PSKS Inc v. Leegin Creative Leather Produc

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PSKS Inc v. Leegin Creative Leather Produc

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IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
N o . 09-40506 August 17, 2010 Lyle W. Cayce Clerk

P S K S , INC., Doing Business as Kay's Kloset . . . . Kay's Shoes, P la in t if f -A p p e lla n t , versu s L E E G I N CREATIVE LEATHER PRODUCTS, INC., D e fe n d a n t -A p p e lle e .

A p p e a l from the United States District Court fo r the Eastern District of Texas

B e fo r e SMITH, GARZA, and CLEMENT, Circuit Judges. J E R R Y E. SMITH, Circuit Judge.

P S K S , Inc. ("PSKS"), sued for alleged violations of §1 of the Sherman Act a n d obtained a substantial judgment. This court affirmed. PSKS, Inc. v. Leegin C r e a tiv e Leather Prods., Inc., 171 F. App'x 464 (5th Cir. 2006). The Supreme C o u r t reversed, overruling Dr. Miles Med. Co. v. John D. Park & Sons Co., 220

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No. 09-40506 U .S . 373 (1911), and holding that vertical price restraints, like vertical nonprice r e s t r a in t s , often have procompetitive justifications and should be judged under t h e rule of reason. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 8 7 7 (2007) ("Leegin"). On remand, we further remanded to the district court for proceedings in light of the Supreme Court's opinion. PSKS, Inc. v. Leegin Creativ e Leather Prods., Inc., 498 F.3d 486 (5th Cir. 2007) (per curiam). The district c o u r t granted defendant's motion to dismiss on the merits. PSKS, Inc. v. Leegin C r e a tiv e Leather Prods., Inc., No. 2:03-CV-107, 2009 WL 938561 (E.D. Tex. A p r . 6, 2009). We affirm.

I. A . Factual Background. L e e g in Creative Leather Products, Inc. ("Leegin"), manufactures and dist r i b u t e s handbags, belts, jewelry, and other products under the "Brighton" b r a n d . PSKS operated Kay's Kloset, a retail fashion and accessories store in L e w is v ille , Texas, that sold Brighton products and goods from other manufact u r e r s to consumers in the greater Dallas area. L e e g in utilizes a "dual distribution system" for its Brighton products. It d is t r ib u t e s Brighton goods at the wholesale level to independent retailers t h r o u g h periodic trade shows. It also owns and controls over one hundred Bright o n retail stores. The company thus is both manufacturer and retailer. To harmonize and control the price of Brighton goods, Leegin imposed a r e s a le price maintenance policy. PSKS violated that policy by offering Brighton p r o d u c t s at a discount through Kay's Kloset. When PSKS refused to stop disc o u n t in g Brighton goods, Leegin ceased to sell Brighton goods to it. PSKS sued Leegin, alleging that it had entered into vertical resale price m a in t e n a n c e ("RPM") agreements. The jury awarded $3,975,000 to PSKS, and t h is court affirmed pursuant to Dr. Miles. PSKS, Inc. v. Leegin Creative Leather 2

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No. 09-40506 P r o d s ., Inc., 171 F. App'x 464 (5th Cir. 2006).

B . The Supreme Court's Decision. T h e Supreme Court granted certiorari to reexamine the per se rule of Dr. M ile s . Leegin, 551 U.S. at 881. The Court recognized that the "economics literat u r e is replete with procompetitive justifications for a manufacturer's use of r e s a le price maintenance." Id. at 889. It noted that the per se rule applies only t o restraints that exhibit "manifestly anticompetitive effects" and lack any red e e m in g virtue. Id. at 886. It then held that the per se rule is no longer approp r ia t e to RPM arrangements, overruling Dr. Miles. Id. at 907. Instead, vertical p r ic e restraints, like vertical nonprice restraints, must be judged under the rule o f reason. Id. T h e Court reasoned that RPM arrangements can have important proc o m p e t it iv e effects, such as encouraging retailers to invest in services and prom o t io n s and eliminating free riding by discounting retailers. Id. at 890-91. The C o u r t nevertheless acknowledged the possible anticompetitive justifications of a RPM regime. Such arrangements can facilitate a manufacturer cartel or a cart e l at the retail level. Id. at 892-93. In the latter instance, a group of retailers c o u ld collude to fix prices to consumers and then convince the manufacturer to a id that unlawful arrangement. A dominant retailer or manufacturer, similarly, c o u ld abuse RPM to its advantage. Id. at 893. A dominant retailer with an ext e n s iv e distribution network, for instance, might request RPM to build a moat a g a in s t competition, and manufacturers might feel compelled to comply in order t o access that distribution network. Id. at 893-94 (citing Toys "R" Us, Inc. v. F T C , 221 F.3d 928, 937-38 (7th Cir. 2000)). The opinion addressed the common criticism, raised again by PSKS and a m ic u s in this appeal, that the rule of reason is tantamount to a rule of per se le g a lit y . Id. at 897-98. The Court overruled Dr. Miles and adopted the rule of 3

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No. 09-40506 r e a s o n precisely because that standard allows lower courts to weed out anticomp e t it iv e RPM without subjecting countless procompetitive uses to drawn out jud ic ia l scrutiny. Id. at 898-99. T h e Leegin decision also tore down the artificial doctrinal wall between v e r t ic a l price and nonprice restraints that had received much criticism after C o n tin e n ta l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). Leegin, 551 U.S. a t 904. That was a critical observation, for it permits this court and lower courts t o draw upon existing vertical nonprice restraint jurisprudence in RPM cases, p r o v id e d that application of the rule of reason always requires a case-by-case a n a ly s is and that there may be situations in which the anticompetitive effects o f vertical price and nonprice restraints will differ.

C . PSKS's claims on remand and the district court's opinion. O n remand, PSKS filed a second amended complaint alleging that indep e n d e n t retailers were involved in the enforcement of Leegin's RPM policy. Spec ific a lly , it alleged that at a meeting, more than one hundred of Leegin's most s u c c e s s fu l retailers had reached a consensus regarding special occasion disc o u n t s and enticements and that that consensus was then adopted and ann o u n c e d as company policy by Leegin's president, Jerry Kohl. It further alleged t h a t Leegin was the hub in a hub-and-spoke conspiracy, because it would interv e n e to resolve pricing disputes between and among competing Brighton retaile r s . At the same time, PSKS alleged that Leegin is "the largest single retailer o f Brighton products." PSKS finally claimed that Leegin, acting at the retail level, agreed with o t h e r retailers on the price at which Brighton goods would be sold to consumers. It therefore alleged that Leegin was involved in a horizontal price-fixing conspira c y . PSKS did not allege that retailers were the "source" of the RPM policy or t h a t Leegin established the policy at retailers' behest. Nor did it allege any 4

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No. 09-40506 a g r e e m e n t among retailers or between Leegin and competing manufacturers. The second amended complaint alleged four anticompetitive effects: (1) that c o n s u m e r s were made to pay an artificially high price for Brighton products; (2 ) that consumers were "deprived of free and open competition in the purchase o f Brighton-brand products"; (3) that PSKS was hindered in its efforts to buy " c o m p e t in g products"; and (4) that consumers were "forced" to pay artificially h ig h and anticompetitive prices for Brighton products. P S K S also urged that the rule of reason is inapplicable to Leegin's conduct, b e c a u s e Leegin is a dual distributor. PSKS consistently alleged that RPM arr a n g e m e n ts must be analyzed differently in dual distribution settings from how t h e y are analyzed in the more common instance in which the manufacturer does n o t participate at the retail level. P S K S alleged the relevant product markets as: (1) the "retail market for B r ig h t o n 's women's accessories" and (2) the "wholesale sale of brand-name wome n 's accessories to independent retailers." It additionally claimed that Leegin h a d market power based on its "highly differentiated products," its large showr o o m at the Dallas trade show, and its alleged position as the largest among an u n s p e c ifie d number of manufacturers in the proposed wholesale market. The district court dismissed PSKS's second amended complaint, holding t h a t it had failed to plead a plausible relevant market as required under the rule o f reason; that its new horizontal restraint allegations were barred by the mand a t e rule; and that the horizontal claims failed as a matter of law, even if they w e r e not barred. The court did not accept the "retail market for Brighton's wome n 's accessories" as the relevant market, because that definition ignored the in n u m e r a b le other brands that are "reasonably interchangeable in use" with B r ig h t o n products. It rejected Brighton's attempt to define Brighton as a singleb r a n d market and held that PSKS had failed to plead a unique submarket for B r ig h t o n goods, because it had failed to first plead a "tenable dominant market." 5

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No. 09-40506 T h e court also refused PSKS's second proposed market definition, which cons is t e d of four characteristics: wholesale sale; brand-name; women's accessories; a n d independent retailers.

II. W e review a dismissal under rule 12(b)(6) de novo. Apani Sw., Inc. v. C o c a -C o la Enters., Inc., 300 F.3d 620, 624 (5th Cir. 2002). "To survive a motion t o dismiss, a complaint must contain sufficient factual matter, accepted as true, t o state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 129 S. C t . 1937, 1949 (2009) (quotations omitted). The complaint need not contain "det a ile d factual allegations" but must state "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. C o r p . v. Twombly, 550 U.S. 544, 555 (2007). "Where a complaint pleads facts t h a t are `merely consistent with' a defendant's liability, it `stops short of the line b e tw e e n possibility and plausibility of entitlement to relief.'" Iqbal, 129 S. Ct. a t 1949 (quoting Twombly, 550 U.S. at 557). See generally 2 JAMES W. MOORE
ET AL.,

MOORE'S FEDERAL PRACTICE § 8.04[1] (3d ed. 2010).

A . Vertical price restraint claims after Leegin. " T o prove a Section 1 violation under rule of reason analysis, [plaintiffs] m u s t show that the defendants' activities caused an injury to competition." Docto r 's Hosp., Inc. v. Se. Med. Alliance, Inc., 123 F.3d 301, 307 (5th Cir. 1997). Und e r the rule of reason, we examine the effect of the alleged restraint on competit io n , considering all the circumstances, "including the facts peculiar to the busin e s s and the history of, reasons for, and market impact of the restraint. . . ." Royal Drug Co. v. Group Life & Health Ins. Co., 737 F.2d 1433, 1436 (5th Cir. 1 9 8 4 ) (quotations omitted). We balance the "anticompetitive evils of a restrictive p r a c t ic e . . . against any procompetitive benefits or justifications within the con6

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No. 09-40506 fin e s of the relevant market." Se. Med. Alliance, 123 F.3d at 307. PSKS argues that the Supreme Court announced a rule-of-reason stand a r d for vertical price restraint cases that is different from the standard that has a p p lie d to vertical non-price restraint cases since GTE Sylvania. Specifically, P S K S claims that under Leegin, a plaintiff sufficiently pleads a vertical pricefix in g claim just by pleading "the existence of the agreement and the scope of its o p e r a t io n ." We need not address that contention, because, as explained in part I I .B ., PSKS's claim fails anyway as a matter of market definition. For the same r e a s o n , we do not need to address the argument of amicus American Antitrust I n s t it u t e that RPM arrangements should carry a presumption of illegality; that R P M arrangements should be treated as "inherently suspect" because they lead t o higher prices or reduced output; that dual distribution systems should be pres u m p t iv e ly illegal; and that without a presumption of illegality, the rule of reas o n amounts to a rule of per se legality for RPM.

B . The relevant market for Brighton goods and market power. T o state an antitrust claim for anticompetitive RPM, PSKS's complaint m u s t plausibly define the relevant product and geographic markets. See Apani, 300 F.3d at 627. A proposed product market must include all "commodities reas o n a b ly interchangeable by consumers for the same purposes." United States v. E .I . du Pont de Nemours & Co., 351 U.S. 377, 395 (1956). W h e r e the plaintiff fails to define its proposed relevant market with r e fe r e n ce to the rule of reasonable interchangeability and cross-elast ic it y of demand, or alleges a proposed relevant market that clearly d o e s not encompass all interchangeable substitute products even w h e n all factual inferences are granted in plaintiff's favor, the relev a n t market is legally insufficient, and a motion to dismiss may be g ra n ted . A p a n i, 300 F.3d at 628.

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No. 09-40506 P S K S alleged two alternative product markets, neither of which encomp a s s e s interchangeable substitute products or recognizes the cross-elasticity of d e m a n d for Brighton goods. The district court properly rejected the "retail mark e t for Brighton's women's accessories" and the "wholesale sale of brand-name w o m e n 's accessories to independent retailers." T h e court also correctly rejected the claim that Brighton products constit u t e their own market. In rare circumstances, a single brand of a product or serv ic e can constitute a relevant market for antitrust purposes. Eastman Kodak v . Image Tech. Servs., 504 U.S. 451, 481-82 (1992). But that possibility is limited t o situations in which consumers are "locked in" to a specific brand by the nature o f the product. There is no structural barrier to the interchangeability of Bright o n products with goods produced by competing manufacturers, nor has PSKS a lle g e d any such structural barriers. N o r does Brighton constitute its own submarket. Although a recognized s u b m a r k e t doctrine exists,1 such markets must exist within broader economic m a r k e t s . And the requirements for pleading a submarket are no different from t h o s e for pleading a relevant broader market.2 T h e second proposed market definition is similarly legally insufficient. "Wholesale sale" does not adequately define the relevant market, because the r e le v a n t market definition must focus on the product rather than the distribut io n level. PSKS has likewise failed sufficiently to allege why Brighton goods are n o t interchangeable with non-brand name products.3 Nor is there any relevance

See Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962) (stating that within broader markets, "well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes). See H.J., Inc. v. Int'l Tel. & Tel. Corp., 867 F.2d 1531, 1540 (8th Cir. 1989); Staples, 970 F. Supp. at 1080 n.11.
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We agree with the district court that allowing PSKS to amend its complaint to correct (continued...)

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No. 09-40506 t o "independent retailers" to the market definition, because PSKS has not alle g e d facts that could establish why independent retailers do not compete with la r g e r chain stores in the distribution of Brighton products. Lastly, "women's accessories" is too broad and vague a definition to constit u t e a market. Indeed, it is impossible to imagine that Leegin could have power o v e r such a market. As the Leegin court points out, 551 U.S. at 898, even antic o m p e t it iv e uses of RPM do not create concern unless the relevant entity has m a r k e t power. A market-power screen is thus compatible with Leegin and our p r e c e d e n t4 and that of our sister circuits.5 To allege a vertical restraint claim s u ffic ie n t ly , a plaintiff must plausibly allege the defendant's market power.

C . The alleged anticompetitive harm. P S K S alleged that the RPM program forced consumers to pay "artificially" h ig h prices for Brighton products. That claim defies the basic laws of economics. Absent market power, an artificial price hike by Leegin would merely cause it t o lose sales to its competitors. PSKS also alleged that the RPM policy deprived consumers of "free and o p e n competition in the purchase of Brighton-brand products," because RPM

(...continued) that deficiency would be futile in light of the complaint's other flaws. See Muenster Butane, Inc. v. Stewart Co., 651 F.2d 292, 298 (5th Cir. Unit A July 1981) (observing that "if a firm lacks market power, it cannot affect the price of its product, and thus any vertical restraint could not be anticompetitive at the interbrand level." (quotation omitted)). See, e.g., Digital Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d 756, 761 (7th Cir. 1996) (Easterbrook, J.) ("[S]ubstantial market power is an indispensable ingredient of every claim under the Rule of Reason."); Assam Drug Co. v. Miller Brewing Co., 798 F.2d 311, 315-16 (8th Cir. 1986) (collecting cases); Graphic Prods. Distribs., Inc. v. Itek Corp., 717 F.2d 1560, 1568 (11th Cir. 1983) ("We have narrowed the broad-ranging inquiry called for by the rule of reason by insisting, at the threshold, that a plaintiff attacking vertical restrictions establish the market power of the defendant." (citing Muenster Butane, 651 F.2d at 298)).
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No. 09-40506 lim it s price competition among retailers. One problem with that argument is t h a t it ignores interbrand competition, which forces Brighton retailers to offer a combination of price and service that attracts consumers away from competing p r o d u c t s . It also fails to recognize that retailers will cease carrying Brighton g o o d s if Leegin imposes onerous requirements that make Brighton products diffic u lt to sell. Moreover, robust competition can exist even in the absence of price c o m p e t it io n . Leegin, 551 U.S. at 891. Retailers may seek to attract customers w it h better service, more knowledgeable staff, more appealing stores, and other n o n p r ic e -o r ie n t e d strategies. Nor is the termination of PSKS as a retailer an anticompetitive effect. It h a s been the rule since United States v. Colgate, 250 U.S. 300 (1919), that a m a n u fa c t u r e r , acting unilaterally, can set resale prices and terminate non-confo r m in g dealers. Although one circuit held that "a dealer terminated for its refu s a l to abide by a vertical minimum price fixing agreement suffers antitrust inju r y and may recover losses flowing from that termination," Pace Elecs., Inc. v. C a n o n Computer Sys., Inc., 213 F.3d 118, 1224 (3d Cir. 2000), that holding reste d on the now-rejected per se illegal treatment of resale price maintenance, id. "The purpose of the antitrust laws . . . is `the protection of competition, not comp e tito r s .'" Leegin, 551 U.S. at 906 (citations omitted). P S K S has further failed to allege any relevant factors that would indicate a plausible anticompetitive effect. Namely, PSKS has never asserted that a cart e l of retailers or one dominant retailer is the "source" of Leegin's RPM program. See H&B Equip. Co. v. Int'l Harvester Co., 577 F.2d 239, 245-46 (5th Cir. 1978). PSKS has claimed that Leegin is the largest single retailer of Brighton products. It is thus difficult to conceive how independent Brighton retailers could be the s o u r c e of the RPM program. Nor has PSKS alleged that RPM is widespread in t h e relevant market, an allegation that would, in any event, contradict its claim t h a t Brighton goods have no competition. 10

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No. 09-40506 E v e n accepting PSKS's factual allegations as true, nothing in its complaint p la u s ib ly alleges a harm to interbrand competition. In Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 489 (1977), the Court held that antitrust plaintiffs m u s t allege and prove an injury that "reflect[s] the anticompetitive effect either o f the violation or of anticompetitive acts made possible by the violation." No r u le of reason can require defendants to litigate antitrust claims that do not s t a t e an antitrust injury beyond motion to dismiss. The attempt to eliminate c la im s that do not state an offense under the Sherman Act was at the core of Bell A tla n tic Corp. v. Twombly, 550 U.S. at 553, and PSKS's complaint fails at that m o s t basic level.

D. The horizontal-restraint claims. P S K S argues that the district court erred in holding that its horizontalr e s t r a in t claims are barred by the mandate rule, which precludes litigation of w a iv e d issues on remand because they were never raised in district court. Unite d States v. Lee, 358 F.3d 315, 321 (5th Cir. 2004). PSKS's attempt to plead horiz o n t a l-r e s tr a in t claims for the first time in the second amended complaint mirr o r s previous efforts by past antitrust plaintiffs whose original claims were reje c t e d by the Supreme Court.6 PSKS attempted to argue its horizontal claims b e fo r e the Supreme Court, but the Court explicitly refused to address the issue, b e c a u s e it had not been raised in the lower courts. Leegin, 551 U.S. at 907-08. The district court rightly dismissed the horizontal-restraint claims as barred by t h e mandate rule.

See Cont'l T.V., Inc. v. GTE Sylvania Inc., 461 F. Supp. 1046, 1051-52 (N.D. Cal. 1978), aff'd, 694 F.2d 1132 (9th Cir. 1982) (foreclosing plaintiff's attempt to assert new horizontal theories on remand after the Supreme Court reversed the per se rule against nonprice vertical restraints and holding that "[s]uch a theory of Section 1 liability has never before been asserted by plaintiff and it cannot properly do so now"); see also Omni Outdoor Adver. v. Columbia Outdoor Adver., 974 F.2d 502, 505-06 (4th Cir. 1992).

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No. 09-40506 I n any event, PSKS has not properly alleged its horizontal-restraint c la im s , and, irrespective of the mandate rule, the claims must be dismissed on t h e pleadings. As already discussed, PSKS has failed to allege that retailers w e r e the source of the price restraint, an allegation that would have been potent ia lly inconsistent with the complaint's factual assertion that Leegin is the large s t single retailer of Brighton goods. P S K S claims that Leegin entered into a horizontal price-fixing conspiracy b y discussing special occasion discounts with its retailers in Hawaii. PSKS ess e n tia lly argues that manufacturers implementing RPM cannot calibrate prices t h r o u g h discussions with their retailers. We cannot agree. Such a rule "can le a d , and has led, manufacturers to take wasteful measures. . . . The increased c o s t these burdensome measures generate flow to consumers in the form of highe r prices." Leegin, 551 U.S. at 903 (citing Brief for PING, Inc., as amicus curiae s u p p o r t in g petitioner). A manufacturer's discussion of pricing policy with ret a ile r s and its subsequent decision to adjust pricing to enhance its competitive p o s it io n do not create an antitrust violation or give rise to an antitrust claim. PSKS's reliance on Toys "R" Us for its hub-and-spoke conspiracy claim is a ls o misguided. PSKS has not alleged that any dominant retailer imposed the R P M policy on Leegin, nor has it alleged an agreement among retailers to implem e n t the RPM policy. In the absence of an assertion that retailers agreed to R P M among themselves, there is no wheel and therefore no hub-and-spoke cons p ir a c y , and that allegation was therefore properly dismissed.7 P S K S further argues that because Leegin is a dual distributor, operating a s both a manufacturer and retailer of Brighton goods, the RPM policy is a horiz o n t a l restraint. It claims that Leegin's retail presence gives it an incentive to r a is e retail prices through RPM in order to capture greater profits. Economic
Similarly off the mark is PSKS's reliance on United States v. McKesson & Robbins, Inc., 351 U.S. 305 (1956), a statutory-interpretation case that is not relevant to the issue.
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No. 09-40506 lo g ic tells us otherwise. Leegin participates in the retail market with nearly 5000 other stores. It m u s t share any profit increase at the retail level with those other retailers. If L e e g in sought only to raise its margins, it would raise the price of Brighton g o o d s at the wholesale level, where it could capture all the gains. Leegin is thus n o different from a manufacturer that does not have retail stores 8 ; it would norm a lly seek to minimize retailer margins as much as possible, including at its o w n retail stores.9 See Leegin, 551 U.S. at 896. A F F IR M E D .

As the district court noted, eight other circuits have applied the traditional rule of reason to dual distribution systems. See AT&T Corp. v. JMC Telecom, LLC, 470 F.3d 525, 531 (3d Cir. 2006); Electronics Commc'ns Corp. v. Toshiba Am. Consumer Prods., Inc., 129 F.3d 240, 243-44 (2d Cir. 1997); Glacier Optical, Inc. v. Optique du Monde, 46 F.3d 1141 (9th Cir. 1995) (unpublished); Smalley & Co. v. Emerson & Cuming, Inc., 13 F.3d 366, 368 (10th Cir. 1993); Hampton Audio Elecs., Inc. v. Contel Cellular, Inc., 966 F.2d 1442 (4th Cir. 1992) (unpublished); Ill. Corporate Travel, Inc. v. Am. Airlines, Inc., 889 F.2d 751, 753 (7th Cir. 1989); Int'l Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 906 (6th Cir. 1989); Ryko Mfg. Co. v. Eden Servs., 823 F.2d 1215, 1230-31 (8th Cir. 1987). "A manufacturer that helps dealers form a cartel is doing itself in. It will sell less, and dealers will get the monopoly profits." Easterbrook, Vertical Restraints and the Rule of Reason, 53 ANTITRUST L.J. 135, 142 (1984).
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