a supplier to set prices for commodity products as resellers can say no and buy the same product from a different supplier. Brand power in many cases equals bargaining power for a manufacturer.
& lsquo; Discounting Hurts Brand’
The Court was ruling in a case between a manufacturer of leather goods, Leegin Creative Leather Products Inc., and retailer Kay’s Closet, owned by PSKS Inc., in Texas.
At issue in this case were belts sold under the brand name, “Brighton.” PSKS, operator of Kay’s Kloset, first started buying Brighton from Leegin in 1995. It promoted the brand heavily, running Brighton advertisements and holding Brighton days in the store. Brighton once accounted for 40-50 percent of the store’s profits.
In 1997, according to the Supreme Court opinion, Leegin instituted the “Brighton Retail Pricing and Promotion Policy,” in which it refused to sell to retailers that discounted Brighton goods below suggested prices. Leegin expressed concern that discounting harmed Brighton’s brand image and reputation.
In December 2002, Leegin discovered Kay’s Kloset had been marking down Brighton’s line by 20 percent to compete with nearby retailers who also were undercutting prices. Kay’s refused to stop discounting, so Leegin stopped selling to it.
PSKS, owner of Kay’s, sued Leegin, alleging it had violated antitrust laws. PSKS won in both district and appeals courts.
Resale Pricing Trends
Suppliers have many reasons to want to set minimum or maximum resale prices: one, for promotional price uniformity, and two, to prevent excessive margins, so that a customer does not feel gouged -and be drawn to another brand as a result. Suppliers, such as Leegin, also argue that prices reflect the value of the brand being sold.
Part of the increased interest as of late in resale price agreements has been due to the use of the Internet as a storefront to sell products. Many of the companies that do so have lower overhead costs, and so can afford to deeply discount name-brand products. However, Zelek says, this has led to piggybacking off of service levels offered in brick-and-mortar shops, which manufacturers require to sell high-level product that requires a high level of service and knowledge.
Arguably, many consumers are familiar with this practice. Go look at cameras, take advantage of the sales people’s knowledge at a specialty camera store, and then go online and buy your favorite for significantly cheaper.
But a manufacturer wants these high service levels, Zelek says, because the end-user ultimately does too. But he says if there is not a minimum price set, the brick-and-mortar stores would no longer be able to afford to compete against an Internet reseller. “Manufacturers want those businesses to survive,” Zelek says. A distributor that offers value-add and technical expertise benefits from this policy.
A Balancing Act
Zelek believes more manufacturers will embrace promotional/resale pricing programs because the Supreme Court’s ruling has made them less risky. However, it’s key for suppliers to remember that setting minimum prices can backfire. If suppliers set the prices too high, sales may fall off dramatically. They must also pay close attention to demand variations from region to region.
In addition, thanks to consolidation, larger distributors and distributors serving niche customer bases may have the power to refuse.
It is possible the Supreme Court decision may conflict with some current or future state laws. Keeley noted that the decision also may spur legal fights at lower court levels as the new standard is ironed out.
The U.S. Supreme Court has ruled for the manufacturer in a pricing case that pitted the supplier against a retailer. The decision could prompt more suppliers to consider minimum resale price-setting programs.
The U.S. Supreme Court in June made it easier for manufacturers to set minimum resale prices by overturning the per se” illegality of minimum resale price agreements.
Instead, the Supreme Court ruled that challenges to minimum resale price agreements or contracts will be judged on a case-by-case basis by the “rule of reason,” a more flexible legal doctrine that requires the challenger to prove price-setting was unreasonably anticompetitive and did economic harm.
“Per se” was a much stricter enforcement that assumed that minimum price setting agreements were on their face illegal, regardless of circumstances. By changing the judgment from “per se” to “rule of reason,” the Supreme Court has made it more difficult for challengers of the law to win and less risky for manufacturers to set minimum prices, says Gene Zelek, leader of the antitrust and trade regulation practice at Freeborn & Peters LLP, Chicago, IL.
The “rule of reason” has also governed practices such as supplier-defined reseller territories, confining reseller sales to particular locations or allocating reseller customers, Zelek says. It is also the same test that the Court determined 10 years ago applies to maximum resale price setting by agreement or contract.
“Although it was possible even before this decision to set minimum or exact resale prices by unilateral policy, the press attention generated by this case likely will spark substantially more interest in resale price programs,” Zelek says.
George Keeley, an attorney with Keeley, Kuenn & Reid, Chicago, IL, who wrote an advisory for the National Association of Wholesaler-Distributors, says that the ruling does not mean manufacturers have an unfettered right to push minimum prices down to a distributor or retailer. “It should be emphasized that the Court’s decision still leaves minimum resale price restraints open to antitrust challenges,” he says.
The Court, in the Leegin case, said that some “vertical price restraints” may have clear anticompetitive effects making them illegal under the “rule of reason” standard. A group of resellers, for example, could fix prices and compel a manufacturer to enforce the illegal arrangement by going along with the price-setting, according to NAW’s advisory on the subject.
Or a manufacturer with market power may set prices to influence key resellers to not sell the products of a smaller rival or new market player.
“This conduct could facilitate a manufacturer price fixing cartel,” the NAW advisory reads. “If a manufacturer adopts the resale price maintenance policy, without influence from its customers, the restraint is less likely to promote anticompetitive conduct at the resale level.”
In explaining its decision, the Court said that minimum resale price maintenance can stimulate competition among manufacturers selling different brands of the same type of product by reducing intrabrand competition among resellers offering the same brand.
“A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers,” Justice Anthony Kennedy wrote for the court.
“Resale price maintenance also 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.”
Resale minimum price setting is generally focused on non-commodity brand products; it is generally not as compelling for