Thursday, November 01, 2007

Senate Bill Would Restore Per Se Treatment of Vertical Price Fixing Agreements

This posting was written by John W. Arden.

A bill to restore the per se illegality rule for vertical agreements to fix minimum prices was introduced in the U.S. Senate on Tuesday, October 30, by Senator Herb Kohl (D-Wis.).

The proposed Discount Pricing Consumer Protection Act (S. 2261) would “correct the Supreme Court’s mistaken interpretation of the Sherman Act in the Leegin decision” and restore the rule that vertical agreements to set minimum prices violate the Sherman Act.

Specifically, the bill would amend Section 1 of the Sherman Act to add, after the first sentence:

“Any contract, combination, conspiracy, or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate the Act.”

The Statement of Findings and Declaration of Purposes of the bill assert that:

(1) from 1911 until June 2007, the Supreme Court had ruled that the Sherman Act forbid in all circumstances resale price maintenance or vertical price fixing;

(2) the per se rule of illegality forbidding resale price maintenance “promoted price competition and the practice of discounting all to the substantial benefit of consumers,"

(3) economic studies show that the rule against resale price maintenance led to lower prices and promoted consumer welfare,

(4) abandoning the rule will likely lead to higher prices paid by consumers and harm the ability of discount stores to compete, and

(5) the 5-4 decision of the Supreme Court in Leegin “incorrectly interpreted the Sherman Act and improperly disregarded 96 years of antitrust law precedent.”

Cost to Consumers

In introducing the bill, Senator Kohl stated that “allowing manufacturers to set minimum retail prices will threaten the very existence of discounting and discount stores, and lead to higher prices for consumers.”

He related a personal experience of working in the family business—Kohl’s department stores. “On several occasions, we lost lines of merchandise because we tried to sell at prices lower than what the manufacturer and our rival retailers wanted . . . The traditional department stores demanded that the manufacturer not sell to us unless we would agree to maintain a certain price. Because they didn’t want to lose the business of their biggest customers, that jeans manufacturer acquiesced in the demands of the department stores—at least until our lawyers told them that they were violating the rule against vertical price fixing.”

Arguing that the Leegin case would harm consumers, Kohl cited Justice Breyer’s dissenting opinion, which estimated that, if only 10% of manufacturers engaged in vertical price fixing, the amount of commerce affected would be $300 billion, translating to an average of $750 to $1,000 for the average American family of four.

Rule of Reason = Per Se Legality?

In holding that resale price fixing agreements must be judged under the rule of reason, Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 CCH Trade Cases ¶75,753) applied an onerous and difficult burden for a plaintiff in an antitrust case, the Senator contended.

“Parties complaining about vertical price fixing are likely to be small discount stores with limited resources to engage in lengthy and complicated antitrust litigation,” he said. “These plaintiffs are unlikely to possess the facts necessary to prove a case under the ‘rule of reason.’ In the words of FTC Commissioner Pamela Jones Harbour, applying the rule of reason to vertical price fixing “is a virtual euphemism for per se legality.”

The legislation—co-sponsored by Senator Joseph Biden (D-Del.) and Senator Hilary Rodham Clinton (D-N.Y.)—was referred to the Senate Committee on the Judiciary on October 30. Further information on this bill is available here at the "Thomas" website ( the Library of Congress

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