|Oregon State Bar Bulletin AUGUST/SEPTEMBER 2007|
By Lori Irish Bauman
A discount store advertises "brand names for less." A commercial for pickup trucks lists the "MSRP." Clothing price tags include the phrase "Manufacturer’s Suggested Price." Countless times every day, consumers have experienced the impact of a 1911 Supreme Court case called Dr. Miles Medical Co. v. John D. Park & Sons Co. Because of that antitrust case, manufacturers could only suggest (and not set) retail prices — hence the term "manufacturer’s suggested retail price," or MSRP. At the end of the Supreme Court’s 2006-07 term, the court reversed Dr. Miles, in an extraordinary repudiation of a legal rule that has become as integral to the retail sector as the end-of-season clearance sale.
In Dr. Miles, the Supreme Court was asked to apply the then-new Sherman Act, the law that prohibits agreements "in restraint of trade." The court held that a manufacturer could not enter into an agreement with a retailer to set the minimum price for resale of the manufacturer’s product. According to the court, to allow the manufacturer to set a floor for the retail price would prevent competition and unfairly increase costs to consumers. Dr. Miles made "resale price maintenance" per se illegal, meaning that any agreement as to price is unlawful, regardless of whether the parties can show that it would be beneficial to consumers.
Over the decades Dr. Miles became knit into the fabric of the economy. Manufacturers were constrained in enforcing their preferred prices, and discounters used the opportunity to draw customers by dropping prices below the MSRP. Wal-Mart, Target and other discounters are the ubiquitous result.
But now the reign of Dr. Miles has ended, with the June 28 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. In Leegin, the owner of a Texas women’s clothing store claimed that Leegin, a manufacturer and distributor of leather goods, illegally entered into agreements with retailers to set prices for its products. At trial, a jury hit Leegin with nearly $4 million in damages. The Supreme Court agreed to review the case, and the stage was set to re-make the law of antitrust.
Like many cases decided this term, the vote was close, 5-4, to reverse Dr. Miles. Now, for the first time in nearly a century, manufacturers and retailers may agree on a retail price, subject only to what antitrust law calls the "rule of reason," which means that the parties must be able to show some pro-competitive benefit from the agreement.
Did the court reach the right result? It depends on your perspective. In the view of many economists, the Dr. Miles rule was an aberration, causing as many problems as it purported to solve. Prohibiting resale price maintenance, as Dr. Miles did, can cause the retail environment to deteriorate as discounters "free ride" on full-service retailers, siphoning away their customers and making it uneconomical to provide service and support. In contrast, allowing resale price maintenance can stimulate competition among manufacturers selling different brands of the same type of product, by reducing competition among retailers selling the same brand. According to Justice Anthony Kennedy, writing for the majority, resale price maintenance ensures a diverse marketplace: It "has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in-between."
But does the disapproval of some economists justify abandoning a rule that underlies so many business relationships? There is a strong argument that the answer is no, and that the court stepped outside of its proper role in this case. If Congress disagreed with how Dr. Miles interpreted the Sherman Act, then it was the job of Congress to write a new law effectively overturning that case and embodying the correct interpretation. Congress had nearly a century to undo Dr. Miles, and it failed to do so. This strongly suggests that Dr. Miles was consistent with Congress’ view of the law. And that the Supreme Court took upon itself the role of legislating when it decided Leegin. As Justice Stephen Breyer stated in dissent, "I am not aware of any case in which the Court has overturned so well-established a statutory precedent."
With the Leegin decision, the members of the court — or at least a bare majority of them — have shown themselves to be not conservative defenders of the status quo, but unapologetic iconoclasts. In this respect, the result in Leegin is as significant as any that came out of this term of the Supreme Court.
ABOUT THE AUTHOR
Lori Irish Bauman is of counsel with the Portland office of Ater Wynne and is a contributor to the Oregon Business Litigation Blog, www.aterwynneblog.com.