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A Better Partnership

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Jun 2007
28
June 28, 2007

Court Eases Pricing Guidelines

For nearly a century, one of the cardinal rules of product distribution has been: "Manufacturers Shall Not Enter Into Agreements With Their Dealers or Distributors Regarding the Price at Which the Manufacturer's Goods May Be Resold." That is no longer the law, thanks to the Supreme Court's June 28 ruling in Leegin Creative Leather Products, Inc. v. PSKS, Inc., a decision that provides manufacturers with far greater ability to control the prices at which their goods are sold by retail distributors.

Since 1911, courts have consistently deemed it per se illegal under the Sherman Act for a manufacturer to enter into any sort of agreement with its distributors that established a minimum resale price for its goods. Manufacturers engaging in such practices, known as "resale price maintenance" or "vertical price fixing," faced significant risks, including the prospect of paying treble damages and attorney fees to successful plaintiffs and even possible criminal prosecution.

By a 5-4 vote, the Court in Leegin eliminated the per se rule. Instead of deeming such agreements automatically anticompetitive and illegal, the ruling means courts and regulators must evaluate them under the "rule of reason" that requires individualized consideration of "all of the circumstances" bearing on the agreement's competitive impact.

Relevant considerations include:

  • The number of manufacturers in the relevant market using resale price maintenance agreements.

  • The business rationale underlying the decision to require minimum resale pricing.

  • The overall market power of the manufacturer imposing its minimum pricing scheme.

Although Leegin certainly represents a major development in pricing law, it is important to recognize that it does not rule out the possibility that certain types of minimum resale price agreements may still violate the antitrust laws, even under the more forgiving "rule of reason" standard. The permissible parameters of minimum pricing agreements will become clearer over time, as this new doctrine is tested in the lower courts. In the meantime, it will be important to consult with qualified antitrust counsel before taking any actions in reliance on this new precedent.

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