High Court Overturns Ruling

September 6, 2007
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The Supreme Court recently overturned a 96-year-old antitrust precedent that barred manufacturers from setting minimum resale prices that wholesalers, distributors and retailers could charge for its products.

The high court found that minimum retail pricing requirements set by manufactures are not necessarily in automatic violation of the Sherman Antitrust Act; they have to be judged on an individual basis under “the rule of reason,” not prohibited per se. In essence, the ruling makes retail price maintenance agreements acceptable under certain circumstances: Manufacturers may dictate what the minimum resale price of their products will be if they can prove they have a reasonable, pro-competition justification for putting such an agreement in place.

The ruling affects relationships between manufacturers and their wholesalers, distributors and retailers and opens new opportunities for manufacturers to structure distribution arrangements with retail price maintenance agreements.

Daniel Gravelyn, a partner in Barnes & Thornburg LLP, concentrates his practice on antitrust and trade regulation litigation and counseling. As he sees it, some retailers are going to be winners and some are going to be losers.

“For retailers who have traditional brick and mortar stores and employ salespeople and actually engage customers in the sale process, they’re going to be able to have more protection against consumers visiting their stores, learning about the product, trying the product, and then hopping online and buying it for less on the Internet,” Gravelyn said.

That practice, known as “free riding,” is a very real problem for manufacturers, said Quentin Riegel, vice president for litigation for the National Association of Manufacturers. Discount stores and Internet sites typically don’t provide training and don’t pay for advertising and other services to help sell the product, but they often get the sale when consumers find they offer the same product at a lower price.

“Brand image and cachet is born from quality, advertising, service and price. And for some products, discount sales can cheapen the image and drive customers away,” Riegel said. “That is an important issue for products such as electronic equipment that require considerable training of sales reps.”

Riegel said the ruling means that manufacturers at least will have a chance to say in court why their pricing policy is good for competition. The National Association of Manufacturers filed a brief last November in support of the outcome.

Mark Cooper, director of research for the Consumer Federation of America, said his organization had filed an amicus brief opposing the change in antitrust law. CFA is an advocacy, research, education and service organization that works to advance pro-consumer policy on a variety of issues before Congress, the White House, federal and state regulatory agencies, state legislatures and the courts. Cooper pointed out that Justice Stephen G. Breyer filed a dissenting opinion along with three other justices.

“Justice Breyer basically said that overturning the antitrust law would cost a family of four $4,000 a year. He was adamant that it was a mistake, and we agree with that,” Cooper said. “Even bigger than that, we think that in the long term it will harm innovation in distribution.”

One of the major changes in the last 30 years has been the advent of the Internet, which affords consumers all kinds of discounts, Cooper explained. With retail price maintenance legal in some circumstances, the manufacturers and brick and mortar distributors are going to try to impose some discipline on Internet discounting, he said, which means they have the green light to undermine competition from discounters.

“The Supreme Court said the Internet discounters could go to court and sue, so basically  you have a situation where you have to win a court case before you can get into business,” Cooper added. 

The Supreme Court’s ruling only affects federal antitrust law; there are about 40 states that have their own “baby antitrust acts,” and many of them take the traditional position that resale price maintenance is unlawful, Gravelyn explained. In fact, 37 states filed an amicus curriae brief in the Supreme Court arguing against a change in the law. Those same states have laws that require them to follow federal precedent.

“I think the Supreme Court opinion is eventually going to ripple though the states, but right now if a company were to go out and engage in retail price maintenance, relying on the Supreme Court’s decision, they might find a state attorney knocking on their door claiming it’s illegal,” Gravelyn explained.

Internet retailers may find, in some instances, that their ability to offer low prices is reduced a bit, Gravelyn noted. But he said it’s unlikely to eliminate discounters as a whole because a lot of manufacturers encourage discounting and want their distributors to be able to offer their products for the lowest price.

“Assuming that states fall in line with the Supreme Court’s decision, then certain discounting activities are going to be limited — that’s a certainty,” Gravelyn said.

For nearly all of the last century, the courts considered all retail price maintenance agreements illegal, regardless of the affect it had on competition. It was determined illegal based on very old common law, Gravelyn explained. One was a rule that prohibited restraints on alienation.

“The idea was that you didn’t have the right to place conditions on what other people did with a product once you sold it,” he said. “In modern times, the rule against retail price maintenance has been defended on consumer protection grounds.”

The counter argument has been that consumers are really worse off when manufacturers don’t have a say, because manufacturers might want to bundle their products with better customer service or better warranty service or knowledgeable salespeople. They can’t do that if they can’t have some say on what the retail price will be because consumers will just go online and get the product for less, Gravely said.

“Consumers will probably face somewhat higher pricing on high-end goods if the manufacturer’s strategy is to bundle those goods with additional services,” he predicted.     LQX

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