Tuesday, June 02, 2009, 11:48 AM

Fourth Circuit Says Leegin Did Not Implicity Overrule Colgate

On March 24, 2009, the Fourth Circuit issued a ruling in Valuepest.com v. Bayer Corp, Case No. 07-1760 ("Valuepest"), in which the Court affirmed the District Court's grant of summary judgment to defendants. Plaintiffs, who provide pest control services to individual customers, brought a price fixing claim under Section 1 of the Sherman Act against a manufacturer of pesticies for allegedly illegally conspiring with its distributors to set a minimum resale price for certain pesticide products. Defendant argued that its policy did not involve concerted action under Section 1 of the Sherman Act because its distributors were bona fide agents, and thus there was no "agreement" between two separate parties. The principal-agency defense was recognized by the United States Supreme Court in United States v. General Electric Co., 272 U.S. 476 (1926).

The Valuepest court noted that principal-agency relationships do not fall within the purview of Section 1 for the same reasons that "Colgate" policies do not involve concerted action. "Unilateral action by a manufacturer does not suffice to implicate s 1; a manufacturer can, for example, refuse to sell retailers who resell its products for less than the manufacturer's preferred price. See United States v. Colgate & Co., 250 U.S. 300 (1919).

The plaintiffs in Valuepest argued that the Supreme Court's 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Ins., 127 S. Ct. 2705 (2007) implicitly overruled the principal-agent defense in General Electric. In Leegin, the Supreme Court held that minimum resale price agreements were no longer per se illegal and were instead governed by the rule of reason. The Valuepest plaintiffs further argued that Leegin required a "generalized inquiry into market power and procompetitive beneifts even where a genuine agency relationship exists" and thus there is no agreement. The Fourth Circuit, however, rejected this argument, stating:

Plaintiffs' argument conflates the distinction between the two elements required to prove liabiltiy under s 1. General Electric concerned the first necessary element of s 1 liabiltiy--the existence of an agreement. Where a manufacturer sells its products through its genuine agents, there is no 'contract combination,' or 'conspiracy,' and thus no basis for antitrust liabiltiy. 15 U.S.C. s 1. At issue in Leegin was an entirely different question regarding the second element of s 1 liabilty that applies when an agreement has been proven: should that agreement be considered per se unlawful or should it be analyzed under the rule of reason? The two cases dealt with separate and distinct issues, and thus no part of Leegin's reasoning casts the slightest bit of doubt on the underpinnings of the rule of General Electric.
The same thing can be said for Colgate. Like the principal-agency relationships under General Electric, Colgate policies do not violate section 1 of the Sherman Act because when a manufacturer unilaterally terminates a discounting retailer there is no "contract, combination" or "conspiracy" between the two parties. The reasoning behind the Valuepest decision confirms that Leegin did not implicitly overrule Colgate.

The importance of Colgate and General Electric has resurfaced because several states have indicated that they still consider RPM to be per se illegal. In fact, Maryland recently amended its state antitrust laws to make it clear that RPM agreements were per se illegal in Maryland. And Congress is considering similar legislation with respect to the Sherman Act. (See here and here). These efforts to "overrule" Leegin should not affect Colgate policies because such policies are not "agreements" to begin with. Therefore, you never get to the question of whether the agreement should be considered per se unlawful or analyzed under the rule of reason.

The Fourth Circuit's decision in Valuepest was not surprising. But it is a nice reminder that the classic defenses to vertical price fixing are still available in the post-Leegin world.

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