For the second ‘day’ I am choosing a story from the supreme court’s docket… from the NY Times, Justices End 96-Year-Old Ban on Price Floors, outlines the decision striking down a century old antitrust rule. The decision was split in the way many feared the new court would polarize.

“…the Supreme Court ruled… that it is no longer automatically unlawful for manufacturers and distributors to agree on setting minimum retail prices.

The decision will give producers significantly more leeway, though not unlimited power, to dictate retail prices and to restrict the flexibility of discounters.”

The court is considering the theoretical findings of some economists in reaching this conclusion, believing ” the new rule could, in some instances, lead to more competition and better service.”

The court followed the reasoning of “the Bush administration, along with economists of the Chicago school, [who] had argued that the blanket prohibition against resale price maintenance agreements was archaic and counterproductive because, they said, some resale price agreements actually promote competition.”

“…They said, such agreements can make it easier for a new producer by assuring retailers that they will be able to recoup their investments in helping to market the product. And they said some distributors could be unfairly harmed by others — like Internet-based retailers — that could offer discounts because they would not be incurring the expenses of providing product demonstrations and other specialized consumer services.”

“A majority of the court agreed that the flat ban on price agreements discouraged these and other marketing practices that could be helpful to competition.”

The case that triggered this supreme court turnaround “involved an appeal of a judgment of $1.2 million against Leegin Creative Leather Products Inc. after it cut off Kay’s Kloset, a suburban Dallas shop, for refusing to honor Leegin’s no-discount policy. The judgment 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 its “Brighton” line of fashion accessories through small boutiques that could offer personalized service. Retailers were required to accept a no-discounting policy.”

Originally, “the Supreme Court adopted the flat ban on resale price agreements between manufacturers and retailers in 1911, when it founded that the Dr. Miles Medical Company had violated the Sherman act. The company had sought to sell medicine only to distributors who agreed to resell them at set prices. The court said such agreements benefit only the distributors, not consumers, and set a rule making such agreements unlawful.”

However Justice Kennedy set aside such considerations and instead proffered that “the court was not bound by the 1911 precedent because of the “widespread agreement” among economists that resale price maintenance agreements can promote competition;” adding “vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed.”

Essentially the majority decision is saying we shouldn’t impose a blanket rule forbidding the practice when it ‘might’ have a positive effect on competition in ‘some’ instances. As the minority stated in their dissenting opinion, what must be considered is how likely it is that this will be to the advantage or disadvantage of consumers; how often will it be implemented to spur on rather than limit competition, and how difficult will it be to tease apart the two for prosecution and enforcement?

In a way it’s akin to the establishment of 0.08 % blood alcohol content (BAC) as the minimum legal limit for consideration of intoxication when operating a motor vehicle. While not ‘beneficial’ of course, that standardization becomes somewhat arbitrary when we consider the diversity of human physiology. What’s meaningful for one individual may be dramatically less so for another. If we were to decide to scrap the standardization because it failed to take into account individual physiological conditions would we really be creating a situation of fairness or would we realistically be sliding back to the days of litigation before the test? Would it serve more unfairly prosecuted ‘unimpaired’ motorists or would it make it nearly impossible to prosecute suspects because the degree of doubt that can be established is overwhelming?

This case was specific to a small manufacturer and a small retailer, and while the arguments to support the majority are more striking for this case, I can’t help coming to a conclusion similar to the dissenters, that it is far more likely that this will be taken advantage of by large businesses and those in industries with high entry barriers. It is more likely that this decision will be used to stifle competition and drive up profit margins by large established players in industries such as energy production, communications and pharmaceuticals to name a very few. It may in theory still be illegal for them to do so, as this decision just states that the matter must be considered on a case-by-case basis but like the example above using the 0.08 % BAC above, when you remove the standard it becomes difficult to enforce and in this case it will give companies with deep pockets (made even deeper by this ruling) the new legal avenues to pursue – or new methods to drag out litigation indefinitely. The government would have to prove that each case negatively effects competition and even if that is possible which seems unlikely given the complexity of the market system, how will a defendant claiming ignorance be handled? Are companies supposed to have a determination standard for how each pricing agreement effects the market? Would it be independent? What happens when there is disparity between the government’s determination and a company’s internal or independent findings?

This seems like the opening of a Pandora’s Box and the two possible outcomes are either a later supreme court retreat in an attempt to close the ‘Box’ or to wholly scrap the enforcement of price-fixing antitrust laws. It’s my guess that the supporters of this decision are in full favor of the latter and the majority members of the Supreme Court probably obfuscated the the true ramifications from themselves when applying their ruling. What I find likely is that this is the first step of two before the Supreme Court. The next may take place when a collection of large companies are caught colluding on price and there is disagreement in how the case-by-case line should be drawn and how competition will realistically be effected. At that point, like this one, the outcome may depend largely on the makeup of the court.

This decision scares me.