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

23

No. 06-480

Jn the Supreme Court of the United States

LEEGIN CREATIVE LEATHER PRODUCTS, INC.,

PETITIONER

Vv.

PSKS, INc., dba KAY’S KLOSET... KAY’S SHOES

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONER

PAUL D. CLEMENT

Solicitor General

Counsel of Record

THOMAS O. BARNETT

Assistant Attorney General

WILLIAM BLUMENTHAL THOMAS G. HUNGAR’

General Counsel Deputy Solicitor General

Federal Trade Commission GERALD F. MASOuUDI

Washington, D.C. 20580 Deputy Agsectont Attorney

enera

LISA S. BLATT

Assistant to the Solicitor

General

CATHERINE G. O’SULLIVAN

DAVID SEIDMAN

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

1/22/06

QUESTION PRESENTED

Whether vertical minimum resale price maintenance

agreements should be deemed per se illegal under

Section 1 of the Sherman Act, 15 U.S.C. 1, or whether

they should instead be evaluated under the rule of

reason.

(I)

TABLE OF CONTENTS

Page

Interest of the United States .............. cece cece eens 1

PR hctkcdevaencomeieassenesuSedatcceecesncsecidde 2

I os cc chcnecucnsenduaednecen eect 3

Argument:

This Court should overrule Dr. Miles and subject resale

price maintenance to the rule of reason ................ 6

A. Per se condemnation applies only to restraints

that are almost invariably anticompetitive .......... 6

B. Resale price maintenance does not meet this

court’s criteria for application of aperserule ....... 9

1. RPM will often have procompetitive justifi-

cations because it can stimulate interbrand

SIE Cd.Gacceeucesusncdneensdsvtscebeces 10

2. RPM may reduce retailers’ incentives to

IIE nncccecéndccsensanaaseces 12

3. RPM may promote the sale of the manufacturer’s

product even absent free riding ................ 15

C. The various justifications that have been offered

for the per se ban on RPM do not withstand

Sc acdiudndsciaddeossediséseweenisehisass 16

1. Dr. Miles’s reasoning has been thoroughly

undermined by this Court’s precedents ......... 16

2. The remaining proffered justifications for the

per se rule do not support its retention .......... 18

D. Considerations of stare decisis do not justify

retention of the Dr. Miles rule .................4. 24

EE i Le Chet Se ated tateeuntuapeosenee 29

(111)

IV

TABLE OF AUTHORITIES

Cases: Page

Albrecht v. Harald Co., 390 U.S. 145 (1965) ............. 6

Arizona v. Maricopa County Med. Soc’y, 457 U.S. 322

nkécamadibdhabatadsduel okhsbmowuseenokis 8,9

Business Elecs. Corp. v. Sharp Elecs. Corp.,

GP OEE esccccacdencccccs 7, 8, 12, 13, 16, 20

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

SI i eal passim

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

EE oo once oebacendenaaws 2, 16, 18

FTC v. Indiana Fed’n of Dentists, 476 U.S. 447 (1986) ... 9

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

LR I ne ee 25

Lapides v. Board of Regents of Univ. Sys., 535 U.S.

SE Sccancuk eich sabsedded dkddsedatisasies 28

Monsanto Co. v. Spray-Rite Serv. Corp.,

ED ac codadauhs ite kenoees 10, 12, 13, 27

NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998) ..... 7,8

Northern Pac. Ry. v. United States, 356 U.S. 1 (1958) .. 8,9

Northwest Wholesale Stationers, Inc. v. Pacific

Stationery & Printing Co., 472 U.S. 284 (1985) .... 7,20

Payne v. Tennessee, 501 U.S. 808 (1991) ........... +. - 2

Ring v. Arizona, 536 U.S. 584 (2002) ................. 28

Simpson v. Union Oil Co., 377 U.S. 13 (1964) .......... 17

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

United States v. Arnold, Schwinn & Co.,

ERE ERE itr Ca Ree 6,17

Cases—-Continued: Page

United States v. Baush & Lomb Optical Co., 321 US.

ED ceuctecdi<cepaddbiidieneadnsnesets tenner 7

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

DE cosenacatweteedsneunbuctedesss cedeces ts 17, 27

United States v. Trenton Potteries, 273 U.S. 392 (1927) .. 7

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

xd ctkentitntoedeseadigtekéecstetsneatsce 8, 19

Statutes:

Act of Nov. 28, 1983, Pub. L. No. 98-166, § 510,

PP neudidddedesscckeeiasimiakexendkaces 21

Act of Dec. 13, 1985, Pub. L. No. 99-180, § 605,

EP rinnddednewciosdeensends¥atssucevens 21

Consumer Goods Pricing Act of 1975, Pub. L. No.

EEE iutccuccnesaderwdeiiiadeedeees 21

J. Res. of Nov. 14, 1983, Pub. L. No. 98-151, § 101(e),

ie iia ede sigadder uaGeetdeues 21

McGuire Bill, ch. 745, 66 Stat. 631 ................40. 22

Miller-Tidings Fair Trade Act, ch. 690, tit. VITI,

DEL: cLhkcisssdebekewerneceen seaaceedekes 22

Sherman Act, 15 U.S.C. 1 et seq.:

PEE d dnkinwewenseendncdnéukenwe 1, 2, 3,6

EE 6 cS alien vuduverscndebeukeseeree 21

ED oc nicks uid pean eaeaeeeeenneenee 21

Miscellaneous:

8 Phillip E. Areeda & Herbert Hovenkamp, Antitrust

EEE. Ge vacedcevcdksnctecsséicdisvevers 18

VI

Miscellaneous—Continued: Page

Robert H. Bork, The Antitrust Paradox (1978) ........ 18

Be BR NEED cecevdconccsccescovessseeces 22

William S. Comanor, Vertical Price-Fixing, Vertical

Market Restrictions, and the New Antitrust

Policy, 98 Harv. L. Rev. 983 (1985) ............. 23, 26

Raymond Deneckere et al.:

Demand Uncertainty and Price Maintenance:

Markdowns as Destructive Competition ,

87 Am. Econ. Rev. 619 (1997) .................. 16

Demand Uncertainty, Inventories, and Resale

Price Maintenance, 111 Q.J. Econ. 885 (1996) .... 16

Frank H. Easterbrook, Vertical Arrangements and

the Rule of Reason, 53 Antitrust L.J. 135 (1984) .. 12, 21

Warren S. Grimes, Brand Marketing, Intrabrand

Competition, and the Multibrand Retailer: The

Antitrust Law of Vertical Restraints, 64 Antitrust

sgh ED 6x6 66e0scusendeetnaneescdesscees 26, 27

H.R. Rep. 341, 94th Cong., Ist Sess. (1975) ............ 22

Pauline M. Ippolito, Resale Price Maintenance:

Empirical Evidence from Litigation, 34 J.L. &

SAE, vo cdceecuuuseeutesetesdseenvenes 20

Pauline M. Ippolito & Thomas R. Overstreet, Jr.,

Resale Price Maintenance: An Economic

Assessment of the Federal Trade Commission's

Case Against the Corning Glass Works, 39 J. L. &

DEED ic cncnucadandavevensesessessooke 11

Ronald N. Lafferty et al., /mpact Evaluations of

Federal Trade Commission Versicle Restraints

PEED 664006006 ekapeoeebeneécne 15

Vil

Miscellaneous—Continued: Page

Howard P. Marvel, The Resale Price Maintenance

Controversy: Beyond the Conventional Wisdom,

63 Antitrust L.J. 59 (1994) ...... 26-62 eee e cece 14, 23

Howard P. Marvel & Stephen McCafferty:

Resale Price Maintenance and Quality

Certification, 15 RAND J. Econ. 346 (1984) ......

The Welfare Effects of Resale Price Ma‘nienance,

28 J.L. & Econ. 363 (1985) ......... sepseeces 20, 23

Frank Mathewson & Ralph Winter, The Law and

Economics of Resale Price Maintenance, 13 Rev.

EE 6 v6 oc ccccnccccecesscecocesess

Stanley I. Ornstein, Resale Price Maintenance and

Cartels, 30 Antitrust Bull. 401 (1985) ...............

Thomas R. Overstreet, Jr., Resale Price Maintenance:

Economic Theories and Empirical Evidence

GS GED ce ccccccccccccccesccccesececoseces 14, 20

Robert Pitofsky, /n Defense of Discounters: The

No-Frills Case for a Per Se Rule Against

Vertical Price Fixing, 71 Geo. L.J. 1487 (1983) ......

Richard A. Posner:

Antitrust Law (2d ed. 2001) .. 2.2.6... cece eee ce ees

The Next Step in Antitrust Treatment of Restricted

Distribution: Per Se Legality, 48 U. Chi. L. Rev. 9

Recent Case, Antitrust Laws-Sherman Act—Verticle

Restraints: Enforcement of Resale Location

Restrictions is a Per se Violation of Section One of

the Sherman Act, 88 Harv. L. Rev. 636 (1975) .......

Section of Antitrust Law, ABA, Antitrust Law and

Economics of Produc.t Distribution (2004) .........

VIII

Miscellaneous—Continued: Page

S. Rep. 466, 94th Cong., Ist Sess. (1975) ............... 22

Robert L. Steiner, How Manufacturers Deal with the

Price Cutting Retailer: When Are Vertical

Restraints Efficient ?, 65 Antitrust L.J. 407 (1997) ... 26

Lester G. Telser, Why Should Manufacturers Want

Fair Trade?, 3 J.L. & Econ. 86 (1960) .............. 14

Ralph A. Winter, Vertical Control and Price Versus

Nonprice Competition, 108 Q.J. Econ. 61 (1993) ..... 15

In the Supreme Court of the United States

No. 06-480

LEEGIN CREATIVE LEATHER PRODUCTS, INC.,

PETITIONER

v.

PSKS, INC., dba KAy’S KLOSET... KAY’S SHOES

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONER

INTEREST OF THE UNITED STATES

The United States Department of Justice and the

Federal Trade Commission have primary responsibility

for enforcing the federal antitrust laws. The question in

this case is whether an agreement between a supplier

and its dealer that sets the dealer’s minimum retail price

constitutes a per se violation of Section 1 of the Sherman

Act, 15 U.S.C. 1, or is instead properly analyzed under

the rule of reason. The Court’s resolution of that ques-

tion may affect both federal antitrust enforcement and

the extent to which private enforcement of the antitrust

laws achieves its intended purpose.

(1)

STATEMENT

1. Petitioner manufactures women’s accessories, in-

cluding handbags, shoes, and jewelry, that are sold

through retailers under the Brighton brand. Pet. App.

2a, 19a n.1. In 1997, petitioner instituted the “Brighton

Retail Pricing and Promotion Policy,” under which it

would sel] its products to only those retailers that fol-

lowed its suggested resale prices. Subsequently, as part

of a new marketing initiative, petitioner insisted that its

retailers pledge to comply with petitioner’s pricing policy

in order to become a Brighton Heart Store. /d. at 2a.

Respondent is a retailer of Brighton products. After

learning that respondent had discounted its entire line of

Brighton products, petitioner suspended all shipment of

its products to respondent. “As a result, [respondent’s]

sales and profits decreased substantially.” Pet. App. 3a.

Respondent filed the instant suit, alleging that peti-

tioner had “entered into illegal agreements with retailers

to fix Brighton products’ prices and terminated [respon-

dent] as a result of those agreements,” in violation of the

Sherman Act, 15 U.S.C. 1. Pet. App. 3a. Petitioner

sought to introduce into evidence the report of its expert

economist, Professor Kenneth Elzinga, who concluded

that petitioner’s “business model, including its use of

Suggested Retail Prices, is procompetitive.” Jd. at 18a,

20a. Relying on this Court’s decision in Dr. Miles Medi-

cal Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)

(Dr. Miles), the district court excluded Professor

Elzinga’s report on the ground that “[vJertical minimum

price fixing agreements * * * remain per se unlawful.”

Mem. Op. and Order 4 (Mar. 25, 2004). The jury found

petitioner liable and awarded damages of $1.2 million.

Pet. App. 7a.

3

2. The court of appeals affirmed. Pet. App. la-11la.

Petitioner did not challenge the jury’s finding that it had

entered into an agreement to fix the minimum price at

which its dealers would sell its products, but rather chal-

lenged the application of a per se rule to its conduct. /d.

at 3a. The court of appeals rejected petitioner’s conten-

tion, concluding that it “remain[ed] bound by [this

Court’s] holding in Dr. Miles.” Id. at 4a. The court of

appeals also found that the trial court had properly ex-

cluded Professor’s Elzinga’s report. The court explained

that “[w]ith the per se rule, expert testimony regarding

economic conditions and the pricing policy’s pro-competi-

tive effects is not relevant.” /d. at 5a-6a.

SUMMARY OF THE ARGUMENT

The per se rule against vertical minimum resale price

maintenance (RPM) established in Dr. Miles is irrecon-

cilable with this Court’s modern antitrust jurisprudence

and cannot withstand analysis. That per se rule should

be abandoned, and Dr. Miles should be overruled.

A. This Court’s antitrust decisions make clear that

the presumptive standard for assessing the legality of

challenged conduct is the rule of reason, which examines

the reasonableness of a given restraint in the context of

a particular case. Per se condemnation of economic re-

straints under Section 1 of the Sherman Act, 15 U.S.C. 1,

is thus exceptional, and is reserved for restraints that

always, or almost always, reduce consumer welfare by

limiting competition and output. Per se treatment is

inappropriate when the economic impact of the type of

conduct at issue is not obviously and predictably anti-

competitive.

B. Because the effects of RPM can be either anti-

competitive or procompetitive depending on the facts in

4

a given case, a per se rule is clearly inappropriate. There

is a widespread consensus of opinion that RPM, like non-

price vertical restraints, can have a variety of procom-

petitive effects that enhance consumer welfare. By re-

ducing intrabrand competition, RPM can stimulate

interbrand competition by giving retailers incentives to

promote the manufacturer’s brand in ways that are de-

sirable for both consumers and the manufacturer. RPM

may ensure sufficient margins and incentives for retail-

ers to engage in beneficial point-of-sale services, because

it prevents “free riding” by price-cutting dealers that

would otherwise make it unprofitable for retailers to in-

cur the cost of providing those services. That potential

is magnified by the advent of high-volume Internet re-

tailers. Even absent free riding, RPM may give retailers

economic incentives to make additional non-price sales

efforts, such as investing in attractive stores and loca-

tions or stocking greater quantities of a product in the

face of uncertain consumer demand. And, at least for

some products, RPM may also serve the manufacturer’s

interest in preserving brand reputation and consumer

loyalty.

C. The reasons suggested for continuation of a per se

rule are unpersuasive. The decision in Dr. Miles is pre-

mised on outdated rationales and principles that have

been undermined by subsequent decisions of this Court

and cannot withstand modern economic analysis. Com-

mon law concerns about restraints on alienation are not

relevant to whether a practice is so likely to be

anticompetitive as to warrant per se condemnation.

Moreover, the belief expressed in Dr. Miles that RPM is

the functional equivalent of a price-fixing agreement

among dealers comports with neither fact nor logic; man-

ufacturers are typically the source of RPM require-

5

ments, yet they have no economic incentive to enrich

dealers with supra-competitive profits while reducing

their own sales.

To be sure, RPM limits intrabrand price competition

and in some circumstances can harm consumer welfare

by supporting cartel efforts by manufacturers or dealers.

But non-price vertical restraints can also harm consumer

welfare, yet they are subject to the rule of reason. Conti-

nental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36

(1977). Nor is there any basis for presuming that RPM

will always or almost always support cartel efforts.

Likewise, indirect indication of past congressional sup-

port for the per se rule of Dr. Miles does not counsel

against this Court’s revisiting the issue in light of subse-

quent decisions and modern economic analysis.

D. The principle of stare decisis does not justify reaf-

firmation of Dr. Miles. That principle has less force in

the antitrust context, because Congress expected this

Court to give continuing shape to the meaning of the an-

titrust laws in keeping with “changed circumstances and

the lessons of accumulated experience.” State Oil Co. v.

Khan, 522 U.S. 3, 20 (1997). That is particularly true

with respect to decisions applying the per se rule, rather

than the rule of reason, because that choice is based on

experience and economic analysis of particular economic

behavior. If experience or economic analysis points in a

different direction over time, there is no basis for main-

taining a clearly outdated rule. This Court thus has

overruled per se prohibitions against non-price vertical

restraints and maximum vertical price restraints when

“the theoretical underpinnings of those decisions” have

been “called into serious question.” Jd. at 21. There is

no justification for retaining an anomalous per se ban on

6

RPM that has no basis in modern antitrust doctrine or

experience.

ARGUMENT

THIS COURT SHOULD OVERRULE DR. MILES AND SUB-

JECT RESALE PRICE MAINTENANCE TO THE RULE OF

REASON

The decision in Dr. Miles was based on reasoning and

economic assumptions that predate and conflict with

modern economic theory. More importantly, the per se

ban on RPM cannot survive subsequent decisions of this

Court, which make clear that per se condemnation is ap-

propriate only for those categories of conduct that are

manifestly anticompetitive. Thus, in Continental T.V.,

Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977), the Court

overruled the per se prohibition against vertical non-

price agreements established by United States v. Arnold,

Schwinn & Co., 388 U.S. 365 (1967), because such agree-

ments could not be shown to meet the demanding stan-

dards for imposition of a per se rule. Similarly, this

Court in State Oil Co. v. Khan, 522 U.S. 3 (1997), over-

ruled the per se ban on vertical maximum price-fixing

agreements established by Albrecht v. Herald Co.,

390 U.S. 145 (1965), in light of subsequent cases and the

absence of a sufficient economic justification for a per se

rule. Similar considerations compel the conclusion that

Dr. Miles should be overruled, and that RPM should be

evaluated under the same rule-of-reason standard that

applies to other vertical agreements.

A. Per Se Condemnation Applies Only To Restraints That

Are Almost Invariably Anticompetitive

1. Section 1 of the Sherman Act, 15 U.S.C. 1, declares

every “contract, combination * * *, or conspiracy, in

7

restraint of trade * * * to be illegal.” In Dr. Miles, this

Court declared unlawful vertical agreements between a

supplier of patent medicines and the wholesalers and

retailers of its products concerning the minimum price at

which they resold the supplier’s medicines. Subsequent

decisions of this Court have read Dr. Miles to have es-

tablished a per se rule under which RPM is unlawful

without any inquiry into its competitive effects in a par-

ticular case. NYNEX Corp. v. Discon, Inc., 525 U.S. 128,

133 (1998); GTE Sylvania, 433 U.S. at 51 n.18; Business

Elecs. Corp. v. Sharp Elees. Corp., 485 U.S. 717, 733

(1988); United States v. Bausch & Lomb Optical Co., 321

U.S. 707, 720 (1944); United States v. Trenton Potteries,

273 U.S. 392, 401 (1927).

Dr. Miles was decided at the dawn of this Court’s

antitrust jurisprudence. Subsequent decisions have con-

siderably clarified, and modified, the proper approach to

antitrust analysis. In particular, decisions post-dating

Dr. Miles have made clear that “most antitrust claims

are analyzed under a ‘rule of reason,” which requires

evaluation of the reasonableness of the challenged re-

straint in the factual context of a specific case. Khan,

522 U.S. at 10; GTE Sylvania, 433 U.S. at 49 (observing

that the rule of reason is “the prevailing standard.”).

By contrast, this Court has concluded that per se con-

demnation, which obviates the need for proof of the ar-

rangement’s effect in a given case, is to be reserved for

restraints that are “manifestly anticompetitive,” GTE

Sylvania, 433 U.S. at 49-50, and “would always or almost

always tend to restrict competition and decrease output.”

Business Elecs., 485 U.S. at 723 (quoting Northwest

Wholesale Stationers, Inc. v. Pacific Stationery & Print-

ing Co., 472 U.S. 284, 289-290 (1985)). Under modern

antitrust principles, therefore, a per se rule is appropri-

8

ate only for those restraints, such as horizontal price

agreements among competitors, that have a “pernicious

effect on competition and lack * * * any redeeming

virtue.” Northern Pac. Ry. v. United States, 356 U.S. 1,

5 (1958).

2. The determination that a specific practice should

be treated as unlawful per se must rest upon experience

in analyzing the practice and examining “the actual im-

pact of these arrangements on competition.” White Mo-

tor Co. v. United States, 372 U.S. 253, 263 (1963). Any

“departure from the rule-of-reason standard must be

based upon demonstrable economic effect rather than

* * * upon formalistic line-drawing.” GTE Sylvania,

433 U.S. at 58-59. Per se condemnation is “appropriate

‘LoJnce experience with a particular kind of restraint en-

ables the Court to predict with confidence that the rule

of reason will condemn it.” Khan, 522 U.S. at 10 (brack-

ets in original (quoting Arizona v. Maricopa County

Med. Soc’y, 457 U.S. 332, 344 (1982)).

Application of a per se rule embodies a generalization

that “certain kinds of agreements will so often prove so

harmful to competition and so rarely prove justified that

the antitrust laws do not require proof that an agreement

of that kind is, in fact, anticompetitive in the particular

circumstances.” NYNEX Corp., 525 U.S. at 133. “Cases

that do not fit the generalization may arise, but a per se

rule reflects the judgment that such cases are not suffi-

ciently common or important to justify the time and ex-

pense necessary to identify them.” GTE Sylvania, 433

U.S. at 50 n.16. This Court has accordingly been “reluc-

tan[t] to adopt per se rules with regard to ‘restraints im-

posed in the context of business relationships where the

economic impact of certain practices is not immediately

9

obvious.” Khan, 522 U.S. at 10 (quoting FTC v. Indiana

Fed’n of Dentists, 476 U.S. 447, 458-459 (1986)).

B. Resale Price Maintenance Does Not Meet This Court’s

Criteria For Application Of A Per Se Rule

This Court has never analyzed the likely economic

effects of RPM, much less found that RPM has a predict-

ably “pernicious effect on competition and lacki[s]* * *

any redeeming virtue.” Northern Pac. Ry., 356 U.S. at

5. Because RPM agreements have been unlawful since

the Dr. Miles decision in 1911, moreover, lower courts

have been precluded from considering evidence of the

competitive purposes and effects of particular RPM

agreements. Thus, the per se prohibition against RPM

has never been justified in accordance with the high

standards for imposition of per se rules enunciated in

Northern Pacific and subsequent decisions of this Court.

It is clear that RPM falls far short of the current stan-

dard for per se condemnation of a practice.

Although RPM may have anticompetitive effects in a

particular case, there is no basis “to predict with confi-

dence that the rule of reason will condemn it” because

the practice is invariably or almost invariably anticom-

petitive and lacking in any redeeming social value.

Khan, 522 U.S. at 10 (quoting Maricopa Co. Med. Soc’y,

457 U.S. at 344). To the contrary, there is a widespread

consensus that permitting a manufacturer to control the

price at which its goods are sold may promote interbrand

competition and consumer welfare in a variety of ways.

Because “the primary purpose of the antitrust laws is to

protect interbrand competition,” Khan, 522 U.S. at 15;

GTE Sylvania, 433 U.S. at 52 n.19, RPM cannot be clas-

sified as a manifestly anticompetitive practice worthy of

per se condemnation.

10

As Justice White observed in his concurring opinion

in GTE Sylvania, moreover, “[iJt is common ground

among the leading advocates of a purely economic ap-

proach to the question of distribution restraints that the

economic arguments in favor of allowing vertical re-

straints generally apply to vertical price restraints as

well.” 433 U.S. at 69 (White, J., concurring). In reality,

“the economic effect of * * * unilateral and concerted

vertical price setting, agreements on price[,] and

nonprice restrictions * * * isin many, but not all, cases

similar or identical.” Monsanto Co. v. Spray-Rite Serv.

Corp., 465 U.S. 752, 762 (1984). Thus, as Justice White

correctly concluded, the Court’s decision to subject verti-

cal non-price restraints to the rule of reason in GTE Syl-

vania “necessarily * * * calls{s] into question” applica-

tion of the per se rule to vertical price restraints gener-

ally. 433 U.S. at 70 (White, J., concurring). There is sim-

ply no basis for subjecting RPM to per se analysis while

analyzing nonprice vertical restraints and maximum re-

sale price maintenance under the rule of reason.

1. RPM will often have procompetitive justifications

because it can stimulate interbrand competition

A manufacturer naturally seeks to make additional

sales by better serving consumers’ interests. Those in-

terests are not limited to low prices, but may include

other factors such as access to product demonstration

and service; convenience of store hours and location; and

knowledgeable, pleasant, and efficient sales personnel.

Unless the manufacturer sells directly to consumers, it

must rely on its retailers to help it achieve its goals. The

interests of retailers and manufacturers, however, do not

always coincide. While manufacturers generally benefit

from dealer efforts to increase sales by lowering retail

11

prices, in some circumstances other forms of sales efforts

may better serve the interests of both consumers and

manufacturers, even if not the dealers.

By fixing the minimum price at which the good may

be sold (and thus guaranteeing the retailer a certain

margin over the cost of the good to the retailer), RPM

provides retailers with an incentive to expend resources

in order to attract additional customers for that product,

thereby furthering the manufacturer’s competitive goals.

RPM thus can have the same types of procompetitive

effects recognized in GTE Sylvania with respect to

nonprice vertical restraints such as exclusive territories.

“Resale price maintenance, like other vertical restraints,

is typically a response to a supplier’s problem of inducing

distributors to provide adequate levels of distribution for

its products.” Section of Antitrust Law, ABA, Antitrust

Law and Economics of Product Distribution, 58 (2006);

Pauline M. Ippolito & Thomas R. Overstreet, Jr., Resale

Price Maintenance: An Economic Assessment of the

Federal Trade Commission’s Case Against the Corning

Glass Works, 39 J. L. & Econ. 285, 322-325 (1996) (con-

cluding that RPM challenged by the FTC was most likely

employed to increase distribution of the products). In

other words, by limiting intrabrand price competition,

the manufacturer may induce its distributors to provide

promotiona] services and sales efforts and thereby in-

crease the attractiveness of the product. RPM thus may

“promote interbrand competition by allowing the manu-

facturer to achieve certain efficiencies in the distribution

of his products.” GTE Sylvania, 433 U.S. at 54.

“For example, new manufacturers and manufacturers

entering new markets can use [RPM] in order to induce

* * * retailers to make the kind of investment of capital

and labor that is often required in the distribution of

y

12

products unknown to the consumer.” GTE Sylvania, 433

U.S. at 55; see Pet. App. 36a (Elzinga Report) (“Leegin’s

pricing policy is designed to induce and incent store-own-

ers and sales personnel to promote the Brighton line, and

to enable Leegin to compete with larger department

stores offering more prominent brands.”). “Established

manufacturers can use [RPM] to induce retailers to en-

gage in promotional activities or to provide service and

repair facilities necessary to the efficient marketing of

their product.” GTE Sylvania, 433 U.S. at 55.

RPM thus accomplishes directly what nonprice verti-

cal restraints accomplish indirectly. Business Elecs.

Corp., 485 U.S. at 727-729; Monsanto, 465 U.S. at 762;

accord Frank H. Easterbrook, Vertical Arrangements

and the Rule of Reason, 53 Antitrust L.J. 135, 156 (1984)

(Easterbrook). As this Court has acknowledged, “all ver-

tical restraints, including the exclusive territory agree-

ment held not to be per se illegal in GTE Sylvania, have

the potential to allow dealers to increase ‘prices’ and can

be characterized as intended to achieve just that.” Busi-

ness Elecs., 485 U.S. at 728. “In fact, vertical nonprice

restraints only accomplish the benefits identified in GTE

Sylvania because they reduce intrabrand price competi-

tion to the point where the dealer’s profit margin permits

provision of the desired services.” /bid. Like other ver-

tical restraints, therefore, RPM has complex competitive

effects because of its “simultaneous reduction of

intrabrand competition and stimulation of interbrand

competition.” GTE Sylvania, 433 U.S. at 51-52.

2. RPM may reduce retailers’ incentives to engage in

free riding

“There is a consensus in the economic literature that

minimum RPM ¢an, in certain circumstances, remedy a

13

free-riding problem and thereby increase competition

and enhance consumer welfare.” Economists Pet. Stage

Amici Br. 5 (Economists Br.). The most prominent pro-

competitive rationale for RPM is that it may alleviate a

free-riding problem when retailers incur costs to pro-

mote the manufacturer’s brand through point-of-sale

services. For example, a manufacturer may want its re-

tailers to provide an in-store demonstration or exhibition

of a product’s features and selections. Such services may

be the best way to educate consumers about the product

and to promote sales. As is the case with vertical non-

price restraints, see GTE Sylvania, 433 U.S. at 55, how-

ever, an individual retailer has an incentive to free ride

on the provision of those services by rival retailers. A

retailer offering no services but a lower price can sel! to

consumers who have been educated by retailers that do

provide the services desired by the manufacturer and the

consumer. The problem is exacerbated by catalog retail-

ing and the advent of the Internet, as consumers may

visit traditional, brick-and-mortar retailers to examine a

product and select its features but then purchase the

product at a discounted price from a catalog or on-line

retailer, whose very lack of “bricks and mortar” affords

point-of-sale services impossible and whose lack of ex-

penses for bricks and mortar gives them a competitive

advantage over traditional retailers who provide the ser-

vices that some manufacturers desire.

If free riding is extensive, few if any retailers will

incur the costs necessary to provide the services for

product promotion, and consumers will not be educated

about the manufacturer’s product, “despite the fact that

each retailer’s benefit would be greater if all provided

the services than if none did.” GTE Sylvania, 422 U.S.

at 55; accord Business Elecs., 485 U.S. at 731; Monsanto,

14

465 U.S. at 762. RPM reduces or eliminates the incentive

to free ride by eliminating the opportunity to attract cus-

tomers through price cutting. Lester G. Telser, Why

Should Manufacturers Want Fair Trade?, 3 J.L. &

Econ. 86, 89-96 (1960).

Manufacturers similarly may rely on RPM to give

certain prestige retailers an incentive to stock and pro-

mote the manufacturer’s product. Prestige retailers

have developed reputations for stocking only high quality

or especially fashionable products, which may be costly

for the retailers to identify. Many customers may evalu-

ate products largely on the basis of the stocking choices

made by the prestige retailers—an effect known as qual-

ity certification or signaling. Other retailers may seek to

sell at a discount the same products stocked by prestige

retailers, thereby free riding on the prestige retailers’

quality certifications. When quality certification is im-

portant to consumers, a manufacturer’s best strategy

may be to impose RPM, which induces prestige retailers

to carry its product when free riding otherwise would

make it unprofitable to do so. Howard P. Marvel, 7'he

Resale Price Maintenance Controversy: Beyond the

Conventional Wisdom, 63 Antitrust L.J. 59, 65-67 (1994)

(Marvel); Howard P. Marvel & Stephen McCafferty, Re-

sale Price Maintenance and Quality Certification, 15

Rand J. Econ. 346 (1984) (Marvel & McCafferty); Ronald

N. Lafferty et al., /mpact Evaluations of Federal Trade

Commission Vertical Restraints Cases 34-35 (FTC

1984); Thomas R. Overstreet, Jr., Resale Price Mainte-

nance: Economic Theories and Empirical Evidence 56-

62 (FTC 1983) (Overstreet).

15

3. RPM may promote the sale of the manufacturer's

product even absent free riding

Even in the absence of free riding, RPM may help the

manufacturer encourage retailers to sell its products vis-

a-vis rival brands.’ By ensuring retailers an adequate

margin over the wholesale price of the product, RPM

provides retailers with an incentive to make non-price

sales efforts that attract customers away from other

brands. Such sales efforts extend beyond product exhibi-

tion and demonstration, on which other retailers can free

ride, and include such factors as the attractiveness and

location of retail stores and the speed and efficiency with

which retailers complete customer transactions, factors

that do not lend themselves to free riding by other retail-

ers. A retailer can increase its sales either by cutting

prices or by increasing sales efforts, but the manufac-

turer’s sales will not increase unless the retailer takes

steps to take sales from rival brands. Manufacturers can

give retailers an incentive to compete harder against

rival brands by using RPM to ensure that retailers com-

pete in non-price areas and can make a profit while pro-

viding the manufacturer’s desired level of sales efforts.

Frank Mathewson & Ralph Winter, The Law and Eco-

nomics of Resale Price Maintenance, 13 Rev. Indus.

Org. 55, 67-69, 72-73 (1998); Ralph A. Winter, Vertical

' It is always in the interest of the manufacturer to make its product

attractive to consumers, and controlling retailer discounting may be

seen as an important component of a strategy to do so. Petitioner

explains that “it was [petitioner's] view that the typical retail strategy

of putting products on and off ‘sale’ degrades a manufacturer’s brand

by causing customers to feel cheated when they buy at the wrong

moment.” Pet. 3. In addition, price may be associated with a brand’s

reputation and identity.

16

Control and Price Versus Nonprice Competition, 108

Q.J. Econ. 61 (1993).

RPM also may encourage retailers to stock the prod-

uct at the manufacturer’s desired level when uncertain-

ties in consumer demand could otherwise limit the quan-

tity purchased by the retailer. Although retailers typi-

cally charge high prices to consumers when demand is

strong and low prices when demand is weak, under cer-

tain circumstances, RPM may cause retailers to charge

lower prices than they otherwise would when demand is

strong because RPM limits the retailers’ losses when

demand is weak. Thus, RPM may induce retailers to

carry larger inventories, benefitting both the manufac-

turer and consumers by assuring the continuous avail-

ability of the brand to consumers. Raymond Deneckere

et al., Demand Uncertainty and Price Maintenance:

Markdowns as Destructive Competition, 87 Am. Econ.

Rev. 619 (1997); Raymond Deneckere et al., Demand

Uncertainty, Inventories, and Resale Price Mainte-

nance, 111 Q.J. Econ. 885 (1996).

C. The Various Justifications That Have Been Offered For

The Per Se Ban On RPM Do Not Withstand Scrutiny

I. Dr. Miles’s reasoning has been thoroughly under-

mined by this Court's precedents

a. In rejecting the manufacturer's claim that it was

entitled to control the price at which its goods would be

sold, Dr. Miles relied on the common law proposition

that “a genera! restraint upon alienation is ordinarily

invalid.” 220 U.S. at 404. In Business Electronics, 485

U.S. at 733, this Court described Dr. Miles’s per se rule

as “based largely on the perception that [a RPM] agree-

ment was categorically impermissible at common law” as

“an unlawful restraint on alienation.”

17

As this Court observed in GTE Sylvania, however,

the common law notion disfavoring restraints on alien-

ation has been subjected to near-universal criticism

by antitrust commentators. 433 U.S. at 53 n.21. While

that common-law rule may have had resonance with

the Lochner-era Court, it has limited utility in interpret-

ing the antitrust statutes. The GTE Sylvania Court re-

fused to rely on that “ancient rule,” holding instead that

“the state of the common law 400 or even 100 years ago

is irrelevant” to modern antitrust analysis. /bid. (quot-

ing Arnold, Schwinn & Co., 388 U.S. at 392 (Stewart, J.,

dissenting)). Accordingly, the principal rationale relied

upon by the Dr. Miles decision is invalid, and cannot jus-

tify continued maintenance of the per se ban on RPM.

In Simpson v. Union Oil Co., 377 U.S. 13, 16 (1964),

the Court identified a closely related rationale for the

Dr. Miles rule, stating that RPM injured commerce be-

cause it was “depriving independent dealers of the exer-

cise of free judgment” in selling the product at a price

determined by the dealer. But, of course, dealers remain

free to exercise their judgment in deciding to enter a

contractual relationship with a supplier. Equally impor-

tant, the suppliers who perceive significant benefits

from controlling retail prices retain the freedom to ter-

minate non-complying dealers, see United States v.

Colgate & Co., 250 U.S. 300, 306-307 (1919), or even to

enter the retail market themselves and eliminate the

independent retailers (and their free judgment) alto-

gether. For that reason, the Court held in Khan, 522

U.S. at 16, that “interfere[nce] with dealer freedom”

‘could not support a per se ban on vertical maximum price

fixing. Thus, the goal of protecting “dealer freedom”

cannot support the continued application of the per se

prohibition against RPM. And in any event, “impairment

18

of dealer freedom alone is not sufficient to constitute an

unreasonable restraint of trade.” 8 Phillip E. Areeda &

Herbert Hovenkamp, Antitrust Law 91609, at 114-115

(2d ed. 2004); see GTE Sylvania, 433 U.S. at 53 n.21.

b. The Court in Dr. Miles also expressed the view

that greater profits from RPM would benefit the dealers,

not the manufacturer, and the Court reasoned that RPM

would be equivalent to a price-fixing agreement among

dealers. 220 U.S. at 407-408. But RPM generally ema-

nates from the manufacturer, who has no economic in-

centive to encourage supra-competitive prices by its

dealers. Quite to the contrary, a price-fixing conspiracy

at the retail level presumably would reduce quantities

sold and thereby reduce the manufacturer’s profits.

Richard A. Posner, Antitrust Law 177 (2d ed. 2001);

Robert H. Bork, The Antitrust Paradox, 33, 288-290

(1978); see GTE Sylvania, 433 U.S. at 56 n.24 (“Gener-

ally a manufacturer would prefer the lowest retail price

possible, once its price to dealers has been set, because

a lower retail price means increased sales and higher

manufacturer revenue.”) (quoting Recent Case, Anti-

trust Laws—Sherman Act—Vertical Restraints: En-

forcement of Resale Location Restrictions is a Per Se

Violation of Section One of the Sherman Act, 88 Harv. L.

Rev. 636, 641 (1975)). As Justice Holmes’ dissenting

opinion in Dr. Miles pointed out, the manufacturer is in

the best position to determine “what will enable it to do

the best business.” 220 U.S. at 412.

2. The remaining proffered justifications for the per se

rule do not support its retention

a. In GTE Sylvania, the Court suggested possible

reasons that could justify the continued per se illegality

of RPM and distinguish RPM from nonprice vertical re-

straints. 433 U.S. at 51 n.18. None of the concerns ex-

19

pressed in GTE Sylvania justifies the continued charac-

terization of RPM as a per se offense.

First, the Court noted Justice Brennan’s earlier as-

sertion in his concurring opinion in White Motor Co., 372

U.S. at 268, that, unlike vertical nonprice restraints,

RPM “almost invariably” reduces interbrand competi-

tion. But Justice Brennan did not identify any theoreti-

cal explanation or empirical support for that assertion,

and the intervening years have not filled either void. To

the contrary, as the Court recognized in GTE Sylvania

itself, the impact of vertical restraints is generally con-

strained by interbrand competition: “when interbrand

competition exists, * * * it provides a significant check

on the exploitation of intrabrand market power because

of the ability of consumers to substitute a different brand

of the same product.” 433 U.S. at 52 n.19. And if a man-

ufacturer does possess interbrand market power, it is not

likely to use RPM as a way to raise resale prices; if ele-

vation of resale price were the manufacturer’s ultimate

purpose, the manufacturer could simply raise its own

price to the distributor and thereby keep for itself any

higher revenues resulting from the higher price.

Economists have observed, moreover, that nonprice

vertical restraints, such as exclusive territories, can

more completely restrict intrabrand competition than

does RPM. While exclusive territorial restrictions can

eliminate virtually all intrabrand competition, RPM per-

mits retailers to engage in intrabrand competition on

factors other than price, “leav[ing] multiple sellers of the

brand in the same geographic market to engage in

interbrand competition.” Economist Br. 17; Richard A.

Posner, The Next Step in Antitrust Treatment of Re-

stricted Distribution: Per Se Legality, 48 U. Chi. L. Rev.

9 (1981) (“Resale price maintenance is more flexible than

20

exclusive territories as a method of limiting price compe-

tition among dealers.”).

Second, the Court in GTE Sylvania noted that RPM

may facilitate cartelization. 433 U.S. at 51 n.18.° That

possibility is a reason to subject RPM to the rule of rea-

son. However, there is no basis in evidence or experi-

ence to predict that RPM “would always or almost al-

ways” be condemned under that standard. Business

Elecs., 485 U.S. at 723 (quoting Northwest Wholesale

Stationers, Inc., 472 U.S. at 289). Studies of RPM cases

over many years have found relatively few instances of

such anticompetitive uses of RPM. An analysis of

all litigated RPM cases during 1976-1982 concluded

that “collusion theories do not seem capable of explain-

ing at least 85 percent of the cases.” Pauline M. Ippolito,

Resale Price Maintenance: Empirical Evidence from

Litigation, 34 J.L. & Econ. 263, 292 (1991)? In any

event, all cartel agreements are illegal per se, regardless

* Manufacturers could use RPM, particularly when combined with

exclusive dealing arrangements with their retailers, to facilitate a price-

fixing conspiracy by enhancing their ability to detect departures from

agreed-upon prices. In addition, retailers might act collectively to

coerce a manufacturer to institute RPM as a means of thwarting

competition from a discounting retail competitor. Business Elecs., 485

U.S. at 725-726; Howard P. Marvel & Stephen McCafferty, The Welfure

Effects of Resale Price Maintenance, 28 J.L. & Econ. 363, 365-369, 373-

378 (1985); Overstreet 13-23.

5

Another study found that only 7% of the horizontal! conspiracy

cases filed by the Department of Justice during 1890-1983 involved

resale price maintenance. Stanley I. Ornstein, Resale Price Mainte-

nance and Cartels, 30 Antitrust Bull. 401, 416-417 (1985). The same

study found that only 10% of RPM complaints brought by the FTC

during 1942-1983 involved cartels. /d. at 423. Still another report found

that a “substantial portion of the [FTC]'s RPM enforcement efforts

[from 1965-1982) have been concentrated in markets which appear to

be structurally competitive.” Overstreet 74.

21

of whether the cartel uses RPM. And the rule of reason

would condemn any RPM demonstrated to be a means of

supporting a cartel. Cf. Khan, 522 U.S. at 22 (“In our

view, rule-of-reason analysis will effectively identify

those situations in which vertical maximum price fixing

amounts to anticompetitive conduct.”).

Third, the Court in GTE Sylvania also cited past con-

gressional action as indicating congressional “approval

of a per se analysis of vertical price restrictions.” 433

U.S. at 51 n.18. The Court referred to the Consumer

Goods Pricing Act of 1975, Pub. L. No. 94-145, 89 Stat.

801, amending 15 U.S.C. 1, 45(a) (1970), which had re-

pealed provisions of earlier statutes which allowed “fair

trade” pricing, z.e., RPM, at the option of individual

States. Congress subsequently enacted temporary pro-

hibitions, no longer in effect, on the Department of Jus-

tice’s use of appropriated funds to advocate the overrul-

ing of Dr. Miles. J. Res of Nov. 14, 1983, Pub. L. No. 98-

151, §101(e), 97 Stat. 973; Act of Nov. 28, 1983, Pub. L.

No. 98-166, 8510, 97 Stat. 1102; Act of Dec. 13, 1985, Pub.

L. No. 99-180, $605, 99 Stat. 1169.

Those congressional enactments do not support the

continued existence of a rule that is dramatically out of

step with this Court’s modern antitrust jurisprudence.

As an initial matter, there is no incongruity between Con-

gress’s action in 1975 and a more flexible treatment of

RPM under the Sherman Act. In repealing the broad

per se legality afforded by the fair trade laws and once

again subjecting RPM to antitrust scrutiny, Congress did

not mandate a particular standard to govern such scru-

tiny. Easterbrook 139. Although both the House and

Senate reports on the 1975 legislation indicate Con-

gress’s awareness of the reality that by repealing the

exemption for fair trade laws they were remitting RPM

22

to the Dr. Miles regime, H.R. Rep. No. 341, 94th Cong.,

Ist Sess. 3 (1975) (House Rep.); S. Rep. No. 466, 94th

Cong., Ist Sess. 1-2 (1975), the legislative history sug-

gests that Congress merely intended to end a special

exemption from the Federal antitrust laws that allowed

States to declare RPM per se legal. House Rep. 5.

In repealing the special exemption for RPM provided

by the fair trade laws, Congress did not purport to freeze

that status and deprive this Court of its recognized au-

thority and flexibility to interpret the Sherman Act’s

general language in accordance with our growing under-

standing of commercial realities. Easterbrook 139.

There is thus no support for the notion that Congress

intended to preserve a per se ban on RPM even if subse-

quent developments in the law rendered that ban anoma-

lous and markedly inconsistent with the treatment of

other forms of vertical restraints. Likewise, the earlier

prohibitions against the Department's use of appropri-

ated funds to advocate Dr. Miles’s demise have not been

in effect for over 20 years, and in any event are hardly a

testament to the robustness of the Dr. Miles rule. Con-

gress could have buttressed the Dr. Miles rule directly,

and more to the point, retains the full ability to address

RPM legislatively. If Dr. Miles cannot survive as a mat-

ter of stare decisis, see pp. 24-28, infra, it should no lon-

ger skew any congressional debate concerning RPM.*

* Congressional views about RPM and Dr. Miles have varied over

the years. The 1975 legislation, after all, repealed earlier legislation,

the Miller-Tydings Fair Trade Act, ch. 690, tit. VIII, 50 Stat. 693, and

the McGuire Bill, ch. 745, 66 Stat. 631, that had been intended to place

“the stamp of approval upon price maintenance transactions under

State [fair trade laws], notwithstanding the Sherman Act of 1890.” 81

Cong. Rec. 8138 (1937) (statement of Rep. Dirksen).

23

b. It also has been argued that RPM necessarily

harms those customers who are already poised to pur-

chase the manufacturer’s product without any special

dealer services supported by RPM (so-called “infra-

marginal” customers). According to that argument,

RPM forces inframarginal customers to pay more for a

product they would have purchased in any event. Wil-

liam S. Comanor, Vertical Price-Fixing, Vertical Market

Restrictions, and the New Antitrust Policy, 98 Harv. L.

Rev. 983, 990-992 (1985) (Comanor). That argument

plainly cannot support per se condemnation. Prices need

not go up when RPM causes retailers to provide costly

additional services, because the manufacturer, in impos-

ing RPM, may lower its wholesale price to retailers.

Marvel 67-71; Marvel & McCafferty 369-373. RPM also

may spur greater retail sales efforts that increase total

output, allowing the manufacturer to achieve economies

of seale.

Second, even if inframarginal customers pay higher

prices, other customers receive the benefit of products

they find more attractive as a result of the enhanced

product information and service. In other words, higher

prices resulting from RPM may enhance consumer wel-

fare as a whole because consumers effectively receive a

different and better product at the higher price. And

third, harm to inframarginal customers will generally be

limited as long as interbrand competition exists, “be-

cause of the ability of consumers to substitute a different

brand of the same product.” GTE Sylvania, 433 U.S. at

52 n.19.

In any event, the per se prohibition against RPM does

not prevent manufacturers from engaging in other con-

duct that achieves similar results. Prevented from using

their preferred—and thus presumably most efficient—

24

marketing strategy, manufacturers can be expected to

adopt the best available alternative to RPM. For exam-

ple, manufacturers might consider relatively inefficient

vertical integration or offer services themselves that

could be more efficiently produced by retailers, thereby

decreasing consumer welfare. See p. 17, supra. Even

under the Dr. Miles rule, moreover, manufacturers may

lawfully adopt a policy of terminating retailers for failure

to abide by the manufacturer’s suggested retail price, as

long as they avoid an agreement. Colgate & Co., 250 U.S.

at 306-307. Thus, there is little basis for concern that

elimination of the Dr. Miles rule will permit RPM that

always or almost always harms consumer welfare.

D. Considerations Of Stare Decisis Do Not Justify Retention

Of The Dr. Miles Rule

1. Although this Court approaches the reconsidera-

tion of its prior decisions with the “utmost caution,”

Khan, 522 U.S. at 20, the principle of stare decisis is “not

an inexorable command.” bid. (quoting Payne v. Ten-

nessee, 501 U.S. 808, 828 (1991)). “In the area of anti-

trust law, there is a competing interest, well represented

in [the] Court’s decisions, in recognizing and adapting to

changed circumstances and the lessons of accumulated

experience.” /bid. Accordingly, “the general presump-

tion that legislative changes should be left to Congress

has less force with respect to the Sherman Act” in light

of the accepted view that Congress expected courts to

give continuing shape to antitrust law. /bid. That is par-

ticularly true in the context of per se rules, which are

adopted based on experience and economic analysis and

should not survive when experience and economic analy-

sis thoroughly undermine the case for per se treatment.

For those reasons, this Court “has reconsidered its

decisions construing the Sherman Act when the theoreti-

25

cal underpinnings of those decisions are called into seri-

ous question.” Khan, 522 U.S. at 21. In an analogous

context, this Court recently overruled its prior decisions

establishing a presumption that patents confer market

power in the context of a tying case, a presumption that

did not comport with modern economic reality. //linois

Tool Works Inc. v. Independent Ink, Inc., 126. Ct. 1281

(2006). Those decisions reflect this Court’s reluctance

“to create out of the single term ‘restraint of trade’ a

chronologically schizoid statute, in which a ‘rule of rea-

son’ evolves with new circumstances and new wisdom,

but a line of per se illegality remains forever fixed where

it was.” Khan, 522 U.S. at 21. There is similarly no jus-

tification for retaining an anomalous per se rule that is

based on erroneous reasoning and manifestly does not

satisfy this Court’s modern test for per se treatment.

“With the views underlying {|Dr. Miles] eroded by this

Court’s precedent, there is not much of that decision to

salvage.” /bid.

2. Dr. Miles’s per se rule has few, if any, defenders

in the scholarly community. See Ahan, 522 U.S. at 15-18

(relying on scholarly criticism in abrogating per se ban

on maximum vertical price restraints). As the brief filed

at the petition stage by leading economists aptly summa-

rizes:

In the theoretical literature, it is essentially undisnuted

that minimum RPM can have procompetitive effects and

that under a variety of market conditions it is unlikely to

have anticompetitive effects. The disagreement in the lit-

erature relates principally to the relative frequency with

which procompetitive and anticompetitive effects are likely

to ensue.

Economists Br. 15-16.

26

Even commentators who emphasize the potential

anticompetitive effects of vertical restraints generally

endorse some form of rule-of-reason analysis that takes

into account the economic and market conditions in any

given case. For example, Professor Pitofsky, while gen-

erally endorsing Dr. Miles’s per se rule, has proposed

significant exceptions to the rule in light of modern eco-

nomic realities. Robert Pitofsky, Jn Defense of Dis-

counters: The No-Friils Case for a Per Se Rule Against

Vertical Price Fixing, 71 Geo. L.J. 1487, 1488, 1495

(1983).

Similarly, Professor Comanor, who has proposed a

per se ban or a “modified rule of reason analysis” for

vertical price and nonprice restraints involving “estab-

lished products,” has advocated that, in the case of new

products or products of new market entrants, “the re-

straints should be permissible, or at least should be

treated more leniently in any modified rule of reason

analysis.” Comanor 99, 1001, 1002. Other critics of RPM

are no exception. Robert L. Steiner, /1ow Manufactur-

ers Deal with the Price-Cutting Retailer: When Are Ver-

tical Restraints Efficient?, 65 Antitrust L.J. 407, 445,

446-447 (1997) (explaining that in some circumstances

“the consumer interest is often better served by RPM [as

opposed to other vertical restraints |—contrary to its per

se illegality and the rule-of-reason status of vertical

nonprice restraints”); Warren S. Grimes, Brand Market-

ing, Intrabrand Competition, and the Multibrand Re-

tailer: The Antitrust Law of Vertical Restraints, 64 An-

titrust L.J. 83, 135 (1995) (explaining that a “structured

rule of reason should be applied to both price and

nonprice [vertical] restraints”).

> Grimes suggests that, under a properly structured rule-of-reason

analysis, RPM would more frequently be found anticompetitive than

27

3. Continuation of a per se ban on RPM poses signifi-

cant practical risks to the procompetitive purposes of the

antitrust laws. Most saliently, the per se ban on RPM

prohibits conduct that would often be efficiency-enhanc-

ing and beneficial, with the result that overall economic

welfare is reduced. See pp. 9-16, supra. Perpetuation of

unjustified per se rules also risks undermining the value

of per se rules more generally. Per se rules are essential

to effective enforcement of the antitrust laws. They es-

tablish bright-line tests that identify plainly pernicious

conduct, thereby deterring unlawful behavior and provid-

ing clear guidance to the business community and anti-

trust counselors. If a per se rule, once adopted, were to

be treated as sacrosanct, it could make courts overly cau-

tious in adopting such rules. Moreover, courts, agencies,

and the business community should have confidence that

per se rules are applied only to manifestly anticompeti-

tive conduct. Application of a per se rule to conduct that

often would be procompetitive has the potential to erode

the rationale for per se treatment and foster judicial re-

luctance to use such a blunt instrument even in those

circumstances when it is appropriate.

In Colgate, supra, the Court held that the antitrust

laws permit a manufacturer unilaterally to announce that

it will refuse to do business with dealers who se!! below

the manufacturer's suggested retail price, provided that

the dealer does not actually enter into an agreement to

maintain retail price. But the distinction between unilat-

eral conduct that is lawful under Colgate and an implicit

agreement that is illegal per se under Dr. Miles is “often

* * * difficult to apply in practice.” Monsanto, 465 U.S.

at 762. The distinction has spawned considerable con-

would some other vertical restraints. Grimes, supra, at 119-134. He

nevertheless rejects a per se rule in favor of the rule of reason.

28

cern and uncertainty in the business community and the

courts, potentially chilling even procompetitive conduct

that might qualify as unilateral under Colgate. Cf. GTE

Sylvania, 433 U.S. at 48 n.14 (discussing distinctions

made by lower courts to limit Schwinn’s per se reach).

4. Nor does the per se rule of Dr. Miles comport with

this Court’s closely related precedents. As discussed,

the Court in GTE Sylvania and Khan overruled its prior

decisions imposing a per se ban on other vertical re-

straints with effects similar to those of RPM. See pp. 6,

9-10, supra. The similarity between RPM and other ver-

tical restraints as to which per se treatment has been

abandoned makes the continued survival of Dr. Miles

impossible to justify. In other contexts, the Court has

overruled anachronistic precedents that could not be

squared with the reasoning of opinions in closely related

cases. E.g. Lapides v. Board of Regents of Univ. Sys.,

535 U.S. 613, 623 (2002); Ring v. Arizona, 536 U.S. 584,

602-609 (2002). The same result is appropriate here.

The time has come to harmonize the law’s treatment

of RPM with modern antitrust doctrine. There is no

sound basis for treating RPM differently from other ver-

tical agreements. The rule of reason offers protection

against anticompetitive uses of RPM, while allowing de-

fendants to defend their arrangements as legitimate and

procompetitive. Moreover, analyzing RPM under the

same standards that govern other vertical restraints will

avoid the continued necessity to make tenuous distine-

tions between economically indistinguishable conduct

and will promote proper application of the per se rule, to

the benefit of strong antitrust enforcement and a vigor-

ously competitive economy.

29

CONCLUSION

The judgment of the court of appeals should be re-

versed and the case remanded for further proceedings.

Respectfully submitted.

WILLIAM BLUMENTHAL

General Counsel

Federal Trade Commission

JANUARY 2007

PAUL D. CLEMENT

Solicitor General

THOMAS O. BARNETT

Assistant Attorney General

Tuomas G. HUNGAR

Deputy Solicitor General

GERALD F. MASOUDI

Deputy Assistant Attorney

eneral

Lisa S. BLATT

Assistant to the Solicitor

General

CATHERINE G. O'SULLIVAN

DAVID SEIDMAN

Attorneys