Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc., DBA Kay’s Kloset, No. 06-480 (U.S. Sup. Ct. 6/28/07)
The One Sentence Summary: Reversing 96 years of antitrust precedent that made minimum resale price agreements between manufacturers and retailers per se illegal, U.S. Supreme Court held in 5-4 decision that vertical price restraints are to be analyzed under “rule of reason” and not deemed unlawful per se.

What They Were Fighting About:
PSKS, Inc., operating as Kay’s Kloset a women’s apparel store in Texas, sued Leegin Creative Leather Products, Inc., which manufactures leather goods and accessories, after Leegin stopped selling to Kay’s Kloset due to its refusal to agree to a new minimum resale pricing policy. Leegin adopted the policy for its Brighton brand in order to protect the brand’s image against what it deemed harmful discounting and to give its retailers sufficient margins to provide a level of customer service that supported the brand. Kay’s Kloset had been discounting Brighton products by 20 percent, and it suffered a substantial decline in sales revenues after Leegin stopped selling it Brighton goods.

Jury trial on PSKS’s antitrust claims resulted in $3.975 million judgment for the retailer, which the Fifth Circuit affirmed. U.S. Supreme Court granted certiorari to determine whether vertical minimum resale price agreements should still be deemed unlawful per se under Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373 (1911).

Court Holdings:

  • Because vertical minimum resale price agreements can have procompetitive or anticompetitive effects depending on the circumstances, they should no longer be deemed illegal per se under Section 1 of the Sherman Act. Minimum resale agreements should be subject to rule of reason analysis, whereby courts balance procompetitive and anticompetitive effects of a challenged restraint in determining whether or not it violates Section 1 prohibition against unreasonable restraints of trade.
  • In reversing Dr. Miles rule that a vertical agreement between a manufacturer and its distributor is unlawful per se, Court relied on economics literature as to two procompetitive effects of minimum resale price agreements.
  • First, allowing a manufacturer and retailer to agree on a minimum resale price tends to eliminate intrabrand price competition (that is, competition among retailers selling the same brand), which can stimulate interbrand competition (that is, competition among manufacturers selling different brands of the same type of product). Vertical price restraints by a manufacturer encourage retailers to invest in customer services and promotions that enhance the manufacturer’s position relative to that of a competing manufacturer. If vertical price restraints were illegal per se, discount retailers would “free ride” on the efforts of retailers who provide such demand-enhancing services and undercut their price.
  • Second, minimum resale price agreements can increase interbrand competition by facilitating entry into the market by new manufacturers and brands.
  • Anticompetitive effects may result from minimum resale price agreements in some cases, such as enabling manufacturing cartels or retailer price fixing. Vertical agreements setting minimum resale prices to enable either type of cartel would be unlawful under the rule of reason.
  • Court’s majority, unlike the four dissenting justices, did not consider stare decisis to be a sufficient reason to continue the bright-line rule against vertical price restraints.
  • Dissenting justices believed that applying the rule of reason to minimum resale price agreement would create an unworkable legal regime, lead to higher retail prices to the detriment of consumers, and make it more difficult for small, price-cutting retailers (both online and brick-and-mortar) to compete with major retailers.