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On the last day of its term, the Supreme Court handed down its decision on Leegin v. PSKS, a case we've been following in the pages of the magazine, and on this blog. Overturning a 96-year-old law known as Dr. Miles, intended to promote competition by prohibiting manufacturers from engaging in price fixing, or resale price maintenance, the court issued a major revision to the country's antitrust laws.

The case argued before the court was 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 $3.6 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--the store's top seller--by as much as 20 percent. Phil Smith, 48, the owner of Kay's Kloset, sued for damages after his revenue fell by half and he was forced to move to a smaller location.

Representing Leegin, former attorney general Theodore Olsen successfully argued for Dr. Miles to be overturned on the grounds that interbrand competition (competition between two or more different brands) is just as vital to the economy as intrabrand competition (i.e., competition between stores selling the same brand).

The ruling, like so many of the court's recent decisions, was predictably split along ideological lines. Justice Anthony Kennedy, writing for the majority, noted that as economic thought has changed over the last century, "there is now widespread agreement" that price maintenance can help promote competition. This does not legalize price fixing across the board, but where it was previously always illegal, claims will now be heard under the "rule of reason," or on a case-by-case basis to determine if the manufacturers' practices were in fact anti-competitive.

Penning the dissent, Justice Stephen Breyer predicted that such a change would cost the American family of four between $750 and $1000 more in retail expenses each year. Indeed, in telephone conversations this morning both Phil Smith of Kay's Kloset, and his attorney Robert Coykendall, cited the cost to the consumer as the chief outcome of the decision. Jerry Kohl, CEO of Leegin, vehemently disagrees with this charge, writing in an email, "I am so happy...Our policy was to help consumers from retailers that play games and hurt not only our brand but cheat our consumers." It is hard to say what the precise effect on the consumer will be, as the Wall Street Journal points out, most large discount retailers should still have power over manufacturers to set their own prices. The retailers that could be the hardest hit, as Coykendall tried to demonstrate, are small boutiques and Internet resellers.

Luke Froeb, an economics professor at Vanderbilt and former Director of the Bureau of Economics at the FTC, who signed an amicus brief on behalf of Leegin, is "overjoyed" by the decision, but worries how individual states will respond. Speaking by phone, he suggested that, "states may pass laws that prohibit resale price maintenance, which could make it difficult for manufacturers to do business in certain places." In effect, this would be the reverse of what has taken place in antitrust law over the past century, as individual states have enacted various laws to permit rules like exclusive territory and maximum price maintenance. Former chief economist at the FTC and Harvard professor F. Michael Scherer, who, despite misgivings signed the same amicus brief, expressed surprise at the decision, "I kind of thought this was a question [the court] would say should be legislated," then again, "this court has no compunction with overruling precedents."

Last updated: Jun 28, 2007




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