The Fall of the per Se Vertical Price Fixing Rule

ABSTRACT In mid-2007, the U.S. Supreme Court overturned a 1911 precedent prohibiting manufacturers from setting prices at the retail level. That earlier decision put price maintenance (vertical price fixing) into the category of violations of the Sherman Act. Per se violations cannot be justified by findings of benefits to competition. The 2007 Leegin decision moved such cases into the other category under the Sherman Act: the rule of reason. Under this category, proof of a violation is often very difficult because of the type of evidence required. Such cases rarely succeed, with the effect that manufacturers can now set retail prices. In this case, Leegin, manufacturing a popular line of women's accessories, disputed the right of a Dallas area retailer Kay's Kottage to discount Leegin's products. Leegin was enforcing a minimum price policy on many, if not all, of its retailers. When Kay's Kottage refused to stop the discounting, Leegin cut off its supply, depriving the store of substantial sales. This article analyzes the opinions of the lower courts and the Supreme Court. Finally, it argues that the decision is mistaken because it breaks long standing precedent, ignores legislative intent, and leads to higher prices for certain types of products. INTRODUCTION Recent years have seen the decline of the per se rule in the interpretation of Section 1 of the Sherman Act dealing with of trade (1890). Now vertical price fixing has been moved by the Supreme Court out of this category. Vertical price fixing (or price maintenance) occurs when a manufacturer sets a price for a retailer. An example might be a high-quality jeans manufacturer not allowing discounting at the retail level. Section 1 of the Sherman Antitrust Act deals with combined activities of two or more parties that may hurt competition and these are called restraints of trade. Since early in this century, the Supreme Court has divided of trade into two categories, the per se rule, and the rule of reason. The rule is used where the restraint is found to be almost always anticompetitive (hurting competition in the market), and thus the Court finds it to be an automatic violation. No defenses or justifications are allowed once the facts indicate the violation. There is no need to show evidence that the practice is anticompetitive. It is assumed. It is thus a fairly easy case for the government or the plaintiff if the facts are there. The Supreme Court has designated a limited number of practices as fitting into this category and up until 2007, vertical price fixing was one of them. Thus the Supreme Court has recently taken another step in restricting the scope of per se antitrust illegality by reversing the per se rule for minimum vertical price fixing in a case decided in June 2007: Leegin Creative Leather Products, Inc. v. PSKS, Inc. The first application of the automatic illegality rule appeared in United States v. Trenton Potteries Co. case in 1927. The term itself was first used in 1940 in United States v. Socony-Vacuum Oil Co. These cases did not allow justifications or defenses. In the course of the twentieth century, Supreme Court opinions basically defined six kinds of per se violations: * cartels (a cartel is a group of competing businesses that coordinate their activities to reduce competition - for example, OPEC is a cartel but beyond the reach of our laws); * horizontal price fixing (competitors agreeing to set prices, typically driving prices higher); * vertical price fixing (sometimes called resale price maintenance); * horizontal production quotas - competitors setting limits on production which again drives prices higher; * horizontal market divisions (competitors agreeing to split up who they will deal with - one example is bid rigging); and * group boycotts (competitors refusing to deal with certain buyers or suppliers). …