Amicus Curiae Brief — Leegin Creative Leather Products v. PSKS, Inc.

e

No. 06-480

In the Supreme Court ef the United States

LEEGIN CREATIVE LEATHER PRODUCTS, INC.,

PETITIONER

Vv.

PSKS, INc., D/B/A KAY’S KLOSET... KAY’S SHOES,

RESPONDENT

On Writ of Certiorari

to the United States Court of Appeals

For the Fifth Circuit

BRIEF OF CTIA — THE WIRELESS ASSOCIATION AS

AMICUS CURIAE IN SUPPORT OF PETITIONER

MICHAEL FIELD ALTSCHUL Roy T. ENGLERT, JR.*

CTIA — The Wireless DONALD J. RUSSELL

Association Robbins, Russell, Englert,

1400 16" Street N.W. Orseck & Untereiner LLP

Suite 600 1801 K Street, N.W.

Washington, D.C. 20036 Suite 411

(202) 785-0081 Washington, D.C. 20006

(202) 775-4500

*Counsel of Record

TABLE OF CONTENTS

Page

pg TET TE Aner er ra RTE il

Be ee GI I Ci cccececccccsccccecccssonccccccccccoseness l

SUMMARY OF ARGUMENT ...............cccccccceececcccescceseeseseees l

(BENE RSG eRe eter on eee ee CPO CT: See ORE ION IG 4

THE ANTITRUST LAWS SHOULD NOT TREAT MINIMUM

RESALE PRICE MAINTENANCE AS A PER SE

UNLAWFUL BUSINESS PRACTICE ............ccccccesseceseeeceeeeeseeeees 4

I. Minimum Resale Price Maintenance Commonly

Serves Legitimate, Procompetitive Purposes

And Should Not Be Outlawed Across The

II]. The Arguments Offered in Defense of Retaining

A Per Se Ban On Minimum Resale Price

Maintenance Are Unpersuasive..............c0ccsseeseeeeeeeees 16

III. Stare Decisis Considerations Do Not Justify

Retaining An Obsolete, Economically

Damaging Rule That This Court Would Not

GRR Ce sccccinssnnntnncgntiininnnsnncinsndincenenieninsainteieinites 24

ee Rivisncircieneccsinssiniinchiaretsinscitnaninnieiidisenniiintiedniiiinciiuinbiinieiie 28

TABLE OF AUTHORITIES

Page(s)

Cases

Alaska Airlines, Inc. vy. United Airlines, Inc., 948

F.2d 536 (9th Siac SUPT ccscnaspntniniannsihiatinnnndguinastnidecidadiantaniesiie 11

Albrecht v. Herald Co., 390 U.S. 145 (1968)... 26

American Airlines, Inc. v. Wolens, 513 U.S. 219

TTT cick einiechsanbcaieitleliaah iene iat naeaiaasaenstaiis 26

Appalachian Coals, Inc. v. United States, 288 U.S.

TTI icincciicnintceaesiersicuna iin sienna dalibiinaaaaadainnnaaaibadea 25

Arizona Vv. Maricopa County Medical Society, 457

Se sicniciianiinnieceinieniiabiapiieiddaiammuasien 5, 25

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d

ls Se arinctitnichinctictesetiaiatideieidhisininensenniteenentin ll

Blue Cross & Blue Shield United of Wisconsin v.

Marshfield Clinic, 65 F.3d 1406 (7th Cir. 1995).............. 11

Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979)............ 5, 25

Brooke Group, Ltd. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209 (1993).......ccccecsseeseeeeeeeees 24

Brown Shoe Co. v. United States, 370 U.S. 294

TTT nesinccshgsipepdanesediaiaiadeehalihdeiianihebtilltedtareiaspicciaitibeiatapanlapeeati 24

Business Electronics Corp. v. Sharp Electronics

Corp., ee ls Fe ee iietiicniahbircnncuicnieaiientbintintiinnindieniitiniin 7

Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S.

TIT cnscissschesiiielciinessetuiucaienliiaihitacaden tients taininiain 24

Chicago Board of Trade v. United States, 246 U.S.

Ba I hsceicisiienieredaininieinhiiienstiaeaitae eal ah iin 4, 25

Continental T.V., Inc. v. GTE Sylvania Inc., 433

Se GIT F iinrinentonniminnnnimcenimiiiieiiliindinnnnennetiin passim

TABLE OF AUTHORITIES—continued

Page(s)

Dr. Miles Medical Co. v. John D. Park & Sons Co.,

Be Es ee IIE ccerteninsienintnessbninitnsertiscecisicumenainnianiniiibil passim

FTC v. Indiana Federation of Dentists, 476 U.S.

aera itciatecliasiniibebiadeetininsaiicuaetnihieneedinisaielniniagianiniadtinidine 25

Henslee v. Union Planters Nat'l Bank & Trust Co.,

ee i icceniciiicidisinsteihinhpsinsineniipntisisaaitiiniicanien 25

Illinois Tool Works v. Independent Ink, Inc., 547 .

US. ge ele Sat REID Ce icenteccusasiuscensenmnvcanasiceinets 6

Kartell v. Blue Shield of Massachusetts, 749 F.2d

Pe I. See iciideibahaininnetinceninnsnbineneiginicinmnianinsntianiubaie 11

Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S.

Fe iacnetcinnnsiticisialabasiitabeieaicsasniiiannusiiaapinachaninditidaianiaiaatie 7

National Society of Professional Engineers v.

United States, 435 U.S. 679 (1978) .......ccccccccccceeeeseseeerenees 24

NCAA v. Board of Regents of the Univ. of

Oklahoma, 468 U.S. 85 (1984) .......cccccccecceeeeeeeeseeceeeeeeeeeees 25

Northern Pacific Ry. v. United States, 356 U.S. 1

[See issivnciisthsitiniassssestasisiasieninidibatinidephiaabieatanbinsdiniiepsiatunpeliliiiadaiatiais 5

Northwest Wholesale Stationers, Inc. v. Pacific

Stationery & Printing Co., 472 U.S. 284 (1985)............... 5

Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990)

I danictasesescisnemtansasintinisnbamanancepiinininnpiciabiisuaate 25

Polygram Holding, Inc. v. FTC, 416 F.3d 29 (D.C.

I nt iia ald ea te 4

Puerto Rico Dep't of Consumer Affairs v. Isla :

Petroleum, 485 U.S. 495 (1988) .......ccccccceseeeseeeeeeeeeeeeeees 23

Simpson v. Union Oil Co., 377 U.S. 13 (1964) ..........00.00000 26

TABLE OF AUTHORITIES—continued

Page(s)

Standard Oil Co. v. United States, 221 U.S. 1

FREESE ence nia eer ec ne OT oe a 4, 25

State Oil Co. v. Khan, 522 U.S. 3 (1997) .....ccccccceeseeees passim

Texaco, Inc. v. Dagher, 547 U.S. 1, 126 S. Ct. 1276

REEL aves oe ooo mt Rte DO ne eae een 4

Texas Industries, Inc. v. Radcliff Materials, Inc.,

ERIE ry meets ene eRe 24

Trace X Chem., Inc. v. Canadian Indus., Ltd., 738

I, i 11

Train v. City of New York, 420 U.S. 35 (1975) .......ccccceeeceees 23

United States v. Addyston Pipe & Steel Co., 85 F.

271 (6th Cir. 1898) , aff'd as modified, 175 U.S.

I idineistiesiiceiceiltitletialit initia ii elastin eiaas 13

United States v. Arnold, Schwinn & Co., 388 U.S.

EERE na oon EY Ra dee oi ea 16, 25

United States v. Colgate & Co., 250 U.S. 300

EERIE Aenean we eRD DOC eRe S ae a Toa ee 13, 15, 26

United States v. General Elec. Co., 272 U.S. 476

RRS REESE I Reenter Soe OT ee PE A eT eae 26

United States v. General Motors Corp., 384 U.S.

I cisitahiieidetennctledindalatinllcaldates ac iailinaaataiaaiasie 18

United States v. Parke, Davis & Co., 362 U.S. 29

EERE ESA ec etivecr a ena no es Oe nce oD rare ES PTO OR 26

United States v. Socony-Vacuum Oil Co., 310 U.S.

ERR Sacer ener ec ee AE TERE Ie 25

United States v. Trans-Missouri Freight Ass'n, 166

EER era Dena Ena mI Oe eR 25

TABLE OF AUTHORITIES—continued

Page(s)

United States v. Trenton Potteries Co., 273 U.S.

TE scescicntiitiahilieitedinibiiiahiaiaahiiielatlanthiihiaiiiieibin aie te datas 25

United States v. United States Steel Corp., 251 U.S.

Sar Fea icsisintictisestetieiinieciliitaeeseaiuinpiniebinenadaniiaiamddddduntanepabioniiiin 13

Volvo Trucks North America, Inc. v. Reeder-Simco

GMC, Inc., 546 U.S. 164, 126 S. Ct. 860 (2006).......... 9,24

White Motor Co. v. United States, 372 U.S. 253

Paar asciscssercistuiainninitciepiahanibeneninlidiiaiaanedisdsameidiadaianitandidiipensdue 25

Williamsburg Wax Museum, Inc. v. Historic

Figures, Inc., 810 F.2d 243 (D.C. Cir. 1987) .......cccceeeee 11

Willy v. Coastal Corp., 503 U.S. 131 (1992)........cccecee cece 24

Statutes and Other Legislative Materials

Pub. L. No. 75-314, 50 Stat. 693 (1937)............ccccecceseeeeeeeees 23

Pub. L. No. 82-543, 66 Stat. 631 (1952)...........cccccceeeeeeeeeeees 23

Pub. L. No. 94-145, 89 Stat. 801 (1975)..........cccccceeseseceeeceees 23

Pub. L. No. 98-166, 97 Stat. 1071 (1983)...........c.cccceeeeeeeeees 23

Pub. L. No. 99-180, 99 Stat. 1136 (1985)... Saati 23

Miscellaneous

ABA Section of Antitrust Law, Antitrust Law and

Economics of Product Distribution (2006)............0:c000000 20

8 Phillip E. Areeda & Herbert Hovenkamp,

Antitrust Law (2d ed. 2004) .0........::ccccccseeeseeeeeeeseeeeeeeees 7,12

William F. Baxter, The Viability of the Vertical

Restraints Doctrine, 75 CAL. L. REV. 933 (1987) .. 7, 20, 26

TABLE OF AUTHORITIES—continued

Page(s)

Roger D. Blair, Jill Boylston Herndon & John E.

Lopatka, Resale Price Maintenance and the

Private Antitrust Plaintiff, 83 WAsH. U.L.Q. 657

Ee 8, 20

Roger D. Blair & David L. Kaserman, Antitrust

TT a ee 7, 10

Robert H. Bork, The Antitrust Paradox (1993 ed.) ....7, 17, 23

Ward Bowman, The Prerequisites and Effects of

Resale Price Maintenance, 22 U. CHI. L. REV.

EE 18

David A. Butz, Vertical Price Controls With

Uncertain Demand, 40 J.L. & ECON. 433 (1997)............... S

Terry Calvan & Andrew G. Berg, Resale Price

Maintenance After Monsanto: A Policy Still at

War With Itself, 1984 DUKE L.J. 1163 ..............ccceeeee 7, 23

Dennis W. Carlton & Jeffrey M. Perloff, Modern

Industrial Organization (4th ed. 2005).................ccccccceeeeee 8

Yongmin Chen, Oligopoly Price Discrimination

and Resale Price Maintenance, 30 RAND J.

a 8

James Cooper, et al., Vertical Restraints and

Antitrust Policy: What About the Evidence?, |

COMPETITION POL. INT’L 45 (2005) -.............cccccceecceceeeeeeeees 8

Raymond Deneckere, Howard P. Marvel & James

Peck, Demand Uncertainty and Price

Maintenance: Markdowns as Destructive

Competition, 87 AMER. ECON. REV. 619 (1997)................. 8

vi

TABLE OF AUTHORITIES—continued

Page(s)

Raymond Deneckere, Howard P. Marvel & James

Peck, Demand Uncertainty, Inventories, and

Resale Price Maintenance, 111 Q.J. ECON. 885

Frank Easterbrook, Antitrust Law Enforcement in

the Vertical Restraints Area: Vertical

Arrangements and the Rule of Reason, 53

A gg EE OT 7, 20, 23

Douglas H. Ginsburg & Leah Brannon,

Determinants of Private Antitrust Enforcement in

the United States, 1 COMPETITION POLICY INT’L

REE TEN ee ee ene ED 14

Warren S. Grimes, Brand Marketing, Intrabrand

Competition, and the Multibrand Retailer: The

Antitrust Law of Vertical Restraints, 64

SED Ge Gp Ge ececersccenesmemnemmennen 20, 23

Oliver Wendell Holmes, The Path of the Law, 10

Ts en RR. GF GPG cecreraserscsnnemsnnnmenemecmnecamenmansee 17

Herbert Hovenkamp, The Antitrust Enterprise

FEIT ccnnemnnnienenitencteniisormnnneguenineinnmeeeniiee passim

Pauline M. Ippolito, Resale Price Maintenance:

Empirical Evidence from Litigation, 34 J.L. &

Eee 8, 19, 20

Benjamin Klein, The Economics of Franchise

Contracts, 2 J. CORP. FIN. 9 (1995) .............ccececsssssccocenseees 8

Benjamin Klein & Kevin M. Murphy, Vertical

Restraints as Contract Enforcement Mechanisms,

Fe Fal Fe cnntncinstiemniinnngin 8

vii

TABLE OF AUTHORITIES—continued

Page(s)

Paul Oskar Knisteller, “Creativity” and

“Tradition,” 44 J. Hist. IDEAS 105 (1983)..............2...000- 24

Howard P. Marvel & Stephen McCafferty, Resale

Price Maintenance and Quality Certification, 15

CE 8

Howard P. Marvel & Stephen McCafferty, The

Political Economy of Resale Price Maintenance,

ee nce eRe cn erreciniensesammmeneiennintenssemmesenn 8

Howard P. Marvel & Stephen McCafferty, The

Welfare Effects of Resale Price Maintenance, 28

Fale Gee DEP CID cecnncnseresssssnssensenensscsmpemennesmenmen 8

Frank Mathewson & Ralph Winter, The Law and

Economics of Resale Price Maintenance, 13 REV.

BN SUI II cirnenininciiitiitannestindnasenediuiesinates 8, 10, 20

Timothy J. Muris, Jmproving the Economic

Foundations of Competition Policy, 12 GEO.

TET Te, © Gee cemrentcccnsensesssnnseqnncesesemmeneneemesnne 8

Thomas R. Overstreet, Jr., Bureau of Econ., Fed’!

rede Comm’n, Resale Price Maintenance:

Economic Theories and Empirical Evidence

ee a 8

Robert Pitofsky, Jn Defense of Discounters: The No-

Frills Case for a Per Se Rule Against Vertical

Price Fixing, 71 Geo. L.J. 1487 (1983)............ 8, 18, 21, 22

Richard A. Posner, Antitrust Law (2d ed. 2001)............... 8, 23

Richard A. Posner, The Next Step in the Antitrust

Treatment of Restricted Distribution: Per Se

Legality, 48 U. Cui. L. REV. 6 (1981)................... 13, 15, 16

vill

TABLE OF AUTHORITIES—continued

Page(s)

Roscoe Pound, Survey of the Conference Problems,

re le ice le: Be EE cccrertecencsictnneniecenenccneccnmninieti 26

John H. Shenefield & Irwin M. Stelzer, The

Antitrust Laws: A Primer (4th ed. 2001) .0............ceceeceeeeee 24

Lester G. Telser, Why Should Manufacturers Want

Fair Trade?, 3 J.L. & ECON. 86 (1960)....................00. 8, 10

Jean Tirole, The Theory of Industrial Organization

eid snedtllasnnesnseneninstivnnanadiigsmgimipenteitnineindatitniminls 8

U.S. Departmen of Justice, Antitrust Division,

Corporate Leniency Policy (Aug. 10, 2003), at

http://www.usdoj.gov/

atr/public/guidelines/009 1 htm ......0........eeeeeeeeeeeeeeeeeeeeeeees 19

U.S. Department of Justice, Antitrust Division,

Leniency Policy for Individuals (Aug. 10, 2004),

at http://www.usdoj.gov/atr/public/

Ere 19

W. Kip Viscusi, John M. Vernon & Joseph E.

Harrington, Jr., Economics of Regulation and

es ee icieciuialitetnaittincantaainidtibinininitnnrtcmeennts 8

Ralph A. Winter, Vertical Control and Price Versus

Nonprice Competition, 108 Q.J. ECON. 61 (1993).............. 9

ix

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BRIEF OF AMICUS CURIAE IN

SUPPORT OF PETITIONER

INTEREST OF AMICUS CURIAE'

CTIA — The Wireless Association represents all segments

of the wireless communications industry. Members of CTIA

include service providers, manufacturers, wireless data and

Internet companies, and other industry participants. CTIA

has filed amicus briefs in this Court and other federal courts

on a variety of issues of interest to the wireless industry in

such disparate cases as Bartnicki v. Vopper, 532 U.S. 514

(2001), City of Rancho Palos Verdes v. Abrams, 544 U.S. 113

(2005), and Bell Atlantic Corp. v. Twombly, No. 05-1126

(argued Nov. 27, 2006). In the present case, the Court

granted CTIA’s motion for leave to file a brief as amicus

curiae at the petition stage.

Members of CTIA sell a variety of sophisticated

communications products, such as Internet-accessible mobile

phones, that benefit from point-of-sale consumer services.

The Court’s decision on the question presented here will

directly affect how those companies market such devices.

SUMMARY OF ARGUMENT

I. There is a consensus among lower courts, antitrust

scholars, and economists that vertical restrictions on

intrabrand competition are usually procompetitive and

beneficial to consumers. Such restraints are adopted for a host

of legitimate, procompetitive reasons. In one fashion or

another, vertical restraints are designed and operate to

' All parties have consented to the filing of this brief. The parties’

letters of consent have been lodged with the Clerk. Under S. Ct. R.

37.6, amicus curiae states that no counsel for a party has written this

brief in whole or in part and that no person or entity other than the

amicus curiae, its members, or its counsel has made a monetary

contribution to the preparation or submission of this brief.

2

promote interbrand competition among rivals. There is no

serious intellectual support for the proposition that such

restrictions, or any category of such restrictions, are always or

almost always anticompetitive and deserving of per se

condemnation. Minimum resale price maintenance is one

such vertical restriction.

Manufacturers, and intermediate distributors such as

members of amicus CTIA, limit intrabrand retail price

competition for legitimate and procompetitive reasons in a

wide range of industries. By guaranteeing a minimum gross

margin between wholesale and retail prices, a manufacturer or

intermediate distributor can enlarge the number of retailers

that are willing to sell the product and create and preserve

retailers’ incentives to invest in valuable non-price

competitive behavior, such as advertising and promoting the

product. Retailers’ incentives to provide such costly services

are severely undermined when a competitor offers lower

prices without providing them and without incurring the

associated costs. Manufacturers and intermediate distributors

have legitimate interests in preventing this free-riding

behavior, and consumers benefit from receiving the services

that vertical price restraints can promote. In the absence of a

cartel (not alleged in this case), manufacturers and

intermediate distnbutors do not use minimum resale price

maintenance as a device to achieve monopoly profits. Such

profits require a restriction in supply, yet a vertical restriction

(unless accompanied by horizontal collusion) affects only one

brand; it does nothing to eliminate or reduce interbrand

competition. The current per se treatment of minimum resale

price maintenance imposes large costs on businesses and

consumers alike, and produces few, if any, countervailing

benefits.

II. The arguments offered in defense of retaining the per

se rule are unpersuasive. In Dr. Miles Medical Co. v. John D.

Park & Sons Co., 220 U.S. 373 (1911), this Court justified a

ban on resale price maintenance on the ground that the

3

practice is an unlawful restraint on alienation. That theory did

not survive this Court’s later decisions rejecting a rule of per

se invalidity for vertical nonprice restraints and for maximum

resale price restraints. Continental T.V., Inc. v. GTE Sylvania

Inc., 433 U.S. 36 (1977); State Oil Co. v. Khan, 522 US. 3

(1997). This per se rule also is defended on the ground that it

is necessary to prevent resale price maintenance from being

used to enforce a manufacturer- or distributor-level price-

fixing cartel. But resale price maintenance does not

invariably—or even usually—stem from or lead to

cartelization, resale price maintenance is not invariably

anticompetitive, and the rule of reason and direct prohibitions

on cartels are sufficient to police resale price maintenance for

potential cartel activity. Another common defense of the per

se rule—that one cannot be sure that manufacturers really

have service-enhancing reasons to wish to protect their

dealers’ prices, and that low price rather than high service is

the one thing ‘we can be sure consumers desire—

paternalistically substitutes scholars’ and courts’ beliefs about

consumer preferences for the surest measure of consumer

preferences, the market. That defense likewise ignores the

discipline interbrand competition places on ineffective or

mistaken manufacturer policies. Finally, some argue that

Congress has endorsed the Dr. Miles rule. But no positive law

today dictates that resale price maintenance be deemed

unlawful per se, and the legislation used to support this

congressional-acceptance argument was repealed long ago.

ili. This Court has recognized that stare decisis has

limited weight in the antitrust arena, \ ‘here Congress intended

that liability rules would be adjusted in light of judicial

experience. That experience, coupled with the overwhelming

weight of scholarship by the legal profession and economics

academy, reveals that minimum resale price maintenance

should not be prohibited across the board. This Court often

has abandoned per se rules when they prove mistaken as a

matter of antitrust policy. In particular, the Court has

4

acknowledged that vertical restraints differ materially from

horizontal ones and so should not be outlawed per se. Few

antitrust precedents have been as thoroughly discredited as

Dr. Miles. Accordingly, stare decisis considerations should

not dissuade the Court from abandoning a rule that is

economically damaging and that the Court never would adopt

if the issue arose for the first time today.

ARGUMENT

THE ANTITRUST LAWS SHOULD NOT TREAT

MINIMUM RESALE PRICE MAINTENANCE AS

A PER SE UNLAWFUL BUSINESS PRACTICE

Section | of the Sherman Act proscribes concerted action

only if it unreasonably restrains competition. Ordinarily,

courts determine whether particular conduct is anticompet-

itive through a case-specific application of a Rule of Reason, -

which requires the factfinder to assess the relevant

considerations in deciding whether a practice is an unreasona-

ble restraint on competition.’ Certain practices, however, are

deemed per se illegal, dispensing with the need for case-by-

case evaluation. But since per se rules of illegality condemn

practices without even asking if they promote competition in

a particular setting, they create a risk of falsely condemning

procompetitive conduct.’ Accordingly, per se rules of

illegality are appropriate only for “conduct that is manifestly

anticompetitive.” Proponents of any such rule have the

burden of proving, “based upon demonstrable economic

effect,” that it is “‘immediately obvious’” or known through

See, e.g., Texaco, Inc. v. Dagher, 547 U.S. 1, 126 S. Ct. 1276, 1279

(2006); Sylvania, 433 U.S. at 49; Chicago Board of Trade v. United

States, 246 U.S. 231, 238 (1918); Standard Oil Co. v. United States,

221 U.S. 1, 60 (1911).

* See Polygram Holding, Inc. v. FTC, 416 F.3d 29, 34 (D.C. Cir.

2005) (Ginsburg, C.J.).

" Sylvania, 433 U.S. at 49.

* Sylvania, 433 U.S. at 58-59.

5

““experience”” that a practice has “a pernicious effect on

competition and lack[s] * * * any redeeming virtue”’ because

it “‘would always or almost always tend to restrict

competition and decrease output.””* A particular business

practice therefore should be held per se unlawful only when

““experience’” with it will “‘[e]nable the Court to predict with

confidence that the rule of reason will condemn it.”””

Under that approach, minimum resale price maintenance

should not be deemed unlawful per se for three reasons:

First: Resale price maintenance directly and ordinarily

serves legitimate, procompetitive goals. Among other things,

the practice is used to create incentives for retailers to engage

in point-of-sale product advertising and promotion, to

maintain adequate inventory, and to train sales personnel to

explain new, complex, or technical products. Manufacturers

and intermediate distributors could reasonably believe that

resale price maintenance is necessary to prevent some

retailers from free riding off the presale services supplied by

others, and market forces will provide the necessary

discipline if they are wrong, because inefficient practices will

result in loss of sales to interbrand competitors.

Second: The rationale for a rule of per se illegality has

become obsolete over time. The Court adopted that rule in

1911 in Dr. Miles Medical Co. v. John D. Park & Sons Co.'°

before it had experience with vertical restraints. Since then,

the Court has rejected per se rules in closely analogous

3996

® Khan, 522 U.S. at 10 (quoting Arizona v. Maricopa County Medical

Society, 457 U.S. 332, 344 (1982)).

” Northern Pacific Ry. v. United States, 356 U.S. 1, 5 (1958).

* Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing

Co., 472 U.S. 284, 289-90 (1985) (quoting Broadcast Music, Inc. v.

CBS, 441 U.S. 1, 19-20 (1979)); Khan, 522 U.S. at 10.

* Khan, 522 U.S. at 10 (quoting Maricopa, 457 U.S. at 344).

220 U.S. 373.

6

circumstances.'' Moreover, resale price maintenance also is

not so inherently likely to serve as a facade or tool for price

fixing that it should be condemned without giving a party a

chance to defend its use. The Justice Department has ample

tools to investigate horizontal cartels, and the Rule of Reason

is fully satisfactory to review specific vertical practices.

Accordingly, the substantive antitrust rules governing vertical

restraints need not be manipulated in order to deal with the

problem of horizontal restraints. Finally, no Act of Congress

dictates the result in this case. At one time, Congress lifted

the per se ban on resale price maintenance when permitted by

state law, and later it repealed that law. But Congress has

never amended the Sherman Act to incorporate the Dr. Miles

rule.

Third: Stare decisis considerations do not justify retention

of the Dr. Miles rule. This Court adopted that rule nearly 100

years ago, long before it acquired experience with the pro-

competitive benefits of vertical restraints; the Court often has

recognized that Congress intended it to adjust federal antitrust

jurisprudence in light of contemporary wisdom and

experience; and this Court has done precisely that in the

closely related areas of vertical nonprice restraints by

abandoning outdated rules that treated such practices as per se

illegal. Stare decisis considerations therefore do not dictate

retention of a competitively damaging rule that this Court

would not adopt today in the first instance.

'' State Oil v. Khan, 522 U.S. 3 (1997) (rejecting a per se rule of

illegality for maximum resale price maintenance); Continental T_V.,

Inc. v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977) (rejecting a per se

rule of illegality for nonprice vertical restraints); cf /llinois Tool

Works v. Independent Ink, Inc., 547 U.S. __, 126 S. Ct. 1281 (2006)

(rejecting a per se rule that a patent creates monopoly power).

7

I. MINIMUM RESALE PRICE MAINTENANCE

COMMONLY SERVES LEGITIMATE, PROCOMPETI-

TIVE PURPOSES AND SHOULD Not BE OUTLAWED

ACROSS THE BOARD

A. Manufacturers and intermediate distributors use

vertical restraints for a host of legitimate, procompetitive

reasons. In one fashion or another, vertical restraints are

designed and operate to promote interbrand competition

among rivals by restraining intrabrand competition among

multiple dealers offering the same product. Over the last 30

years, this Court has recognized on a number of occasions

that vertical restraints can be procompetitive. 7

Minimum resale price maintenance (also known as RPM)

is one type of vertical restraint. Sometimes used in lieu of

vertical integration, minimum resale price maintenance

constrains the lowest price at which a dealer can offer a

supplier’s product.'* Although this Court banned that practice

in 1911 in the Dr. Miles case, for more than two decades there

has been widespread agreement among antitrust scholars’*

'? See Sylvania, 433 U.S. at 54 (“Vertical restrictions promote

interbrand competition by allowing the manufacturer to achieve certain

efficiencies in the distribution of his products.”); Monsanto Co. v.

Spray-Rite Serv. Corp., 465 U.S. 752, 762-763 (1984); Business Elec-

tronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 728 (1988);

Khan, 522 U.S. at 15-19.

“A vertically integrated firm would set its own resale price to

consumers, so resale price maintenance is a partial substitute for

vertical integration. Roger D. Blair & David L. Kaserman, Antitrust

Economics 353 (1985).

'* See, e.g., 8 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law

| 1611 (2d ed. 2004); Robert H. Bork, The Antitrust Paradox 280-98

(1993 ed.); William F. Baxter, The Viability of the Vertical Restraints

Doctrine, 75 CAL. L. REV. 933, 935 (1987); Terry Calvani & Andrew

G. Berg, Resale Price Maintenance After Monsanto: A Policy Still at

War With Itself, 1984 DUKE L.J. 1163, 1180-82; Frank Easterbrook,

Antitrust Law Enforcement in the Vertical Restraints Area: Vertical

Arrangements and the Rule of Reason, 53 ANTITRUST L.J. 135, 146-48

8

and economists’ alike that minimum resale price mainten-

ance is a legitimate business practice that manufacturers

(1984); Herbert Hovenkamp, The Antitrust Enterprise 123-24, 186-91

(2005); Timothy J. Muris, /mproving the Economic Foundations of

Competition Policy, 12 GEO. MASON L. REV. 1, 17 (2003); Richard A.

Posner, Antitrust Law 172-73, 189 (2d ed. 2001). But see Robert

Pitofsky, Jn Defense of Discounters: The No-Frills Case for a Per Se

Rule Against Vertical Price Fixing, 71 GEO. L.J. 1487 (1983).

> See, e.g., Roger D. Blair, Jill Boylston Hemdon & John E. Lopatka,

Resale Price Maintenance and the Private Antitrust Plaintiff, 83

WASH. U.L.Q. 657, 659, 697-714 (2005); David A. Butz, Vertical

Price Controls With Uncertain Demand, 40 J.L. & ECON. 433 (1997);

Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial

Organization 423-34 (4th ed. 2005); Yongmin Chen, Oligopoly Price

Discrimination and Resale Price Maintenance, 30 RAND J. ECON.

441 (1999); James Cooper, et al., Vertical Restraints and Antitrust

Policy: What About the Evidence?, 1 COMPETITION POL. INT’L 45, 55-

58 (2005); Raymond Deneckere, Howard P. Marvel & James Peck,

Demand Uncertainty and Price Maintenance: Markdowns as

Destructive Competition, 87 AMER. ECON. REV. 619 (1997); Raymond

Deneckere, Howard P. Marvel & James Peck, Demand Uncertainty,

Inventories, and Resale Price Maintenance, 111 Q.J. ECON. 885

(1996); Pauline M. Ippolito, Resale Price Maintenance: Empirical

Evidence from Litigation, 34 J.L. & ECON. 263 (1991); Benjamin

Klein, The Economics of Franchise Contracts, 2 J. CORP. FIN. 9

(1995); Benjamin Klein & Kevin M. Murphy, Vertical Restraints as

Contract Enforcement Mechanisms, 31 J.L. & ECON. 265 (1988);

Frank Mathewson & Ralph Winter, The Law and Economics of Resale

Price Maintenance, 13 REV. INDUS. ORG. 57 (1998); Howard P.

Marvel & Stephen McCafferty, The Political Economy of Resale Price

Maintenance, 94 J. POL. ECON. 1074 (1986); Howard P. Marvel & -

Stephen McCafferty, The Welfare Effects of Resale Price

Maintenance, 28 J.L. & ECON. 363 (1985); Howard P. Marvel &

Stephen McCafferty, Resale Price Maintenance and (Quality

Certification, 1S RAND J. ECON. 346 (1984); Thomas R. Overstreet,

Jr., Bureau of Econ., Fed’! Trade Comm'n, Resale Price Maintenance:

Economic Theories and Empirical Evidence (Staff Report 1983);

Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L.

& ECON. 86 (1960); Jean Tirole, The Theory of Industrial Organiza-

tion 170-84 (1988); W. Kip Viscusi, John M. Vernon & Joseph E.

9

ordinarily use as a means of limiting intrabrand competition

in order to enhance interbrand competition, which is the

“primary concer of antitrust law.”’°

Minimum resale price maintenance fosters competition

and efficiency in many ways. By ensuring a minimum margin

between wholesale and retail prices, a manufacturer or

intermediate distributor can: (1) ensure that a larger number

of retail outlets will carry the product; (2) spur nonprice

competition among potential dealers for the right to sell the

product; (3) create loyalty and honesty in retailers; (4) prevent

deterioration in the image of quality or prestige created by the

manufacturer’s or intermediate distributor’s marketing

efforts; and (5) create and preserve retailers’ incentives to

invest in several forms of valuable non-price competitive

behavior. Examples of such procompetitive non-price

behavior include, among others: point-of-sale advertising and

product promotion to educate consumers about new or

complex products; adequate, well-organized inventory and

prominent shelf space in individual outlets; the hiring or

training of knowledgeable sales personnel to explain

products; creation of an attractive shopping environment (e.g.,

multiple, short cashier lines, and convenient, usable product

samples); and the offer of after-sale services. A manufac-

turer’s economic encouragement of these behaviors can cause

retailers to create nonprice value for consumers that exceeds

the value of a somewhat lower retail price, and therefore

enhances demand for the product.

Efforts by manufacturers or intermediate distributors to

offer consumers point-of-sale services are common in a wide

range of industries. Consumers benefit directly from receiving

Harrington, Jr., Economics of Regulation and Antitrust 283 (4th ed.

2005); Ralph A. Winter, Vertical Control and Price Versus Nonprice

Competition, 108 Q.J. ECON. 61 (1993).

™ Sylvania, 433 U.S. at 52 n.19; see also Volvo Trucks North America,

Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164, 126 S. Ct. 860, 872

(2006).

10

the services and indirectly from the augmented interbrand

competition. And even dealers can benefit financially from

increased consumer demand due to nonprice sales features.

In sum, all parties can benefit from this practice.'’

Retailers’ incentives to provide costly point-of-sale

services are severely undermined when a retailer that provides

these services loses sales to a competitor that can offer lower

prices because it does not provide such services and therefore

does not incur the costs associated with them. A manufacturer

or intermediate distributor has legitimate interests in

preventing this kind of free-riding behavior, to encourage the

provision of these retail services when they allow the

manufacturer to engage more effectively in interbrand

competition. Yet, without a minimum resale price, dealers

knowledgeable or fearful of free-riding competitors would not

offer these services, injuring the manufacturer and consumers

alike.

The dramatic growth of Internet commerce has vastly

increased the threat of free riding; retailers that provide costly

point-of-sale services now lose sales to distant Internet

sellers, not just local bricks-and-mortar free riders. If RPM

were permissible, manufacturers or intermediate distributors

could use that device to distribute their products through the

Internet, while limiting free riding by Internet sellers.

Instead, because RPM is currently per se _ illegal,

manufacturers and intermediate distributors now face the

'’ Manufacturers vary in their use of resale price maintenance. Some

firms may find it useful for retailers to educate consumers about new

products or about old ones that are purchased infrequently, such as

electronics equipment or vehicles. Other companies may find it

valuable to use RPM in lieu of or in conjunction with national

advertising. Different manufacturers may abandon RPM over time as

consumers gain familiarity with a product. And still other manufac-

turers may choose to rely entirely on national advertising for consumer

education. Telser, 3 J.L. & ECON. at 95-96; Blair & Kaserman,

Antitrust Economics 350; Mathewson & Winter, 13 REV. INDUS. ORG.

at 68.

1]

unattractive alternatives of forgoing Internet distribution

entirely, or severely undermining the incentives of their

bricks-and-mortar retailers to provide valuable point-of-sale

services.

In the absence of a cartel, manufacturers and intermediate

distributors do not use minimum resale price maintenance as

a device to achieve monopoly profits. Such profits require a

restriction in supply, yet a single manufacturer’s vertical

restriction affects only one brand; it does nothing to eliminate

or reduce interbrand competition. It also would be irrational

for a manufacturer to use resale price maintenance to allow

distributors to earn a monopoly return; that would be

tantamount to giving money to distributors. And if all that a

manufacturer wanted were to increase prices, it would simply

raise the price charged to distributors.’

A manufacturer may sometimes misgauge consumer

preferences, and a particular decision to promote non-price

competition by suppressing intrabrand price competition

could conceivably make consumers, on the whole, worse off.

The reason, however, is not that the manufacturer has done

something anticompetitive, and the reasonable response to

this phenomenon is not strict treble-damage liability for

'* The same principles apply even when the manufacturer is the

dominant firm in an industry. Minimum resale price maintenance does

not enable a dominant firm to extract monopoly profits from

consumers. If a manufacturer is a monopolist, it can make pricing

decisions without need for this restraint, since the exercise of its

market power is not itself illegal. Hovenkamp, The Antitrust

Enterprise 291 (there is no “no-fault” antimonopoly rule); e.g., Berkey

Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 294 (2d Cir. 1979);

Blue Cross & Blue Shield United of Wisconsin v. Marshfield Clinic, 65

F.3d 1406, 1412-13 (7th Cir. 1995) (Posner, C.J.); Alaska Airlines, Inc.

v. United Airlines, Inc., 948 F.2d 536, 548-49 (9th Cir. 1991);

Williamsburg Wax Museum, Inc. v. Historic Figures, Inc., 810 F.2d

243, 252 (D.C. Cir. 1987); Kartell v. Blue Shield of Massachusetts,

749 F.2d 922, 927 (ist Cir. 1984); Trace X Chem., Inc. v. Canadian

Indus., Lid., 738 F.2d 261, 268 (8th Cir. 1984).

12

guessing wrong. Because sellers of products can be more

profitable by giving consumers what they want than what

they do not want, the incentive of the manufacturer is aligned

with that of the body of consumers, and a misapprehension of

consumers’ tradeoffs is merely the result of imperfect

information or bad business judgment, not a diminution in

competition. Moreover, interbrand rivals can take advantage

of such a mistake by offering consumers the cheaper, no-frills

product if that is what consumers (in the requisite numbers)

want. The market, not a court, will “punish” the manufacturer

for any mistakes it makes.'® And here the record facts suggest

that petitioner did not make any mistake, but rather correctly

chose a strategy to advance both its own business interests

and consumer welfare. See Pet. App. 37a-38a. The self-

correcting “problem” of manufacturer restraints that do not in

practice optimize consumer welfare for some limited period

of time is trivial in comparison to the procompetitive benefits

of resale price maintenance, and certainly no reason for a per

se rule against the practice.

Moreover, were RPM not categorically forbidden, it

would be relatively easy to identify those cases in which a

firm’s RPM policy produces a net decrease in consumer

welfare by providing services that consumers do not value

enough to justify paying higher prices. As Judge Posner has

explained, a determination whether consumers have benefited

is precisely equivalent to a determination whether the vertical

restraint caused the output of the firm imposing the restraint

to rise or fall. “If its output expanded, the restriction must

have made the firm’s product more attractive to consumers on

balance, thereby enabling the firm to take business from its

competitors. * ** The increase [in interbrand competition]

must exceed any net reduction in intrabrand competition

considered in both its price and service aspects. *** If, on

balance, the product is more attractive to consumers, as

'? See 8 Areeda & Hovenkamp, supra, J 1612e, at 149.

13

demonstrated by the fact that more of it is sold, the net effect

on competition must be positive.”””

Thus, perversely, the instances of RPM most likely to be

corrected by the market itself (because they are unprofitable)

are the only ones that (in the absence of a cartel) might even

possibly reduce overall consumer welfare and therefore be of

conceivable antitrust concern. The instances of RPM most

likely to be attacked in litigation—sustained, successful

efforts by a manufacturer to increase its output and improve

its brand image and profitability—are those most clearly

beneficial to consumers.

B. This Court has acknowledged that every other means

through which manufacturers may limit intrabrand

competition can be procompetitive. A manufacturer may

lawfully limit intrabrand competition by vertically integrating

into retailing;?' by announcing a suggested retail price and

unilaterally terminating any retailer that charges less;? by

contractually limiting the geographic area or the class of

customers that a retailer may serve;”> and by agreeing with

retailers on a maximum retail price.** Like resale price

maintenance, all of these practices have both the purpose and

the effect of limiting intrabrand competition, but this Court

has recognized that such practices often increase interbrand

competition. Their net effect is usually procompetitive, and

none of these practices is subject to per se condemnation;

indeed, the vertical restriction that is the most similar to resale

* Richard A. Posner, The Next Step in the Antitrust Treatment of

Restricted Distribution: Per Se Legality, 48 U. CHI. L. REV. 6, 21

(1981) (emphasis in orginal).

*! See United States v. Addyston Pipe & Steel Co., 85 F. 271, 287 (6th

Cir. 1898) (Taft, J.), aff'd as modified, 175 U.S. 211 (1899); cf United

States v. United States Steel Corp., 251 U.S. 417 (1920).

22 United States v. Colgate & Co., 250 U.S. 300 (1919); Monsanto,

supra; Sharp Electronics, supra.

> Sylvania, supra.

- Khan, supra.

14

price maintenance—a manufacturer’s unilateral policy of

refusing to sell to any dealer than charges less than the price

“suggested” by the manufacturer—is per se lawful.

Judicial experience has confirmed that vertical restraints

are almost always procompetitive. When non-price vertical

restraints were mistakenly treated as per se unlawful, the

result was described by Judge Ginsburg (formerly the

Assistant Attorney General in charge of the Antitrust

Division) as a “plaintiffs’ picnic” that produced a surge of

meritless antitrust litigation.” Sylvania corrected that mistake

by holding that the legality of non-price vertical restraints

must be judged by their actual competitive effects; in the 14

years after Sylvania was decided, plaintiffs won in only four

of the 45 reported decisions involving non-price vertical

restraints.” And that sample of 45 litigated cases, of course,

involved those restraints that were most likely to be

anticompetitive. For the vast majority of vertical restraints, no

plaintiff even alleged an anticompetitive effect. In light of this

judicial experience with non-price vertical restraints, there is

no reason to believe that resale price maintenance is virtually

always anticompetitive. Vertical agreements that limit

intrabrand price competition should be treated in the same

way as non-price vertical restraints.

Instead, under the Dr. Miles rule, businesses are forced to

use more costly and less effective devices to limit intrabrand

competition rather than resale price maintenance agreements,

and to spend large amounts of time and money on antitrust

compliance programs designed to ensure adherence to

arbitrary distinctions that are as irrational and counterintuitive

to business executives as they are to antitrust scholars. These

costs are imposed on every manufacturer or intermediate

distributor that relies on others to distribute and retail its

*° Douglas H. Ginsburg & Leah Brannon, Determinants of Private

Antitrust Enforcement in the United States, 1 COMPETITION POLICY

INT'L 29, 37 (2005).

°° Id. at 42.

15

products. And the beneficiaries of this complexity are not

consumers, distributors, or manufacturers, but lawyers.”

Consider just the costs of navigating between the

Dr. Miles rule prohibiting resale price maintenance and the

Colgate rule allowing firms to refuse to sell to dealers who

will not follow a manufacturer’s recommended resale price.

The legality of a Colgate “announce and terminate” policy

does not turn on an evaluation of its competitive effects.

Rather, it turns on a formalistic inquiry into whether the

supplier and dealer have engaged in verbal or nonverbal

communications sufficient for them to be deemed to have

entered into an agreement. Any back-and-forth communi-

cations that could give rise to an inference that the supplier

asked the reseller to maintain a minimum price and that the

reseller communicated his assent might suffice to allow a

finding of agreement. Moreover, actions by a supplier other

than immediate and indefinite termination of a noncompliant

dealer raise a raft of questions whether they have “agreed” on

a resale price. Here are just a few examples:

e Can a manufacturer take any retroactive action with

respect to past sales, such as declining to give

otherwise earned rebates or discounts or refusing to

accept returns on terms otherwise applicable, or does

such retroactive action permit the inference that

manufacturer and dealer had agreed on resale prices

and that the dealer breached the agreement?

e Can a manufacturer discuss with the dealer whether it

will terminate the reseller, or just give the dealer a

warning?

e Can a manufacturer adopt an “announce and

terminate” policy for some products, but not for all?

>? See Posner, 48 U. CHI. L. REV. at 14 (“The Court's distinction

between price and nonprice restrictions has no intuitive meaning to the

businessman, and makes his fortunes ever more dependent on whether

he, his dealers, and his distributors, have good antitrust lawyers.”’).

16

e Can a manufacturer terminate a dealer for some

elements of the manufacturer’s product line, or must

the dealer be terminated across the board?

e Can a manufacturer terminate only some noncom-

pliant dealers, or must all be terminated?

e Can a manufacturer reinstate a wayward dealer, or

will reinstatement be deemed an agreement to sell at

the manufacturer’s resale price?

e Can a manufacturer prohibit other dealers from

transshipping goods to a terminated dealer, or will that

be deemed an agreement between the manufacturer

and the remaining dealers or among the remaining

dealers to sell at the manufacturer’s resale price?

The complexities demanded by this state of the law force

companies to spend on legal fees money that is better spent

on product research and development. This type of needless

line-drawing exercise is precisely what Sy/vania sought to end

by stating that any “departure from the rule-of-reason

standard must be based upon demonstrable economic effect

rather than * * * upon formalistic line drawing.”** And a

distinction between “price” and “nonprice” vertical restraints,

though encouraged by dictum in Sylvania itself,”’ is just such

formalistic line drawing. “This distinction between price and

nonprice restrictions is indefensible.”

Il. THE ARGUMENTS OFFERED IN DEFENSE OF

RETAINING A PER SE BAN ON MINIMUM RESALE

PRICE MAINTENANCE ARE UNPERSUASIVE

In Dr, Miles, this Court justified a ban on resale price

maintenance on the ground that the practice is an unlawful

“restraint(] upon alienation.’ Regardless of whether reliance

*8 433 U.S. at 58-59.

9 433 U.S. at $1 n.18.

= Posner, 48 U. CHI. L. REV. at 9.

3! 920 U.S. at 404; United States v. Arnold, Schwinn & Co., 388 U.S.

365, 380 (1967) (so construing Dr. Miles).

17

on that ancient property law rule was appropriate in 191

that rationale did not survive this Court’s 1977 decision in

Sylvania, which rejected a rule of per se invalidity for vertical

nonprice restraints, or the Court’s 1997 decision in Khan,

which rejected a rule of per se invalidity for maximum resale

price restraints. A defense of Dr. Miles must lie elsewhere.

A. A tool to prevent cartels: The principal defense

offered today for the Dr. Miles rule is that minimum resale

price restraints can sometimes be used as a tool to monitor

and enforce horizontal cartel agreements by manufacturers or

retailers. That theoretical concern, however, finds scant

support, at best, in actual experience. In cases challenging

horizontal cartels, evidence that vertical restraints were used

as a Cartel tool is rare. Similarly, cases challenging vertical

restraints rarely produce evidence of horizontal cartel

agreements. Dr. Miles may have been one of those rare

exceptions; the facts in that case suggest that the dealers there

may have been involved in a cartel.’ But in the

overwhelming majority of resale price maintenance cases, as

in this one, there is not even a hint of horizontal cartel

behavior. See Pet. App. 32a, 34a-3Sa.

The leading scholarly defender of the per se rule against

RPM has rested his analysis largely on the possibility of cartel

facilitation. Dean Pitofsky has asserted that “experience

shows that the manufacturer is often induced to act as an

organizer of [a] dealer’s cartel by dealer threats or

2

Wy

* Justice Holmes did not think so. Dr. Miles, 220 U.S. at 412

(dissenting opinion); see also Oliver Wendell Holmes, The Path of the

Law, 10 HARV. L. REV. 457, 469 (1897) (“For the rational study of the

law the blackletter man may be the man of the present, but the man of

the future is the man of statistics and the master of economics.”); Bork,

The Antitrust Paradox 285 (“It is hardly reassuring to learn that the

sole basis for antitrust’s answer to a modem business problem is the

solution given three or four hundred years ago by an English judge

who was talking about something else.”).

*? Herbert Hovenkamp, The Antitrust Enterprise 186 (2005).

18

enticements,” and noted that through RPM “the manufacturer

may tend to stabilize prices at the manufacturer's level.””*

From those premises, he leaps to the conclusion that “vertical

price fixing almost always generates anticompetitive

horizontal effects at the dealer level, and sometimes at the

manufacturer level as well.””°

Experience, however, simply does not show what Dean

Pitofsky claimed. For the proposition that the use of RPM to

facilitate dealer cartels was frequent, he cited only a decision

of this Court and a law review article,*° neither of which

purports to support any proposition stronger than the point

that RPM can be used to facilitate a dealer cartel.’’ For the

proposition that RPM may facilitate manufacturer cartels, he

made no claim about what experience shows. Actual

empirical research attempting to address the question whether

** Pitofsky, 71 GEO. L.J. at 1490 (first emphasis added).

*° Pitofsky, 71 GEO. L.J. at 1491 (emphasis added).

°° United States v. General Motors Corp., 384 U.S. 127, 145-147

(1966); Ward Bowman, The Prerequisites and Effects of Resale Price

Maintenance, 22 U. CHI. L. REV. 825, 830-831 (1955), cited in

Pitofsky, 71 GEO. L.J. at 1490 n.19.

*” Professor Bowman did assert that “examples” he had discussed—

involving U.S. druggists’ pressure on wholesalers between 1900 and

1904, similar pressure in the same industry in Great Britain between

1895 and 1906, and similar activities in the same industry in France

between 1886 and 1933-——“suggest that resale price maintenance is a

method used by organized dealers to force unwilling manufacturers to

work for them to protect dealer profit margins.” 22 U. CHi. L. REV. at

830. He further asserted that this “simple, plausible explanation of

resale price maintenance * * * probably explains much of its recent as

well as its early use.” /d. at 831 (emphasis added). But he provided

no stronger empirical support than turn-of-the-century evidence from

one industry in three countnes, and he acknowledged elsewhere in the

same article that “a great many manufacturers actively support resale

price maintenance, even though their dealers are not organized to

present the kind of united front found among drug and liquor dealers.”

Id. at 833 (footnote omitted); see also id. at 840-841 & nn.46-48.

19

RPM is used to facilitate cartels, by contrast, has concluded

that such use is infrequent.**

In any case, the question here is not whether resale price

maintenance can occasionally be anticompetitive, but whether

it is virtually always anticompetitive. There is no reason to

deprive businesses and consumers of the usual benefits of the

practice merely because, in unusual cases, the practice might

be misused by a cartel.

The continued application of the per se rule against

horizontal price fixing is not at issue in this case. The Justice

Department has wide-ranging authority to investigate

suspected cartel activity by using grand jury subpoenas and

Civil Investigative Demands, and, by offering leniency to

individual and corporate whistleblowers, offers a powerful

incentive. to- participating cartel members to identify

anticompetitive activity.’ And the Sherman Act provides

ample tools to sue (and prosecute as a criminal offense) a

cartel directly. Inflexible condemnation of an often-

procompetitive practice because it might sometimes be

associated with an always-illegal practice is unwarranted.

Moreover, there is widespread agreement among the antitrust

** Ippolito, 34 J.L. & ECON. at 281 (concluding that “there is little

[empirical] evidence *** to support the hypothes[is}] *** that

collusion is the primary reason for the use of RPM”); id. at 282 (the

evidence “suggests that noncollusive uses of RPM are far more

common than collusive uses”); id. at 291-292 (“service- and sales-

enhancing theories, taken together, appear to have greater potential to

explain” observed uses of RPM than a collusion hypothesis); id. at 292

(“The evidence suggests that the collusion theories do not seem

capable of explaining at least 85 percent of the cases, and, when taken

together, the agency theories are plausible explanations for virtually all

cases in the sample.”).

*® See US. Department of Justice, Antitrust Division, Leniency Policy

for Individuals (Aug. 10, 2004), at http://www.usdoj.gov/atr/public/

guidelines/0092.htm; U.S. Department of Justice, Antitrust Division,

Corporate Leniency Policy (Aug. 10, 2003), at http://www.usdoj.gov/

atr/public/guidelines/009 1 .htm.

20

bar that “[m]ost instances of resale price maintenance are

beneficial to consumers and cannot reasonably be construed

as efforts to restraint trade or monopolize any product or

service.” Accordingly, the possibility that a facially

legitimate business practice could be used to enforce a price-

fixing agreement does not suffice to outlaw its use across the

board.

B. Low price as the exclusive or nearly exclusive

measure of consumer welfare: Another argument made in

defense of the per se rule against RPM is that low price is so

central a measure of consumer welfare that any practice that

raises prices to consumers shou!d be presumed—conclusively

or nearly so—to harm consumer welfare. Advocates of this

view belittle service competition, question how often

manufacturers really use RPM to encourage dealers to

provide better service, and suggest that they themselves know

better than consumers what mix of low price and high service

consumers want.

Dean Pitofsky, for instance, gives the hypothetical

example of a manufacturer that sells its highly advertised

product at a wholesale price of $20, after which the product

can be found in some fashionable stores at a retail price of

$35 but in discount houses at $22. Ignoring interbrand

competition entirely, he asserts that the competition between

the fashionable stores and the discount houses will force the

retail prices in the fashionable stores to fall, and eventually

“ Hovenkamp, The Antitrust Enterprise 123-24. Accord, e.g., ABA

Section of Antitrust Law, Antitrust Law and Economics of Product

Distribution 76 (2006) (“the bulk of the economics literature on RPM

* * * suggests that RPM is more likely to be used to enhance

efficiency than for anticompetitive purposes”); Baxter, 75 CAL. L.

REV. at 944-45; Blair, Herndon & Lopatka, 83 WASH. U. L.Q. at 696;

Easterbrook, 53 ANTITRUST L.J. at 135; Warren S. Grimes, Brand

Marketing, Intrabrand Competition, and the Multibrand Retailer: The

Antitrust Law of Vertical Restraints, 64 ANTITRUST L.J. 83, 89 (1995);

Ippolito, 34 J.L. & ECON. at 281-82, 292; Mathewson & Winter, 13

REV. INDUS. ORG. at 66.

21

force the manufacturer to cut its wholesale price.*' In Dean

Pitofsky’s eyes, it seems to be self-evident that consumers

benefit from this process.

To ignore interbrand competition, however, is to distort

the analysis in quite a major way. If low price alone is what

consumers perceive as maximizing their welfare, the

manufacturer that uses RPM to maintain a uniform retail price

of $35 will create a golden opportunity for a rival

manufacturer to take sales away from the first manufacturer

by allowing its dealers to charge a $22 retail price for an

equivalent product. If interbrand competition does not take

away enough sales from the first manufacturer to force it to

lower its price, it must be because consumers perceive the

first manufacturer's product—and the services that

accompany its sale—to justify paying more money.

Consumers necessarily have concluded, in sufficient numbers

to make a $35 retail price profit maximizing, that they prefer

the higher-priced good to the lower-priced good. It is a

strange conception of consumer welfare that refuses to honor

that choice by consumers. And it is, if anything, even

stranger to assume that intrabrand competition by retailers

will force manufacturers to cut prices while assuming that

interbrand competition has had and will have no such effect.

Relatedly, Dean Pitofsky defends discounters as “the very

heart of a free market competitive system,” worries that they

will be “denfied] * * * access to products because they are

aggressive in pricing (and perhaps more efficient as well),”

and suggests that to allow RPM is giving “the manufacturer,

in effect, * * * the power to put” no-frills discounters “out of

business." Only by again ignoring interbrand competition,

however, and by treating as a priori incredible the proposition

that consumers may in some circumstances prefer higher-

*! Pitofsky, 71 GEO. L.J. at 1492.

* Pitofsky, 71 GEO. L.J. at 1493.

22

priced goods, can Dean Pitofsky make those worries seem so

serious.

If consumers truly would rather purchase goods from no-

frills discounters, rivals of the manufacturer that refuses to

allow discounters to carry its goods will clobber that

manufacturer in the marketplace. The issue is not one of

putting no-frills discounters out of business, but one of

allowing different manufacturers to compete using different

strategies, including a low-price, no-frills retail strategy and a

high-price, high-service “luxury goods” retail strategy.

Although Dean Pitofsky asserts that “[t]hose opposing per se

rules in this area implicitly assume that the manufacturer

knows better than the market what will or will not work in the

marketplace,’*’ the exact opposite is actually the case. Those

opposing per se rules in this area are completely agnostic

about what will or will not work in the marketplace, but have

confidence in the market itself to punish sellers who are

wrong about what will work, in particular sellers who

wrongly assume that a high-price, high-service mix will

appeal to consumers and sellers who wrongly assume that

their RPM policies will induce better service by dealers.

Those advocating per se rules in this area are confident in

their views that low price is always what consumers prefer,

and unwilling to let consumers express their real preferences

through the market. Instead, they use a rigid legal rule to

force every manufacturer and intermediate distributor, except

those vertically integrated to the retail level, to allow retail

discounting of its product in all circumstances. It is the

defenders of the per se rule, not its critics, who lack “{a] full

commitment to a regime wherelyy competition governs the

marketplace.” “

C. Congressional ratification: Another defense is that, in

1975, Congress ratified the Dr. Miles rule by repealing

* Pitofsky, 71 GEO. L.J. at 1493.

“ Pitofsky, 71 GEO. L.J. at 1493.

23

legislation (the Méiller-Tydings and McGuire Acts)

authorizing states to permit resale price maintenance.*° But

that conclusion does not follow from its premise. At one time,

Congress did suspend the Dr. Miles rule whenever a State

chose to permit resale price maintenance, and Congress later

lifted the suspension. But in so doing Congress did not revise

the Sherman Act to incorporate the Dr. Miles rule and make it

a permanent feature of antitrust law. The choice that Congress

made in 1975 was not a decision to entomb development of

antitrust law in its then-current state. Rather, Congress chose

to return the development of federal antitrust law to the

federal common law decisionmaking process, rather than to

leave the matter to state legislatures.” And any hope that the

Members of any particular Congress may have had as to the

future course of antitrust that was not expressed in positive

law does not bind the courts.*’ This Court is free to revisit the

issue.

*° See the Miller-Tydings Act, Pub. L. No. 75-314, 50 Stat. 693

(1937), and the McGuire Act of 1952, Pub. L. No. 82-543, 66 Stat. 631

(1952), repealed by the Consumer Goods Pricing Act of 1975, Pub. L.

No. 94-145, 89 Stat. 801.

*° Bork, The Antitrust Paradox 288; Easterbrook, 53 Antitrust L.J. at

139; Posner, Antitrust Law 189.

In the 1980s, Congress twice added riders to appropriations bills

prohibiting the Justice Department from arguing for reversal of the Dr.

Miles rule. Pub. L. No. 99-180, 99 Stat. 1136 (1985); Pub. L. No. 98-

166, § 510, 97 Stat. 1071, 1102 (1983); Calvani & Berg, 1984 DUKE

L.J. at 1166 n.11. Even then, however, Congress did not limit private

litigants’ ability to challenge Dr. Miles or the Court’s authority to

reconsider its per se rule. Whatever import those appropriations bills

may have had then, they are not in effect today.

*’ See Puerto Rico Dep't of Consumer Affairs v. Isla Petroleum, 485

U.S. 495, 501 (1988) (“[U]nenacted approvals, beliefs, and desires are

not law.”); Train v. City of New York, 420 U.S. 35, 45 (1975)

("[L legislative intention, without more, is not legislation.”).

* It is no defense of the Dr. Miles rule that it is necessary to protect

small retail firms. (In fact, it could be argued that RPM benefits small

manufacturers seeking to promote a new product, Grimes, 64

24

Il1.S74RE DECISIS CONSIDERATIONS DO Not JUSTIFY

RETAINING AN OBSOLETE, ECONOMICALLY

DAMAGING RULE THAT THIS CouRT WOULD Not

ApDopT TODAY

Stare decisis considerations dictate that settled decisions

ordinarily should receive considerable deference and should

not be abandoned lightly.*” But those considerations enjoy

less weight in this context. In the antitrust laws, Congress

authorized the federal courts to create a common law

governing the competitive process,’ and the antitrust laws,

like the common law generally,°' must “adapt{] to changed

circumstances and the lessons of accumulated experience.”

Aware that “{c]Jourts do make mistakes,’”” * this Court has been

receptive to Justice Frankfurter’s sage advice that “[w]isdom

too often never comes, and so one ought not to reject it

ANTITRUST L.J. at 100; Pet. 2-3, and small retailers wishing to provide

services without the threat of free riding by others, Pet. App. 52a &

n.46.) The antitrust laws protect the market, not individual firms

whatever their size. E.g., Brooke Group, Ltd. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209, 224 (1993) (“It is axiomatic that the

antitrust laws were passed for ‘the protection of competition, not

competitors.’”) (quoting Brown Shoe Co. v. United States, 370 U.S.

294, 320 (1962)); Volvo, 546 U.S. 164, 126 S. Ct. at 872 & n.4 (same);

Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 116 (1486)

(“[T]he antitrust laws do not require the courts to protect small

businesses from the loss of profits due to continued competition.”);

John H. Shenefield & Irwin M. Stelzer, The Antitrust Laws: A Primer

12-13 (4th ed. 2001).

” E.g., Khan, 522 U.S. at 21.

*° Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 643

(1981); National Society of Professional Engineers v. United States,

435 U.S. 679, 688 (1978).

*! See Paul Oskar Kristeller, “Creativity” and “Tradition,” 44 J. HIST.

IDEAS 105, 112 (1983) (“We should realize from the beginning that a

completely stable or rigid tradition that never admits change is

humanly impossible and has never existed.”).

* Khan, 522 U.S. at 20; Sylvania, 433 U.S. at 48-59.

*? Willy v. Coastal Corp., 503 U.S. 131, 139 (1992).

25

merely because it comes late.”** In antitrust law the Court

often has retraced its steps when it concluded that an earlier

path was wrongly chosen.*° That has been particularly true in

the case of vertical business practices, which this Court has

come to appreciate as often procompetitive.”°

** Henslee v. Union Planters Nat'l Bank & Trust Co., 335 U.S. 595,

600 (1949) (Frankfurter, J., dissenting).

™ Compare, e.g., United States v. Trans-Missouri Freight Ass'n, 166

U.S. 290 (1897) (adopting a rule of per se invalidity for honzontal

price-fixing agreements), with Standard Oil Co. of New Jersey v.

United States, 221 U.S. 1 (1911) (adopting a rule-of-reason analysis

for all horizontal agreements), with United States v. Trenton Potteries

Co., 273 U.S. 392 (1927) (readopting a rule of per se invalidity for

horizontal price-fixing agreements), with Appalachian Coals, Inc. v.

United States, 288 U.S. 344 (1933) (applying a rule of reason to a

horizontal output-restnction agreement), with United States v. Socony-

Vacuum Oil Co., 310 U.S. 150 (1940) (applying a rule of per se

invalidity for horizontal price-fixing agreements), with Broadcast

Music, Inc. v. CBS, 441 U.S. 1 (1979) (efficiency-enhancing horizontal

price-fixing agreements may be subject to a rule-of-reason analysis),

with Arizona v. Maricopa County Medical Society, 457 U.S. 332

(1982) (applying a rule of per se invalidity for a honzontal maximum

price-fixing agreement), with NCAA v. Board of Regents of the Univ.

of Oklahoma, 468 U.S. 85 (1984) (applying a rule of reason to a

horizontal agreement to limit output), and with Palmer v. BRG of

Georgia, Inc., 498 U.S. 46 (1990) (per curiam) (applying a rule of per

se invalidity for a horizontal market allocation agreement). Or

compare Chicago Board of Trade v. United States, 264 U.S. 231, 238

(1918) (identifying factors used in the rule-of-reason analysis), with

FTC v. Indiana Federation of Dentists, 476 U.S. 447, 458-59 (1986)

(articulating a so-called “quick look” analysis).

° Compare, e.g., White Motor Co. v. United States, 372 U.S. 253

(1963) (adopting rule-of-reason analysis for vertical nonprice

restraints), with United States v. Arnold, Schwinn & Co., 388 U.S. 365

(1967) (adopting a rule of per se invalidity for vertical nonprice

restraints; overruling White Motor), and with Continental T.V., Inc. v.

GTE Sylvania, Inc., 433 U.S. 36 (1977) (abandoning a rule of per se

invalidity for vertical nonprice restraints; overruling Schwinn). Or

compare Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S.

373 (1911) (a manufacturer cannot force a distributor to agree on a

26

This Court had little experience with vertical restraints at

the time that it decided Dr. Miles. William Baxter, former

Assistant Attorney General for the Antitrust Division, made

that point succinctly: “Unlike the early cases involving

horizontal restraints, none of the early vertical restraint cases

wrestled with economic principle and explored the

implications of the then-rudimentary learning about price

theory or industrial organization.” *’ By outlawing the

practice in Dr. Miles, however, this Court denied itself, the

lower courts, the academy, and the bar the opportunity to

acquire the experience with vertical pricing mechanisms that

is necessary before a business practice should invariably be

outlawed.”

In the last 30 years, however, this Court has held that two

closely related practices-—vertical nonprice restraints (such as

territorial restrictions) and maximum _ resale price

maintenance—should not be deemed per se unlawful under

manufacturer's pricing recommendation), with United States v.

Colgate & Co., 250 U.S. 300 (1919) (a manufacturer may refuse to

deal with a retailer that does not honor the manufacturer’s pricing

recommendations), with United States v. General Elec. Co., 272 U.S.

476 (1926) (a manufacturer can set a resale price by consigning the

goods to a distributor, instead of selling them), and with United States

v. Parke, Davis & Co., 362 U.S. 29 (1960), and Simpson v. Union Oil

Co., 377 U.S. 13 (1964) (a manufacturer cannot enforce its pricing

recommendations). Or compare Albrecht v. Herald Co., 390 U.S. 145

(1968) (adopting a rule of per se invalidity for maximum resale price

maintenance), with State Oil Co. v. Khan, 522 U.S. 3 (1997) (rejecting

a rule of per se invalidity for maximum resale price maintenance;

overruling Albrecht).

*’ Baxter, 75 CAL. L. REV. at 933; see also Hovenkamp, The Antitrust

Enterprise 186.

** Hovenkamp, The Antitrust Enterprise 186; see American Airlines,

Inc. v. Wolens, 513 U.S. 219, 234-35 (1995) (“{I]n our system of

adjudication, principles seldom can be settled ‘on the basis of one or

two cases, but require a closer working out.””) (quoting Roscoe Pound,

Survey of the Conference Problems, 14 U. CIN. L. REV. 324, 339

(1940) (Conference on the Status of the Rule of Judicial Precedent)).

27

the antitrust laws.*’ Stare decisis did not prevent this Court

from overruling unsound precedents in those cases. The

factors that this Court found persuasive there—particularly

the economic utility of vertical restraints in promoting

interbrand competition” —militate powerfully in favor of

treating the vertical practice at issue here as another generally

permissible business decision. The “lessons of accumulated

experience” that this Court found convincing in Sylvania and

Khan are equally instructive here.

** kK *

It is inconceivable that this Court would conclude today,

as a matter of first impression, that vertical resale price

maintenance warrants per se condemnation. This case offers a

perfect opportunity to revisit that issue. The Court adopted the

Dr. Miles rule more than 95 years ago, long before it

concluded that antitrust analysis should be guided by

contemporary industrial organization theory. Contemporary

antitrust legal and economic analysis has concluded that

vertical restraints are usually procompetitive, not

anticompetitive. And this case squarely presents the question

whether the Dr. Miles rule should be overruled. The Dr. Miles

rule has become an anachronism harmful to both competition

and the development of sound antitrust law. This Court

should overrule the Dr. Miles rule automatically and

invariably condemning minimum resale price maintenance.

$9 .

Sylvania, supra; Khan, supra.

Sylvania, 433 U.S. at 49-52.

28

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

MICHAEL FIELD ALTSCHUL Roy T. ENGLERT, JR.*

CTIA — The Wireless DONALD J. RUSSELL

Association Robbins, Russell, Englert,

1400 16" Street N.W. Orseck & Untereiner LLP

Suite 600 1801 K Street, N.W.

Washington, D.C. 20036 Suite 411

(202) 785-0081 Washington, D.C. 20006

(202) 775-4500

JANUARY 2007 *Counsel of Record