFla).
7 Joseph Pereira, 'Price-Fixing Makes Comeback After Supreme Court Ruling', Wall Street Journal, 18 August 2008, page 1, referring to Babyage.com v
Toys 'R' Us Inc, 02:05-cv-6792 (E.D.Pa.), complaint originally filed 29 December 2005.
8 In re Nine West Group Inc, No. C-3937 (11 April 2000).
9 24 March 2008 Proposed Stipulated Judgment and Consent Decree, State of New York v Herman Miller Inc, No. 08-cv-2977 (SDNY). Available at http://antitrustcommentary.com/wp-content/uploads/2008/03/hmillerconsent.pdf.
10 550 US ____, 127 S.Ct. 1955 (2007).
11 Wellnx Life Sciences Inc v Iovate Health Sciences Research Inc, 516 FSupp.2d 270 (SDNY 2007).
12 530 F.3d 2004 (3d Cir. 2008).
13 Explanation and Order, Babyage.com v Toys 'R' Us Inc, 02:05-cv-6792 (EDPa), filed 20 May 2008.

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