Justices to Review Limits on Retail Prices

1911 Antitrust Decision Bars Manufacturers From Setting Minimums for Sellers

Bargain hunters everywhere have an unwitting patron saint they've probably never heard of. His name is Dr. Miles. His days may be numbered.

It is because of Dr. Miles that anyone who has ever watched "The Price Is Right" knows that the manufacturer's retail price is only suggested. It is his unintended legacy that shoppers have developed the unshakable belief that if they only look hard enough, they can find the same product somewhere else for less money.

But tomorrow, the Supreme Court will hear arguments that it should do away with its nearly century-old opinion in Dr. Miles Medical Co. v. John D. Park & Sons Co., a decision that has meant retailers are free to price products at less than what the manufacturer thinks they should. Dr. Miles, whose company later changed its name to Miles Laboratories, wanted to set a minimum price for his elixirs.

Some economists argue that the Dr. Miles rule has outlived its usefulness and is unnecessary as an antitrust weapon in a modern economy. Consumer groups counter that the restriction has saved shoppers hundreds of billions of dollars.

Although the impact of reversing the rule at this point is debatable -- many manufacturers who care to have already found ways around it -- the reach of the Dr. Miles decision is vast.

"It really pertains to the whole economy. Everything from cars to computers to toothpaste," said Andrew I. Gavil, an antitrust expert at Howard University School of Law.

And so it makes sense that Monday's legal battle before the court has drawn a host of interested parties. On the side of doing away with Dr. Miles are the National Association of Manufacturers, makers of high-end goods such as Ping golf clubs and the Bush administration. Opposing the change are the Consumer Federation of America, discounters such as Burlington Coat Factory and the attorneys general of 36 states, including Maryland.

The issue at stake is the court's 1911 decision that a manufacturer's requirement that a reseller not price its goods below a set minimum is a per se-- that is, automatic -- violation of the Sherman Antitrust Act. Proponents of a change argue that such requirements should not be categorically deemed violations but should be evaluated case by case, under a "rule of reason," to decide whether they interfere with market competition.

The current case is about handbags.

Leegin Creative Leather Products is a California company that makes purses, belts and other accessories under the brand name Brighton. It said it would refuse to sell its goods to any retailer that did not comply with its "Brighton Retail Pricing and Promotion Policy," which mostly bans discount prices for Brighton products.

Leegin said that "the typical retail strategy of putting products on and off 'sale' degrades a manufacturer's brand by causing customers to feel cheated when they buy at the wrong moment."

But Kay's Kloset, a women's boutique in the Dallas suburb of Flower Mound, refused to abide by the rules and placed all of its Brighton products on sale. Leegin stopped selling to Kay's Kloset, the store's business suffered, and Kay's parent company, PSKS, sued.

A jury, finding that Leegin's actions were automatically a violation of the Sherman act, awarded Kay's Kloset $1.2 million, damages that were tripled because the actions violated antitrust laws. The U.S. Court of Appeals for the 5th Circuit upheld the ruling.

Leegin contends in its brief to the court that the Dr. Miles decision is "premised upon the antiquated common-law rule" and that it "squarely conflicts with the modern economic understanding that resale price maintenance agreements can have significant procompetitive effects."

Such a free-market economic analysis holds that minimum resale pricing would ensure that retailers would make enough profit to provide better service to customers and promote the manufacturer's products. It would eliminate "free riding," in which a consumer might try out the latest tennis racket at the local pro shop and then hit the Internet to find a cheaper price.

Even if setting a minimum price hurts "intrabrand" competition by forbidding stores to set their own prices, free-market thinking holds, it doesn't affect "interbrand" competition. Not every manufacturer would take advantage of such a rule, such analysis says, nor would any manufacturer price itself out of business.

But Mark Cooper, director of research for the Consumer Federation of America, said the reality is that a change would mean higher prices for shoppers.

"Basically, they want to get rid of discounters, particularly Internet discounters," Cooper said. And he added that if manufacturers' actions must be challenged on a case-by-case basis, "the burden becomes immense."

Cooper said that Congress has continually shown its approval of the current system and that it doesn't make sense to change what has worked because of theories that it can work better.

"When you make a change like this, you better expect the worst, not the best," he said.

The Justice Department and the Federal Trade Commission told the court that the debate shows why an automatic prohibition such as Dr. Miles creates is wrong. Because setting minimum prices "can be either anticompetitive or procompetitive depending on the facts in a given case, a per se rule is clearly inappropriate," they wrote.

The court has shown little reluctance to relax or even reverse antitrust rulings in light of changing economic reality, and it seems unlikely that the justices would have decided to hear Leegin's direct challenge of the rule unless they were seriously considering a change.

"I think there's almost no chance that Dr. Miles will survive," said Gavil, the law professor.

The question is what rule will replace it.