Leegin, the Rule of Reason, and Vertical Agreement
Herbert J. Hovenkamp
University of Iowa - College of Law
December 15, 2010
U Iowa Legal Studies Research Paper No. 10-40
The Supreme Court’s Leegin decision overturned the longstanding rule of per se illegality for resale price maintenance and applied a rule of reason. One might think that the question whether a vertical “agreement” exists between a manufacturer and a dealer should not be affected by the mode of analysis to be applied after an agreement is found. First one asks whether an agreement exists, and determines whether the per se rule or rule of reason applies only after receiving an affirmative answer. Nevertheless, ever since Colgate the Supreme Court has generally taken a more restrictive approach on the agreement issue in resale price maintenance cases than in cases involving other vertical agreements.
Unlike horizontal agreements among competitors, which are relatively uncommon, vertical agreements between actual or would-be suppliers and customers are everywhere, and include sales, licenses, franchises, employment agreements, and information arrangements. Their very ubiquity indicates that only a few will be of antitrust concern. Given the ubiquity of vertical agreements, we need to be clear on which ones should be of concern to antitrust law. Too many cases have asked whether an agreement is present without considering the nature of the agreement sought. Indeed, virtually every case alleging resale price maintenance or other vertical restraints involves firms who are the parties to some agreement.
A curiosity of many dealer-complaint cases is their failure to identify the nature and content of the alleged complainer-manufacturer agreement. The apparent subject matter of the alleged agreement is not the plaintiff’s destruction but the manufacturer’s distribution policy and its implementation, the complainer’s future behavior, or both.
The tribunal must first define its concept of an agreement and then ask whether the defendant had a motive to enter into that agreement. If unilateral termination of a price cutter because of price cutting does not constitute an agreement, then no agreement exists unless there is a motive for and evidence of the manufacturer’s agreement with some third party. In any event, the consequences of not finding an agreement are not quite the same when the underlying restraint is addressed under the rule of reason. Both unilateral and multilateral conduct that result in reduced output and higher prices are actionable, although unilateral conduct must meet the somewhat stricter structural standards of §2’s monopolization or attempt offense.
Number of Pages in PDF File: 15
Keywords: resale price maintenance, antitrust, per se, rule of reason, agreement, conspiracy
Date posted: September 8, 2010