Vertical Price Fixing CaseLeegin Creative Leather Products, Inc. vs. 

PSKS Inc., Kay’s Kloset…Kay’s shoes

Ia Kurdiani

Presentation outline

• Vertical Price Fixing and RPM• Case discription• Sherman Antitrust Act• “Illegality Per Se” versus Rule of reason• Previous case‐ Dr. Miles Case• Discussion on RPM• Overruling• Conclusions

VPF & RPM

• Vertical Price fixing: – Menufacturers or wholesalers are able to control the retail price 

of their goods and services

• Resale Price Maintenance (RPM)– Manufacturer and its distributors agree that the latter will sell 

the former’s products at certain prices. – Minimum RPM ‐Maximum RPM

• Prevent resellers from competing on price• To keep resellers profitable• Ensures that distributors who invest in promoting the 

product can recoup additional costs• (contradictory practice)

Introduction of the case

• 1995‐ Leegin (manufacturer of Brighton women’s accessories) began selling its product to PSKS (specialitystore) 

• Soon Brighton becomes PSKS’ most profitable line

• 1997‐ Leegin : “Brighton Retail Pricing and Promotion Policy”, (business only with retailers following its suggestedretail prices)

• Leegin introduces “Heart Store Program” – (new marketing initiative – to provide incentives to certain

brighton retailers to promote the brand within a separate section of their stores)

Story continues…

• Late 2002 – PSKS violates Leegin’s pricing policy – Puts entire product line on sale

• Leegin suspends shipment of its products

• PSKS – filed action against Leegin Inc. • claiming that Leegin entered into illegal (illegal per se under §1 of Sherman Act) agreements with retailers to fix Brighton products’ prices and terminated PSKS as a result of those agreements

• seeking future‐lost‐profits damages.

Sherman Antitrust Act

• July 2, 1890

• The first US Fed statute to limit cartels and monopolies. 

• Under § 1 of Sherman Act –“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal"

Sherman Antitrust Act

• The act also provides : "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony“

• The Act is brief and not highly specific. This meant that responsibility for the development of Antitrust law was entrusted to the U.S. courts, particularly the SUPREME COURT, which have the power to interpret federal statutes.

Back to the case

• Jury found : – Leegin and its retailers agreed to fix retail prices ofBrighton, and by stopping business with PSKS causedPSKS to suffer antitrust injury

– Case decided as “per se unlawful”– PSKS entitled to damajes of $ 1.2 million

• Expert testimony describing procompetitiveeffects of the pricing policy rejected by court.

• Leegin renewed its motion for judgment asmatter of law and moved for a new trial

Per se Illegality

• Leegin contended that the rule of reason should haveapplied to those agreements, and not the “per se illegal” rule. 

• “Per Se illegal” rule• a rule that considers a particular restraint of trade to be manifestly contrary to competition and does not require an inquiry into precise harm or purpose for an instance of it to be declared illegal per se rule to price‐fixing by public utilities– include horizontal agreements among competitors to fixprices, or devide markets. 

– restraints that would always or almost always tend torestrict competition and decrease output 

Rule of Reason

• Rule of reason: standard for testing wether a practice restrains trade in violation of §1. 

• It requires a court to assess restraints on trade by looking at the impact on competition.

• Factfinder weighs all the circumstances of a case in deciding wether a restrictive practiceshould be prohibited as imposing anunreasonable restraint on competition. 

Precedent

• Court followed Precedent

• Earlier case‐ (1911) Dr. Miles Medical Co. v. John D. Park

– Court established a per se rule against a verticalagreement between a manufacturer and itsdistributor to set RPM

Discussion on RPM 

• Minimum Retail Price Maintenane can:– stimulate interbrand competition by reducingintrabrand competition among retailers selling the same brand. 

– Encourages retailers to invest in services ofpromotional efforts that aid the manufacturer’s prosition as against rival manufacturers

– Give consumers more options to choose among low‐high price, high service brands. 

– Increase interbrand competition by facilitaiting market entry for new firms and brands

Negative effects

• Anticompetitive effects:– Unlawful price fixing

– Facilitate manufacturer cartel or be used toorganize retail cartels

– Monopoly profits

– Can be abused by powerful manufacturers and retailers (not letting to sell products of smaller rivals/newentrants) 

One argument

• Justice Kennedy writes:– "A single manufacturer’s use of vertical price restraints tends to 

eliminate intrabrand price competition; [competition between manufacturers who sell different brands of the same type of product.] which 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.”

– With price competition decreased, the manufacturer retailers compete among themselves over services

Other side

• Justice Breyer: – “The fact that a rule of law has become ‘embedded’ in our ‘national culture’ argues strongly against overruling…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'…It reflects a basic antitrust assumption (that consumers often prefer lower prices to more service)

– Prediction: 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. 

Court Considerations

• The Supreme Court identified factors to be considered to determine whether the RPM has an anticompetitive effect: 

• 1. the number of competitors that have adopted the manufacturer’s RPM 

• 2. whether the manufacturer or retailer initiated the RPM 

Overruling

• June 28, 2007

• Leegin case – US Supreme court overruled nearly100 years of precedent in antitrust law, and heldthat resale price maintenance is lawful if basedon a reasonable justification. 

• The court relied on respected economic analysisto colclude that vertical price restraints can haveprocompetitive effects and thus should be judgedby the rule of reason .

conclusions

• Since RPMs can have either pro or anticompetitive effects, they should be evaluated under the rule of reason, not prohibited per se.

References

• http://www.supremecourtus.gov/opinions/06pdf/06‐480.pdf

• http://www.ca5.uscourts.gov/opinions/unpub/04/04‐41243.0.wpd.pdf• http://supreme.justia.com/us/250/300/case.html

• http://en.wikipedia.org/wiki/Sherman_Antitrust_Act

• http://en.wikipedia.org/wiki/Resale_price_maintenance

• http://www.law.cornell.edu/supct/html/06‐480.ZS.html

• Thank you for your attention