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U.S. SUPREME COURT: SCHOOL REACTION; PRICE CONTROLS

Antitrust ruling may mean higher prices, fewer discounts

Justices overturn a 1911 price-fixing ban, saying it's flawed and outdated.

June 29, 2007|David G. Savage and Daniel Yi | Time Staff Writers

WASHINGTON — Manufacturers can set a minimum price for their products and forbid retailers from offering discounts, the Supreme Court said Thursday in a decision that overturned almost a century of antitrust law and could result in higher consumer prices and fewer discounts, especially on the Internet.

But it was good news for manufacturers and full-service retailers, which say they need higher prices to cover the costs of store displays and knowledgeable sales staffs.

In a 5-4 ruling, the court's majority said the long-standing rule against price-fixing, or what lawyers call "resale price maintenance agreements," is outdated and in conflict with modern economics.

Manufacturers compete across brands, and they should not be prevented from marketing their products as they choose, the majority said.

"It is a flawed antitrust doctrine," Justice Anthony M. Kennedy said, because the rigid rule "requires manufacturers to choose second-best options to achieve sound business objectives."

The dissenters said consumers would see higher prices and fewer choices because some discounting might be eliminated.

The rule against price-fixing is familiar to anyone who has looked at the window sticker on a new car. "Manufacturer's suggested retail price" meant automakers could do no more than suggest what the customers should pay.

Until now, independent dealers have been free to sell for less.

This rule dates to 1911, when the court decided a case involving the Dr. Miles Medical Co. of Indiana and its patented medicine. The company required retail druggists to charge the prices it set for its medicines, but the Supreme Court said such price-fixing tactics violated the free-trade principles set in the Sherman Act of 1890.

Business experts disagreed Thursday on the effect repeal of the "Dr. Miles rule" would have.

Because many manufacturers focus on having large sales volumes, they will not choose to set prices that leave a high margin for retailers, some analysts said. But others said makers of products such as watches, computers and golf clubs might prefer a strategy of higher prices and better service for customers with lower sales volumes.

"Resale price maintenance can increase inter-brand competition by encouraging retailer services," said Kennedy, speaking for the majority. He said retailers that offer displays and service for customers could be undercut by "free-riding" discounters.

But lawyers for the Consumers Union said that abandoning the rule against retail price-fixing would result in higher prices for a variety of products.

The decision is a victory for a Los Angeles-area maker of handbags and other leather products. Leegin Creative Leather Products Inc., based in the City of Industry, makes handbags under the Brighton brand. Owner Jerry Kohl has insisted that shopkeepers sell his bags at prices he set.

He was sued by the owner of Kay's Kloset, a women's clothing shop near Dallas, on the grounds that his pricing policy violated antitrust laws. A jury agreed with the shopkeeper, and the decision led to a nearly $4-million judgment.

The Supreme Court reversed the verdict in Leegin vs. PSKS. Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr. also were in the majority.

Leegin declined to comment on the ruling.

"Bottom line, the consumers were the big losers today," said Phil Smith, owner of Kay's Kloset. "Price competition has always been the American way. We always like to shop for the best deal, and that's been taken away."

But a marketing official for the Phoenix-based golf club maker Ping Inc. welcomed the ruling. "Not every consumer is a bargain shopper," said Ping's director of distribution, Bill Gates. He said his company's sales representatives spend 30 or 40 minutes with a customer to fit the golfer with a club.

The decision repealing the automatic rule against retail price-fixing was the Supreme Court's fourth this year to limit the reach of the antitrust laws.

The dissenters in Thursday's ruling, led by Justice Stephen G. Breyer, faulted the majority for overturning a long-established rule that had benefited consumers.

"The only safe predictions to make about today's decision are that it will likely raise the price of goods at retail, and that will create considerable legal turbulence," Breyer said.

The ruling leaves open the possibility that price-fixing agreements can be challenged under antitrust laws, but only when a manufacturer's brand dominates the market. This is rarely true with common retail products.

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david.savage@latimes.com

daniel.yi@latimes.com

Savage reported from Washington and Yi from Los Angeles.

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