Resale Price Maintenance - United States Law

United States Law

On June 28, 2007, the Supreme Court overruled Dr. Miles, discussed below, holding that such vertical price restraints as Minimum Advertised Pricing are not per se unlawful but, rather, must be judged under the "rule of reason." Leegin Creative Leather Products, Inc. v. PSKS, Inc., Slip Op. No. 06–480 (Decided June 28, 2007). This marked a dramatic shift on how attorneys and enforcement agencies address the legality of contractual minimum prices, and essentially allowed the reestablishment of resale price maintenance in the United States in most (but not all) commercial situations.

In Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911), the United States Supreme Court affirmed a lower court's holding that a massive minimum resale price maintenance scheme was unreasonable and thus offended Section 1 of the Sherman Antitrust Act. The decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel. Subsequent decisions characterized Dr Miles as holding that minimum resale price maintenance is unlawful per se - that is, without regard to its impact on the marketplace or consumers.

During the Great Depression in the 1930s, a large number of U.S. states began passing fair trade laws. These were intended to protect independent retailers from the price-cutting competition of large chain stores by authorizing resale price maintenance. Since these laws allowed vertical price fixing, they directly conflicted with the Sherman Antitrust Act, and Congress had to carve out a special exception for them with the Miller-Tydings Act of 1937. This special exception was expanded in 1952 by the McGuire Act (which overruled a 1951 Supreme Court decision that gave a narrower reading of the Miller-Tydings Act).

The fair trade laws became widely unpopular after World War II and so the Miller-Tydings Act and the McGuire Act were repealed by the Consumer Goods Pricing Act of 1975.

In 1968 the Supreme Court extended the per se rule against minimum resale price maintenance to maximum resale price maintenance, in Albrecht v. Herald Co., 390 U.S. 145 (1968). The Court opined that such contracts always limited the freedom of dealers to price as they wished. The Court also opined that the practice "may" channel distribution through a few large, efficient dealers, prevent dealers from offering essential services, and that the "maximum" price could instead become a minimum price.

In 1997, the Supreme Court overruled Albrecht, in State Oil v. Khan, 522 U.S. 3 (1997).

Several decades after Dr Miles, scholars began to question the assertion that minimum resale price maintenance, a vertical restraint, was the economic equivalent of a naked horizontal cartel. In 1960, Lester G. Telser, an economist at the University of Chicago, argued that manufacturers could employ minimum resale price maintenance as a tool to ensure that dealers engaged in the desired promotion of a manufacturer's product through local advertising, product demonstrations, and the like. Without such contractual restraints, Telser said, no frills distributors might "free ride" on the promotional efforts of full service distributors, thereby undermining the incentives of full service dealers to expend resources on promotion. Six years later, Robert Bork reiterated and expanded upon Telser's argument, contending that resale price maintenance was simply one form of contractual integration, analogous to complete vertical integration, that could overcome a failure in the market for distributional services. Bork also argued that non-price vertical restraints, such as exclusive territories, could achieve the same results.

In 1978, the U.S. Supreme Court held that non-price vertical restraints, such as vertically imposed exclusive territories, were to be analyzed under a fact-based "rule of reason." In so doing, the Court embraced the logic of Bork and Telser as applied to such restraints, opining that, in a "purely competitive situation," dealers might free ride on each other's promotional efforts.

In 1980, the U.S. Supreme Court held that the repeal of Miller-Tydings implied that the Sherman Act's complete ban of vertical price fixing was again effective, and that even the 21st Amendment could not shield California's liquor resale price maintenance regime from the reach of the Sherman Act. California Liquor Dealers v. Midcal Aluminum, 445 U.S. 97 (1980). Thus, from the 1975 enactment of the Consumer Goods Pricing Act to the 2008 Leegin decision, resale price maintenance was again no longer legal in the United States.