WASHINGTON, June 28 — Striking down an antitrust rule nearly a century old, the Supreme Court ruled on Thursday that it was not automatically unlawful for manufacturers and distributors to agree on minimum retail prices.
The decision will give producers significantly more, though not unlimited, power to dictate retail prices and to restrict the flexibility of discounters.
Five justices, agreeing with the nation’s major manufacturers, said the new rule could in some instances lead to more competition and better service. But four dissenting justices agreed with 37 states and some consumer groups that abandoning the old rule could result in significantly higher prices and less competition for consumer and other goods.
The court struck down the 96-year-old rule that resale price maintenance agreements were an automatic, or per se, violation of the Sherman Antitrust Act. In its place, the court instructed judges considering such agreements for possible antitrust violations to apply a case-by-case approach, known as a “rule of reason,” to assess their impact on competition. The new rule is considerably more favorable to defendants.
The decision was handed down on the last day of the court’s term, which has been notable for overturning precedents and for victories for big businesses and antitrust defendants. It was also the latest of a series of antitrust decisions in recent years rejecting per se rules that had prohibited various marketing agreements between companies.
The Bush administration, along with economists of the Chicago school, had argued that the blanket prohibition against resale price maintenance agreements was archaic and counterproductive because, they said, some resale price agreements actually promote competition.
For example, they said, such agreements can make it easier for a new producer by assuring retailers that they will be able to recoup their investments in helping to market the product. And some distributors would be unfairly harmed by others, like Internet-based retailers, which could offer discounts because they would not have the expense of product demonstrations or other specialized consumer services.
A majority of the court agreed that the flat ban on price agreements discouraged these services and other marketing practices that could promote competition.
“In sum, it is a flawed antitrust doctrine that serves the interests of lawyers — by creating legal distinctions that operate as traps for the unaware — more than the interests of consumers — by requiring manufacturers to choose second-best options to achieve sound business objectives,” the court said in an opinion written by Justice Anthony M. Kennedy and signed by Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.
But in his dissent, portions of which he read from the bench, Justice Stephen G. Breyer said that there was no compelling reason to overturn a century’s worth of Supreme Court decisions that had affirmed the prohibition on resale maintenance agreements.
“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles,” he wrote. “I do not believe that the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing.”
During a 38-year period from 1937 to 1975 that Congress permitted the states to adopt laws allowing retail price fixing, economists estimated that such agreements covered about 10 percent of consumer good purchases. In today’s dollars, Justice Breyer estimated that the agreements translated to a higher annual average bill for a family of four of about $750 to $1,000.
The case involved an appeal of a judgment of $1.2 million against Leegin Creative Leather Products after it cut off Kay’s Kloset, a suburban Dallas shop, for refusing to honor Leegin’s no-discount policy. The judgment was automatically tripled under antitrust law.
Leegin’s marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell its “Brighton” line of fashion accessories through small boutiques that could offer personalized service. Retailers were required to accept a no-discounting policy.
After the United States Court of Appeals for the Fifth Circuit, in New Orleans, upheld the judgment and said it was bound by Supreme Court precedent, Leegin took the case to the Supreme Court. Unless it is settled, the case, Leegin Creative Leather Products v. PSK Inc., will now be sent down to a lower court to apply the new standard.
The Supreme Court adopted the flat ban on resale price agreements between manufacturers and retailers in 1911, when it found that the Dr. Miles Medical Company had violated the Sherman act. The company had sought to sell medicine only to distributors who agreed to resell them at set prices. The court said such agreements benefit only the distributors, not consumers, and set a per se rule making such agreements unlawful.
Justice Kennedy said Thursday 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.
“Vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed,” he wrote.
But Justice Breyer said in his dissent that the court had failed to justify the overturning of the rule, or that there was significant evidence to show that price agreements would often benefit consumers. He said courts would have a difficult time sorting out the price agreements that help consumers from those that harm them.
“The upshot is, as many economists suggest, sometimes resale price maintenance can prove harmful, sometimes it can bring benefits,” he wrote. “But before concluding that courts should consequently apply a rule of reason, I would ask such questions as, how often are harms or benefits likely to occur? How easy is it to separate the beneficial sheep from the antitrust goats?”
“My own answer,” he concluded, “is not very easily.”