May 2011 Vol. 56, No. 4
ILLINOIS STATE BAR ASSOCIATION
Corporation, Securities &
Business Law Forum
The newsletter of the Illinois State Bar Association’s Section on Corporation, Securities & Business Law
The curious history of resale price maintenance
By Charles A. Stewart, Of Counsel, Kopecky, Schumacher & Bleakley, P.C., Chicago, IL
R
esale price maintenance (“RPM”) is a
simple thing, it is where manufacturers insist that their distributors sell
the manufacturer’s goods at or above a set
minimum price. Now, establishing a minimum retail price doesn’t directly benefit the
manufacturer as they sell at wholesale. Instead, the incentive for manufacturers to set
minimum retail prices stems from the manufacturer’s desire to ensure that its articles
are seen as high quality goods, not cut-rate
items. It is also believed that when sufficient
margins are guaranteed to the resellers they
will make extra efforts to promote and sell
the products, such as by extra marketing efforts or providing services to the customers.
An example of providing services might be
demonstrations in how to use the product,
such as new electronic goods that customers
may not be familiar with. Those of a certain
age may remember trying to program their
first VCR and understand how helpful such
services can be.
While the idea of RPM is simple, its implementation in practice has been the subject of
some controversy. This is due to the advent
in 1890 of the Sherman Act (15 USC 1, et
seq.) which, among other things, proscribed
contracts, combinations and conspiracies in
restraint of trade. The agreement between
manufacturer and retailer to set minimum
prices eliminates, or at least dramatically
restricts intrabrand competition among retailers of the articles and so is an obvious
restraint of trade deemed illegal by the Sherman Act. At least, that was the finding of
the 1911 case of Dr. Miles Medical Company
v. John D. Park & Sons, 220 U.S. 373, 31 S.Ct.
376 (1911). So, RPM was declared per se illegal by Dr. Miles and that was the last of RPM.
Well, not so fast. While those who seek cer-
tainty might have enjoyed the Dr. Miles court
writing, say, “we find RPM to be per se illegal
under the Sherman Act,” this they did not do.
Instead, the Court reviewed the restrictions
imposed by the manufacturer in Dr. Miles under a rule of reason analysis, stating:
The question is, whether, under the
particular circumstances of the case
and the nature of the particular contract involved in it, the contract is, or is
not, unreasonable.
The idea of per se illegality of RPM, then,
comes from how the Court later interpreted
the Dr. Miles decision (see, Leegin Creative
Leather Products, Inc. v. PSKS, Inc., dba Kay’s
Kloset, 551 U.S. 877 (2007)).
Of course whether by interpretation or
otherwise, if the Supreme Court says Dr. Miles
institutes a rule of per se illegality then that’s
the way things will be. The way things will
be, that is, until the Supreme Court decides
it is not done with RPM. Just eight years after
Dr. Miles, in the case of U.S. v. Colgate and Co.,
250 U.S. 300 (1919), the Court determined
that there was RPM and then there was RPM,
which is to say that the ruling in Colgate distinguished the means of implementing the
minimum retail price restriction in Dr. Miles
from the means used in Colgate. While the
producer in Dr. Miles entered into a contract
with the resellers binding the resellers to not
sell below a set price, in Colgate the producer
unilaterally determined that it would not sell
to retailers who did not abide by the producer’s minimum pricing policy. As the action
was unilateral on the part of the producer
there was determined to be no contract,
combination or conspiracy and, hence, no
Sherman Act violation, even though the end
result—minimum prices set by the manufacturer—was the same.
So, one would imagine that manufacturers who wished to institute RPM, with Colgate
as a roadmap, had no further legal issues and
happily went on their way. This demonstrates
how wrong one can be. As it happens, manufacturers do not wish to spend time and effort policing pricing policies and especially
do not wish to terminate otherwise effective
distributors for not following pricing policies. Hence, manufacturers were not satisfied
with using Colgate and wished to continue
entering into agreements with their resellers
for minimum prices. Luckily for them, the U.S.
became involved in a Great Depression.
During the depression certain states
passed what were known as fair trade laws
which allowed vertical price fixing. The
thought here being that allowing such vertical price fixing would protect small independent retailers from being driven out of
business by large chain stores which could
undercut their prices. As these state laws
tended to be in conflict with the Sherman
Act, the U.S. Congress passed the MillerTidings Act in 1937 to provide an exemption
allowing such state approved plans to proceed. The exception allowed by the MillerTidings Act was even extended in 1952 by
the McGuire Act to prevent the Supreme
Court from narrowing the protection provided by the Miller-Tidings Act (“Resale Price
Maintenance,” Wikipedia: The Free Encyclopedia. Wikipedia Foundation. Accessed February 4, 2011).
At this point, then, not only have state
and federal legislatures considered RPM
and passed statutes, but the nation’s highest
court has opined on how—and how not—to
institute RPM so, was the matter finished?
Certainly not. Instead, the Miller-Tidings Act
and the McGuire Act were repealed in 1975,
Corporation, Securities & Business Law Forum |
thereby reinstating the Dr. Miles per se rule
of illegality of RPM even in those states that
sought to avoid it. But while the Congress
may have considered that a per se rule of illegality was a good idea, the Supreme Court
was having second thoughts.
The case of U.S. v. Arnold, Schwinn & Co.,
388 U.S. 365 (1967) had determined that
contracts between producers and distributors for territorial restrictions were per se illegal under the Sherman Act. However, in 1977
the Supreme Court considered the case of
Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36
(1977). The Court in GTE Sylvania overruled
Schwinn, determining that a rule of reason
test was more appropriate. The next step in
the process was taken in 1997. In addition
to vertical restrictions on minimum prices
being per se illegal, the Supreme Court in Albrecht v. Herald Co., 390 U.S. 145 (1968) had
determined that vertical restrictions on maximum resale prices were per se illegal. In 1997
the Albrecht decision was overruled by State
Oil Company v. Barkat U. Khan and Khan and
Associates, Inc., 522 U.S. 3 (1997) which instituted a rule of reason test for such maximum
price restrictions.
The GTE Sylvania and Khan cases signaled
the Court’s move away from per se rules to
rule of reason analysis. Thus, when the case
of Leegin Creative Leather Products, Inc. v. PSKS,
Inc. dba Kay’s Kloset, 551 U.S. 877 (2007) overruled Dr. Miles and instituted a rule of reason
test for RPM it should not have been seen as
odd. What might be considered as odd was
the reasoning that went into the Leegin decision, which is that RPM can actually have
beneficial effects on competition.
This view that RPM could be pro-competitive was supported by an amicus brief filed
by a number of economists (Amicus Curiae
Brief of Economists in Support of Petitioner)
which brief stated that while RPM may decrease intrabrand competition, it can foster
May 2011, Vol. 56, No. 4
greater interbrand competition, due to the
services which may be provided by the retailers once they are assured of receiving a
minimum return, a conclusion based on the
latest in economic studies.
The economists putting their names on
the amicus brief included academics from
such estimable institutions such as New York
University, MIT, the University of Chicago,
University of California-Berkeley, and UCLA.
But there is an old saying that if you laid all
the economists in the world end to end they
would all point in different directions. Hence,
two economists, William S. Comanor and
Frederic M. Scherer filed their own, second
amicus brief which supported neither party
to the action but which was simply intended
to explain further their views on RPM. This
second amicus brief is important in that it
states:
It is uniformly acknowledged that
RPM and other vertical restraints lead
to higher consumer prices. And studies have suggested that these higher
prices can be substantial.
(Amicus Curiae Brief of Comanor and
Scherer).
That RPM should lead to higher consumer prices should be obvious as, after all,
preventing discounts to consumers is the
whole point of RPM. But while the Supreme
Court in Leegin seems only interested in
competition, not prices, the same cannot
be said for Congress. In October, 2007, just a
few short months after the Leegin decision,
Sen. Herbert Kohl (D-WI) introduced S.2261,
the Discount Pricing Consumer Protection
Act, which sought to restore the per se rule
of RPM illegality. This bill was co-sponsored
by then-Senators Hillary Clinton (D-NY) and
Joseph Biden (D-DE). The bill was also supported by an open communication from
35 state Attorneys General, including those
from New York, California and Illinois. Even
with this support the bill was never brought
to a vote and died at the end of the session.
Sen. Kohl has not given up, re-introducing the bill in 2009, 2010 and most recently
as S.75 in January, 2011. On the state level,
Maryland Commercial Law Code 11-204(b)
was enacted to amend that state’s equivalent
of the Sherman Act to restore per se illegality of RPM in that state. Even without such
amendments, several other states’ Attorneys
General have expressed the view that RPM
remains per se illegal under their state antitrust laws. The current Illinois Attorney General, Lisa Madigan, was a signatory to the
open communication supporting passage
of the Discount Consumer Protection Act in
2007 and presumably would also view the Illinois Antitrust Act (740 ILCS 10/1, et seq.) as
providing for per se illegality of RPM in this
state. However, many state laws are modeled
on the Sherman Act and so if challenged may
quite possibly be susceptible to having a rule
of reason approach adopted by courts based
on the same reasoning as the Supreme Court
used in Leegin.
In light of this uncertainty as to per se illegality one wonders whether it is a matter
worth fighting over, especially given the
Colgate prescription for allowing RPM by unilateral action of the producer. The answer apparently is “yes,” given that golf club producer
Ping, Inc. filed an amicus brief in Leegin, stating that while it used a Colgate approach to
RPM, such an approach was costly and inefficient (Amicus Curiae Brief of Ping, Inc.).
While a rule of reason analysis of various RPM
agreements may well allow many such RPM
programs to proceed, anyone adopting such
a scheme would be inviting the risk of an
antitrust suit with all that entails in terms of
both risk as well as the expense and bother
of litigation. It is clear that this is not the end
of the discussion over RPM and producers
have reason to be cautious in this area. ■
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ILLINOIS STATE BAR ASSOCIATION’S
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