SPRING 2009
Licensing Intellectual Property
 
Course No.:  9200-705 (&805)-801
Course IDs:  16444, 16445
M, W  4:45 - 6:15 p.m.
Room W-206
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
dratler@uakron.edu,
jdratler@gmail.com


Leegin Creative Leather Prods. v. PSKS, Inc.

127 S. Ct. 2705, 168 L. Ed. 2d 623 (2007)


Kennedy, J., delivered the opinion of the Court, in which Roberts, C. J., and Scalia, Thomas, and Alito, JJ., joined.  Breyer, J., filed a dissenting opinion, in which Stevens, Souter, and Ginsburg, JJ., joined.

[*2710]  Justice Kennedy delivered the opinion of the Court.

In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373(1911), the Court established the rule that it is per se illegal under § 1 of the Sherman Act, 15 U.S.C. § 1, for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods.  The question presented by the instant case is whether the Court should overrule the per se rule and allow resale price maintenance agreements to be judged by the rule of reason, the usual standard applied to determine if there is a violation of § 1.  The Court has abandoned the rule of per se illegality for other vertical restraints a manufacturer imposes on its distributors.  Respected economic analysts, furthermore, conclude that vertical price restraints can have procompetitive effects.  We now hold that Dr. Miles should be overruled and that vertical price restraints are to be judged by the rule of reason.

I

Petitioner, Leegin Creative Leather Products, Inc. (Leegin), designs, manufactures, and distributes leather goods and accessories.   In 1991, Leegin began to sell belts under the brand name “Brighton.”  The Brighton brand has now expanded into a variety of women’s fashion accessories.  It is sold across the United States in over 5,000 retail establishments, for the most part independent, small boutiques and specialty stores.   Leegin’s president, Jerry Kohl, also has an interest in about 70 stores that sell Brighton products.  Leegin asserts that, at least for its products, small retailers treat customers better, [*2711] provide customers more services, and make their shopping experience more satisfactory than do larger, often impersonal retailers. Kohl explained: “[W]e want the consumers to get a different experience than they get in Sam’s Club or in Wal-Mart.  And you can’t get that kind of experience or support or customer service from a store like Wal-Mart.”

Respondent, PSKS, Inc. (PSKS), operates Kay’s Kloset, a women’s apparel store in Lewisville, Texas.  Kay’s Kloset buys from about 75 different manufacturers and at one time sold the Brighton brand.  It first started purchasing Brighton goods from Leegin in 1995.  Once it began selling the brand, the store promoted Brighton.  For example, it ran Brighton advertisements and had Brighton days in the store.  Kay’s Kloset became the destination retailer in the area to buy Brighton products.  Brighton was the store’s most important brand and once accounted for 40 to 50 percent of its profits.

In 1997, Leegin instituted the “Brighton Retail Pricing and Promotion Policy.”  Following the policy, Leegin refused to sell to retailers that discounted Brighton goods below suggested prices.  The policy contained an exception for products not selling well that the retailer did not plan on reordering.  In the letter to retailers establishing the policy, Leegin stated:
    “In this age of mega stores like Macy’s, Bloomingdales, May Co. and others, consumers are perplexed by promises of product quality and support of product which we believe is lacking in these large stores.  Consumers are further confused by the ever popular sale, sale, sale, etc.

    “We, at Leegin, choose to break away from the pack by selling [at] specialty stores; specialty stores that can offer the customer great quality merchandise, superb service, and support the Brighton product 365 days a year on a consistent basis.

    “We realize that half the equation is Leegin producing great Brighton product and the other half is you, our retailer, creating great looking stores selling our products in a quality manner.”
Leegin adopted the policy to give its retailers sufficient margins to provide customers the service central to its distribution strategy.  It also expressed concern that discounting harmed Brighton’s brand image and reputation. A year after instituting the pricing policy Leegin introduced a marketing strategy known as the “Heart Store Program.”  It offered retailers incentives to become Heart Stores, and, in exchange, retailers pledged, among other things, to sell at Leegin’s suggested prices.  Kay’s Kloset became a Heart Store soon after Leegin created the program.  After a Leegin employee visited the store and found it unattractive, the parties appear to have agreed that Kay’s Kloset would not be a Heart Store beyond 1998.  Despite losing this status, Kay’s Kloset continued to increase its Brighton sales.

In December 2002, Leegin discovered Kay’s Kloset had been marking down Brighton’s entire line by 20 percent.  Kay’s Kloset contended it placed Brighton products on sale to compete with nearby retailers who also were undercutting Leegin’s suggested prices.  Leegin, nonetheless, requested that Kay’s Kloset cease discounting.  Its request refused, Leegin stopped selling to the store.  The loss of the Brighton brand had a considerable negative impact on the store’s revenue from sales.

[*2712]  PSKS sued Leegin in the United States District Court for the Eastern District of Texas.   It alleged, among other claims, that Leegin had violated the antitrust laws by “enter[ing] into agreements with retailers to charge only those prices fixed by Leegin.”  Leegin planned to introduce expert testimony describing the procompetitive effects of its pricing policy.  The District Court excluded the testimony, relying on the per se rule established by Dr. Miles.  At trial PSKS argued that the Heart Store program, among other things, demonstrated Leegin and its retailers had agreed to fix prices.  Leegin responded that it had established a unilateral pricing policy lawful under § 1, which applies only to concerted action.  See United States v. Colgate & Co., 250 U.S. 300, 307 (1919).  The jury agreed with PSKS and awarded it $1.2 million.  Pursuant to 15 U.S.C. § 15(a), the District Court trebled the damages and reimbursed PSKS for its attorney’s fees and costs.  It entered judgment against Leegin in the amount of $3,975,000.80. The Court of Appeals for the Fifth Circuit affirmed. . . .  On appeal Leegin did not dispute that it had entered into vertical price-fixing agreements with its retailers.  Rather, it contended that the rule of reason should have applied to those agreements. * * *  We granted certiorari to determine whether vertical minimum resale price maintenance agreements should continue to be treated as per se unlawful.

II

Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” 15 U.S.C. § 1.  While § 1 could be interpreted to proscribe all contracts, see, e.g., Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918), the Court has never “taken a literal approach to [its] language,” Texaco Inc. v. Dagher, 547 U.S. 1, 5, (2006).  Rather, the Court has repeated time and again that § 1 “outlaw[s] only unreasonable restraints.”  State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).

The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of § 1.  See Texaco, supra, at 5.   “Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.”  Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).  Appropriate factors to take into account include “specific information about the relevant business” and “the restraint’s history, nature, and effect.”  Khan, supra, at 10.  Whether the businesses involved have market power is a further, significant consideration.  See, e.g., Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984) (equating the rule of [*2713] reason with “an inquiry into market power and market structure designed to assess [a restraint’s] actual effect”); see also Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 45-46 (2006).  In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest.

The rule of reason does not govern all restraints.  Some types “are deemed unlawful per se.”  Khan, supra, at 10.  The per se rule, treating categories of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real market forces at work, Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988); and, it must be acknowledged, the per se rule can give clear guidance for certain conduct.  Restraints that are per se unlawful include horizontal agreements among competitors to fix prices, see Texaco, supra, at 5, or to divide markets, see Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50 (1990) (per curiam).  Resort to per se rules is confined to restraints, like those mentioned, “that would always or almost always tend to restrict competition and decrease output.” Business Electronics, supra, at 723 (internal quotation marks omitted). To justify a per se prohibition a restraint must have “manifestly anticompetitive” effects, GTE Sylvania, supra, at 50, and “lack . . . any redeeming virtue,” Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 289 (1985) (internal quotation marks omitted).

As a consequence, the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, see Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 9 (1979), and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason, see Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 344 (1982).  It should come as no surprise, then, that “we have expressed reluctance to adopt per se rules with regard to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.”  Khan, supra, at 10. . . .  And, as we have stated, a “departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than . . . upon formalistic line drawing.”  GTE Sylvania, supra, at 58-59.

III


The Court has interpreted Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), as establishing a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices.  See, e.g., Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 761 (1984).  In Dr. Miles the plaintiff, a manufacturer of medicines, sold its products only to distributors [*2714] who agreed to resell them at set prices.  The Court found the manufacturer’s control of resale prices to be unlawful.  It relied on the common-law rule that “a general restraint upon alienation is ordinarily invalid.” . . .   The Court then explained that the agreements would advantage the distributors, not the manufacturer, and were analogous to a combination among competing distributors, which the law treated as void.

The reasoning of the Court’s more recent jurisprudence has rejected the rationales on which Dr. Miles was based.  By relying on the common-law rule against restraints on alienation, the Court justified its decision based on “formalistic” legal doctrine rather than “demonstrable economic effect,” GTE Sylvania, supra, at 58-59.  The Court in Dr. Miles relied on a treatise published in 1628, but failed to discuss in detail the business reasons that would motivate a manufacturer situated in 1911 to make use of vertical price restraints.  Yet the Sherman Act’s use of “restraint of trade” “invokes the common law itself, . . . not merely the static content that the common law had assigned to the term in 1890.”  Business Electronics, supra, at 732.  The general restraint on alienation, especially in the age when then-Justice Hughes used the term, tended to evoke policy concerns extraneous to the question that controls here.  Usually associated with land, not chattels, the rule arose from restrictions removing real property from the stream of commerce for generations.  The Court should be cautious about putting dispositive weight on doctrines from antiquity but of slight relevance.  We reaffirm that “the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today.”  GTE Sylvania, 433 U.S., at 53, n. 21 (internal quotation marks omitted).

Dr. Miles, furthermore, treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal combination among competing distributors.  In later cases, however, the Court rejected the approach of reliance on rules governing horizontal restraints when defining rules applicable to vertical ones.  See, e.g., Business Electronics, supra, at 734 (disclaiming the “notion of equivalence between the scope of horizontal per se illegality and that of vertical per se illegality”) . . . .  Our recent cases formulate antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements, differences the Dr. Miles Court failed to consider.

The reasons upon which Dr. Miles relied do not justify a per se rule.  As a consequence, it is necessary to examine, in the first instance, the economic effects of vertical agreements to fix minimum resale prices, and to determine whether the per se rule is nonetheless appropriate. . . .

A

Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance. . . . [*2715] . . .  The few recent studies documenting the competitive effects of resale price maintenance also cast doubt on the conclusion that the practice meets the criteria for a per se rule.  See T. Overstreet, Resale Price Maintenance: Economic Theories and Empirical Evidence 170 (1983) (hereinafter Overstreet) (noting that “[e]fficient uses of [resale price maintenance] are evidently not unusual or rare”); see also Ippolito, Resale Price Maintenance: Empirical Evidence From Litigation, 34 J. Law & Econ. 263, 292-293 (1991) (hereinafter Ippolito).

The justifications for vertical price restraints are similar to those for other vertical restraints.  See GTE Sylvania, 433 U.S., at 54-57.  Minimum resale price maintenance can stimulate interbrand competition—the competition among manufacturers selling different brands of the same type of product—by reducing intrabrand competition—the competition among retailers selling the same brand.  The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.”  Khan, 522 U.S., at 15.  A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers.  Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.   Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided.  This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate.  GTE Sylvania, supra, at 55.  Consumers might learn, for example, about the benefits of a manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. R. Posner, Antitrust Law 172-173 (2d ed. 2001) (hereinafter Posner).  Or consumers might decide to buy the product because [*2716] they see it in a retail establishment that has a reputation for selling high-quality merchandise.  Marvel & McCafferty, Resale Price Maintenance and Quality Certification, 15 Rand J. Econ. 346, 347-349 (1984) (hereinafter Marvel & McCafferty).  If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer.  Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider.  With price competition decreased, the manufacturer’s retailers compete among themselves over services.

Resale price maintenance, in addition, can increase interbrand competition by facilitating market entry for new firms and brands.  “[N]ew manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer.”  GTE Sylvania, supra, at 55; see Marvel & McCafferty 349 (noting that reliance on a retailer’s reputation “will decline as the manufacturer’s brand becomes better known, so that [resale price maintenance] may be particularly important as a competitive device for new entrants”).  New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect.

Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding.  It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform.  Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.  See Mathewson & Winter, The Law and Economics of Resale Price Maintenance, 13 Rev. Indus. Org. 57, 74-75 (1998) (hereinafter Mathewson & Winter); Klein & Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31 J. Law & Econ. 265, 295 (1988); see also Deneckere, Marvel, & Peck, Demand Uncertainty, Inventories, and Resale Price Maintenance, 111 Q. J. Econ. 885, 911 (1996) (noting that resale price maintenance may be beneficial to motivate retailers to stock adequate inventories of a manufacturer’s goods in the face of uncertain consumer demand).

B

While vertical agreements setting minimum resale prices can have procompetitive justifications, they may have anticompetitive effects in other cases; and unlawful price fixing, designed solely to obtain monopoly profits, is an ever present temptation.  Resale price maintenance may, for example, facilitate a manufacturer cartel.  See Business Electronics, 485 U.S., at 725.  An unlawful cartel will seek to discover if some manufacturers are undercutting the cartel’s fixed prices.  Resale price maintenance could assist the cartel in identifying price-cutting manufacturers who benefit from the lower prices they offer.  Resale price maintenance, furthermore, could discourage a manufacturer from cutting prices to retailers with the concomitant benefit of cheaper prices to [*2717] consumers.

Vertical price restraints also “might be used to organize cartels at the retailer level.”  Business Electronics, supra, at 725-726.  A group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance.  In that instance the manufacturer does not establish the practice to stimulate services or to promote its brand but to give inefficient retailers higher profits.  Retailers with better distribution systems and lower cost structures would be prevented from charging lower prices by the agreement.  See Posner 172; Overstreet 13-19.  Historical examples suggest this possibility is a legitimate concern.  See, e.g., Marvel & McCafferty, The Welfare Effects of Resale Price Maintenance, 28 J. Law & Econ. 363, 373 (1985) (hereinafter Marvel) (providing an example of the power of the National Association of Retail Druggists to compel manufacturers to use resale price maintenance); Hovenkamp 186 (suggesting that the retail druggists in Dr. Miles formed a cartel and used manufacturers to enforce it).

A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful.  See Texaco, 547 U.S., at 5; GTE Sylvania, 433 U.S., at 58, n 28.  To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel, it, too, would need to be held unlawful under the rule of reason.  This type of agreement may also be useful evidence for a plaintiff attempting to prove the existence of a horizontal cartel.

Resale price maintenance, furthermore, can be abused by a powerful manufacturer or retailer.  A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs.  A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network.  See Overstreet 31; 8 P. Areeda & H. Hovenkamp, Antitrust Law 47 (2d ed. 2004) (hereinafter Areeda & Hovenkamp); cf. Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 937-938 (CA7 2000).  A manufacturer with market power, by comparison, might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants. . . .  As should be evident, the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated.

C

Notwithstanding the risks of unlawful conduct, it cannot be stated with any degree of confidence that resale price maintenance “always or almost always tend[s] to restrict competition and decrease output.”  Business Electronics, supra, at 723 (internal quotation marks omitted).  Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed.  And although the empirical evidence on the topic is limited, it does not suggest efficient uses of the agreements are infrequent or hypothetical. . . . [*2718]  As the rule would proscribe a significant amount of procompetitive conduct, these agreements appear ill suited for per se condemnation.

Respondent contends, nonetheless, that vertical price restraints should be per se unlawful because of the administrative convenience of per se rules.  See, e.g., GTE Sylvania, supra, at 50, n. 16 (noting “per se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system”).  That argument suggests per se illegality is the rule rather than the exception.  This misinterprets our antitrust law.  per se rules may decrease administrative costs, but that is only part of the equation.  Those rules can be counterproductive.  They can increase the total cost of the antitrust system by prohibiting procompetitive conduct the antitrust laws should encourage.  See Easterbrook, Vertical Arrangements and the Rule of Reason, 53 Antitrust L. J. 135, 158 (1984) (hereinafter Easterbrook).  They also may increase litigation costs by promoting frivolous suits against legitimate practices.  The Court has thus explained that administrative “advantages are not sufficient in themselves to justify the creation of per se rules,” GTE Sylvania, 433 U.S., at 50, n. 16, and has relegated their use to restraints that are “manifestly anticompetitive,” id., at 49-50.  Were the Court now to conclude that vertical price restraints should be per se illegal based on administrative costs, we would undermine, if not overrule, the traditional “demanding standards” for adopting per se rules.  Id., at 50.  Any possible reduction in administrative costs cannot alone justify the Dr. Miles rule.

Respondent also argues the per se rule is justified because a vertical price restraint can lead to higher prices for the manufacturer’s goods.  See also Overstreet 160 (noting that “price surveys indicate that [resale price maintenance] in most cases increased the prices of products sold”).  Respondent is mistaken in relying on pricing effects absent a further showing of anticompetitive conduct.  Cf. id., at 106 (explaining that price surveys “do not necessarily tell us anything conclusive about the welfare effects of [resale price maintenance] because the results are generally consistent with both procompetitive and anticompetitive theories”).  For, as has been indicated already, the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result. . . .  The Court, moreover, has evaluated other vertical restraints under the rule of reason even though prices can be increased in the course of promoting procompetitive effects.  See, e.g., Business Electronics, 485 U.S., at 728.  And resale price maintenance may reduce prices if manufacturers have resorted to costlier alternatives of controlling resale prices that are not per se unlawful. Respondent’s argument, furthermore, overlooks that, in general, the interests of manufacturers and consumers are aligned with respect to retailer profit margins.  The difference between the price a manufacturer charges retailers and the price retailers charge consumers represents part of the manufacturer’s cost of distribution, which, like any other cost, the manufacturer usually desires to minimize.  See GTE Sylvania, 433 U.S., at 56, n 24; see also id., at 56 (“Economists . . . have argued that manufacturers have an economic interest in maintaining as much intrabrand competition as is consistent with the efficient distribution of their products”).   A manufacturer [*2719] has no incentive to overcompensate retailers with unjustified margins.  The retailers, not the manufacturer, gain from higher retail prices.  The manufacturer often loses; interbrand competition reduces its competitiveness and market share because consumers will “substitute a different brand of the same product.”  Id., at 52 . . . .  As a general matter, therefore, a single manufacturer will desire to set minimum resale prices only if the “increase in demand resulting from enhanced service . . . will more than offset a negative impact on demand of a higher retail price.”  Mathewson & Winter 67.

The implications of respondent’s position are far reaching.  Many decisions a manufacturer makes and carries out through concerted action can lead to higher prices.  A manufacturer might, for example, contract with different suppliers to obtain better inputs that improve product quality.  Or it might hire an advertising agency to promote awareness of its goods.  Yet no one would think these actions violate the Sherman Act because they lead to higher prices.  The antitrust laws do not require manufacturers to produce generic goods that consumers do not know about or want.  The manufacturer strives to improve its product quality or to promote its brand because it believes this conduct will lead to increased demand despite higher prices.  The same can hold true for resale price maintenance.

Resale price maintenance, it is true, does have economic dangers.  If the rule of reason were to apply to vertical price restraints, courts would have to be diligent in eliminating their anticompetitive uses from the market.  This is a realistic objective, and certain factors are relevant to the inquiry.  For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction.  When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers. . . .  Likewise, a retailer cartel is unlikely when only a single manufacturer in a competitive market uses resale price maintenance.  Interbrand competition would divert consumers to lower priced substitutes and eliminate any gains to retailers from their price-fixing agreement over a single brand.  Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice.  Cf. Scherer & Ross 558 (noting that “except when [resale price maintenance] spreads to cover the bulk of an industry’s output, depriving consumers of a meaningful choice between high-service and low-price outlets, most [resale price maintenance arrangements] are probably innocuous”); Easterbrook 162 (suggesting that “every one of the potentially-anti-competitive outcomes of vertical arrangements depends on the uniformity of the practice”).

The source of the restraint may also be an important consideration.  If there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer.  If, by contrast, a manufacturer adopted the policy independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct.  Cf. Posner 177 (“It makes all the difference whether minimum retail prices are imposed by the manufacturer in order to evoke point-of-sale services or by the dealers in order to obtain monopoly profits”).  A manufacturer also has an incentive to protest inefficient retailer-induced [*2720] price restraints because they can harm its competitive position.

As a final matter, that a dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes may not be a serious concern unless the relevant entity has market power.  If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers.  See also Business Electronics, supra, at 727, n. 2 (noting “[r]etail market power is rare, because of the usual presence of interbrand competition and other dealers”).  And if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets.

The rule of reason is designed and used to eliminate anticompetitive transactions from the market.  This standard principle applies to vertical price restraints.  A party alleging injury from a vertical agreement setting minimum resale prices will have, as a general matter, the information and resources available to show the existence of the agreement and its scope of operation.  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.

For all of the foregoing reasons, we think that were the Court considering the issue as an original matter, the rule of reason, not a per se rule of unlawfulness, would be the appropriate standard to judge vertical price restraints.

IV


We do not write on a clean slate, for the decision in Dr. Miles is almost a century old.  So there is an argument for its retention on the basis of stare decisis alone.  Even if Dr. Miles established an erroneous rule, “[s]tare decisis reflects a policy judgment that in most matters it is more important that the applicable rule of law be settled than that it be settled right.”  Khan, 522 U.S., at 20 (internal quotation marks omitted).  And concerns about maintaining settled law are strong when the question is one of statutory interpretation. . . . Stare decisis is not as significant in this case, however, because the issue before us is the scope of the Sherman Act.  Khan, supra, at 20 (“[T]he general presumption that legislative changes should be left to Congress has less force with respect to the Sherman Act”).  From the beginning the Court has treated the Sherman Act as a common-law statute.  See National Soc. of Professional Engineers v. United States, 435 U.S. 679, 688, 98 S. Ct. 1355, 55 L. Ed. 2d 637 (1978); see also Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 98, n 42, 101 S. Ct. 1571, 67 L. Ed. 2d 750 (1981) (“In antitrust, the federal courts . . . act more as common-law courts than in other areas governed by federal statute”).  Just as the common law adapts to modern understanding and greater experience, so too does the Sherman Act’s prohibition on “restraint[s] of trade” evolve to meet the dynamics of present economic conditions.  The case-by-case adjudication contemplated by the rule of reason has implemented this common-law approach. . . .  Likewise, the boundaries of [*2721] the doctrine of per se illegality should not be immovable.  For “[i]t would make no sense to create out of the single term ‘restraint of trade’ a chronologically schizoid statute, in which a ‘rule of reason’ evolves with new circumstance and new wisdom, but a line of per se illegality remains forever fixed where it was.”  Business Electronics, 485 U.S., at 732.

A

Stare decisis, we conclude, does not compel our continued adherence to the per se rule against vertical price restraints.  As discussed earlier, respected authorities in the economics literature suggest the per se rule is inappropriate, and there is now widespread agreement that resale price maintenance can have procompetitive effects.  It is also significant that both the Department of Justice and the Federal Trade Commission—the antitrust enforcement agencies with the ability to assess the long-term impacts of resale price maintenance—have recommended that this Court replace the per se rule with the traditional rule of reason. . . .  In the antitrust context the fact that a decision has been “called into serious question” justifies our reevaluation of it.  Khan, supra, at 21. * * * [*2722] * * *  [The Court discusses how subsequent cases undermined the holding of Dr. Miles.]

The Dr. Miles rule is also inconsistent with a principled framework, for it makes little economic sense when analyzed with our other cases on vertical restraints.  If we were to decide the procompetitive effects of resale price maintenance were insufficient to overrule Dr. Miles, then cases such as Colgate and GTE Sylvania themselves would be called into question.  These later decisions, while they may result in less intrabrand competition, can be justified because they permit manufacturers to secure the procompetitive benefits associated with vertical price restraints through other methods.  The other methods, however, could be less efficient for a particular manufacturer to establish and sustain.  The end result hinders competition and consumer welfare because manufacturers are forced to engage in second-best alternatives and because consumers are required to shoulder the increased expense of the inferior practices.

The manufacturer has a number of legitimate options to achieve benefits similar to those provided by vertical price restraints.  A manufacturer can exercise its Colgate right to refuse to deal with retailers that do not follow its suggested prices.  See 250 U.S., at 307.  The economic effects of unilateral and concerted price setting are in general the same.  See, e.g., Monsanto, 465 U.S., at 762-764.  The problem for the manufacturer is that a jury might conclude its unilateral policy was really a vertical agreement, subjecting it to treble damages and potential criminal liability.  Ibid.; Business Electronics, supra, at 728.  Even with the stringent standards in Monsanto and Business Electronics, this danger can lead, and has led, rational manufacturers to take wasteful measures.  A manufacturer might refuse to discuss its pricing policy with its distributors except through counsel knowledgeable of the subtle intricacies of the law.  Or it might terminate longstanding distributors for minor violations without seeking an explanation.  The increased costs these burdensome [*2723] measures generate flow to consumers in the form of higher prices.

Furthermore, depending on the type of product it sells, a manufacturer might be able to achieve the procompetitive benefits of resale price maintenance by integrating downstream and selling its products directly to consumers.  Dr. Miles tilts the relative costs of vertical integration and vertical agreement by making the former more attractive based on the per se rule, not on real market conditions.  See Business Electronics, supra, at 725; see generally Coase, The Nature [***48] of the Firm, 4 Economica, New Series 386 (1937).  This distortion might lead to inefficient integration that would not otherwise take place, so that consumers must again suffer the consequences of the suboptimal distribution strategy.  And integration, unlike vertical price restraints, eliminates all intrabrand competition.  See, e.g., GTE Sylvania, 433 U.S., at 57, n 26.

There is yet another consideration.  A manufacturer can impose territorial restrictions on distributors and allow only one distributor to sell its goods in a given region.  Our cases have recognized, and the economics literature confirms, that these vertical nonprice restraints have impacts similar to those of vertical price restraints; both reduce intrabrand competition and can stimulate retailer services.  See, e.g., Business Electronics, supra, at 728; Monsanto, supra, at 762-763 . . . .  Cf. Scherer & Ross 560 (noting that vertical nonprice restraints “can engender inefficiencies at least as serious as those imposed upon the consumer by resale price maintenance”); Steiner, How Manufacturers Deal with the Price-Cutting Retailer: When Are Vertical Restraints Efficient?, 65 Antitrust L. J. 407, 446-447 (1997) (indicating that “antitrust law should recognize that the consumer interest is often better served by [resale price maintenance]--contrary to its per se illegality and the rule-of-reason status of vertical nonprice restraints”).  The same legal standard (per se unlawfulness) applies to horizontal market division and horizontal price fixing because both have similar economic effect.  There is likewise little economic justification for the current differential treatment of vertical price and nonprice restraints.  Furthermore, vertical nonprice restraints may prove less efficient for inducing desired services, and they reduce intrabrand competition more than vertical price restraints by eliminating both price and service competition. . . .

In sum, it is a flawed antitrust doctrine that serves the interests of lawyers—by creating legal distinctions that operate as traps for the unwary—more than the interests of consumers—by requiring manufacturers to choose second-best options to achieve sound business objectives.

B

[The Court rejects the arguments that Congress’ repeal of certain “fair trade” statutes, which let states permit resale price maintenance, codified the per-se rule against vertical minimum price restraints.]  * * *  [*2724] * * *  

Reliance interests do not require us to reaffirm Dr. Miles.  To be sure, reliance on a judicial opinion is a significant reason to adhere to it, especially “in cases involving property and contract rights,” Khan, 522 U.S., at 20.  The reliance interests here, however, like the reliance interests in Khan, cannot justify an inefficient rule, especially because the narrowness of the rule has allowed manufacturers [*2725] to set minimum resale prices in other ways.  And while the Dr. Miles rule is longstanding, resale price maintenance was legal under fair trade laws in a majority of States for a large part of the past century up until 1975. It is also of note that during this time “when the legal environment in the [United States] was most favorable for [resale price maintenance], no more than a tiny fraction of manufacturers ever employed [resale price maintenance] contracts.”  Overstreet 6; see also id., at 169 (noting that “no more than one percent of manufacturers, accounting for no more than ten percent of consumer goods purchases, ever employed [resale price maintenance] in any single year in the [United States]”); Scherer & Ross 549 (noting that “[t]he fraction of U.S. retail sales covered by [resale price maintenance] in its heyday has been variously estimated at from 4 to 10 percent”).  To the extent consumers demand cheap goods, judging vertical price restraints under the rule of reason will not prevent the market from providing them.  Cf. Easterbrook 152-153 (noting that “S.S. Kresge (the old K-Mart) flourished during the days of manufacturers’ greatest freedom” because “discount stores offer a combination of price and service that many customers value” and that “[n]othing in restricted dealing threatens the ability of consumers to find low prices”); Scherer & Ross 557 (noting that “for the most part, the effects of the [Consumer Goods Pricing Act] were imperceptible because the forces of competition had already repealed the [previous antitrust exemption] in their own quiet way”).

For these reasons the Court’s decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), is now overruled.  Vertical price restraints are to be judged according to the rule of reason.

V

Noting that Leegin’s president has an ownership interest in retail stores that sell Brighton, respondent claims Leegin participated in an unlawful horizontal cartel with competing retailers.  Respondent did not make this allegation in the lower courts, and we do not consider it here.

The judgment of the Court of Appeals is reversed, and the case is remanded for proceedings consistent with this opinion.

It is so ordered.


Justice Breyer, with whom Justice Stevens, Justice Souter, and Justice Ginsburg join, dissenting.

* * *  This Court has consistently read Dr. Miles as establishing a bright-line rule that agreements fixing minimum resale prices are per se illegal. . . .   That per se rule is one upon which the legal profession, business, and the public have relied for close to a century. * * * The Court justifies its departure from ordinary considerations of stare decisis by [*2726] pointing to a set of arguments well known in the antitrust literature for close to half a century.  Congress has repeatedly found in these arguments insufficient grounds for overturning the per se rule.  And, in my view, they do not warrant the Court’s now overturning so well-established a legal precedent.

I

* * *

[*2730]  * * * [T]he ultimate question is not whether, but how much, “free riding” [on retailers’ investment] takes place.  And, after reading the briefs, I must answer that question with an uncertain “sometimes.” . . .

How easily can courts identify instances in which the benefits are likely to outweigh potential harms?  My own answer is, not very easily.  For one thing, it is often difficult to identify who—producer or dealer—is the moving force behind any given resale price maintenance agreement.  Suppose, for example, several large multibrand retailers all sell resale-price-maintained products.  Suppose further that small producers set retail prices because they fear that, otherwise, the large retailers will favor (say, by allocating better shelf-space) the goods of other producers who practice resale price maintenance.  Who “initiated” this practice, the retailers hoping for considerable insulation from retail competition, or the producers, who simply seek to deal best with the circumstances they find? * * *

I recognize that scholars have sought to develop check lists and sets of questions that will help courts separate instances where anticompetitive harms are more likely from instances where only benefits are likely to be found. . . .  But applying these criteria in court is often easier said than done.  The Court’s invitation to consider the existence of “market power,” for example, invites lengthy time-consuming argument among competing experts, as they seek to apply abstract, highly technical, criteria to often ill-defined markets.  And resale price maintenance cases, unlike a major merger or monopoly case, are likely to prove numerous and involve only private parties. One cannot fairly expect judges and juries in such cases to apply complex economic criteria without making a considerable number of mistakes, which themselves may impose serious costs. . . . [*2731] * * *

Given the uncertainties that surround key items in the overall balance sheet, particularly in respect to the “administrative” questions, I can concede to the majority that the problem is difficult.  And, if forced to decide now, at most I might agree that the per se rule should be slightly modified to allow an exception for the more easily identifiable and temporary condition of “new entry.” . . .  But I am not now forced to decide this question.  The question before us is not what should be the rule, starting from scratch.  We here must decide whether to change a clear and simple price-related antitrust rule that the courts have applied for nearly a century.

II

We write, not on a blank slate, but on a slate that begins with Dr. Miles and goes on to list a century’s worth of similar cases, massive amounts of advice that lawyers have provided their clients, and untold numbers of business decisions those clients have taken in reliance upon that advice. . . .  Indeed a Westlaw search shows that Dr. Miles itself has been cited dozens of times in this Court and hundreds of times in lower courts.  Those who wish this Court to change so well-established a legal precedent bear a heavy burden of proof.  See Illinois Brick Co. v. Illinois, 431 U.S. 720, 736, 97 S. Ct. 2061, 52 L. Ed. 2d 707 (1977) (noting, in declining to overrule an earlier case interpreting § 4 of the Clayton Act, that “considerations of stare decisis weigh heavily in the area of statutory construction, where Congress is free to change this Court’s interpretation of its legislation”).  I am not aware of any case in which this Court has overturned so well-established a statutory precedent.  Regardless, I do not see how the Court can claim that ordinary criteria for over-ruling an earlier case have been met. . . .

A

I can find no change in circumstances in the past several decades that helps the majority’s position.  In fact, there has been one important change that argues strongly to the contrary.  In 1975, Congress repealed the McGuire and Miller-Tydings Acts, [which allowed states to permit resale price maintenance, thereby making it illegal nationally.]

* * * [*2732] * * *

Congress did not prohibit this Court from reconsidering the per se rule.  But enacting major legislation premised upon the existence of that rule constitutes important public reliance upon that rule.  And doing so aware of the relevant arguments constitutes even stronger reliance upon the Court’s keeping the rule, at least in the absence of some significant change in respect to those arguments. Have there been any such changes?  There have been a few economic studies, described in some of the briefs, that argue, contrary to the testimony of the Justice Department and FTC to Congress in 1975, that resale price maintenance is not harmful. * * *

Regardless, taken together, these studies at most may offer some mild support for the majority’s position. But they cannot constitute a major change in circumstances.

Petitioner and some amici have also presented us with newer studies that show that resale price maintenance sometimes brings consumer benefits. . . .  But the proponents of a per se rule have always conceded as much.  What is remarkable about the majority’s arguments is that nothing in this respect is new. * * * [*2733] * * *  The one arguable exception consists of the majority’s claim that “even absent free riding,” resale price maintenance “may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.”  I cannot count this as an exception, however, because I do not understand how, in the absence of free-riding (and assuming competitiveness), an established producer would need resale price maintenance.  Why, on these assumptions, would a dealer not “expand” its “market share” as best that dealer sees fit, obtaining appropriate payment from consumers in the process?  There may be an answer to this question.  But I have not seen it.  And I do not think that we should place significant weight upon justifications that the parties do not explain with sufficient clarity for a generalist judge to understand.

No one claims that the American economy has changed in ways that might support the majority.  Concentration in retailing has increased. . . .  That change, other things being equal, may enable (and motivate) more retailers, accounting for a greater percentage of total retail sales volume, to seek resale price maintenance, thereby making it more difficult for price-cutting competitors (perhaps internet retailers) to obtain market share.

Nor has anyone argued that concentration among manufacturers that might use resale price maintenance has diminished significantly.  And as far as I can tell, it has not. * * * [2734] * * *  Increased concentration among manufacturers increases the likelihood that producer-originated resale price maintenance will prove more prevalent today than in years past, and more harmful.  At the very least, the majority has not explained how these, or other changes in the economy could help support its position.

In sum, there is no relevant change.  And without some such change, there is no ground for abandoning a well-established antitrust rule.

B

With the preceding discussion in mind, I would consult the list of factors that our case law indicates are relevant when we consider overruling an earlier case. * * *

First, the Court applies stare decisis more “rigidly” in statutory than in constitutional cases. . . .  This is a statutory case.

Second, the Court does sometimes overrule cases that it decided wrongly only a reasonably short time ago.  As Justice Scalia put it, “[o]verruling a constitutional case decided just a few years earlier is far from unprecedented.”  Wisconsin Right to Life, ante, at 19 (emphasis added).  We here overrule one statutory case, Dr. Miles, decided 100 years ago, and we overrule the cases that reaffirmed its per se rule in the intervening years. . . .

Third, the fact that a decision creates an “unworkable” legal regime argues in favor of overruling. . . .  Implementation of the per se rule, even with the complications attendant the [unilateral action] exception allowed for in United States v. Colgate & Co., 250 U.S. 300 (1919), has proved practical over the course of the last century, particularly when compared with the many complexities of litigating a case under the “rule of reason” regime.  No one has shown how moving from the Dr. Miles regime to “rule of reason” analysis [*2735] would make the legal regime governing minimum resale price maintenance more “administrable,” . . . particularly since Colgate would remain good law with respect to unreasonable price maintenance.

Fourth, the fact that a decision “unsettles” the law may argue in favor of overruling. . . .   The per se rule is well-settled law, as the Court itself has previously recognized.  Sylvania, supra, at 51, n. 18.  It is the majority’s change here that will unsettle the law.

Fifth, the fact that a case involves property rights or contract rights, where reliance interests are involved, argues against overruling. . . .  This case involves contract rights and perhaps property rights (consider shopping malls).  And there has been considerable reliance upon the per se rule. * * *   New distributors, including internet distributors, have . . . invested time, money, and labor in an effort to bring yet lower cost goods to Americans.

This Court’s overruling of the per se rule jeopardizes this reliance, and more.  What about malls built on the assumption that a discount distributor will remain an anchor tenant?  What about home buyers who have taken a home’s distance from such a mall into account?  What about Americans, producers, distributors, and consumers, who have understandably assumed, at least for the last 30 years, that price competition is a legally guaranteed way of life?  The majority denies none of this. It simply says that these “reliance interests . . ., like the reliance interests in Khan, cannot justify an inefficient rule.”

The Court minimizes the importance of this reliance, adding that it “is also of note” that at the time resale price maintenance contracts were lawful “‘no more than a tiny fraction of manufacturers ever employed’” the practice. . . .  By “tiny” the Court means manufacturers that accounted for up to “‘ten percent of consumer goods purchases’” annually.  That figure in today’s economy equals just over $300 billion.  See Dept. of Commerce, Bureau of [*2736] Census, Statistical Abstract of the United States: 2007, p 649 (126th ed.) (over $3 trillion in U. S. retail sales in 2002).  Putting the Court’s estimate together with the Justice Department’s early 1970’s study translates a legal regime that permits all resale price maintenance into retail bills that are higher by an average of roughly $750 to $1000 annually for an American family of four.  Just how much higher retail bills will be after the Court’s decision today, of course, depends upon what is now unknown, namely how courts will decide future cases under a “rule of reason.”  But these figures indicate that the amounts involved are important to American families and cannot be dismissed as “tiny.”

Sixth, the fact that a rule of law has become “embedded” in our “national culture” argues strongly against overruling.  Dickerson v. United States, 530 U.S. 428, 443-444, 120 S. Ct. 2326, 147 L. Ed. 2d 405 (2000).  The per se rule forbidding minimum resale price maintenance agreements has long been “embedded” in the law of antitrust.  It involves price, the economy’s “‘central nervous system.’”  National Soc. of Professional Engineers, 435 U.S., at 692 (quoting Socony-Vacuum Oil, 310 U.S., at 226, n. 59, 60 S. Ct. 811, 84 L. Ed. 2d 1129).  * * *

The only contrary stare decisis factor that the majority mentions consists of its claim that this Court has “[f]rom the beginning . . . treated the Sherman Act as a common-law statute,” and has previously overruled antitrust precedent. * * * [*2737] * * *

The Court suggests that it is following “the common-law tradition.”  But the common law would not have permitted overruling Dr. Miles in these circumstances. Common-law courts rarely overruled well-established earlier rules outright.  Rather, they would over time issue decisions that gradually eroded the scope and effect of the rule in question, which might eventually lead the courts to put the rule to rest.  One can argue that modifying the per se rule to make an exception, say, for new entry, . . . could prove consistent with this approach. To swallow up a century-old precedent, potentially affecting many billions of dollars of sales, is not.  * * *

* * *   [B]oth Congress and the FTC, unlike courts, are well-equipped to gather empirical evidence outside the context of a single case.   As neither has done so, we cannot conclude with confidence that the gains from eliminating the per se rule will outweigh the costs.

In sum, every stare decisis concern this Court has ever mentioned counsels against overruling here.  * * *

The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles.  I do not believe that the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing.  All ordinary stare decisis considerations indicate the contrary.  For these reasons, with respect, I dissent.

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