Dr. Miles is Dead. Now What?

Thom Lambert —  11 September 2008

As regular readers of this blog will know, I was pretty stoked when the Supreme Court finally overruled its infamous Dr. Miles decision. The Leegin Court’s holding that minimum resale price maintenance (RPM) is not per se illegal constituted a major step toward an economically rational and theoretically coherent approach to vertical restraints. (And on a more personal note, Leegin‘s holding meant that I didn’t have to eat my hat, as I’d promised to do if the Court upheld the per se rule against vertical price-fixing.)

The victory achieved in Leegin may turn out to be pyrrhic, though, if courts adopt overly prohibitory approaches to evaluating particular RPM agreements. Without doubt, the Supreme Court contemplated that the lower courts would create some form of “structured” rule of reason for assessing instances of RPM. It directed them to “establish the litigation structure to ensure the rule [of reason] operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses,” and it suggested that they “devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones.” Courts and commentators are currently grappling with that challenge. Unfortunately, the evaluative approaches that have been proposed thus far are, in my opinion, overly deterrent.

For that reason, I spent my summer drafting an article criticizing the structured rules of reason that have been suggested and proposing an alternative approach. The six approaches I evaluate in the article are (1) the classic, Brandeisian rule of reason; (2) Judge Posner’s per se legality approach; (3) the approach advocated by 27 states in the recent Nine West matter; (4) the approach the FTC adopted in that case (which I also discussed here); (5) the approach advocated by economists William Comanor and F.M. Scherer, who filed an amicus brief in Leegin; and (6) the approach set forth in the Areeda/Hovenkamp Antitrust Law Treatise. Finding each of these approaches deficient — all, except for Posner’s, overly deterrent — I set forth my own approach.

Under my proposed rule of reason approach, few challenges to instances of minimum RPM will succeed. A challenger must either (1) produce convincing evidence that RPM resulted in an output reduction that cannot be attributed to another cause or (2) first demonstrate the existence of all the prerequisites to one of RPM’s potential anticompetitive harms and then rebut any claim that the RPM was imposed as the most efficient means of securing a procompetitive end. These proof burdens are difficult to satisfy. Still, the proposed rule should deter blatantly anticompetitive instances of RPM, particularly since successful challenges will result in treble damages, which are not justified by the clandestine nature of the offense and thus result in some measure of overdeterrence. Given that most instances of RPM are procompetitive [as I explain in the article], that the costs of false convictions generally exceed those of false acquittals [as Judge Easterbrook has argued and as I discuss in the article], and that damages-trebling for RPM violations already creates a measure of overdeterrence, the slightly pro-defendant proposed rule would seem to strike the proper balance for minimizing error costs.

The article, Dr. Miles Is Dead. Now What?: Structuring a Rule of Reason for Minimum Resale Price Maintenance, is now available on SSRN. I’d love to receive any suggestions, criticisms, hate mail, or accolades our smart readers will provide.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

One response to Dr. Miles is Dead. Now What?

  1. 

    Senator Kohl’s Senate Bill S.2261 “Discount Pricing Consumer Protection Act” co-sponsored by Senator Biden (this Bill will overturn the Supreme Court’s misinterpretation of the Sherman Antitrust Act for the Leegin case) deserves Presidential Debate. The United States has already been down this road before (Fair/Unfair Trade Laws) with horrible results. Congress soundly rejected the arguments for RPM with the passage of the Consumer Goods Pricing Act of 1975. If the Leegin decision is good law then Congress should have no problem confirming the FIVE JUSTICES decision to overturn Dr. Miles. Congress is best suited to determine the National Antitrust Policy on RPM. Congress needs to confirm or reject the Leegin decision.