Resale-Price-Maintenance Agreements Under US Antitrust Law
Some antitrust questions are easy: Is price-fixing among competitors a Sherman Act violation? Yes, of course it is.
But there is one issue that is not only a common occurrence but also engenders great controversy among antitrust attorneys and commentators: Is price-fixing between manufacturers and distributors (or retailers) an antitrust violation? This is usually called a resale-price-maintenance agreement and it really isn’t clear if it violates the antitrust laws.
For many years, resale-price maintenance—called RPM by those in the know—was on the list of the most forbidden of antitrust conduct, a per se antitrust violation. It was up there with horizontal price fixing, market allocation, bid rigging, and certain group boycotts and tying arrangements.
There was a way around a violation, known as the Colgate exception, whereby a supplier would unilaterally develop a policy that its product must be sold at a certain price or it would terminate dealers. This well-known exception was based on the idea that, in most situations, companies had no obligation to deal with any particular company and could refuse to deal with distributors if they wanted. Of course, if the supplier entered a contract with the distributor to sell the supplier’s products at certain prices, that was an entirely different story. The antitrust law brought in the cavalry in those cases.
In 2007, the Supreme Court dramatically changed the landscape when it decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). The question presented to the Supreme Court in Leegin was whether to overrule an almost 100-year old precedent (Dr. Miles Medical Co.) that established the rule that resale-price maintenance was per se illegal under the Sherman Act.
Over the years, the Supreme Court had gradually backed away from per se antitrust liability for other types of vertical agreements. For example, the Court earlier changed course and applied the rule of reason instead of the per se rule to vertical price agreements that set maximum pricing and vertical agreements that did not involve prices. But until Leegin, minimum price agreements between a manufacturer and distributor (or retailer) were always considered per se antitrust violations.
Before delving into its substantive analysis, the Supreme Court interestingly noted that the existingper se rule developed from the common-law rule that a general restraint on alienation is ordinarily invalid. A resale-price-maintenance agreement is, in fact, a restraint on alienation because the supplier sells a good to a distributor and tells the distributor that it must sell that good at a price that is at least a certain amount. And, as the Supreme Court explained, concerns about restraints on alienation developed from property and real estate: “the rule arose from restrictions removing real property from the stream of commerce for generations.”
The Supreme Court didn’t believe this was a good justification: “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.”
The typical per se antitrust violation is conduct that rarely if ever has pro-competitive benefits. That is why the Supreme Court has seen fit to declare the actions per se illegal under the Sherman Act—there is little concern about deterring or prohibiting competitively beneficial activity. A rule-of-reason claim is complicated and expensive, so the per se shortcut saves a lot on administrative costs and incents plaintiffs to enforce the antitrust laws as private attorney generals.
The Supreme Court explained in Leegin that there is little dispute in economics or antitrust that resale-price maintenance does, in fact, have some pro-competitive virtues. So a per se prohibition here would likely deter competitively beneficial activity. The Court then created its own ledger of sorts and explained the pro-competitive benefits of RPM, then its potentially anticompetitive harm.
Because the Court ultimately concluded that resale-price-maintenance agreements will henceforth be adjudged under the rule-of-reason, you should really pay attention to these sections. The Court supplies a roadmap of factors that will either add or detract from an agreement’s likely legality.
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