A fight is brewing in Washington over whether manufacturers should have the right to set minimum retail prices for the products they make.
For nearly a century, courts have banned the practice under antitrust laws. In July 2007, however, the Supreme Court overturned nearly a century of precedence, upsetting retailers such as eBay and Costco.
Now those retailers are lobbying for a bill that would bypass the court decision.
The case centered on a brand of purses called Brighton, made by Leegin Creative Leather Products in Pasadena, Calif. Leegin sells to independent retailers, not big chains like Macy's and Bloomingdale's.
Phil Smith was one of those retailers. He owned a story called Kay's Kloset in suburban Dallas. In order to compete with a nearby airport shop that gave airline employees a 20 percent discount, he slashed prices by that much for all his customers.
Leegin stopped shipping purses to Smith. He subsequently went out of business and took the company to court.
"It is an insult to my status as an independent retailer to have my prices dictated by a manufacturer," Smith said.
The case went all the way to the U.S. Supreme Court, where Smith lost.
"Allowing price fixing will result in higher retail prices, lower store sales volumes, lower store profits and higher business failures," Smith said.
The majority of justices, however, considered other factors in deciding to overturn existing antitrust law and once again allowing manufacturers and retailers to agree on minimum prices. They said in their ruling that allowing the practice would provide some stores with more profits that may "give consumers more options to choose among low-price, low-service brands; high-price, high-service brands; and brands falling in between."
Price Fixing Vs. Brand Maintenance
EBay's chief lobbyist, Tod Cohen, blames the decision on the makeup of the current court. He said the court, dominated by conservative justices, sided with big-business interests "versus traditional antitrust doctrine which has been far more of a progressive value rather than a conservative value."
When critics refer to the practice of setting minimum prices, they call it price fixing. But Jerry Kohl, the owner of Leegin, calls it "brand maintenance." He says it's important his independent retailers don't start undercutting each other's prices and cheapening the Brighton brand.
Kohl also dismisses dire predictions that the Supreme Court decision will raise prices for consumers and put small retailers out of business.
"You want to see how it's affected prices — walk into Neiman's today," Kohl said. "Almost the entire store is on sale. So, obviously not much has changed."
Of course, there is a deep recession under way. Still, Kohl says his case changed only one thing.
"Now it's not automatically illegal for people to talk about setting prices, before it was automatically illegal," he says.
Now, if a retailer thinks price-setting is unfair, it can take a manufacturer to court. In legal language, this is called the "rule of reason." Critics, however, say few retailers actually would go to the expense and headache of filing such a lawsuit.
"To think about bringing a case like that against a giant with enormous resources is really unrealistic," said Seth Bloom, senior counsel of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights. "So it's nice to say, in an academic way, rule of reason is available, but I think this is about what practically happens in the marketplace."
That's one reason Bloom's boss, Sen. Herb Kohl (D-WI), is sponsoring legislation that bypasses the Supreme Court ruling and makes all price-setting by manufacturers illegal again.