Dr. Miles Is Dead. Now What? Structuring a Rule of Reason for Evaluating Minimum Resale Price Maintenance

ABSTRACT In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the U.S. Supreme Court overruled its 1911 precedent declaring vertical minimum resale price maintenance (RPM) to be per se illegal. The Leegin Court held that the practice should instead be examined on a case-by-case basis under antitrust's rule of reason. The Court further exhorted the lower courts to craft a "structured" rule of reason for evaluating RPM. This Article critiques six proposed approaches for evaluating minimum RPM and offers an alternative approach. The six approaches critiqued are: (1) the Brandeisian, unstructured rule of reason; (2) Judge Posner's rule of per se legality; (3) the approach advocated by twenty-seven states in the recent Nine West case; (4) the approach adopted by the Federal Trade Commission in that case; (5) the approach advocated by economists William Comanor and F.M. Scherer; and (6) the approach proposed in the Areeda & Hovenkamp Antitrust Law treatise. Finding each of these approaches deficient, this Article proposes an alternative evaluative approach that harnesses economic learning and allocates proof burdens in a manner that minimizes the sum of decision and error costs, thereby maximizing the net social benefits of RPM regulation. TABLE OF CONTENTS INTRODUCTION I. RPM AND COMPETITION A. Potential Anticompetitive Harms 1. Facilitating Dealer Collusion 2. Facilitating Manufacturer Collusion a. Reducing Incentives To Cheat b. Making Cheating More Visible 3. RPM-Augmented Foreclosure B. Potential Procompetitive Benefits 1. Enhancing Distributional Efficiency a. Encouraging Retail Service by Eliminating Free Riders b. Enforcing Unspecified Agreements 2. Facilitating Entry 3. Facilitating the Marketing of Products with Unpredictable Demand II. PROPOSALS FOR EVALUATING RPM UNDER THE RULE OF REASON A. Two Nonstarters: An Unstructured Rule of Reason and a Rule of Per Se Legality 1. An Unstructured Rule of Reason 2. Per Se Legality B. The States' Proposed Approach: Higher Price Places Burden on Defendant To Prove Procompetitive Effect that Could Not Have Been Achieved Less Restrictively C. The FTC Approach: Defendant Can Avoid Burden of Proving Procompetitive Effect of RPM Only if It Proves Absence of "Leegin Factors" D. The Comanor / Scherer Approach: RPM Is Unreasonable if Retailer-Initiated; Otherwise, Focus on Quantitative Foreclosure E. The Antitrust Law Approach III. AN ALTERNATIVE APPROACH A. Principles Governing Rule Selection 1. Likelihood of Incorrect Judgments a. Economic Theory b. Empirical Evidence c. Retailing Trends 2. Magnitude of Losses from Errors 3. Difficulty of Administering the Rule B. The Proposed Rule 1. Plaintiff's Prima Facie Case a. Circumstantial Dealer Collusion Theory b. Circumstantial Manufacturer Collusion Theory c. Foreclosure Theory 2. Defendant's Rebuttal Opportunity 3. Responses Available to Challenger C. Evaluation of the Proposed Rule CONCLUSION INTRODUCTION The U.S. Supreme Court's decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., (1) marked the end of an era in antitrust. Leegin overruled the Court's 1911 Dr. Miles decision, (2) which had established that minimum vertical resale price maintenance (RPM)--the fixing of minimum downstream prices by upstream firms (3)--is per se unreasonable. (4) Leegin's holding that instances of RPM must instead be evaluated under antitrust's rule of reason (5) was no great surprise. The Court has repeatedly emphasized that per se illegality is reserved for restraints of trade that are always or almost always anticompetitive. …