Dr. Miles Medical Co. v. John D. Park & Sons Co
220 U.S. 373 (1911)
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Rule of Law:
Vertical agreements between a manufacturer and its distributors to set minimum resale prices for the manufacturer's products are an unreasonable restraint of trade and are per se illegal under antitrust law.
Facts:
- Dr. Miles Medical Company (Dr. Miles) manufactured proprietary medicines using secret formulas.
- To maintain uniform prices, Dr. Miles established a system requiring its distributors to sign contracts setting the minimum prices at which the medicines could be resold.
- The system involved two types of agreements: a 'Consignment Contract' for over 400 wholesalers and a 'Retail Agency Contract' for 25,000 retailers.
- These contracts obligated distributors not to sell Dr. Miles' products below the specified list prices.
- John D. Park & Sons Company (Park & Sons), a wholesale drug business, refused to enter into these agreements.
- Park & Sons acquired Dr. Miles' medicines at discounted, or 'cut,' prices by inducing wholesalers and retailers who had signed the contracts to breach their agreements and sell the products to them.
Procedural Posture:
- Dr. Miles Medical Company filed a suit for an injunction against John D. Park & Sons Company in the U.S. Circuit Court for the Western District of Kentucky.
- The defendant, Park & Sons, demurred to the complaint, arguing that it failed to state a valid claim for relief.
- The Circuit Court, a trial court, sustained the demurrer and dismissed the suit.
- Dr. Miles appealed the dismissal to the U.S. Court of Appeals for the Sixth Circuit.
- The Court of Appeals affirmed the decision of the Circuit Court, holding that the restrictive contracts were invalid.
- The U.S. Supreme Court then granted review of the Court of Appeals' decision.
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Issue:
Are contracts between a manufacturer and its wholesale and retail dealers that fix the minimum resale price of the manufacturer's products void as an unlawful restraint of trade?
Opinions:
Majority - Mr. Justice Hughes
Yes. Contracts that fix minimum resale prices are an unlawful restraint of trade. While the 'consignment' contracts are framed as creating an agency relationship, the court views the overall system as a plan to control prices after Dr. Miles has sold its products. The 'retail agency' contracts are clearly agreements of sale, not agency. A manufacturer cannot, by contract, restrain the freedom of trade by controlling the price of its product after it has parted with title. Such vertical price-fixing is analogous to a horizontal price-fixing agreement among dealers, which is illegal. The manufacturer's right to property does not include the right to impose a general restraint on alienation by controlling resale prices. The fact that the products are made via a secret process does not grant them an exception from antitrust laws, as this right is not equivalent to the statutory monopoly granted by a patent. The public is entitled to the benefits of competition among distributors once the manufacturer has sold its goods into the channels of trade.
Dissenting - Mr. Justice Holmes
No. The contracts should not be considered an unlawful restraint of trade. A manufacturer should be free to manage its own business, and the court is unwisely extending public policy into a new sphere. The majority's conclusion is based on form over substance, as Dr. Miles could legally achieve the same result by making all dealers true agents and retaining title. The value of price competition for non-essential goods is exaggerated; the manufacturer knows best what price structure is most efficient for its business and what consumers are willing to pay. The defendant's conduct is fraudulent interference with contracts, and the court should not protect 'knaves' who cut reasonable prices for their own ulterior purposes. This vertical arrangement is not comparable to a horizontal combination of competitors seeking to exclude others from the market.
Analysis:
This landmark decision established that vertical minimum price-fixing agreements were a per se violation of the Sherman Act, treating them as equivalent to horizontal price-fixing cartels. It enshrined the principle that once a manufacturer sells its product, it cannot legally control the price at which the product is resold, reinforcing the 'first sale' doctrine in an antitrust context. This per se rule against resale price maintenance stood for nearly a century until it was overturned in 2007 by Leegin Creative Leather Products, Inc. v. PSKS, Inc., which replaced it with a 'rule of reason' analysis.
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