Kansas Supreme Court Declares "Rule of Reason" Inapplicable to Kansas Antitrust Law; Legislature May Have a Different Idea

by Sheppard Mullin Richter & Hampton LLP
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[authors: Don T. Hibner, Jr. and Tyler Cunningham]

In Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the U.S. Supreme Court expressly overruled the categorical ban on vertical price fixing agreements that had existed for nearly a century prior. See Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373 (1911). Leegin, a designer and manufacturer of high-end leather goods, instituted a policy under which it "refused to sell to retailers that discounted Brighton [a Leegin brand] goods below [manufacturer] suggested prices." 551 U.S. at 883. Leegin discovered that Kay's Kloset (PSKS) was discounting Brighton products, and asked it to stop. PSKS refused, and Leegin discontinued sales. PSKS sued, alleging vertical price fixing in violation of Section 1 of the Sherman Act. The Supreme Court rejected the rationale of Dr. Miles, recognizing that advances in economic analysis now demonstrate that vertical resale price maintenance may sometimes have pro-competitive justifications under the rule of reason. The Court held that the justifications for analysis under the rule of reason were similar to those of other vertical restraints, including territorial restraints and the use of location clauses. It recognized that "[m]inimum resale price maintenance can stimulate inter-brand competition," the protection of which is "the primary purpose of the antitrust laws." Id.

Based upon substantially the same facts, the Kansas Supreme Court has now rejected the application of Leegin to Kansas law, holding that a rule of reason approach was incompatible with the unambiguous language of the applicable Kansas Restraint of Trade Act, Sections K.S.A. 50-101, and 50-112. O'Brien v. Leegin Creative Leather Prods., Inc., No. 101000, 2012 WL 1563976 (Kansas Supreme Court May 4, 2012). The Kansas high court held that while the intent of the legislature governs, the first judicial approach is to ascertain the legislature's intent through the statutory language enacted. Here, the court held that the term "all" was "plain and unambiguous", and that as used in K.S.A. 50-112, "all" means "all." As stated in K.S.A. 50-112:

All arrangements, contracts, agreements, trusts, or combinations between persons made with a view or which tend to prevent full and free competition … and all arrangements, contracts, agreements, trusts or combinations between persons, designed or which tend to advance, reduce, or control the price of the cost to the producer or to the consumer of any such products or articles … are hereby declared to be against public policy, unlawful and void.

Next, the court determined that the primary inquiry was whether, based upon the record evidence, an inference was appropriate that the purpose of Leegin's pricing policy was "for the purpose of fixing prices or designed to control prices [or] tended to control prices." O'Brien, 2012 WL 1563976, at *14. The court held that such an inference was clearly appropriate.

It determined that since the applicable Kansas statutes did not mention "reasonableness" but rather provided that "any" such combinations are unlawful and void, the "clear statutory language draws a bright line." The court then overruled contrary authorities that had been decided during the period that Kansas law provided for resale price maintenance through "fair trade" agreements.

Perhaps to compound beyond necessity, the court then announced that an explicit written agreement is not needed to make out a vertical price fixing violation under Kansas law. The court reasoned that K.S.A. 50-101 and K.S.A. 50-112 prohibit more than simply "agreements" to fix prices. By definition, K.S.A. 50-112 declares that:

All arrangements, contracts, agreements, trusts, or combinations between persons made with a view or which tend to prevent full and free competition in the importation, transportation or sale of articles imported into this state, or in the product, manufacturer or sale of articles of domestic growth or product of domestic raw material, and all arrangements, contracts, agreements, trusts or combinations between persons, designed or which tend to advance, reduce or control the price or the cost to the producer or to the consumer of any such products or articles, …, are hereby declared to be against public policy, unlawful and void. (emphasis added).

At this point in the analysis, one might wonder what, if anything, could be left of the doctrine annunciated in the Supreme Court's 1919 decision in United States v. Colgate & Co., which held that the Sherman Act does not restrict a trader's right to freely exercise its independent discretion to refuse to deal with another. 250 U.S. 300 (1919). Here, the Kansas court focused on two additional words of the statute: "between persons." The court noted that Kansas antitrust law and Section 1 of the Sherman Act share these words. Accordingly, it is now appropriate to look to United States Supreme Court precedent to determine what "between persons" might mean. The court noted further that a "combination" and an "arrangement" might be something less than an "agreement". But, because it must be "between persons", it must imply something more than a merely unilateral pricing policy adopted by a supplier. The Kansas court determined that its judicial "rosetta stone" is none other than Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 763 (1984).

The court cited Monsanto for the proposition that a violation of Sherman Act Section 1 requires evidence that tends to exclude the possibility of independent action by the manufacturer and distributor.

[T]he antitrust plaintiff should present direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective.

Monsanto, 465 U.S. at 764 (internal quotations omitted). Neither communications between a manufacturer and its retailers, nor the existence of complaints about discounting, standing alone, would satisfy plaintiff's burden of proof. Id. at 768.

Thus, what "any" seemingly took away, "between persons" may have restored. Query whether the Colgate doctrine exists under Kansas law in the same robust form as in Monsanto. And query whether the further announcement of Monsanto would be applicable that

The concept of a "meeting of the minds" or "a common scheme" in a distributor-termination case means more than a showing that a distributor conformed to the suggested price. It means as well that evidence must be presented both that the distributor communicated its acquiescence or agreement, and that this was sought by the manufacturer.

Monsanto, 465 U.S. at 764 n.9 (emphasis added).

But the plot thickens. On May 10, the Kansas House Appropriations Committee introduced House Bill No. 2797, which provides that no "arrangement, contract, agreement, trust, understanding or combination" shall be deemed unlawful under the Kansas Restraint of Trade Act if it would be deemed a reasonable restraint of trade under the Sherman Act. The bill states that its aim is

to prevent wasteful litigation that would likely result if such interpretation is not corrected; to forestall those potentially affected by such interpretation from ceasing or refusing to do business in Kansas in order to avoid potential liability; and to minimize conflicts between the Kansas restraint of trade act, section 1 of the Sherman Act, 15 U.S.C. § 1, and reduce uncertainty as to the law applicable to commerce in Kansas.

Needless to say, a good argument can be made that building an antitrust regime upon the alleged plain meeting of "any" is not likely to be any more successful than the early Sherman Act cases which held, or seem to hold, that "every" means "every". In United States v. Trans-Missouri Freight Ass'n., 166 U.S. 290 (1897), the Supreme Court, for a 5-4 Court, determined that "every" meant that "every" trade restraint, without exception, was in violation of Section 1 of the Sherman Act. Justice Edward White dissenting, accused the majority, headed by Justice Rufus Peckham, of disabling the new antitrust law by stifling its capacity to adjust to practical necessities. In 1898, in Hopkins v. United States, the Court softened its approach, and explained in dictum that some restraints which would be lawful at common law, such as the formation of a corporation of partnership, would fall outside of "every". See Hopkins v. United States, 171 U.S. 578 (1898), and United States v. Joint Traffic Association, 171 U.S. 505 (1898). Thus, the domain of discourse shifted from what "every" meant to what "restraint of trade" meant. This, of course, paved the way for United States v. Standard Oil Co. of New Jersey, 221 U.S. 1 (1911). In Standard Oil, now Chief Justice White, who had authored the dissenting opinions in Trans-Missouri and Northern Securities Co. v. United States, 193 U.S. 197 (1904), wrote for an eight-Justice majority, and held that the Sherman Act did not prohibit "all" trade restraints, but only outlawed restrictions whose character or effect was "unreasonably" anticompetitive.

The rule of reason remains with us today as a vital part of federal antitrust juris-prudence, and exemplifies the vigor of the law to modify itself where necessary to accommodate new and improved understandings of economics and commerce.

But as Mark Twain stated: "No man's life, liberty, or property is safe while the legislature is in session." Let's see what happens in Kansas.

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