The Price Is Right

By Thomas Brom

When cash is king, discount pricing rules. Even Saks Fifth Avenue cut its prices 70 percent last November just to make it through the holidays. But while pinched consumers are shopping online or simply doing without, the U.S. Supreme Court recently loosened constraints on resale price maintenance (RPM) agreements, a.k.a. vertical price-fixing. Go figure.

Gary L. Reback, an antitrust attorney at the Palo Alto firm of Carr & Ferrell, explores this contradiction in his new book, Free the Market! Why Only Government Can Keep the Marketplace Competitive (Portfolio, 2009). To frame his account of antitrust battles in Silicon Valley, Reback uses the career of William F. Baxter Jr., a former Stanford Law School professor appointed to head the Justice Department's antitrust division in 1981. Baxter had embraced the laissez-faire philosophy of the Chicago school of economics, applying it to everything from mergers and acquisitions to pricing theory.

The 20-year ascendancy of judges partial to the Chicago school, Reback says in an interview, describes "an arc of conservative influence" in the federal courts that remains today. In many ways, he says, the zenith of that arc was a 2007 U.S. Supreme Court decision that overturned the per se rule prohibiting vertical minimum price-fixing, under section 1 of the Sherman Antitrust Act (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007) ).

"Of all the things the Chicago school believes is wrong with antitrust law, the per se rule in vertical-price-maintenance cases was the most wrong," Reback says. "It denies the manufacturer control over distribution of the product."

Writing for the 5-4 majority in Leegin, Justice Anthony Kennedy stated, "Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances." Striking down a 1911 decision that it is per se illegal for a manufacturer and its distributor to agree on prices, the court substituted a rule-of-reason standard to assess the effects of RPM agreements.

In dissent, Justice Stephen Breyer wrote, "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."

"Leegin has come to symbolize the difference between liberals and conservatives in antitrust law," says Reback, who supports a modified rule-of-reason standard himself. "Conservatives say the per se rule makes no sense, and liberals say price constraints just give economic power to suppliers and raise prices for consumers."

The retail marketplace reacted swiftly to Leegin. Previous court rulings had permitted suppliers to establish manufacturer's suggested retail prices (MSRPs), minimum advertised prices (MAPs), and so-called Colgate policies that avoid Sherman Act constraints under a Supreme Court ruling that permits vertical price-fixing if it is unilateral rather than by agreement (United States v. Colgate & Co., 250 U.S. 300 (1919)). After Leegin, vertical price-fixing in all its variations flourished.

In December the Wall Street Journal published a page-one profile of "price enforcers" who monitor online discount retailers for deviations from MAPs imposed by their clients. Authorized retailers that offer lower prices risk losing their suppliers, and unauthorized resellers may be threatened with trademark or copyright violations for using images of the suppliers' products. Net Enforcers Inc. reported it had helped shut down 1.2 million seller pages on eBay in the previous ten months because of either MAP violations or trademark- and copyright-infringement claims.

But there were problems with the new regime. Thirteen states - including California and New York - have antitrust laws that specifically prohibit agreements to fix prices or set minimum prices for the sale of any product. Under California's Cartwright Act, the state attorney general may enforce antitrust law through civil actions, indirect purchasers may file private actions, and litigants may recover enhanced damages and attorneys fees (Cal. Bus. & Prof. Code § 16750).

"Because of the state laws, most manufacturers have not moved to RPM agreements," says Sean Gates, a partner in the Los Angeles office of Morrison & Foerster. "They have other tools available to them to affect retailer behavior, but still have to worry that courts will interpret those tools as RPM agreements that are per se illegal under state antitrust law."

After Leegin, the National Association of Attorneys General vowed to enforce state antitrust laws that prohibit vertical price-fixing. Last year New York, Illinois, and Michigan signed a consent decree against a furniture manufacturer for conduct they claimed was potentially in violation of state antitrust laws. And in February, Kathleen E. Foote, California's senior assistant attorney general for antitrust, told a State Bar CLE panel that she was looking for an RPM case with an important consumer-harm aspect. "The Cartwright Act explicitly defines a resale price maintenance agreement as a trust, and it is therefore unlawful," Foote said. "The Legislature has stated that RPMs are anticompetitive. We have no discretion to change the per se standard."

Don T. Hibner Jr., a retired antitrust partner in the Los Angeles office of Sheppard Mullin Richter & Hampton, responds that, "If the state challenges a resale price maintenance agreement under the per se rule, it should lose on appeal." Hibner contends the state Supreme Court gave vertical price-fixing a rule-of-reason interpretation nearly a century ago, and only recently decided to follow the federal per se rule.

"The Cartwright Act is not in conflict with Leegin, or with Colgate," says Hibner. "Big suppliers using vertical restraints have to prove that higher prices are procompetitive. And they may flunk the rule of reason."

The trouble with the rule-of-reason standard, however, is its lack of clarity. "How easily can courts identify instances in which the benefits are likely to outweigh potential harms?" Justice Breyer asked in his Leegin dissent. "My own answer is, not very easily."

But the plaintiffs antitrust bar has adjusted. Some attorneys have amended their complaints to allege that retailers participated not in vertical price-fixing but in variations of "hub and spoke" price-fixing, which is still prohibited. Among such pending cases, ironically, is Leegin, which was remanded in 2007 to federal court in Tennessee and state court in Texas.

Consumer advocates have not conceded ground on vertical price-fixing at all. Last year, Sen. Herb Kohl (D-Wisc.) introduced the Discount Pricing Consumer Protection Act (S. 148), a one-sentence bill supported by 35 state attorneys general that would reinstate the per se rule. Christine Varney, nominated in February to head the Justice Department's antitrust division, supported the per se rule when she served on the Federal Trade Commission (FTC) during the Clinton administration. The FTC is hosting a series of public workshops this year to study the impact of RPM agreements on consumers.

"There's not much new in this debate," says Warren S. Grimes, a professor at Southwestern Law School in Los Angeles and former counsel to the House Judiciary Committee's Subcommittee on Monopolies and Commercial Law. "The evidence is pretty solid that RPMs increase prices to consumers. But the Chicago school doesn't really look at the retail end. It sees only through the eyes of manufacturers."

That perspective - promoting the interests of suppliers over those of retailers and consumers - is a curiosity in itself. "Leegin was a case about ladies' handbags," Reback says. "The legal arguments could have occurred in the 1970s. There was no mention of online marketing - where suppliers can shut down price competition lickety-split - or of big-box discounters like Wal-Mart and Target. Even Justice Breyer was fighting the last war."

Reback would like to see fresh economic theories influence antitrust law, but he concedes that Chicago-school judges on the federal bench aren't going away anytime soon. "The court," he says, "is still catching up with reality."

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