Some history

For nearly 100 years, any agreement between a manufacturer and its retailers to adhere to a minimum resale price - a form of vertical price fixing - has been viewed as an automatic or "per se" violation under the Sherman Antitrust Act, meaning there's no need to prove or evaluate the precise competitive harm. When General Motors tried to discipline a discounting dealer in the Los Angeles market in the 1960s, the U.S. Supreme Court applied the per se rule and said GM couldn't do this.

In the 1990s the Supremes decided that a maximum resale price agreement should be tested under the "rule of reason test" rather than the per se rule, meaning you have to prove there is competitive harm for it to be illegal (State Oil Co. v. Khan). The Supreme Court is now considering whether the rule of reason should also be applied to minimum resale price maintenance agreements.

The current case 

Leegin Creative Leather Products Inc. cut off shipments to customer Kay's Closet, a women's clothing retailer, because it discounted Leegin's products. Parent company PSKS sued, claiming Leegin - which also had an interest in retail stores - entered into per se illegal agreements with retailers to fix prices. The jury agreed and assessed antitrust damages of $1.2 million, which were trebled under antitrust law, plus attorney fees. Leegin urged use of the rule of reason with the appeals court, which said it was bound by the S.C. to use the per se rule and affirmed the lower court's decision. The S.C. heard oral arguments on March 26.

The implications

"This case could allow (automobile) factories to knock out discounting. There would no longer be MSRP, it would be actual price. This could change everything about how consumers deal in the market place," says Mr. Chase, a commercial litigator and nationally recognized authority in automotive franchise law. The big question for dealers, he says: "How would you feel if the factory is dictating retail prices to you?"

Mr. Chase, who has represented dealers for 27 of his 30+ years as an attorney, recommends that dealers who make a living on high volume discounting keep an extra close eye on the case. He expects it will be decided later this year in favor of rule of reason by what he describes as a Supreme Court inclined to be sympathetic to vertical arrangements in which prices are set by a franchisor. He also notes that the case was argued by former solicitor general Theodore Olson, who successfully represented George W. Bush in the Supreme Court Bush v. Gore dispute over the 2000 presidential election.

Mr. Chase points out that under the per se rule, you'd just have to prove that your manufacturer told you that you couldn't go below the $20K threshold, for example, when selling a new vehicle to a customer. But under the rule of reason, a dealer would have to prove competitive harm from this minimum price restriction. "Rule of reason cases are mission impossible…proving competitive harm requires reams of expert analysis; it's very hard and the likelihood is no one would challenge," he says.

Although Mr. Chase predicts we won't see a lot of change here by the factories - and he thinks that only the high line brands would be interested in imposing minimum resale prices, "every dealer should be aware of this case. It cuts right at the heart of the industry's franchise/retail system," he says. In addition, "we may see (the factories) disciplining hard if dealers start to get out of hand." Stay tuned.