Antitrust law losing its teeth

The Supreme Court has relaxed rules against price fixing. Coming up: a big case for retailers.

 

By David G. Savage

 

Los Angeles Times

March 19, 2007

WASHINGTON With a push from the Bush administration, the Supreme Court is in the midst of steady, if little noticed, retreat from enforcing the antitrust laws that for decades have guarded against monopolies and price fixing.

In the last year, the court has relaxed or repealed several rules designed to prevent anti-competitive schemes, and later this month will hear another widely followed case that could dramatically change the rules of the retailing business.

"The court is on a path to reshape the law to conform to the Chicago school of law and economics," said Albert Foer, president of the American Antitrust Institute, referring to the free-market theories associated with the University of Chicago. "The theory now is that markets rarely fail, and regulation of business is nearly always bad."

Born in the late 19th century, the antitrust laws grew during an era when unchecked corporate power was feared. "Every contract or conspiracy in restraint of trade" was made illegal, and judges generally struck down business schemes that could hurt competition or consumers.

But in recent years concerns about corporate power have been replaced at the high court and in the White House by skepticism toward the regulations that enforce the antitrust laws.

"This is just basic economics: letting manufacturers compete in their own way," said Roy Englert Jr., a lawyer who represents the wireless industry. "This is the free market come to life."

Some say that antitrust laws have less relevance in the modern economy, where technology and globalization have changed the nature of business competition.

New York lawyer Joseph Angland, who heads the American Bar Assn.'s antitrust division, said the rigid rules set early in the 20th century "don't stand up to scrutiny today."

"The court is moving to bring antitrust law into line with economic thinking, and that is refreshing," he said.

Last year, the justices tossed out a ruling that barred a "joint venture" between two oil giants Texaco and Shell to sell gasoline in the West. While this joint venture may be "price fixing in the literal sense, it is not price fixing in the antitrust sense," wrote Justice Clarence Thomas, because these two rivals had not competed in this market.

Also last year, the justices repealed a long-standing rule that made it illegal for owners of a patented product such as a high-speed printer to require its customers to purchase extra products, such as replacement ink. If consumers don't like this "tying" arrangement, they can buy another brand of printer, the court said.

Last month, the justices overturned a $79-million jury verdict against lumber giant Weyerhaeuser for having conspired to buy up hardwood trees and put out of business its one competing saw mill in Washington state. Punishing an aggressive firm like Weyerhaeuser for buying up raw materials may "chill legitimate pro-competitive conduct," the court said.



Dispute over handbags

The most important test of the anti-antitrust trend comes before the court March 26. The Bush administration, the National Assn. of Manufacturers and other big-business groups are urging the court to repeal a nearly century-old rule that bars the fixing of retail prices by manufacturers.

The case involves a dispute over a Los Angeles-area company's pricing of its women's handbags. Lawyers and economists say the outcome could affect the pricing and marketing of a vast array of products, including tennis rackets, golf clubs, plumbing fixtures and appliances.

Under current practices, product makers can set a "manufacturer's suggested retail price," but that price is rarely paid by consumers because independent dealers are free to sell for less.

Since 1911, the court has held to the "Dr. Miles rule," which forbids a manufacturer and a retailer from agreeing on a minimum price for the product.

The rule itself has a colorful history. At the turn of the century, the Dr. Miles Medical Company of Indiana sought to prop up the prices of its secret elixirs and potions through deals with retail druggists. It complained of "certain establishments, known as department stores" that had adopted "a cut-price system" and thereby caused "much confusion, trouble and damage."

Unmoved, the Supreme Court declared "injurious to the public interest" all contracts and agreements between manufacturers and dealers, saying "their sole purpose [was] the destruction of the competition and the fixing of prices."

The Dr. Miles rule is credited with helping create an extraordinarily competitive retail market in the United States. The department stores of the early 20th century have been followed by waves of discounters, now including Internet sellers.

The company involved in the case before the court, Leegin Creative Leather Products, makes handbags, shoes and jewelry in the City of Industry, and it sells them through small stores under the Brighton brand. Its president, Jerry Kohl, told retailers they must sell the handbags at the price he set. When he learned Kay's Kloset in a suburb of Dallas was selling at a discount, Kohl cut it off from further sales.

The owners of Kay's Kloset sued, alleging they were being punished for discounting. A jury agreed and awarded $1.2 million in damages, which was tripled to $3.6 million because it was a violation of the antitrust laws. Relying on the Dr. Miles rule, the U.S. appeals court in New Orleans upheld the verdict.

Last fall, Washington lawyer Theodore Olson, the former U.S. solicitor general, appealed to the Supreme Court, urging the justices to overturn the Dr. Miles rule.

Bush administration lawyers joined the case on Olson's side. In its brief to the high court, the administration argued the rule is outdated and "cannot withstand modern economic analysis."

"Dr. Miles should be overruled," said U.S. Solicitor General Paul Clement.

They argue that while product makers must compete against other manufacturers, they should be free to market their brands as they choose. Some companies want to sell their products through a network of retailers who offer special displays and extra service to customers. In exchange, the retailers are promised a fixed price and a guaranteed profit margin.

The manufacturers and some retailers complain about the "free rider" problem: the discounter who sells for less but does not offer the service or display that helps promote the brand.

Consumer advocates say a court ruling in favor of manufacturers would be felt in higher prices for many products.

Repealing the Dr. Miles rule "will change the whole field of retail pricing," said Mark Cooper, research director of the Consumer Federation of America. If the Dr. Miles rule is repealed, "the retailers will hug the manufacturers, and they will put in a price floor. It will hurt the discounters."



'Business-friendly'

Cooper is pessimistic about the likely outcome in the high court. "Antitrust is in a sad state in America," he said. "We're in the last two years of a business-friendly administration, and this is take-the-money-and-run time."

Englert, a lawyer who says Dr. Miles should be overruled, doubts its repeal will have a major impact. "Most manufacturers have found a way to do this already," he said, by restricting who sells their products.

The case before the court concerns only so-called vertical agreements between a manufacturer, a wholesaler or a retailer. No one is challenging the rule against a "horizontal" price-fixing scheme between manufacturers or between retailers.

Though the Supreme Court has held to the Dr. Miles rule that outlaws retail price fixing, Congress made a partial exception to the rule during the 1950s and '60s at the behest of industry. States were permitted to adopt "fair trade" laws that cleared the way for manufacturers and retailers to fix prices.

The experiment proved costly to consumers. A Justice Department study in the late 1960s found certain products in the "fair trade" states cost 18% to 27% more. Congress moved to repeal its earlier measure, and in 1975, President Ford signed into law a renewed ban on price fixing by manufacturers.

The state price-fixing laws had "prevented the American people from receiving the benefit of lower prices on cameras, watches, sporting goods, small appliances, auto supplies and many other brand-name products," Ford said when he enacted the bill. The measure, he said, would "enable consumers in all 50 states to shop for the best products at the lowest possible prices."