2. ©2008 Haynes and Boone, LLP National Alcoholic Beverage Control Association March 11, 2008 RESALE PRICE MAINTENANCE AFTER LEEGIN: AS CLEAR AS MUD Veronica Kayne Haynes and Boone, LLP Washington, DC veronica.kayne@haynesboone.com

3. ©2008 Haynes and Boone, LLP Resale Price Maintenance Defined (1) Maximum RPM: a supplier sets the maximum price that resellers can charge their customers Minimum RPM: a supplier sets the minimum price that resellers can charge their customers

4. ©2008 Haynes and Boone, LLP Resale Price Maintenance Defined (2) Supplier: manufacturer, wholesaler, franchisor, intellectual property licensor. Reseller: wholesaler, franchisee, retailer, manufacturer of item made under an IP license “Supplier” and “Reseller” are in a vertical relationship in the supply chain

5. ©2008 Haynes and Boone, LLP Resale Price Maintenance: What It Is, and What It Isn’t (3) What It Is: the price to be charged by one buyer to another further down the supply chain: Manufacturer tells wholesaler what to charge retailer; franchisor tells franchisee what to tell consumer What It Isn’t: post-and-hold; below-cost prohibition; predatory pricing prohibition.

6. ©2008 Haynes and Boone, LLP The World Before Leegin 1911: Dr. Miles decision – resale price maintenance agreements are per se illegal. 1997: State Oil v. Kahn decision: maximum resale price maintenance agreements should be judged under the rule of reason

7. ©2008 Haynes and Boone, LLP How Leegin Changes The Law All forms of resale price maintenance, maximum and minimum, should be judged under the rule of reason.

8. ©2008 Haynes and Boone, LLP Why Change the Law? Rule of reason is the “norm”; per se treatment the exception. Dr. Miles was based on “formalistic line- drawing,” not economic inquiry. Modern economics offers many procompetitive justifications for RPM. There is no basis for blanket condemnation of potentially procompetitive practice.

9. ©2008 Haynes and Boone, LLP Other Legal Regimes Affect RPM State regulation – “franchise” or “open” or “control” state State antitrust law Other state laws Potential federal legislation

10. ©2008 Haynes and Boone, LLP What Would a Rule of Reason Analysis Look Like? In general: –product market definition –geographic market definition –anticompetitive effects not offset by procompetitive benefits

11. ©2008 Haynes and Boone, LLP Anticompetitive Effects Higher prices and reduced output Anticompetitive effects more likely if: –defendant supplier has market power –retailers pushed for RPM –many suppliers have adopted RPM

12. ©2008 Haynes and Boone, LLP Procompetitive Benefits Decreased quality-adjusted price and increased output Procompetitive benefits could be the result of many activities, such as –increased point-of-sale service –increased advertising –improved shopping experience – store amenities and location

13. ©2008 Haynes and Boone, LLP Adopting an RPM Policy What is the procompetitive objective? Is the policy narrowly designed to achieve the goal? What do existing company documents say? Does the supplier/retailer have market power? Do competitors have RPM policies? Should the effect of the policy be examined periodically?

14. ©2008 Haynes and Boone, LLP Leegin Provides Comfort on Other Practices Colgate-style unilateral price policies are still lawful; if a Colgate policy were found to have crossed the line into agreement, it would be judged under the rule of reason. Leegin reinforces that advertising restrictions are subject to the rule of reason.

15. ©2008 Haynes and Boone, LLP Conclusion Rule of reason treatment creates opportunity and uncertainty. Before opting for RPM policy, consider whether options will serve the purpose and whether other legal regimes affect the decision.

16. ©2008 Haynes and Boone, LLP www.haynesboone.com