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308 Leegin Notes.docx

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McGill University
Economics (Arts)
ECON 308
Christopher Green

Supreme Court of the United States: Leegin - In Dr Miles Medical v John D Park & Sons Co (1911), the Court established the rule that it is per se illegal under section 1 of the Sherman Act for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods. - Question of piece: should the Court overrule the per se rule and allow retail price maintenance agreements to be judged by the rule of reason, the usual standard applied to determine if there is a violation of section 1? - Some economic analysts conclude that vertical price restraints can have procompetitive effects - In 1991, Leegin began selling belts under the brand name Brighton. It has now expanded into a variety of women’s fashion accessories. - Leegin asserts that small retailers treat customers better, provide more services, and make their shopping experience better than larger retailers. - Kay’s Closet at one time sold the Brighton brand, beginning in 1995. Once it began selling, the store promoted the Brighton brand. Brighton was the store’s most important brand and once accounted for 40-50 percent of its profits - In 1997, Leegin instituted the “Brighton Retail Pricing and Promotion Policy”, in which they refused to sell to retailers that discounted the Brighton goods below suggested prices. The policy had an exception for products not selling well that the retailer didn’t plan on reordering. It also expressed concern that discounting harmed Brighton’s brand image and reputation. - In December 2002, Leegin discovered Kay’s Closet had been marking down Brighton’s entire line by 20 percent. Kay’s Closet said they had done this to compete with nearby retailers who also were undercutting Leegin’s suggested prices. Leegin requested that Kay’s Closet stop discounting, which KC refused, so Leegin stopped selling to them. The loss of the Brighton brand had a considerable negative impact on the store’s revenue from sales. - PSKS sued Leegin, saying they had violated the antitrust laws by entering into agreements with retailers to charge only those prices fixed by Leegin. - The jury agreed with PSKS, Leegin was fined nearly 4 million dollars - On appeal, Leegin didn’t dispute that it had entered into vertical price-fixing agreements with its retailers. Rather, it contended that the rule of reason should have been applied to those agreements, which the Court rejected, saying it was bound by Dr Miles because the Supreme Court consistently applied the per se rule to vertical price-fixing agreements. - Section 1 of the Sherman Act prohibits “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce”. - The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of section 1. Appropriate factors to take into account include specific info about the relevant business and the restraint’s history nature, and effect. Whether the businesses involved have market power is a further significant consideration - The rule distinguished between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest. - The per se rule can give clear guidance for certain conduct. Restraints that are per se illegal include horizontal agreements to fix prices or divide markets - Resort to per se rules is confined to restraints that would always or almost always tend to restrict competition and decrease output - To justify a per se prohibition, a restraint must have manifestly anticompetiti
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