High Court Overturns Century-Old Antitrust Rule
Manufacturers Gain Say on Retail Prices

By Ylan Q. Mui and Robert Barnes
Washington Post Staff Writers
Friday, June 29, 2007

The U.S. Supreme Court yesterday overturned a nearly century-old ruling that prohibited manufacturers from dictating the minimum prices retailers must charge for their goods, saying such agreements could spark competition rather than stifle it.

The 5 to 4 opinion, delivered by Justice Anthony M. Kennedy, found that minimum-pricing requirements by manufacturers do not constitute an automatic violation of the Sherman Antitrust Act. Instead, the agreements must be judged on a case-by-case basis according to a "rule of reason" to determine whether they interfere with market competition.

Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr. joined Kennedy in the opinion. Justice Stephen G. Breyer filed a dissenting opinion with Justices John Paul Stevens, David H. Souter and Ruth Bader Ginsburg, arguing that little has changed in the U.S. economy to warrant overruling a decision that has held up since 1911.

The reach of that previous case, Dr. Miles Medical Co. v. John D. Park & Sons Co., has been vast. In his dissent, Breyer described it as being embedded in antitrust law. It has covered the price of perfume, the cost of cars and countless other goods. The decision is why manufacturers can only offer suggested retail prices.

But some free-market economists have argued that Dr. Miles outlived its usefulness and is unnecessary as an antitrust weapon in a modern economy.

Their analysis holds that minimum-resale pricing would ensure retailers 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 minimum-price requirements were to hurt retail competition, free-market economists say it doesn't affect competition among brands. No manufacturer would want to price itself out of business.

In its opinion, the court found that reasoning to be persuasive, at least in some instances.

Mallory Duncan, general counsel for the National Retail Federation, said the justices "put a thumb on the scale in favor of those manufacturers who would like to set resale prices.

"It doesn't guarantee them the right to do it," he said. "But it gives them a little more ammunition."

Consumer groups counter that the restriction has saved shoppers hundreds of billions of dollars over the years. Mark Cooper, director of research for the Consumer Federation of America, said yesterday's ruling will make it more difficult for discounters and small businesses to challenge large manufacturers.

"It gives manufacturers and dealers a weapon to use against discounters, which will raise prices and stifle innovation," he said.

The Supreme Court case was brought by Leegin Creative Leather Products, a California company that makes purses, belts and other accessories under the brand name Brighton. It had refused to sell its goods to any retailer that did not comply with its pricing and promotion policy, which mostly bans discount prices for Brighton products.

But Kay's Kloset, a women's boutique in the Dallas suburb of Flower Mound, refused to abide by the rules and put 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.

The Supreme Court's decision underscored its philosophy that antitrust issues should be judged on economic grounds, said James F. Blumstein, a professor at Vanderbilt University.

"It's more of a question of what the soul of antitrust is," he said, "whether it's focused on preserving competition . . . and not some broader kind of social policy."

The case is Leegin v. PSKS, 06-480.

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