Resellers May Feel the Impact |
A recent Supreme Court decision ruled that it is not an automatic violation of the Sherman Antitrust Act for manufacturers to require that distributors agree to fixed resale prices. Resale price maintenance agreements, often called vertical pricing, have been considered a per se (or automatic) antitrust violation since the early 1900s.
The ruling may have widespread implications on future pricing agreements between manufacturers and distributors. However, while the Supreme Court ruled that vertical price agreements are not an automatic violation of the Antitrust Act, the decision directs lower courts to apply a "rule of reason" with regard to whether similar cases violate antitrust law in the future. (Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, 6/28/07)
|
A Brave New World:
Resale Price Maintenance, the Internet, and Free Riders
 | In the Majority Opinion of the Court, Justice Kennedy stated that one of the principal competitive justifications for resale price maintenance is to combat "free riding." In recent years, Internet shopping has made free riding an increasing concern in the brick and mortar retail industry.
While consumers can often buy retail items cheaper on the Internet, they cannot try on outfits, smell perfume or see how accessories might match a favorite suit. To accomplish these objectives, consumers head to their local stores. However, if items are cheaper on the Internet, they will often utilize the services of the local store but then purchase the items online.
This not only hurts potential sales of the brick and mortar stores, but can also cost them revenue in terms of wasted customer service. Resale price agreements can effectively negate free riding if all distributors (local stores and Internet retailers) must sell the same item from the same manufacturer for the same price.
Internet retailers are often able to sell products at lower prices due to their lack of overhead, but if the items were required to have identical sales tags, the playing field would be leveled for offline competitors.
Those on the other side of the argument feel the free market should prevail and Internet retailers should be allowed to sell products at lower prices thereby benefiting consumers.
There are many sides to this argument, but one thing is certain: free riding and resale price floors have been a hot economic topic for the past decade and the recent Supreme Court ruling only turns up the heat. |
Facts of the Case
The case before the Court involved a manufacturer of leather goods and accessories that required distributors to resell its "Brighton" brand products at a minimum price. The brand became a central part of Kay's Kloset store in Texas, which was owned by PSKS Inc. The retailer heavily promoted Brighton products in its advertising. "Brighton was the store's most important brand and once accounted for 40 to 50 percent of its profits," according to court documents.
However, Kay's routinely discounted Brighton products, which ultimately resulted in the manufacturer canceling its contract and stopping shipments to the store. Revenue from sales at Kay's Kloset declined. The retailer then sued the manufacturer, claiming it violated the Sherman Antitrust Act by forcing stores to only charge prices that it fixed.
In its case, the retailer relied on a Supreme Court decision from 1911 involving a medicine manufacturer named Dr. Miles Medical Company. The manufacturer sold its products only to distributors who agreed to resell them at set prices. The Court found Dr. Miles' control of resale prices to be unlawful under the Sherman Antitrust Act.
PSKS Inc. was victorious in both the U.S. District Court of East Texas and the U.S. Court of Appeals, which upheld the lower court's finding based on the precedent set by the 1911 case. Both courts ruled that Leegin violated the Sherman Act by requiring that distributors adhere to a price floor when reselling its products. A judgment of nearly $4 million was awarded to PSKS, which included damages, attorney's fees and costs.
Leegin appealed to the Supreme Court maintaining that pricing agreements should only be considered illegal when they can clearly be proven anti-competitive. The retail manufacturer argued that being anti-competitive was not its objective in instituting the price agreements. Leegin argued that it sought only to establish and maintain a certain image that was consistent with higher price points and that discounting items tarnished that image and devalued the brand.
The National Association of Manufacturers filed an amicus brief with the Supreme Court on behalf of Leegin. The organization argued that, "giving manufacturers the flexibility to establish the price at which their products may be sold can provide a variety of pro-competitive benefits." Leegin's counsel argued that a "rule of reason" should determine whether pricing agreements were anti-competitive in nature.
The Supreme Court Overrules Earlier Decision. After hearing arguments, the Supreme Court ruled in Leegin's favor effectively overturning the Dr. Miles precedent and dictating a "rule of reason" for lower courts to follow in the future. The decision stated that lower courts can create a "litigation structure" that will "devise rules over time" to ensure that the rule of reason is "fair and efficient" in its application.
Pricing Agreements in the Wake of the Decision:
Leegin Provides Some Potential Leeway The ruling in the Leegin case is expected to have an impact on pricing agreements in the future. Manufacturers now have some leeway in requiring distributors to meet minimum resale prices but they don't have free reign. Here are some factors to consider:
- Check out state and international laws. Some states have laws that may still prevent resale price maintenance agreements. While these laws may change in the wake of the Supreme Court decision, consult with your legal advisers about state laws before establishing a vertical pricing policy. And manufacturers dealing with foreign resellers also must also investigate whether pricing policies violate international antitrust laws.
- Remain cautious when setting prices. Under the rule of reason, vertical pricing agreements must be evaluated on a case-by-case basis. Anti-competitive harm is balanced against pro-competitive benefits. Manufacturers should only consider agreements that have reasonable arguments behind them that maintain competitiveness.
- Steer clear of agreements with other manufacturers or dealers regarding price. The Supreme Court case deals with vertical pricing. Agreements with other manufacturers or dealers generally constitute horizontal price agreements, which are still illegal.
- Check your present contracts if your company decides to institute vertical pricing agreements. Replace any provisions that allow resellers to set their own prices.
[NOTE: Information and guidance in this article is intended to provide accurate and general information on the subjects covered. It is not intended to provide a legal service for readers' individual needs. For legal guidance in your specific situations, always consult with an attorney.]
|
Full Newsletter
