978-1285770178 Case Printout Case CPC-26-07 Part 1

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127 S.Ct. 2705

U.S.,2007

Supreme Court of the United States

LEEGIN CREATIVE LEATHER PRODUCTS, INC., Petitioner,

PSKS, INC., dba Kay’s Kloset … Kay’s Shoes.

Argued March 26, 2007.

Decided June 28, 2007.

Justice KENNEDY delivered the opinion of the Court.

In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 31 S.Ct. 376,

55 L.Ed. 502 (1911), the Court established the rule that it is per se illegal under §

and that vertical price restraints are to be judged by the rule of reason.

once accounted for 40 to 50 percent of its profits.

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

interest in about 70 stores that sell Brighton products. Leegin asserts that, at

least for its products, small retailers treat customers better, provide customers

more services, and make their shopping experience more satisfactory than do

promoted Brighton. For example, it ran Brighton advertisements and had

area to buy Brighton products. Brighton was the store’s most important brand and

Leegin Creative Leather Products, Inc. v. PSKS, Inc.

In 1997, Leegin instituted the “Brighton Retail Pricing and Promotion Policy.” 4

id., at 939. 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

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

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

loss of the Brighton brand had a considerable negative impact on the store’s

revenue from sales.

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

concerted action. See United States v. Colgate & Co., 250 U.S. 300, 307, 39

S.Ct. 465, 63 L.Ed. 992 (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.

to [vertical minimum price-fixing] agreements.” 171 Fed.Appx., at 466. On this

premise the Court of Appeals held that the District Court did not abuse its

discretion in excluding the testimony of Leegin’s economic expert, for the per se

rule rendered irrelevant any procompetitive justifications for Leegin’s pricing

policy. Id., at 467. We granted certiorari to determine whether vertical minimum

amended, 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, 38

S.Ct. 242, 62 L.Ed. 683 (1918), the Court has never “taken a literal approach to

[its] language,” Texaco Inc. v. Dagher, 547 U.S. 1, 5, 126 S.Ct. 1276, 164

L.Ed.2d 1 (2006). Rather, the Court has repeated time and again that § 1

practice should be prohibited as imposing an unreasonable restraint on

competition.” Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 97

S.Ct. 2549, 53 L.Ed.2d 568 (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, 118 S.Ct. 275. Whether 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.

[4] Link to KeyCite Notes The rule of reason does not govern all restraints. Some

types “are deemed unlawful per se.” Khan, supra, at 10, 118 S.Ct. 275. The per

see Texaco, supra, at 5, 126 S.Ct. 1276, or to divide markets, see Palmer v.

BRG of Ga., Inc., 498 U.S. 46, 49-50, 111 S.Ct. 401, 112 L.Ed.2d 349 (1990)

(per curiam).

[5] Link to KeyCite Notes Resort to per se rules is confined to restraints, like

those mentioned, “that would always or almost always tend to restrict competition

[6] Link to KeyCite Notes 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,

99 S.Ct. 1551, 60 L.Ed.2d 1 (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,

253, 263, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963) (refusing to adopt a per se rule for

a vertical nonprice restraint because of the uncertainty concerning whether this

type of restraint satisfied the demanding standards necessary to apply a per se

rule). And, as we have stated, a “departure from the rule–of-reason standard

must be based upon demonstrable economic effect rather than … upon

752, 761, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984). In Dr. Miles the plaintiff, a

manufacturer of medicines, sold its products only to distributors 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.” 220 U.S., at 404-405, 31 S.Ct. 376. The

its decision based on “formalistic” legal doctrine rather than “demonstrable

economic effect,” GTE Sylvania, supra, at 58-59, 97 S.Ct. 2549. 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”

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, 97 S.Ct. 2549 (internal

supra, at 734, 108 S.Ct. 1515 (disclaiming the “notion of equivalence between

the scope of horizontal per se illegality and that of vertical per se illegality”);

Maricopa County, supra, at 348, n. 18, 102 S.Ct. 2466 (noting that “horizontal

restraints are generally less defensible than vertical restraints”). Our recent cases

formulate antitrust principles in accordance with the appreciated differences in

485 U.S., at 726, 108 S.Ct. 1515.

[7] Link to KeyCite Notes 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

interbrand competition and consumer welfare in a variety of ways”); ABA Section

of Antitrust Law, Antitrust Law and Economics of Product Distribution 76 (2006)

(“[T]he bulk of the economic literature on [resale price maintenance] suggests

that [it] is more likely to be used to enhance efficiency than for anticompetitive

purposes”); see also H. Hovenkamp, The Antitrust Enterprise: Principle and

Ross, Industrial Market Structure and Economic Performance 558 (3d ed.1990)

(hereinafter Scherer & Ross) (“The overall balance between benefits and costs

[of resale price maintenance] is probably close”).

The few recent studies documenting the competitive effects of resale price

maintenance also cast doubt on the conclusion that the practice meets the

restraints. See GTE Sylvania, 433 U.S., at 54-57, 97 S.Ct. 2549. 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.

See id., at 51-52, 97 S.Ct. 2549. The promotion of interbrand competition is

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

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

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, 97 S.Ct. 2549; see Marvel & McCafferty

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

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).

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

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

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, 126 S.Ct. 1276; GTE

Sylvania, 433 U.S., at 58, n. 28, 97 S.Ct. 2549. 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

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 (C.A.7 2000). A

manufacturer with market power, by comparison, might use resale price

degree of confidence that resale price maintenance “always or almost always

tend[s] to restrict competition and decrease output.” Business Electronics, supra,

at 723, 108 S.Ct. 1515 (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

conclusion). As the rule would proscribe a significant amount of procompetitive

conduct, these agreements appear ill suited for per se condemnation.

[8] Link to KeyCite Notes 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, 97 S.Ct. 2549

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

Miles rule.

[9] Link to KeyCite Notes 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”).

competition, from which lower prices can later result. See Khan, 522 U.S., at 15,

118 S.Ct. 275. 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, 108 S.Ct. 1515. And resale price maintenance may reduce prices if