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Web address: http://www.nylj.com
Volume 237—no. 8
Thursday, january 11, 2007
Antitrust Trade
and
Practice
By Neal R. Stoll and Shepard Goldfein
On Per Se Illegal Minimum Resale Price Maintenance
I
t has been nearly 100 years since
the U.S. Supreme Court held that a
manufacturer of trademarked medicines
could not enter into contracts with
dealers specifying the minimum resale
price. 1 While the Supreme Court has
gradually moved to a rule-of-reason standard
for non-price and maximum resale price
maintenance (RPM), minimum RPM
remains per se illegal.
In December 2006, the Supreme Court
granted certiorari to reconsider a U.S. Court
of Appeals for the Fifth Circuit decision
grudgingly applying the per se rule, possibly
heralding the end for the last of the per se
vertical restraints.2
This article will explore Dr. Miles and
the Supreme Court’s subsequent erosion
of per se liability for vertical restraints,
the most pervasive justifications for and
against minimum RPM per se illegality,
and finally, several alternative rule-of-reason
formulations available to the Supreme Court
should it eliminate per se treatment for
minimum RPM.
Per Se Illegality
• ‘Dr. Miles’ and the History of Vertical
Restraint Jurisprudence. In Dr. Miles, the
Supreme Court held that a manufacturer’s
contractual fixing the retail price for
goods constituted a per se violation of the
Sherman Act. The Court reasoned that the
suppression of competition among dealers
by the manufacturer had the same effect as
an agreement among the dealers to suppress
competition, and thus, like horizontal
agreements, were “injurious to the public
Neal R. Stoll and Shepard Goldfein are
partners at Skadden, Arps, Slate, Meagher & Flom.
Brett Arkuss, an associate at the firm, assisted
in the preparation of this article.
interest and void.” Over the oft-quoted freemarket objections of Justice Oliver Wendell
Holmes, the Court held that prohibitions
on the restraint of alienation mandated that
once a manufacturer sells its product to a
retailer, “the public is entitled to whatever
advantage may be derived from competition
in the subsequent traffic.”
Shortly after Dr. Miles, a decision
predicated on the existence of an explicit
agreement, the Court in Colgate, held
that a manufacturer could unilaterally
announce the resale price in advance of
contracting with retailers, and refuse to
deal with retailers who did not comply.3
Likewise, a distributor, without running
afoul of Dr. Miles, is free to acquiesce in
the manufacturer’s unilateral demands in
order to avoid termination.
For nearly a half-century, the Court
refrained from further comment on
the principles of Colgate and Dr. Miles.
However, in the 1960s the Court created
a sea change concerning vertical restraint
antitrust jurisprudence. In Schwinn, the
court ruled that a bicycle manufacturer
could not carve out exclusive territories
for its 22 wholesale distributors. The court
held that these restraints were analogous
to price-fixing cartels, and thus, in those
situations “it is needless to inquire further
into competitive effect because it is
established doctrine that…the fixing of
prices is anticompetitive.”4
One year later the Court ruled that
the contractual imposition of maximum
RPM was per se illegal. In Albrecht, a
newspaper granted exclusive territories to
independent carriers provided that they
adhered to the maximum resale price. The
Court, concerned that maximum RPM
was a disguise for minimum RPM, issued a
blanket conclusion that “per se treatment
is justified because analysis alone, without
the burden of a trial in each individual case,
demonstrates that price floors are invariably
harmful on balance.”5
It was Justice Stewart’s dissent in Albrecht
that augured the demise of per se illegality
for most vertical restraints. Justice Stewart
noted that the maximum RPM scheme was
actually protecting consumers from dealers
such as Mr. Albrecht, who, as “the only
person who could sell for home delivery the
city’s only daily morning newspaper,” was “a
monopolist within his own territory.”6
In Sylvania, the Court took a long first
step back from per se condemnation of nonprice vertical restraints, holding that a TV
manufacturer was within its rights to limit
the number of distributors in a given area
in order “to improve his market share by
attracting more aggressive and competent
retailers….”7 However, the Court was quick
to note that its decision did not affect the
continuing per se illegality of vertical price
restrictions. The Court noted that some
commentators had argued that manufacturer
motivations for imposing price restrictions
were the same as non-price restrictions,
but nevertheless concluded that RPM
was designed to, and almost invariably
did in fact, reduce both intrabrand and
interbrand competition.
In two 1980s decisions, the Court struck
two large holes in Dr. Miles’ exterior. In
Monsanto, relying on the Colgate doctrine,
the Court held that something else besides
evidence of distributors’ complaints
was needed; and that the terminated
discounting plaintiff had the burden of
providing evidence that tended to exclude
the possibility that the manufacturer and
the nonterminated distributor were acting
independently. 8 In Sharp, the court held
that a manufacturer who terminated a pricecutting retailer at the request of another
dealer did not engage in per se RPM unless
New York Law Journal
there was proof of an agreement between
the manufacturer and distributors on specific
prices or price levels.9
The Court’s tsunami aimed at per se
vertical price restraints occurred in its 1997
Kahn decision.10 In Kahn, an oil company
terminated its relationship with a gas station
after the gas station exceeded the 3.25 cent
margin over acquisition cost it was permitted
to resell gasoline under the contract. The
U.S. Court of Appeals for the Seventh
Circuit, constrained by Albrecht, ruled that
the oil company’s maximum resale restraints
were per se illegal, although it characterized
Albrecht as “unsound when decided” and
“inconsistent with later decisions” of the
Supreme Court.11
The Supreme Court, receptive to
the circuit court’s reasoning, held that
Albrecht was no longer in accord with a
considerable body of scholarship and the
Supreme Court’s general view that the
antitrust laws first priority was to protect
interbrand competition.
Minimum RPM
• Competing Arguments Relating to
Minimum RPM Per Se Illegality. Ever
since Dr. Miles, economists, antitrust
scholars and jurists have been grappling with
the underlying economic foundations of per
se illegality for minimum RPM.
• First and foremost, proponents of
the status quo assert an economic
argument based on the alleged harms
that can result from minimum RPM,
chiefly manufacturer/supplier collusion,
dealer/distributor collusion, and price
discrimination. While none of these
proponents claim that one or all of
these anticompetitive effects are
associated with all minimum RPM
agreements, several assert that they are
widespread enough that per se treatment
is appropriate.
• Second, proponents make a judicial
efficiency/allocative efficiency argument.
They contend that a rule-of-reason
analysis, or any of the quasi rule-ofreason analyses utilized by the courts
would create additional hurdles for
plaintiffs that would overwhelmingly
discourage filing minimum
RPM litigation.
• Third, proponents assert that one
hundred years of per se illegality stare
decisis warrants naked adherence to
previous decisions. This is perhaps
the weakest argument. The Court’s
holdings in Monsanto, Kahn and
Thursday, january 11, 2007
Sharp demonstrate that the unique
role of the judiciary in interpreting
antitrust law mandates a more flexible
approach than a blind allegiance to
centenarian precedent.12
• Fourth, Congress has, from time-totime, projected the vox populi’s support
favoring per se illegality for minimum
RPM. Specifically, acts of Congress in
1983 and 1985 forbade the Department
of Justice from using appropriated funds
to seek to overturn the per se treatment
of minimum RPM.13
• Finally, proponents contend that
Colgate and its progeny, specifically
Monsanto, have already created an
extremely high bar for plaintiffs
xxxxxxxxxxxxxx
It is axiomatic that nonprice
vertical restraints have
pricing effects correspondent
to minimum RPM and
there exists a pandemic
of ‘Colgate’-sanctioned
unilateral pricing terms
and conditions that are
functional equivalents of per
se ‘Dr. Miles’ RPM agreements.
Thus, we expect the Court
in ‘Leegin’ to stop filling
prescriptions for per se
unlawful minimum RPM.
xxxxxxxxxxxxxx
challenging minimum RPM, and that
additional hurdles would all but end
such challenges.
Generally, opponents of per se illegality
for minimum RPM articulate three
basic arguments. Most importantly, they
highlight the procompetitive effects and
business rationales of minimum RPM,
including: (1) elimination of the free rider
problem; (2) ensuring dealer contribution
to product quality; (3) effective managing
of demand uncertainty when retailers
must purchase inventory before demand
is established; and (4) enhancement of
interbrand competition.
The first two reasons are based on the
well-accepted economic principles that
distributors who cannot compete on price
are incentivized to provide enhanced
services to distinguish themselves from
their competitors. As for managing
demand uncertainty, opponents explain
that if demand proves unexpectedly low
after retailers have acquired a substantial
inventory, prices can plummet as retailers
liquidate their holdings. By preventing
this selfish irrational behavior, minimum
RPM can benefit consumers by encouraging
retailers to maintain appropriate
inventory levels. The fourth economic
justification is perhaps the lynchpin of
the argument, asserting that by restricting
intrabrand competition, minimum RPM
is simultaneously stimulating interbrand
competition. As Justice Powell articulated
in Sylvania, stimulating interbrand
competition is the “primary concern of
antitrust law.”14
Opponents of per se illegality next focus
their attack on the supposed anticompetitive
harms of minimum RPM, chiefly that the
practice is primarily used to facilitate
manufacturer or retailer cartels. They argue
that there is no evidence that minimum
RPM is always or often used for these illicit
purposes, and that absent this empirical
showing, courts should not condemn the
practice, absent inquiry. As the Court
stated in Sylvania, “departure from the
rule-of-reason standard must be based
on demonstrable economic effect rather
than…upon formalistic line drawing.” 15
The Supreme Court has issued repeated
edicts for more than half a century that
in order to qualify for per se treatment,
alleged restraints must be shown to have a
“pernicious effect on competition” and be
utterly lacking in redeeming value.16
Third, opponents of per se illegality
point to the apparent inconsistency
between having different modes of analysis
for price and nonprice vertical restrictions.
They contend that vertical nonprice
restraints, analyzed under the rule-ofreason since Sylvania, have the potential
to stifle intrabrand competition to a greater
extent than their much maligned price
brethren. For example, those retailers
subject to exclusive territory restrictions,
like those subject to minimum RPM,
cannot compete on price. However, unlike
retailers subject to minimum RPM, those
retailers in exclusive territories the retailers
have no incentive to compete on quality
of service either.
Finally, opponents of per se illegality
for minimum RPM argue that despite
widespread disagreement in the economic
literature about the empirical data
concerning the prevalence and severity of
the anticompetitive effects of minimum
RPM, under no circumstance does the
New York Law Journal
data indicate harms necessary to condemn
the practice wholesale without further
inquiry. As the Court said in Sylvania, per
se rules are appropriate only for conduct
that is manifestly anticompetitive,”…that
is conduct “that would always or almost
always tend to restrict competition and
decrease output.”17
Which of Three Options?
• Per Se, Rule-of-Reason, or a
Compromise? The Supreme Court will
have three basic options when it considers
Leegin. It can affirm the U.S. Court of
Appeals for the Fifth Circuit ruling and
reiterate per se treatment for minimum
RPM; overturn its previous holdings and
remove minimum RPM from the per se
category of antitrust offenses; or it could
fashion a compromise. This final option
is the most probable outcome, and creates
some intriguing possibilities as to what form
such compromise might take.
Several commentators have suggested
alternative methods of inquiry, beholden
neither to the traditional per se or ruleof-reason inquiries for minimum RPM.
Such models of inquiry are more reflective
of the Supreme Court’s recent antitrust
jurisprudence. In three recent Supreme
Court cases purportedly involving per se
antitrust offenses, the Court has carved
out a modified rule-of-reason analysis that
neither vitiates historical per se illegality,
nor calls initially for a full scale rule-ofreason analysis.
In Northwest Wholesalers, a wholesale
price cooperative expelled one of
its members for failing to meet the
cooperative’s disclosure requirements. In
the subsequent suit based on a theory of
per se group boycott, the Court held that
absent a showing of market power, courts
should apply the rule-of-reason analysis.18
Similarly, in reviewing alleged tying, the
Court held that absent an indication of
market power, a tying arrangement does
not warrant per se invalidation.19 Finally,
in BMI, the Court utilized a “quick look”
process where a court looks first at the
possible procompetitive justifications for an
otherwise anticompetitive practice before
determining application of a per se or rule
of reason analysis.20
The common theme across this broad
spectrum of approaches to applying the
antitrust laws is the Supreme Court’s growing
reluctance to condemn procompetitive
actions as per se illegal without an initial
inquiry to determine if the market conditions
warrant such an outcome.
Thursday, january 11, 2007
For minimum RPM, Mssrs. Areeda &
Hovenkamp suggest a preliminary inquiry
into eight market factors most often
associated with adverse effects from RPM.21
They do not take a position on the preferred
burden shifting of their inquiry, noting
merely that the inquiry would be the same
in both situations (i.e., the plaintiff must
show one or several of the factors in order
for the per se rule to apply, or the defendant
must show an absence of most or all of
the factors in order for the rule-of-reason
to apply).22
Economist Thomas Overstreet, puts forth
three alternatives to a full-fledged rule-ofreason analysis.23
• First, the per se rule would remain in
place, but the defendant could rebut the
presumption upon a showing: (1) small
market shares; (2) lack of concentration
in the manufacturers horizontal product
market; or (3) the defendant is a new
entrant, distributing a new product, or
expanding existing product lines into
new markets.24
• The second alternative is for a presumed
rule-of-reason analysis subject to rebuttal
if the plaintiff can demonstrate that
the defendant’s market share exceeds a
predetermined threshold.
• Finally, because of the difficulty in
accurately assigning market shares, Mr.
Overstreet offers a third alternative
whereby the rule-of-reason would be
presumed but the plaintiff could rebut
this presumption upon a showing of any
of the possible pernicious effects of RPM:
(1) manufacturer collusion; (2) dealer
collusion; or (3) price discrimination.
Conclusion
As is evident from the raging debate
reported above, a century is time enough to
determine whether competitive conduct, such
as minimum RPM “would always or almost
always tend to restrict competition and
decrease output.” It took the Court only 10
years to turn its bicycle 180 degrees, 26 years
to bury Utah Pie25 under a pile of cigarettes26
and 44 years to strip patents trademarks and
copyrights of market power.27 Moreover, it is
axiomatic that nonprice vertical restraints
have pricing effects correspondent to
minimum RPM and there exists a pandemic
of Colgate-sanctioned unilateral pricing terms
and conditions that are functional equivalents
of per se Dr. Miles RPM agreements. Thus
we expect the Court in Leegin to stop
filling prescriptions for per se unlawful
minimum RPM.
•••••••••••••
••••••••••••••••
1. Dr. Miles Med. Co. v. John D. Park & Sons Co., 220
US 373 (1911).
2. Leegin Creative Leather Prod., Inc. v. PSKS, Inc.,
No. 04-41243, 2006 WL 690946 (5th Cir. Mar. 20 2006),
cert. granted, —US— (2007).
3. U.S. v. Colgate & Co., 250 US 300, 307 (1919).
4. U.S. v. Arnold, Schwinn & Co., 388 US 365, 37576 (1967).
5. Albrecht v. Herald Co., 390 US 145 (1968), citing
U.S. v. Trenton Potteries Co., 273 US 392, 395-402
(1927).
6. Albrecht, 390 US at 168 (J. Stewart dissenting).
7. Cont’l T.V., Inc. v. GTE Sylvania, Inc., 433 US 36
(1977).
8. Monsanto Co. v. Spray-Rite Service Corp., 465 US
752, 759 (1984).
9. Bus. Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717
(1988).
10. State Oil v. Kahn, 522 US 3 (1997).
11. Khan v. State Oil Co., 93 F3d 1358, 1363, (7th
Cir. 1996), rev’d State Oil v. Kahn, 522 U.S. 3 (1997).
The U.S. Court of Appeals for the Fifth Circuit in
Leegin took a page from the U.S. Court of Appeals for
the Seventh Circuit playbook by acknowledging that
it was bound to follow the Supreme Court precedence
while simultaneously urging that the Supreme Court take
a hard look at what the Fifth Circuit believed to be a
previously erroneous holding.
12. Sharp, 522 US at 20-21 (stare decisis is not an
inexorable command…. In the area of antitrust law, there
is compelling interest…in recognizing and adapting to
changed circumstances and the lessons of accumulated
experience); Kahn, 485 US at 732 (“The Sherman Act
adopted the term restraint of trade along with its dynamic
potential,” and therefore the “line of per se illegality”
should not “remain forever fixed where it was…in
1890”).
13. Act of Oct. 11, 1983, Pub. L. No. 98-116, 97 Stat.
795; Act of Dec. 19, 1985, Pub. L. No. 99-190, 99 Stat.
1185.
14. Sylvania, 433 US at 52, n. 19.
15. Id. at 58-59.
16. N. Pac. R. Co. v. U.S., 356 US 1, 5 (1958).
17. Sylvania, 433 U.S. at 49.
18. Nw. Wholesale Stationers, Inc. v. Pac. Stationary &
Printing Co., 472 US 284, 297 (1985).
19. Jefferson Parish Hosp. Dist. v. Hyde, 466 U.S. 2, 1215 (1984); see also, Illinois Tool Works, Inc. v. Independent
Ink, Inc., 126 S.Ct. 1281, 1284, 1291 (2006) (plaintiff
must prove market power in the tying product before a
per se rule is applicable; mere presence of patent does not
confer market power).
20. Broad. Music, Inc. v. CBS, Inc., 441 US 1, 1920 (1979); see also, NCAA v. Bd. of Regents of Univ. of
Oklahoma, 468 US 85, 103-104 (1984).
21. Areeda & Hovenkamp, “Antitrust Law,”
§1633c1(A-H) (2d. Ed. 2004).
22. The eight factors are (1) manufacturer
concentration; (2) dealer concentration; (3) widespread
market coverage; (4) dealer initiatives; (5) powerful
brand; (6) dominant dealer; (7) selective coverage; and
(8) homogeneous product.
23. Thomas Overstreet, “Resale Price Maintenance,
Economic Theories and Empirical Evidence, Bureau of
Economics Staff Report to the Federal Trade Commission,”
171-75 (November 1983).
24. According to Dr. Overstreet the presence of any of
these factors greatly eschew the possible anticompetitive
effects of RPM
25. Utah Pie Co. v. Continental Baking Co., 386 US 685
(1967).
26. Brook Group Ltd. v. Brown & Williamson Tobacco
Corp., 509 US 209 (1993).
27. Illinois Tool, 126 S.Ct. at 1284 (2006).
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January 11, 2007 edition of the New York Law
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