Suppose the ineffectual manufacturer’s suggested retail price were suddenly reinvented, with teeth, as a minimum set price? It could happen, and soon. All retailers would do well to monitor decisions coming out of the U.S. Supreme Court through early summer. A ruling is expected in Leegin Creative Leather Products v. PSKS Inc. a case argued before the court in late March which could profoundly reshape the retail landscape, or reaffirm the status quo.
Potentially at stake is a retail concept which anyone who has grown up in the last century takes for granted: manufacturers cannot set the minimum price at which their goods must be sold in stores. It’s a fixture in the consumer’s mindset, fundamental principle for today’s aggressive brand of deep discount, mass market anything-for-less retailing. Free to sell products at any price, some promote hot products as loss leaders to entice customers into stores with hope they will also buy something a little more profitable.
But for the little guys and independents who can’t get goods on the same terms as volume resellers, success is often won by how effectively they compete where the big guys can’t, on the selection, service and expertise that define specialty retailing.
A Long History
And that’s been the way things are for nearly a century. Way back in 1911 in a case known as Dr. Miles Medical Company vs. John D. Park & Sons, the Supreme Court ruled that agreements between a manufacturer and its retail network to establish a minimum resale price squelched competition in our free-market economy and amounted to a violation of federal anti-trust laws. In that case Dr. Miles was the precursor of Miles Laboratories, trying at the time to secure the right to dictate to retailers what consumers should pay for its elixirs.
Well Dr. Miles lost, and one of the parameters guiding the evolution of American retailing for the next century was set: let the consumer decide which retail outlet offers the best value for their money. If price is all that matters, they’ll shop one place; if they place a premium on service, however one defines it, they’re just as free to shop somewhere else.
But now a contentious and closely watched case has moved from Texas through federal court and all the way to Washington to challenge that notion. In late March the nine justices of the U.S. Supreme Court listened to testimony from both sides in the case of Leegin Creative Leather Products v. PSKS Inc. Leegin, a Calif.-based manufacturer of tooled leather handbags, shoes and other accessories, is hoping the court will overturn a lower federal court ruling which awarded the PSKS $3.6 million in damages, and allow it to again argue its case in a lower court.
The Current Case
According to press reports, here’s how the case has progressed. PSKS is the parent company of Kay’s Kloset, an independent specialty store. In 2002 owners Phil and Kay Smith ran the business in a 6,000 square foot facility in the Dallas suburb of Lewisville. Their inventory included the Brighton line of leather accessories manufactured by Leegin Creative Leather Products. Leegin sells through its own store network as well as some department and independent specialty stores.
The company had a long standing agreement with its retailers: to stock its products they agree to follow the company’s suggested pricing and promotion policies, including minimum set prices.
Many apparently did, but in 2002 Leegin learned the Smiths had lowered prices on its products as much as 20 percent. The Smiths contend the move was made in response to price reductions Leegin was offering to shoppers at a store in Dallas/Fort Worth International Airport. When Leegin threatened to stop shipping items to any store which did not follow its guidelines, only the Smiths refused to comply. Leegin stopped shipping to Kay’s Korner, and store sales and profits fell. The store now operates out of a 1,500 square foot facility in Flower Mound, TX.
The Smiths in turn sued Leegin in U.S. District Court in Marshall, TX, charging illegal price fixing. A jury agreed, awarding them more than $1 million for damages and lost business. That ruling was later upheld on Leegin’s appeal to sue in the U.S. 5th Circuit Court of Appeals in New Orleans, and the award was tripled to $3.6 million. Leegin again appealed, this time to the U.S. Supreme Court, where the justices agreed to hear the case late last year.
Leegin’s position, backed by the Bush Administration and the National Association of Manufacturers, petitions the court to overturn the broadest implications of the 1911 Dr. Miles decision: that any agreement to establish a minimum retail price is always illegal, and thereby a violation of anti-trust laws. In fact, the company makes no claims its retail agreements amount to anything less than a form of price fixing.
Rather, it contends consumers benefit from improved service when retailers can resell products when profits are guaranteed by a set price. The company and its supporters are asking the court to decide if price fixing should be considered on a case-by-case basis to determine if and when minimum set pricing promotes or stifles competition.
Lawyers arguing for the Smiths, and backed by the attorney generals of 37 states and the Consumer Federation of America, counter that the Miles decision as it stands allows smaller retailers to effectively compete against larger chains, and gives consumers an assurance they are always paying a fair price for goods. In fact, if any anti-trust tenets of the Sherman Act should be revised, they contend that is the responsibility of Congress, and not the Supreme Court, to make those changes.
Revisiting Dr. Miles
How the Court will rule is anyone’s guess. At the very least, though, the decision to hear this case suggests the Supreme Court members believe it’s time to revisit the Dr. Miles ruling, and see how well it addresses the realities of today’s retail market. The majority could rule to leave things as they are, and uphold lower court rulings. Then again, much has changed since 1911, and a lot more could change should the majority of Justices decide that blanket forbiddance of price fixing no longer applies. At the very least, stipulating that price fixing agreements be reviewed on a case-by-case basis would certainly mean more work for lawyers, more cases in court.
But the implications of a new ruling, and how it would actually play out at retail is much harder to cipher. Any decision in favor of pricing agreements will not come as a price fixing mandate. Manufacturers will be free to selectively adopt or apply the concept to their needs. Smaller brands could use the guaranteed profits of a minimum set price as a way of muscling onto store shelves. Or, a manufacturer might seek pricing agreements for the most in-demand hot products in short supply, while allowing retailers to set pricing on the rest of its line.
The specter of set pricing agreements also raises questions about how it might hurt or benefit retailers. Could such a ruling provide the largest retail chains an additional profit buffer, based on the discount buys they get while smaller retailers, with much smaller orders, pay more to sell at the exact same price? And, if everyone has a product at the same price, could that actually play to the advantage of the specialty dealer, whose success has always been in providing value-added services?
However the Court rules, it will impact the future of retailing. For some insight on perspective on what its decision might mean for imaging retailers, I contacted Bill McCurry of McCurry Associates, retail consultant, speaker and author with special emphasis on the imaging industry.
Wisely, when given the opportunity to predict what the Supreme Court decision might be, he demurred. “It’s always risky to try and handicap which way the Supreme Court will go,” he laughed. “I wouldn’t want to guess what shape their decision might take.”
Nevertheless, he sees this as a serious case whose outcome should be closely scrutinized by manufacturers as well as retailers. In fact, McCurry suggests it may be worth reading the Court’s full decision, supporting and opposing views, rather than headline summaries, for insight on the implications for retailing. “In business cases, you often can’t say a ruling is either all good or all bad until you read the opinions and what is behind their decision.”
If the ruling comes down in favor of Leegin, retailers should be ready to act: “If they overturn the court’s earlier ruling, and allow minimum set pricing, and I was a store buyer, I’d be on the phone with manufacturers the next day asking them, ‘What are you going to do about it, and what are you going to do for me now?’ ”
A decision in Leegin Creative Leather Products v. PSKS is expected by summer, and Picture Business will explore its implications, however the U.S. Supreme Court rules, later this year. yy