Antitrust Alert: More Uncertainty About State Treatment Of Vertical Pricing Restraints

The status of vertical pricing restraints at the federal level has been settled since the U.S. Supreme Court's decisions in State Oil v. Khan, 522 U.S. 3 (1997), and Leegin  Creative Leather  Prods., Inc.  v. PSKS, Inc., 551 U.S. 877 (2007).  Whether the restraint is a maximum resale restraint (Khan) or resale price maintenance (or RPM (Leegin)), the rule of reason and not the per se rule is the method of analysis.  The law is less settled at the state level, where by statute (e.g., Maryland) or case law (e.g., California) RPM is occasionally viewed as per se illegal.  Two recent cases continue the uncertainty about the treatment of RPM at the state level, and one raises significant counseling issues because of its potential application to a broader range of pricing practices.

The more unsettling development is last week's decision from the Kansas Supreme Court in a state court challenge to Leegin's pricing practices, O'Brien v. Leegin Creative Leather Prods., Inc. (No. 101,000 May 5, 2012).  There, the Kansas Supreme Court held that RPM is per se illegal under Kansas antitrust law.  The Kansas Court appeared to be unpersuaded by the logic of Justice Brandeis in the Chicago Board of Trade case, which held that Section 1 of the Sherman Act (which literally prohibits “every contract … in restraint of trade”) didn't really mean what it said, and that it prohibited only unreasonable restraints.  The Kansas Supreme Court instead concluded that the Kansas antitrust statute means exactly what it says and permits no competitive effects analysis for conduct literally covered by its language.  To make matters worse, the statute broadly prohibits joint conduct “[t]o increase or reduce the price of merchandise, produce, or commodities” (K.S.A. § 50-101) as well as joint conduct that is “designed or which tend[s] to advance, reduce or control the price or the cost to the producer or to the consumer of any … products or articles” (K.S.A. § 50-112).

So, in the wake of O'Brien, any joint conduct that is “designed … to … advance, reduce or control” a producer's or consumer's price or cost is per se illegal under Kansas law.  O'Brien involved minimum RPM claims, but the decision appears to apply equally to maximum resale restraints (even though such restraints reduce the price to the consumer).  In addition, a creative plaintiff might now try to use the Kansas antitrust statute to attack a variety of other retail practices, including manufacturer-to-retailer discounting, a common practice in the distribution of consumer goods where manufacturers offer discounts on the condition that they be passed along to consumers.  Such discounts arguably are “designed … to … reduce the price … to the consumer.”  One expects that a rational court would not extend the Kansas antitrust statute to such a pro-competitive business practice.  But, under the literal reading suggested by the Court, such discounting could very well be per se illegal in Kansas, especially if the discounting is offered to retailers in return for advertising or shelf space (since retailers that choose not to accept the conditions may argue they are harmed by the discounting). 

The Kansas Supreme Court's decision in O'Brien has several other notable features.  The Court found that the plaintiff only had to show a subjective intent to affect prices, and not an actual effect on prices.  The Court also implied that an agreement is not required, but that "[m]ere arrangements" (undefined by the Court) also are prohibited as long as they are “between persons.”  On the other hand, the Court did apply the well-known “tends to exclude” standard for proving collusive conduct under federal law (Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984)), so that is good news.

And, a word of warning for those who have never litigated an antitrust case in Kansas – K.S.A. § 50-115 provides that any conduct that violates K.S.A. § 50-112 entitles an injured party to recover the "full consideration … paid … for any goods … included in or advanced or controlled in price" by the challenged conduct, which is then trebled pursuant to K.S.A. § 50-161(b).  So, three times the full amount paid for the goods for engaging in conduct that arguably has efficiency justifications. 

The second state RPM ruling is this week's decision by the New York Supreme Court in People v. Tempur-Pedic International, Inc.  In an ongoing battle, the New York Attorney General has been seeking to prohibit what it views as Tempur-Pedic's efforts to control its retailers' prices to consumers.  So far, it has not met success. 

The New York Supreme Court held that New York's General Business Law made contract provisions containing RPM “unenforceable,” but that RPM was not illegal or unlawful.  Also, applying the Colgate doctrine, the Court further held that Tempur-Pedic did nothing more than announce a minimum price policy and that its retailers independently decided to accept, or acquiesce in, the suggested prices.  So, Tempur-Pedic is a helpful decision regarding the treatment of RPM under New York law.

In sum, recent state developments in this key vertical pricing area represent a decidedly mixed bag – while RPM still has life in New York, antitrust counseling has become more difficult for vertical pricing practices that affect commerce in Kansas.

Lawyer Contacts 

For more information, please contact your principal Jones Day representative or either of the lawyers listed below. 

Thomas Demitrack (Tom) 

Kathryn M. Fenton (Kathy)

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