Corporate & Securities Law

The ABA Defends Leegin and Stands Up to Senator Kohl on RPM Bill

Some interesting developments on the RPM front.  James Wilson testified on behalf of the ABA Antitrust Section testified at the recent hearings on the Discount Consumer Pricing Act on May 19th explaining the ABA’s resolution on the issue of RPM:

RESOLVED, That the American Bar Association recommends that the Sherman Act, 15 U.S.C. § 1, and comparable state and territorial laws should not be interpreted to apply a rule of per se illegality to agreements between a buyer and seller setting the price at which the buyer may resell goods or services purchased from the seller.

Wilson’s testimony concludes:

In sum, the ABA supports the position that under federal Sherman Act?and analogous state and territorial antitrust law?agreements between a buyer and seller setting the price at which the buyer may resell a product or service purchased from the seller should not be illegal per se. Instead, these agreements should be analyzed under a rule of reason analysis. The ABA also believes that the Supreme Court?s recent decision in Leegin is consistent with that position. Therefore, the ABA opposes legislation such as S. 148, which would overturn the Court?s decision and reestablish the per se rule of illegality for resale price maintenance. The ABA appreciates the opportunity to appear before the Subcommittee to discuss this important issue of U.S. antitrust law, and I look forward to your questions.

Apparently, Senator Kohl followed up with the ABA to ask some additional questions in a June 1 letter.  I found the ABA’s analysis very well done, as with the responses to Kohl’s questions.  Especially in a time where defense of rule of reason analysis for minimum RPM and the Leegin decision are not very popular, but in my view, the right policy for consumers.  Kudos!

Here’s the ABA response.  My testimony at the FTC RPM hearings is available here and further thoughts on the state of empirical evidence are here.  Below the fold, I’ve cut and paste the first question and answer about the existing empirical evidence on RPM where the ABA dismantles the assertion that the fair trade era studies conclusively establish (despite modern economic literature tending to show the opposite effect) that RPM is anticompetitive.

Question: You testified that you did not believe that ending the per se ban on vertical price fixing would lead to higher prices.  But there is substantial evidence that vertical price fixing in fact leads to higher prices. For 40 years prior to 1975, federal law permitted states to enact so-called ?fair trade? laws allowing vertical price fixing. These laws were abolished by the passage of the Consumer Goods Pricing Act of 1975. Numerous studies prior to the passage of that law in 1975 documented the fact that retail price maintenance leads to higher prices. Studies conducted by the Department of Justice in the late 1960s indicated that retail prices were between 18 and 27 % higher in states that allowed vertical price fixing than those that did not. And, in his dissenting opinion in the Leegin case, Justice Breyer estimated that if just ten percent of products were subject to vertical price fixing, would affect $ 300 billion dollars in commerce, raising the average bill a family of four would pay for retail goods by $ 750 to $ 1000 every year. What is your response to all of this evidence?

Response: The studies to which you referred are among many that have been conducted on the effects of vertical price fixing, and others studies have reached different results. Collectively, the studies show that minimum resale price maintenance can have mixed effects ? in some instances it can be procompetitive, and in other instances it can have anticompetitive effects that produce higher prices. Because resale price maintenance can be benign or procompetitive, rule of reason analysis is the appropriate way of measuring these mixed effects. If resale price maintenance produces anticompetitive effects, it can be found unlawful under the rule of reason.
Many economic studies have reported or predicted that resale price maintenance will lead to higher prices, but those studies that are based on analysis of actual market effects all use data from the fair trade era ? from passage of the Miller-Tydings Fair Trade Act in 1937 to passage of the Consumer Goods Pricing Act of 1975. These studies, which include those to which you referred in your question, were summarized in a 1983 staff report of the Federal Trade Commission’s Bureau of Economics prepared by Thomas R. Overstreet, Jr.1 The results are actually far more equivocal than has been portrayed by supporters of a return to the per se rule for minimum resale price maintenance.

Several of the studies reviewed by Overstreet showed that resale price maintenance had mixed effects. In a 1938 study of 50 drug products sold by drug retailers in New York State, the data showed that, after passage of fair trade legislation, prices increased for nationally advertised goods sold in discount stores, but fell slightly for the same items sold in non-discount stores.2 Prices for those items that were not nationally advertised did not seem to be affected.3  In a study of the effects of the 1970 repeal of fair trade legislation in Rhode Island, retail prices on five of the nine product lines surveyed were not affected by repeal.4 For the four product lines that showed price declines, price reductions were not universally implemented. Many smaller retailers simply held their prices unchanged and reduced their inventories and selections from the product line.5

In a 1945 FTC study of pricing for drug and food products in selected cities, the data showed that use of resale price maintenance had mixed results. After passage of fair trade laws, prices of vegetable oil shortenings increased in chain and department stores but declined in individual stores.6 Prices of soap products and cake flour increased in supermarkets but fell in individual stores, and for other grocery products there was no observable change in prices.7 For products sold through retail drug stores, the data showed that prices decreased at individual stores in medium-sized and large cities.8  Overstreet concluded that resale price maintenance can have diverse effects,9 and the empirical evidence indicates that it did not, during the fair trade era, lead uniformly to higher retail prices for consumers. We question the value of the fair-trade-era studies because they are dated and took place under very different circumstances. They should not, in any event, be used in making predictions about resale price maintenance in the current marketplace, for the following reasons.

First, fair trade laws were not equivalent to an antitrust regime that provides rule of reason treatment for resale price maintenance. Resale price maintenance in today?s economy depends on the willing acquiescence of both seller and retailer; under the fair trade laws of certain states, a resale price maintenance agreement with one retailer in a state could bind all other retailers, whether they agreed or not.10 The competitive effects of that regime would obviously be very different from those flowing from a resale price maintenance agreement between a manufacturer and its dealers today.

Second, the retail landscape in the U.S. is considerably different today than during the fair trade era, and it is improbable that a manufacturer could impose resale price maintenance on big box discount stores like Wal-Mart, Target or Best Buy unless the stores were satisfied that the pricing was competitive. These types of large multi-brand retailers, which account for a significant part of the consumer economy,11 have buying power that ?trumps even the power of supplier of a major brand.?12 As one commentator has noted, this kind of retail buying power gives the large retailer control over ?whether [items] will be priced or marketed aggressively,? and this, in turn, gives it

Full post as published by Truth on the Market on July 06, 2009 (boomark / email).