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High court to weigh ban on price fixing

A City of Industry firm challenges a 95-year-old rule that forbids setting minimum retail prices.

December 08, 2006|David G. Savage | Times Staff Writer

WASHINGTON — Accepting an appeal from a California manufacturer, the U.S. Supreme Court agreed Thursday to reconsider a long-standing rule that forbids companies from setting a minimum retail price for their products.

A win for the manufacturer could have a wide effect on how products are sold and how much consumers pay for items as diverse as cars and handbags. Some retail analysts said Thursday that it could lead to sharply higher prices, especially for some well-known brands.

The justices took the case from Leegin Creative Leather Products Inc., a maker of high-quality women's handbags based in the City of Industry. The company was sued and hit with a $3.6-million verdict by a Texas jury for having dropped a retailer that discounted prices on its merchandise.

Former U.S. Solicitor General Ted Olson, who represents the company, urged the high court to scrap the landmark decision that made retail price fixing illegal. He said the court's decision to hear the case was significant.

"This is quite important," Olson said. "It doesn't happen often that the Supreme Court agrees to revisit a 95-year-old rule that was seemingly written in stone."

In 1911, the Supreme Court in the case of Dr. Miles Medical Co. vs. John D. Park & Sons Co. ruled that retail price fixing is illegal in all instances. The rule outlaws contracts or agreements between manufacturers and independent sellers that require these retailers to charge a minimum price for a product.

Car buyers are familiar with the sticker price on a new vehicle, which is called the manufacturer's suggested retail price. This price is rarely followed because dealers are free to sell the cars for less.

The ban on price fixing has helped create an intensely competitive retail market in the U.S., one in which low-cost sellers regularly undercut the prices of brand-name products.

Some manufacturers have chafed at the rule, and many economists say it is outdated.

Although many manufacturers want their retailers to sell as many products as possible -- even if the retailers have to cut prices to do it -- other manufacturers want to maintain special niches and high prices for their products. They also want retailers to give special displays to their products and extra service for their customers. Those companies said they should be allowed to insist that their retailers not undercut the price.

Last month, a group of 25 economists joined the National Assn. of Manufacturers in urging the court to overrule its precedent against retail price fixing. And on Thursday, the court agreed to consider it.

Olson and the group of economists said a repeal of the rule against retail price fixing could have "significant pro-competitive effects" because it would give manufacturers more freedom to decide on how their products are marketed and sold. And, he added, it would also mean "manufacturers can insist on high-quality service from their retailers."

Two retail analysts, however, said the effect could be higher prices for consumers.

"This could change the dynamics of retailing, especially for the highly branded and more expensive items," said Eli Portnoy, a retail analyst based in Orlando, Fla. "The image-oriented products that have built their brand want to control how it is sold and how much it is sold for. But ultimately, I think consumers will be hurt. When you take away some competition, you bring in the possibility of prices rising dramatically."

Burt Flickinger, a retail analyst in New York, said retail price fixing could benefit the premium brands and hurt the discounters. "It could mean a better time for the department stores and the special stores" that stock well-known brands, he said.

For its part, the Supreme Court has grown increasingly skeptical of antitrust laws and, in particular, strict rules that make certain conduct an automatic violation.

Olson asked the court to overturn the rule that makes retail price fixing automatically illegal and instead put the burden on those who are challenging a company's pricing policy to prove that it is harmful to competition and consumers.

Leegin, which makes leather products under the Brighton name, was founded in 1966 in a Redondo Beach warehouse and taken over by Jerry Kohl in 1972.

In 1997, it adopted a policy of selling its Brighton handbags only with retailers that agreed to charge its suggested retail prices. The company said it did that for two reasons. First, sales and discounting can cheapen the brand, Leegin said. And second, it said, higher prices would encourage retailers to "provide special attention and service to Brighton customers."

Four years ago, the manufacturer learned that Kay's Kloset, a women's store near Dallas, was selling Brighton products at a discount, and it cut off shipments.

PSKS Inc., the Flower Mound, Texas-based owner of Kay's Kloset, said it had invested heavily in advertising Brighton products, which it said were its bestselling and most profitable items. It sued Leegin, accusing it of violating antitrust laws and the rule against price fixing.

A jury that heard the suit agreed Leegin had fixed prices and concluded that PSKS suffered $1.2 million in damages. Under antitrust laws, that amount tripled to $3.6 million. In March, the U.S. Court of Appeals in New Orleans upheld the verdict against Leegin, citing the Dr. Miles case as binding precedent.

"This case is an ideal vehicle for this court to revisit its decision in Dr. Miles," Olson said in appeal. "In this case, Leegin is a small manufacturer with no market power in an intensely competitive marketplace.... There is simply no realistic threat that its use of resale price maintenance could have had anti-competitive effects."

david.savage@latimes.com

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