Category: Retail Law

The National Law Review recently published an article by Lawrence I. Fox, Megan Morley, and Joseph F. Winterscheid of McDermott Will & Emery regarding Resale Price Maintenance in Kansas:

The Kansas Supreme Court recently determined resale price maintenance isper se illegal under state law, becoming the latest state to reject the rule of reason standard mandated by the Supreme Court of the United States.  The decision serves as a reminder that although a supplier’s pricing policies may be permissible under federal law, they may nevertheless be subject to per se condemnation under certain state statutes.

On May 4, 2012, the Kansas Supreme Court announced that resale price maintenance (RPM) is per se illegal under Kansas law in O’Brien v. Leegin Creative Leather Products, Inc.  With this ruling, Kansas joined a growing number of states—including Maryland, New York and California—that have refused to follow the Supreme Court of the United State’s 2007 holding in Leegin Creative Leather Products, Inc. v. PSKS, Inc. that the legality of RPM should be assessed under the rule of reason.  The O’Brien decision therefore serves as yet another sobering reminder that suppliers need to be mindful that although RPM may be subject to rule of reason analysis at the federal level, it remains subject to per secondemnation at the state level in many states under state antitrust statutes

In O’Brien, the plaintiff, a purchaser of accessories, filed a class action litigation against Leegin Creative Leather Products, a manufacturer and retailer of Brighton fashion accessories and luggage (Brighton)—the same defendant involved in the U.S. Supreme Court’s landmark 2007 eponymous decision—alleging Brighton’s pricing practices violated the Kansas Restraint of Trade Act (KRTA).  These practices included calling for retailers to sell Brighton products at a “keystone” price determined by Brighton and for certain “heart store” retailers to sell Brighton products at a “suggested price every day, 365 days a year.”  Brighton did admit to investigating reports it received regarding alleged violations of the policy and, although not occurring in Kansas, it acknowledged refusing to deal with retailers that intentionally violated the policy.

Upon motion for summary judgment, the trial court held the plaintiff’s RPM claims should be evaluated under the rule of reason.  To determine that a rule of reason analysis is appropriate, the court invoked language from Heckard v. Park, 188 P.2d 926, 931 (1948), and Okerberg v. Crable, 341 P.2d 966, 971 (1959): “The real question is never whether there is any restraint of trade but always whether the restraint is reasonable in view of all the facts and circumstances and whether it is inimical to the public welfare.”  Using this standard, the court refused to grant summary judgment because it believed there was a genuine issue of material fact as to the reasonableness of Brighton’s pricing policies.  The trial court, however, still granted Brighton’s summary judgment motion after ruling the plaintiff would be unable to prove antitrust injury.

On the plaintiff’s appeal, the Kansas Supreme Court overturned the ruling of the trial court and declared that horizontal and vertical restraints of trade, including RPM, are per se illegal.  In reaching this decision, the Kansas Supreme Court examined the plain language of KRTA, federal antitrust rulings and past Kansas precedent.

First, the court looked at the statutory language of KRTA.  Section 50-101(d) provides “[a]ny such combinations are declared to be against public policy, unlawful and void.”  Section 50-112 states “[a]ll arrangements, contracts, agreements, trusts, or combinations … designed or which tend to advance, reduce, or control the price … to the consumer … are hereby declared to be against public policy, unlawful, and void.”  Because these statutes do not mention reasonableness, the court believed that this “clear statutory language draws a bright line” against the use of a rule of reason standard.

Second, the court briefly addressed and then dismissed the notion that federal antitrust rulings, such as Leegin, compelled a rule of reason analysis.  Citing a string of Kansas decisions, the court determined “that federal precedents interpreting, construing, and applying federal statutes have little or no precedential weight when the task is interpretation and application of a clear and dissimilar Kansas statute.”

Third, the Kansas Supreme Court looked at prior state cases to assess whether a reasonableness standard should be read into KRTA.  Three of these cases were decided under Kansas’s General Statutes of 1915 and Revised Statutes of 1923, which the court described as the “legislative ancestor[s]” of KRTA and which contained similar language to the present day statute.  In each of these cases, the Kansas Supreme Court held the vertical price-fixing agreements at issue were unenforceable and per se illegal.

In 1937, however, the state legislature enacted the Kansas Fair Trade Act (KFTA).  This statute both permitted contracts controlling resale prices and authorized private actions to punish deviations from these contracts.  Although the legislature repealed this statute in 1963, the Kansas Supreme Court examined whether the per se rule adopted in these pre-KFTA cases had been overruled while KFTA was in effect.  The only relevant cases decided during this period were the aforementioned decisions in Heckard and Okerberg, which did indeed adopt a reasonableness standard.

Analyzing these KFTA-era cases, however, the Kansas Supreme Court determined that this “reasonableness rubric” did not apply to alleged price-fixing agreements.  The restraints of trade at issue in those cases—non-compete covenants and requirements contracts—were “factually and legally distinct from vertical and horizontal price-fixing.”  Moreover, the court went on to state it would have to read unwritten elements into the unambiguous statutory language of KRTA to impose a rule of reason in price-fixing cases, which would require the court to impermissibly encroach on the legislative function.  The court concluded that if Heckard andOkerberg were before it today, it would not impose a reasonableness standard because the clear statutory language does not require it.  The Kansas Supreme Court therefore overruled the reasonableness standard adopted in Heckard andOkerberg and held that price-fixing violations are per se illegal under KRTA.

With the decision in O’Brien, Kansas is the latest state to reject the rule of reason standard mandated by Leegin for federal RPM cases when applying state antitrust statutes.  This decision serves as a reminder to suppliers that although their pricing policies may be permissible under federal law, these same policies may nevertheless be subject to per se condemnation under certain state statutes.  Any programs directed at affecting downstream resale prices must therefore be crafted carefully to ensure they are legally compliant at both the state and federal levels.

© 2012 McDermott Will & Emery