Doctor Who?: Reason Comes to Minimum RPM in Leegin
Like the Doctor’s tardis, some Supreme Court cases are “transcendentally dimensional”: bigger (or smaller) on the inside than the appear from the outside. I have never been sure of the exact “size” of the Supreme Court’s 1911 decision in Dr. Miles, but I no longer need to sort through that. This morning, in a 5-4 decision authored by Justice Kennedy, in Leegin Creative Leather Products v. PSKS, the Supreme Court overruled Dr. Miles and determined that antitrust actions relating to minimum resale price maintenance should be evaluated under the rule of reason. (Minimum RPM means that the manufacturer requires a retailer to agree to sell the manufacturer’s goods for at least a particular price. Sony might require Best Buy to sell its new HD rear-projection TV—I have been doing some looking—for at least $1500.) This was exactly what I predicted before when the Supreme Court took the case, so this isn’t a surprise. That said, the oral argument indicated that the decision would be close and that too was right. We get another 5-4, and like the other cases at the end of this Term, you can probably guess the line-up.
First about the size of Dr. Miles. Dr. Miles was an early consideration of the Sherman Act by the Supreme Court. The Sherman Act was enacted in 1890 and the Supreme Court struggled to find its footing. The literal language of section 1 is quite powerful: “every contract ... in restraint of trade." As I ask on the first day of my antitrust class, what part of “every” don’t you understand? The Court’s 1897 decision in Trans-Missouri Freight Association had concluded that the literal language of the statute should control. As Dennis Carlton and I note in a recent paper on antitrust and regulation, it is hard to over-exaggerate the importance of Trans-Missouri in shaping early antitrust law. It was only in the Standard Oil decision (221 US 1 (1911)) that the Supreme Court abandoned the literalism of Trans-Missouri and moved towards evaluating the reasonableness of restrictions.
But Dr. Miles was decided before Standard (Dr. Miles is at 220 US 373 (1911)), before the Court moved towards applying the rule of reason to restraints in trade. Plus Dr. Miles was decided at a time—and the opinion reflects this directly—where the courts were generally concerned about restrictions on alienation. Concerned about title to chattels and apparent title and ostensible ownership.
Now to the size of Dr. Miles. When you teach these issues in antitrust, you head to the blackboard and draw a 2 x 2 matrix (or, in my case, push another button on your remote to bring up another PowerPoint slide). The two relevant dimensions for vertical restraints are price versus non-price and unilateral versus agreement. On nonprice vertical restraints—agreements about which stores in a particular area can sell a particular good (locational restraints)—the Supreme Court went through the same pattern of first concluding that at least in some circumstances per se illegality should apply (in Schwinn (388 US 365) (1967) depending on where title (again) was located) before eventually abandoning that in favor of rule-of-reason analysis in Continental TV v. GTE Sylvania (433 US 36 (1977)). So for the last 30 years, nonprice vertical restraints have been judged under the rule of reason.
Our second dimension is unilateral versus agreement (or concerted action). Eight years after Dr. Miles, in 1919, the Supreme Court decided the Colgate case (250 US 300 (1919)). Colgate seemed to validate restraints very similar to those at stake in Dr. Miles as long as they were imposed unilaterally.
Now we can see size directly. On the one hand sophisticated manufacturers could navigate around Dr. Miles by being careful under Colgate. And it may be the case that some nonprice vertical restraints can achieve some of the same ends the price vertical restraints seek to create. So the harm of the rule of per se illegality in Dr. Miles relative to rule-of-reason treatment is determined by how good these are as substitutes for the pure-price vertical restraints barred by Dr. Miles. Dr. Miles may be a decision that is smaller on the inside than it appears on the outside (just the opposite of the tardis if we are keeping track).
You see each of these issues in Justice Kennedy’s majority opinion. After an early glitch in the opinion (p5 (page references are to the official Supreme Court version)) on the early history of the Sherman Act—he inexplicably starts with Chicago Board of Trade in 1918 rather than Trans-Missouri in 1897 and Standard Oil in 1911—he turns (p7-8) to the ideas that animated Dr. Miles. He notes the reliance on a 1628 treatise and the focus on restraints on alienation, which as Justice Kennedy makes clear “tended to evoke policy concerns extraneous to the questions that control here.”
He then (p9) turns to the defining feature of modern antitrust analysis, namely the role of economics in understanding how we should evaluate particular practices. As to minimum RPM, his conclusion is clear: “[t]hough each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.” He also notes the overlap between justifications for nonprice vertical restraints and vertical price restraints.
Justice Kennedy then turns to the question of stare decisis. He notes that the Sherman Act is effectively a common-law statute and that over the last hundred years the Supreme Court has steadily moved away from rules of per se illegality towards the rule of reason. In many cases, it has overturned prior precedent of the Supreme Court in doing so, just as it did for maximum RPM in State Oil v. Khan (522 US 3 (1997)).
As Justice Kennedy notes and as I hope my matrix makes clear, there has been real tension between the Court’s position in Dr. Miles and Colgate and Dr. Miles and GTE Sylvania. As Justice Kennedy notes (p22-23): “[t]he Dr. Miles rule is also inconsistent with a principled framework, for it makes little economic sense when analyzed with our other cases on vertical restraints. If we were to decide the procompetitive effects of resale price maintenance were insufficient to overrule Dr. Miles, then cases such as Colgate and GTE Sylvania themselves would be called into question.” And finally, you can’t like these rules unless you are a hard-line Darwinist—the survival of the competitors with the fittest lawyers. Again as Justice Kennedy emphasizes (p25): “[i]n sum, it is a flawed antitrust doctrine that serves the interests of lawyers—by creating legal distinctions that operate as traps for the unwary—more than the interests of consumers—by requiring manufacturers to choose second-best options to achieve sound business objectives.”
Justice Breyer’s dissenting opinion emphasizes that, were he writing on a blank slate, he would find a question of whether to apply the rule of reason to minimum RPM difficult. This turns much on the genuine difficulties of establishing an administrative rule that meaningfully implements the rule of reason. Economists may be able to get tenure writing articles that conflict about the theoretical consequences of minimum RPM, but a district court judge actually has to make decisions. As Justice Breyer puts it (p8): “[b]ut antitrust law cannot, and should not, precisely replicate economists’ (sometimes conflicting) views. That is because law, unlike economics, is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients.” That leads Justice Breyer to his conclusion (p11): “[a]nd, if forced to decide now, at most I might agree that the per se rule should be slightly modified to allow an exception for the more easily identifiable and temporary condition of ‘new entry.’”
Justice Breyer then turns to the question of whether Dr. Miles should be overruled. He notes nothing has really changed recently that would call Dr. Miles into question. At this point, the debates over Dr. Miles are classics, and so there is nothing that really explains the timing for the call to overturn Dr. Miles (I noted this as well in my original post).
Justice Breyer then turns to considerations of stare decisis and our 5-4 fights come to the fore. He starts with a quote from Justice Scalia’s opinion in Monday’s Wisconsin Right to Life case. Justice Breyer appropriately looks for investment-backed reliance on the rule in Dr. Miles and draws upon a brief filed by Burlington Coat Factory about how discount retailers have organized their businesses. Finally, he confronts, as he must, the curious fact that when the Court overturned the rule of per se illegality for maximum RPM in State Oil v. Khan, that decision was nine zip with our current dissenters—Justices Breyer, Stevens, Souter, and Ginsburg—all silent. If stare decisis was so important in 1997, why didn’t we hear something about it then?
I take at this point is not lost on Justice Breyer and he attempts to distinguish (p21), Khan and Leegin—Khan overruled Albrecht and only 29 years had passed, while Leegin overrules Dr. Miles and we are almost at a century—but I would have thought that the investment-backed reliance issues—a key issue for stare decisis in business cases—would have been similar.