Leegin Creative Leather Products, Inc. v. PSKS, Inc.
168 L. Ed. 2d 623, 127 S. Ct. 2705 (2007)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Vertical agreements between a manufacturer and its distributors to set minimum resale prices are not per se illegal under Section 1 of the Sherman Act; instead, their legality must be judged by applying the rule of reason.
Facts:
- Leegin Creative Leather Products, Inc. (Leegin) designed, manufactured, and distributed a line of leather goods under the 'Brighton' brand, selling them through small boutiques and specialty stores.
- PSKS, Inc. (PSKS) owned Kay's Kloset, a retail store that began selling Brighton products in 1995, with the brand eventually accounting for 40-50% of the store's profits.
- In 1997, Leegin instituted a pricing policy refusing to sell to retailers that discounted Brighton goods below its suggested retail prices, believing this would maintain its brand image and allow retailers to provide better customer service.
- Leegin later introduced a 'Heart Store Program,' offering incentives to retailers who, among other things, pledged to sell at Leegin's suggested prices.
- In 2002, Leegin discovered that PSKS was marking down its entire line of Brighton products by 20% to compete with other local retailers.
- Leegin demanded that PSKS cease discounting. When PSKS refused, Leegin stopped selling its products to the store, which significantly harmed PSKS's revenue.
Procedural Posture:
- PSKS, Inc. sued Leegin Creative Leather Products, Inc. in the U.S. District Court for the Eastern District of Texas, alleging that Leegin's pricing policy constituted an illegal price-fixing agreement.
- The trial court, applying the per se rule from Dr. Miles, excluded expert testimony from Leegin regarding the procompetitive justifications for its policy.
- A jury returned a verdict in favor of PSKS, awarding it $1.2 million in damages.
- The District Court trebled the damages as required by antitrust statutes, entering a final judgment against Leegin for approximately $3.975 million.
- Leegin, as appellant, appealed to the U.S. Court of Appeals for the Fifth Circuit, arguing that the rule of reason should have applied.
- The Fifth Circuit, with PSKS as appellee, affirmed the District Court's decision, holding that it was bound by the Supreme Court's long-standing precedent making vertical minimum price-fixing per se illegal.
- The U.S. Supreme Court granted certiorari to reconsider the validity of the per se rule.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an agreement between a manufacturer and its distributor to set a minimum resale price constitute a per se violation of Section 1 of the Sherman Act?
Opinions:
Majority - Justice Kennedy
No, an agreement between a manufacturer and its distributor to set a minimum resale price does not constitute a per se violation of Section 1 of the Sherman Act. The Court's 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., which established the per se rule of illegality for such agreements, is now overruled. Economic analysis demonstrates that vertical price restraints can have procompetitive effects, such as stimulating interbrand competition, preventing 'free-riding' by discounters on service-providing retailers, and facilitating market entry for new products. While these restraints can also have anticompetitive effects, such as facilitating cartels, these risks do not justify a blanket per se prohibition. Therefore, the traditional rule of reason, which weighs all circumstances of a case, is the appropriate standard for judging vertical minimum resale price maintenance agreements.
Dissenting - Justice Breyer
Yes, an agreement between a manufacturer and its distributor to set a minimum resale price should remain a per se violation of the Sherman Act. The Dr. Miles precedent has been a cornerstone of antitrust law for nearly a century, and principles of stare decisis weigh heavily against overruling it. Congress itself endorsed the per se rule when it repealed fair trade laws in 1975. The majority undervalues the significant anticompetitive harms of resale price maintenance, which invariably leads to higher consumer prices and can be used to organize or stabilize cartels. The claimed procompetitive benefits are often theoretical and difficult to prove, and abandoning the clear per se rule for a complex, costly, and unpredictable rule-of-reason analysis will create legal uncertainty and harm consumers, discounters, and the economy.
Analysis:
This decision represents a seismic shift in antitrust law, overturning nearly a century of precedent established in Dr. Miles. By discarding the per se rule for vertical minimum price-fixing, the Court aligned its treatment with that of vertical non-price restraints, all of which are now judged under the more flexible rule of reason. This ruling increases the evidentiary burden for plaintiffs, who can no longer win a case merely by proving the existence of a price maintenance agreement but must now demonstrate a net anticompetitive effect in a relevant market. The decision gives manufacturers greater latitude to control their distribution channels and brand image but has been criticized for potentially leading to higher consumer prices and making it harder for discount retailers to compete.
