High Court lifts ban on price pacts

Impact on retailers under examination

Weeks after the U.S. Supreme Court overturned a 96-year-old antitrust law forbidding price-setting agreements between manufacturers and resellers, the impact on retailers is still uncertain.

The move is deemed a win for manufacturing, especially those providing premium or custom services and products, but it’s a mixed bag for retail. Analysts believe discounters might be under a minor disadvantage, while non-discounting and specialty retailers might benefit.

In a 5-4 decision, the high court lifted its hard-line stance against retail price agreements per se. Now, judges considering antitrust cases are instructed to apply a “rule of reason,” or case-by-case approach, to assess the impact of the price agreement on competition and whether it helps or hurts consumers.

Justice Anthony Kennedy, writing the majority opinion, said that the court was not bound by the 1911 precedent because of the “widespread agreement” among economists that resale price maintenance agreements can promote competition “by allowing retailers to invest in customer service or provide greater retail floor space to specific lines without fearing their investment will be undercut by discounting competitors.”

Writing for the dissenting judges, Justice Stephen Breyer said, “the only safe predictions to make about [the] decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence….” He speculated that the decision could cost an American family of four up to $1,000 per year.

The case reached the Supreme Court after a dispute over the sale prices of designer handbags made by a California manufacturer, Leegin Creative Leather Products, Inc., which required a small Texas boutique to agree in writing not to sell its products below a certain price. The store did so anyway, then sued the manufacturer for damages after being dropped as a dealer for violating the agreement.

Joining Kennedy in the majority on the opinion were the members of the Court’s conservative bloc: Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito. With Breyer in dissent were Justices John Paul Stevens, David Souter and Ruth Bader Ginsburg.

Interpreting the ruling
Mallory Duncan, general counsel to the National Retail Federation, said the decision “puts a slight thumb on the scale for those manufacturers who may want to set minimum prices.”

Neither the NRF nor Michigan Retailers Association has taken a position on the case, since it will affect members in different ways.

Quentin Riegel, deputy legal counsel for the National Association of Manufacturers, called the decision “a narrow ruling that recognizes the complexity of competition and the need for courts to let it work.”

“This ruling does not legalize resale price maintenance. It merely puts the practice on a par with other acceptable restraints that some manufacturers may impose on dealers.

“Resale price maintenance will be illegal, and subject to triple damages and attorneys’ fees, if the manufacturer can provide no reasonable, pro-competitive justification for it. The ruling means that manufacturers will at least have a chance to say in court why their pricing policy is good for competition.”

In addition, the Philadelphia-based law firm of Duane Morris points out that the Leegin decision does not address state antitrust laws, and foreign jurisdictions may also prohibit minimum price restraints.

Effect on consumers, retailers
Some legal scholars dispute the notion, expressed in the court’s minority opinion, that the ruling will lead to higher prices. They point out that in today’s market, many “big box” retailers have considerable leverage over their suppliers and can easily demand—and receive—low price assurances.

A number of small businesses have applauded the decision, stating that it will help insulate them from harmful price competition, according to MRA Washington Counsel James Goldberg.

“Not many manufacturers are likely to use these agreements because competition is fierce in so many product categories,” said Patricia Huddleston, professor of retailing at Michigan State University. “Unique products with high brand equity will have the most leverage in implementing these agreements because retailers cannot purchase similar products elsewhere.”

Antitrust departments at law firms are looking at the larger picture of the Leegin case, and believe it may have a subtle impact on retailer-manufacturer relations over the long term.

“Following Leegin, many companies likely will re-examine and consider modifying distribution agreements and pricing policies,” according to Edward Biestra, an antitrust specialist with Duane Morris. “Licensors may have more flexibility in drafting pricing provisions in license agreements, particularly in competitive markets.

“The Leegin case, like GTE Sylvania in 1977, which made vertical territorial restraints subject to the rule of reason, likely will have substantial effects on businesses, distribution and pricing policies and consumers,” wrote Biestra.

Michigan perspectives
Stan Diroff, manager of Durocher TV & Appliance in Monroe, thinks minimum pricing agreements can be good for the retailer and the consumer. He shared his views from the perspective of an appliance retailer.

“We’d rather see a fair price on high-end products with strong brand recognition,” he said.

The higher the quality of the product, the more important it is to maintain the integrity of the brand, and these agreements help do that, explained Diroff. He offered the Sub-Zero brand of refrigerators as an example.

“You never have to tell a customer this product has value—they generally come in knowing it,” said Diroff. “And many do want to own the high-end product and want that brand to mean something—they want the brand to retain its high value.

“If a discounter offers a high-end, strongly branded product for 30 percent off the suggested price, it sets up a perception in the customer’s mind that the product should be that lower price all the time,” said Diroff. That leads to the brand becoming degraded, losing its perceived value over time.

Both manufacturers and retailers spend a lot of money building a brand image, Diroff contends, and when someone else comes in and takes that customer away without having spent anything on building that brand, that’s unfair. It’s known as “free riding,” and it is what this new ruling can help remedy.

“The only retailers that might be hurt by the new ruling are those that rely only on price to compete. Those of us who compete on full service—knowledgeable sales staff, fair policies, follow-up after the sale—we can benefit from some products having a stable price,” said Diroff. “And so can the consumer.”

Consumers benefit by having the concern about lowest price removed from the equation. They won’t be afraid to buy—they can trust a stable price on these items, since all retailers who carry the line are restricted from selling at a discount.

“It’s especially relevant to postponable purchases, like high-end appliances and electronics,” explained Diroff.

“If the customer is assured the price will be stable, there’s no advantage to waiting for the item to go on sale or shopping around. The customer can base the purchase decision on other factors, such as the features, the warranty, the service options and trustworthiness of the retailer.”

The agreements usually apply only to current product lines. If a retailer stocks a model that doesn’t sell before the new model comes out, he or she may mark it down once the new model is out. Floor models also are usually exempt from such agreements.

Another industry likely to be affected by the ruling is apparel, especially those retailers who carry designer labels.

Mariah Hull MacGirr, manager of apparel store Hull’s of Frankfort and Manistique, sells jewelry and accessories in the Brighton brand, made by Leegin Creative Leather Products, Inc., the manufacturer in the lawsuit. Brighton consists of an extensive line of jewelry, belts, handbags, wallets and many other accessories.

Leegin is careful in choosing authorized retailers to sell its Brighton brand, with fewer than 6,000 specialty retailers in the U.S. (and another 50 all-Brighton stores). It took MacGirr years to acquire the right to sell Brighton because one of her stores was within eight miles of another dealer—a common method, known as territorial exclusivity, manufacturers use to control and protect brand integrity.

“We have not been asked to sign a minimum price agreement from Leegin/Brighton or any other supplier,” said MacGirr. “I’m not sure how we would react if presented with one, without knowing the details of it.”

She said Hull’s has always adhered to the guidelines provided by Brighton on pricing, selling at the suggested manufacturer’s retail price and only marking down items when the manufacturer advises it or when the store will not reorder the item, consistent with the guidelines Brighton advises.

“It works for us,” she said. “Most specialty or boutique clothing stores don’t mark products down until they are considered clearance items at the end of a season. One reason this works is exclusivity agreements.”

“If I were asked to sign an agreement from a supplier, I would want to see some guarantees about my exclusivity,” said MacGirr. “That is, I’d want to know that the supplier wouldn’t be also supplying other stores in my selling area—even lines I don’t carry.”

Her concerns arise from the possibility that exclusivity, and other non-price restraints that protect both the brand and the retailer, may have less appeal to manufacturers after this ruling.

“From a manufacturer’s perspective, it might be easier to enter into a minimum price agreement with a retailer than to ‘police’ an exclusive relationship,” said MSU’s Huddleston.

“A pricing agreement would be negotiated up-front, and once the retailer pays the invoice, he or she is bound by it. From the perspective of a retailer with an exclusive relationship, this might not be a desirable outcome because it could open the door to additional competition within that brand,” explained Huddleston.

Leegin is only one example of a manufacturer interested in using minimum pricing agreements to protect its brand integrity. Whether this new ruling encourages others to be more innovative with pricing agreements—and what effect this may have on retailers—time and another few lawsuits will tell.

This article was written by Amy Buttery, Michigan Retailer staff writer, with the assistance of James Goldberg, MRA Washington Counsel.