June 28, 2007

Ding Dong, Dr. Miles Is Dead!

by PG

I know everyone is more interested in the Seattle schools decision, but for antitrust junkies, the decision that vertical price restraints would be judged by the rule of reason rather than as a per se violation is like watching a zombie finally stagger into its grave. It's also kind of fun seeing the 5-conservative majority opinion explain why a bright-line rule is bad and why a statute really is more like common law to be driven by judicial interpretation, so it's OK to ignore whatever signals Congress might be sending about the statute. Indeed, a major weakness in Kennedy's opinion is its attempt to deal with the Consumer Goods Pricing Act of 1975.

In 1937, Congress passed the Miller-Tydings Fair Trade Act, 50 Stat. 693, which made vertical price restraints legal if authorized by a fair trade law enacted by a State. Fifteen years later, Congress expanded the exemption to permit vertical price-setting agreements between a manufacturer and a distributor to be enforced against other distributors not involved in the agreement. McGuire Act, 66 Stat. 632. In 1975, however, Congress repealed both Acts. Consumer Goods Pricing Act, 89 Stat. 801. That the Dr. Miles rule applied to vertical price restraints in 1975, according to respondent, shows Congress ratified the rule. This is not so. The text of the Consumer Goods Pricing Act did not codify the rule of per se illegality for vertical price restraints. It rescinded statutory provisions that made them per se legal. Congress once again placed these restraints within the ambit of §1 of the Sherman Act.

And, as has been discussed, Congress intended §1 to give courts the ability “to develop governing principles of law” in the common-law tradition. Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U. S. 630, 643 (1981); see Business Electronics, 485 U. S., at 731 (“The changing content of the term ‘restraint of trade’ was well recognized at the time the Sherman Act was enacted”). Congress could have set the Dr. Miles rule in stone, but it chose a more flexible option. We respect its decision by analyzing vertical price restraints, like all restraints, in conformance with traditional §1 principles, including the principle that our antitrust doctrines “evolv[e] with new circumstances and new wisdom.” Business Electronics, supra, at 732; see also Easterbrook 139.

The rule of reason, furthermore, is not inconsistent with the Consumer Goods Pricing Act. Unlike the earlier congressional exemption, it does not treat vertical price restraints as per se legal. In this respect, the justifications for the prior exemption are illuminating. Its goal “was to allow the States to protect small retail establishments that Congress thought might otherwise be driven from the marketplace by large-volume discounters.” California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U. S. 97, 102 (1980). The state fair trade laws also appear to have been justified on similar grounds. See Areeda & Hovenkamp 298. The rationales for these provisions are foreign to the Sherman Act. Divorced from competition and consumer welfare, they were designed to save inefficient small retailers from their inability to compete. The purpose of the antitrust laws, by contrast, is “the protection of competition, not competitors.” Atlantic Richfield Co. v. USA Petroleum Co., 495 U. S. 328, 338 (1990) (internal quotation marks omitted). To the extent Congress repealed the exemption for some vertical price restraints to end its prior practice of encouraging anticompetitive conduct, the rule of reason promotes the same objective.

The above thicket of statutes and cases can be cut down as follows. Keep in mind that the prohibition on resale price maintenance is relevant only if the manufacturer wants to maintain a certain retail price, just as the Robinson-Patman Act is relevant only if the manufacturers wants to give discounts to chain stores not provided to independents. Plenty of manufacturers don't care what their products retail for, as long as they can maximize their own profits at the wholesale level. One reason for manufacturers to pursue resale price maintenance actually is vertical integration: if they are retailers of their own product in competition with other retailers of their product, they naturally would prefer not to have to compete on price, even if they want to maximize the number of retailers selling their products. For example, if a large discount shoe store carries Nine West shoes, it is competing with Nine West stores, and profit maximization for Nine West argues in favor of their requiring that all retailers sell hideously uncomfortable thong sandals for no less than $10.

1937: Miller-Tydings Fair Trade Act = if State passed a law in which retailers could label items "fair trade" (this was the Depression, not Starbucks) for adhering to a contract that forced them to maintain MSRP -- or rather, MMRP, Manufacturer's Mandated Retail Price -- the manufacturer had not violated the Sherman Act. A 1948 TIME article militated against the law and deemed it a child of the druggist lobby, but admitted, "Competition was reduced, pricewise; but it was increased in an unexpected way. The attraction of 'sure profits' on fixed prices lured thousands of new merchants into business. As they scrambled for customers, price-cutting returned in another form. Now, in order to undersell the 'protected' independents, most large chain stores put out their own brands. R. S. Macy & Co. has over 1,400 such items. Gimbels offers its own brand of bonded liquor."

1952: McGuire Act - Extended the Fair Trade Act such that manufacturer could cut off shipments to any retailer that did not follow MMRP, even if the retailer never had contracted to follow MMRP. Again from TIME, now a 1958 article:

No one has battled harder to enforce Fair Trade around the U.S. than giant General Electric Co., which gets an estimated 35% of its $4 billion annual sales from its consumer products. Last week G.E. threw in the sponge. [The sponge?] ...
G.E. had been leading a lost cause ever since 1952, when the federal McGuire Act legalized Fair Trade laws. In Fair Trade states, manufacturers, exempted by the McGuire Act from antitrust prosecution, were permitted to fix minimum prices for an entire state so long as they signed a contract with one dealer; all others were bound, whether they signed or not. Yet no sooner were the laws on the books than retailers started breaking them, cut prices far below company minimums. In five years G.E. alone spent almost $5,000,000 tracking down violators, brought suit against more than 3,000 price cutters. Yet the pressure against Fair Trade grew so strong that by last year it was enforceable in only 31 states. In 1954 G.E. stopped tagging major appliances with suggested list prices; two years later it gave up on TV sets.
1975: Consumer Goods Pricing Act: When President Ford signed it, he stated, "I am today signing into law H.R. 6971, which will make it illegal for manufacturers to fix the prices of consumer products sold by retailers. This new legislation will repeal laws enacted in 1937 and 1952 which amended the Federal antitrust laws so States could authorize otherwise illegal agreements between manufacturers and retailers setting the price at which a product would be sold to consumers." [emphasis added]

President Ford's understanding of the Consumer Goods Pricing Act appears to have been quite different from Kennedy's. So is Rep. Conyers's: "As you know, vertical minimum price fixing, often called resale price maintenance (RPM), is an issue of vital importance to consumers and retailers, as well as many manufacturers. Congress has legislated on this issue on at least four occasions over the past 70 years: in 1937 to pass the Miller Tydings Act, in 1952 to pass the McGuire Act, in 1975 to pass the Consumer Goods Pricing Act, and in 1983 to prohibit the expenditure of appropriated funds to urge the Supreme Court to overturn the per se rule." Apparently foreseeing today's outcome, Conyers asked in his letter to the FTC, "Given Congress’ active involvement in the RPM issue -- on the last two occasions (in 1975 and in 1983) in unequivocal support of the Dr. Miles line of cases -- would you agree that the Supreme Court should defer to Congress on this issue?"

(I attended a couple of the FTC's vertical hearings last summer, but as the panels had many economics wonks without formal legal training, the debate concentrated more on the wisdom of various policies rather than whether they should be promulgated by statute or common law, so I dunno how the FTC would have answered Conyers's question. There's no unanimous FTC position even on the policy question, given that Commissioner Harbour pleaded with the Court not to kill Dr. Miles, but according to the majority opinion, both the DOJ and FTC recommended that the Court replace the per se rule with rule of reason.)

Anyway, the line of reasoning Kennedy uses to square the Consumer Goods Pricing Act with the majority's decision to toss per se illegality for RPM is an odd one: because the CGPA had an objective of invalidating prior legislation that had an anti-competitive effect, and the Court considers its rule of reason for RPM also has a pro-competition objective, there's no conflict between the two! I look forward to future decision in which the Court decides that it is acting consistently with legislation because it totally shares Congress's goals.

June 28, 2007 06:08 PM | TrackBack
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