I picked up a tip from this blog in one of my RSS alerts about MAP pricing. Knowing that a lot of our customers work with MAP pricing, the story caught my eye. What’s interesting is I think this blogger is pretty much dead wrong in his interpretation of the new Supreme Court ruling. He interchanges MAP and resale price throughout the article. So what does the ruling really say?

Before starting, I thought I would give some case history on original pricing law. This turned out to be an interesting research assignment. Before 1911 a manufacturer of specialty medicines was forcing all retailers and wholesales to sign contracts to agree to sell products at certain prices. The case history is here.

Essentially the court ruled that the manufacturer cannot fix resale prices:

“Nor can the manufacturer by rule and notice, in the absence of contract or statutory right, even though the restriction be known to purchasers, fix prices for future sales. It has been held by this court that no such privilege exists under the copyright statutes, although the owner of the copyright has the sole right to vend copies of the copyrighted production.”

… and that the retailer can sell at whatever price it pleases:

The complainant having sold its product at prices satisfactory to itself, the public is entitled to whatever advantage may be derived from competition in the subsequent traffic.

Now read carefully here. The Court really said nothing about advertised prices, only resale prices. Quentin “Tim” Johnson talks about some of the history/distinction from a legal perspective. It also says that the Supreme Court had not yet ruled on MAP pricing in the Internet age. So what does this new case really say?

A retailer, Kay’s Kloset was selling the Brighton line of products. It made up 40-50% of their revenue. Kay’s became a preferred store (called a Heart Store), and agreed to sell at the manufacturer’s suggested prices. Well, the manufacturer visited, found the store substandard, and removed the retailer from the preferred store program, but continued selling to them. 4 years pass. Now the manufacturer learns that Kay’s is discounting suggested prices 20% off (the retailer contends to compete with other local retailers). You probably know what happens next. Yadda yadda yadda, the manufacturer cuts off supply to the retailer.

What happens next, many retailers can’t afford to do, based on either time or money. They sued. And won. That’s right, the store won on anti-competitive/restriction of trade grounds saying that the preferred store program (called Heart Store) proved that the manufacturer was trying to fix prices. After all, it was right there in a contract. Then they won the appeal. So that’s two victories for the retailer, all more or less referencing the original 1911 case which indicates that manufacturer resale price fixing is wrong always, per se, rather than on a case by case basis, or the rule of reason.

The majority opinion finds that price-fixing tends to allow brands with low cost and low service to flourish, as well as high-cost, high-service brands:

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.

In essence, all the Supreme Court is saying is that setting mininum sale prices is not wrong in all cases, and that future cases should be judged on a case-by-case basis. That’s all it says. If you read between the lines in the majority opinion, it tends to make the point that if the manufacturer isn’t a monopoly, then why should the Court get between agreements between companies? Perhaps, but it also puts more power in the hands in manufacturers hands relative to retailers.

And how does the dissent (Justice Breyer, Justice Stevens, Justice Souter, and Justice Ginsburg) characterizes the new decision?

This Court has consistently read Dr. Miles as establishing a bright-line rule that agreements fixing minimum resale prices are per se illegal. See, e.g., United States v. Trenton Potteries Co., 273 U. S. 392, 399-401 (1927); NYNEX Corp. v. Discon, Inc., 525 U. S. 128, 133 (1998). That per se rule is one upon which the legal profession, business, and the public have relied for close to a century. Today the Court holds that courts must determine the lawfulness of minimum resale price maintenance by applying, not a bright-line per se rule, but a circumstance-specific “rule of reason.”

What’s really interesting is reading the dissent closely. Basically characterizing the affirmative case as “a group of economists trying to make law”. Shouldn’t it give everyone pause when the majority Court opinion attempts to find economist consensus, at any point in time, draw some conclusions from that, and overturn a law which has stood for over a century. When have economists agreed on anything? They can’t even agree whether or not interest rates are going up or down next month.

Am I the only one who finds this kind of stuff fascinating? ChannelAdvisor’s legal counsel, Scott, should start blogging too I think. :-)

The Bottom Line

Essentially now, manufacturers setting minimum resale (not advertised) prices, and being able to enforce that in contract used to always be illegal. Now, that’s not the case. What will this do? On balance, it will tend to increase prices in the short-term. But it’s not all doom and gloom. Consumers aren’t stupid, and neither is the market, and so things will adjust. What will be interesting to me is which industries will this be OK for. Golf? Apparel? ?

If you’re a retailer, I would be paying attention — always read anything you sign with a manufacturer carefully. You can bet manufacturers are paying attention to this ruling, and as this comment indicates, may get bolder as a result.

More from a USA Today article.

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