In 1911, Dr. Miles Medical Co, a maker of relaxants and other medicines, sued a distributor, John D. Park & Sons Co., for selling at cut rate prices. The company lost the case when the Supreme Court held that it was trading too close to cartel-like trading. The judgment in the case Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) became a precedent in antitrust law and came to be known as Dr. Mile Rule. Under that rule minimum prices manufacturers set on what dealers can charge customers for their products are deemed as illegal per se under the Sherman Act, no matter what evidence might be presented.
This precedent has now been revered by the Supreme Court in Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 2705 (2007). The Supreme Court in a 5-4 decision held that minimum pricing pacts between manufacturers and retailers could benefit customers under certain circumstances and should be considered on a pact by pact basis. The pact could foster competition by giving retailers enough profit to promote a brand or offer better services. The Supreme Court upheld the manufacturer’s right to enforce minimum prices on its own products.
Before this judgment, a manufacturer would be violating the antitrust law by punishing or discriminating against a retailer who sells at cut rate prices. This judgment gives the manufacturers new powers and can change the face of discount retailing in the United States. Manufacturers can now require retailers to abide by minimum pricing pacts or have their supplies cut off.
This ruling has in effect allowed price fixing to make a comeback. It undermines the free market by limiting the consumer’s power to decide for himself whether to buy at rock bottom prices from a no frills retailer or pay the full price at a retailer offering better services and other benefits. From a consumer’s point of view, it is very difficult to prove that such minimum price fixing pacts are anti-competitive.
The judgment has failed to consider one important aspect of retail trade – competitive environment. A uniform price might not work for all retailers.
This judgment will most probably result in many manufacturers fixing the minimum price at which the retailers must sell their products. This could feed inflation. Among the dissenting judges, one judge estimated that legalizing price setting could add $300 billion to consumer costs every year.
Manufacturers have welcomed this decision. Many manufacturers look upon discounts as tarnishing their image. Many have used this decision to get price fixing allegations against them dismissed. Cendant Corporation, the owners of Avis and Budget rent-a-cars, was facing price fixing allegations in a case filed in the U.S. District Court in Anchorage, AK, filed by one of its franchisees. The very next day after the Supreme Court’s ruling, Cendant asked the court to dismiss the allegations. The court dismissed the allegations citing the Supreme Court judgment.
Welcome to the new era of legalized price fixing.
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