Tuesday, May 13, 2008, 9:53 AM

FTC Modifies Price-Fixing Consent Order After Leegin

On Tuesday, May 6, 2008, the FTC announced that it had modified a 2000 consent order that settled retail price-fixing charges against shoe seller Nine West. Under the conset order, Nine West was prohibited from penalizing its dealers for selling its goods below retail prices set by Nine West. In 2007, however, the Supreme Court ruled that minimum resale price maintenance was not per se illegal. See Leegin Creative Leather Products, Inc. v. PSKS, Inc. (For a discussion of Leegin see this Power Point presentation). Nine West cited Leegin as the reason why the FTC should modify its 2000 consent order. In granting Nine West's request, the FTC identified the following relevant factors from the Leegin decision:

"One factor is the source of the resale price mainentance program: if retailers were the impetus for the adoption of RPM, that could indicate the existence of a retailer cartel or support for a dominant, ineffecient retailer. A second factor is whether RPM programs were ubiquitous in an industry.... A third factor is whether the practice is likely to increase prices because a manufacturer or retailer is a dominant player in the market in which it competes."

The FTC recognized that the Leegin Court "did not spell out which variation of the rule of reason should be applied to RPM going forward." The analytical options include the elaborate and comprehensive full-blown rule of reason inquiry, a truncated rule of reason analysis as applied by the Supreme Court in FTC v. Indiana Fed'n of Dentists, 476 U.S. 447 (1986), or another type of truncated inquiry into the likely effects of RPM.

The FTC stated that "a truncated analysis ... might be suitable for analyzing minimum resale price maintenance agreements, at least under some circumstances.... The question is whether post-Leegin, RPM can be considered in some circumstances as 'inherently suspect,' and thus a worthy object for the scrutiny under the presumptions and phased inquiries" of a truncated rule-of-reason analysis.

Althought the FTC did not definitively answer that question, the FTC explained: "RPM agreements ordinarily might be seen by the Court as less intrinsically dangerous than horizontal price-setting arrangements, but not invariably so." Therefore, the FTC stated that it will use the relevant factors identified in Leegin as a guidline for determining whether a truncated rule of reason analysis should apply in a given case.

Applying this analysis to Nine West's petition, the FTC stated that "two ways that Nine West can demonstrate that its use of RPM will not harm competition is to show that it lacks market power, and that the impetus for the resale price maintenance is from Nine West itself and not retailers." The FTC conlcuded that Nine West "has only modest market share" in the relevant market; that there was "no evidence of a dominant, ineffecient retailer in the market"; and that Nine West stated that its desire to engage in RPM "is based on its wish to increase the services offered by retailers that sell Nine West products."

Therefore, the FTC granted in part and denied in part Nine West's petition to modify the consent order. In the event Nine West engages in RPM agreements, it must provide to the FTC periodic reports that document the effects of the RPM agreements on Nine West's prices and output. The FTC would then use these reports to analyze Nine West's RPM agreements and challenge them if they appear to be illegal.

Also, the FTC's order does not affect the legality of RPM agreements under state law. As previously noted, it is not clear whether states will follow Leegin or maintain the per se rule under state antitrust law. In 2000, Nine West settled RPM lawsuits with state attorneys general, which settlement agreement contained its own injunctive relief. The FTC order does not affect Nine West's obligations under this state settlement agreement.

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