Class Certification and Rule of Reason Testing of RPM

Two recent high-profile antitrust decisions, Leegin and Hydrogen Peroxide, brought significant changes to antitrust law. Simply put, Leegin removed the per se illegality of resale price maintenance (RPM) policies, while Hydrogen Peroxide made it clear that there is a significant evidentiary threshold for certifying a class. Moreover, the interaction between these decisions may have additional significant implications for the standards of economic analysis and proof required in class certification. Together these decisions may reduce significantly the number of RPM cases in which it is possible to certify a class.

In the Leegin decision, the Supreme Court struck down the per se illegality of RPM policies. The Court mandated that a rule-of-reason analysis is required to determine whether a particular RPM policy is anti- or pro-competitive. The court recognized that economists have developed models of firm behavior and consumer demand that demonstrate that RPM may have anti-competitive effects, such as cartel enforcement and entry deterrence, and pro-competitive effects, such as output expansion, increased provision of retail services, and increased product choice and availability. Evidence of any adverse price effect must be weighed against evidence of quality- and output-enhancing results of the RPM policy. What the Leegin decision means for defendants is that an affirmative defense that empirically demonstrates the pro-competitive effect of an RPM policy can defeat evidence of price effects offered by plaintiffs. The question for the trier of fact is whether the RPM policy ultimately is good or bad for consumers. This question is independent of whether the RPM policy is good for competing manufacturers or retailers. In class actions, the rule-of-reason weighing is not only required in the aggregate to demonstrate harm to competition, but presumably must apply to each individual class member to show class-wide impact.

In the Hydrogen Peroxide decision, the circuit court articulated a stringent evidence-based standard that plaintiffs must meet to have a class certified. The circuit court found that a court must resolve all factual and legal disputes relevant to the class, including issues that touch on the merits of the case. Most commentators seem to agree that plaintiffs’ evidentiary burden has increased in that the court is likely to require a rigorous empirical analysis that demonstrates a methodology that can determine impact and damages using common evidence. Hydrogen Peroxide invites the defense to present a fact-based refutation of plaintiffs’ proposed methodologies for satisfying class requirements. Instead of merely determining that the proposed methodology meets some threshold of plausibility, the court must weigh the arguments to resolve factual disputes and determine if plaintiffs’ proposed methodology survives defendants’ criticisms.

Where the Hydrogen Peroxide and Leegin decisions overlap (i.e., where class certification is sought with respect to a rule-of-reason violation such as RPM), the defense may explicitly include evidence of the pro-competitive results of an RPM policy. To determine if class-wide impact can be shown with common proof (which is necessary for certification of the class), a methodology must be developed for determining how the RPM policy affected each consumer in the proposed class, both negatively and positively. Previously it could be assumed that the RPM policy was per se illegal, and the analysis could ignore any consumer impact other than the change in retail prices. Now to demonstrate that a viable methodology exists for showing class-wide impact, both price and non-price effects will likely have to be included in a model of the total impact on consumers. In addition, the proposed methodology will have to account for the differences in how consumers value the estimated price and non-price effects.

An example can illustrate this distinction. Assume that a manufacturer implements an RPM policy and, therefore, the product is sold at the same price by a high-service/high-cost retailer and also by a low-service/low-cost retailer. Plaintiffs may argue that the RPM policy limits discounting by the low-service retailer, so that all consumers paid higher prices because other retailers were not forced to match the discounts. Plaintiffs then may propose a methodology that claims to determine the market price absent the RPM policy. But now that a rule-of-reason analysis is required to show consumer harm, the proposed plaintiffs’ analysis may not represent a complete methodology if it examines price in isolation. If all members of the class value only low prices, then determining price might be sufficient. But when some consumers value the services provided by the high-service retailer and would have bought the product there even if the same product was available elsewhere at a lower price, then non-price benefits must be included to determine impact on particular members of the proposed class. If the lower prices that plaintiffs claim would have occurred absent the RPM policy also induced some retailers to curtail services or to discontinue the products (as some procompetitive explanations for RPM predict), then the elimination of RPM may harm some members of the proposed class. As a result, plaintiffs must identify a method of measuring the non-price benefits to consumers and offsetting those benefits against the predicted lower prices to demonstrate that both price-only buyers and price-and-service buyers within the proposed class were harmed by the RPM policy or they must propose a methodology that would (through common proof) identify price-only consumers that are appropriately in the class.

A combination of these two recent decisions appears to require that plaintiffs seeking a class in an RPM case demonstrate a method of estimating any pro-competitive benefits to consumers and determining which individual consumers value these benefits. Even if identifying and documenting procompetitive effects is the burden of the defendant at the merits stage, plaintiffs still cannot ignore these effects at the class certification stage. Plaintiffs cannot now claim to have a viable method of showing class-wide impact without demonstrating that their methodology could reliably show the individualized impact of both the price and non-price effects of RPM on each consumer. Based on the circuit court’s decision in Hydrogen Peroxide, the proposed methodology must also be empirically grounded in the facts of the case. In addition the proposed methodology is now open to refutation by a fact-based demonstration by defendants. If defendants can demonstrate that plaintiffs’ proposed methodology will not accurately measure both the anti- and pro-competitive effects of RPM, as required by the Leegin decision, then plaintiffs will not have met their burden under the Hydrogen Peroxide decision.

John M. Gale is an antitrust economist who focuses on strategic firm interaction. He has analyzed the competitive effects of RPM policies in a variety of industries and has testified concerning class certification.