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Court Ruling Threatens Discounting

Sep 1, 2007

In a reversal of a 96 year old antitrust rule, the U.S. Supreme Court has ruled that suppliers' efforts to control the minimum price of their products at retail is no longer automatically illegal. Although the general public largely overlooked the ruling, delivered in the final days of the Supreme Court's term, the five to four decision in Leegin Creative Leather Products Inc. vs. PSKS Inc. rewrites history when it comes to suppliers' control over the prices retailers charge for their products.

This overturns a 1911 judgment that resale price maintenance agreements violate aspects of the Sherman Antitrust Act. It give suppliers significant, but not unlimited, power to dictate pricing and limit discounting.

Now, according to the Supreme Court decision, the rule of reason must be applied to assess the impact of price maintenance agreements on competition on a case by case basis. "Nobody thinks the old rule made economic sense," said Lawrence Silverman, a specialist in distribution law in the Miami office of the Akerman Senterfitt law firm.

"But Congress wasn't going to change it," he said, "so the court's majority felt this old rule's foundations has been eaten away. Now manufacturers can enter into long term agreements with retailers that contain particular pricing limits."

Because pricing for each individual item can't be written into a long term agreement, Silverman said, manufacturers will typically send retailers monthly updates. These will decree price or what discounts will be permissible for individual products.

Silverman expects health and beauty aids, consumer electronics, and apparel to be most impacted by the court's ruling. Though Silverman declined to name specific retailers that will be impacted, it's clear that discount retail chains, such as TJ Maxx and Marshall's, which specialize in high end apparel, are vulnerable, as are many internet merchants. So, too, may be mall owners that have discounters as tenants.

The ruling "may also impact the size and frequency of Sunday circulars," Silverman said. "Most of those ads carry a minimum advertised price, and are reimbursed by the manufacturer. Manufacturers will likely reconsider such reimbursements, and, as a result, retailers may reallocate their marketing budgets.

"The old system was inefficient and expensive," he explained. "The ad expenditures were built into the cost of the product. Some consumers may have a harder time finding hair salon beauty product brands at a discount. But, while it may limit consumers' ability to go to a discounter, it also offers incentives for a retailer to invest in services they can't get at a discounter, which makes the (product) franchise worth more," Silverman said.

The court's lift of the long time ban on minimum pricing took root in what may seem an unlikely place. Leegin, based in City of Industry, CA, makes the Brighton brand of leather fashion accessories, and PSKS operates a Kay's Kloset store in Lewisville, TX.

When Leegin discovered that Kay's Kloset was selling the Brighton brand below the manufacturer's suggested retail price, it stopped selling to PSKS. PSKS sued Leegin and thus began a series of cases that wound up at the top court in which PSKS finally triumphed.

The court's majority concluded that the long standing law was no longer appropriate, and that price floors could help promote competition. Justice Anthony Kennedy spoke for the majority, which included Chief Justice John Roberts, and Justices Antonin Scalia, Clarence Thomas and Samuel Alito. Speaking for the dissent, Justice Stephen Breyer said, "The only safe predictions about today's decision are that it will likely raise the price of goods at retail." Justices John Paul Stevens, David Souter, and Ruth Bader Ginsburg joined him in the dissent.

Topic: Wholesale News

Related Articles: law 

Article ID: 311

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