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The Fix is In

Manufacturers must be delighted and discounters devastated by today's 5-4 Supreme Court decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. 

The much-awaited antitrust decision overturned 96 years of precedent that had treated as per se illegal vertical price restraints, such as an agreement between a manufacturer and retailers to set minimum retail prices.  Instead, courts must now apply a "rule of reason" on a case-by-case basis to determine whether or not such price maintenance agreements constitute antitrust violations. 

Leegin Creative originated as a dispute between a manufacturer of leather goods and accessories and PSKS, which operates a women's clothing store in Lewisville, Texas, "Kay's Kloset."  Kay's Kloset began selling Leegin's "Brighton" line of merchandise in 1995.  Two years later, the manufacturer instituted a minimum pricing policy that claimed to bolster the brand's image and to promote competition on the basis of quality and service rather than price.  In 2002, Leegin discovered that Kay's Kloset had been marking down the entire Brighton line by 20%.  When the retailer refused to abandon this practice, Leegin terminated the relationship, and PSKS sued.

Writing for the majority, Justice Kennedy, joined by Roberts, Scalia, Thomas, and Alito, cited a great deal of economic literature to the effect that price maintenance agreements between manufacturers and retailers can have either procompetitive or anticompetitive effects.  In other words, unlike certain classic horizontal combinations in restraint of trade, such as price fixing among various brands or geographical market division agreements, vertical price restraints do not necessarily harm the consumer.  In reversing and remanding the case, the Supreme Court directed the lower court to admit evidence regarding the effects of Leegin's policy.

Justice Breyer's dissent, joined by Stevens, Souter, and Ginsburg, did not dispute the essence of the economic data.  Rather, the dissent noted that the relevant precedent has been in place since 1911 and that economic arguments on both sides have been part of the antitrust literature for over half a century.  In Breyer's view, if such data has not been sufficient to convince Congress of the need to alter the law and there has been no dramatic change in circumstances, then the Court should respect the principle of stare decisis and resist the temptation to overturn well-established precedent.

After announcing the decision this morning, the Court recessed until October 1 -- giving the soberly clad justices ample time to hit Fourth of July sales before the effects of their ruling become apparent.  (Not to say that judicial robes can't be quite striking on occasion....)


UPDATE:  More analysis is available on the Antitrust & Competition Policy Blog.