Justices Revisit Manufacturer's Right to Set Retail Price of Goods

For nearly 100 years, the Supreme Court has held that manufacturers cannot dictate a minimum retail price for their goods. But the current justices seemed divided yesterday about whether the time has come for a change.

The justices held a lively session -- at times more like a debate -- on whether the 1911 ruling that economists and lawyers refer to as the Dr. Miles decision is a relic of a U.S. economy that no longer exists, or is an important protection that has saved consumers billions of dollars.

A California women's accessories company, backed by the Federal Trade Commission and the Bush administration, is challenging Dr. Miles's holding that agreements between companies and retailers that goods will not be sold below a certain price constitute a per se-- that is, automatic -- violation of antitrust laws.

Such a rule is "outdated, misguided and anticompetitive," said Theodore B. Olson, a former solicitor general who is representing Leegin Creative Leather Products. He and the government say there is a "consensus" among leading economists that such agreements can foster competition and should be examined case by case, rather than automatically invalidated.

But he encountered fairly stiff resistance from the court's more liberal members.

Justice Stephen G. Breyer disputed that there is an economic consensus about the issue, and said at least one prominent economist said reversing the Dr. Miles decision would mean "every American will pay far more for the goods that they buy at retail." He added: "We're supposed to count economists?"

Justice David H. Souter said that if there is a "massive reorientation in the retail economy if Dr. Miles goes," then such a decision should be made by Congress, not the court. Justice Ruth Bader Ginsburg said a manufacturer's dictate that retailers sell at a certain price would in effect create a "horizontal accord" that would be illegal if the retailers attempted it themselves.

But Justice Antonin Scalia came to Olson's aid. He made the free-market argument that manufacturers have a legitimate purpose in trying to increase the profits of retailers, so that stores can provide better service, display goods more prominently and advertise more.

"Is the sole object of the Sherman [antitrust] Act to produce low prices?" Scalia asked.

"No," Olson answered.

"I thought it was consumer welfare," Scalia said.

"Yes, yes, it is," Olson agreed.

"So the mere fact that it would increase prices doesn't prove anything," Scalia said, adding: "If, in fact, it's giving the consumer a choice of more service at a somewhat higher price, that would enhance consumer welfare, so long as there are competitive products at a lower price, wouldn't it?"

"That's -- that's absolutely correct," Olson replied.

Deputy Solicitor General Thomas G. Hungar said there is "just no basis for these assertions that somehow the economy is going to be massively changed." Manufacturers already have legal ways to ensure that retailers stick with their "suggested" prices, and Hungar said the rise of discounters such as Wal-Mart and Target has more to do with international trade than the current restrictions on pricing agreements.

But division on the issue is clear: While the federal government is asking the court to reverse Dr. Miles Medical Co. v. John D. Park & Sons Co., three-quarters of state attorneys general have asked that it be retained.

Robert W. Coykendall represented Kay's Kloset, a Texas boutique that successfully sued Leegin after being dropped for discounting its "Brighton" products. He told the justices there is "no doubt that resale price maintenance raises prices to consumers. The only economic doubt is whether there are any redeeming effects of those prices."

The case is Leegin Creative Leather Products Inc. v. PSKS Inc.

Meanwhile, the court announced that next term it will hear a challenge to a 2003 federal act that would criminalize distribution of child pornography over the Internet and through the mail. A lower court had found the pandering provision of the Protect Act of 2003 overbroad and vague. The case is U.S. v. Williams.