Antitrust law losing its teeth
The Supreme Court has relaxed rules against price fixing. Coming up: a big case for retailers.
WASHINGTON With a push from the Bush administration, the Supreme Court is in the midst of steady, if little noticed, retreat from enforcing the antitrust laws that for decades have guarded against monopolies and price fixing.
In the last year, the court has relaxed or repealed several rules designed to prevent anti-competitive schemes, and later this month will hear another widely followed case that could dramatically change the rules of the retailing business.
...
The most important test of the anti-antitrust trend comes before the court March 26. The Bush administration, the National Assn. of Manufacturers and other big-business groups are urging the court to repeal a nearly century-old rule that bars the fixing of retail prices by manufacturers.
The case involves a dispute over a Los Angeles-area company's pricing of its women's handbags. Lawyers and economists say the outcome could affect the pricing and marketing of a vast array of products, including tennis rackets, golf clubs, plumbing fixtures and appliances.
Under current practices, product makers can set a "manufacturer's suggested retail price," but that price is rarely paid by consumers because independent dealers are free to sell for less.
Since 1911, the court has held to the "Dr. Miles rule," which forbids a manufacturer and a retailer from agreeing on a minimum price for the product.
The rule itself has a colorful history. At the turn of the century, the Dr. Miles Medical Company of Indiana sought to prop up the prices of its secret elixirs and potions through deals with retail druggists. It complained of "certain establishments, known as department stores" that had adopted "a cut-price system" and thereby caused "much confusion, trouble and damage."
Unmoved, the Supreme Court declared "injurious to the public interest" all contracts and agreements between manufacturers and dealers, saying "their sole purpose [was] the destruction of the competition and the fixing of prices."
The Dr. Miles rule is credited with helping create an extraordinarily competitive retail market in the United States. The department stores of the early 20th century have been followed by waves of discounters, now including Internet sellers.
The company involved in the case before the court, Leegin Creative Leather Products, makes handbags, shoes and jewelry in the City of Industry, and it sells them through small stores under the Brighton brand. Its president, Jerry Kohl, told retailers they must sell the handbags at the price he set. When he learned Kay's Kloset in a suburb of Dallas was selling at a discount, Kohl cut it off from further sales.
The owners of Kay's Kloset sued, alleging they were being punished for discounting. A jury agreed and awarded $1.2 million in damages, which was tripled to $3.6 million because it was a violation of the antitrust laws. Relying on the Dr. Miles rule, the U.S. appeals court in New Orleans upheld the verdict.
Last fall, Washington lawyer Theodore Olson, the former U.S. solicitor general, appealed to the Supreme Court, urging the justices to overturn the Dr. Miles rule.
Bush administration lawyers joined the case on Olson's side. In its brief to the high court, the administration argued the rule is outdated and "cannot withstand modern economic analysis."
"Dr. Miles should be overruled," said U.S. Solicitor General Paul Clement.
They argue that while product makers must compete against other manufacturers, they should be free to market their brands as they choose. Some companies want to sell their products through a network of retailers who offer special displays and extra service to customers. In exchange, the retailers are promised a fixed price and a guaranteed profit margin.
The manufacturers and some retailers complain about the "free rider" problem: the discounter who sells for less but does not offer the service or display that helps promote the brand.
Consumer advocates say a court ruling in favor of manufacturers would be felt in higher prices for many products.
Repealing the Dr. Miles rule "will change the whole field of retail pricing," said Mark Cooper, research director of the Consumer Federation of America. If the Dr. Miles rule is repealed, "the retailers will hug the manufacturers, and they will put in a price floor. It will hurt the discounters."
...
Though the Supreme Court has held to the Dr. Miles rule that outlaws retail price fixing, Congress made a partial exception to the rule during the 1950s and '60s at the behest of industry. States were permitted to adopt "fair trade" laws that cleared the way for manufacturers and retailers to fix prices.
The experiment proved costly to consumers. A Justice Department study in the late 1960s found certain products in the "fair trade" states cost 18% to 27% more. Congress moved to repeal its earlier measure, and in 1975, President Ford signed into law a renewed ban on price fixing by manufacturers.
The state price-fixing laws had "prevented the American people from receiving the benefit of lower prices on cameras, watches, sporting goods, small appliances, auto supplies and many other brand-name products," Ford said when he enacted the bill. The measure, he said, would "enable consumers in all 50 states to shop for the best products at the lowest possible prices."
