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

;

¢;

No. 06-480

IN THE

Supreme Court of the United States

LEEGIN CREATIVE LEATHER PRODUCTS, INC.,

Petitioner,

:

PSKS, INC., DOING BUSINESS AS KAY'S KLOSET...

KAY'S SHOES,

Respondent.

On Writ or CERTIORARI TO THE UNITED STATES

Court OF APPEALS FOR THE Fietu Circuit

BrifF FOR THE STATES OF New York, ALASKA, ARKANSAS, CONNECTICUT,

Deri aware, Froripa, Hawan, Ipano, ILiivors, Lowa, KANSAS, KENTUCKY,

Louisiana, Maine, MARYLAND, MASSACHUSETTS, MICHIGAN, MINNESOTA,

Miussissipet, Missouri, Montava, Nevapa, New Hamesuire, New

Jersey, New Mexico, Nortu Caroiina, Ono, OKLAHOMA, OREGON,

Pexvsyivania, Soutu Carona, Sout Dakota, UtTan, VERMONT,

W asHincros, West Vircisia, AND Wyominc As Amici CURIAF

SUPPORTING RESPONDENT

ANpREW M. Cuomo

Attorney General of the

State of New York

BARBARA D. UNDERWOOD*

Solicitor General

BENJAMIN N. GUTMAN

Acting Deputy Solicitor General

Jay L. HIMFs Danikt J. CHEPAITIS

Chief, Antitrust Bureau Assistant Solicitor General

120 Broadway, 25th Floor

Ropert L. HUBBARD New York, NY 10271

Director of Litigation, (212) 416-8020

Anautrust Bureau * Counsel of Record

Attorneys for Amici Curiae

/ Additional Counsel Listed on Signature Page]

i

QUESTION PRESENTED

Whether this Court should overrule Dr. Miles Medical

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

held that minimum resale price maintenance agreements

constitute per se violations of the Sherman Act, 15 U.S.C.

§ 1.

il

TABLE OF CONTENTS

Page

QUESTION PRESENTED .......cccccsscccce: i

FAD GE GRTEETED = civcecdvccccivescveses li

TABLE OF CITED AUTHORITIES. ............ ill

INTEREST OF AMICI CURIAE ............... l

SUMMARY OF ARGUMENT ................. 2

TE 6 SS et.0 bd te nadennsedacdinesancas 4

A.- The Direct Anticompetitive Effects of

Minimum RPM Justify Continued Adherence

to the Per Se Prohibition. ............... 5

B. Petitioner Has Not Presented Empirical

Evidence That the Higher Prices Caused by

Minimum RPM Benefit Consumers or .

PS > uiweawddcesenteneacsa pases 10

C. The Importance of Clear Guidance Provides

an Additional Reason To Adhere To

SE cava vaaehkewensbbeweeoiies 17

D. Applying the Per Se Rule Against Minimum

RPM Is Consistent With Testing Other Vertical

Restraints Against the Rule of Reason. .... 18

CNS so okccceedtndece sh ccevenoenses 20

lil

TABLE OF CITED AUTHORITIES

Page

Cases

324 Liquor Corp. v. Duffy,

Se EE ine Gnd catavceoauneseees 5

Apex Hosiery Co. v. Leader,

310 U.S. 469 (1940) ......... cc cece ee cee eee 10

Arizona v. Maricopa County Medical Society,

oe OO re eee 5

Broadcast Music, Inc. v. Columbia

Broadcasting System, Inc.,

ee ee ED Sho nti es Kwanon ne wae aswcae 12, 13

Business Electronics Corp. v. Sharp

Electronics Corp.,

ee aR WEE CEE .vhb oven skeseacenedenes 5, 10, 18

California Retail Liquor Dealers Association v.

Midcal Aluminum, Inc.,

i co eevee eeabe ows 5

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

oo) re ee rrr 5, 6, 18

Dickerson v. United States,

ca evel wks aus 4

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

Is I oa ee oe i, 2,5, 6

iv

Cited Authorities

Page

Georgia v. Pennsylvania Railroad Co.,

EEE 6 Siac de vcncsbudesvadcnes l

In re Compact Disc Minimum Advertised

Price Antitrust Litigation,

216 F.R.D. 197 (D. Me. 2003) .............. ‘ |

In re Minolta Camera Products Antitrust Litigation,

668 F. Supp. 456 (D. Md. 1987) ............. 1

In re Nine West Shoes Antitrust Litigation,

80 F. Supp. 2d 181 (S.D.N.Y. 2000) .......... |

Maryland vy. Mitsubishi Electronics America, Inc.,

1992-1 Trade Cas. (CCH) 69,743 (D. Md.

CEE Sat kccanousectsesesohse cue ces I

Missouri v. American Cyanamid Co.,

1997-1 Trade Cas. (CCH) 71,712

Se Fy EE 9 0 We b00s 6 weisedeune l

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

Se as FS CPOE, KK ess sececccoeessevecee 5

National Collegiate Athletic Association v.

Board of Regents, :

468 U.S. 85 (1984) ............. eee eeeeeees 12, 13

New York v. Keds Corp.,

1994-1 Trade Cas. (CCH) ¥ 70,549

Es SN OO Deo kev oho 600d -0b eee l

Cited Authorities

Page

New York v. Nintendo of America,

775 F. Supp. 676 (S.D.N.Y. 1991) ............ l

New York v. Reebok International, Ltd.,

903 F. Supp. 532 (S.D.N.Y. 1995),

aff'd, 96 F.3d 44 (2d Cir. 1996) .............. ]

New York v. Salton, Inc.,

265 F. Supp. 2d 310 (S.D.N.Y. 2003) ......... ]

Northern Pacific Railway Co. v. United States,

Se Wa CRUE 04 6 sebevenséucenesseneees 17

Northwest Wholesale Stationers, Inc. v.

Pacific Stationery & Printing Co.,

Fe Ws PP END. 0:0. 5d% Kio bec ews cae eae es 6

Pennsylvania v. Playmobil USA,

1995-2 Trade Cas. (CCH) 9 71,215

CEA Fe BR: TA FED cs ccccecectessusces 1

Planned Parenthood v. Casey,

Far Was SE LUPUS hc boc eeeecnsnceadeueass 4

Schwegmann Bros. v. Calvert Distillers Corp.,

ee Ges SP ENOED 4b decd cuvvenseucsicese 5

Simpson v. Union Oil Co.,

PEF Gs CRUE 6ncccvedanvennexatvesdees 5

State Oil Co. v. Khan,

ge RR errr mar 4,5, 10, 19

vi

Cited Authorities

Texas v. Zeneca, Inc.,

1997-2 Trade Cas. (CCH) 4 71,888

EE

United States v. A. Schrader’s Son, Inc.,

Ne cadéeee

United States v. Bausch & Lomb Optical Co.,

Dt TCD é6ccevcdeccdecencecceos

United States v. Parke, Davis & Co..,

i a cues

United States v. Socony-Vacuum Oil Co.,

ED <ccgeveuceesncstccoeses

Statutes

PE -ccesceeanpecdsestecevorce

ee

DT Ktichauvenessserdedsececdceess

Miscellaneous Authorities

Charles Van Hise, Concentration and Control (1973)

Seeeeseeeeeeeeeeeeeeeeeeeeeeeeeeeeeaeeeee 6

Frank H. Easterbrook, Antitrust Law Enforcement

in the Vertical Restraints Area: Vertical

Arrangements and the Rule of Reason, 53 Antitrust

i ci 6d6bvcceeeeeeetesseeececes

Page

17

1,2

passim

vil

Cited Authorities

Page

Herbert Hovenkamp, Vertical Restrictions and

Monopoly Power, 64 B.U. L. Rev. 521 (1984) .. 12, 14

Howard P. Marvel & Stephen McCafferty, The

Political Economy of Resale Price Maintenance,

94 J. Pol. Econ. 1074 (1986) ................ 7,9

Karl Popper, The Logic of Scientific Discovery (2002)

soucenevubecensdues ceéecnandivedseouaseas 13

Kenneth G. Elzinga & David E. Mills, The Economics

of Resale Price Maintenance, available at hitp://

www.virginia.edu/economics/papers/mills/

PEE UIED cxcccvesescesénenenens 9, 11

Lester G. Telser, Why Should Manufacturers Want Fair

Trade ?, 3 J.L. & Econ. 86 (1960) ........ 9,11, 12, 14

NAAG State Antitrust Litigation Database, Attp://

naag.org/antitrust/search/ ........6666 eee ee l

Pauline M. Ippolito, Resale Price Maintenance:

Empirical Evidence from Litigation, 34 J.L. &

OE hi cadectanvicddcsnseuescies 3, 11

Pauline M. Ippolito & Thomas R. Overstreet, Resale

Price Maintenance: An Economic Assessment of

the Federal Trade Commission's Case Against the

Corning Glass Works, 39 J. Law & Econ. 285

EDU ob dsdduweeuneseseeededhacetevedeess 15, 16

Quality Stabilization: Hearings Before a

Subcommittee of the Senate Committee on

Commerce, 88th Cong. (1963) .............4.. 8

vill

Cited Authorities

Page

Ralph A. Winter, Vertical Control and Price Versus

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

Veheddekeuendhende sé4nseahunendu éxtaecus 9,14

Richard Posner, Antitrust Law (1976) ........... 12

Robert Bork, The Antitrust Paradox (1978) ...... 14

Sanford M. Litvack, The Future Viability of the

Current Antitrust Treatment of Vertical Restraints,

Bee ee a, SEED ced noedscsdenndons 11

Thomas K. McCraw, Competition and “Fair Trade”:

History and Theory, 16 Res. Econ. Hist. 185 (1996)

$dbneebdekdusendsebedbwessdeenseneuaneens 6

Thomas R. Overstreet, Resale Price Maintenance:

Economic Theories and Empirical Evidence

St PD sccsendunubsawus bhkueneseunnete passim

William S. Comanor, F.M. Scherer & Robert L.

Steiner, Vertical Antitrust Policy as a Problem of

Inference: The Response of the American Antitrust

Institute (AAI Working Paper No. 05-04, 2005)

eer eeeeeeneeneeeeeeeneeeeeeeeeeeneeeeeeee eee

l

INTEREST OF AMICI CURIAE

Congress has authorized the Attorneys General of the

States to bring federal antitrust actions to protect their citizens

from the harmful effects of price-fixing and other

anticompetitive conduct. 15 U.S.C. § |5c; see also Georgia

v. Pa. R.R. Co., 324 U.S. 439 (1945). The States therefore

have a strong interest in ensuring that the courts apply clear

and effective standards for liability under the Sherman Act,

15 U.S.C. §$§ 1 et seq.

The States have a particular interest in preserving the

per se prohibition against the price-fixing practice challenged

here — minimum resale price maintenance (“minimum

RPM”). The States vigorously prosecute cases involving

minimum RPM agreements. See, e.g., New York v. Salton,

Inc., 265 F. Supp. 2d 310 (S.D.N.Y. 2003); In re Compact

Disc Minimum Advertised Price Antitrust Litig., 216 F.R.D.

197 (D. Me. 2003); In re Nine West Shoes Antitrust Litig.,

80 F. Supp. 2d 181 (S.D.N.Y. 2000); Texas v. Zeneca, Inc.,

1997-2 Trade Cas. (CCH) J 71,888 (N.D. Tex. June 27, 1997);

Missouri v. Am. Cyanamid Co., 1997-1 Trade Cas. (CCH)

71,712 (W.D. Mo. Feb. 7, 1997); New York v. Reebok Int'l,

Ltd., 903 F. Supp. 532 (S.D.N.Y. 1995), aff'd, 96 F.3d 44

(2d Cir. 1996); Pennsylvania v. Playmobil USA, 1995-2 Trade

Cas. (CCH) J 71,215 (M.D. Pa. Dec. 15, 1995); New York v.

Keds Corp., 1994-1 Trade Cas. (CCH) 4 70,549 (S.D.N.Y.

Mar. 21, 1994); Maryland v. Mitsubishi Elecs. Am., 1992-1

Trade Cas. (CCH) 69,743 (D. Md. Jan. 15, 1992); New York

v. Nintendo of Am., 775 F. Supp. 676 (S.D.N.Y. 1991); In re

Minolta Camera Prods. Antitrust Litig., 668 F. Supp. 456

(D. Md. 1987).' The States recovered more than $115 million

in cash and $75 million in product for consumers in these

cases.

|. Information about these cases is available from the NAAG

State Antitrust Litigation Database, http://naag.org/antitrust/search.

2

SUMMARY OF ARGUMENT

Section | of the Sherman Act prohibits any “contract

.. . in restraint of trade or commerce.” 15 U.S.C. § 1. In Dr.

Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373

(1911), this Court held that a minimum RPM agreement —

an agreement not to sell products below a specified minimum

price — is per se a violation of section |. Dr. Miles was

correct when it was decided, and remains sound today,

because minimum RPM agreements are direct agreements

to raise retail prices, and there is no evidence that they offer

any offsetting consumer benefits.

In this case, petitioner — a manufacturer of women’s

fashion accessories sold primarily in boutique stores — made

an agreement with its retailers, including respondent, that

they would not sell its products below specified minimum

prices. When it learned that respondent had sold its products

below the agreed-upon price, it cut off all shipments to

respondent.

Petitioner does not dispute that, under Dr. Miles, its

minimum RPM agreement violated the Sherman Act. Neither

petitioner nor its amici offer adequate justification for

overruling Dr. Miles and nearly a century of precedent

adhering to it.

A. The available empirical data support Dr. Miles’s

common-sense conclusion that minimum RPM agreements,

by directly eliminating price competition, produce the very

anticompetitive effect that the antitrust laws seek to avoid:

raising consumer prices. Under “fair trade” laws, minimum

RPM agreements were legal in some States from 1931 to

1976. Advocates for these laws championed the interests of

merchants, in the form of higher profit margins, over those

of consumers, who benefit from lower prices. And as the

3

economic literature on which petitioner relies acknowledges,

the laws succeeded: consumer prices were higher in States

that permitted minimum RPM agreements than in States that

did not.

B. By contrast, no empirical evidence shows that

minimum RPM agreements have offsetting benefits for

consumers. Petitioner relies on a body of economic literature

that speculates as to the possible procompetitive effects of

minimum RPM agreements. But as Judge Easterbrook has

explained, “no economic model is worth much without

testing.” Frank H. Easterbrook, Antitrust Law Enforcement

in the Vertical Restraints Area: Vertical Arrangements and

the Rule of Reason, 53 Antitrust L.J. 135, 151 (1984).

Although a model may raise “fascinating intellectual

questions, .. . ultimately only good, hard, empirical work

can offer answers.” /d.

Despite widespread academic interest in the subject, no

one has answered Judge Easterbrook’s call for empirical

research. Rather, a “dearth of empirical evidence on the use

of” minimum RPM — indeed, an “empirical vacuum” —

“seriously limits the development of economic understanding

of these practices” and has left “[t]he host of competing

theories ... untested.” Pauline M. Ippolito, Resale Price

Maintenance: Empirical Evidence from Litigation, 34 J.L.

& Econ. 263, 293 (1991). Untested economic hypotheses,

whether promising or not, are no basis for overturning this

Court’s longstanding precedent.

C. Even if one could imagine hypothetical scenarios in

which a minimum RPM agreement might, on balance, benefit

consumers, countervailing interests justify continued

adherence to the per se prohibition. Bright-line rules avert

litigation by providing clear guidance to businesses that want

to avoid antitrust violations. And litigation under a per se

4

rule is far less costly, and far more manageable, for all parties

than litigation under a rule of reason. These considerations

outweigh any hypothetical imperfections in the per se rule

that petitioner asserts.

D. This Court’s decisions applying the rule of reason to

other vertical restraints, such as maximum RPM, are fully

consistent with a per se prohibition on minimum RPM.

Minimum RPM is different from these other practices. The

anticompetitive effect of minimum RPM is direct, obvious,

and empirically documented: Minimum RPM raises prices

for consumers. By contrast, the anticompetitive effects of

maximum RPM and other vertical restraints are neither direct,

obvious, nor as fully documented by empirical evidence.

ARGUMENT

Although stare decisis is “not an inexorable command,”

this Court “approach[es] the reconsideration of [its] decisions

.. . With the utmost caution.” State Oil Co. v. Khan, 522 U.S.

3, 20 (1997). ‘Stare decisis . .. promotes the evenhanded,

predictable, and consistent development of legal principles,

fosters reliance on judicial decisions, and contributes to the —

actual and perceived integrity of the judicial process.” /d.

(citations and quotation marks omitted). The doctrine

mandates that “a departure from precedent . . . be supported

by some special justification,” Dickerson v. United States,

530 U.S. 428, 443 (2000) (citation and quotation marks

omitted), that is, “some special reason over and above the

belief that a prior case was wrongly decided,” Planned

Parenthood v. Casey, 505 U.S. 833, 864 (1992).

In interpreting section | of the Sherman Act, this Court has

overturned prior decisions only when necessary to “adapt[]

to changed circumstances and the lessons of accumulated

experience.” Khan, 522 U.S. at 20.

5

In the ninety-six years since Dr. Miles, this Court has

repeatedly reaffirmed that minimum RPM agreements violate

the Sherman Act per se.’ Petitioner cannot point to either

“changed circumstances” or “lessons of accumulated

experience” that justify overruling this body of precedent.

Parties to a minimum RPM agreement agree to maintain

higher prices for consumers than would exist if price

competition were allowed. Not surprisingly, “accumulated

experience” has taught that minimum RPM agreements

achieve their goal of raising prices for consumers. Petitioner’s

explanation for why higher prices benefit consumers or

competition does not_draw on practical experience or new

empirical studies. Rather, it is based on untested academic

speculation. This Court should not overturn longstanding

precedent on the basis of unproven hypotheses.

A. The Direct Anticompetitive Effects of Minimum RPM

Justify Continued Adherence to the Per Se

Prohibition.

A century of experience confirms that Dr. Miles and the

later decisions reaffirming it properly hold minimum RPM

agreements per se illegal. The ‘per se approach permits

categorical judgments with respect to certain business

practices that have proved to be predominantly

2. E.g., State Oil Co. v. Khan, 522 U.S. 3, 17 (1997); Bus. Elecs.

Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 724 (1988); 324 Liquor

Corp. v. Duffy, 479 U.S. 335, 341-43 (1987); Monsanto Co. v. Spray-

Rite Serv. Corp., 465 U.S. 752, 761 (1984); Arizona v. Maricopa

County Med. Soc'y, 457 U.S. 332, 348 (1982); Cal. Retail Liquor

Dealers Ass'n v. Midcal Aluminum, Inc. , 445 U.S. 97, 102-02 (1980);

Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51 0.18

(1977); Simpson v. Union Oil Co., 377 U.S. 13, 17-18 (1964); United

States v. Parke, Davis & Co., 362 U.S. 29, 47 (1960); Schwegmann

Bros. v. Calvert Distillers Corp., 341 U.S. 384, 386 (1951); United

States v. Bausch & Lomb Optical Co., 321 U.S. 707, 720-21 (1944);

United States v. A. Schrader’s Son, Inc. , 252 U.S. 85, 99-100 (1920).

6

anticompetitive.” Northwest Wholesale Stationers, Inc. v.

Pac. Stationery & Printing Co., 472 U.S. 284, 289 (1985);

see also Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S.

717, 723 (1988) @er se rules are appropriate “for conduct

that ... would always or almost always tend to restrict

competition”) (citation and quotation marks omitted).

A per se rule, rather than a rule of reason, may be justified

“based on demonstrable economic effect.” Continental T.V.,

Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58-59 (1977).

1. Minimum RPM agreements merit per se treatment

because they have demonstrably anticompetitive effects that

harm consumers. A minimum RPM agreement directly and

intentionally eliminates price competition. It is by definition

price-fixing. See Dr. Miles, 220 U.S. at 408 (noting that the

object of minimum RPM is “destruction of competition and

the fixing of prices”). With minimum RPM, suppliers and

retailers agree to maintain higher prices than would exist

absent the agreement. The intended higher prices are

themselves the demonstrable economic effect. See id. (noting

that “the advantages which the participants expect to derive”

entail an “enhanced price to the consumer”).

Empirical evidence confirms — if confirmation is needed

— the common-sense notion that eliminating price

competition has the anticompetitive effect of raising prices.

Most of the data come from a natural experiment conducted

by the States with federal authorization. From 1931 to 1976,

States enacted “fair trade” laws that exempted minimum

RPM agreements from federal antitrust scrutiny. See

generally Thomas K. McCraw, Competition and “Fair

Trade”: History and Theory, 16 Res. Econ. Hist. 185 (1996).

The laws’ supporters believed that minimum RPM

agreements would raise consumer prices and retailers’ profits.

Fair-trade laws were “‘urged almost entirely by . . . organized

dealer groups,’” who hoped to “‘eliminat[e] price

competition’” and “‘to bring pressure to bear on

7

manufacturers to place products under price maintenance at

prices yielding dealer margins satisfactory to cooperating

organized dealer groups.’” Thomas R. Overstreet, Resale

Price Maintenance: Economic Theories and Empirical

Evidence 145 (FTC 1983) (quoting H.R. Rep. No. 94-341

(1975)); see also McCraw, Competition, supra, at 187

(traditional wholesalers and retailers lobbied for legalization

of minimum RPM “to shield themselves against new forms

of competition”). The retailers lobbying for the laws did not

argue that increased prices and profits would promote

consumer welfare by, for example, making manufacturers’

distribution networks more efficient. Instead, they argued that

vigorous competition — and falling consumer prices — were

generally bad for the economy and for small businesses.

See McCraw, Competition, supra, at 208-09.

The effects of the fair-trade laws on consumer welfare

were studied extensively. Academics and government

agencies compared prices in fair-trade States to those in “‘free-

trade” States, as the States that continued to prohibit

minimum RPM agreements were called. As the economic

literature on which petitioner relies acknowledges, empirical

studies showed that fair-trade laws, and the minimum RPM

agreements that they authorized, achieved their goals:

consumer prices went up. See Howard P. Marvel & Stephen

McCafferty, The Political Economy of Resale Price

Maintenance, 94 J. Pol. Econ. 1074, 1084 (1986) (“[T]he

price evidence ... strongly supports the view that prices in

[fair-trade states] were higher than those in free-trade

states.”); Overstreet, Resale Price Maintenance, supra, at

3. Other New Deal programs, like the National Industrial

Recovery Act, also were based on a skepticism of the value of

competition. McCraw, Competition, supra, at 208-09; cf. Charles

Van Hise, Concentration and Control 226 (1973) (original date of

publication 1912) (“[sJufficient cooperation should be allowed to

prevent fierce and unrestrained competition which goes to the extent

of reducing prices below a reasonable amount”).

8

160 (“The price surveys indicate that RPM in most cases

increased the prices of products sold with RPM.”).

A 1956 United States Department of Justice study

concluded that consumers in fair-trade States paid from

19 to 27 percent more than consumers in free-trade States.

Quality Stabilization: Hearings Before a Subcomm. of the

Senate Comm. on Commerce, 88th Cong. 6 (1963) (statement

of Lee Loevinger, Assistant Attorney General, Antitrust

Division, Department of Justice); see also Overstreet, Resale .

Price Maintenance, supra, at 113 (1970 Department of

Justice study found that prices in fair-trade States were up to

37.4 percent higher than in free-trade States). The Department

concluded that “the operation of a national price maintenance

law ... would cost-the American consumer billions of dollars

and have a powerful inflationary effect.” Quality

Stabilization, supra, at 6. For example, when Levi Strauss

stopped requiring minimum RPM, retail prices for its

merchandise plunged. For men’s jeans alone, consumers

saved an estimated $200 million in eighteen months.

See William S. Comaner, F.M. Scherer & Robert L. Steiner,

Vertical Antitrust Policy as a Problem of Inference: The

Response of the American Antitrust Institute 8 (AAI Working

Paper No. 05-04, 2005).

2. The link between minimum RPM and higher prices

is not disputed by most economists. As Judge Easterbrook

has explained, when economists claim that minimum RPM

is procompetitive, they nevertheless assume that

manufacturers “raise the price” and “increas{e] the dealer’s

margin” in order to “compensatfe] retailers” for something:

“There is no such thing as a free Junch; the manufacturers

can’t get the dealer to do more without increasing the dealer’s

margin.” Easterbrook, Vertical Arrangements, supra, at 156.

Although offering different explanations for how the

consumer supposedly benefits from higher prices, economists

almost unanimously accept, and conform their hypotheses

9

to, the evidence that minimum RPM raises consumer prices

and retailer margins.*

Petitioner likewise does not seriously dispute tne link

between minimum RPM and higher consumer prices. While

petitioner asserts in passing that minimum RPM need not

necessarily lead to higher prices, Pet. Br. at 17 n.7, the

primary authority that petitioner cites for this proposition

refutes it instead. See Marvel & McCafferty, Political

Economy, supra, at 1084 (acknowledging that cross-

jurisdictional price surveys “strongly support[]” the

conclusion that prices were higher in fair-trade jurisdictions

than in free-trade jurisdictions, although offering a theoretical

explanation for why multi-state surveys are of little value).

And the only “empirical” support petitioner offers is a single

study, cited in the Overstreet survey, that found that minimum

RPM was accompanied by increases in price among some

4. See, e.g., Kenneth G. Elzinga & David E. Mills, The

Economics of Resale Price Maintenance, available at http://

www.virginia.edu/economics/papers/mills/RPM20for20ABA.pdf

(“[m]anufacturers . . . in perfectly competitive markets would never

use RPM as a pricing practice”); Ralph A. Winter, Vertical Control

and Price Versus Nonprice Competition, 108 Q.J. Econ. 61, 73 (1993)

(proceeding from premise that manufacturers use “quasi-rents” to

compensate retailers); Easterbrook, Vertical Arrangements, supra,

at 141 (1984) (noting criticism that “resale price maintenance. . .

enables manufacturers to jack up the retail price of its products,”

and responding, “So it does”); Overstreet, Resale Price Maintenance,

supra, at 160 (“both procompetitive and anticompetitive economic

theories of RPM predict that price maintenance will usually raise

prices”); Lester G. Telser, Why Should Manufacturers Want Fair

Trade ?, 3 J.L. & Econ. 86, 87 (1960) (“a necessary condition to a

manufacturer’s use of resale price maintenance is that he must

possess some degree of monopoly control over the price of the

product”); cf. Marvel & McCafferty, Political Economy, supra, at

1075 (offering theory for why RPM might lower prices, but

acknowledging that common-sense suggests that “the protection of

higher dealer margins . .. would. . . seem to raise prices”).

10

retailers and less significant decreases among others. But

Overstreet concluded that the evidence shows that minimum

RPM usually leads to price increases; and he expressly noted

that economic models assume as much. See Overstreet,

Resale Price Maintenance, supra, at 160.

3. The broad acceptance that minimum RPM results in

higher prices, as it is intended to do, merits significant weight

in deciding whether minimum RPM should be per se illegal.

“The protection of price competition from conspiratorial

restraint is an object of special solicitude under the antitrust

laws.’” Bus. Elecs. Corp., 485 U.S. at 742, 743 n.5 (quoting

United States v. Gen. Motors, 384 U.S. 127, 148 (1966)).

Indeed, this Court has defined unreasonable restraints of trade

as those that are “so substantial as to affect market prices.”

Apex Hosiery Co. v. Leader, 310 U.S. 469, 500 (1940).

Thus, far from showing a need to overrule Dr. Miles,

“lessons of accumulated experience” confirm the holding of

that case. Kahn, 522 U.S. at 20. Minimum RPM agreements

are, after all, agreements not to lower prices. They produce

higher prices than would exist without those agreements.

Absent substantial evidence that minimum RPM agreements

have other procompetitive effects that outweigh the harm of

higher prices, they are properly treated as per se illegal. That

evidence has not been forthcoming.

B. Petitioner Has Not Presented Empirical Evidence

That the Higher Prices Caused by Minimum RPM

Benefit Consumers or Competition.

Minimum RPM has the obvious and empirically well-

documented effect of raising prices. Thus, petitioner, in

asking this Court to overturn settled precedent, must defend

its counterintuitive claim that higher prices benefit consumers

__by somehow stimulating competition. Petitioner tries to do

1]

so by arguing that the higher retailer profits that result from

minimum RPM agreements “provide incentives for retailers

to engage in promotional activities that are necessary to the

efficient marketing,” or otherwise to “invest in demand-

creating services.” Pet. Br. at 6-7. This echoes the economic

literature, which speculates that minimum RPM agreements

— by guaranteeing higher profits and preventing price

competition by retailers — encourages retailers to provide

additional services such as “pre-sale display, product-specific

information, [consumer-friendly] store hours, adequate

inventory, post-sale service, ... certifi[cation] of product

quality, and other shopping amenities.” Elzinga & Mills,

supra, at 2.

1. But petitioner offers no real-world evidence

supporting those assertions. Nor does the economic literature

contain empirical support for the belief that minimum RPM

has procompetitive effects. Thus, the following observation,

made in 1987, continues to be true today: “the basic reason

the per se rule continues to be accepted is that those .. . who

would argue against it[] have not made their case outside of

an economic laboratory.” Sanford M. Litvack, The Future

Viability of the Current Antitrust Treatment of Vertical

Restraints, 75 Cal. L. Rev. 955, 956 (1987).

Although the procompetitive theories have been

discussed by scholars since at least 1960,° the literature

forthrightly acknowledges that there is an “empirical

vacuum” that “seriously limits the development of economic

understanding of these practices” and has left “[t]he host of

competing theories ... untested.”® Indeed, much of the

5. See Telser, Why Should Manufacturers Want Fair Trade ?,

supra (1960) (advancing “free rider” theory for minimum RPM); cf.

id. at 86 n.1, 87 n.2, & 89 n.4 (crediting articles going back to 1916).

6. Ippolito, Resale Price Maintc nance, supra, at 293; see also

Easterbrook, Vertical Arrangements, supra, at 151 (noting need for

(Cont'd)

12

literature does not even purport to rest its conclusions on

empirical work.’

This lack of empirical work may reflect that while the

direct, negative consumer-welfare effects of minimum RPM

are readily observable, the hypothesized procompetitive

benefits are too ephemeral to be tested. Advocates of the

procompetitive explanations do not even assert that the

benefits are measurable empirically.

In this respect, minimum RPM differs sharply from the

economic practices at issue in cases in which this Court has

abrogated the per se rule against price fixing — in favor of

rule-of-reason analysis — on the ground that the particular

practice at issue arguably conferred benefits on consumers

and competition. See, e.g., Nat'l Collegiate Athletic Ass'n v.

Bd. of Regents, 468 U.S. 85 (1984); Broadcast Music, Inc. v.

Columbia Broadcasting Sys., Inc., 441 U.S. 1, 21-22 (1979).

In these cases, the defendants alleged a consumer benefit

from collusion that could be empirically verified. They

asserted, and this Court agreed, that they were creating

entirely new products, whose existence requires some

elimination of competition — in NCAA, a sports league, and

(Cont'd)

“empirical work”); Overstreet, Resale Price Maintenance, supra,

at | (no procompetitive hypothesis “is well supported by available

empirical evidence”); Richard Posner, Antitrust Law 151 (1976)

(noting that economists’ explanations have not “yet been tested

empirically”).

7. See, e.g., Herbert Hovenkamp, Vertical Restrictions and

Monopoly Power, 64 B.U. L. Rev. 521 (1984); Robert Bork, The

Antitrust Paradox 280-98 (1978); Telser, Why Should Manufacturers

Want Fair Trade ?, supra (identifying no evidence in support of his

“free rider” theory); cf. id. at 99-104 (discussing evidence supporting

explanation that minimum RPM facilitates the creation of cartels).

13

in Broadcast Music, a blanket license. See NCAA, 468 U.S.

at 101 (“this case involves an industry in which horizontal

restraints on competition are essential if the product is to be

available at all”); Broadcast Music, 441 U.S. at 21-22

(defendant had shown that blanket license offered jointly by

individual license holders was “a different product” from

that offered individually by license holders). By contrast,

petitioner does not claim to have created a new product

through minimum RPM and has no real-world evidence that

its practices result in any measurable benefits to consumers.

The lack of empirical work may also reflect that the

economic models are too inconsistent, general, and imprecise

to yield clear predictions — true hypotheses — to test. See

Karl Popper, The Logic of Scientific Discovery 72 (2002)

(“a self-contradictory system is uninformative .. . because

any conclusion we please can be derived from it” and no

particular result “is singled out, either as incompatible or as

derivable, since all are derivable”); id. at 116 (a theory should

be “sufficiently precise to be capable of clashing with

observational experience”). The explanations reach the

“consensus” that petitioner touts, Pet. at 13, only by glossing

over inconsistent premises or remaining at such a high level

of generality that they could be thought consistent with almost

any set of observed facts.

For example, the literature has not resolved even basic

questions about whether, under the procompetitive

explanations, one would expect to find evidence of market

power at the supplier level in industries in which minimum

RPM is used. Petitioner assumes that minimum RPM occurs

in competitive interbrand markets. Pet. Br. at 22. This

suggests that suppliers who use minimum RPM need not have

market power. But much of the literature that petitioner cites

posits that suppliers using minimum RPM must have market

power — and, in effect, confer some of that power on retailers

14

in return for preferential treatment.* Similarly, the literature

has not resolved whether one would expect to find higher-

than-competitive returns among retailers subject to minimum

RPM agreements. Some scholars assume not. See Bork, The

Antitrust Paradox, supra, at 290 (“No manufacturer or

supplier will ever use ... [minimum RPM] for the purpose

of giving the resellers a greater-than-competitive return.”’);

Hovenkamp, Vertical Restrictions, supra, at 524 (concluding

that minimum RPM will not result in retailer profits beyond

an ordinary, competitive market return). Others make the

opposite assumption. See Winter, Vertical Control, supra, at

73 (positing that suppliers share “quasi-rents” with retailers

in minimum RPM).

One would expect such inconsistencies to make it

difficult to test the procompetitive position, and they have.

See Overstreet, Resale Price Maintenance, supra, at 12

(notwithstanding the long time that economists have

discussed possible procompetitive explanations regarding

minimum RPM, the underlying theories “are not precise

enough to generate distinctive testable hypotheses.”). For

example, one cannot draw meaningful conclusions from data

about market power or retailer profits — two common

indirect indicia of competitive effects — because, as noted

above, some model is likely to fit the empirical evidence no

8. See Easterbrook, Vertical Arrangements, supra, at 156

(suppliers must have power over price to confer something of value

on retailers that will induce them to give special treatment to

suppliers’ goods); Overstreet, Resale Price Maintenance, supra, at

17 (“retailers would have little incentive to extract RPM from

manufacturers of products . . . where the manufacturer does not have

some market power, unless the dealers are able to induce RPM on

all or most competing brands as well”); Telser, Why Should

Manufacturers Want Fair Trade?, supra, at 87 (“a necessary

condition to a manufacturer's use of resale price maintenance is that

he must possess some degree of monopoly control over the price of

the product’).

15

matter what it shows. See Pauline M. Ippolito & Thomas R.

Overstreet, Resale Price Maintenance: An Economic

Assessment of the Federal Trade Commission's Case Against

the Corning Glass Works, 39 J. Law & Econ. 285, 301 (1996)

(noting that the “structural evidence .. . typically available

in antitrust investigations ... does not allow tests” of the

procompetitive theories). Because the explanations are so

malleable that they can generate almost any hypothesis one

wants, they cannot be tested with any rigor.

2. In view of these obstacles, it is not surprising that

the few empirical studies of procompetitive explanations

draw only the -weakest conclusions — conclusions that do

nothing to advance petitioner’s case. Pauline Ippolito’s

Resale Price Maintenance study, supra — a review of cases

from 1975 and 1982 that involved allegations of minimum

RPM agreements — is typical. The study did not test for the

hypothesized consumer benefits directly. Instead, it merely

tried to determine whether any of the procompétitive

explanations had even “limited plausibility” in some of the

studied cases. Jd. at 293. Not surprisingly, Ippolito concluded

that she could not entirely rule out the procompetitive

explanations. Some cases, for example, involved products

as to which the consumer might want more information. /d.

at 282-85. Others involved products for which the retailer

might add something tangible to the product, such as

installation or post-sale adjustment. /d. at 285-89. Yet others

involved products that an especially motivated retailer might

be able to persuade a wavering customer to buy. /d. at 289-

91. But showing that an explanation is merely plausible —

in the sense of not obviously incorrect — is a far cry from

showing that it is correct. Even Ippolito acknowledges that

her analysis did little to fill the “empirical vacuum” in this

area. Id. at 293.

16

Other studies are similarly unhelpful to petitioner's

position. For example, “the most rigorous and complete

empirical evaluation of an application of RPM” involved

bread products subject to minimum RPM. Overstreet, Resale

Price Maintenance, supra, at 126. Analysis “showed that the

price of bread fell . . . and that the quantity of bread consumed

was not adversely affected” when minimum RPM ceased.

Id. The data thus were “inconsistent with the procompetitive

... theory.” Jd. Another study found that the output and profit

levels of a single company, Corning Glass Works, were higher

during periods when it used minimum RPM than when it

did not. But the study’s scope was so limited that at most it

could show, in this one case, that the data were “generally

consistent” with procompetitive explanations. Ippolito &

Overstreet, Resale Price Maintenance, supra, at 322.

3. Recognizing the lack of empirical support for their

position, proponents of minimum RPM simply assume that

there are unobservable benefits. See Winter, Vertical Control,

supra, at 69 (noting hypothesis that suppliers are seeking

“certiflication] [of] product quality”); Ippolito, Resale Price

Maintenance, supra, at 286 n. 38 (suggesting that minimum

RPM could be justified for milk on the theory that higher

margins will induce retailers of milk to provide greater

“quality assurance”). Indeed, petitioner goes so far as to

suggest that higher prices are the benefit consumers receive

because consumers who pay more for a product feel better

about the product’s quality. Pet. Br. at 3 (asserting that putting

a product on sale “degrades a manufacturer’s brand” in

consumers’ eyes). There is no evidence, of course, that

consumers in fact like paying higher prices. And even if that

counterintuitive proposition were true, it still would not mean

that on balance consumers are better off with the satisfaction

of paying more for something than if they had the extra money

to spend on other needs.

17

C. The Importance of Clear Guidance Provides an

Additional Reason To Adhere To Dr. Miles.

Even if one could imagine hypothetical situations in

which minimum RPM might benefit consumers on balance,

that would not be a reason to abandon the per se rule that

this Court has applied consistently. All that would show is

that a per se rule might in theory be overbroad. But virtually

all per se rules have overbreadth potential, and that has not

alone been sufficient to undermine their value. For example,

one might speculate that horizontal price-fixing could, in

unusual circumstances, actually benefit consumers —

perhaps, to take petitioner’s own suggestion, by raising prices

and thus enhancing consumers’ perception of a product’s

quality. Nonetheless, because price is the “central nervous

system of the economy,” the per se rule is applied to

horizontal price-fixing. United States v. Socony-Vacuum Oil

Co., 310 U.S. 150, 224, 226 n.59 (1940).

Countervailing interests make the per se rule against

minimum RPM appropriate even if it is not perfectly tailored. .

The per se rule, unlike the rule of reason, makes it clear at

the outset what the Sherman Act prohibits. See N. Pac. Ry.

Co. v. United States, 356 U.S. 1, 5 (1958). Bright lines make

it possible for attorneys to advise their clients in advance

what they may or may not do, thus avoiding litigation in the

first place. And when there is litigation, the per se rule

obviates the need for “an incredibly complicated and

prolonged economic investigation into the entire history of

the industry involved, as well as related industries, in an effort

to determine at large whether a particular restraint has been

unreasonable — an inquiry so often wholly fruitless when

undertaken.” /d.; see also Easterbrook, Vertical

Arrangements, supra, at 155 (“Litigation costs are the product

of vague rules combined with high stakes, and nowhere is

that combination more deadly than in antitrust litigation under

the rule of reason.”).

18

As frequent enforcers of the Sherman Act, the States are

acutely aware of the benefits of clear standards. Antitrust

lawsuits are by their nature difficult, complicated cases.

Litigation under the rule of reason, rather than under the per

se rule, is almost always more protracted and expensive for

all involved. And if, as here, the potential for overbreadth is

speculative at best, the benefits of a simple rule outweigh

whatever theoretical imperfection inures in the per se rule.

Cf. Bus. Elecs. Corp., 485 U.S. at 723 (noting that the per se

rule is appropriate “for conduct that ... would always or

almost always tend to restrict competition” (emphasis added)

(internal citation and quotation marks omitted)).

D. Applying the Per Se Rule Against Minimum RPM Is

Consistent With Testing Other Vertical Restraints

Against the Rule of Reason.

Minimum RPM is fundamentally different from other

vertical restraints, such as territorial restrictions and

maximum RPM, that are subject to the rule of reason.

In deciding whether to apply the rule of reason or the per se

‘rule, this Court has focused on “demonstrable economic

effect.” Continental T.V., 433 U.S. at 59. For minimum RPM,

as explained above, higher consumer prices are the

demonstrable economic effect. Any supposedly

procompetitive effects, by contrast, are speculative.

Other vertical restraints, however, may not always — or

even usually — have the same uniform and direct harmful

effect on consumers. For example, it is not obvious whether

territorial restrictions on retailers ultimately raise or lower

consumer prices. See id. at 51-56. Because both the

anticompetitive and procompetitive effects of the practice

are speculative, it is appropriate to apply the rule of reason.

Id. at 57. Similarly, this Court explained that prohibiting

maximum RPM agreements — agreements between a

19

supplier and retailer not to charge consumer more than a

specified amount for a product — might prevent “lower

prices” for consumers, which are “the very essence of

competition” and a demonstrable consumer benefit. Kahn,

522 U.S. at 15 (citations and quotation marks omitted).

Recognizing that maximum RPM also could have

anticompetitive effects, this Court again applied the rule of

reason. Id. at 16-18.

These other vertical restraints can, under some

circumstances, have anticompetitive effects, but they also

sometimes have demonstrable procompetitive effects. The

rule of reason allows the courts to consider all the relevant

circumstances in distinguishing good practices from bad

ones. By contrast, minimum RPM has an obvious

anticompetitive effect — higher prices. No one has found

evidence of a procompetitive benefit, despite petitioner’s

strenuous claim that such a benefit exists. The per se

prohibition is thus fully justified.

20

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted,

ANDREW M. Cuomo

Attorney General of the

State of New York

BarBARA D. UnDERWOOD*

Solicitor General

BENJAMIN N. GUTMAN

Acting Deputy Solicitor

Jay L. Himes General

Chief, Antitrust Bureau Daniet J. CHEPAITIS

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Antitrust Bureau (212) 416-8020

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