WASHINGTON, March 26 — A 96-year-old rule that treats as an automatic antitrust violation any agreement between a manufacturer and its retailers to adhere to a minimum resale price is considered archaic and out of touch by the Bush administration and economists of the Chicago school.
But it still has friends, and several of them sit on the Supreme Court.
A Supreme Court argument on Monday laid to rest any expectation that the rule against “resale price maintenance” would go quietly, joining other types of agreements between manufacturers and retailers that the Supreme Court no longer regards as automatic, or per se, violations of the Sherman Antitrust Act.
The old per se rule got a spirited defense not only from lawyers representing a small boutique in Texas and a coalition of 37 states, but from Justices Stephen G. Breyer, John Paul Stevens, Ruth Bader Ginsburg and David H. Souter.
These justices questioned the impact on consumers of permitting anti-price-cutting agreements and suggested that it was up to Congress and not the court to disavow a foundational principle of modern antitrust law, one that was announced by the Supreme Court in a 1911 case, Dr. Miles Medical Company v. John D. Park & Sons.
These four justices include two with substantial expertise in antitrust law: Justice Stevens, who made antitrust his specialty as a practicing lawyer before he became a federal judge, and Justice Breyer, who taught the subject at Harvard Law School.
The court’s other antitrust expert, Justice Antonin Scalia, also practiced and taught antitrust law in his pre-judicial career. Justice Scalia, however, expressed a very different view of the question. He offered a helping hand to Theodore B. Olson, the lawyer who was arguing on behalf of a leather goods manufacturer that the per se rule against resale price maintenance should be overturned.
Mr. Olson’s client, Leegin Creative Leather Products Inc., which makes the Brighton line of leather goods, lost a multimillion-dollar jury verdict to a retailer it had cut off for discounting its products. Mr. Olson accepted Justice Scalia’s help gratefully after having endured a barrage of skeptical questions in the opening minutes of his argument as Justice Breyer and the others warned that retail prices would inevitably rise if Mr. Olson won his appeal.
The colloquy proceeded as follows:
Justice Scalia: Is it the sole object of the Sherman Act to produce low prices?
Mr. Olson: No.
Justice Scalia: I thought it was consumer welfare.
Mr. Olson: Yes, yes, it is.
Justice Scalia: And I thought some consumers would prefer more service at a higher price.
Mr. Olson: Precisely.
Justice Scalia: So the mere fact that it would increase prices doesn’t prove anything. If in fact it’s giving the consumer a choice of more service at a somewhat higher price, that would enhance consumer welfare, so long as there are competitive products at a lower price, wouldn’t it?
Mr. Olson: That’s absolutely correct.
If the court does use this case, Leegin Creative Leather Products Inc. v. PSKS Inc., No. 06-480, to overturn the per se rule, resale price maintenance would not automatically be legal. Rather, any challenge to an agreement between a manufacturer and retailer to forbid discounting would be subject to the “rule of reason,” a familiar concept in antitrust law under which courts evaluate the anticompetitive effects of a marketing restriction case by case. So if Leegin wins at the Supreme Court, the case would go back to Federal District Court in Marshall, Tex., for a trial under the rule of reason.
In the company’s appeal to the United States Court of Appeals for the Fifth Circuit, in New Orleans, Leegin had urged application of the rule of reason. But the appeals court said it was bound by Supreme Court precedent to apply the per se rule. The jury’s award of $1.2 million in damages to Kay’s Kloset, the suburban Dallas shop that Leegin cut off, was automatically tripled under antitrust law.
Leegin’s marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell the Brighton line through small boutiques that could offer personalized service. Retailers were required to accept its no-discounting policy. Leegin did not dispute that this amounted to price fixing, but argued that consumers benefited from the extra care that the retailers’ guaranteed margin enabled them to give to promoting and servicing the products.
The Supreme Court in recent years has overturned per se rules against other types of manufacturer-dealer agreements, including, most recently, the setting of maximum resale prices.
Both Robert W. Coykendall, arguing for PSKS Inc., the parent of Kay’s Kloset, and Barbara D. Underwood, the New York State solicitor general who argued on behalf of 37 states, told the justices that the rule against minimum resale price maintenance was different and should be retained.
“Price is different,” Ms. Underwood said, adding that “this court has said that price competition is the central nervous system of the economy.”
Overturning the rule would be “a drastic change in the longstanding, settled interpretation of the Sherman Act,” she said, adding: “If that change is to be made at all, it should be made by Congress and not by this court.”
During the Depression, Congress passed a law permitting states to allow retail price fixing through what were known as “fair trade” laws. A Justice Department study in 1956 showing that consumers in those states were paying considerably more than consumers in “free trade” states brought new scrutiny to the issue, and Congress repealed the fair trade statute in 1975.
The outcome of the case may well depend on the vote of Justice Anthony M. Kennedy, who asked several questions during the argument but did not appear persuaded one way or another. Justice Samuel A. Alito Jr. and Chief Justice John G. Roberts Jr. seemed inclined to overturn the rule. Justice Clarence Thomas did not ask questions during the argument.