Who Gets to Say When the Price is Right?
The federal laws governing wholesale prices are the subject of a key case on the Supreme Court's docket this spring. The outcome of the case, which pits the interests of manufacturers against those of retailers, could affect the cost of goods ranging from socks to cell phones to a gallon of gas. Manufacturers hope that the Roberts Court will overturn precedent and let them set specific minimum retail prices, in effect providing them with the power to veto discount pricing schemes. Retailers want to preserve their right to employ markdowns to manage inventory and cash flow. And consumers--to the extent that they are aware of the case--are probably just hoping the outcome won't send prices rising.
The suit that the high court will hear is an appeal brought by Leegin Creative Leather Products, a luxury leather goods company in City of Industry, California. The company was ordered by a lower court to pay more than $3 million in damages after it stopped shipping handbags to Kay's Kloset, a Dallas-area retailer. Leegin, which grossed more than $250 million in 2006, cut off the store in 2002 after it repeatedly discounted Leegin's popular Brighton handbags by as much as 20 percent. Phil Smith, 48, the owner of Kay's Kloset, says that losing the Brighton line--his top-selling product--was devastating. Revenue fell by half, and he had to move to a smaller location. "I believe the damage done to my business is permanent," says Smith.
Under current law, a manufacturer can suggest a price but cannot punish a retailer for any deviation. Legally, that's considered price fixing, as verboten as when two businesses collude to charge higher prices. Back in 1911, the Supreme Court ruled that such price fixing violated the Sherman Antitrust Act, and Congress closed loopholes that existed at the state level in 1975.
The theory behind the law is that allowing manufacturers to set prices would reduce competition, but some economists are not so sure. A group of 25 leading academics who hail from across the political spectrum submitted an amicus brief on Leegin's behalf, saying that a blanket ban on price minimums is outdated. Courts, they contend, should be allowed to look at the rationale for setting prices on a case-by-case basis. Setting strict prices can be anticompetitive, says Harvard economist Frederic Michael Scherer, one of the brief's co-signers, but the system ought to reflect the fact that there are instances, like product launches, where minimum prices can help a company establish itself without harming consumer interests.
To Jerry Kohl, 55, the owner of Leegin, charging a fixed price is one of the few ways that his company can establish its brand, compared with much larger corporations such as Louis Vuitton and Coach (NYSE:COH), which create the impression of luxury through global advertising campaigns. Setting a minimum retail price may also motivate retail salesclerks to focus on Brighton bags and ensure that they give prospective customers plenty of attention. Kohl has already spent more than $4 million in legal fees--considerably more than he would have paid in damages. His attorney is former U.S. Solicitor General Ted Olson, who is best known for successfully representing then-Governor George W. Bush in Bush v. Gore. In late January, the Justice Department announced that the Bush administration planned to support Leegin, the manufacturer, in the case.
Of course, Leegin can always charge higher wholesale prices for its handbags, thereby compelling a retailer to raise its prices. But higher wholesale prices can't guarantee that retailers won't still have frequent markdowns or treat a product line as a loss leader. Repeatedly reducing a bag's price, even by small amounts, can diminish "the trust that the consumer has in the product," Kohl argues.
For his part, Smith of Kay's Kloset says he discounted the handbags to keep up with a competitor that had cut its prices on Brighton bags. After 20 years in business, he says, he's learned that occasional markdowns on high-end products will increase foot traffic. If the current rules are overturned, he believes, manufacturers will raise prices, and retailers and consumers will get burned. With strong arguments on both sides, the case could signal how active the Roberts Court intends to be on issues involving interstate commerce. The Court's decision is expected in June.