See Update Below.
The Supreme Court’s ruling in PSKS v. Leegin Creative Leather Products, which reversed Dr. Miles and ended the per se rule for minimum resale price maintenance, remanded the case to the district court to consider claims under the new rule of reason analysis. On remand, PSKS filed a second amended complaint alleging that independent retailers were involved in the enforcement of Leegin’s RPM scheme and that Leegin (as a participant at the retail level) agreed on the price of Brighton goods. The second amended complaint also asserted Brighton goods as a single brand market.
The district court dismissed the second amended complaint. Recently, the Fifth Circuit affirmed dismissal on the grounds that the plaintiffs did not define a plausible relevant market. The two candidate market definitions were the “retail market for Brighton’s women’s accessories” and the “wholesale sale of brand-name women’s accessories to independent retailers.” The Fifth Circuit also rejected PSKS’s claim that Brighton goods constitute a single brand market.
According to this WSJ story, the plaintiffs appear to be ready to petition for certiorari not in order to encourage the Court to revisit its earlier decision, but on the grounds that the Fifth Circuit ruling closes the door to all challenges to RPM schemes under the rule of reason:
Supreme Court losers like Kay’s Kloset—which went out of business after lower courts dismissed its claim against the Brighton Inc. accessories line—rarely get a second glance from the justices. But the boutique has enlisted a prominent advocate, Einer Elhauge, a Harvard law professor who says he is so concerned with the lower court decisions that he took the case pro bono.
Consumer advocates condemned the 2007 ruling, which split 5-4 along the Supreme Court’s conservative-liberal divide, as sure to drive up prices. Mr. Elhauge defends the high court’s decision, but he says that the lower courts took it too far, depriving retailers of the chance to challenge manufacturers.
An appeals court ruling against Kay’s Kloset “is not just a problem for vertical price-fixing law but also for antitrust law generally,” he said, warning that it would “drastically restrict” any attempt to scrutinize the details of an allegedly anticompetitive action.
There are two key features of the Fifth Circuit decision. One is that it rejects the notion that Brighton goods are a so-called “single brand market.” The Fifth Circuit panel writes:
The court also correctly rejected the claim that Brighton goods constitute their own market. In rare circumstances, a single brand of a product or service can constitute a relevant market for antitrust purposes. See Eastman Kodak v. Image Tech Servs., 504 US 451, 481-82 (1992). But that possibility is limited to situations in which consumers are “locked in” to a specific brand of the product. There is no structural barrier to the interchangeability of Brighton products with goods produced by competing manufacturers, nor as PSKS alleged any such structural barriers.
Nor does Brighton constitute its own submarket. Although a recognized submarket doctrine exists, such markets must exist within broader economic markets. And the requirements for pleading a submarket are no different from those for pleading a relevant broader market.
The court goes on to reject the “wholesale sale” in “women’s accessories” market as inadequately plead. The second key feature of the Fifth Circuit decision is that it, like most rule of reason cases, imposes a clear market power requirement.
Reading between the lines of Professor Elhauge’s concern that the Fifth Circuit ruling creates issue beyond vertical price-fixing arrangements, I suspect that the concern is the rejection of the single brand as a plausible relevant market — and not the market power requirement, which is completely standard in vertical rule of reason cases. Of course, we’ll have to wait to see the petition to evaluate the arguments. [SEE UPDATE BELOW]
But Post-Kodak, lower courts all over the country have rejected single brand claims in another vertical context, aftermarket tying arrangements. In that sense, the Fifth Circuit decision is one of many that systematically and uniformly reject single brand markets. For example, Kobayashi and Wright show that lower courts have rejected over 90 percent of these claims at the motion to dismiss or summary judgment level. Since those cases were pre-Twombly, it is not surprising to see the rejection of single brand claims — which often do not make economic sense in differentiated product markets where products compete vigorously against one another and firms also have some degree of economic market power — at the pleading stage. I do not think that such a ruling threatens the ability of plaintiffs, in the appropriate case with appropriate evidence, to bring a rule of reason RPM case. Further, there does not appear to be much for the Supreme Court to do here.
UPDATE: Thanks to a reader for a copy of the PSKS petition. There is a lot to absorb and evaluate here — though the key arguments appear to revolve around the distinction between market power and monopoly power and single brand markets. More on this later.
