The Supreme Court found itself drawn deeply on Monday into the economics of modern retailing, and confronted a complex yet very simply stated question: do consumers really benefit the most from low prices, or is something else more imporant for them — like service or a selection of brands? And that translated into a legal question: should the Justices shape antitrust law to promote one or the other of those consumer preferences?
The oral argument (transcript here) in the case of Leegin Creative Leather Products Inc. v. PSKS Inc. (06-480) showed the Court more closely divided than might have seemed likely when the case was granted in December. The Court is being asked in the case to overrule the 1911 Dr. Miles decision, so as to allow manufacturers of consumer goods more legal leeway to bar discount prices when their products are sold at retail. Because the Court in modern times has swept away antitrust rules that are like the price-maintenance ban of the Dr. Miles decision, and because a chorus of economists insists that the consumer goods market is more dynamic now and needs more flexible legal rules, the rule of Dr. Miles might well have been judged to be in serious trouble.
But, except for Justice Antonin Scalia, there was no obvious sentiment on the bench for doing away with the per se rule that virtually bars vertical resale price maintenance. The economic “consensus” that Leegin and its allies have insisted exists against that ban did not seem so evident among the Justices. Justice Stephen G. Breyer, perhaps the most energetic questioner, openly doubted that claim. One economist, Breyer said, had concluded that if resale price maintenance were allowed on any scale, “every American would pay far more for the goods they buy at retail. Should we overturn Dr. Miles and run that risk?”
When Leegin’s lawyer, Theodore B. Olson of Washington, D.C., countered that the vast majority of economists disagreed, Breyer shot back: “We’re supposed to count economists?”
The effect of that exchange was to suggest that risking higher prices for consumers might be enough to cause some Justices to shy away from overruling the Dr. Miles precedent. Olson sought to parry that effect, repeatedly arguing that one manufacturer’s resale price mainenance tends to encourage competition at the retail level from makers of other brands, thus benefitting the consumer. Price maintenance, Leegin’s lawyer argued, enables manufacturers and retailers to provide better service to make their branded products more popular than others’.
After Olson conceded that it would be illegal if a group of retailers themselves got together in agreement on prices, Justice Anthony M. Kennedy — who may well hold a swing vote in the case — seized upon that concession. “Why should we allow the manufacturer to do something that [we] wouldn’t allow the retailers to do?” Isn’t that why there should remain a per se rule when manufactures insist upon the pricing level? Kennedy went on. Olson argued that manufacturers actually want the lowest prices possible charged at retail, to increase volume, and inter-brand competition might help with that desire.
Justice Scalia clearly was not ready to let the argument continue to focus predominantly on pricing, and on whether the Dr. Miles rule pushes prices up or down. “I don’t know why we should have to focus our entire attention on whether it’s going to produce higher prices or not. The market out there has different goods at different prices which have different qualities that attract different consumers.” The object of antitrust law, the Justice contended, is not lower prices, but “consumer welfare.” Consumers might well benefit from better service, and better service might be what one gets with “a somewhat higher price,” Scalia suggested.
Olson eagerly welcomed the aid. The Court, he said, had spelled out over and over again that “the purpose of the antitrust laws it not price, but it’s competition, because competition between competing manufacturers give the consumers more choice.”
When Deputy Solicitor General Thomas G. Hungar was at the podium, arguing against the Dr. Miles rule, he found a tough adversary in Justice David H. Souter. “The decision in this case,” Souter said, “is going to be very significant in the sort of battle between Wal-Mart and the Main Street stores; and why should this Court take a shot in the dark at resolving that, as distinct from leaving it to Congress, which is in a position to know more about where the shot is going to land than we are?”
Hungar fought back, contending that it is “simply insupportable” that abandoning the per se rules against resale price maintenace “is going to revolutionize the economy.” Manufacturers, he explained, could unilaterally impose retail price levels legally, so long as they do not do it in agreement with retail stores. But that thrust only met a rhetorical question from Chief Justice John G. Roberts, Jr.: “Well,then, what’s the great benefit in changing the rule if it’s perfectly legal to achieve the same result already?” Unilateral price maintenance, Hungar said, is not an efficient way for manufacturers to operate.
As the argument moved on to the view of retailers who want to charge discount prices for goods like Leegin’s leather products, Justice Scalia was the only serious skeptic about the stores’ concerns over pricing. “I just don’t think that all the customers want is cheap,” Scalia commented. “I think they want other things besides cheap. I think they want service. I think they want selection.”
But, Wichita, Kan., lawyer Robert W. Coykendall responded, “all those things are available under our current regime where we have a per se prohibition against resale price maintenance.” He also had a ready answer when Justice Samuel A. Alito, Jr., wondered why large-scale, low-price retailers (like Wal-Mart) were not taking part in this case, if they really needed the Dr. Miles rule for their commercial success. Coykendall said: “The large-scale dominant players in the retail industry have their own market power. They don’t need the protection of the per se rule in order to enforce [their power].”
Once more, however, Justice Scalia was there with a counter-argument. “We talk about the Wal-Marts and the Targets. They’re not here on amicus briefs because what they’re selling is cheap. They are selling price, and peopole who want low price and for whom that’s of value above all other things are going to coninue to go to those stores.”
The Supreme Court will be making up its mind in coming months about keeping or discarding the Dr. Miles rule; its decision is expected before early summer.
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