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Supreme Court Changes Rules on Vertical Price Fixing

by Lee Gesmer (excerpted from his blog at MassLawBlog.Com)

As recently as 1977 virtually all “vertical restraints” were per se illegal under the federal antitrust laws. This included “nonprice” restraints, which restrict the conditions under which firms may resell goods. An example might be a restriction on the locations from which a retailer may sell a manufacturer’s product.

Supreme Court precedent also restricted both vertical “maximum” price restrictions (e.g., “you may not price this product higher than $12/unit”) and vertical “minimum” price restraints (e.g., “you may not price this product at less than $10/unit”).

However, over the last 30 years the Supreme Court has, in effect, withdrawn each of these antitrust prohibitions, holding that these restraints must be subject to the “rule of reason” (requiring an economic examination in every case to determine whether the harms outweigh the benefits), rather than the per se doctrine (that is, automatically illegal; no excuse will do).

In 1977 the Supreme Court dropped the per se rule on “nonprice” restraints in the case of Continental T.V., Inc. v. GTE Sylvania, Inc. Twenty years later, in State Oil Co. v. Khan, the second leg of this three-legged chair was removed when the Supreme Court held that maximum vertical price restraints should not be subject to the per se rule of illegality. In and of itself this was not terribly significant, since manufacturers rarely set maximum prices. The real battle, all antitrust lawyers knew, lay with the third, and most controversial, leg of the chair: minimum vertical price-fixing.

Since the 1997 Khan ruling left the per se rule against minimum price restraints intact, for the last ten years it has remained per se illegal for a manufacturer to dictate the minimum price at which a product may be sold. Hence, the phrase “manufacturer’s suggested retail price” or “MSRP.”

On June 28, however, the Supreme Court overruled the per se rule on vertical minimum price fixing. In Leegin v. PSKS, Inc., the Court swept away the almost 96-year-old rule against vertical minimum price fixing, holding that henceforth this practice, too, will be judged under the “rule of reason.”

The rationale behind this ruling? In a nutshell, the Court was convinced that “interbrand” (as opposed to “intrabrand”) competition is sufficient to protect consumers. This leaves the risk, therefore, that a monopolist, or a manufacturer with overwhelming market power, will still be prevented from vertical minimum price fixing. However, because the practice no longer is per se illegal, proving the harmful impact on competition in any given case will be far more costly, difficult and unpredictable, for either a private plaintiff or the government. As a result, these cases will be rare.

Will this make business happy? Almost certainly it will, particularly since sellers can advertise price cuts so easily on the Web. Why should a retailer maintain a storefront and experienced on-site sales staff when it can be undercut so easily by an online vendor?

Will this change in the law be good for consumers in the long run, as the Supreme Court majority believes? Measuring the benefits and detriments of a rule such as this in an economy as complex as ours is well near impossible. The Supreme Court’s decision was based more on economic theory than any empirical economic evidence, and therefore the answer to that question may never be known. What is clear, however, is that a generation of antitrust lawyers will have to learn to change their tune when a client asks: “Can I tell all my distributors (or retailers) that they cannot sell below a specific price?”