veronica kayne haynes and boone, llp washington, dc veronica.kayne@haynesboone

©2008 Haynes and Boone, LLP

National Alcoholic Beverage Control AssociationMarch 11, 2008

RESALE PRICE MAINTENANCEAFTER LEEGIN: AS CLEAR AS

MUD

Veronica KayneHaynes and Boone, LLPWashington, [email protected]


Resale Price Maintenance Defined (1)

• Maximum RPM: a supplier sets the maximum price that resellers can charge their customers

• Minimum RPM: a supplier sets the minimum price that resellers can charge their customers


Resale Price Maintenance Defined (2)

• Supplier: manufacturer, wholesaler, franchisor, intellectual property licensor.

• Reseller: wholesaler, franchisee, retailer, manufacturer of item made under an IP license

• “Supplier” and “Reseller” are in a vertical relationship in the supply chain


Resale Price Maintenance: What It Is, and What It Isn’t (3)

• What It Is: the price to be charged by one buyer to another further down the supply chain: Manufacturer tells wholesaler what to charge retailer; franchisor tells franchisee what to tell consumer

• What It Isn’t: post-and-hold; below-cost prohibition; predatory pricing prohibition.


The World Before Leegin

• 1911: Dr. Miles decision – resale price maintenance agreements are per se illegal.

• 1997: State Oil v. Kahn decision: maximum resale price maintenance agreements should be judged under the rule of reason


How Leegin Changes The Law

• All forms of resale price maintenance, maximum and minimum, should be judged under the rule of reason.


Why Change the Law?

• Rule of reason is the “norm”; per se treatment the exception.

• Dr. Miles was based on “formalistic line-drawing,” not economic inquiry.

• Modern economics offers many procompetitive justifications for RPM.

• There is no basis for blanket condemnation of potentially procompetitive practice.


Other Legal Regimes Affect RPM

• State regulation – “franchise” or “open” or “control” state

• State antitrust law• Other state laws• Potential federal legislation


What Would a Rule of Reason Analysis Look Like?

• In general:– product market definition– geographic market definition– anticompetitive effects not offset by

procompetitive benefits


Anticompetitive Effects

• Higher prices and reduced output• Anticompetitive effects more likely

if:– defendant supplier has market power– retailers pushed for RPM – many suppliers have adopted RPM


Procompetitive Benefits

• Decreased quality-adjusted price and increased output

• Procompetitive benefits could be the result of many activities, such as– increased point-of-sale service– increased advertising– improved shopping experience – store

amenities and location


Adopting an RPM Policy

• What is the procompetitive objective?• Is the policy narrowly designed to achieve

the goal?• What do existing company documents say?• Does the supplier/retailer have market

power?• Do competitors have RPM policies?• Should the effect of the policy be examined

periodically?


Leegin Provides Comfort on Other Practices

• Colgate-style unilateral price policies are still lawful; if a Colgate policy were found to have crossed the line into agreement, it would be judged under the rule of reason.

• Leegin reinforces that advertising restrictions are subject to the rule of reason.


Conclusion

• Rule of reason treatment creates opportunity and uncertainty.

• Before opting for RPM policy, consider whether options will serve the purpose and whether other legal regimes affect the decision.


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veronica kayne haynes and boone, llp washington, dc veronica.kayne@haynesboone

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