S. 148, the Discount Pricing Consumer Protection Act was introduced by Senator Herb Kohl and referred to the Senate’s Committee on the Judiciary on January 6, 2009. The purpose of the Act is to restore the rule that vertical pricing otherwise known as resale price maintenance agreements, where manufacturer’s set a price below which wholesalers, retailers, or distributors cannot sell the manufacturer’s product, are per se illegal and thus violate section 1 of the Sherman Act.
The legislation amends section 1 of the Sherman Act by stating that “Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.” The legislation has one co-sponsor, Senator Sheldon Whitehouse of Rhode Island.
The Sherman Act makes illegal every contract, trust, or combination designed to restrain trade. See 15 U.S.C. sec. 1. From 1911, starting with Dr. Miles Medical Co. v. John D. Park & Sons Co. (220 U.S. 373) up until 2007, an assessment as to legality of a resale price maintenance agreement was made pursuant to a per se rule. This meant that based on a court’s experience with evaluating resale price maintenance agreements and with no additional economic analysis, a court could find that an agreement acted as a restraint on competition and that the court could predict with confidence that were the agreement subject to such an analysis, the agreement would be invalidated.
In 2007, however, the United States Supreme Court decided in Leegin Creative Leather Products, Inc., v. PSKS, Inc. that assessing the legality of a resale price maintenance agreement was best made under a rule of reason approach. This meant that a court could take into account specific market and economic information about the business, and characteristics surrounding a resale price maintenance agreement including its history, nature, and effect on trade.
The court went on further to state that a resale price maintenance agreement could work to promote interbrand competition amongst manufacturers. Specifically by eliminating price competition amongst retailers selling a manufacturer’s brand, retailers could focus energy and resources promoting a manufacturer’s brand against the manufacturer’s competitors. The court did acknowledge, however, that there is a risk of anticompetitive behavior as a result of resale price maintenance agreements in the form of monopoly or unlawful price fixing. In the end, it is the circumstances that will dictate whether a resale price maintenance agreement is precompetitive or anticompetitive.
S. 148 would in essence overturn the Supreme Court’s ruling in Leegin, and replace the rule of reason with the per se rule. One rationale for S. 148 is that the per se rule promoted price competition and that substantial benefits of lower prices flowed to consumers. The legislation makes reference to economic studies that further support the argument that consumer welfare is increased as a result of applying the pro se rule.
If the underlying social policy is to insure that the benefits of competition via lower prices flow to the consumer, then this bill will not accomplish that. Not only does the bill take away from a court the benefit of conducting a case-by-case economic analysis of an alleged violation, it takes away a tool that manufacturers can use to promote the image of their product.
Part of that image is the price of the product. Price sends signals to desired markets and targets certain consumers based on their tastes, desires, expectations, and income. Consumer choice is harmed where the manufacturer is denied a method that allows its product to stand out from other products.