Supreme Court lets manufacturers set minimum prices

Decision reverses 1911 ruling — what does it mean for consumers?

Consumer advocates say that a recent landmark U.S. Supreme Court decision will drive up prices for many products that now are heavily discounted on the Internet and elsewhere. The big question, they say, is by how much.

By a 5-4 vote on June 28, the court reversed a nearly century-old decision that made it illegal for manufacturers and merchants to agree on retail prices. Under the new rules, the legality of so-called retail-price maintenance agreements will be judged on a case-by-case basis, depending on whether they are or are not found to be anti-competition.

By reversing the 1911 Supreme Court ruling that created the ban, critics say, the court is paving the way for higher prices and jeopardizing discount retailers who have invested millions of dollars under the well-established ruling.

Manufacturers “are not going to wake up tomorrow morning and jack up prices,” said Mark Cooper, director of research for the Consumer Federation of America (CFA), which had filed a brief with the court supporting the ban (Consumers Union, the publisher of Consumer Reports, is a member of the CFA). “It will spread over time.” He accused the court of "siding with the big corporations at the expense of the public and competition."

The five-member majority included the conservative justices and Justice Anthony Kennedy, who is viewed as a moderate conservative and often is the swing vote. The four liberal judges dissented.

Among others who asked the court not to overturn the 1911 decision were 37 state attorneys general, the American Antitrust Institute, and Burlington Coat Factory, a nationwide discount retailer.

Those who supported lifting the ban included the Department of Justice and Federal Trade Commission. In the 1990s, Congress prohibited both agencies from using any of their funds to overturn the rule, a provision that has since expired.

In a dissenting opinion, Justice Stephen G. Breyer wrote that swallowing up “a century-old precedent, potentially affecting billions of dollars of sales” could end up costing a family of four $750 to $1,000 annually.

Even Justice Anthony Kennedy, who wrote the decision for the five-member majority, acknowledged that retail-price maintenance agreements, a form of so-called vertical price fixing, tend to result in higher prices. But he said that they also can produce consumer benefits, such as better service. He said that the court’s ruling would not lead to the elimination of discounting on the Internet or elsewhere.

 

Exactly how the court’s decision will affect prices depends on a variety of factors. Among them are the number of manufacturers who seek minimum-price agreements, the number of stores willing to accept them, the way lower courts apply the ruling, and whether the states or Congress act to restore the ban.

Proponents of minimum-price agreements say the practice ensures retailers get a minimum margin and avoids cut-throat competition that can shrink prices to the point where stores are unable to provide the high levels of service and promotion that some manufacturers want for their products. They say it also can help eliminate the ability of discount online retailers to "free ride" on the costly promotional efforts of full-service retailers. While they acknowledge that such agreements tend to lower price competition for a given brand, they tend to increase competition among brands as shoppers, looking for a better price, are forced to look at competing products.

Despite the ban, manufacturers are already able to dictate retail prices in several ways. Among them are unilateral pricing policies that cut off products to retailers who sell below the manufacturers suggested retail price. But in adopting such policies, manufacturers have to be exceedingly careful about how they communicate and enforce them for fear of being perceived as eliciting retailers’ consent in violation of antitrust rules.

In the case decided by the court, a California-based manufacturer, Leegin Creative Leather Products, cut supplies of its Brighton handbags and other products to a Texas retailer that it found was discounting prices by 20 percent.

In a lawsuit brought by the retailer, a U.S. District court in Texas barred Leegin from introducing evidence to show its minimum-price policy, adopted in 1997, had a positive effect on competition, saying the ban made the policy’s effect irrelevant. A jury awarded the retailer $1.2 million, which the court tripled to nearly $4 million under federal antitrust law. (See Will the nation’s highest court force higher prices? for more details.)

Bill Gates, associate general counsel and director of distribution at PING, a manufacturer of high-end, custom golf equipment, said the decision "will make life easier for us." The company has enforced a unilateral minimum price policy since 2004, having cut supplies to nearly 1,000 retailers who violated it. But he said PING has had to be very careful to avoid violating the law.
Gates said the company is studying how is will react to the ruling. He said it probably will change how it communicates the policy to retailers and consumers.

“From our perspective, this ruling is going to lead to more consumer choice and more consumer alternatives in the marketplace,” he said.

But critics of the court decision say the economy is best served when the market is allowed to dictate prices freely. They point to a 1970 Justice Department study that found prices were more than 37 percent higher in states that allowed retail-price maintenance programs, which Congress permitted from 1937 to 1975.

By lifting the ban, they say, the court will prevent retailers who find innovate ways of cutting costs from passing any savings onto consumers. Another danger, they say, is that the change will encourage full-service retailers to press manufacturers to adopt the agreements in an efforts to drive out discounters.

In his majority opinion, Justice Kennedy wrote that courts might find such agreements anti-competition if they are the result of retailer pressure, are adopted by entire industries, or if the manufacturer has significant market share.

In his dissenting opinion, Justice Breyer agreed that retail-price maintenance agreements can be pro-competitive. But he said that will be very difficult for courts to determine and that many mistakes will be made.