Center for Legal & Responsible Commerce

Supreme Price Fixing

    Before leaving for their summer vacation, the Supreme Court issued their decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007).  While this decision will have significant impact for antitrust law, contrary to most reports in the media, the Supreme Court did not give anyone permission to engage in unrestrained price fixing.  The only thing changed by the Leegin decision is the rule for analyzing whether a certain type of vertical price restraint, violates the federal antitrust laws.  Leeginmerely eliminates the "per se rule" for analyzing these vertical price restraints and replaces it with the "rule of reason."   Under the per se rule, the courts presumed that a minimum retail price set by the manufacturer was anti-competitive, and that manufacturer imposed minimum retail prices regimes had few if any redeeming features.  The rule of reason differs from per se rule in that courts will not presume the given activity (e.g., manufacturer set minimum retail price), violates the antitrust laws.  In the absence of this presumption, the courts will allow defendants in this type of antitrust case to present evidence that the anti-competitive activity actually enhances competition more than it harms competition.1
    One should not walk away from this article with the belief that we think thatLeegin was correctly decided.  The majority opinion in Leegin overrules nearly 100 years of precedent on the basis of arguments advanced in economics literature.  We do not think it is prudent for the Supreme Court to overturn well established precedent based on theoretical economics arguments.  Compare the majority's theory based arguments, with the dissent, which cites to actual historical evidence that shows that when minimum retail pricing was allowed under the Miller-Tydings Fair Trade Act2 and McGuire Act,3 retail prices rose 19-27%.  (Breyer, J., 127 S.Ct. 2705 at 2728.)  There is also little or no evidence to show that when manufacturers engaged in minimum retail pricing arrangements, they did so for any reason other than to raise their profits.
    The majority's opinion cites two primary reasons for allowing minimum retail pricing regimes, the prevention of "free riding" and the enhanced product support that can be demanded (by the manufacturer) from the retailer if "free riding" is eliminated.  First, as the majority notes in its opinion, the Supreme Court's precedent already allows for vertical nonprice restraints (e.g., the manufacturer dictating to the retailer how and where their product is to be displayed).4  The majority's opinion then makes the illogical jump that since precedent already allows vertical nonprice restraints to be analyzed under the rule of reason,5 the Court should also allow for vertical price restraints to be analyzed under the rule of reason.6  The majority seems to ignore two points with this argument.  The first is the fact that manufacturers can already demand retailers who sell their products to display their product in a specified manner (i.e., in a high-end showroom), train their employees on the details of the manufacturer's products, etc...  The second faulty assumption is that manufacturers want retailers to develop their own product marketing and/or support efforts with respect to that manufacturer's product.  It cannot be understated that having every retailer develop a marketing campaign is inefficient, but it may also disrupt the manufacturer's efforts to have a uniform marketing campaign.  Additionally, even if the manufacturer dictates the look and form of their retailers' marketing efforts so as to convey a uniform message, the manufacturer's marketing efforts are likely going to be less efficient than they would be if the manufacturer controlled all of its advertising efforts directly.7  It should also be noted that even in a market where free riding is possible, retailers have decided on their own to make the investment in enhanced showrooms, knowledgeable employees, and other services that add to their cost (costs which they pass along to the consumer), because they recognize that many consumers are willing to pay for the enhanced service(s) they provide and which free riding sellers often skip.8  Another question one has to ask is, "Does the benefit received from eliminating all free riding, exceed the harm of eliminating 'big box' retailers who compete primarily on price?"
     Another major problem with the majority's opinion is that it fails to recognize that in allowing for minimum retail pricing, where the manufacturer also demands enhanced service(s) from the retailer, the manufacturer's setting of the minimum retail price leads to inefficiency in providing these additional services.  If the manufacturer places vertical nonprice restraints on their retailers, their retailers are going to have an incentive to provide those additional services, which may distinguish one brand from another (i.e., stimulate interbrand competition), in the most efficient manner possible.  The only motivation a retailer has to provide these mandated services efficiently under a minimum retail price regime is to increase profits.  Unfortunately, the Court's opinion fails to explain how enhanced retailer profits benefits the consumer.9  The Court's opinion also fails to explain how the manufacturer is supposed to police their retailers' provision of these enhanced services on a consistent basis.

The Practical Effects of Leegin

    If we were advising a manufacturer of how to proceed in the wake of the Court's decision in Leegin, we would strongly advise manufacturers to NOTintroduce vertical price restraints.  Besides the negative impact such a program would have with consumers (who would resent the manufacturer's attempt to squeeze more money out of them for the same product), such price fixing is still going to be challenged in the courts.  While the courts will be reviewing each minimum price program under the rule of reason, and not the per sestandard, the manufacturer will still have to prove that its minimum retail pricing program actually provided benefits (i.e., increases in interbrand competition and the corresponding benefits to the consumer.)  Not only will the manufacturer have to prove that these benefits exist, but that the minimum retail price was set at a point limited to achieving these legitimate purposes, and was not a pretext for achieving supernormal profits.  All of this will have to be proven with experts that will cost significant amounts of money.  Further, these experts will have to convince judges and juries10 that the consumer benefits from their minimum retail price fixing. 
    Further, as is often the case when the Supreme Court destroys a bright line test in favor of a complex regime based on theoretical benefits, the lower courts are likely going to introduce high hurdles for a manufacturer to overcome in proving that their minimum retail price program has legitimate, procompetitive purpose(s).  Further, given that it was already difficult under aper se analysis for a manufacturer to figure out what price restraints were legal (beyond providing a Manufacturer's Suggested Retail Price), it is going to be nearly impossible for lawyers to counsel their manufacturing clients as to what sort of program will pass judicial scrutiny. 
    Finally, why incur the cost of litigation that is sure to result from any price fixing program that is instituted?  As a practical matter, even if the courts eventually come up with a test that provides clear guidance to the business community, Congress will likely override the Supreme Court's decision inLeegin with legislation.11  We believe Congress will get involved because enough businesses will try to institute minimum retail price programs, that consumer prices will go up as they have in the past.12  Consumers, and their elected representatives, unconcerned with the theoretical arguments contained in the economics literature relied on by the Supreme Court's majority opinion, will enact legislation which will hopefully reestablish the principal that price fixing is not acceptable for any purpose.

1 Note that the Supreme Court reversed and remanded Leegin back to the district court for trial.  If the Supreme Court's decision had been to legalize vertical price restraints, it would not have been necessary to remand the case.

2 50 Stat. 693.

3 66 Stat. 631.

4 See Leegin, 127 S.Ct. at 2722.

5 Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 57B59 (1977)(overruling United States v. Arnold, Schwinn & Co., 388 U. S. 365 (1967).

6 See Leegin, 127 S.Ct. at 2722.

7 A manufacturer with central control of advertising dollars is likely going to maximize the geographic and demographic coverage of their marketing campaigns.  Compare this with retailers who are more likely to be interested in specific subsections of the population.

8 It should also be noted that many manufacturers pay retailers to have these elaborate displays.  Therefore the manufacturer is bearing the cost of enhanced marketing, is maximizing the effectiveness of their marketing (not every retailer needs to have an extensive display), and those retailers who have agreed to serve as showcases for a manufacturer's product(s) get the advantage of increased foot traffic.  By not having every retailer have an extensive display, costs to the consumer are kept down, manufacturers can use marketing dollars more efficiently and the retailers who have accepted the enhanced displays get the benefit of having first opportunity to sell to consumers who are concerned about more than price.

9 While minimum retail price may allow for new competitors to enter the market for a given product, what is to prevent the incumbent manufacturer(s) from dropping their minimum retail price programs long enough to prevent the new challenger from staying in the market?

10 Most of  whom are not millionaires, and not interested in stimulating interbrand competition at the expense of higher prices.

11 As of the time this article was written, several committees in Congress have held hearings on legislation designed to abrogate the Court's decision in Leegin.

12 See Leegin, 127 2728 (Breyer, J., dissenting).