On June 28, 2007, a 5-4 Supreme Court ruling in Leegin Creative Leather Products, Inc. v. PSKS overturned almost 100 years of federal precedent by declaring that vertical price fixing is no longer automatically presumed illegal under U.S. antitrust law. This decision allows manufacturers to set fixed prices for their products and forbid retailers from offering discounts. This ruling permits manufacturers to adopt “resale price maintenance agreements” that forbid discounting, which is likely to have a negative impact on off-price and independent retailers.
Prior to this decision, the market had been ruled by the Dr. Miles Medical Co. v. John D. Park & Sons Co. decision from 1911, which made it illegal for retail sellers and manufacturers to agree on fixed prices. However, in June, the Supreme Court in Leegin described this rule as outdated and out of step with modern economics.
The Supreme Court stated that manufacturers should be free to control how their products will be marketed and sold. According to the majority opinion; competition will not suffer; on the contrary, resale price maintenance can increase inter-brand competition by encouraging retailer services that would not be provided in the absence of free riding.
The decision was a victory for the Los Angeles-based maker of high-end women’s handbags, Leegin Creative. The owner insisted that shopkeepers sell his bags at prices he sets in an attempt to compete against larger brands. Kay’s Kloset, a clothing shop, disapproved of the policy and in 2001 began selling Leegin’s leather goods at a 20 percent discount. Leegin pulled its product from the store and Kay’s Kloset sued on the grounds that the pricing policy violated antitrust laws. The court initially agreed with Kay’s Kloset and awarded the store a $3.6-million judgment. However, on June 28, 2007 the Supreme Court reversed this verdict.
The dissent emphasized that the majority overturned a long-running rule that benefited consumers. Justice Breyer, writing for the dissent, predicted that the new rule will raise the prices of goods and will create legal turbulence. Retailers will have less flexibility to move merchandise and set prices in their own stores (the decision removes price competition from our economy), while manufacturers would find it easier to protect their brands from discounting.
Proponents of the new rule say that for luxury goods manufacturers, the ability to set a minimum resale price could allow them to extend their brand into new channels without fear of brand dilution.
However, the ruling leaves open the possibility that price-fixing agreements can be attacked under the antitrust laws when a manufacturer’s brand dominates the market.