Senate Panel Explores Need to Fix High Court’s Vertical Price Fixing Decision

This posting was written by John Scorza, CCH Washington Correspondent.

Witnesses at a July 31 Congressional hearing called for legislation to overturn a recent Supreme Court decision that reversed a 96-year-old precedent applying the per se rule to vertical price fixing.

On June 28, the Court, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007 CCH Trade Cases ¶75,753), held that agreements to set minimum resale prices must be judged under the rule of reason. In doing so, the Court reversed and remanded an appeals court decision, upholding an award of nearly $4 million in favor of a terminated apparel retailer.

The Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights convened the hearing to explore whether the court’s 5-4 decision in Leegin—which overturned Dr. Miles Medical Co. v. John D. Park & Sons Co. (220 U.S. 373)— threatens discount retailers and consumers and whether a legislative fix is needed.

Sen. Herb Kohl (D-Wis.), chairman of the subcommittee, called the decision “an abrupt change to a settled antitrust rule.”

Possible Harm to Consumers

Quoting a dissenting opinion in the case, Kohl outlined the possible harm to consumers of vertical price fixing. “Justice [Stephen G.] Breyer estimated that if only 10% of manufacturers engaged in vertical price fixing, the volume of commerce affected today would be $300 billion dollars, translating into retail bills that would average $750 to $1,000 dollars higher for the average family of four every year.”

FTC Commissioner Pamela Jones Harbour called for legislation to overturn the decision.

“The Leegin opinion relies on at least two implicit assumptions: First, that manufacturers know what is best for consumers—even better than retailers, or consumers themselves— and second, that retail competition is not important to the American economy or to consumers,” said the Commissioner.

“But these assumptions do not match the reality of the American marketplace,” Ms. Jones Harbour testified. “[I]t is extremely likely that retail prices for thousands of products will go up in the wake of Leegin, with no countervailing benefits—which clearly is not good for consumers.”.

Impairment of Retail Competition

Robert Pitofsky, former FTC Chairman, joined in the call to Congress to step in. “I believe the majority decision was wrong and that otherwise healthy competition at the retailer level will be impaired,” he said. “Virtually all agree that minimum resale price maintenance, if allowed, will result in higher prices to consumers. Arguments that the higher prices are worth it because consumers will receive desirable services are entirely speculative and lacking any empirical support.”

Effect of Restraint on Competition

Testifying on behalf of the National Association of Manufacturers, lawyer Stephen Bolerjack countered that the court reached the correct decision in Leegin.

“Leegin applies the rule of reason, the accepted standard for antitrust cases, to minimum resale price maintenance agreements,” Bolerjack testified. “Leegin requires courts to make decisions based on substance – the effect of the restraint on competition in a market – rather than on formalistic analysis of whether conduct shows an agreement between a manufacturer and a reseller.”