The Confusion Over Leegin And Retail Price Restraints

August 28, 2015Articles Law360

Reprinted with permission from Law360. (c) 2015 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

The confusion over the Leegin case is legion. Leegin Creative Leather Products Inc. v. PSKS Inc.[1] is a 2007 Supreme Court case which was supposed to unloose price restraints. This was and remains of critical concern to the fashion community. Classically a design house may have multiple channels of distribution in addition to its own vertically integrated stores. There may be franchise or license relationships; shop in shop agreements under joint ventures; sales to specialty boutiques; as well as department stores. In each, aside from the vertically integrated model, a designer is rightfully concerned about the pricing of its goods by third parties.

Before Leegin, setting or stipulating a minimum resale price was per se illegal. Going back to a 1911 case, Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911),verticalprice agreements between a manufacturer and distributor or as commonly known Resale Price Maintenance Agreements or RPMs, were deemed unreasonable as being the equivalent ofhorizontalprice restraints which were the basis of cartel formation. So, since 1911 it was a presumptive, per se, violation of Section 1 of the Sherman Act to establish RPM agreements.[2] However Leegin made headlines because the Supreme Court shifted ground and declared that going forward vertical price restraints would no longer be per se illegal but would be subject to a rule of reason analysis. So it was anticipated that there would be an efflorescence of RPMs in franchise and distribution agreements. That has not occurred and the question is why, if indeed Leegin opened the door to RPMs?

The primary misconception arising from Leegin is that subjecting an agreement between a manufacturer and distributor to the rule of reason will ineluctably result in a finding for the manufacturer. That presupposes that under a rule of reason analysis RPMs could never be deemed an unreasonable restraint of trade. But there is always the possibility, again even under Leegin, that one could find material adverse restraints of trade in an RPM. RPMs could result in manufacturer and retailer cartels; the former by assisting manufactures in identifying price-cutting manufacturers who benefit from the lower prices they offer and the latter by retailers conspiring to fix prices and then securing RPMs to enforce the same. Most obviously, dominant manufacturers or retailers could use RPM to enforce the status quo and avoid changes in distribution models and forestalling the entry of competitive retailers. Even if it is safe to say that after Leegin the prevailing analysis is that at least on the federal level, subjecting an RPM to the rule of reason would result in a finding that it was not an unreasonable restraint of trade and therefore enforceable, there remains the threat of a finding of unreasonable restraint of trade.

Further upon this supposed Leegin clarity was cast the shadow of state anti-trust laws which were too often overlooked. Certain states have declared RPMs to be per se illegal, such as New York, Illinois, Michigan, Maryland and California. This created a checkerboard hodgepodge of different standards and rules.

Confusion is the main theme of the day. New York under its anti-trust law, the Donnelly Act, still tries to enforce bans on vertical restraints. However, in People v.Tempur-Pedic International Inc.[3] the state lost and Tempur-Pedic was not deemed in violation of the law. The court found that section 369-of the Donnelly Act did not prohibit minimum retail price maintenance agreements. However this should give little comfort: if any presumption would apply that should be the state will look for an opportunity to enforce the Donnelly Act against RPMs.

Further in contradistinction to New York, in People v. Bioelements Inc.[4], the California Attorney General obtained a consent decree against Biolelements for its attempt to maintain RPM agreements. Maryland actually adopted a statute[5] after Leegin which makes RPM (as to minimum as opposed to maximum pricing) per se illegal.

So for now the prudent designer would avoid RPM so as not to unnecessarily divert resources to litigation with an aggressive state’s attorney general.

If we stopped at this juncture the designer would have no ability to protect its brand image and full service retailers from free riding on the internet. However the Colgate doctrine gives some guidance as to what can be done. In United States v. Colgate & Co. 250 U.S. 300 (1919) a unilateral declaration, in contradistinction to any downstream agreements with retailers, that Colgate would not conduct business with those selling below manufacturer’s suggested retail price was not deemed a restraint of trade since there was no “agreement.” Colgate acted unilaterally. The Colgate doctrine is good law and opens one door to the designer.

A designer can also adopt a minimum advertised price (or MAP) policy which like Colgate is a unilateral deceleration, with no downstream agreements, prohibiting advertising a sales price below manufacturer’s suggested retail price. The theory is if you cannot advertise a price it does a retailer little good to discount since it will not be able to drive business to its store(s) based upon the discounted price. Moreover in the public domain there is no dilution of brand image.

A cautious yet salutary approach would be to adopt a Colgate policy in combination with a MAP. This was the strategy adopted by Tempur-Pedic. The company combined a Colgate declaration with a MAP policy.[6] This is a reasonable course of action to take when dealing with the possibilities opened by Leegin and the conflicting realities of the checkerboard maze of state law. Finally, as an ever evolving area of the law any such Colgate-MAP policy should be frequently revisited to ensure any necessary adaptations are made on a timely basis.