Academic journal article Harvard Law Review

Leegin's Unexplored "Change in Circumstance": The Internet and Resale Price Maintenance

Academic journal article Harvard Law Review

Leegin's Unexplored "Change in Circumstance": The Internet and Resale Price Maintenance

Article excerpt

For almost a century, agreements between retailers and suppliers fixing a minimum resale price, also known as minimum resale price maintenance (RPM) or vertical minimum price fixing agreements, (1) were considered per se violations of the Sherman Act. (2) For example, Polo could not have entered into a contract with Macy's requiring Macy's to sell a particular shirt for at least sixty dollars. However, over time the Supreme Court slowly relaxed the restrictions on other types of vertical agreements, such as vertical maximum price fixing (3) and nonprice restrictions. (4) In addition, economists posited procompetitive justifications for the use of RPM. It was unsurprising, therefore, when the Court held in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (5) that RPM agreements should not be prohibited as per se unlawful, but rather should be subject to rule of reason analysis. (6) Reactions to the decision ranged substantially. Some predicted doom for low-priced retailers like Wal-Mart, (7) while many commentators sighed with relief after arguing for years that RPM agreements were often procompetitive. (8) Other commentators questioned the importance of the decision, doubting the usefulness of vertical minimum price fixing under normal market conditions. (9)

Although the shift to the rule of reason approach in Leegin was preferable to maintaining the per se prohibition, the Court's reasoning did not account for changes in modern business practices based on Internet competition. Had the Court considered those changes, it might have crafted a more tailored rule. For something as intimately tied to business strategy and competitiveness as suppliers' relationships with their retailers, (10) legal evaluation of vertical price restraints has failed to consider actual business strategy along with the theoretical and economic arguments for and against RPM. One of the biggest and most vexing challenges for businesses today is how to handle the Internet channel. Competing prices are readily available to consumers, who increasingly take advantage of price information in their purchasing. Businesses' desire to control prices to protect brand image and to protect retailers from Internet competition makes RPM a more valuable tool for manufacturers than it was in the past, a fact largely ignored by the Leegin Court, particularly by the dissent. (11) In ignoring the Internet, the Court missed an opportunity to craft a rule that would better balance the competing pro- and anticompetitive justifications for the use of RPM.

Part I discusses the legal developments and the economic debate that preceded the decision in Leegin. Part II lays out the Court's decision in Leegin. Part III examines the Internet's effect on the competing pro- and anticompetitive rationales offered for RPM. Part IV explores how the Court might have used those developments to craft a more tailored rule. Part V concludes.

I. DEVELOPMENTS LEADING TO LEEGIN

The debate over RPM raged for years before the Court revisited the issue in Leegin. Congress weighed in for a time, passing legislation allowing the practice but later repealing the legislation. The Court also seemed conflicted, overruling cases that had held vertical maximum price and nonprice agreements per se unlawful but consistently not reaching the per se rule as applied to RPM. A considerable economic debate built up around the issue, as many economists argued that RPM could have pro- competitive effects in certain situations. These legal developments, coupled with the economic debate, set the stage for the fight in Leegin.

A. Congressional and Legal Developments

In Dr. Miles Medical Co. v. John D. Park & Sons Co., (12) the Court held RPM to be a per se violation of section 1 of the Sherman Act (13) as an unlawful restraint on competition. (14) Dr. Miles involved a suit by a supplier to enforce an RPM agreement against a wholesaler. …

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