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

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379 [>

No. 06-480

In The

Supreme Court of the Gnited States

LEEGIN CREATIVE LEATHER PRODUCTS. INC..,

Petitioner.

PSKS. INC. DBA KAY'S KLOSET ... KAY'S SHOES.

Respondent.

—@

On Writ Of Certiorari To The United States

Court Of Appeals For The Fifth Circuit

—

BRIEF OF THE AMERICAN ANTITRUST

INSTITUTE AS AMICUS CURIAE

IN SUPPORT OF RESPONDENT

_ >

RICHARD M. BRUNELI ALBERT FOER

Director of Legal Advocacy Counsel of Record

and Senior Feilow President

AMERICAN ANTIPRUST AMERICAN ANTITRUST

INSTITUTE INSTITUTE

2919 Ellicott St.. N.W. 2919 Ellicott St., N.W.

Washington, DC 20008 Washington, DC 20008

(617) 435-6464 (202) 276-6002

TABLE OF CONTENTS

Page

ee ED viiicinctnnininiscnnicintiinivntinaniimnnianeiis iil

EE I CIE oiisciccccccscnesicsnnncniiewscnsiiinincan 1

a ii incccitesitiiniiisnisicnusinidansanuiaiitiiinia 1

I. PETITIONER AND ITS AMICI OFFER

NO COMPELLING JUSTIFICATION FOR -

OVERRULING DR. MILES ............cccceseceeeeees 2

A. Dr. Miles Is Firmly Embedded In This

+ €ourt’s Antitrust Jurisprudence And Has

Been Ratified By Congress ...................065 2

B. The Court Has Set A Very High Bar For

Overruling A Long-Standing Statutory

Construction Ratified By Congress.......... 5

C. Congressional Reliance Distinguishes

This Case From Other Sherman Act

Cases In Which Stare Decisis Was Not

I siicskcsccinitciasndipnieiienscisitdenpieiaicitibaccnehinntiititibinvaaapions 7

D. Federal And State Antitrust Enforcers

Continue To Rely On The Per Se Rule To

_ Bring Cases Against Vertical Price Fix-

ing And Related Conduct ...................ce eee 10

Il. The Conceptual Underpinnings Of The Per

Se Rule Remain Sound..................cccsssesseesseees 11

A. The Anticompetitive Effects Of RPM Are

iscincininncnencodiidnnnnishionsinnsisimetiiansinints 13

en 13

2. Reduced innovation and efficiency in

Ci cciticinneitiiicetrcnsinccitanniidlsniainnnegstesaininn 14

Protection of retailer interests ........... 15

Restricted interbrand competition...... 17

TABLE OF CONTENTS -— Continued

Page

B. The Procompetitive Uses Of RPM Are

Not Common Or Important...................... 19

1. Free-rider argument...............cc.cccc000 19

2. Other “procompetitive” theories ......... 20

3. Less restrictive alternatives............... 21

C. Having Different Rules For Price And

Nonprice Restraints Makes Sense............ 22

D. Foreign Jurisdictions, Including The EU

And Canada, Generally Ban Minimum

STE siiteiintenietinaeannibinnieneiinieaaitndanindtiainiediie 24

E. Difficulty Distinguishing “Unilateral”

Conduct Under Colgate and Unlawful

RPM Does Not Justify a the

ee ED icasevennicitatseciecmaninenninnittediones 25

III. OVERRULING DR. MILES IN FAVOR OF

THE SYLVANIA RULE OF REASON

WOOPRFRD GED CIO EE cercceccevecvescecnssseocecorsecveese 26

IV. IF THE COURT OVERRULES DR. MILES,

IT SHOULD ADOPT A REBUTTABLE PRE-

SUMPTION THAT RPM IS UNLAWFUL........ 28

i ee 30

ili

TABLE OF AUTHORITIES

Page

CASES

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

eae sins teapesnsiinsicesteiittaintydacindennnnendenianinacepebitinianeiiagl 6, 7, 10

Burnet v. Coronado Oil & Gas Co., 285 U.S. 393

Tt iccinnieiiaiedennbcsiunenneimineiamipsidbaitmingbbaninniaaianebipiildcmbdains 5

Business Elecs. Corp. v. Sharp Elecs. Corp., 485

SLE: Se SUITE hninsininccencunsbiietstnbianisiionsemensseiodiin 2, 14, 17, 23

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

ey ST Ui asictssnstestnanieniinininsasnnicabianinenidatenannennts passim

Copperweld Corp. v. Ind. Tube Corp., 467 U.S. 752

Serie ssisebiiincinecneesadinsivetinsseeindieipaainhaatiibeabeiadpintiasidenichtaemsadeliidaibiags 8, 10

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

Se Mae CE UNTIED ccscsciteyneteininnceidsitnapintainmininaiiminébatendin passim

Flood v. Kuhn, 407 U.S. 258 (1972) .......ccccccesscccsesseseceeess 5,6

FTC v. Onkyo U.S.A. Corp., 1995-2 Trade Cas.

Oe Pee Gels. SD ccitsccrcnenisentecdeienmiinbeniaenses 10

Guardians Ass’n v. Civ. Serv. Com’n, 463 U.S. 582

SETI i csheiaheanieuariesreinasiink einfach nla ceieiihaitiil 6

Hilton v. S. Carolina Public Ry. Com’n, 502 U.S.

Sas SI visaiciecinspctinrpeniicesiitincedciiiniansitaiicidaaadietinddiibiaiildieliiainiiaiiiaiien 5

Hubbard v. United States, 514 U.S. 695 (1995) ........... 6, 10

Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977)........... 5,6

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

a es TEE UII chins teliaehiaiaieteeneigihieicadaiiinmipreiiiaiel 8,11

Keogh v. Chicago & N.W. Ry. Co., 260 U.S. 156

Taal noscsicihaitneintincninesiimnetiielntaietnadideeanciniadadadadioaeiatsiicpintineiininis 8,9

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

er GE nittabeescintsisncsiseninisincincaiianndsieinitaniintidibininiininniiacebine 2,3

TABLE OF AUTHORITIES - Continued

Page

NCAA v. Board of Regents, 468 U.S. 85 (1984) ......cccceee 29

National Society of Professional Engineers v. United

States, 435 U.S. 679 (1978)..........cccsssorcssssrerescscsssesers 13

Neal v. United States, 516 U.S. 284 (1996) ............ccceceees 10

Parkway Gallery Furn., Inc. v. Kittinger/Pennsyivania

House Group, Inc., 878 F.2d 801 (4th Cir. 1989)........... 27

Patterson v. McLean Credit Union, 491 U.S. 164

SSTnTTET iisechbciconenihsediaiieciasiiabieigemtaeinasigableiiabimticiaseibdiiinatincielsibbsuiidadaunds 5

Polygram Holding, Inc. v. F-T:C., 416 F.3d 29 (D.C.

I a iietacahlecdapihehiiaph italics a dalasincnitaiadai 29, 30

Square D Co. v. Niagra Frontier Tariff Bureau, Inc.,

Fe Be CE CI HED secsctnscnsivusstnssessenecsanensnccnnanens 9

Square D Co. v. Niagra Frontier Tariff Bureau, Inc.,

ee Ee eterecietniesitcnnnisenesteinersiniienens 5, 6, 7, 8,9

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

Toys “R” Us, Inc. v. F-T-C., 221 F.3d 928 (7th Cir.

es saecnsenesensosesesesessnsncncssosnsesacesensores 15, 16, 21, 27

United States v. Anchorshade, Inc., 1996-2 Trade

Cas. (CCH) 971,640 (S.D. Fla. 1996)... eee 10

United States v. Board of Comm’rs, 435 U.S. 110

Teil clei ciccsciacinisiinhiitatataiadahdeaninpainedinaaieniininianiches sssiiadlainsiaindiiniite 6

United States v. Brush Fibers, Inc., 1997-2 Trade

Cas. (CCH) 971,915 (E.D. Pa. 1997) .............ccceseeeeeeeeees 10

United States v. California SunCare, Inc., 1994-2

Trade Cas. (CCH) 970,843 (C.D. Cal. 1994) 0.0.0.0... 10

United States v. Canstar Sports USA, Inc., 1993-2

Trade Cas. (CCH) 970,372 (D. Vt. 1993) ............ceeeeeeeee 10

TABLE OF AUTHORITIES — Continued

Page

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

CITI D wusissesenicninssndbeiceninsiiumnianininieinienmmmiaeiabiinial 25

United States v. Playmobil USA, Inc., 1995-1 Trade

Cas. (CCH) 971,000 (D. D.C. 1995)... cece eeeeeeeseeeees 10

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

BI Se ccccccnsccscnscnncisntsidsnbainaiimuisinpiaamiiaianiiabimimgiiumsiasas 13

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

[Fete oncncncncesnnisnnmactenisnasiaiashittiiivansisadisasmenaiianiianiidel 22, 23

STATUTES

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

94-145, 89 Stat. 801 (1975)... eeeeteeeeeeees 3, 8, 13, 28

a mena 28

LEGISLATIVE MATERIALS

Fair Trade Laws: Hearings on S. 408 Before the

Subcomm. on Antitrust and Monopoly of the

Senate Comm. on the Judiciary, 94th Cong., lst

RD, CBee Pacccvnscccennscnnincsstninbciiudsiniibinasidibaidinmimmianaiiiaiaibds 3-4

Fair Trade: Hearings on H.R. 2384 Before the

Subcomm. on Monopolies and Commercial Law

of the House Comm. on the Judiciary, 94th

Cong., lst Sess. 109, 121 (1975)...........ccccssseeceeeeereeeeees 4,5

H.R. Rep. No. 341, 94th Cong., lst Sess. (1975)................. 4

H.R. Rep. No. 237, 102nd Cong., lst Sess. (1991).............. 3

S. Rep. No. 466, 94th Cong., Ist Sess. (1975)... eee 4

Statement by President Gerald R. Ford Upon

Signing the Consumer Goods Pricing Act of 1975

GRE: Fly. Wi eee cunincnssncttstsesnnuisinvcninesitabiiiaaiainieaiagemsiniaaaae 4

TABLE OF AUTHORITIES — Continued

Page

121 Cong. Rec. 23,659 (1975)...........cccssccceseeees iediitieiaiaicie 4

121 Cong. Rec. 38,049 (1975) ...........ccccccecseeceees anieiniainitdindainmans 4

ADMINISTRATIVE MATERIALS

Dept. of Justice and Federal Trade Commission,

Antitrust Guidelines for the Licensing of Intellec-

tual Property (April 6, 1995) .............ccccccsccesssessseseseseees ll

In re American Cyanamid Corp., 123 F.T.C. 1257

REESE SEINE TLS no 10

In re Kreepy Krauly USA, Inc., 114 FT.C. 777

| EES EE ER 10

In re New Balance Athletic Shoe, Inc., 122 F.T.C.

EET ESSE RS A 10

In re Nine West Group, Inc., 2000 FTC LEXIS 48

EEE EE LILES 10

In re Nintendo of America Inc., 114 F.T.C. 702

ESE EE LETT 10

In re Reebok International, Ltd., 120 F.T.C. 20

EEE ESS I a EO 10

In re The Keds Corp., 117 F.T.C. 389 (1994)... 10

In re Time Warner, Inc., 2000 FTC LEXIS 40

EEE Ee 10, 17, 27

MISCELLANEOUS

ABA Section of Antitrust Law, Competition Laws

Outside the United States (2001) .............cccccceeeceeeeeeeeees 25

8 Phillip E. Areeda, Antitrust Law (1989)................... 28, 29

vii

TABLE OF AUTHORITIES - Continued

8 Phillip E. Areeda & Herbert Hovenkamp, Anti-

Speed Tele GAB Oe BD cccesseescnnenesemcessunensetnnsansnennes passim

Donald I. Baker, Hitting the Potholes on the Illinois

Brick Road, Antitrust, Fall 2002 ...................ccceeeee ce ee 28

Ward Bowman, Jr., The Prerequisites and Effects of

Resale Price Maintenance, 22 U. Chi. L. Rev. 825

Brief for the United States and Federal Trade

Commission as Amici Curiae Supporting Rever-

sal, State Oil Co. v. Khan, 1997 WL 163852 (U.S.).. 8, 21

Brief for the United States as Amicus Curiae

Supporting Petitioners, Square D Co. v. Niagra

Frontier Tariff Bureau, Inc., 1985 WL 670055

See acctencieciineaitcitiilinaniihlideisainiatitiaiatdliaeianccatsiliiaiaaiiaialial 8

Jean Wegman Burns, Vertical Restraints, Efficiency

and the Real World, 62 Ford. L. Rev. 597 (1993).......... 12

Arndt Christiansen & Wolfgang Kerber, Competi-

tion Policy With Optimally Differentiated Rules

Instead of “Per Se Rules vs Rule of Reason”, 2 J.

Comp. L. & Econ. 215 (2006) .............ccccsccccccsssesseseseseees 12

William S. Comanor, The Two Economics of Vertical

Restraints, 21 Sw. U. L. Rev. 1265 (1992)..................... 16

Deloitte, 2007 Giobal Powers of Retailing, Stores,

Jan. 2007, available at http://www.nxtbook.com/

nxtbooks/nrfe/stores-globalretail07/Aindex.php ............. 17

William N. Eskridge, Jr., Overruling Statutory

Precedents, 76 Geo. L. J. 1361 (1988) ................ccceceeeeeees 6

European Commission, Commission Regulation

(EC) 2790/1999, 1999 O.). (L336) 21.0.0... ceescecceeeeeeees 24

TABLE OF AUTHORITIES - Continued

Daniel A. Farber & Brett H. McDonnell, “Js There a

Text in this Class?” The Conflict Between Textual-

ism and Antitrust, 14 J. Contemp. Leg. Issues

Sr nreT ei ecinneasiatetiiene iterate iilncesiinitiniieaniai 6

Federal Trade Commission, Record Companies

Settle FTC Charges of Restraining. Competition

in CD Music Market, May 10, 2000, at http://

www. ftc.gov/opa/2000/05/cdpres. htm............ccccceeeeeeeees 14

Andrew I. Gavil et al., Antitrust Law in Perspective

ee tnictnnntnsennensenseemmmnaneiiinnineneimenieninmapmienenanaie 30

David Gilo, Retail Competition Percolating Through

to Suppliers and the Use of Vertical Integration,

Tying, and Vertical Restraints To Stop It, 20 Yale

i i iinccentnetinnnenieniencniminnineentininimammntatienen 17

Douglas H. Ginsburg, Vertical Restraints: De Facto

Legality Under the Rule of Reason, 60 Antitrust

Bel Se icdcccneriensenennnnsinentainnsnienenmnnetennineationninens 27

Pamela Jones Harbour, An Open Letter to the

Supreme Court of the United States from Com-

missioner Pamela Jones Harbour (Feb. 26, 2007),

at http://www.ftc.gov/speeches/harbour.htm.................. il

Herbert Hovenkamp, Chicago and its Alternatives,

Ne Ga eiiinsncrencsnnneicnntnnmnensininenienntinmnnmnnes 3

Herbert Hovenkamp, Federal Antitrust Policy (3rd

BE BEI icdectecennnsenionmerenndaternenenmsiamenatiinnenineniits 16, 25

Edward Iacobucci, The Case for Prohibiting Resale

Price Maintenance, 19 World Comp. L. & Econ.

i Th GED diecnieeceneenteennineninnpernnnesnntoanmens 13, 16, 20, 21

Interview With Former Assistant Attorney General

James F. Rill, 63 Antitrust & Trade Reg. Rep.

(BNA) 254 (Aug. 27, 1992) ........cccccesccesccesseessessesesesseeneee ll

TABLE OF AUTHORITIES — Continued

Benjamin Klein & Kevin Murphy, Vertical Re-

straints as Contract Enforcement Mechanisms, 31

Ba CA Se SR. Ga Ce cetenececcccensensncscenmesssnssen 20, 22

Thomas B. Leary, Freedom as the Core Value of

Antitrust in the New Millennium, 68 Antitrust L.

a eseciratienenieiananicitaticnaeahdatanciaatablieaiansiaiaiatatinideatehttenisiinay 14

Lawrence C. Marshall, “Let Congress Do It”: The

Case for an Absolute Rule of Statutory Stare De-

cisis, 88 Mich. L. Rev. 177 (1989)...............cccccsssssesserssees 7

Jayma M. Meyer, Relaxation of the Per Se Mantra

in the Vertical Price Fixing Arena, 68 S. Cal. L.

Inn. SOUT scusnteeinarnnintiemetnantepedebaanniiadsanunneidabipetieneesiees 28

OECD, Buying Power of Multiproduct Retailers

(1999), at http://www.oecd.org/dataoecd/1/18/

OECD, Resale Price Maintenance (1998), at http://

www.oecd.org/dataoecd/35/7/1920261 .pdf................ 24, 25

Thomas R. Overstreet Jr., Resale Price Mainte-

ae ti iicniscdanienciminiiesaieiesianndtpeammnenineinis 16, 18

Thomas R. Overstreet Jr. & Alan A. Fisher, Resale

Price Maintenance and Distribution Efficiency:

Some Lessons from the Past, 3 Contemp. Policy

I Gp Ga ivesetensenscssnsremmsnesteemnmmnnmnmann 28

Ittai Paldor, Rethinking RPM: Did the Courts Have

it Right All Along? (Working Paper 2007), at

http://papers.ssrn.com/sol3/papers.cfm?abstract_

Ie vensecqsesnsinernmnmsnnnannpenienineieniontnoningueni 21, 24, 25

Thomas A. Piraino, Jr., Reconciling the Per Se and

Rule of Reason Approaches to Antitrust Analysis,

ee 28

TABLE OF AUTHORITIES - Continued

Robert Pitofsky, Are Retailers Who Offer Discounts

Really “Knaves”?: The Coming Challenge 'o the

Dr. Miles Rule, Antitrust, Spring 2007 (forthcom-

BP iceinsstietisnnssnastaignemmnasmiannniinineeneniniammenepseapnaninets

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)................022+.

Record Canadian Fine is Levied in Resale Price

Maintenance Case, 83 Antitrust & Trade Reg.

Rep. (BNA) 410 (Oct. 25, 2002) .20............cceccceceeeseeees

F.M. Scherer, Comment on Cooper et al.’s “Vertical

Restrictions and Antitrust Policy”, 1 Comp. Policy

LETTS eT nn TEEN

F. M. Scherer & David Ross, Industrial Market

Structure and Economic Performance (3rd ed.

David F. Shores, Vertical Price-Fixing and the

Contract Conundrum: Beyond Monsanto, 54

RE one erreeree

Speech by Ass’t Attorney General James F. Rill, 57

Antitrust & Trade Reg. Rep. (BNA) 671, Nov. 9,

FIT csusnanantntnnnennsnssenseniiemsiniemmntnieneenemensnemenebeun

Robert L. Steiner, How Manufacturers Deal with the

Price Cutting Retailer: When are Vertical Restraints

Efficient? 65 Antitrust L.J. 407 (1997)............ 14, 16,

Richard M. Steuer, Dysfunctional Discounts, Anti-

ET, SN Tits CID Cab vesenencccenncnnntnsesetncenimcsanean

Kortney Stringer, Style & Substance: Shoppers Who

Blend Store, Catalog and Web Spend More, Wall

St. J., Sept. 3, 2004, at AZ ...ccccceccecccessssessessessseerseeees

Page

TABLE OF AUTHORITIES — Continued

Page

Lawrence A. Sullivan & Warren S. Grimes, The Law

of Antitrust: An Integrated Handbook (2006)........... passim

Transcript of Oral Argument, State Oil Co. v. Khan,

1997 U.S. Trans. LEXIS 81 (Oct. 7, 1997)........:cccecceeves 13

Arthur H. Travers, Jr. & Thomas D. Wright, Re-

stricted Channels of Distribution Under the

Sherman Act, 75 Harv. L. Rev. 795 (1962)................... 23

United States Dept. of Justice, Massachusetts

Tampico Fiber Distributor Charged in Price Fix-

ing Conspiracy, Aug. 29, 1996, available at http://

www.usdoj.gov/atr/public/press_releases/1996/0862.

OID scacnesscsessnnisinnibinanantendiiniauiutininaniaiiatanpensiannindianents 18

S. Robson Walton, Antitrust, RPM, and the Big

Brands: Discounting in Small-Town America (11),

15 Antitrust L. & Econ. Rev. No. 2, 11 (1983)............... 17

Joseph F. Winterscheid & Margaret A. Ward, Two

Part Harmony: New Rules for Vertical Agree-

ments Under European Union Competition Pol-

icy, Antitrust, Summer, 2000, at 52...............:ccccseeeeeeeee 24

INTEREST OF AMICUS CURIAE

The American Antitrust Institute (“AAI”) is an inde-

pendent non-profit education, research, and advocacy

organization. Its mission is to advance the role of competi-

tion in the economy, protect consumers, and sustain the

vitality of the antitrust laws. The Advisory Board of AAI,

which serves in a consultative capacity, consists of promi-

nent antitrust lawyers, law professors, economists, and

business leaders. See http://www.antitrustinstitute.org.’

SUMMARY OF ARGUMENT

The issue before the Court is whether petitioner or its

amici have offered a sufficiently compelling reason for

overruling the venerable Dr. Miles per se rule against

minimum resale price maintenance (RPM) in light of

Congress’s ratification of the rule. They have not. Accord-

ing to petitioner and its amici, the main cost of Dr. Miles is

that manufacturers that wish to adopt RPM for a legiti-

mate purpose (e.g., promotion of services) are forced to use

alternative means to achieve that end (e.g., direct pay-

ments). But even assuming arguendo that RPM can have

procompetitive uses in theory, petitioner and its amici

have offered no evidence that such uses are common or

important or that less restrictive alternatives are in fact

more costly or less effective. Nor have they indicated the

magnitude of any such costs, and there is no reason to

think that such costs are significant.

In contrast to the theoretical case offered by propo-

nents for a radical shift in antitrust policy, the reality is

that RPM virtually always raises prices to consumers,

' The written consents of all parties to the filing of this brief have

been lodged with the Clerk. No counsel for a party has authored this

brief in whole or in part, and no person or entity other than AAI or its

counse! has made a monetary contribution to the preparation or

submission of this brief. The AAI is managed by its Board of Directors,

which has approved of this filing. The individual views of members of

the Advisory Board may differ from the positions taken by AAI.

prevents more efficient retailers from passing along the

savings from their efficiency to consumers, tends to retard

innovation in retailing, and often has been used by retail-

ers and manufacturers for anticompetitive ends. Repealing

Dr. Miles would increase the incidence of anticompetitive

RPM and increase business uncertainty. Thus, the concep-

tual basis of the per se rule remains sound. The distinction

between price and nonprice restraints is also valid because

nonprice restraints are less likely to impair interbrand

competition at the retailer and manufacturer levels and

more likely to have procompetitive benefits. In sum, not

only is there no compelling basis for reversing Dr. Miles,

but consumer welfare is better served by a per se rule than

a rule of reason, as most antitrust jurisdictions in the

world recognize by treating RPM harshly.

I. PETITIONER AND ITS AMICI OFFER NO

COMPELLING JUSTIFICATION FOR OVER-

RULING DR. MILES

A. Dr. Miles Is Firmly Embedded In This

Court’s Antitrust Jurisprudence And Has

Been Ratified By Congress

For nearly a century since Dr. Miles Medical Co. v.

John D. Park & Sons Co., 220 U.S. 373 (1911), this Court

has repeatedly and unequivocally held that minimum

RPM is per se illegal. Even as the Court has altered the

treatment of nonprice vertical restraints in Continental

T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), ad-

justed the contours of the Colgate doctrine in Monsanto

Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984),

clarified the boundary between price and nonprice re-

straints in Business Elecs. Corp. v. Sharp Elecs. Corp., 485

U.S. 717 (1988), and changed the treatment of maximum

RPM in State Oil Co. v. Khan, 522 U.S. 3 (1997), it has

steadfastly adhered to the core of Dr. Miles, significantly in

respect of the will of Congress. Since 1975, Congress has

repeatedly and unequivocally acted to extend and preserve

Dr. Miles.’ “With the possible exception of merger policy,

there is probably no area of antitrust where Congress has

displayed such an explicit and abiding intent to set policy

for the courts and enforcement agencies as the area of

resale price maintenance (‘RPM’).” H.R. Rep. No. 237,

102nd Cong., lst Sess. 4 (1991).

Contrary to the arguments of petitioner and the

United States, the Court in Sylvania did not err when it

read the repeal of the fair trade amendments as approval

of Dr. Miles.’ The legislative history of the Consumer

Goods Pricing Act of 1975 indicates not merely “Congress’s

awareness of the reality that by repealing the exemption

for fair trade laws [it] was remitting RPM to the Dr. Miles

regime,” Brief for the U.S. as Amicus Curiae (U.S. Br.) 21-

22, but that Congress specifically intended to outlaw the

practice of RPM by restoring Dr. Miles as the governing

law nationwide. At the hearings, enforcement agency

officials testified that RPM was pernicious and should be

banned.’ The committee reports show that the House and

* See Consumer Goods Pricing Act of 1975, Pub. L. No. 94-175, 89

Stat. 801. After the Reagan Administration’s Justice Department

sought to overturn Dr. Miles in Monsanto, Congress passed appropria-

tions measures in 1983, 1985, 1986, and 1987 preventing the Depart-

ment from using appropriated funds for this purpose. Such measures

were no longer needed when the (first) Bush Administration came to

office and promised to enforce Dr. Miles. See Speech by Asst Attorney

General James F. Rill, 57 Antitrust & Trade Reg. Rep. (BNA) 671, Nov. 9,

1989 (stating that the Antitrust Division would not advocate change to

the per se rule and would “not hesitate to bring a resale price mainte-

nance case, contingent only on evidence sufficient to establish a genuine

resale price conspiracy and facts showing a significant regional impact”).

* See Herbert Hovenkamp, Chicago and its Alternatives, 1986 Duke

L.J. 1014, 1020 n.34 (“I am persuaded . . . that Congress has sanctioned

the per se rule for resale price maintenance, and that we should feel

obliged to comply with it until Congress tells us otherwise.”).

* See Fair Trade Laws: Hearings on S. 408 Before the Subcomm. on

Antitrust and Monopoly of the Senate Comm. on the Judiciary, 94th

Cong., Ist Sess. 170-72 (1975) (Senate Hearings) (FTC Chairman Lewis

A. Engman testifying that “fair trade laws are little more than anti-

competitive price fixing, unadorned with any redeeming features”);

id. at 172-77 (Thomas E. Kauper, Ass’t Attorney General, making

(Continued on following page)

- Senate Judiciary Committees intended to remove the fair

trade obstacle to the per se treatment of RPM.’ And the

chief sponsors of the bill articulated the same understand-

ing.” Congress was well aware of the theoretical procom-

petitive uses of RPM, including the promotion of dealer

services, yet rejected any exceptions to the per se rule.’

strong case against “resale price fixing” in any circurnstances); Fair

Trade: Hearings on H.R. 2384 Before the Subcomm. on Monopolies and

Commercial Law of the House Comm. on the Judiciary, 94th Cong., Ist

Sess. 109, 121 (1975) (House Hearings) (similar testimony of Keith

Clearwaters, Deputy Ass’t Attorney General).

* S. Rep. No. 466, 94th Cong., Ist Sess. 1 (1975) (Senate Rep.)

(“The purpose of the proposed legislation is to repeal Federal antitrust

exemptions which permit States to enact fair trade laws [which are]

legalized price-fixing ... Without these exemptions the agreements

they authorize would violate the antitrust laws.”); id. at 2 (repeal “will

prohibit manufacturers from enforcing resale prices.”); H.R. Rep. No.

341, 94th Cong., Ist Sess. 2 (1975) (House Rep.) (“An agreement

between a manufacturer and a retailer that the retailer will not resell

the manufactured product below a specified price is ... per se illegal

under section 1 of the Sherman Act”).

* See 121 Cong. Rec. 38,049-50 (1975) (Sen. Brooke, chief Senate

sponsor: “Fair trade is legalized price fixing.... Without [Miller-

Tydings and McGuire Acts], these interstate-price fixing conspiracies

would be in violation of ... the Sherman Antitrust Act”); id. at 23,659

(Rep. Jordan, chief House sponsor: without the exemptions RPM

agreements “would be per se violations of the antitrust laws”); see also

Statement by President Gerald R. Ford Upon Signing the Consumer

Goods Pricing Act of 1975 (law “will make it illegal for manufacturers to

fix the prices of consumer products sold by retailers”).

* The Senate report rejected the dealer services case for RPM as

follows: “Opponents were primarily service-oriented manufacturers who

claimed retailers would not give adequate service unless they were

guaranteed a good margin of profit. However, the manufacturer could

solve this problem by placing a clause in the distributorship contract

requiring the retailer to maintain adequate service. Moreover, the

manufacturer has the right to select distributors who are likely to

emphasize service.” Senate Rep. 3; see also House Rep. 4 (“[T]o the extent

that ... the retailer charges a higher price because he is providing more

services to his customers, consumers should have the freedom to choose

between paying more for those services and buying nothing but the

unadorned product at a lower price from a competitor.”); id. at 5

(Continued on following page)

B. The Court Has Set A Very High Bar For

Overruling A _ Long-Standing Statutory

Construction Ratified By Congress

“[S]tare decisis is a basic self-governing principle

within the Judicial Branch, which is entrusted with the

sensitive and difficult task of fashioning and preserving a

jurisprudential system that is not based upon ‘an arbitrary

discretion.’” Patterson v. McLean Credit Union, 491 U.S.

164, 171 (1989) (quoting The Federalist, No. 78, A. Hamil-

ton). The Court has long held that “considerations of stare

decisis weigh heavily in the area of statutory construction,

where Congress is free to change this Court’s interpreta-

tion of legislation.” Jllinois Brick Co. v. Illinois, 431 U.S.

720, 736 (1977). As Justice Brandeis observed, and this

Court has repeatedly quoted: “Stare decisis is usually the

wise policy because in most matters, it is more important

that the applicable rule of law be settled than that it be

settled right. This is commonly true even where the error

is a matter of serious concern, provided correction can be

had by legislation.” Burnet v. Coronado Oil & Gas Co., 285

U.S. 393, 406 (1932) (dissenting). Accordingly, as Justice

Kennedy explained in a statutory case, this Court “will not

depart from the doctrine of stare decisis without some

compelling justification.” Hilton v. S. Carolina Public Ry.

Com’n, 502 U.S. 197, 202 (1991).

The “strong presumption of continued validity that

adheres in the judicial interpretation of a statute” applies

to cases interpreting the Sherman Act. Square D Co. v.

Niagra Frontier Tariff Bureau, Inc., 476 U.S. 409, 424

(1986) (declining to overrule Keogh doctrine); see also

Illinois Brick, 431 U.S. at 736-37 (declining to overrule

Hanover Shoe rule); Flood v. Kuhn, 407 U.S. 258, 282-84

(1972) (refusing to overturn prior decisions exempting

baseball from the Sherman Act notwithstanding “any

inconsistency or illogic in all this” because the “aberration

(rejecting “new product” exemption), see also House Hearings 32

(quoting Bork’s efficiency explanation for RPM).

... has been with us now for half a century” and Congress

“has clearly evinced a desire not to disapprove them

legislatively.”).

The case for following precedent here is particularly

strong because not only has Congress repeatedly acted in

this area, its actions could not more clearly validate Dr.

Miles. By eliminating the fair trade exceptions to Dr. Miles

that it had written into Section 1, Congress essentially

reenacted the law prior to Miller-Tydings, i.e. the law of

Dr. Miles.’ To be sure, in Khan the Court stated that “the

general presumption 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

the courts to give shape to the statute’s broad mandate by

drawing on common-law tradition.” 522 U.S. at 20-21

(internal quotes omitted). But even if this is correct,’ the

* See United States v. Board of Comm'rs, 435 U.S. 110, 134-35

(1978) (“When a Congress that re-enacts a statute voices its approval of

an administrative or other interpretation thereof, Congress is treated

as having adopted that interpretation, and this Court is bound

thereby.”); see also Hubbard v. United States, 514 U.S. 695, 714 (1995)

(“Stare decisis has special force when legislators or citizens have acted

in reliance on a previous decision”) (internal quotes omitted).

* Scholars have questioned the extent to which the Court operates

as a “free agent” in interpreting the Sherman Act. For a recent critique,

see Daniel A. Farber & Brett H. McDonnell, “Js There a Text in this

Class?” The Conflict Between Textualism and Antitrust, 14 J. Contemp.

Leg. Issues 619 (2005). In any event, Justice O’Connor’s statement that

the presumption of validity of statutory precedent is weaker in

Sherman Act cases was unsupported and in fact a departure from the

Court's decisions in Square D, lilinois Brick, and Flood. But see

Guardians Ass’n v. Civ. Serv. Com’n, 463 U.S. 582, 642 n.12 (1983)

(Stevens, J., dissenting). Indeed Jllinois Brick is a leading cite for the

“super-strong” presumption of the correctness of statutory precedents.

See William N. Eskridge, Jr., Overruling Statutory Precedents, 76 Geo.

L. J. 1361, 1368 n.34 (1988). Nor does it follow that the “common law”

nature of Sherman Act interpretation should give the Court more

leeway to reverse a long-standing precedent. Indeed. the Court in

Maricopa thought the opposite:

Our adherence to the per se rule {for maximum horizontal

price fixing) is grounded not only on economic prediction,

(Continued on following page)

Court has never suggested that the “strong presumption” of

continued statutory validity has any less force with respect

to the Sherman Act than other statutes when Congress has

legislated in the area in reliance on the Sherman Act

precedent and made its intent absolutely clear. See Square

D, 476 U.S. at 424 (“We are especially reluctant to reject

this presumption in an area that has seen careful, intense,

and sustained congressional attention.”).

C. Congressional Reliance Distinguishes This

Case From Other Sherman Act Cases In

Which Stare Decisis Was Not Decisive

None of the Sherman Act cases in which the Court has

overruled one of its precedents has involved any congres-

sional reliance on the precedent. In Sylvania, the Court

expressly noted that while “Congress recently has ex-

pressed its approval of a per se analysis of vertical price

restrictions by repealing those provisions of the Miller-

Tydings and McGuire Acts allowing fair trade pricing at

the option of the individual States,” “|nJo similar expres-

sion of congressional intent exists for nonprice restric-

tions.” 433 U.S. at 51 n.18 (1977). In Khan, the Court

could “infer little meaning from the fact that Congress has

not reacted legislatively to Albrecht,” and “[i]Jn any event,

the history of various legislative proposals regarding price

judicial convenience, and business certainty, but also on a

recognition of the respective roles of the Judiciary and the

Congress in regulating the economy.... Given its general-

ity, our enforcement of the Sherman Act has required the

Court to provide much of its substantive content. By articu-

lating the rules of law with some clarity and by adhering to

rules that are justified in their general application, however,

we enhance the legislative prerogative to amend the law. ...

Arizona v. Maricopa County Med. Soc’y, 457 U.S. 332, 354-55 (1982),

See also Lawrence C. Marshall, “Let Congress Do It”: The Case for an

Absolute Rule of Statutory Stare Decisis, 88 Mich. L. Rev. 177, 223

(1989) (arguing that case for statutory stare decisis for common law-like

statutes is stronger than for other statutes because “the lawmaking role

of the court is at its pinnacle”).

fixing seems neither clearly to support or denounce the per

se rule of Albrecht.” 522 U.S. at 19.”

In Copperweld Corp. v. Ind. Tube Corp., 467 U.S. 752

(1984), there was no suggestion that Congress (or anyone

else) had acted in reliance on the intra-enterprise conspir-

acy doctrine, nor any hint that Congress approved the

doctrine. And in Illinois Tool Works Inc. v. Independent

Ink, Inc., 126 S. Ct. 1281 (2006), the Court reversed the

presumption of market power in patent tying antitrust

cases precisely because Congress had made such a change

in patent misuse cases. Thus, the Court was acting in

deference to congressional will, not against it. See id. at

1290-91 (“While the 1988 amendment does not expressly

refer to the antitrust laws, it certainly invites reappraisal

of the per se rule announced in /nternational Salt.”).

In contrast, in Square D, where congressional reliance

was strong, the Court declined to overrule Keogh v. Chi-

cago & N.W. Ry. Co., 260 U.S. 156 (1922), which barred

treble damage actions to remedy price fixing conspiracies

in connection with filed rates. As here, the United States

as amicus curiae urged that Keogh be overruled because

the rationales of the decision had been undermined by

subsequent developments and rendered the “decision

obsolete and its continued application anomalous.” Judge

The Consumer Goods Pricing Act of 1975 repealing the fair trade

exemptions was not directed at maximum RPM. See Brief for the U.S.

and F.T.C. as Amici Curiae Supporting Reversal, State Oil Co. vu. Kahn,

1997 WL 163852 *18 n.7 (U.S. Khan Br.) (noting that the “congressional

approval of per se analysis inferred by the Court [in Sylvania] from

repeal of the federal antitrust exemptions for state ‘fair trade’ laws

would not extend to maximum price restraints, because the sort of ‘fair-

trade pricing ... covered by those laws ... typically involved only the

setting of minimum prices.”).

" Brief for the U.S. as Amicus Curiae Supporting Petitioners, 1985

WL 670055 (U.S.) *7. And, as here, the United States argued that

congressional action in the area did not indicate that Congress “in-

tended to fix by legislative fiat the balance this Court struck in 1922”

particularly in light of the “long tradition of dialogue between the

judicial and legislative branches that has served to perfect and preserve

the vitality of the antitrust laws.” Jd. at *16 & n.21. The United States

(Continued on following page)

Friendly, writing for the Second Circuit also thought that

the reasoning of Keogh “outdated” and that “[t}he case for

reaching a conclusion contrary ... is particularly strong in

the light of recent statutes which rely increasingly on

competition rather than regulation to insure the reason-

ableness of rail and motor carrier rates.” 760 F.2d 1347,

1349, 1354 (2d Cir. 1985). The Supreme Court essentially

agreed, but nonetheless declined to overrule Keogh, stating:

Even if it is true that these developments cast

Justice Brandeis’ reasons in a different light,

however, it is also true that the Keogh rule has

been an established guidepost at the intersection

of the antitrust and interstate commerce statutory

regimes for some 6 1/2 decades. The emergence of

subsequent procedural and judicial developments

does-not minimize Keogh’s role as an essential

element of the settled legal context in which Con-

gress has repeatedly acted in this area.

476 U.S. at 423 (emphasis added). The Court concluded,

“If there is to be an overruling of the Keogh rule, it must

come from Congress, rather than this Court.” Jd. at 424.

ke *

Petitioner and its amici fail to come to grips with the

implications of congressional action on the stare decisis

question, treating them as independent issues. Thus,

having established that congressional action does not

mandate the per se rule, the United States goes on to

suggest that stare decisis does not justify retention of Dr.

Miles because it is bad policy and does not comport with

Sylvania’s treatment of nonprice restraints (even though

the Court in Sylvania thought different treatment was

appropriate). But the point is that congressional approval

bolsters the case for stare decisis such that only the most

compelling reasons can justify reversal. The United States

asserts, “Congress could have buttressed the Dr. Miles rule

also emphasized the fact that the Keogh rule was a “judicially-crafted

immunity,” id., thus suggesting that the Court had ample leeway to

reverse course.

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

address RPM legislatively. If Dr. Miles cannot survive as a

matter of stare decisis ... it should no longer skew any

congressional debate concerning RPM.” Br. 22. This is

exactly backwards. The doctrine of stare decisis in statutory

cases ensures that congressional authority to amend the

law is preserved. See Maricopa, 457 U.S. at 354; see also

Neal v. U.S., 516 U.S. 284, 295-96 (1996) (“Were we to alter

our statutory interpretations from case to case, Congress

would have less reason to exercise its responsibility to

correct statutes that are thought unwise or unfair.”).

D. Federal And State Enforcers Continue to

Rely On The Per Se Rule To Bring Cases

Against Vertical Price Fixing And Related

Conduct

In reversing Albrecht, the Court in Khan relied in part

on the fact that “Albrecht has little or no relevance to

ongoing enforcement of the Sherman Act.” 522 U.S. at 18;

see also Copperweld, 476 U.S. at 777 & n.25; Hubbard, 514

U.S. at 713. In contrast, the Justice Department, FTC, and

the States continue to rely on Dr. Miles to bring cases

against RPM and related conduct.” Moreover, the federal

“ Recent FTC cases include: Jn re Nintendo of America Inc., 114

F.T.C. 702 (1991), In re Kreepy Krauly USA, Inc., 114 F.C. 777 (1991),

In re The Keds Corp., 117 F.T.C. 389 (1994), In re Reebok International,

Ltd., 120 F.T.C. 20 (1995), FTC v. Onkyo U.S.A. Corp., 1995-2 Trade

Cas. (CCH) $71,111 (D.D.C. 1995), In re New Balance Athletic Shoe,

Inc., 122 F.T.C. 137 (1996), In re American Cyanamid Corp., 123 F-.T.C.

1257 (1997), In re Nine West Group, Inc., 2000 FTC LEXIS 48 (2000),

and In re Time Warner, Inc., 2000 FTC LEXIS 40 (2000) (minimum

advertised price agreement). DOJ cases include: U.S. v. Canstar Sports

USA, Inc., 1993-2 Trade Cas. (CCH) 970,372 (D. Vt. 1993), U.S. v.

California SunCare, Inc., 1994-2 Trade Cas. (CCH) 470,843 (C.D. Cal.

1994), U.S. v. Playmobil USA, Inc., 1995-1 Trade Cas. (CCH) 471,000

(D. D.C. 1995), U.S. v. Anchorshade, Inc., 1996-2 Trade Cas. (CCH)

971,640 (S.D. Fla. 1996), and U.S. v. Brush Fibers, Inc., 1997-2 Trade

Cas. (CCH) 971,915 (E.D. Pa. 1997). The numerous cases brought by

-he States are identified in their amicus brief.

and state enforcement agencies, on a bipartisan basis,

have invoked the per se rule in their guidelines and

enforcement agendas.”

Il. THE CONCEPTUAL UNDERPINNINGS OF THE

PER SE RULE REMAIN SOUND

Petitioner and its amici assert that the per se rule is

not appropriate for minimum RPM because there is a

consensus among economists that RPM can sometimes be

procompetitive, and the per se rule is reserved for conduct

that is “always” or “almost always” anticompetitive.

However, that is not the test that the Court applied in

either Sylvania or Khan. Indeed, the Court in Sylvania

suggested — and modern decision theory dictates — that the

proper focus is not simply on the frequency with which

RPM is anticompetitive or procompetitive, but also on the

magnitude of the harms or benefits and, given error costs,

whether an alternative rule would generally improve

consumer welfare and the administration of the antitrust

laws. In Sylvania, Justice Powell stated:

Per se rules ... require the Court to make broad

generalizations about the social utility of particu-

lar commercial practices. The probability that

anticompetitive consequences will result from a

practice and the severity of those consequences

'* See Dept. of Justice and F.T.C., Antitrust Guidelines for the

Licensing of Intellectual Property §5.2 (April 6, 1995) (“the Agencies will

enforce the per se rule against resale price maintenance in the intellec-

tual property context”); cf Illinois Tool Works, 126 S. Ct. at 1292-93

(finding it significant that Guidelines did not follow presumption of

market power in tying cases). It is noteworthy that two of the current

FTC commissioners dissented from the FTC’s decision to join the

amicus brief of the United States. See An Open Letter to the Supreme

Court of the United States from Commissioner Pamela Jones Harbour

(Feb. 26, 2007), at http://www.ftc.gov/speeches/harbour. htm. Moreover,

prior agency support for Dr Miles has been bipartisan. See, e.g.,

Interview With Former Assistant Attorney General James F. Rill, 63

Antitrust & Trade Reg. Rep. (BNA) 254 (Aug. 27, 1992) (favoring “a per

se illegality principle applied to resale price maintenance”).

must be balanced against its procompetitive con-

sequences. Cases that do not fit the generaliza-

tion may arise, but a per se rule reflects the

judgment that such cases are not sufficiently

common or important to justify the time and ex-

pense necessary to identify them.

433 U.S. at 50 n.16 (emphasis added).

“It is thus not enough to suggest that a class of re-

straints is sometimes or even often beneficial or harmful.

The critical questions are always ones of frequency and

magnitude relative to the business and legal alternatives.” 8

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law

{1628b, at 292 (2d ed. 2004)."* As documented below, there is

strong evidence that RPM can have, and often has had,

significant anticompetitive effects. Abandoning the per se

rule will inevitably mean an increased incidence of anticom-

petitive RPM, as well increased uncertainty for business and

greater litigation expenses, particularly if the Court adopts

an unstructured rule of reason in place of the per se rule. At

the same time, there is no evidence that the Dr. Miles rule

harms consumer welfare. Petitioner has not shown that

procompetitive uses of RPM are common or important nor

that less restrictive alternatives are more costly or less

effective. In short, even if the Court were approaching the

issue de novo, there is ample reason for having a per se rule

against minimum RPM, as most countries do.”

* See also Arndt Christiansen & Wolfgang Kerber, Competition

Policy With Optimally Differentiated Rules Instead of “Per Se Rules vs

Rule of Reason”, 2 J. Comp. L. & Econ. 215, 238 (2006) (explaining

“error cost approach” in law and economics, and observing that to

justify abandoning prohibition of RPM, “it is not sufficient to show that

that there are cases in which resale price maintenance can lead to

positive welfare effects”).

* Many scholars concur. See, e.g., Robert Pitofsky, Jn Defense of

Discounters: The No-Frills Case for a Per Se Rule Against Vertical Price

Fixing, 71 Geo. L. J. 1487, 1495 (1983) (Pitofsky); Robert Pitofsky, Are

Retailers Who Offer Discounts Really “Knaves”?: The Coming Challenge

to the Dr. Miles Rule, Antitrust, Spring 2007 (forthcoming); Jean

Wegman Burns, Vertical Restraints, Efficiency and the Real World, 62

(Continued on following page)

A. The Anticompetitive Effects Of RPM Are

Significant

1. Higher prices. The function of RPM is to raise

resale prices to consumers and there is no dispute that

RPM generally has that effect. See 8 Areeda & Hovenkamp

41604b, at 40 (RPM “tends to produce higher consumer

prices than would otherwise be the case. The evidence is

persuasive on this point.”). This is enough to make it

competitively suspect, see National Soc’y of Professional

Engineers v. United States, 435 U.S. 679, 692 (1978)

(“[plrice is the ‘central nervous system of the economy’ ”)

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

150, 226 n.59 (1940)), and was the main reason Congress

repealed the fair trade laws.” Studies of the fair trade era

Ford. L. Rev. 597 (1993) (advocating retention of Dr. Miles rule); David

F. Shores, Vertical Price-Fixing and the Contract Conundrum: Beyond

Monsanto, 54 Ford. L. Rev. 377 (1985) (same); see also Edward Iacobucci,

The Case for Prohibiting Resale Price Maintenance, 19 World Comp. L. &

Econ. Rev., Dec. 1995, at 71, 101 (Iacobucci) (advocating per se rule

because “the number of cases where RPM is efficient will probably be

rather small,” “suitable alternatives exist that do not involve price

setting,” and “the cost of a rule-of-reason review is likely to be signifi-

cant”). This is in contrast to the scholarly commentary on Albrecht and

Schwinn, the overwhelming consensus of which was critical.

’* The 1975 Act itself is titled, “An act to Amend the Sherman

Antitrust Act to provide lower prices for consumers.” The significance of

low prices to the Court’s vertical restraints jurisprudence was con-

firmed by Khan, where the Court reiterated that “[lJow prices ...

benefit consumers regardless of how those prices are set,” and “con-

demnation of practices resulting in lower prices to consumers is

especially costly because cutting prices to increase business often is the

very essence of competition.” 522 U.S. at 15 (internal quotes omitted).

Thus, the Court found that the per se rule against maximum RPM

could not be sustained because maximum RPM was used to keep

consumer prices low, notwithstanding that in some cases the prices

might be set too low for dealers to offer consumers essential or desired

services. As one member of the Court noted at the Khan oral argument,

the distinction between maximum RPM and minimum RPM is that “the

one, means the consumer pays low prices; in the other, high prices.

Where the consumer pays high prices, that’s likely to be bad. Where the

consumer pays lower prices, that’s likely to be good.” Trans. of Oral

Argument, State Oil Co. v. Kahn, 1997 U.S. Trans. LEXIS 81 (Oct. 7,

(Continued on following page)

show that prices of items subjected to fair trade were

significantly higher in states where fair trade was permit-

ted than in states where RPM was illegal, and that fair

trade cost consumers several billion dollars a year. See

House Rep. 3; see also F.M. Scherer, Comment on Cooper et

al.’s “Vertical Restrictions and Antitrust Policy”, 1 Comp.

Policy Int'l, Autumn 2005, 65, 72-74 (reviewing studies

showing substantial consumer savings from termination of

RPM in light bulb, retail drug, blue jeans, and other sec-

tors). More recently, music companies’ efforts to restrain

resale prices of CDs was estimated by the FTC to have cost

consumers as much as $480 million. See F.T.C., Record

Companies Settle FTC Charges of Restraining Competition

in CD Music Market, May 10, 2000.”

2. Reduced innovation and efficiency in retail-

ing. In addition to raising prices, RPM has a tendency to

retard innovation and efficiency in retailing. See Robert L.

Steiner, How Manufacturers Deal With the Price-Cutting

Retailer: When are Vertical Restraints Efficient?, 65 Anti-

trust L.J. 407, 424 & n.47 (1997) (Steiner) (“growth of...

more efficient new retailing forms often has been seriously

1997). To be sure, this Court in Business Elecs. noted that “all vertical

restraints ... have the potential to allow dealers to increase ‘prices’ and

can be characterized as intended to achieve just that,” 485 U.S. at 728,

but in fact nonprice restraints often are not intended to increase price

and always permit the retailer to engage in price competition with

competing brands. See infra.

" Petitioner and its amici argue that preserving “dealer freedom”

cannot justify the Dr Miles rule. Plainly, the principal concern of

Congress in repealing the fair trade laws was to protect consumers, and

Khan recognized that dealer freedom to set high prices could not trump

consumers’ interests in low prices. But dealer freedom to compete with

lower prices is another matter, and was recognized by Congress as an

interest deserving protection. See House Rep. 3 (“Some retailers prefer

to try to enlarge their share of the market by competing vigorously in

price — precisely the sort of behavior encouraged by our antitrust

laws.”); see also Thomas B. Leary, Freedom as the Core Value of

Antitrust in the New Millennium, 68 Antitrust L. J. 545, 552 (2000)

(“dealer freedom is a protected value, but only along with the freedom

of other actors”).

retarded by their inability to obtain well-known manufac-

turers’ brands, free of RPM”); 8 Areeda & Hovenkamp

1632c4, at 320 (“When resale prices are not fixed, price

competition among dealers favors the expansion of those

with efficient scale and methods, thus lowering the cost of

distribution.”); Lawrence A. Sullivan & Warren S. Grimes,

The Law of Antitrust: An Integrated Handbook §6.3a2, at

335 (2d ed. 2006) (“Preserving entry opportunities for new

retailers and new retailing approaches is a critical compo-

nent to the dynamic growth of our economy. Intrabrand

competition serves this goal by preserving one of the new

entrant’s most competitive tools: the ability to discount

popular branded items that draw customers.”). See also

Brief of Amicus Curiae Consumer Federation of America 5-

11.

3. Protection of retailer interests. Petitioner and

its amici suggest that the obvious anticompetitive effects

of RPM should be ignored because a manufacturer ordi-

narily benefits from low resale prices; hence if the manu-

facturer adopts RPM, it must believe it is necessary to

achieve distribution efficiencies. That is not the case. If a

manufacturer adopts RPM at the behest of its retailers,

then this presumption evaporates. See Brief for William S.

Comanor & Frederic M. Scherer as Amici Curiae 8

(“|Tjhere are no arguments in economic analysis support-

ing restraints arising from distributor actions or pres-

sures. In such circumstances, RPM and similar restraints

lead to higher consumer prices with no demonstrated

redeeming values.... ”); Toys “R” Us, Inc. v. F-T.C., 221

F.3d 928, 938 (7th Cir. 2000) (“the rationale for permitting

restricted distribution policies depends on the alignment

of interests between consumers and manufacturers.

Destroy that alignment and you destroy the power of the

argument.”) (internal quotes omitted). The United States

insists that “RPM generally emanates from the manufac-

turer,” U.S. Br. 18, but that assertion is belied by the

historical record. As Professors Areeda and Hovenkamp

conclude, “the Court’s perception [in Dr. Miles] that

dealer power may be the predominant explanation for

much resale price maintenance may have been accurate.”

8 Areeda & Hovenkamp {11620c4, at 217; see also id.

91604a, at 35 (“(MJanufacturers have often restrained

intrabrand competition — especially through resale price

maintenance — not to achieve more effective distribution

but rather to appease dealer interests in excess profits or

the quiet life.”).

The retailer power explanation for RPM does not rely

on the existence of a retailer cartel, or even tacit retailer

collusion.” Rather, “{a] manufacturer might be forced to

restrain distribution in order to appease one or more

individually powerful dealers,” 8 Areeda & Hovenkamp

91604d2, at 47, or may adopt RPM based on the calcula-

tion that it has more to lose from its incumbent high-cost

retailers than to gain from emerging lower cost retailers.”

** Thus the contention by petitioner and its amici that the empiri-

cal evidence (essentially three reviews of litigated cases) does not

suggest that minimum RPM often facilitates dealer cartels is beside the

point. Further, the contention simply ignores that “[a] wealth of history

shows that dealers have attempted to use RPM imposed by suppliers to

facilitate horizontal dealer collusion.” Herbert Hovenkamp, Federal

Antitrust Policy 451 (3rd ed. 2005); see Thomas R. Overstreet Jr., Resale

Price Maintenance 15 n.1 (FTC 1983) (explaining that “the literature

contains numerous examples where analysts have attributed the

existence of RPM to pressures from organized trade groups, rather than

to manufacturers’ attempts to deal with ‘free-rider’ problems,” citing

Palamountain, Bowman, Yamey, and Hollander). Professor Hovenkamp

criticizes the conclusions about collusion drawn from studies of litigated

RPM cases because, in addition to the fact that the studies do not

consider tacit collusion, “litigated cases probably represent a skewed

sample” (i.e., are more marginal than the overall pool of cases) and

plaintiffs had no need to allege collusion “since RPM is independently

illegal.” Hovenkamp, supra, 464 & n.19, see also lacobucci 96 (similar

criticism).

* See Steiner 426; see also 8 Areeda & Hovenkamp 71604d3, at 48,

49 (“Multibrand dealers’ ability to substitute other brands gives the

dealers considerable leverage.”); William S. Comanor, The Tiwo Econom-

ics of Vertical Restraints, 21 Sw. U. L. Rev. 1265, 1276-81 (1992)

(monopsony power arises from pervasive economies of scope in distribu-

tion sector); cf. Toys “R” Us, 221 F.3d at 930 (large toy manufacturers

acceded to demands of Toys “R” Us to restrict distrioution to lower

margin warehouse clubs because manufacturers felt they could not find

other retailers to replace it).

The increasing concentration of retail markets in recent

years and rise of buyer power suggests that the risks of

retailer-induced RPM have only increased since fair trade

was repealed.”

4. Restricted interbrand competition. The

assumption that manufacturers have the same interest as

consumers in low reseller prices is also belied by manufac-

turers’ incentive to adopt RPM in order to protect their

own wholesale margins. Retail discounting is often harm-

ful to the manufacturer because it puts pressure on the

manufacturer to reduce its wholesale prices. See 8 Areeda

& Hovenkamp {1606c, at 85-86.” Even without dealer

pressure, it is widely recognized that RPM may be used to

restrict interbrand competition by facilitating coordinated

pricing by manufacturers. Petitioner and its amici ac-

knowledge that RPM might be used to facilitate a cartel at

the manufacturer level, see Brief of Amici Curiae Econo-

mists 13 (Econ. Br.) (objection “had some traction histori-

cally”), but claim that this is not likely to be common and

* To be sure, the Court in Business Elecs. stated that “[rjetail

market power is rare, because of the usual presence of interbrand

competition and other dealers,” 485 U.S. at 727 n.2, but this is difficult

to square with current realities. See, e.g., Deloitte, 2007 Global Powers

of Retailing, Stores, Jan. 2007, at 2-G8 (combined sales of ten largest

retailers worldwide has grown to nearly 30% of total retail sales of top

250 retailers); OECD, Buying Power of Multiproduct Retailers 7 (1999)

(“last twenty years have seen momentous changes in retail distribution

including significant increases in concentration”).

** See also Steiner 441-42 (RPM may be used to tame the exercise

of countervailing retail power); David Gilo, Retail Competition Percolat-

ing Through to Suppliers and the Use of Vertical Integration, Tying, and

Vertical Restraints To Stop It, 20 Yale J. Reg. 25 (2003) (explaining how

RPM offsets manufacturer’s incentive to offer selective price cuts to

distributors); e.g., Jn re Time Warner, Inc., 2000 FTC LEXIS 40 (2000)

(music companies’ restriction on resale prices designed to shore up

wholesale prices); accord S. Robson Walton, Antitrust, RPM, and the

Big Brands: Discounting in Small-Town America (11), 15 Antitrust L. &

Econ. Rev. No. 2, at 11, 16 (1983) (Wal-Mart senior executive stating “I

don’t have any question but that competitive pricing at the retail level

creates more pressure on manufacturers’ factory prices than is present

when they’re able to set retail prices”).

in any event may be controlled by the per se rule against

horizontal price fixing. However, RPM can be used as a

facilitating device not only to enforce an unlawful cartel,

but to dampen price competition among oligopolistic manu-

facturers. See 8 Areeda & Hovenkamp 41606d-f, at 86-92

(RPM reinforces manufacturer coordination, whether

express or tacit, by reducing utility of wholesale price cuts

and increasing visibility of prices; “danger is more than

theoretical”).

Petitioner and its amici contend that the existence of

interbrand competition will prevent the exercise of in-

trabrand market power by retailers, quoting Sylvania to

that effect. See 433 U.S. at 52 n.19. Of course, Sylvania

nonetheless upheld the per se rule for RPM. In any event,

the existence of interbrand competition obviously does not

check intrabrand market power when RPM is itself used

to restrict interbrand competition. Moreover, it is com-

monly understood by economists that neither retailers nor

manufacturers will engage in RPM without some inter-

brand market power.”

* Again, the reliance by petitioner and its amici on three empirical

studies of litigated cases that conclude that RPM has not been frequently

used to support a manufacturer’s cartel is beside the point. None of the

studies addresses whether RPM may have been used to facilitate oligopoly

pricing. And even as to cartel facilitation, the studies are flawed. See supra

note 18; see also 8 Areeda & Hovenkamp 41606f, at 91 (criticizing Ornstein

study). Moreover, petitioner and its amici ignore other evidence that RPM

has often been used in conjunction with manufacturer cartels. See

Overstreet, supra, at 22 (“The economics literature contains several

examples of possible collusion among manufacturers which may have been

facilitated by RPM.”). For a recent example, see Dept. of Justice, Massachu-

setts Tampico Fiber Distributor Charged in Price Fixing Conspiracy, Aug.

29, 1996 (“textbook example of a cartel among producers enhanced and

strengthened by a resale price agreement”).

* See Ward Bowman, Jr., The Prerequisites and Effects of Resale

Price Maintenance, 22 U. Chi. L. Rev. 825, 849 (1955) (“Price mainte-

nance appears to be incompatible with an assumption of pure competi-

tion among both sellers and resellers.”); 8 Areeda & Hovenkamp

41632e2, at 324-25 (“most products subject to RPM are sufficiently

differentiated to enjoy greater pricing discretion than is possible for

perfectly competitive products”); see also Sullivan & Grimes §7.2b, at

(Continued on following page)

B. The Procompetitive Uses Of RPM Are Not

Common Or Important

Against the history of the use of RPM for anticompeti-

tive purposes, petitioner and its amici offer theories under

which RPM could be procompetitive. Particularly in the

context of overturning a keystone antitrust precedent, the

Court should insist on evidence that petitioner’s theories

are common explanations for real world events. However,

the few empirical studies cited provide minimal support

for procompetitive explanations, as the States’ amicus

brief demonstrates, and no evidence that less restrictive

alternatives would not serve equally as well in the limited

instances where procompetitive explanations are likely.

1. Free-rider argument. Petitioner and its amici focus

primarily on the “free rider” theory, contending that RPM can

benefit consumers because the higher prices may induce

retailers to provide pre-sale services that promote interbrand

competition. This “modern” economic theory (dating back to

Telser in 1960) was well known to Congress in 1975 and the

Court in Sylvania, but nonetheless was rejected as a basis for

permitting RPM.” As Professors Comanor and Scherer point

out, “there is skepticism in the economic literature about how

often {free riding] occurs.”* Moreover, as amici economists

379 (the more effective a vertical restraint is in differentiating a brand,

the greater the reduction in interbrand competition).

* See supra note 7. The suggestion by the United States and CTIA

that the free-nder problem has been exacerbated by the growth of Internet

commerce, see, e.g., U.S. Br. 13, illustrates the weakness of the free rider

argument, as the growth of Internet commerce has only increased the

efficiency of retail markets and increased sales of “bricks and mortar”

retailers. See, e.g., Kortney Stringer, Style & Substance: Shoppers Who

Blend Store, Catalog and Web Spend More, Wall St. J., Sept. 3, 2004, at A7

(“After initial worries that the Internet would steal sales from stores,

retailers now are realizing that just the opposite is happening.”).

* Comanor & Scherer Br. 6; see also F. M. Scherer & David Ross,

Industrial Market Structure and Economic Performance 552 (3rd ed.

1990) (“relatively few products qualify ... under Telser’s free-rider

theory”); 8 Areeda & Hovenkamp 4160le, at 13 (“[U)nrestrained

intrabrand competition does not lead to substantially detrimental free

(Continued on following page)

Klein and Murphy have noted elsewhere, the standard free-

rider theory for RPM is “fundamentally flawed” because it is

based on “the unrealistic assumption that sole avenue of

nonprice competition available to retailers is the supply of the

particular services desired by the manufacturer.”” The

“quality certification” version of the free-rider theory, which

has limited applicability on its own terms, is similarly

flawed.” Furthermore, even if RPM is used to prevent free

riding and increase output, while it may be profit-maximizing

for the manufacturer, there is no a priori reason to believe

that consumers as a whole benefit because most consumers

may prefer the lower-priced product without the services.

Comanor & Scherer Br. 4-5; see also Econ. Br. 10 (noting that

Scherer & Ross have shown “that RPM may reduce both

consumer and social welfare under a plausible hypothesis

regarding the impact on demand for the product”).

2. Other “procompetitive” theories. Petitioner

and its amici maintain that RPM can enhance interbrand

competition even without free riding because “RPM

provides retailers with an incentive to make non-price

sales efforts that attract customers away from other

riding when dealers provide no significant services (such as drugstores

selling toothpaste), the services they do provide cannot be utilized by

customers who patronize other dealers (luxurious ambience), the services

are paid for separately (post-sale repair), the services provided are not

brand specific and are fully supported by a wide range of products (high-

quality department store), the services can be provided efficiently by the

manufacturer (advertising), or a sufficient number of consumers patron-

ize the dealers from whom they receive the service.”); ia. J1611f, at 134

(“for most products, low-service discounting dealers do not impair the

viability of full-service dealers; both exist side by side”).

* Benjamin Klein & Kevin Murphy, Vertical Restraints as Contract

Enforcement Mechanisms, 31 J. Law & Econ. 265, 266 (1988) (“No

matter how large a margin is created’ by resale price maintenance,

there appears to be no incentive for competitive free-riding retailers to

supply the desired . . . services.”).

” See Iacobucci 80-82; see also 8 Areeda & Hovenkamp 41613g,

156-65 (quality certification theory is “relatively weak” largely because

elite dealers’ services are usually not brand specific and RPM in this

context may well reflect dealer power).

brands.” U.S. Br. 15. The logic of the non-free-rider theo-

ries is not obvious because, absent free riding, the retailer

has every incentive to offer services that consumers

prefer.” Furthermore, insofar as higher retailer margins

induce multibrand retailers to undertake nonprice sales

efforts to favor one brand over another, the result is

generally anticompetitive, not procompetitive. See 8

Areeda & Hovenkamp $1614, at 165-71 (rejecting dealer

“goodwill” as justification for RPM; providing multibrand

retailers with higher margin to push particular brand

leads to deception of consumers and reflects retailer

power); Sullivan & Grimes §6.3c2, at 343.

3. Less restrictive alternatives. Any procompeti-

tive effects of RPM can be achieved by less restrictive

means that do not prevent efficient retailers from passing

on the benefits of their efficiency to consumers. Amici

economists recognize that manufacturers may curtail free

riding by other means, and that where such means are

available, “RPM may not offer an incremental benefit to

interbrand competition that would offset the diminution of

intrabrand competition.” Econ. Br. 9. The United States

apparently agrees.” The most obvious way to ensure

desired retailer services is to pay retailers for performing

those services. See Toys “R” Us, 221 F.3d at 933, 938

* Also, Klein and Murphy’s “contractual fidelity” theory, Winter's

“inter-retailer v. product margin” theory, and Deneckere et al.’s “demand

uncertainty” theory suffer from the limitation that the theories have

neither been shown to be of significance in the real world nor that the

concerns they address could not be resolved equally as well by techniques

other than RPM. See Iacobucci 84-89; see also Ittai Paldor, Rethinking

RPM: Did the Courts Have it Right All Along? 52-72, 206-15 (Working

Paper 2007) (Paldor), at http://papers.ssrn.com.

* See U.S. Br. 23 (“the per se prohibition against RPM does not

prevent manufacturers from engaging in other conduct that achieves

similar results”); see also U.S. Khan Br. *18 n.8 (“in the case of vertical

minimum price fixing, suppliers’ stated concerns (such as inducing

dealers to provide adequate point-of-sale services) could often be

addressed directly in a distribution agreement without reference to

price (by, for example, requiring the distributor to provide a certain

level of facilities or services to its customers)”).

(rejecting free-rider argument because services performed

by retailer, such as advertising, warehousing and full-line

stocking, were compensated by manufacturer). Petitioner

has failed to demonstrate that these alternatives have

proven to be inadequate or costly.”

C. Having Different Rules For Price And

Nonprice Restraints Makes Sense

“It is ... entirely reasonable to regard resale price

maintenance as a more pervasive threat to competition

than nonprice restraints.” 8 Areeda & Hovenkamp 41630b,

at 303. “Nonprice restraints fulfill a wider range of poten-

tially legitimate objectives and threaten fewer harms to

competitive interests” than RPM. /d. 302. The Court in

Sylvania distinguished price and nonprice vertical re-

straints on the ground that RPM “almost invariably”

reduces interbrand competition. 433 U.S. at 51 n.18

(quoting Justice Brennan’s concurring opinion in White

Motor). Indeed, RPM is more likely than nonprice re-

straints to restrict interbrand competition at both the

* See Steiner 427-29 The Robinson Patman Act is no impediment

to reimbursing retailers for services that benefit the supplier. See

Richard M. Steuer, Dysfunctional Discounts, Antitrust, Spring 2005, at

75, 79. Amici economists maintain that paying dealers for services may

not be as efficient as RPM “under some circumstances” because “1t may

be difficult to specify completely all of the services that the retailer must

perform and the level that the retailer must perform them,” or because it

is “possible that the retailer, rather than the manufacturer, knows which

retail-level services wil] be the most effective in maximizing the competi-

. tiveness of the product, or that the most effective services will be

discovered only through experience with the market and will be more

apparent to the retailer than to the manufacturer.” Econ. Br. 9 (emphasis

added). However, no evidence is offered as to empirical relevance of these

possibilities. Moreover, merely raising retailer margins through RPM -

without contractual service requirements — is generally ineffective in

curtailing free riding. See supra note 26. It is not apparer.t why a retailer

would choose to provide services that the manufacturer does not even ask

for when other retailers are not also required to provide such services,

unless the services themselves are profitable for a retailer, which means

that RPM is not necessary in the first place.

retailer and manufacturer levels. At the retailer level, only

RPM restricts dealers from competing on price against

other brands.” And RPM, unlike nonprice restraints,

prevents more efficient retailers from passing on the

benefits of that efficiency to consumers.” Furthermore,

RPM stultifies competition among multibrand retailers,

which are generally not susceptible to territorial or cus-

tomer restraints. See 8 Areeda & Hovenkamp 916046, at

65. As a general matter, “|t/he form of restraint most likely

to reflect dealer power is resale price maintenance.” /d.;

see also id. {1630b, at 303 (“Historically ... price rather

than nonprice restraints have been the vehicle chosen by

dealer organizations to limit competition among their

members.”).

The Court in Sylvania also distinguished price and

nonprice vertical restraints on the ground that price

restraints can facilitate a cartel. 433 U.S. at 51 n.18; see

also Business Elecs., 485 U.S. at 725-26 (noting that

authorities cited by Sylvania suggested RPM may assist

cartelization, but “|slimilar support for the cartel-

facilitating effect of vertical nonprice restraints was and

remains lacking”); 8 Areeda & Hovenkamp 41606, at 99

(“[MJost nonprice restraints lack the characteristics that

enable |RPM] to support price coordination among manu-

facturers.”). Petitioner and its amici do not challenge this

distinction, but rather argue that cartelization is still not a

common use for RPM. However, as pointed out above, the

evidence on this score is contested, and petitioner and its

“ Even airtight territorial exclusives allow restricted dealers to

fully compete in their territories against dealers of other brands, but

RPM prevents dealers “from engaging resellers of other brands in price

competition.” 8 Areeda & Hovenkamp 41630b, at 303.

“ See Arthur H. Travers, Jr. & Thomas D. Wright, Restricted

Channels of Distribution Under the Sherman Act, 75 Harv. L. Rev. 795,

801 (1962) (noting territorial and customer restraints do not have

“settled propensity of resale price maintenance to prevent dealers or

distributors from passing the benefits of efficient distribution on to

consumers by adopting a high-volume, low-markup policy”) (cited by

Justice Brennan in White Motor Co. v. U.S., 372 U.S. 253, 268 n.7 (1963)).

amici ignore the fact that RPM may facilitate coordinated

pricing as well as an actual cartel. See supra.

Besides doing less harm, nonprice vertical restraints

are more likely to have procompetitive benefits than RPM.

Nonprice vertical restraints have a wider range of legiti-

mate justifications, including ensuring efficient dealer

scale, focusing dealer effort on developing classes of

customers or territories, and promoting product quality

and safety. See 8 Areeda & Hovenkamp 11647; Sylvania,

433 U.S. at 55 n.23. Moreover, to the extent that territorial

or customer restraints entirely eliminate intrabrand

competition, they are more likely than RPM to solve free-

rider problems because a service-providing dealer under

RPM may lose business to free-riding dealers that main-

tain the same prices but offer other inducements to cus-

tomers. See Sullivan & Grimes §6.3b, at 338; Paldor 293.

D. Foreign Jurisdictions, Including The EU

And Canada, Generally Ban Minimum RPM

Antitrust authorities around the world generally ban

minimum RPM and treat it more harshly than nonprice

vertical restraints.” For example, the European Union,

which recently liberalized its treatment of most nonprice

restraints, continues to treat minimum RPM as a “hard-

core” restraint, equivalent to per se illegal.” Member

States, many of which led the U.S. in abolishing fair trade,

* See OECD, Resale Price Maintenance 10 (1998) (OECD RPM)

(reporting that “RPM is generally prohibited in almost al} OECD

countries, subject to a few exemptions, mostly for books, newspapers

and medicaments.”), at http://www.oecd.org/dataoecd/35/7/1920261. pdf.

“ Commission Regulation (EC) 2790/1999, 1999 O.J. (L336) 21.

Most vertical nonprice restraints, as well as maximum RPM, are

presumptively lawful if undertaken by a supplier with a market share

of less than 30%. See id.; Joseph F. Winterscheid & Margaret A. Ward,

Two Part Harmony: New Rules for Vertical Agreements Under European

Union Competition Policy, Antitrust, Summer, 2000, at 52.

follow suit.” Canada treats RPM as a criminal offense.”

The rest of the advanced industrialized world, like Con-

gress, recognizes the wisdom of the Dr. Miles rule.”

E. Difficulty Distinguishing “Unilateral” Cor-

duct Under Colgate and Unlawful RPM

Does Not Justify Abandoning the Per Se

Rule

Petitioner and several amici suggest that confusion in

the Colgate doctrine, which permits manufacturers “uni-

laterally” to impose RPM, militates in favor of repealing

Dr. Miles. There are several responses. As an initial

matter, the tension between Dr. Miles and Colgate has

existed since Colgate was decided in 1918. The fact that

manufacturers may coerce compliance with suggested

resale prices by threatening to refuse to deal with dis-

counters has never been thought to justify abandoning Dr.

Miles, but rather has been accepted as essentially an

exception justified by the need to protect a certain degree

of manufacturer freedom.” Second, any confusion arising

from the Colgate doctrine will persist regardless of

whether RPM is treated as per se illegal or analyzed under

the rule of reason (unless of course RPM is made de facto

legal, see infra). Indeed, to the extent business certzinty

* See, eg., Il ABA Section of Antitrust Law, Competition Laws

Outside the United States France-42, Germany-33, United Kingdom,-56

(2001); see also Paldor 53-54, Scherer & Ross. supra, at 549-50.

* See Record Canadian Fine is Levied in Resale Price Maintenance

Case, 83 Antitrust & Trade Reg Rep. (BNA) 410 (Oct. 25, 2002).

* See OECD RPM 130 (EC official explaining anticompetitive

effects of RPM and that “if one supposes that RPM can improve

efficiency, this economic efficiency could be achieved by less costly

means in terms of competition”).

* See U.S. v. Parke, Davis & Co., 362 U.S. 29, 44 (1960). It has also

been suggested that insofar as the determination of “unilateral” conduct

under Colgate/Monsanto focuses on whether the conduct is in the

independent best interest of the manufacturer, then the doctrine

screens out instances of RPM that are less likely to be anticompetitive

See Hovenkamp, supra, at 471.

about the rules of the game is problematic now, it would

only be worsened by abandoning Dr. Miles in favor of an

unstructured rule of reason. See 8 Areeda & Hovenkamp

11633b, at 330 (an “open [ended] approach to resale price

maintenance would obviously create great uncertainty.”).

Third, if there is confusion in the application of the Col-

gate doctrine, then the logical solution is to attack the

problem directly rather than indirectly by modifying Dr.

Miles. The academic critique of the Colgate doctrine has

been far more severe and universal than the criticism of

Dr. Miles. See Sullivan & Grimes §7.2c, at 382 n.50.

Fourth, the claim of business uncertainty 1s overstated

and arises in many contexts requiring antitrust counsel.

See 8 Areeda & Hovenkamp §1630d, at 305-06.

Ill. OVERRULING DR. MILES IN FAVOR OF THE

SYLVANIA RULE OF REASON WOULD BE

COSTLY

Petitioner and the United States urge that RPM be

analyzed under the same rule of reason applicable to

nonprice restraints under Sylvania.” Pet. Br. 36-39; U.S.

Br. 28. Adopting the Sylvania rule of reason would

inevitably increase the incidence of anticompetitive RPM,

as few cases would be brought either by private parties or

the government under the Sherman Act.“ As Professor

(and former FTC chair) Pitofsky notes, “rule of reason

cases often take years to litigate and are extremely

expensive” and “it is very difficult for a plaintiff (either

* In Sylvania the Court did not specify how the rule of reason

should be implemented, but rather merely stated that the “factfinder

weighs all of the circumstances of a case,” and referred to the open-

ended test of Chicago Board of Trade. See 433 U.S. at 43 & n.15.

“ A rule of reason would also increase the incidence of anticompeti-

tive RPM because it denies the manufacturer an important tool in

combating retailer pressure to adopt RPM. See 8 Areeda & Hovenkamp

§ 1632b, at 319 (“There is little doubt that per se illegality strengthens

the hands of manufacturers in resisting dealer demands for price

protection.”).

the government or a private party) to win a rule of reason

case.” Pitofsky 1489. Indeed, most commentators agree

that the Sylvania rule of reason, as applied by the lower

courts, has resulted in a rule of de facto per se legality

for nonprice vertical restraints."’ To be sure, the govern-

ment occasionally brings a successful nonprice vertical

restraint case, but such cases have often involved per se

elements.”

Another cost of abandoning Dr. Miles is the uncer-

tainty for businesses that would likely result from the fact

that many states ban RPM, sometimes expressly. See, e.g.,

“ See, e.g., Douglas H. Ginsburg, Vertical Restraints: De Facto

Legality Under the Rule of Reason, 60 Antitrust L.J. 67 (1991). Plain-

tiffs cannot win nonprice restraints cases not because such restraints

are never anticompetitive, but rather because the hurdles for recovery

are so high. Not only must plaintiffs jump through the “agreement”

hoops that the Court has established for RPM, see, eg., Parkway

Gallery Furn., Inc. v. Kittinger/Pennsylvania House Group, Inc., 878

F.2d 801 (4th Cir. 1989), but, as petitioner points out, lower courts have

ordinarily required plaintiffs to make a threshold showing that the

manufacturer has market power, Pet. Br. 37, and “|mlJost cases have

made clear that power will not be inferred unless the defendant’s

market share is significant.” 8 Areeda & Hovenkamp 91645c, at 404-05.

Whatever the merits of a market share screen for nonprice restraints,

see Sullivan & Grimes §7.3a1, at 384-88 (noting that firms with small

market shares but powerful brands may have significant market

power), it is not responsive to the risks of RPM such as dealer pressure

and facilitating coordinated interaction among manufacturers or

dealers. See 8 Areeda & Hovenkamp 91633c, at 330-32.

“ Thus in Toys “R” Us, for example, the government prevailed by

proving a horizontal group boycott by manufacturers orchestrated by

the retailer. 221 F.3d 928. And in the minimum advertised pricing case

brought against the music companies, the FTC found that their

cooperative advertising programs, although not per se illegal, had

effectively eliminated the ability of retailers to sell at a discount

(because all discount advertising was forbidden) and stated that

“henceforth ... arrangements that have the same practical effect” as

minimum RPM would be considered “unlawful ... without a detailed

market analysis, even if adopted by a manufacturer without substantial

market power.” Time Warner, 2000 FTC LEXIS 40, *32. Reversing Dr.

Miles would presumably preclude such a rule and likely hamper the

ability of the FTC to obtain settlements in cases like Time Warner.

N.Y. Gen. Bus. L. §369-a (2007). Repealing Dr. Miles

threatens to recreate the balkanized state of affairs that

existed prior to the Consumer Goods Pricing Act of 1975,

when fair trade was legal in some states and illegal in

others. Indeed, given the anti-consumer effect of RPM,

states that follow the Sherman Act can be expected to

adopt “Leegin repealers” (either by statute or judicial

construction), perhaps replicating the confusion, uncer-

tainty, and expense that has resulted from the divergent

treatment of indirect purchaser damage actions under the

Sherman Act and state law. See Donald I. Baker, Hitting

the Potholes on the INinois Brick Road, Antitrust, Fall

2002, at 14.

IV. IF THE COURT OVERRULES DR. MILES, IT

SHOULD ADOPT A REBUTTABLE PRESUMP-

TION THAT MINIMUM RPM IS UNLAWFUL

The case for overruling Dr. Miles has not been made.

However, if the Court determines otherwise, it should

adopt a rebuttable presumption that RPM is unlawful,

rather than an open-ended rule of reason.” Such an

* Many commentators who do not favor a per se rule advocate

treating RPM as presumptively unlawful or otherwise reject a Sylvania

rule of reason. See, e.g., 8 Phillip E. Areeda, Antitrust Law 41633c, at

378-81 (1989) (would allow RPM if defendant proves the absence of

number of specified factors), Thomas R. Overstreet Jr. & Alan A. Fisher,

Resale Price Maintenance and Distribution Efficiency: Some Lessons

from the Past, 3 Contemp. Policy Issues 43, 53-54 (1985) (maintaining

that rule of reason would be “a litigation nightmare” and advocating

compromise of continuing per se ban with limited exceptions, such as

for new entrants and firms with sma!) market shares if the largest

firms do not use RPM); Comanor & Scherer Br. 8-9 (maintaining that

Court should treat distributor-induced RPM as per se illegal and

evaluate other instances under structured rule of reason); Jayma M.

Meyer, Relaxation of the Per Se Mantra in the Vertical Price Fixing

Arena, 68 S. Cal. L. Rev. 73 (1994) (advocating rebuttable presumption

of illegality); Thomas A. Piraino, Jr., Reconciling the Per Se and Rule of

Reason Approaches to Antitrust Analysis, 64 S. Cal. L. Rev. 685 (1991)

(advocating ancillary restraints approach under which RPM induced by

dealer coercion would be summarily condemned).

approach does less violence to the 96 years of this Court’s

jurisprudence firmly holding that RPM is illegal, and is

more respectful of the determination by Congress and the

States over the last 32 years that RPM is pernicious. A

presumption of illegality is also warranted by the simple

fact that RPM ordinarily directly raises prices to consum-

ers and by the absence of theoretical and empirical evi-

dence that consumers generally benefit from these higher

prices. Cf. NCAA v. Board of Regents, 468 U.S. 85, 110

(1984) (“naked restraint on price and output requires some

competitive justification even in the absence of a detailed

market analysis”); Polygram Holding, Inc. v. F-T.C., 416

F.3d 29, 36 (D.C. Cir. 2005) (restraint is presumed unlaw-

ful if “it is obvious that a restraint of trade likely impairs

competition”). If businesses wish to raise prices to con-

sumers by agreement, it is hardly unreasonable to place

the burden on them to justify the practice in a particular

case.

Under this approach, a manufacturer may rebut the

presumption of illegality by proving that RPM is reasona-

bly necessary to achieve a legitimate business purpose

that benefits consumers. Cf. Polygram, 416 F.3d at 36 (to

rebut presumption “defendant must either identify some

reason the restraint is unlikely to harm consumers or

identify some competitive benefit that plausibly offsets the

apparent or anticipated harm.”). “To prove a legit'mate

purpose, the manufacturer must offer proof that it has

such a purpose and that the restraint serves it.” 8 Areeda

¥1633d2, at 384. In addition, there must be substantial

evidence that less restrictive alternatives (e.g., promo-

tional allowances) “would be significantly more costly or

significantly less effective.” Jd. at 386; see Dr. Miles, 220

U.S. at 406 (to sustain restraint it must be “limited to

what is fairly necessary, in the circumstances of the

particular case”). Evidence that RPM was imposed in

response to pressure from a significant retailer or retailers

would militate against any legitimate purpose. See 8

Areeda & Hovenkamp 91648, at 442; Comanor & Scherer

Br. 9.

If the manufacturer rebuts the presumption of illegal-

ity by proving a legitimate business purpose that benefits

consumers, the burden would shift to the plaintiff to

establish that RPM is nonetheless anticompetitive. Cf.

Polygram, 416 F.3d at 36 (defendant’s justification may be

rebutted with sufficient evidence “to show that anticom-

petitive effects are in fact likely”). For example, the plain-

tiff may show that RPM facilitates a manufacturer’s cartel

or oligopoly pricing, or significantly restricts consumer

choice or retailing innovation. One way p.aintiff could

meet its burden is by showing that the upstream market is

concentrated or by showing widespread coverage of RPM

in downstream markets. See Comanor & Scherer Br. 9-10;

8 Areeda & Hovenkamp 911633c, at 330-31."

CONCLUSION

For the foregoing reasons, the judgment of the court of

appeals should be affirmed.

Respectfully submitted,

RICHARD M. BRUNELL ALBERT FOER

Director of Legal Advocacy Counsel of Record

and Senior Fellow President

AMERICAN ANTITRUST AMERICAN ANTITRUST

INSTITUTE INSTITUTE

2919 Ellicott St., N.W. 2919 Ellicott St., N.W.

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February 26, 2007

“ If the Court overrules Dr Miles because the goal is “to avoid the

continued necessity to make tenuous distinctions between economically

indistinguishable conduct,” U.S. Br. 28, then the Court should also

harmonize its definition of concerted action for horizontal and vertical

restraints and treat RPM coerced by a manufacturer’s threatened

refusal to deal as an RPM agreement, subject to the pr2sumption-based

analysis. See Andrew I. Gavil et al., Antitrust Law in Perspective 363

(2002) (suggesting that “Colgate’s fiction of ‘no agreement might

well be abandoned if Dr Miles is ever overruled”)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.