Antitrust, Vol. 22, No. 1, Fall 2007. © 2007 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Protecting Consumers Post-Leegin BY ROBERT L. HUBBARD

S

TATES HAVE A LONG HISTORY OF securing remedies for consumers victimized by vertical restraints. Time will tell whether Leegin Creative Leather Products, Inc. v. PSKS, Inc.1 ultimately will help or hurt state efforts to protect consumers from anticompetitive vertical restraints, including minimum vertical price fixing. Of course, state enforcers will have more difficulty proving the violation under federal antitrust law in light of the Supreme Court’s 5–4 decision rejecting the ninety-seven-year-old per se rule against minimum vertical price fixing. But rather than holding vertical restraints per se legal or intrabrand competition irrelevant, the Court instructed lower courts to develop “fair and efficient” rules for analyzing vertical price fixing and other vertical restraints. Leegin has thus elevated the profile of vertical restraints, creating new opportunities for state enforcers depending on how lower courts apply Leegin. Moreover, Congress might enact legislation that enhances enforcement against vertical restraints in response to Leegin and states might turn to state law claims. Leegin had the potential to be the end of meaningful analysis of vertical restraints, the culmination of a thirtyyear process that began with GTE Sylvania.2 When the Supreme Court granted certiorari in Leegin, after a pro forma application of the per se rule by the Fifth Circuit, the last vestige of stringent rules against vertical restraints was directly under attack. The Court appeared ready to reject summarily numerous precedents, which decade after decade had held that minimum vertical price fixing was per se illegal.3 In recent Supreme Court cases, neither the Court nor the United States has supported the plaintiff, siding with defense positions time and again.4 That four Justices and two FTC Commissioners sided with PSKS is the closest an antitrust plaintiff has gotten to prevailing with the U.S. Supreme Rober t Hubbard is Director of Litigation, Antitrust Bureau, New York Attorney General’s office, and Chair, Multistate Antitrust Task Force of the National Association of Attorneys General. I have benefited from the comments, criticisms, and contributions of state enforcers on the Vertical Restraints Working Group in preparing this piece. I owe a par ticular debt to Emily Granrud, a New York Assistant Attorney General, for her work and research on state fair trade laws.

Court or the United States Solicitor General for far too long. PSKS and its amici defended the per se rule with vigor. The parties did not suggest or propose any standard less stringent than the per se rule. They argued that the ninetyseven-year-old rule remained sound because vertical price-fixing agreements are direct agreements to raise prices to consumers without offering consumers any corresponding benefits.5 Perhaps because of this advocacy, Leegin does not represent the end of meaningful analysis of vertical price agreements. A proponent of vigorous rules against vertical price fixing has three strategies to pursue in response to Leegin: seek Congressional action; apply the standards of the Leegin majority; or rely on state law. This article elaborates on those potential strategic responses to Leegin. Leegin Legislation The first strategy is to consider legislation. Members of the public often believe strongly that vertical price fixing is and should be illegal, and communicate that belief to state attorneys general. Consumers generally are not receptive to economic arguments that higher retail prices and other vertical restraints actually benefit them. Consumers’ elected representatives often share that belief. The Antitrust Subcommittee of the Senate Judiciary Committee already has held a hearing on Leegin.6 Senator Kohl’s opening statement expressed his concern with the Leegin decision, including “whether legislation will be necessary to protect the continued existence of consumer discounts.” 7 Federal legislation is possible. Congress may decide that the Court in Leegin misconstrued Congressional views on vertical price fixing or gave inadequate weight to stare decisis. Congress could declare that the Consumer Goods Pricing Act of 1975 and other acts by Congress represent congressional endorsements of the per se rule against vertical price fixing, contrary to what the Court held.8 Addressing an issue left open by the Court, Congress also could engage in fact-finding and address the states’ argument that the economic literature demonstrates that vertical price fixing increases prices for consumers but does not demonstrate any procompetitive benefits. Rather, the literature theorizes, hypothesizes, and muses about those procompetitive benefits.9 Congress could require proof of actual procompetitive benefits before permitting a restraint designed to raise prices for consumers. The closest the majority came to addressing this issue was its statement that “And although the empirical evidence on the topic is limited, it does not suggest efficient uses of the agreements are infrequent or hypothetical.” 10 Congress is entitled to conclude that the Court too easily abandoned the per se rule, and require the proponents of minimum RPM to prove “efficient uses” empirically. Senators Kohl, Biden, and Clinton introduced a bill to overrule Leegin on October 30, 2007.11 S. 2261 adds a new second sentence to Section 1 of the Sherman Act, which provides: “Any contract, combination, conspiracy, or agreeF A L L

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ment setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor, shall violate this Act.” Given the significant issues facing Congress in general and the Judiciary committees specifically, Leegin legislation may not be enacted. But the topic does resonate with the public and federal legislation is a possibility. Applying the Majority Standard to a Simple Vertical Price-Fixing Claim The second strategy is to apply the standards in the majority opinion in Leegin. Although it rejected the per se rule, the majority recognized the anticompetitive potential of vertical restraints generally and price restraints specifically. Recognizing that the proof required should match the restraint challenged, the Court mandated a “fair and efficient” rule: As courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for example, devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones.12

Discerning what the Court means by a “fair and efficient” rule is a challenge. Minimum vertical price fixing is a restraint that is intended to and does raise or maintain retail prices. Is proof that the restraint had its intended price effect on consumers direct evidence of the anticompetitive effect that avoids market definitions and other elements of a full-blown rule of reason case? Some commentators have argued that evidence that the restraint raises prices should not be enough to establish a plaintiff ’s claims, citing the following quote in Leegin: “Respondent is mistaken in relying on pricing effects absent a further showing of anticompetitive conduct.” 13 But that sentence is contained in a paragraph analyzing whether adverse price effects justify continuing the per se rule. The Court merely indicated that higher prices alone should not end the analysis of whether the per se rule applies because those higher prices may generate additional beneficial services for consumers. Deciding what proof is needed and what party has the obligation to present that proof under a “fair and efficient” rule is a different question. The Leegin majority downplays the importance of the price effect because it accepts the assumption in the economic literature that manufacturers’ and consumers’ interests are “aligned with respect to retailer profit margins.” 14 The Court accepts this assumption despite section III.B of the opinion, which specifies some anticompetitive effects of vertical price fixing in which those interests are clearly not aligned.15 Building on that premise, the Court specifies the limited circumstances in which the price effect might be overcome by procompetitive benefits: “As a general matter, therefore, a single manufacturer will desire to set minimum 4 2

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resale prices only if the ‘increase in demand resulting from enhanced service . . . will more than offset a negative impact on demand of a higher retail price.’” 16 Despite accepting that assumption, the majority did not reject the importance that price increases have when proving an antitrust violation. The Court has expressly recognized the centrality of price to the antitrust laws, having noted: “The protection of price competition from conspiratorial restraint is an object of special solicitude under the antitrust laws.” 17 The Court has characterized actionable restraints under Section 1 as those that are “so substantial as to affect market prices.”18 Underscoring that importance, the Court has drawn a “significant distinction between vertical nonprice and vertical price restraints.” 19 In Leegin itself, the Court discusses anticompetitive harms flowing from the restraint that manifest themselves in higher prices for consumers.20 Thus, as lower courts grapple with applying a “fair and efficient” rule, two questions will be paramount: (1) must courts and parties accept the Court’s premise that consumers’ interests are almost always aligned with manufacturers’ interests; and (2) how will courts resolve disputes about whether the vertical price fixing has procompetitive benefits? Some subsidiary questions could be: What happens if the parties dispute whether manufacturers’ and consumers’ interests are aligned? What happens if the parties dispute whether the price restraint caused enhanced services? What happens if the enhanced services do not increase demand? What happens if the increased demand from enhanced services does not exceed the decreased demand from the higher price? Litigation could be structured to answer those questions, but that structure will depend significantly on what facts are alleged and what material facts are disputed. An analytical structure like that used in PolyGram Holding v. FTC,21 might fit the bill. That structure first asks whether the harm to consumers is obvious, in which case the restraint is deemed “inherently suspect.” Given that consumers almost always pay more as a result of vertical price fixing, the “inherently suspect” label should apply. The defendant then would have the burden of providing a plausible and cognizable justification.22 If a court allows the defendant to meet that burden by referring to theoretical benefits gleaned from the economic literature, the burden would shift to the plaintiff to demonstrate actual harm (i.e., price increases) in the specific case. Then the defendants would have the burden of demonstrating that the procompetitive benefits outweigh the anticompetitive harm by proving: (1) the restraint caused retailers to provide actual enhanced value or services; (2) the enhanced value or services increased demand; and (3) the increased demand from that value or those services was greater than the decreased demand caused by the higher price. That could be a daunting task for a defendant. In addition, the party defending the vertical price fixing should have the burden of establishing that the enhanced value or services could not have been achieved in a less

restrictive way. In NCAA v. Board of Regents, for example, the Court rejected a restraint that allegedly led to a procompetitive new product when that product “could be marketed just as effectively without” the restraint.23 Similarly, in Broadcast Music, Inc. v. CBS, the Court accepted the causal link between the challenged price fixing and the procompetitive new product, a blanket license. The Court referred to the link as “reasonably necessary to effectuate the rights,” an “obvious necessity,” and a “necessary consequence of the integration.” 24 Congress has used similar concepts when defining what is appropriate joint development activity, excluding from “joint venture” exchanges of price and other information that “is not reasonably required to carry out the purpose of the venture.”25 If courts adopt a “fair and efficient” methodology for vertical price restraints like the PolyGram methodology, states and other plaintiffs may be able to challenge vertical price fixing and other vertical restraints under the Sherman Act economically and efficiently. Relying on State Law The third potential strategic response to Leegin would be to rely on state law to challenge vertical price fixing. State law is wholly enforceable even if it diverges from federal antitrust jurisprudence on vertical price fixing.26 Using state law to overcome the limitations of Illinois Brick illustrates how complicated this alternative might become. In California v. ARC America Corp., the Court upheld the arguments of four states that their state statutes permitted recovery by “indirect” purchasers despite Illinois Brick. Alabama’s statute allowing recovery of “indirect” damages was passed in 1907, and had not been amended in response to Illinois Brick. Arizona’s statute generally followed the broad language of section 4 of the Clayton Act and had not been amended after Illinois Brick.27 California’s statute had been amended in response to Illinois Brick to clarify that “indirect” purchasers could recover under California antitrust law. Minnesota’s statute had been amended in 1984 to allow prospective recovery by “indirect” purchasers. In all four of those contexts, the Court held unanimously that state law could diverge from federal law.28 The state law arguments concerning vertical price fixing may be significantly different from the state law arguments concerning Illinois Brick issues. State law did not generally address whether “indirect” purchasers could recover prior to Illinois Brick. Prior to Illinois Brick, states had no reason to distinguish between “direct” and “indirect” purchasers in their state antitrust law. State legislatures and courts simply did not provide any historical guidance on the issue. By contrast, states do have historical guidance concerning the costs and benefits of minimum resale price fixing. Much of that legislative and judicial history was generated in the context of considering whether vertical price fixing or competition made for better economic policy. In the midst of the Depression, when many businesses were failing and unemployment skyrocketed, states and then

Congress explored whether vertical price fixing should be allowed, despite Dr. Miles.29 From 1931 through 1950, states enacted so-called fair trade laws, which gave a manufacturer the ability to set the retail price for its products. These statutes included non-signer clauses that required all distributors or retailers to meet the minimum price set by the manufacturer, regardless of whether the distributor or retailer had signed a contract to that effect.30 After World War II, states began to reevaluate the wisdom of these laws and found them invalid as, for example, a price-fixing statute that violated the right to own and enjoy property,31 an improper use of legislative power,32 a violation of a state constitutional ban on price fixing,33 or a violation of due process.34 In 1975, in the midst of a national effort to reduce inflation, Congress passed the Consumer Goods Pricing Act of 1975, repealing the laws that had exempted state fair trade laws from the federal antitrust laws.35 By that time, twentyeight states had already effectively repealed their fair trade laws and endorsed so-called free trade and the per se rule against vertical price fixing in Dr. Miles.36 Following the Consumer Goods Pricing Act, all but three of the remaining states repealed their fair trade laws between 1975 and 1977, again endorsing free trade and Dr. Miles. Like many states, New York went from fair trade to free trade, but in addition to repealing its fair trade law, New York enacted a new statute. New York General Business Law section 369-a provides: “Any contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable or actionable at law.” The legislative history of section 369-a illustrates that New York banned vertical price fixing because it caused high consumer prices. The Governor’s Program Bill in support of section 369-a stated that the fair trade laws “maintain prices at an artificially higher level than would prevail in a free market,” and that the collusion allowed by those laws cost consumers nationally “as high as [$1.5 to $3] billion a year.” The bill, which repealed New York’s fair trade law and enacted New York’s ban on vertical price fixing, “would permit the lowering of prices to the consumer as a result of the competitive processes operating in a free market place.” 37 One question that frequently arises under state antitrust law is the extent to which interpretation of state law defers to federal antitrust law. New York’s highest court, the Court of Appeals, has consistently held that New York’s antitrust law should follow federal antitrust law unless there are differences in state and federal policy, statutory language, or legislative history.38 The history of the fair trade laws, the repeal of the fair trade laws, and the enactment of section 369-a illustrate precisely the differences that justify concluding that New York law prohibits vertical price fixing, despite Leegin. Conclusion Each of the strategic responses considered above carry risks for state enforcers. Federal legislation would be quick and F A L L

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would provide a certain national standard, but the prospects of legislation are always uncertain. Federal court interpretations of Leegin might eventually result in a national standard, but that will be uncertain and slow. Relying on state law is likely to produce different results from state to state, creating a patchwork of differing rules that are inequitable and difficult to administer. Time will tell which strategic alternative is best.


S T O R I E S

19 Business

Electronics, 485 U.S. at 725 (citing Continental T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36, 52 n.18 (1977)). See Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 763 (1984) (noting that it is of “considerable importance that concerted action on nonprice restrictions be distinguished from price-fixing agreements”).

20 127

S. Ct. at 2716 (“unlawful price fixing, designed solely to obtain monopoly profits, is an ever present temptation”); id. at 2716–17 (“Resale price maintenance, furthermore, could discourage a manufacturer from cutting prices to retailers with the concomitant benefit of cheaper prices to consumers.”).

21 416

F.3d 29, 35–36 (D.C. Cir. 2005).

22 Supreme

1

127 S. Ct. 2705 (2007).

2

Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

3

E.g., State Oil Co. v. Khan, 522 U.S. 3, 17 (1997); Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 720, 724 (1988); 324 Liquor Corp. v. Duffy, 479 U.S. 335, 341–43 (1987); Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984); Arizona v. Maricopa County Med. Soc’y, 457 U.S. 332, 348 (1982); California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 102–02 (1980); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51 n.18 (1977); Simpson v. Union Oil Co., 377 U.S. 13, 18 (1964); United States v. Parke, Davis & Co., 362 U.S. 29, 47 (1960); Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 386 (1951); United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 721–22 (1944); United States v. A. Schrader’s Son, Inc., 252 U.S. 85, 99–100 (1920).

4

5

In addition to Leegin, recent antitrust cases in which the Supreme Court and the United States wrote in support of the party alleged to have violated the antitrust laws include Credit Suisse Sec. v. Billing, 127 S. Ct. 2383 (2007); Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955 (2007); Illinois Tool Works Inc. v. Indep. Ink, Inc., 126 S. Ct. 1281 (2006); Texaco Inc. v. Dagher, 126 S. Ct. 1276 (2006); Volvo Trucks N. Am. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006); Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007); F. Hoffmann-LaRoche Ltd. v. Empagran S.A., 542 U.S. 155 (2004); and Verizon Commc’ns, Inc. v. Curtis V. Trinko, LLP, 540 U.S. 398 (2004). The states’ amicus, for example, is available at http://www.oag.state.ny.us/ business/antitrust/pdfs/Leegin%20States.pdf.

6

The statements given at the hearing are available at http://judiciary.senate. gov/hearing.cfm?id=2893.

7

Senator Kohl’s statement is available at http://judiciary.senate.gov/ member_statement.cfm?id=2893&wit_id=470.

8

Leegin, 127 S. Ct. at 2723–25.

9

See Sanford M. Litvack, The Future Viability of the Current Antitrust Treatment of Vertical Restraints, 75 C AL . L. R EV. 955, 956 (1987) (“The basic reason the per se rule continues to be accepted is that those . . . who would argue against it[] have not made their case outside of an economic laboratory.”); Frank H. Easterbrook, Antitrust Law Enforcement in the Vertical Restraints Area: Vertical Arrangements and the Rule of Reason, 53 A NTITRUST L.J. 135, 151 (1984) (“No economic model is worth much without testing . . . only good, hard, empirical work can offer answers.”).

10 Leegin,

127 S. Ct. at 2717.

11 Senator

Kohl issued a press release on this legislation, which is available at http://kohl.senate.gov/~kohl/press/07/09/2007A30814.html.

12 Leegin,

127 S. Ct. at 2720 (emphasis added).

13 Id.

at 2719.

14 Id.

at 2718.

15 Id.

at 2716–17.

16 Id.

at 2719 (citation omitted).

17 Bus.

Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 742 n.5 (1988) (citing United States v. Gen. Motors, 384 U.S. 127, 148 (1966)).

18 Apex

4 4

Hosiery Co. v. Leader, 310 U.S. 469, 500–01 (1940). ·

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Court precedent places the burden of going forward with proof of procompetitive justifications in a rule of reason case on the defendant. NCAA v. Bd. of Regents, 468 U.S. 85, 113 (1984) (referring to this as a “heavy” burden and citing National Society of Professional Engineers v. United States, 435 U.S. 679, 692–96 (1978)). See Cal. Dental Ass’n v. FTC, 526 U.S. 756, 775–76 (1999).

23 468

U.S. 85, 114 (1984).

24 441

U.S. 1, 19, 20 (1979).

25 15

U.S.C. § 4301(b)(1).

26 California

v. ARC America Corp., 490 U.S. 93 (1989).

27 In

Bunker’s Glass Co. v. Pilkington PLC, 75 P.3d 99 (Ariz. 2003), the Arizona Supreme Court exercised its right to construe similar language in the Arizona state statute differently than how the Supreme Court construed the federal statute in Illinois Brick.

28 490 29 Dr.

U.S. at 97–98, 102–06.

Miles Med. Co. v. John D. Park & Sons, 220 U.S. 373 (1911).

30 Ronald

H. Wolf, The Fair Trade Law of Tennessee, 41 T ENN . L. R EV. 851, 870 (1974); H.J. O STLUND & C.R. V ICKLAND , FAIR T RADE AND THE R ETAIL D RUG S TORE 2 (Druggists’ Research Bureau 1940).

31 Liquor

Store, Inc. v. Continental Distilling Corp., 40 So. 2d 371 (Fla. 1949).

32 Gen.

Elec. Co. v. Wahle, 207 Or. 302, 296 P.2d 635 (1956).

33 Gen.

Elec. Co. v. Thrifty Sales, Inc., 5 Utah 2d 326, 301 P.2d 741 (1956).

34 Grayson-Robinson

Stores v. Oneida, 209 Ga. 613, 75 S.E.2d 161 (1953).

35 Thomas

K. McCraw, Competition and “Fair Trade”: History and Theory, 16 R ES . E CON . H IST. 185, 215 (1996).

36 Court

rulings effectively repealed fair trade laws in Alabama (1962), Arkansas (1966), Colorado (1956), Florida (1949), Georgia (1955), Indiana (1957), Iowa (1961), Kansas (1958), Kentucky (1958), Louisiana (1956), Massachusetts (1973), Michigan (1941), Minnesota (1960), Montana (1961), Nebraska (1955), Nevada (1964), New Mexico (1957), North Carolina (1974), Oklahoma (1961), Oregon (1956), Pennsylvania (1964), Rhode Island (1964), South Carolina (1957), South Dakota (1970), Utah (1956), Washington (1959), West Virginia (1957), and Wyoming (1962).

37 Fair

Trade – Price-Fixing, 1975 N.Y. Legislative Memoranda 1595. See Governor’s statement on approving the bill. Id. at 1736–37. The Governor’s statement refers to costs to consumers being “as high as $10 billion a year” nationally. That figure may have come from an internal memorandum of an FTC Commissioner obtained by The New York Times estimating the costs to consumers for collusion generally. F.T.C. Aide Sees Wide Price-Fixing, N.Y. T IMES , July 26, 1974, at 34. Testimony in congressional hearings on the fair trade laws estimated the annual cost to consumers as $1.5 to $3 billion. 1 T HE L EGISLATIVE H ISTORY OF THE F EDERAL A NTITRUST L AWS AND R ELATED S TATUTES 940 (Earl W. Kintner ed., 1978). I use that range in the text. The testimony in New York on the fair trade laws estimated the annual cost to consumers nationally for vertical price fixing to be $1.5 billion, based on the 1969 annual report of the Council of Economic Advisors. Joint Hearing of the Select Committee on Consumer Protection and the Assembly Commerce Committee 116 (N.Y., N.Y., Oct. 2, 1973) (testimony of Meyer S. Tulkoff, FTC assistant regional director for the New York region).

38 E.g., People

v. Rattenni, 81 N.Y.2d 166, 597 N.Y.S.2d 280 (1993); AnheuserBusch, Inc. v. Abrams, 71 N.Y.2d 327, 334–35, 525 N.Y.S.2d 816, 820 (1988); State v. Mobil Oil Corp., 38 N.Y.2d 460, 463, 381 N.Y.S.2d 426, 428 (1976).