Vertical within-brand restraints

Vertical within-brand restraints: courts treat these restraints (price and non-price) under the rule of reason (almost always view these restraints as legal).

Horizontal non-price restraints can still be per se illegal.

History: likely to change in the future; use the past to give perspective on changes (general trend toward rule of reason).

Treatment	Minimum resale price	Maximum resale price	Non-price restrictions
Per se illegal	Dr. Miles (1911)	Albrecht (1968)	Schwinn (1967)
Overruled to rule of reason	Leegin (2007)	State Oil v. Khan (1997)	Sylvania (1977)

Critique of move to rule of reason: per se treatment was a way to protect the downstream firm (franchisee) from being dominated by the upstream firm.

• Courts would disagree; majority view is that the purpose of antitrust law is to protect competition, not individual firms.

Economics helps explain move from per se to rule of reason treatment (mix of good and bad effects from single-brand restraints): suppose there is a downstream and upstream firm

• The upstream firm wants to charge the downstream firm as much as possible
• The downstream firm wants to buy from the upstream firm as cheaply as possible and sell to consumers for as much as possible
• Suppose both the upstream and downstream firm have monopolies: from the perspective of the consumer there will be two markups (one at each stage)
  • If the consumer is buying from a monopolist, they prefer to buy from one rather than two (one markup rather than two)
  • Note the difference from horizontal economics: a consumer prefers fewer firms vertically and more firms horizontally
• Maximum resale price (good): to prevent the double markup, the upstream firm can limit the downstream firm's ability to raise the price consumers pay by imposing a maximum resale price
  • Economics says this is good: a lower price results in a higher quantity of goods sold
• Minimum resale price (good): upstream firm can incentivize the downstream firm to make complementary investments in selling goods (e.g., Coach purses, corporate wants franchisees to invest in a nice store to bolster the brand)
  • Procompetitive because it ensures there's a market for luxury goods, prevents collapse into a market filled with goods no one wants
• Collusive effects: minimum resale price could help facilitate an upstream or downstream cartel
• Exclusionary effects:
  • Maximum resale price could help upstream firms exclude rivals from downstream access (enables D to pay suppliers/distributors to exclude)
  • Minimum resale price could help downstream firms exclude rivals from upstream access

The "forcing" (monopoly power) motivation behind the per se treatment has fallen out of judicial favor for:

• Single-brand price restraints (S1)
• Single-brand non-price restraints (S2)
• Tying (S1/C3) (across-brand restraint)
• But it could always be revived

Caselaw

Minimum resale price

Dr. Miles (1911) (traditional per se rule)

• Holding: agreements between a supplier and distributor to set a minimum resale price are illegal (later came to be understood as a per se rule)
  • What constitutes an agreement:
    • U.S. v. Colgate (1919): a firm may impose resale price management on distributors unilaterally if it is not engaged in monopolization
      • Prof. Note: this is absurd; there is no meaningful difference between saying that there was some agreement to sell above a certain price and a firm saying generally that it will not deal if the good is sold below a certain price
    • Monsanto v. Spray-Rite (1984): a terminated dealer cannot establish a resale price management agreement if it proves only that it was terminated after other dealers complained about its discounting
      • There must be evidence that tends to prove a "conscious commitment" to achieve an "unlawful objective"
  • What constitutes a sale: firms can control downstream prices if the downstream seller acts as an agent and the goods are not sold but instead delivered on consignment (ownership stays with consignor until goods are sold)
• Facts: manufacturer (D) of medicine sold in pharmacies had a minimum resale price.

Leegin v. PSKS (2007) (minimum resale price should be analyzed under rule of reason)

• Holding: minimum resale price should be analyzed under rule of reason, remand (no harm found on remand)
  • Minimum resale price should be analyzed under the rule of reason
  • Dr. Miles relied on:
    • The common-law rule against restraints on alienation (sale vs. non-sale)
    • An analogy between vertical and horizontal agreements
  • Effects of minimum resale price management are mixed
    • Procompetitive justifications for minimum price management:
      • Encourage complementary investment
      • Discourage free riding
      • Brand and price differentiation
      • Facilitate entry
    • Possible anticompetitive effects:
      • Facilitate upstream or downstream collusion
  • Interbrand competition is the primary concern of antitrust
  • "The antitrust laws do not require manufacturers to produce generic goods that consumers do not know about or want"
• Facts: leather manufacturer (D) institutes pricing and promotion policy and refuses to sell to retailers who sell below suggested prices. D discovers retailer (P) is marking down D's clothes by 20% and stops selling to P after P refuses to stop. P sues alleging per se illegal minimum resale price management agreement.

Maximum resale price

• Albrecht: extends per se illegality to maximum resale price
• State Oil v. Khan (1997): maximum resale price under rule of reason

Non-price restrictions

U.S. v. Arnold, Schwinn & Co. (1967) (extends per se illegality to non-price restrictions)

• Holding: per se illegal to restrict sale of goods beyond the first sale
  • Territorial restrictions on distributors (only sell to retailers in a specific area) are indistinguishable from resale restrictions on distributors (only sell to licensed franchisees) and franchise retailers (no resale to unlicensed franchisees)
  • Territorial restrictions ("confine areas or persons with whom an article may be traded") are per se illegal under the Sherman Act
• Facts: bicycle manufacturer (D) restricts resale of bikes: distributors can only sell to licensed dealers, while dealers can only sell to consumers.
• Prof. Note: today, courts might look at Schwinn's conduct as a way to enhance competition between other bike manufacturers

Continental TV v. GTE Sylvania (1977) (overrules Schwinn)

• Holding: non-price restrictions should be analyzed under the rule of reason
  • Non-price restrictions should be analyzed under the rule of reason (not per se)
    • Non-price vertical restrictions can promote interbrand competition, which is "the primary concern of antitrust law": they can induce retailer investment, combat free riding, and align the upstream firm's interest with that of the consumer
    • Price restrictions are different, though
• Facts: D has low television sales. To recover, D limits the number of regional retail franchises and limits sales to franchise locations, followed by a rise in D's market share. D terminates retailer (P) for planning to sell outside its territory. P claims that D violated S1 by prohibiting franchisee sales outside of specified locations (Schwinn).

Additional references:

• U.S. v. Sylvania (1977): vertical non-price restrictions analyzed under the rule of reason
• Toys "R" Us