Levin Creative Leather Products, Inc., designs,

Levin Creative Leather Products, Inc., designs,

Levin Creative Leather Products, Inc., designs, manufactures, and distributes leather goods and accessories. Leegin sells belts under the brand name “Brighton.” To ensure a favorable shopping experience for its retail customers, Leegin sells to independent, small boutiques and specialty stores. Further, Leegin instituted the “Brighton Retail Pricing and Promotion Policy.” This policy creates minimum prices for Brighton belts, and Leegin refuses to sell to any retailer who discounts Brighton goods below the suggested prices. PSKS, Inc., operates Kay's Kloset in Lewisville, Texas. Kay's Kloset originally agreed to the “Brighton Policy” and was successful in selling Brighton products. Later, Kay's Kloset began marking down these products to compete with nearby retailers. When Leegin learned of these excessive discounts, it stopped selling to Kay's Kloset. Having lost this line of belts and the resulting income, PSKS, Inc., sued Leegin claiming the “Brighton Policy” was in violation of§ 1 of the Sherman Act. The District Court refused to allow Leegin's expert to testify on how its resale minimum pricing policy had a procompetitive impact. The trial jury awarded PSKS, Inc., $1.2 million. When the District Judge tripled the damages and awarded attorney fees and other costs, a judgment was entered against Leegin in the amount of $3,975,000.80. The Fifth Circuit Court of Appeals affirmed. The Supreme Court granted Leegin's petition for certiorari to determine whether vertical minimum resale price maintenance agreements should be treated as per se illegal or analyzed under the rule of reason. KENNEDY, J.: … 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 among the several States.” While § 1 could be interpreted to proscribe all contracts, the Court has never taken a literal approach to its language. Rather, the Court has repeated time and again that§ 1 outlaws only unreasonable restraints. The rule of reason is the accepted standard for testing whether a practice restrains trade in violation ? f § 1. Under this rule, the factfinder weighs all of the  Circumstances of a case in deciding whether a retentive practice should be prohibit  as imposmgan unreasonable restraint on competition. Apocopate factors to take into account include specific information about the relevant business and the restraint's history nature ' ' and effect. Whether the businesses involved have market power is a further, significant consideration. In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest. The rule of reason does not govern all restraints. Some types are deemed unlawful per se. The per se rule, treating categories of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real market forces at work .. . Restraints that are per se unlawful include horizontal agreements among competitors to fix prices. Resort to per se rules is confined to restraints, like those mentioned, that would always or almost always tend to restrict competition and decrease output. To justify a per se prohibition a restraint must have manifestly anticompetitive effects and lack any redeeming virtue. As a consequence, the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, and only If  our s can predict with confidence that it would be mvahdated in all or almost all instances under the rule of reason. It should come as no surprise, then, that we have expressed reluctance to adopt per se rules . with regard to restraints imposed in the c? text of business relationships where the economic Impact of certam practices is not immediately obvious. And, as we have stated, a departure from the rule-of-reason  tandard must be based upon demonstrable  conorruc effect rather than upon formalistic line drawmg. . The Court has interpreted Dr. Miles Medical Co. v. john D. Park & Sons Co., 31 S. Ct. 36 (1911), as establishing a per se rule against a vertlal agreement between a manufacturer and i s distributor . to set minimum resale prices. In Dr. . Mtles the plamtiff, a manufacturer of medicines, sold Its product only to distributors who agreed to resell them at set pnces. !he Court found the manufacturer's control of resale pnces to be unlawful. It relied on the _ conmon law rule that a general restraint upon alienation IS ordmanly mvahfd The Court then explained that the agreements would advantage the distributors, not the manufacturer, an were analogous to a combination amo? g competing distributors, which the law treated as void Dr. Miles, furthermore, treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal combination among cometing distributors. In later cases, however, the Court reJected the approach of reliance on rules goerning horiz? n­ tal restraints when defining rules apphcable to vertical ones. Our recent cases formulate antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements, differences the Dr. Miles Court failed to consider. The reasons upon which Dr. Miles relied do not justify a per se rule. As a consequence, it is necessary to examine, in the first instance, the economic effects of vertical agreements to fix minimum resale prices, and to determine whether the per se rule is nonetheless appropriate. Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer's use of resale price maintenance. Even those more skeptical of resale price maintenance acknowledge it can have procompetitive effects …. The justifications for vertical price restraints are similar to those for other vertical restraints. Minimum resale price maintenance can stimulate interbrand competition-the competition among manufacturers selling different brands of the same type of productby reducing intrabrand competition-the competition among retailers selling the same brand. The promotion of interbrand competition is important because the primary purpose of the antitrust laws is to protect this type of competition. A single manufacturer's use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer's position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose am ng low-price, low-service brands; high-price, highserviCe brands; and brands that fall in between. Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retaiers who furnish services and then capture some of the mcreased demand those services generate. Consumers might learn, for example, about the benefits of a manufacturer's product from a retailer that invests in fine showrooms, offers product demonstrations or hires and trains knowledgeable employees. Or consm­  rs migh decide . to buy the product because they see it  n a  etall estabhshment that has a reputation for sellmg htgh-quality merchandise. If the consumer can then ?uy the product from a retailer that discounts because 1t has ot spent  pital providing services or developing a quahty reputatiOn, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer's retailers compete among themselves over services. Resale price maintenance, in addition, can increase interbrand competition by facilitating market entry for new firms and brands. New manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer. New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect. Resale price maintenance can also increase inter brand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer's market share by inducing the retailer's performance and allowing it to use its own initiative and experience in providing valuable services …. Respondent contends, nonetheless, that vertical price restraints should be per se unlawful because of the administrative convenience of per se rules. That argument suggests per se illegality is the rule rather than the exception. This misinterprets our antitrust law. Per se rules may decrease administrative costs, but that is only part of the equation. Those rules can be counterproductive. They can increase the total cost of the antitrust system by prohibiting procompetitive conduct the antitrust laws should encourage. They also may increase litigation costs by promoting frivolous suits against legitimate practices. The Court has thus explained that administrative advantages are not sufficient in themselves to justify the creation of per se rules, and has relegated their use to restraints that are manifestly anticompetitive. Were the Court now to conclude that vertical price restraints should be per se illegal based on administrative costs, we would undermine, if not overrule, the traditional demanding standards for adopting per se rules. Any possible reduction in administrative costs cannot alone justify the Dr. Miles rule. Respondent also argues the per se rule is justified because a vertical price restraint can lead to higher prices for the manufacturer's goods. Respondent is mistaken in relying on pricing effects absent a further showing of anticompetitive conduct. For, as has been indicated already, the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result. The Court, moreover, has evaluated other vertical restraints under the rule of reason even though prices can be increased in the course of promoting procompetitive effects. And resale price maintenance may reduce prices if manufacturers have resorted to costlier alternatives of controlling resale prices that are not per se unlawful …. Resale price maintenance, it is true, does have economic dangers. If the rule of reason were to apply to vertical price restraints, courts would have to be diligent in eliminating their anticompetitive uses from the market. This is a realistic objective, and certain factors are relevant to the inquiry. For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction. When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers. Likewise, a retailer cartel is unlikely when only a single manufacturer in a competitive market uses resale price maintenance. Interbrand competition would divert consumers to lower priced substitutes and eliminate any gains to retailers from their price-fixing agreement over a single brand. Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice …. The rule of reason is designed and used to eliminate anticompetitive transactions from the market. This standard principle applies to vertical price restraints. A part . y . alleging injury from a vertical agreement settmg mm1mum resale prices will have, as a general matter, the information and resources available to show the existence of the agreement and its scope of operation. As courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for example, devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones. For all of the foregoing reasons, we think that were the Court considering the issue as an original matter, the rule of reason, not a per se rule of unlawfulness, would be the appropriate standard to judge vertical price restraints …. The judgment of the Court of Appeals is reversed, and the case is remanded for proceedings consistent with this opinion.
1. Why did  establish and maintain a minimum resale pricing policy for its products?
2. How does the Supreme Court describe the procompetitive impact of a resale price maintenance plan? 3. The retailer makes two arguments to justify why a per se illegality analysis is best applied to this resale price maintenance plan. What are these arguments and what is the Supreme Court's response?
 
 
 
 
 
 

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