Friday, 14 September 2007

Club Med after holidays

Interesting Club Med this week on the treatment of Resale Price Maintenance (RPM) clauses. The US upreme Court in Leegin (pdf) has reversed a century-old rule treating RPM as illegal per se and has ruled that it must be now judged according to the so-called rule of reason.

The Court was split 5-4, along the (by now) familiar ideological line drawn by the recent appointment of the two new judges.

Our group, too, was split on the evaluation of the judgment. To mention just a few points that came up in the discussion: (*)

1. Civil law uneasiness: some in the group expressed their uneasiness with such an important decision being taken with almost half of the Court openly against it. McCormick was quoted: "The practice of keeping judicial argument over right and wrong behind closed doors [exists and is defended] so that the courts eventual judgment shall contribute rather to faith in the relative certainty of the law than to the revelation of its relative uncertainty."

2. On the substance of the case: economic theory is not conclusive on the welfare effects of RPM. Economic evidence is tiny and only a few empirical studies have been conducted, with divergent results. There is however a very clear risk of RPM: it can profitably be used to facilitate and reinforce horizontal cartels. All this seems to support the position that an outright per se illegality is inappropriate.

3. The new rule of reason approach is likely to produce very high costs for companies and for the legal system. RPM is likely to be often anticompetitive, hence for those cases the new rule is a net increase in the judicial costs. Moreover, the often prohibitive costs of lawsuits may discourage complaints against anticompetitive RPM clauses. In other words, while the risk of false positives is drastically reduced, the risk of false negatives seems now significant.

4. There was a certain consensus in the group that a statutory (as opposed to judicial) change from per se to rule of reason, could have provided a more satisfactory (and perhaps cost-saving) solution. A statute could have lifted the ban while at the same time filling the "void" with a (rebuttable) presumption of illegality above a certain market share, safe harbours for firms without market power, a transitory period to adjust to the new approach. A similar outcome can be achieved also by court decisions, but, probably, at much higher cost.

(*) This is just an informal summary and is not meant to represent the official views of the group

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