Radical surgery on Dr. Miles? Argument 3/26/07

By Lyle Denniston
on Mar 25, 2007 at 6:45 am

In April 1911, Associate Justice Charles Evans Hughes stated a simple economic proposition: “The argument appears to be that, as the manufacturer can make and sell, or not, as he chooses, he may affix conditions as to the use of the article or as to the prices at which purchasers may dispose of it…But because a manufacturer is not bound to make or sell, it does not follow in case of sales actually made he may impose upon purchasers every sort of restriction.” In fact, said Hughes, such restrictions on resale rights are “obnoxious to public policy,” and thus illegal.

In other words, the Supreme Court was saying, once a product is sold, the right of property passes to the buyer, who can resell it at whatever price he wants and attempts to stop him are always illegal. That is what is known now as the “Dr. Miles rule,” from Hughes opinion in Dr. Miles Medical Co. v. John D. Park & Sons Co.

In layman’s language, the rule means that it is illegal for a manufacturer to bar a retailer of its goods from selling them at a discount; in legal parlance, it means that vertical “resale price maintenance” is per se (virtually automatically) illegal under the Sherman Antitrust Act.

On Monday, almost exactly 96 years later, the Supreme Court will hear argument on whether to cast aside the “Dr. Miles rule.” In the case of Leegin Creative Leather Products Inc. v. PSKS, Inc. (06-480), the Justices will consider whether — from now on — manufacturers should be legally free as a general rule to require retailers to charge only what the manufacturer says when the goods are sold in a retail store.

The case pits a maker of a line of women’s shoes, bags and other accessories, against a women’s outfitting store – Kay’s Kloset – in Lewisville, Texas, that was selling Leegin’s “Brighton” line of goods at discount prices. Leegin found out, and cut off the store’s supply of Brighton items, provoking an antitrust lawsuit. The Fifth Circuit Court, saying it had no choice but to apply the Dr. Miles rule, upheld a $3.6 million tripled antitrust damages award against Leegin because its attempt to control Kay’s Kloset prices was illegal. The Supreme Court put that ruling on hold while the case is on appeal.

Amid a welter of economic and legal arguments in the briefs, the Court finds only a simple legal question: should manufacturer’s resale price control policies now be judged on a case-by-case basis, applying normal legal and economic reasoning, or will the Court retain the notion that such policies are virtually always illegal?

Four attorneys will argue the case, beginning shortly after 10 a.m. Monday. Theodore B. Olson, the former Solicitor General and now a partner at Gibson Dunn & Crutcher in Washington, will argue for Leegin for 20 minutes, followed by Deputy U.S. Solicitor General Thomas G. Hunger, representing the federal government and arguing for ten minutes in support of overruling the Dr. Miles decision. Speaking for the Texas store will be Robert W. Coykendall of Morris, Laing, Evans, Brock & Kennedy in Wichita, Kan., followed by New York State Solicitor General Barbara D. Underwood, representing 37 states that want the Court to preserve the Dr. Miles rule.

Leegin’s main point for doing away with the per se rule for resale price maintenance agreements is that it is based upon an “antiquated common-law rule” against “alienating” the rights of property once sold, and that the Supreme Court for 30 years has been casting aside other per se rules under the antitrust laws.

“The per se rule against resale price maintenance is the lone remaining vestige of an antitrust regime that cannot be reconciled with either recent antitrust decisions or economic theory,” the brief argues. Because such price maintenance can have positive effects on competition, and thus benefit consumers, they should be allowed unless – examined one by one – they are found to stifle competition, the company contends. Among other consumer benefits claimed for the practice is that it gives stores incentives to compete on service, quality and promotional campaigns rather than simply trying to draw trade with lower prices. That will encourage inter-brand competition, it asserts.

The Justice Department supports the rule-of-reason approach for such policies, saying there is “a widespread consensus of opinion that RPM, like non-price vertical restraints, can have a variety of procompetitive effects that enhance consumer welfare.” There is no need, out of respect for precedent, to keep the Dr. Miles rule, the Department contends, because Congress in enacting the Sherman Act expected the Court to keep antitrust law up to date, as experience or economic analysis “points in a different direction.”

Much of the argument in amici briefs on that side of the case focuses on the supposed widespread agreement in the economic literature that RPM does not always harm competition, and that the Court should opt for symmetry so as to allow rule-of-reason analysis for vertical price restraints as it has done for some time with vertical non-price restraints. Those, for example, are the central points of a brief by two dozen professors of economics – eight of them former key aides at the Federal Trade Commission or in the Justice Department’s Antitrust Division.

The Texas store urges the Court to follow the rule of stare decisis, and keep the Dr. Miles precedent intact. Congress, it argues, has repeatedly reaffirmed its support for the per se rule, and has several times curbed the Justice Department in attempts to overturn the rule.

On basic economic theory, the store suggests that “the structure and nature of the American economy is shaped by consumers’ desire for lower prices, and retailers’ willingness to achieve economies and pass savings on to consumers. Overturning Dr. Miles would unsettle the way products are now distributed and priced in this country.” Resale price maintenance, the store says, demonstrably and uniformly leads to one thing: “higher consumer prices.”

The 37 states lining up on the store’s side dismiss as “untested academic speculation” the argument that RPM actually benefits consumers or competition. That line of argument, the states assert, “does not draw on practical experience or new empirical studies,” and the Court should not alter antitrust law and overturn precedent “on the basis of unproven hypotheses.” Boldly, their brief insists that there simply is “no empirical evidence” to show that such agreements “have offsetting benefits for consumers.” Indeed, it says, there is an “empirical vacuum” on the point.

The American Antitrust Institute warns the Court against a “radical shift in antitrust policy” that will not demonstrably aid shoppers, and the Consumer Federation of America seeks to convince the Court that RPM works as a serious barrier to entry into the retail market by discounters, like Sam Walton. “To overrule Dr. Miles would serve to entrench current modes of retailing,” the Federation claims. Burlington Coat Factory, a discounter, in its own brief seconds those thoughts.

The Court is expected to decide the case before recessing for the summer in late June.