The Return of Price-Fixing

Imagine that you're a clothing retailer who has spent many years building a prosperous business -- playing by the rules, paying your taxes, and offering a service that customers are happy with.  Imagine further that your most popular wholesaler suddenly informs you that you will no longer have access to his line of ladies' handbags, a line that has been your best sales motivator.  Moreover, suppose the handbags were pulled not because you did anything illegal or immoral, but because the wholesaler decided that he was unwilling to subscribe to the laws on price-fixing.

It all began in 2002, when California-based Leegin Creative Leather Products Inc., a luxury leather goods company, stopped selling its Brighton line of handbags to a Lewisville, Texas retailer named Phil Smith.  Mr. Smith's boutique, Kay's Kloset, had been selling Brighton-brand leather handbags at a 20-percent discount.  After refusing to sell them at the prices dictated by the manufacturer, he lost the account.

As a result, Kay's Kloset lost 50 percent of its business and had to move to a smaller, less expensive location in nearby Flower Mound.  Realizing that price-fixing is against the law, Smith sued Leegin in U.S. District Court and won $4 million in damages.  The ruling was based on lost sales and other claims, all of which were upheld by the U.S. Fifth Circuit Court of Appeals.

The ruling on price-fixing dates back to 1911, when the courts ruled in Dr. Miles Medical Co. vs. John D. Park and Sons that it's always illegal for a supplier to dictate minimum prices to a retailer.  Nevertheless, the case was appealed all the way to the Supreme Court, which, in a 5-4 decision, overturned the rulings of the lower courts.  Justice Anthony Kennedy wrote the majority opinion, stating that discounts can harm consumers by driving prices down, depriving retailers of the profits they need to provide good service.  Huh?  Since when does a consumer suffer when prices are marked down?  One wonders if Justice Kennedy has ever done any price comparison shopping. 

Consumer advocates condemned the ruling as one that will definitely drive up prices on most consumer goods.  Of course, that seems like a no-brainer.  If manufacturers can set prices, it has a deleterious effect on free trade.  In effect, it takes bargaining out of the sales equation.  In a free market, competition is the impetus that keeps the entrepreneurial spirit alive.

The owner of Leegin is Jerry Kohl*, who spent more than $4 million on legal fees, was represented in the highest court of the land by none other than Ted Olson, best-known for the successful Supreme Court defense of Governor George W. Bush in Bush v. Gore for the presidency of the United States.  Also not surprisingly, while the Leegin vs. Kay's Kloset antitrust case was being waged in the Supreme Court by the former Bush advocate, the Bush administration's Justice Department supported the manufacturer. 

This just smacks of collusion between the large, well-heeled companies and their friendly supporters in the government.  First of all, Mr. Smith was operating under the law in effect at the time.  That law said a manufacturer can suggest a price but cannot punish a retailer for any deviation.  To do so was considered price-fixing, which is as illegal as having two or more businesses conspire to charge higher prices.  Hence, when his business was damaged by a supplier who was defying the laws on price-fixing, Smith was legally entitled to his victory.

But with a deep-pocketed antagonist able to spend huge sums for arguably the most well-connected attorney in the country, what chance did Smith have?  In overturning Smith's victory, the Supremes said that courts should be allowed to look at the rationale for setting prices on a case-by-case basis.  Well, if nothing else, that ruling will keep the court calendars backed up until most of the litigants meet their makers.

Meanwhile, Kay's Kloset went out of business.  But the indefatigable Mr. Smith wants to take the case back to the Supreme Court.  To do so, he has enlisted the aid of Harvard Law professor Einer Elhauge, who feels the case is so important to the future of the free-market system that he will handle it pro bono.  Mr. Elhauge said the ruling against Kay's Kloset is now being misinterpreted in the lower courts.  He maintains that it's not just a problem for vertical price-fixing, but also for antitrust law generally because it will "drastically restrict" any attempt to scrutinize the details of an allegedly anticompetitive action.

Of course, there is no guarantee that the Supreme Court will revisit the case.  Yet one would think that a country which prides itself on its free-market principles would be more consistent in its application of such laws.

*corrected. Jerry Kohl has no relationship top Kohl's Department Stores. We regret the error.

Bob Weir is a former detective sergeant in the New York City Police Department.  He is the executive editor of The News Connection in Highland Village, Texas.  E-mail Bob. 
Imagine that you're a clothing retailer who has spent many years building a prosperous business -- playing by the rules, paying your taxes, and offering a service that customers are happy with.  Imagine further that your most popular wholesaler suddenly informs you that you will no longer have access to his line of ladies' handbags, a line that has been your best sales motivator.  Moreover, suppose the handbags were pulled not because you did anything illegal or immoral, but because the wholesaler decided that he was unwilling to subscribe to the laws on price-fixing.

It all began in 2002, when California-based Leegin Creative Leather Products Inc., a luxury leather goods company, stopped selling its Brighton line of handbags to a Lewisville, Texas retailer named Phil Smith.  Mr. Smith's boutique, Kay's Kloset, had been selling Brighton-brand leather handbags at a 20-percent discount.  After refusing to sell them at the prices dictated by the manufacturer, he lost the account.

As a result, Kay's Kloset lost 50 percent of its business and had to move to a smaller, less expensive location in nearby Flower Mound.  Realizing that price-fixing is against the law, Smith sued Leegin in U.S. District Court and won $4 million in damages.  The ruling was based on lost sales and other claims, all of which were upheld by the U.S. Fifth Circuit Court of Appeals.

The ruling on price-fixing dates back to 1911, when the courts ruled in Dr. Miles Medical Co. vs. John D. Park and Sons that it's always illegal for a supplier to dictate minimum prices to a retailer.  Nevertheless, the case was appealed all the way to the Supreme Court, which, in a 5-4 decision, overturned the rulings of the lower courts.  Justice Anthony Kennedy wrote the majority opinion, stating that discounts can harm consumers by driving prices down, depriving retailers of the profits they need to provide good service.  Huh?  Since when does a consumer suffer when prices are marked down?  One wonders if Justice Kennedy has ever done any price comparison shopping. 

Consumer advocates condemned the ruling as one that will definitely drive up prices on most consumer goods.  Of course, that seems like a no-brainer.  If manufacturers can set prices, it has a deleterious effect on free trade.  In effect, it takes bargaining out of the sales equation.  In a free market, competition is the impetus that keeps the entrepreneurial spirit alive.

The owner of Leegin is Jerry Kohl*, who spent more than $4 million on legal fees, was represented in the highest court of the land by none other than Ted Olson, best-known for the successful Supreme Court defense of Governor George W. Bush in Bush v. Gore for the presidency of the United States.  Also not surprisingly, while the Leegin vs. Kay's Kloset antitrust case was being waged in the Supreme Court by the former Bush advocate, the Bush administration's Justice Department supported the manufacturer. 

This just smacks of collusion between the large, well-heeled companies and their friendly supporters in the government.  First of all, Mr. Smith was operating under the law in effect at the time.  That law said a manufacturer can suggest a price but cannot punish a retailer for any deviation.  To do so was considered price-fixing, which is as illegal as having two or more businesses conspire to charge higher prices.  Hence, when his business was damaged by a supplier who was defying the laws on price-fixing, Smith was legally entitled to his victory.

But with a deep-pocketed antagonist able to spend huge sums for arguably the most well-connected attorney in the country, what chance did Smith have?  In overturning Smith's victory, the Supremes said that courts should be allowed to look at the rationale for setting prices on a case-by-case basis.  Well, if nothing else, that ruling will keep the court calendars backed up until most of the litigants meet their makers.

Meanwhile, Kay's Kloset went out of business.  But the indefatigable Mr. Smith wants to take the case back to the Supreme Court.  To do so, he has enlisted the aid of Harvard Law professor Einer Elhauge, who feels the case is so important to the future of the free-market system that he will handle it pro bono.  Mr. Elhauge said the ruling against Kay's Kloset is now being misinterpreted in the lower courts.  He maintains that it's not just a problem for vertical price-fixing, but also for antitrust law generally because it will "drastically restrict" any attempt to scrutinize the details of an allegedly anticompetitive action.

Of course, there is no guarantee that the Supreme Court will revisit the case.  Yet one would think that a country which prides itself on its free-market principles would be more consistent in its application of such laws.

*corrected. Jerry Kohl has no relationship top Kohl's Department Stores. We regret the error.

Bob Weir is a former detective sergeant in the New York City Police Department.  He is the executive editor of The News Connection in Highland Village, Texas.  E-mail Bob. 

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