Leegin Case: Resale Price Maintenance vs. Consumer Welfare

As mentioned above, after U.S. Supreme Court’s decision in Dr. Miles, a hostile approach to RPM was criticized frequently and it can be noticed that the decision in Leegin case was a consequence of the endless pressure from economists and legal practitioners. Over the years, courts have increasingly turned to economic principles to guide their interpretation of the antitrust laws[5]. Economists and practitioners have argued that courts should note that RPM have both the anti-competitive and pro-competitive market forces, thus the rule of reason should be applied instead of per se illegality approach. Firstly, the more fact-based approach and the rule of reason were applied in assessing non-price vertical agreements in Sylvania[6]. Albeit this case was concerned with franchise location clause in a vertical agreement, but it brought forward further debates on vertical price fixing issue and commentators claimed that the rule of reason should also be applied to price fixing agreements, either to maximum price or minimum price fixing.

Other influential opinion, which promoted the application the rule of reason to vertical price fixing, was frequently heard from Chicago school in 1970’s. Scholars used economic theory to show how price fixing practices and other agreements could be used to generate efficiency gains, and, thus, should be evaluated under the rule of reason analysis or even be declared per se legal. In addition, they argued that antitrust law should be guided solely by economic efficiency, focusing on the effects of restrictive agreements alone[7].

Consequently, U.S. Supreme Court overturned a precedent of Dr. Miles in Leegin in 2007. Leegin was a company which produced leather goods and accessories and had a policy of refusing to sell to retailers that discounted its goods below suggested prices. When Leegin stopped selling to retailer’s PSKS store, PSKS filed a suit, alleging that Leegin violated antitrust laws by entering into vertical agreements with its retailers to set minimum resale prices[8]. U.S. Supreme court decided, by a weak majority 5 against 4, that RPM had both pro-competitive and anti-competitive effects and that the rule of reason should be used when assessing its effects to competition. This U.S. Supreme Court’s decision, not surprisingly, is called a landmark decision not only because it overruled 97 years of authority on vertical price fixing, but also because it consisted of the main arguments and economic theories which questioned whether RPM is competitively motivated.

Justice Kennedy, in his opinion in Leegin, emphasised that minimum or fixed RPM had unequivocal pro-competitive effects. First of all, minimum RPM 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). In addition, he stated that minimum or fixed RPM can increase interbrand competition by facilitating market entry for new firms and brands. Furthermore, Justice Kennedy stated that RPM can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding.

Aforementioned pro-competitive effects of minimum or fixed RPM were not the only ones offered in Leegin, but were common object of discussion among practitioners and economists. It was first argued that minimum or fixed RPM can have a positive effect on interbrand competition where a manufacturer implies minimum RPM on its dealership agreements it can avoid a free riding problem. Free riding is a common situation when one or more dealers operating in sales of the same product take an advantage of the investment in better promotion of the product made by other dealers also operating within the same product sales. While one dealer invests into better presentation of a product and, therefore, the price of such product increases, other dealer, which does not promote the same product, has an opportunity to sell it in a lower price. Eventually, this leads to a situation where dealers do not invest in better promotion of product because of “free riders” and overall sales of manufacturer’s product decreases. In order to avoid such situation, minimum RPM can be a useful tool to the manufacturer. Manufacturers can prevent retailers from free riding by adopting a uniform price floor. Indeed, once RPM is imposed, retailers can not cut retail prices below the price floor and, therefore, cannot lure consumers away from other retailers by lowering prices[9]. In addition, minimum RPM induces dealers to invest into better promotion and presentation of a product which can be anything from luxury interior of a store or more qualified personnel. Where retailers supply such services, demand for the manufacturer’s products increases. That explains manufacturer’s desire for retailers to supply such point-of-sale services[10]. Hence minimum RPM aids manufacturer’s position amongst his competitors and therefore stimulates interbrand competition.

Second pro-competitive effect argued by Justice Kennedy in Leegin and other enthusiasts of RPM is the facilitation of market entry for new firms and brands. In some markets manufacturers or new brands, in order to entry a market, need extensive assistance of dealers and retailers. Minimum RPM can be an effective tool which can help them to find and persuade competent dealers to invest into promotion of a new product and its market development. Without RPM dealers may be unwilling to make the necessary investments unless they receive some assurance that new dealers who did not incur similar development costs will not be able to compete by charging lower prices, thereby preventing their recoupment of their development costs[11]. Therefore, entry for new brands and products can be easier, leading to an increase in a wider choice of products.

Other point made in Leegin was that 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. This can be a case of specific products or luxury brands. Strict RPM can be used for the protection of a very well-known and prestigious brand name from widespread use that might deteriorate it[12]. It is a common situation when consumers buy a specific product, not only because of its quality or price, but also because they appreciate promotional services and product’s elite image. In order to retain such characteristics of its product, a manufacturer can achieve it by imposing minimum RPM and attract only those dealers or retailers which have sufficient financial abilities and sufficient expertise which, in turn, enables them to sell expensive and prestigious products.

It was mentioned that Leegin case was not a unanimous decision and there was a lot of criticism towards its approach to minimum RPM. Justice Breyer, in his dissenting opinion in Leegin, had argued that “antitrust law cannot, and should not, precisely replicate economists’ (sometimes conflicting) views. That is because law, unlike economics, is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. And that fact means that courts will often bring their own administrative judgment to bear, sometimes applying rules of per se unlawfulness to business practices even when those practices sometimes produce benefits”[13].

Dissenting opinion in Leegin had a lot of support from practitioners and economists. It was first argued that “free riding” is not a widespread phenomenon that can justify most cases of resale price maintenance[14]. In addition, it can be claimed that exceptional promotion and presentation of a product only applies to a few percent of overall product sales, therefore it can not be asserted that RPM can be justified in a majority of cases.

Furthermore, there are number of other anti-competitive effects of RPM that commentators signify. First concern is that RPM can facilitate a “dealer cartel”, as well as a “manufacturer cartel”. Through RPM the manufacturer becomes the retail cartel enforcer, ensuring that no retailer deviates from the cartel price and in “manufacturer cartel scenario”, RPM increases price transparency and thus facilitates easy detection of any deviations from a collusive equilibrium. Generalized RPM can facilitate collusion on retail prices even among a significant number of players, due to its self-enforcing character[15].

Another concern with RPM is its effect on retail market. Discounting prices is one of the most successful marketing strategy which leads to greater sales and consumer welfare. However, it can be often observed that RPM prevents efficient retailers from achieving a higher volume of sales by passing along their cost savings to consumers, and thereby minimizes the incentive for retail innovation[16].

On the top of that, other compelling anti-competitive effect of RPM is its impact on product price. It was mentioned that in decision in Leegin and in other views of economists, who advocate pro-competitive effects of RPM, it is argued that, in order to escape “free riding” consequences, it is necessary to impose RPM and thus secure inter-brand competition and retail services. However, it is not convincing that RPM can actually lower consumer prices. Where a manufacturer and retailer or dealer agrees to fix prices it can be a matter of course that their primary goal is to maximise their profits. Nonetheless, it can not be clearly proved that RPM can increase or decrease consumer prices, because product price is influenced by many other factors. In Leegin, it is stated that antitrust laws primarily are designed to protect interbrand competition from which lower prices can later result, but would it not be more accurate to declare that antitrust laws are primary designed to protect consumer welfare and ipso facto lower prices, because it can be noticed that interbrand competition can be manipulated by either cartels or different opinions of economists.

Evolution and development of U.S. Antitrust Law on RPM can be defined as controversial. Albeit in Leegin Justice Breyer stated that antitrust law cannot, and should not, precisely replicate economists, however, it can come to view that economy reflects fairness and rationality of Competition Law or Antitrust Law and should not be underestimated. Economic approach to RPM had also come to a greater view in EU Competition Law and, in order to answer if EU should follow controversially changing U.S. Antitrust Law, these issues must be discussed.