Resale Price Maintenance After Leegin
For most of a century a manufacturer that told a retailer what to charge committed a per se violation. That rule is gone from federal law, and its removal created one of the sharpest divergences between the Sherman Act and the state statutes that were written to mirror it.
The rule in short
The Supreme Court in Leegin overruled Dr. Miles and held that minimum resale price agreements are judged under the rule of reason rather than condemned per se. Maximum resale prices had already moved, as had non-price territorial restrictions. Federal analysis now weighs the source of the restraint, its prevalence and the market power of the parties. Several state antitrust statutes retain per se treatment, so a national program can be lawful federally and unlawful by state.
Few antitrust rules were as firmly settled, or as widely disliked by economists, as the per se prohibition on minimum resale price maintenance. It came from a case about proprietary medicines and survived nearly a century. Its removal by a divided Supreme Court reordered the law of distribution, and it left behind a patchwork in which the same contract may be tested one way in federal court and another way under the statute of the state where the goods were sold.
The rule that was replaced
The old rule treated an agreement between a manufacturer and a reseller setting a minimum resale price as unlawful without inquiry into its purpose or effect, on the reasoning that a producer who has sold goods has no legitimate interest in what the buyer later charges. Leegin overruled that holding and directed that such agreements be judged under the rule of reason.
The decision completed a sequence rather than beginning one. Non-price restrictions on the territories and customers a dealer may serve had been moved to the rule of reason decades earlier, when the Court concluded that interbrand competition is the primary concern of the antitrust laws and that restraints reducing intrabrand rivalry may strengthen it. Agreements setting a maximum resale price followed. Minimum prices were the last vertical category left in the per se box, and the Court's stated ground for moving them was that the same economic literature applied.
Why the Court thought reasonableness was the right test
The opinion identified procompetitive uses. A guaranteed margin can induce retailers to provide demonstrations, trained staff, showroom space and after-sale support that customers value but that a discounter can free-ride upon by letting a full-service store make the sale and then undercutting it. A new entrant may need resale price maintenance to persuade retailers to carry an unknown brand. Both effects operate on interbrand competition, which is where the Court located the antitrust interest.
It also identified anticompetitive uses, and these define the modern inquiry. Resale price maintenance can be the enforcement mechanism for a cartel among manufacturers, because uniform retail prices make deviations visible. It can be the mechanism for a cartel among retailers who press a supplier to eliminate discounting. And a dominant manufacturer or a dominant retailer may use it to exclude rivals from distribution. The Court accordingly directed lower courts to weigh how many firms in the industry use the practice, whether the restraint originated with the supplier or with its resellers, and whether either has market power.
A program the manufacturer designed, announced and applied uniformly is analyzed as a vertical restraint. A program a manufacturer adopted because its largest reseller demanded it, and that operates to discipline that reseller's competitors, is a horizontal restraint transmitted vertically. The second characterization returns the case to the per se rule, and the documents that decide it are usually internal emails written long before anyone thought about antitrust.
Whether there is an agreement at all
The rule of reason only matters if there is a contract, combination or conspiracy. A seller acting unilaterally may announce in advance the prices at which it wishes its products resold and may refuse to deal with resellers that do not observe them. That freedom, recognized long before the modern vertical cases, remains good law and is the foundation of the announced-policy programs used across consumer goods.
The freedom is narrower than it sounds. A supplier that goes beyond announcement and refusal — that enlists wholesalers to police retail prices, extracts assurances of future compliance as a condition of reinstatement, or builds a reporting system through which resellers turn each other in — has secured acquiescence and therefore an agreement. And the Court has held that an agreement to terminate a price cutter is per se unlawful only where the agreement itself concerns price or price levels, so a supplier that terminates a discounter after complaints from a rival dealer, without more, has not necessarily fixed anything.
The evidentiary standard is the same one that governs inferring concerted action from circumstantial evidence: the plaintiff must produce proof tending to exclude the possibility that the supplier acted independently.
The restraints and their exposure
| Arrangement | Federal treatment | Agreement required | State exposure |
|---|---|---|---|
| Minimum resale price agreement | Rule of reason | Yes | Per se unlawful in several states |
| Maximum resale price agreement | Rule of reason | Yes | Generally follows federal law |
| Announced policy plus refusal to deal | Outside section 1 entirely | No | Same analysis, but policing creates agreement |
| Minimum advertised price policy | Restriction on promotion, rule of reason | Depends on enforcement | Scrutinized where it fixes transaction price |
| Territorial or customer restriction | Rule of reason | Yes | Generally follows federal law |
The states that stayed where they were
Most state antitrust statutes contain harmonization language directing courts to construe them consistently with federal precedent, and in those states the federal change carried over. Several states went the other way. One state legislature amended its antitrust act expressly to declare that a contract, combination or conspiracy fixing a minimum resale price is unlawful per se, restoring by statute what the Supreme Court had removed. Another state's supreme court read its restraint of trade act as leaving no room for a reasonableness inquiry and declined to import the federal rule, prompting legislative attention afterward. In a further group, state courts had long treated vertical price fixing as per se unlawful under the state statute and saw no reason to revisit that construction.
A separate line of state law makes resale price provisions unenforceable as a matter of contract without creating antitrust liability, so a supplier may find that a clause it drafted cannot be sued upon even where the arrangement itself is defensible. State attorneys general have also brought enforcement actions and obtained consumer restitution in this area, and their authority does not depend on the federal characterization.
The practical consequence for a national program is that federal compliance is a floor rather than an answer. Counsel designing distribution terms have to check the antitrust statute of every state in which the goods are resold, in the same way they check state registration requirements before offering a franchise.
What a defensible program looks like
Three features recur in programs that survive challenge. The restraint is initiated and designed by the supplier, with a documented commercial rationale connected to services or to brand entry rather than to a reseller's complaints. It is applied uniformly, because selective enforcement suggests that the real purpose is to protect a favored reseller. And it is limited in duration and scope, which makes the less-restrictive-alternative argument harder for a plaintiff to run.
Programs that combine resale pricing with other restrictions attract closer review, because the effects compound. A supplier that sets minimum prices, limits territories, and requires purchases through approved sources is imposing a package, and courts assess the package. Those adjacent restraints have their own bodies of law, from foreclosure analysis for exclusivity and tied sales to the franchise-specific rules governing approved suppliers and rebates. And because the claims are brought mainly by private plaintiffs seeking trebled damages, the design question is inseparable from who is entitled to sue over an overcharge in the first place.
Points to carry away
- Minimum resale price agreements are now assessed under the rule of reason in federal court.
- Maximum resale prices and non-price territorial restraints moved to the rule of reason earlier.
- A restraint sought by retailers rather than imposed by a manufacturer is treated as more suspect.
- A unilaterally announced price policy enforced only by refusal to deal is not an agreement at all.
- Several state antitrust statutes continue to treat minimum resale price agreements as per se unlawful.
- The Federal Trade Commission retains authority over resale pricing under its unfair methods provision.
Questions readers ask
Is a minimum advertised price policy the same as resale price maintenance?
Not legally, though the commercial effect can be similar. A minimum advertised price policy restricts the price a reseller may publish in advertising while leaving the reseller free to sell at any price it chooses, including in the store or at checkout. Because it does not fix the resale price, it has generally been treated as a restriction on promotion rather than on price, and the historical practice of the enforcement agencies has been to tolerate it. A policy so detailed that the advertised price is in substance the transaction price invites the opposite characterization.
Can a manufacturer terminate a discounting retailer?
A manufacturer acting alone may refuse to deal with anyone for any reason, including a reason it dislikes about the retailer's pricing. The difficulty is that terminations rarely happen in isolation. Where competing retailers complained before the termination, a plaintiff will argue that the manufacturer and the complaining retailers reached an understanding. The Supreme Court has held that complaints plus termination are not enough, and that the evidence must show a conscious commitment to a common scheme designed to achieve an unlawful objective.
Does the change help a manufacturer facing a dominant online discounter?
It removes the automatic bar, but it does not supply a defense. A program adopted to preserve retailer services that customers value, applied consistently across all channels and initiated by the manufacturer, is defensible under the rule of reason. A program adopted at the insistence of one large reseller in order to blunt a rival channel looks like the retailer-initiated restraint the Court flagged as suspect, and it will attract attention from state enforcers whose statutes may not follow the federal rule at all.
Sources
- Cornell Legal Information Institute — 15 U.S.C. 1, Trusts in Restraint of Trade IllegalThe agreement requirement that separates a policy from a contract in restraint of trade.
- Cornell Legal Information Institute — 15 U.S.C. 45, Unfair Methods of CompetitionThe Commission's independent authority over resale pricing practices.
- Cornell Legal Information Institute — 15 U.S.C. 15, Suits by Persons InjuredThe treble damages action through which most resale pricing claims are now brought.
- Federal Trade Commission — Dealings in the Supply ChainWhy vertical arrangements are generally viewed as beneficial and tested for reasonableness.
- Federal Trade Commission — Manufacturer-Imposed RequirementsThe agency's treatment of resale price, territory and customer restrictions imposed on dealers.
- Department of Justice, Antitrust Division — The Antitrust LawsThe Division's overview of the statutes under which vertical restraints are assessed.
Justice Partners Journal is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
