Resale Price Maintenance and the Rule of Reason

A recent case in Kansas State Court provides an early example of how courts may deal with resale price maintenance (or RPM) agreements under the rule of reason. RPM was viewed as a per se violation for almost 100 years until in 2007 the Supreme Court, in Leegin Creative Products, Inc. v. PSKA, Inc., reversed that prohibition. The Supreme Court case involved an action against fashion accessories manufacturer Leegin. A similar case was brought against the same defendant in Kansas State Court by a class of Kansas consumers. The Kansas plaintiffs claimed that Leegin’s pricing policy violated Kansas antitrust law and that, as a result of this violation, the class had suffered antitrust injury.

In the Kansas case, the court addressed two issues. First, was the RPM policy anticompetitive when judged under the rule of reason? Second, if the RPM policy was anticompetitive, did it result in injury or damage to the plaintiffs, in this case the members of the class?

In answering either question, it is important to realize that RPM policies, like other restrictions affecting the vertical relationships between a manufacturer and its dealers, are typically procompetitive. Manufacturers generally desire competitive wholesale and retail sectors because efficiency in those sectors will expand their product sales through lower costs and prices. Nonetheless, a manufacturer sometimes benefits from imposing vertical restrictions on its dealers’ activities. Some restrictions on intrabrand competition (competition among sellers of the same brand) may increase the intensity of interbrand competition (competition among sellers of different brands). The net effect of the restriction is to make the manufacturer a stronger competitor, which benefits consumers. The procompetitive objectives of antitrust law generally align with a manufacturer’s use of vertical restrictions.

Manufacturers may use vertical restrictions to create the incentive and ability for their dealers to invest in marketing the manufacturer’s brand in a setting and manner that supports the brand image and reputation in the long run. One such vertical arrangement is where a manufacturer deals only with retailers that adhere to a suggested resale pricing and promotion policy. A manufacturer wants its retailers to sell as much of its product as possible. Competitive low pricing helps increase sales, but so do non-price factors, such as better service and marketing. Providing quality retail service and marketing is costly, and a retailer will carry and invest in brands only if it can do so profitably. Free-riding retailers can eliminate the incentive and ability of high-service, high-quality retailers to make the necessary long-term commitments to marketing a particular brand.

By dealing only with retailers that adhere to a suggested retail pricing and promotion policy, a manufacturer prevents other dealers from free-riding on their dealers’ investments and undercutting their dealers’ incentives to support the manufacturer’s brand. A manufacturer would not profit from imposing vertical restrictions that reduced sales by making the product more expensive for consumers without a commensurate increase in value. As a general matter, a manufacturer will want to restrict intrabrand competition only if that restriction promotes more vigorous and effective interbrand competition. As a result of a manufacturer’s retail pricing policy, a consumer may find less retail price dispersion among retailers of the manufacturer’s product but may also find those products at more retailers and in greater selection. As a result, the manufacturer’s brand becomes a stronger interbrand competitor to the benefit of consumers.

Leegin’s pricing policy provides an example. Leegin primarily sells its Brighton fashion accessories products to specialty high-end “boutique” retailers. These retailers have built a reputation and image for high-end goods and service by investing in a high-quality physical environment and a well-trained sales staff and by carefully selecting brands, styles and products to carry. Without Leegin’s pricing policy, low-end discount retailers (who make none of the costly investments made by boutique retailers) would be able to sell Brighton products at a substantially lower price. Two things would likely follow. Brighton sales would shift away from the specialty boutiques to the lower-priced free-riding retailers and, because of the low-quality service and environment at these retailers, Brighton’s brand image would be weakened. As business shifted to the free-riding retailers, the specialty boutiques may lose the incentive or the financial ability to continue to support the Brighton brand or even to continue to carry the Brighton products. If high-quality retailers stopped supporting and carrying Brighton products, overall sales of the brand likely would decline. The resulting weakening of the Brighton brand image and reputation would reduce interbrand competition. Leegin’s pricing policy enables Brighton to provide strong competition to other fashion accessories brands.

Even if a rule of reason analysis finds that an RPM policy was anticompetitive, the court still must determine whether the plaintiffs were in fact “injured or damaged” by the agreement. Determining injury requires constructing a model of what prices consumers would have paid and what level of retail services they would have received in the absence of the alleged unlawful agreement. The difference between these “but-for” prices and “but-for” services and the actual prices paid by class members and the actual retail services they received is the measure of actual impact or “fact of injury,” if any. Among other arguments, Leegin contended that one highly plausible but-for pricing scenario would be for Leegin to adopt a lawful “Colgate safe-harbor” pricing policy (i.e., announce that it would not sell to retailers that did not adhere to its suggested retail prices and discounts). Had Leegin adopted such a policy, consumers would have faced the same prices as had existed under the RPM policy.

In July 2008, the Kansas court ruled in favor of defendant and granted its motion for summary judgment. The court ruled that there was not enough evidence to evaluate Leegin’s pricing policy under the rule of reason at that time. Nonetheless, the court granted Leegin’s request for summary judgment based on the failure of plaintiffs’ economic experts to provide sufficient evidence of class-wide proof of antitrust injury. The court noted that, at a minimum, plaintiffs must show that the defendant’s alleged RPM policy resulted in higher prices to the consumer for these products. A mere showing that an RPM policy exists and that, in theory, RPM policies result in higher prices is not sufficient: “In order for Plaintiff to establish she paid supra-competitive prices as a result of Defendant’s RPM policy, she must establish what the competitive price level would have been in the absence of the RPM policy.

Laura A. Malowane together with Allison M. Holt assisted William C. Myslinski, who submitted both class and merits testimony to the court on behalf of Leegin in the Kansas case.