The U.S. Supreme Court Opens the Door for Manufacturers and Franchisors to Set Resale Prices

By David C. Lundsgaard
July 12, 2007

For almost 100 years, the federal antitrust laws strictly prohibited manufacturers and other suppliers from setting minimum "resale" prices of their goods. Automobile manufacturers were prohibited from telling their dealers what to charge for cars, clothing manufacturers were prohibited from telling retailers what to charge for clothes, etc. This rule came from a 1911 case called Dr. Miles.

At the end of last month, however, the Supreme Court changed this long-standing rule, over-ruled Dr. Miles, and opened the door for manufacturers and franchisors to exercise much greater control over the resale prices of their goods or services. The court held that such "resale price maintenance" was legal, unless in a particular case the anticompetitive effects outweighed the procompetitive benefits-in other words, if the pricing "unreasonably restrained" competition. This new ruling is not only a significant change in antitrust doctrine, it will in practice significantly affect many sectors of the U.S. economy.

The Ruling
The Supreme Court announced the new rule in Leegin Creative Leather Products, Inc. v. PSKS, Inc. dba Kay's Kloset. Leegin was a clothing manufacturer that produced the " Brighton" line of leather products. Kay's Closet was a retail store in Texas that sold the Brighton line. Kay's Closet started selling the Brighton line at discounted prices, Leegin terminated Kay's Closet as one of its retailers for doing so, and Kay's Closet sued for violation of the antitrust laws, citing the rule in Dr. Miles. Based on Dr. Miles, Kay's Closet won in each lower court, then the case reached the Supreme Court. The high court held that Leegin's minimum resale price fixing was not categorically illegal, but was only illegal if it unreasonably restrained competition based on all of the facts and circumstances.

The Consequences
While this may sound like a highly technical ruling, it will mean a fundamental change in how resale price setting is handled. It is very difficult (and expensive) to prove that a particular pricing practice unreasonably restrains competition, which means that in many (if not most) circumstances minimum resale price setting is now legal. A critical pricing practice that was once absolutely forbidden is now, in most circumstances, permitted.

Many common features of our economy are based on the former antitrust rule. For example, everyone is familiar with the acronym MSRP ("Manufacturer's Suggested Resale Price") and the disclaimer that "Prices may vary" at different stores. Experienced in-house counsel may be familiar with carefully constructed "Colgate" pricing policies. These practices are in large part the result of the Dr. Miles rule that manufacturers could not set resale prices, and are likely to change as a result of the new rule in Leegin.

Leegin provides manufacturers with new opportunities to manage their distribution networks. Manufacturers may be able to insist on dealers providing specific levels of service and on-site advertising, and then be able to guarantee the margins necessary to support those services. Manufacturers may also be able to use pricing policies to maintain brand identity, such as what Leegin itself sought to do by keeping the price of its Brighton products up, and may be able to dispense with burdensome Colgate policies that were used to achieve those objectives under the old regime.

The Caveats
Before a manufacturer starts dictating minimum resale prices to their dealers under Leegin, however, there are several key points to keep in mind.

First, a manufacturer may have existing distribution or dealership contracts that explicitly grant pricing freedom to the distributors or dealers. The fact that the antitrust laws now permit a manufacturer to set resale prices is not permission to violate existing valid contracts.
Second, the Supreme Court's decision affects only federal law. States are generally permitted to have more restrictive state antitrust laws (many do), and particular states may have their own rules on minimum resale price maintenance. Even in states that do not presently have such laws, there will be efforts to reinstate the Dr. Miles rule as a matter of state law. Almost forty states joined an amicus brief urging the Supreme Court to keep Dr. Miles, demonstrating extensive state level support.
In addition, some states have industry-specific legislation (such as the petroleum industry) that prohibit a manufacturer from dictating resale prices, while others have pricing legislation that mandate minimum price mark-ups on certain items such as alcoholic beverages.
Third, the decision in Leegin is still only a week or so old. It may be some time before all of its consequences fully shake out. There may even be efforts at the federal level to restore Dr. Miles as a matter of federal antitrust law. Before you change a well-established pricing program based on Leegin, consult your antitrust counselor.

The Effects on Dealers
The effect of Leegin on distributors, dealers, and retailers will vary. High-service dealers and retailers who desire protection from discounters may benefit because manufacturers will be able to establish resale prices and then police them. Low-overhead dealers who prefer a discount strategy may be hurt because they may no longer have the pricing freedom they once enjoyed. Given the inevitable winners and losers under the new rules, we should see many new friction points arise between manufacturers and dealers, and between dealers and dealers, as businesses adjust to Leegin.

Conclusion
Whether Leegin will be good or bad for the U.S. economy may be uncertain, but whether it will affect how business is done in the U.S. is not. Everyone in the distribution chain should be familiar with the new rules and prepared for how they are going to impact their business.

Please feel free to contact David C. Lundsgaard (206.340.9691 or dlundsgaard@grahamdunn.com) or Susan M. Johnson (206.340.8769 or sjohnson@grahamdunn.com) should have any questions or wish to discuss this topic further.