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The Future of Retail Pricing Agreements

            Have you ever wondered what the justification is for the "manufacturer's suggested retail price" or "MSRP?"  Why can't manufacturers and retailers simply agree on the price at which goods will be sold?

The answer goes back to a 96 year-old Supreme Court precedent called Dr. Miles.  In March of this year, the United States Supreme Court heard oral arguments as it considered whether to abandon this important precedent that governs retail pricing throughout the nation.  Under the current law, manufacturers may not enter into agreements with retailers to sell products at a certain price.  Retail pricing agreements have long been held anticompetitive and illegal as a result of the 1911 antitrust precedent named after the manufacturer that sought to set retail prices of its patent medicines.  Dr. Miles was decided under the Sherman Antitrust Act which prohibits "every contract, combination...or conspiracy, in restraint of trade or commerce." 

            In the case currently before the Court, Leegin Creative Leather Products v. PSKS, Inc., Leegin, the manufacturer of the Brighton line of unique leather goods and clothing accessories, dropped a Texas boutique called Kay's Kloset when it discovered the store was selling its products at prices less than allowed by the company's pricing agreement.  The retailer sued Leegin arguing the agreement was illegal in the first place.  The retailer won a $3.6 million jury verdict which was affirmed by the Fifth Circuit Court of Appeals.  On appeal, the Supreme Court considered whether retail pricing agreements are always anticompetitive, or whether it is better to examine the agreements on a case by case basis to determine if the agreements have an anticompetitive effect in the marketplace. 

Leegin, backed by the Bush Administration and business groups, argued its retail pricing agreements allow it to improve customer service and maintain the integrity of its brand.  The company argued its retail pricing agreements benefit consumers by promoting competition between brands and by providing incentives to dealers to provide better service.  According to Leegin, pricing agreements allow it to provide better service to customers because it can assure its retailers they won't be undercut by competitors who are not providing the same customer service.  Kay's Kloset, on the other hand, argued that retail price agreements absolutely result in higher consumer prices.  The company argued there is no economic evidence that retail price agreements benefit consumers.  The State of Utah, together with 36 other states, sided with Kay's Kloset. The states argued that retail price agreements are, in effect, agreements to raise prices to the detriment of consumers. 

            The Justices' comments at oral argument were illuminating.  Justice Scalia expressed concern that even if retail pricing agreements result in higher consumer prices, "giving the consumer a choice of more service at a somewhat higher price...would enhance consumer welfare, so long as there are competitive products at a lower price."  Justice Scalia also noted that retail pricing agreements have the potential to solve the "free rider problem" where "customers shop at the place that has the big show room, looks at all the product there, and goes and buys it from somebody else who has not incurred that expense."  Chief Justice Roberts' questions appeared to hint that pricing agreements are more efficient than the practice under Dr. Miles, in which manufacturers are allowed to unilaterally terminate relationships with retailers that don't observe the MSRP, but may not achieve the same results by contract.  Ping, the maker of high-end golf clubs and accessories, filed an influential brief with the Court that made this very argument.  Justice Souter questioned whether discarding Dr. Miles would result in a "massive reorientation in the retail economy." If so, he asked "why should we be the people to make a guess as opposed to the Congress?"

            Although it is impossible to predict how the Court will ultimately rule, Utah manufacturers, retailers, and consumers should not be surprised if there is a change in the law.  Now is the time for business leaders to take stock of how to react to a potential market transformation.