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
- 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