U.S. Supreme Court Gives Manufacturers Greater Leeway in Controlling Distributors’ Prices

July 2007

Manufacturers often want to dictate the prices their distributors or retailers charge to consumers. For instance, a manufacturer may not want distributors charging low prices that harm a product’s upscale image. A manufacturer may want to encourage its retailers to provide exceptional service or attractive displays, which they may not do if they may be undercut by another retailer selling the same product.

For nearly a hundred years, however, manufacturers’ efforts to control the prices charged by their distributors or retailers ran headlong into the Sherman Antitrust Act. In 1911, the United States Supreme Court declared in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), that an agreement between a manufacturer and its distributor on the prices to be charged by the distributor – known as resale price maintenance or vertical price-fixing – was automatically unlawful under the antitrust laws.

Manufacturers had developed a number of ways to work around the Dr. Miles rule. For example, “suggested” retail prices were permitted, as was “pre-marking” of retail prices on packages. A manufacturer could lawfully adopt a pricing policy and then terminate non-compliant distributors. Some manufacturers adopted joint advertising programs and then conditioned participation on a distributor’s adherence to the manufacturer’s pricing policy. These tactics helped manufacturers accomplish their marketing objectives, but in a much more inefficient way than directly controlling their distributors’ prices.

On Thursday, June 28, 2007, the Supreme Court overruled the Dr. Miles decision in a 5-4 decision called Leegin Creative Leather Products, Inc. v. PSKS, Inc., ___ U.S. ___, No 06-480. The Supreme Court held that agreements between a manufacturer and distributor on the prices to be charged by the distributor are not automatically illegal. The Court held that the lawfulness of these agreements will be judged based on all relevant circumstances. The Court pointed to several factors to be considered, the most important among them the manufacturer’s market power (i.e., its ability to control overall market prices).

As a practical matter, the Leegin decision is likely to make it lawful in most instances for a manufacturer to dictate the prices its distributors and retailers charge their customers. Unless a defendant has market power – the ability to control overall market prices and output – its pricing practices cannot have an overall harmful effect, because buyers can turn to other sellers. After Leegin, resale price maintenance will probably prove to be lawful when the manufacturer lacks market power and debatable when the manufacturer has market power.

All manufacturers should be aware, however, that state antitrust enforcers may not follow the new Leegin rule, which is a matter of federal antitrust law. While most states generally follow federal antitrust decisions, they are not obligated to do so. Some states may continue to enforce the old automatic prohibition on vertical price-fixing.

For more information about the Leegin decision or Frost Brown Todd’s antitrust practice, please contact Matt Blickensderfer at (513) 651-6162 or mblickensderfer@fbtlaw.com. We welcome to our antitrust practice J. Michael Peffer, formerly Vice President and General Counsel of The Valvoline Company, a division of Ashland, Inc.. Based in our Lexington office, Mike has significant antitrust experience, including criminal investigations, company audits, merger review, and price discrimination law. Mike can be reached at (859) 244-3272 or mpeffer@fbtlaw.com.

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