Doing Bus. As Kay's Kloset .... Kay's Shoes v. Leegin Creative Leather Prod.s Inc.

• Decision Date: 17 August 2010
• Docket Number: No. 09-40506.,09-40506.
• Citation: 615 F.3d 412
• Parties: PSKS, INC., Doing Business as Kay's Kloset .... Kay's Shoes, Plaintiff-Appellant, v. LEEGIN CREATIVE LEATHER PRODUCTS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

615 F.3d 412

PSKS, INC., Doing Business as Kay's Kloset .... Kay's Shoes, Plaintiff-Appellant,

v.LEEGIN CREATIVE LEATHER PRODUCTS, INC., Defendant-Appellee.

No. 09-40506.

United States Court of Appeals,Fifth Circuit.

Aug. 17, 2010.

COPYRIGHT MATERIAL OMITTED.

Robert W. Coykendall, Ken M. Peterson, St. Trial Atty., Will B. Wohlford (argued), Morris, Laing, Evans, Brock & Kennedy, Chtd., Wichita, KS, for Plaintiff-Appellant.

Marc M. Seltzer, Susman Godfrey, L.L.P., Los Angeles, CA, for American Antitrust Institute, Amicus Curiae.

Jeffrey I. Weinberger (argued), Kathryn Kalb Anderson, Rohit K. Singla, Jeffrey Y. Wu, Munger Tolles & Olson, L.L.P., Los Angeles, CA, Tyler Alexander Baker, III, Fenwick & West, Mountain View, CA, Gregg Aaron Myers, Howrey, L.L.P., San Francisco, CA, for Defendant-Appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before SMITH, GARZA and CLEMENT, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

PSKS, Inc. (“PSKS”), sued for alleged violations of § 1 of the Sherman Act and obtained a substantial judgment. This court affirmed. PSKS, Inc. v. Leegin Creative Leather Prods., Inc., 171 Fed.Appx. 464 (5th Cir.2006). The Supreme Court reversed, overruling Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 31 S.Ct. 376, 55 L.Ed. 502 (1911), and holding that vertical price restraints, like vertical nonprice restraints, often have procompetitive justifications and should be judged under the rule of reason. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 127 S.Ct. 2705, 168 L.Ed.2d 623 (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 Creative Leather Prods., Inc., 498 F.3d 486 (5th Cir.2007) (per curiam). The district court granted defendant's motion to dismiss on the merits. PSKS, Inc. v. Leegin Creative Leather Prods., Inc., No. 2:03-CV-107, 2009 WL 938561 (E.D.Tex. Apr. 6, 2009). We affirm.

I.

A. Factual Background.

Leegin Creative Leather Products, Inc. (“Leegin”), manufactures and distributes handbags, belts, jewelry, and other products under the “Brighton” brand. PSKS operated Kay's Kloset, a retail fashion and accessories store in Lewisville, Texas, that sold Brighton products and goods from other manufacturers to consumers in the greater Dallas area.

Leegin utilizes a “dual distribution system” for its Brighton products. It distributes Brighton goods at the wholesale level to independent retailers through periodic trade shows. It also owns and controls over one hundred Brighton retail stores. The company thus is both manufacturer and retailer.

To harmonize and control the price of Brighton goods, Leegin imposed a resale price maintenance policy. PSKS violated that policy by offering Brighton products at a discount through Kay's Kloset. When PSKS refused to stop discounting Brighton goods, Leegin ceased to sell Brighton goods to it.

PSKS sued Leegin, alleging that it had entered into vertical resale price maintenance (“RPM”) agreements. The jury awarded $3,975,000 to PSKS, and this court affirmed pursuant to Dr. Miles. PSKS, Inc. v. Leegin Creative Leather Prods., Inc., 171 Fed.Appx. 464 (5th Cir.2006).

B. The Supreme Court's Decision.

The Supreme Court granted certiorari to reexamine the per se rule of Dr. Miles. Leegin, 551 U.S. at 881, 127 S.Ct. 2705. The Court recognized that the “economics literature is replete with procompetitive justifications for a manufacturer's use of resale price maintenance.” Id. at 889, 127 S.Ct. 2705. It noted that the per se rule applies only to restraints that exhibit “manifestly anticompetitive effects” and lack any redeeming virtue. Id. at 886, 127 S.Ct. 2705 . It then held that the per se rule is no longer appropriate to RPM arrangements, overruling Dr. Miles. Id. at 907, 127 S.Ct. 2705. Instead, vertical price restraints, like vertical nonprice restraints, must be judged under the rule of reason. Id.

The Court reasoned that RPM arrangements can have important procompetitive effects, such as encouraging retailers to invest in services and promotions and eliminating free riding by discounting retailers. Id. at 890-91, 127 S.Ct. 2705. The Court nevertheless acknowledged the possible anticompetitive justifications of a RPM regime. Such arrangements can facilitate a manufacturer cartel or a cartel at the retail level. Id. at 892-93, 127 S.Ct. 2705. In the latter instance, a group of retailers could collude to fix prices to consumers and then convince the manufacturer to aid that unlawful arrangement. A dominant retailer or manufacturer, similarly, could abuse RPM to its advantage. Id. at 893, 127 S.Ct. 2705. A dominant retailer with an extensive distribution network, for instance, might request RPM to build a moat against competition, and manufacturers might feel compelled to comply in order to access that distribution network. Id. at 893-94, 127 S.Ct. 2705 (citing Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 937-38 (7th Cir.2000)).

The opinion addressed the common criticism, raised again by PSKS and amicus in this appeal, that the rule of reason is tantamount to a rule of per se legality. Id. at 897-98. The Court overruled Dr. Miles and adopted the rule of reason precisely because that standard allows lower courts to weed out anticompetitive RPM without subjecting countless procompetitive uses to drawn out judicial scrutiny. Id. at 898-99.

The Leegin decision also tore down the artificial doctrinal wall between vertical price and nonprice restraints that had received much criticism after Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). Leegin, 551 U.S. at 904, 127 S.Ct. 2705. That was a critical observation, for it permits this court and lower courts to draw upon existing vertical nonprice restraint jurisprudence in RPM cases, provided that application of the rule of reason always requires a case-by-case analysis and that there may be situations in which the anticompetitive effects of vertical price and nonprice restraints will differ.

C. PSKS's claims on remand and the district court's opinion.

On remand, PSKS filed a second amended complaint alleging that independent retailers were involved in the enforcement of Leegin's RPM policy. Specifically, it alleged that at a meeting, more than one hundred of Leegin's most successful retailers had reached a consensus regarding special occasion discounts and enticements and that that consensus was then adopted and announced as company policy by Leegin's president, Jerry Kohl. It further alleged that Leegin was the hub in a hub-and-spoke conspiracy, because it would intervene to resolve pricing disputes between and among competing Brighton retailers. At the same time, PSKS alleged that Leegin is “the largest single retailer of Brighton products.”

PSKS finally claimed that Leegin, acting at the retail level, agreed with other 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 conspiracy. PSKS did not allege that retailers were the “source” of the RPM policy or that Leegin established the policy at retailers' behest. Nor did it allege any agreement among retailers or between Leegin and competing manufacturers. The second amended complaint alleged four anticompetitive effects: (1) that consumers were made to pay an artificially high price for Brighton products; (2) that consumers were “deprived of free and open competition in the purchase of Brighton-brand products”; (3) that PSKS was hindered in its efforts to buy “competing products”; and (4) that consumers were “forced” to pay artificially high and anticompetitive prices for Brighton products.

PSKS also urged that the rule of reason is inapplicable to Leegin's conduct, because Leegin is a dual distributor. PSKS consistently alleged that RPM arrangements must be analyzed differently in dual distribution settings from how they are analyzed in the more common instance in which the manufacturer does not participate at the retail level.

PSKS alleged the relevant product markets as: (1) the “retail market for Brighton's women's accessories” and (2) the “wholesale sale of brand-name women's accessories to independent retailers.” It additionally claimed that Leegin had market power based on its “highly differentiated products,” its large showroom at the Dallas trade show, and its alleged position as the largest among an unspecified number of manufacturers in the proposed wholesale market.

The district court dismissed PSKS's second amended complaint, holding that it had failed to plead a plausible relevant market as required under the rule of reason; that its new horizontal restraint allegations were barred by the mandate rule; and that the horizontal claims failed as a matter of law, even if they were not barred. The court did not accept the “retail market for Brighton's women's accessories” as the relevant market, because that definition ignored the innumerable other brands that are “reasonably interchangeable in use” with Brighton products. It rejected Brighton's attempt to define Brighton as a single-brand market and held that PSKS had failed to plead a unique submarket for Brighton goods, because it had failed to first plead a “tenable dominant market.” The court also refused PSKS's second proposed market definition, which consisted of four characteristics: wholesale sale; brand-name; women's accessories; and independent retailers.

II.

We review a dismissal under rule 12(b)(6) de novo. Apani Sw., Inc. v. Coca-Cola Enters., Inc., 300 F.3d 620, 624 (5th Cir.2002) . “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quotations omitted). The complaint need not...