The U.S. Supreme Court ruled yesterday that manufacturers have the legal right to set minimum prices for goods sold through retail stores. The ruling overturns a 96-year legal decision that had put pricing in the hands of retailers and, in the process, may change the relationship between merchants and manufacturers.
The case brought before the nation's top court pitted Leegin Creative Leather Products, a manufacturer of a wide range of casual and dress leather products under a variety of labels including Brighton, Leegin, Onyx, Justin, Tony Lama and others, against Kay's Kloset, a retailer in Texas.
In the late nineties, Leegin had created a trade promotion that classified certain retailers as participants in its "Heart Store Program." To take part in the program, retailers agreed to certain merchandising conditions and minimum selling prices.
Kay's Kloset was among the specialty retailers that participated in the program but according to the Opinion of the Court, "a Leegin employee visited the store and found it unattractive." Following the visit, the parties agreed that Kay's Kloset would not continue in the program after 1998. The store did continue to carry Leegin products, specifically its Brighton line.
In 2002, Leegin discovered that Kay's Kloset was moving Brighton merchandise but at 20 percent below the manufacturer's recommended minimum. The retailer argued the pricing was necessary for it to compete against others also discounting Leegin merchandise while the supplier said Kay's Kloset was, among other things, contributing to a devaluation of the brand.
When Leegin requested the discounting stop, Kay's Kloset refused and the Brighton line was pulled from the retailer. It was then that the retailer brought a suit, which argued that Leegin was in violation of a 1911 ruling (Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373) that determined minimum prices set by manufacturers were anticompetitive and therefore illegal.
In its new ruling, the Supreme Court has taken the position that manufacturer-set minimum prices do not always discourage competition and in some cases encourage it. In essence, the Court has decided that the minimum pricing issue needs to be determined on a case-by-case basis.
Justice Anthony Kennedy, writing for the majority, concluded, "Vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed."
The Justice wrote, "A single manufacturer's use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer's position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between. Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate."
By not adhering to minimum prices, the Court maintained, discounters were able to essentially let competitors do much of the heavy lifting required to make a sale.
"Consumers might learn, for example, about the benefits of a manufacturer's product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer's retailers compete among themselves over services."
Discussion Question: How will the Supreme Court ruling in the Leegin vs. Kay's Kloset case affect the relationship between retailers and manufacturers?