Has Interbrand Competition Become
the Sole, Not Merely the “Primary”
Concern of Antitrust Law in the
United States?
Presentation by
Professor Andrew I. Gavil
Howard University School of Law, Washington, D.C. and
Visiting Professor, Centre for Competition Policy
University of East Anglia, Norwich, UK (May-June, 2010)
CCP 6th Annual Conference
18 June 2010
Copyright Andrew I. Gavil, 2010
Outline of the Presentation
Challenging the Conventional View of Leegin


Leegin implicitly overruled key theory of anticompetitive
effect from Sylvania

RPM three years after Leegin


Less uniformity than one might imagine
1.
2.
3.

Perceived value of intraband competition as a stimulant to
interbrand competition diminished
Overrule Leegin -- bring back per se rule
Work within Leegin -- develop a structured rule of reason
Fully embrace Leegin -- stop worrying about vertical restraints
Some Questions and Speculations about Future
Directions
2
Part I:
Challenging the Conventional View
of Leegin
The Conventional View

“Leegin reaffirmed and extended Sylvania to
vertical intrabrand price restraints”

It:
ended the disparate treatment of price and non-price
restraints…
 restored consistency and harmony to the law….
 and all thanks to well-settled economics!

The Sylvania Colour TV
c. 1966
The Brighton Line
4
Largely Accurate for Efficiency

Sylvania

Key: Promote Interbrand
Competition




Facilitate entry by attracting
dealers willing to invest in
service and promotion
Induce retailers to promote,
service, and repair existing
products
Defeat free riding
* Ensure quality & safety to
safeguard reputation and
reduce liability exposure

Leegin

Key: Promote Interbrand
Competition




Facilitate entry by attracting
dealers willing to invest in
service and promotion
Induce retailers to promote,
service, and repair existing
products
Defeat free riding
* Promote consumer choice
But do theories of anticompetitive effect
similarly align?
5
Sylvania’s Theory of
Anticompetitive Effects – Non-Price Restraints

Sylvania, 433 U.S. at 52 n.19:

“Interbrand competition is the … primary concern of antitrust law.”

Implication: We permit restraints on intrabrand when they enhance
interbrand – Why?


“[W]hen interbrand competition exists … it provides a significant check on
the exploitation of intrabrand market power because of the ability of
consumers to substitute a different brand of the same product.”
Converse: Restraints on intrabrand competition are unreasonable if…



Interband competition is lacking, i.e., when the supplier has market power
Why? They eliminate the primary source of downward pressure on price
(intrabrand competition), without any benefit to interbrand competition.
Additional Assumption?

Intrabrand competition (“dealer noise”) stimulates interbrand competition
6
Business Electronics (1988)
“What is most troubling about the majority's opinion
[in Business Electronics] is its failure to attach any
weight to the value of intrabrand competition... Not a
word in the Sylvania opinion implied that the
elimination of intrabrand competition could be
justified as reasonable without any evidence of a
purpose to improve interbrand competition.”
Stevens, J., dissenting

7
Sylvania’s Theory of
Anticompetitive Effects – RPM

Sylvania, 433 U.S. at 51 n.18:

RPM “is not only designed to, but almost invariably”
reduces interbrand price competition


Dampening/softening of competition theory
Facilitates cartelizing
8
Leegin’s Theory of
Anticompetitive Effects for RPM

Explicit and Extensive Treatment

Facilitate Collusion



Note: Sylvania’s core theory is not mentioned.
Facilitate Exclusion



Manufacturer
Dealer
Dominant manufacturer
Dominant retailer
Three Relevant “Filters”:



Widely utilized? (necessary for cartel theory)
Dealer initiated? (necessary for either dealer-related theory)
Market Power? (necessary for all theories)
9
The Issue Going Forward

Has interbrand competition become the sole,
not merely the “primary” concern of U.S.
antitrust law?


If Leegin silently overruled core theory of
Sylvania, then “yes.”
If so, was Leegin correct? Is Sylvania’s theory
economically sound?
10
Intrabrand Competition After Leegin:
Two Approaches

Single monopoly profit
theory as critique of
Sylvania



If a mfr has market power, it
cannot gain any additional
power by limiting intrabrand
competition.
Did SCT implicitly endorse?
Flaws?



Assumes “perfect” market
power
Ignores exclusion
Denigrates value of intrabrand
competition as competition

Dampening Competition
Theory


Core concept from Sylvania
Intrabrand competition is real
competition





Responsive to consumers
Pressure on suppliers
Promotes interbrand
Mostly ignored by economic
writing on vertical restraints
Does it fit well with observed
behaviour?
11
Does Intrabrand Competition Have Independent
Competitive Value?
An Illustration
Some Mfr Assumptions:
1.
2.
Market power is “imperfect” (can’t simply
raise price as predicted by SMP).
Cost of vertical integration is prohibitive
(so must work with independent dealers).
Some Dealer Assumptions:
1.
2.
3.
4.
5.
Rival Dealers
Manufacturer/
Supplier
Rival Dealers
Rival Dealers
No free-riders.
A discounter emerges.
Price war erupts.
Dealers ALL reduce services/promotion.
Sales begin to fall overall.
12
Manufacturer’s Options

The Mfr’s Dilemma:
“My dealers have
reduced promotion and
my sales are dropping,
what can I do?”
1. Use RPM to Restore Incentive to Promote
(Leegin’s solution)
(Benjamin Klein, Competitive Resale Price Maintenance
in the Absence of Free Riding,
76 Antitrust L.J. 431 (2010))
2. Increase efficiency and lower prices.
(Sylvania’s solution)
£$€
13
Two Options/Two Sets of Priors

Option 1: Restraint

Restrict intrabrand to enhance
interbrand






Option 2: Market Forces

Use RPM to Protect Dealer
Margin
Dealer will use margin to
promote product
Interbrand competition will
discipline price
Mfr and consumer interests
are aligned
Market Establishes
Competitive Dealer Margin



Protects supplier autonomy


“Noise” from dealers
provides incentive for dealer
and supplier to become more
efficient and lower price
Dealer is responding to
consumer choice and
communicating it to supplier
Suppliers compete to provide
best margin/volume
combination
Supplier can use non-price
restraints and performancebased discounts to secure
promotion
Limits supplier autonomy
14
Margin Wars & Vertical Restraints
Cost of production
+
Cost of distribution =
Price to
consumers
Key Assumption from Sylvania & Leegin:
Supplier has interest in minimizing cost of distribution, so adopt rules that promote supplier autonomy.
Alternate Assumption:
Dealers have competing interest in minimizing cost of production, so adopt rules that promote dealer autonomy.
The Antitrust Dilemma?
What rule of law will permit lively interaction among suppliers, dealers, and consumers to determine optimal mix?
15
Part II:
Continuing Debate within the
U.S. Antitrust Enforcement
Community
Recollect the Complexity of the U.S.
Competition Policy System
Who has a voice in the post-Leegin debate?
Public Sector
Federal
Congress
DOJ
Antitrust Division
State
FTC
Legislature
Antitrust
Enforcers (OAGs)
Private Sector
Interested Groups
(Consumer Organizations
& Business Firms)
Defence Bar
Plaintiff’s Bar
Academic
Commentators
17
Congress;
“Overruling Leegin”

S. 148/H.R. 3190 – “The Discount Pricing Consumer
Protection Act”


“Findings” recount history of Dr. Miles and abandonment
in Leegin
Amends Sherman Act, §1:



“Any contract, combination, conspiracy, or agreement setting a
minimum price below which a product or service cannot be sold by
a retailer, wholesaler, or distributor shall violate this Act.”
Second attempt since 2007; depth of support not clear
Would abandon generality and flexibility of Section 1
18
DOJ/Antitrust Division:
“Working Within Leegin”

Speech by Christine Varney (Oct. 7, 2009)

Leegin as an “invitation”:


“As courts gain experience considering the effects of these
restraints by applying the rule of reason over the course of
decisions, they can establish the litigation structure to ensure the
rule operates to eliminate anticompetitive restraints from the market
and to provide more guidance to businesses. Courts can, for
example, devise rules over time for offering proof, or even
presumptions where justified, to make the rule of reason a fair and
efficient way to prohibit anticompetitive restraints and to promote
procompetitive ones.” Leegin, 551 U.S. at 898-99.
Reflect some distrust of comprehensive rule of reason?
19
DOJ/Antitrust Division cont’d

General Principles

“Structured rule of
reason”





Euphemism for something
less than comprehensive
rule of reason
Presumptions and burden
shifting
“Sliding scale” as in
mergers
Preserves possibility of
per se rule
Specific Tests for Each
Leegin Scenario



Collusion Scenarios
Exclusion Scenarios
Role of three Leegin
factors
20
FTC -- A More Complex Picture
“Overrule or Work Within Leegin?”

Chairman Leibowitz

January 2007


Commission Positions

Then Commissioner, he
dissents from Leegin
Amicus
Pre-Leegin


May 2008



Votes in favor of Nine
West petition

Post-Leegin

Spring 2009

As Chairman, supports
bill to overrule Leegin at
ABA Spring Meeting

Amicus Brief
Kovacic & Rosch likely
still support Leegin
outcome
Nine West Consent
Decree Modification
New Commissioners
Could Determine FTC
Position

Ramirez & Brill
21
FTC -- A Closer Look at Nine West
What was
involved?
A petition by a shoe
mfr to modify a preLeegin consent
decree that prohibited
its use of RPM.

Petition Granted (4-0)

General Principles



RPM NOT per se lawful
Leegin’s “invitation” could mean agencies should
explore truncated approaches using three factors
RPM could be “inherently suspect” (Polygram)


“presumptions and phased inquiries”
Nine West demonstrated:


No market power + RPM initiated by Nine West,
…so no likely anticompetitive effect
But…NW failed to demonstrate how RPM would
increase demand for its products, so monitoring
required
22
A Closer Look at Nine West cont’d

“Through the Commission’s own enforcement work,
research, and external consultations such as
workshops, we anticipate further refinements to this
analysis, including the further specification of
scenarios in which RPM poses potential hazards and
those in which it does not.”

Workshop held in May 2009; no Report yet
23
Basis for Federal Consensus?
If Leegin is not overruled by Congress…
DOJ/Antitrust Division
FTC
Common Ground:
Look for structured/truncated
ways to identify “bad” RPM.
24
The States

Courts & Legislation

Most state antitrust laws
expressly or by court decision
follow federal law



So far, at least two state
courts have decided to follow
Leegin
Some states have specific
prohibitions of RPM (NY)
Maryland amended law to
reject Leegin


OAG Enforcement



Amicus in Leegin supporting
Dr. Miles (37 states)
Opposed Nine West Petition
(27 states)
Cases Filed Since Leegin



Herman Miller (NY, IL, MI)
Tempur Pedic (NY)
Derma-Quest (CA)
So far the only “Leegin
repealer”
25
Some Critical Questions

Does SMP theory convincingly
dispose of all concerns about
loss of intrabrand competition?

Can intrabrand stimulate
interbrand competition in some
circumstances?

How can antitrust rules best
calibrate relationship among
suppliers, dealers. and
consumers?
Manufacturer/
Supplier
Dealers
Consumers
26
Concluding Thoughts on U.S.

If Leegin is not overruled…


DOJ/FTC will focus on refining test for effects
Few cases are likely (never been a high priority)



FTC more likely to pursue?
Will courts be receptive to abbreviated analysis?
Regardless of Leegin…



Some states will continue to prosecute
Will these cases trigger private damages actions?
Intrabrand competition will remain marginalized
27