[Senate Report 111-227]
[From the U.S. Government Publishing Office]
Calendar No. 473
111th Congress Report
SENATE
2d Session 111-227
======================================================================
DISCOUNT PRICING CONSUMER PROTECTION ACT
_______
July 21, 2010.--Ordered to be printed
_______
Mr. Leahy, from the Committee on the Judiciary, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 148]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to which was referred the
bill (S. 148), to restore the rule that agreements between
manufacturers and retailers, distributors, or wholesalers to
set the minimum price below which the manufacturer's product or
service cannot be sold violates the Sherman Act, having
considered the same, reports favorably thereon, without
amendment, and recommends that the bill do pass.
CONTENTS
Page
I. Background and Purpose of the Discount Pricing Consumer Protection
Act..............................................................2
II. History of the Bill and Committee Consideration..................6
III. Section-by-Section Summary of the Bill...........................6
IV. Congressional Budget Office Cost Estimate........................7
V. Regulatory Impact Evaluation.....................................8
VI. Conclusion.......................................................8
VII. Minority Views of Senators Sessions, Hatch, and Kyl..............9
VIII.Changes to Existing Law Made by the Bill, as Reported...........16
I. Background and Purpose of the Discount Pricing Consumer Protection
Act
This legislation is intended to restore the automatic
(``per se'') ban on manufacturer setting of minimum resale
prices (a practice known as ``minimum resale price
maintenance''). Minimum resale price maintenance results in
higher prices to consumers. Until the recent Supreme Court
decision in Leegin Creative Leather Products, Inc. v. PSKS,
Inc.,\1\ these agreements had been per se illegal for nearly a
full century under the antitrust laws. This legislation
reinstates that per se ban.
---------------------------------------------------------------------------
\1\551 U.S. 877 (2007).
---------------------------------------------------------------------------
The antitrust laws forbade manufacturers from setting
minimum resale prices.\2\ Three years ago, in its 5-4 decision
in Leegin, the Supreme Court overturned this per se
prohibition. Instead, the narrow majority in Leegin directed
that minimum resale price maintenance be evaluated on a case-
by-case basis under the ``rule of reason'' approach, pursuant
to which the anticompetitive effects of the conduct are weighed
against its likely pro-competitive benefits.
---------------------------------------------------------------------------
\2\Dr. Miles Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
---------------------------------------------------------------------------
The per se rule banning minimum resale price maintenance by
manufacturers enabled retail discounting and permitted vigorous
price competition to flourish. The dissenting opinion in Leegin
predicted that, if only 10 percent of manufacturers imposed
resale price maintenance policies under the new interpretation
of the law, the average family of four's retail bills would
increase between $750 and $1000.\3\ Since the Leegin decision,
it has been reported that over 5,000 manufacturers have
implemented minimum price policies.\4\ These policies have
appeared in various industries, including electronics, apparel,
toys, home furnishings, and others. If minimum resale price
maintenance continues to be permitted, prices for a myriad of
consumer goods are likely to increase, consumer access to
discounted products will decline, and retail competition will
be inhibited.
---------------------------------------------------------------------------
\3\Leegin, 551 U.S. at 926 (Breyer, J., dissenting).
\4\Joseph Pereira, State Law Targets `Minimum Pricing', Wall St. J.
at D1 (E. ed. April 28, 2009).
---------------------------------------------------------------------------
This legislation is necessary to prevent this consumer
harm. Rule of reason analysis, adopted by the Leegin court, is
insufficient to prevent anticompetitive minimum resale price
maintenance agreements, given the practical difficulties that
plaintiffs face in bringing a successful case. In antitrust
cases, rule of reason requires ``the factfinder [to] weigh all
the circumstances of a case in deciding whether a restrictive
practice should be prohibited as imposing an unreasonable
restraint on competition.''\5\ ``Appropriate factors to take
into account `include specific information about the relevant
business' and `the restraint's history, nature, and
effect.'''\6\ Whether the businesses involved have ``market
power'' is a ``further, significant consideration.''\7\
Further, the ``plaintiff bears the burden of proving that a
restraint has a substantial anticompetitive effect.''\8\ The
restraint's anticompetitive effect must be ``significant'' to
establish liability under the rule of reason,\9\ and the
plaintiff must prove that ``the restraint is likely to have a
substantial, adverse effect on competition by engaging in an
analysis of the [relevant] market to predict the restraint's
effect. . . .''\10\
---------------------------------------------------------------------------
\5\Leegin, 551 U.S. at 885 (quoting Continental T.V. Inc. v. GTE
Sylvania Inc., 433 U.S. 36, 49 (1977)).
\6\Id. at 885 (quoting State Oil Co. v. Khan, 522 U.S. 3, 10
(1997)).
\7\Id. at 885-86.
\8\ABA Section of Antitrust Law, Antitrust Law Developments, at 55
(4th ed. 1997) (citing U.S. v. Arnold, Schwinn & Co., 388 U.S. 365, 374
n. 5 (1967)).
\9\Id. at 55.
\10\Id. at 59 (citing Copperweld Corp. v. Independence Tube Corp.,
467 U.S. 752, 768 (1984) (noting that the rule of reason is ``an
inquiry into market power and market structure designed to assess the
combination's actual effect'')).
---------------------------------------------------------------------------
The likely antitrust plaintiffs in minimum resale price
maintenance cases--small discount retailers and consumers
likely will not have the economic resources to successfully
bring these actions. Given the substantial legal burdens,
requiring litigants to prove minimum resale price maintenance
illegal under the rule of reason is both costly and time
consuming.\11\ Testimony from economic experts regarding the
market, the market power of the parties to the restraint, and
the likely impact on competition is typically required in such
a case; oftentimes involving highly complex economic
modeling.\12\
---------------------------------------------------------------------------
\11\See H. Hovenkamp, The Antitrust Enterprise 105 (2005)
(litigating a rule of reason case is ``one of the most costly
procedures in antitrust practice''). See also, M.A. Carrier, The Rule
of Reason: An Empirical Update for the 21st Century, 16 Geo. Mason L.
Rev. 827, 830 (finding that out of 222 reported Federal antitrust cases
decided under the rule of reason in the last decade, the plaintiff
prevailed in only one).
\12\As Justice Breyer pointed out in dissent in Leegin, requiring
proof of ``market power'' ``invites lengthy time-consuming argument
among competing experts, as they seek to apply abstract, highly
technical, criteria to ill-defined markets.'' 551 U.S. at 917 (Breyer,
J., dissenting).
---------------------------------------------------------------------------
Two prominent discount retailers that testified in hearings
on this issue before the Judiciary Committee's Subcommittee on
Antitrust, Competition Policy and Consumer Rights (``Antitrust
Subcommittee'') stated their companies did not believe the rule
of reason standard would be effective in halting
anticompetitive behavior, as they would be unlikely to bring a
rule of reason case challenging minimum resale price
maintenance.\13\
---------------------------------------------------------------------------
\13\Marcy Syms, CEO of Syms discount clothing stores, stated in an
answer to a written question from Senator Kohl as to whether she would
be likely to bring a rule of reason case challenging minimum resale
price maintenance, that ``[i]t would be very unlikely for SYMS to bring
an antitrust suit [under the rule of reason]. We would not have the
resources, knowledge or a strong enough position in the market place to
make such action prudent.'' The Leegin Decision: The End of the
Consumer Discounts or Good Antitrust Policy?: Hearing Before Senate
Subcommittee on Antitrust, Competition Policy and Consumer Rights of
the Committee on the Judiciary, S. Hrg. 110-342 (2007) at 40 (August
24, 2007 letter to Sen. Herb Kohl from Marcy Syms). Likewise, Stacy
Haigney, counsel to Burlington Coat Factory, testified that ``the cost
[of pursuing a rule of reason antitrust case] is more than likely to be
well into the seven figures. Burlington Coat Factory cannot afford that
kind of expenditure and disruption of its business in a litigation
which . . . is far from certain to succeed. Thus, as a practical
matter, the Leegin case deprives Burlington Coat Factory of any remedy
should it become a victim of vertical price fixing.'' The Discount
Pricing Consumer Protection Act: Do We Need to Restore the Ban on
Vertical Price Fixing?: Hearing Before the Subcommittee on Antitrust,
Competition Policy and Consumer Rights of the Committee on the
Judiciary, S. Hrg. 111-267 [hereinafter 2009 Antitrust Subcommittee
Vertical Price Fixing Hearing] at 33. Haigney also described the
considerable hurdles that a discount retailer would need to overcome to
establish a rule of reason case challenging minimum resale price
maintenance. According to Haigney, in light of the Supreme Court's
decision in Bell Atlantic Corp. v. Twombly, 55 U.S. 544 (2007),
requiring an antitrust plaintiff to plead a ``plausible'' antitrust
claim, ``without any discovery, a plaintiff must undergo the effort and
expense of putting together a complex economic analysis of the market,
the history of the restraint, the relative market shares of the product
and the parties, etc., simply to survive a motion to dismiss. Assuming
that this hurdle can be surmounted, the plaintiff would then have to
embark upon years of document-rich discovery and motion practice
against a well-heeled adversary with numerous depositions, including of
multiple experts on both sides.'' Id. at 20 & 33.
---------------------------------------------------------------------------
These concerns are supported by evidence that the current
law is not deterring resale price maintenance agreements. While
it has been less than three years since the Leegin decision,
more than 5,000 companies have reportedly implemented minimum
pricing policies.\14\ A new industry referred to as ``internet
monitors'' has emerged since the Leegin decision. As part of
their efforts to enforce minimum resale pricing policies,
manufacturers hire these companies to monitor retail prices on
the Internet. After noticing low prices, the internet monitors
report the low prices to manufacturers, who then demand the
retailer raise their prices to the manufacturers' minimums.\15\
---------------------------------------------------------------------------
\14\Joseph Pereira, State Law Targets `Minimum Pricing', Wall St.
J. (E. ed.), April 28, 2009, at D1.
\15\2009 Antitrust Subcommittee Vertical Price Fixing Hearing,
supra at n.13, (Written Testimony of FTC Commissioner Pamela Jones
Harbour [hereinafter Harbour Written Testimony]) at 119; Id. at 13 (Tod
Cohen, eBay Vice President and Deputy General Counsel for Government
Relations, testified that since the Leegin decision, one internet
monitoring company, alone, has sent over 1.2 million ``notice and
takedown'' requests to the eBay site); Joseph Pereira, Discounters,
Monitors Face Battle On Minimum Pricing, Wall St. J. (E. ed.), Dec. 4,
2008, at A1.
---------------------------------------------------------------------------
In addition, at the Antitrust Subcommittee's May 2009
hearing on S. 148, former FTC Commissioner Pamela Jones Harbour
testified that since the Leegin decision ``the number of
companies using RPM has substantially increased,'' ``some
discounters had been terminated by as many as a quarter of
their suppliers,'' and other discounters (including PSKS, Inc.,
the plaintiff in the Leegin case) have gone out of business,
unable to get the courts to ``even consider the merits of their
claims under the rule of reason.''\16\ This testimony is
supported by reports received by Antitrust Subcommittee staff
from Internet retailers that manufacturers are implementing
policies forbidding Internet retailers from listing discounted
prices on the Internet retailer's web page for that product.
Only after potential customers add the product to their
Internet ``shopping cart'' does that customer see the
discounted price. Among other things, this prevents web
applications that identify low prices on the Internet for
consumers from finding the sale price for the product. This has
the effect of stifling price competition on the Internet.
---------------------------------------------------------------------------
\16\Harbour Written Testimony, at 119-120.
---------------------------------------------------------------------------
There are many other examples of the implementation of
minimum resale price maintenance since the announcement of the
Leegin decision, including Sony's decision to implement a
program mandating minimum retail prices on certain high end
electronics,\17\ efforts to forbid retailers from discounting
toys during the 2008 holiday shopping season,\18\ and Avis'
Rent-A-Car policy forbidding its independently owned
franchisees from renting cars below Avis' minimum prices in
Alaska.\19\
---------------------------------------------------------------------------
\17\Cecile Kohrs Lindell, Sony Upsets Holiday Shoppers, Antitrust
Attorneys, The Deal, Nov. 24, 2008, http://www.thedeal.com/dealscape/
2008/11/sony_upsets_holiday_shoppers_a.php (last visited Dec. 3, 2008).
\18\Joseph Pereira, Why Some Toys Don't Get Discounted--
Manufacturers Set Price Minimums That Retailers Must Follow Or Risk
Getting Cut Off; Shopping Around for `Rock Band 2', Wall St. J. (E.
ed.), Dec. 24, 2008, at D.1.
\19\Joseph Pereira, Price Fixing Makes Comeback After Supreme Court
Ruling, Wall St. J. (E. ed.), Aug. 18, 2008, at A.1.
---------------------------------------------------------------------------
Past empirical studies further demonstrated the negative
effect of minimum price agreements. In 1975 Congress repealed
the Miller-Tydings Fair Trade Act\20\ and the McGuire Act\21\
which permitted individual States to enact ``fair trade'' laws
authorizing minimum resale price maintenance agreements. At the
time of the repeal, 36 States permitted minimum resale pricing.
A study conducted by the Department of Justice found minimum
resale price maintenance policies in the States that permitted
this practice raised prices by 19% to 27%.\22\ Additionally, in
1983, the Federal Trade Commission staff, after studying
numerous pricing surveys, concluded that the surveys
``indicate[d] that [resale price maintenance] in most cases
increased the prices of products sold.''\23\
---------------------------------------------------------------------------
\20\50 Stat. 693.
\21\66 Stat. 631.
\22\Leegin, 551 U.S. at 912 (opinion of Breyer, J., dissenting)
(citing Hearings on H.R. 2384 before the Subcommittee on Monopolies and
Commercial Law of the House Committee on the Judiciary, 94th Cong., 1st
Sess., 122 (1975) (statement of Keith I. Clearwaters, Deputy Assistant
Attorney General, Antitrust Division)).
\23\T. Overstreet, Bureau of Economics Staff Report to the FTC,
Resale Price Maintenance: Empirical Theories and Empirical Evidence 160
(1983).
---------------------------------------------------------------------------
The Supreme Court's rationale for subjecting resale price
agreements to a rule of reason analysis, rather than a per se
ban, is to promote competition among manufacturers selling
different brands of the same type of product.\24\ However,
banning minimum resale price maintenance itself may actually
enhance this ``interbrand competition.'' If a manufacturer of a
product bans its retailers from selling its products at a
discount, then competing manufacturers will not feel the
competitive pressure to reduce the retail price of their
competing products. Allowing resale price maintenance could
actually make it easier for competing manufacturers to collude.
As Justice Breyer explained in his dissenting opinion in
Leegin:
---------------------------------------------------------------------------
\24\Leegin, 551 U.S. at 889.
Resale price maintenance agreements can help to
reinforce the competition-inhibiting behavior of firms
in concentrated industries. In such industries firms
may tacitly collude, i.e., observe each other's pricing
behavior, each understanding that price cutting by one
firm is likely to trigger price competition by all. . .
. [R]esale price maintenance agreements will tend to
prevent price competition from ``breaking out'' and
they will thereby tend to stabilize producer
prices.\25\
---------------------------------------------------------------------------
\25\Id. at 911 (opinion of Breyer, J., dissenting) citing 8 P.
Areeda and H. Hovenkamp para.1632d, at 321-323 (2d ed. 2004).
Thus, allowing resale price maintenance makes it very easy
for the formation of implicit agreements between competing
manufacturers to keep prices artificially inflated.\26\ Such
collusion is nearly impossible to prove and ultimately harms
the consumer.\27\
---------------------------------------------------------------------------
\26\The majority opinion in Leegin noted that ``[r]esale price
maintenance may, for example, facilitate a manufacturer cartel.''
Leegin, 551 U.S. at 892 (citing Business Electronics Corp. v. Sharp
Electronics Corp., 485 U.S. 717, 725 (1988)).
\27\Additionally, the per se rule of liability for minimum resale
price maintenance has the strong advantage of being a bright line rule,
eliminating all of the uncertainty associated with a lengthy and
complicated litigation inherent in rule of reason antitrust cases. The
per se rule enables businesses to more clearly understand what is
permissible and what is not with respect to vertical price restraints;
the rule of reason, by contrast, may lead to uncertainty as to what
conduct is forbidden and what is allowed, and under what circumstances.
---------------------------------------------------------------------------
A ban on minimum resale price maintenance is essential to
maintaining vibrant competition among retailers. Indeed, the
ban on minimum resale price maintenance greatly aided the rise
of today's low price, discount retailers--stores such as
Target, Walmart, and Syms--as well as giant Internet
discounters such as Amazon and eBay--which have been so
successful in challenging incumbent retailers. All of these
companies offer consumers a wide array of highly desired
products at discount prices. Eliminating the ban on minimum
resale price maintenance runs the substantial risk of blocking
new discount retailers from getting a competitive foothold
necessary for their survival. If new discount retailers are
prevented from selling products at the behest of large,
incumbent retailers because of the pressure these incumbents
put on manufacturers to forbid discounting, then an essential
element of retail competition so beneficial to consumers may be
imperiled. Enactment of S. 148 will keep discount retail
competition alive.\28\
---------------------------------------------------------------------------
\28\Nothing in this legislation will alter the rule of U.S. v.
Colgate & Co., 250 U.S. 300 (1919), that a manufacturer does not
violate antitrust law by refusing to do business with distributors,
including distributors that fail to adhere to a unilaterally announced
pricing policy, nor is it the intent of this legislation to do so. Thus
the opposition to the bill on the grounds that certain high end
manufacturers will not be able to control where their products are
sold, and that the reputation of these brands will suffer if their
products are sold at a discount outlet, is not well founded. Under the
Colgate doctrine, a manufacturer is always free to choose which
retailers may or may not sell its products. Enactment of this bill will
not force any manufacturer to have its product sold at any store it
finds undesirable.
---------------------------------------------------------------------------
II. History of the Bill and Committee Consideration
The Discount Pricing Consumer Protection Act was first
introduced in the 110th Congress by Senator Kohl on October 30,
2007 (S. 2261). The bill had three cosponsors (Senators Biden,
Clinton, and Whitehouse). It was referred to the Committee on
the Judiciary. No further action was taken on S. 2261 in the
110th Congress.
On January 6, 2009, Senator Kohl introduced the Discount
Pricing Consumer Protection Act in the 111th Congress (S. 148).
The bill has 10 cosponsors (Senators Durbin, Feinstein,
Feingold, Franken, Kaufman, Klobuchar, Schumer, Specter,
Whitehouse, and Wyden). It was referred to the Committee on the
Judiciary. The Committee held a hearing titled ``The Discount
Pricing Consumer Protection Act: Do We Need to Restore the Ban
on Vertical Price Fixing?'' on May 19, 2009. Testimony was
received from Pamela Jones Harbour, Commissioner, Federal Trade
Commission; Tod Cohen, Vice President and Deputy General
Counsel, eBay; Stacy Haigney, General Attorney, Burlington Coat
Factory; and James Wilson, Partner, Vorys, Sater, Seymour &
Pease, LLP.
The Senate Judiciary Committee considered the legislation
on March 18, 2010, and voted to report the Discount Pricing
Consumer Protection Act, without amendment, favorably to the
Senate by voice vote.
III. Section-by-Section Summary of the Bill
Section 1. Short title
This section provides that the legislation may be cited as
the ``Discount Pricing Consumer Protection Act.''
Section 2. Congressional findings and declarations of purposes
This section contains congressional findings and
declarations of purposes.
Section 3. Prohibition on vertical price fixing
Subsection (a) amends Section 1 of the Sherman Act by
adding a provision stating that ``[a]ny contract, combination,
conspiracy or agreement setting a minimum price below which a
product or service cannot be sold by a retailer, wholesaler or
distributor violates this Act.''
Subsection (b) provides that this Act shall take effect 90
days after the date of enactment.
IV. Congressional Budget Office Cost Estimate
The Committee sets forth, with respect to the bill, S. 148,
the following estimate and comparison prepared by the Director
of the Congressional Budget Office under section 402 of the
Congressional Budget Act of 1974:
March 25, 2010.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 148, the Discount
Pricing Consumer Protection Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Mark
Grabowicz.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
S. 148--Discount Pricing Consumer Protection Act
S. 148 would prohibit agreements between manufacturers and
wholesalers, distributors, or retailers to set minimum prices
for a product or service. The bill would negate the effects of
a 2007 Supreme Court decision (Leegin Creative Leather
Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007)) that permits
minimum price agreements in certain cases.
Based on information from the Department of Justice, CBO
estimates that implementing the bill would have no significant
effect on the department's spending to handle cases involving
minimum price agreements.
Pay-as-you-go procedures would apply to the legislation
because violators of the bill's provisions could be subject to
civil and criminal fines. Criminal fines are deposited as
revenues in the Crime Victims Fund and later spent. However,
CBO estimates that any additional revenues and direct spending
would not be significant in each year.
S. 148 contains no intergovernmental mandates as defined in
the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments.
Prohibiting agreements between manufacturers and
wholesalers, distributors, or retailers to set minimum retail
prices would impose a private-sector mandate as defined in
UMRA. Any existing or future agreements that set such prices
would be a violation of antitrust law.
The cost of that mandate would be the forgone net income
resulting from prohibiting such agreements; however, how such
prohibitions would affect industry income is uncertain for
several reasons. Although a large number of firms could be
affected by the mandate, contracts involving pricing policies
are confidential and can vary widely across markets. Further,
the cost of the legislation would be mitigated to some extent
because several states already prohibit such contracts and
because firms could continue to use noncontractual policies
that have the effect of setting minimum resale prices.
Consequently, CBO cannot determine whether the cost of the
mandate would exceed the annual threshold established in UMRA
for private-sector mandates ($141 million in 2010, adjusted
annually for inflation).
On March 5, 2010, CBO transmitted a cost estimate for H.R.
3190, the Discount Pricing Consumer Protection Act of 2009, as
ordered reported by the House Committee on the Judiciary on
January 13, 2010. The two bills are similar, and the cost
estimates are the same.
The CBO staff contacts for this estimate are Mark Grabowicz
(for federal costs) and Marin Randall (for the private-sector
impact). The estimate was approved by Theresa Gullo, Deputy
Assistant Director for Budget Analysis.
V. Regulatory Impact Evaluation
In compliance with rule XXVI of the Standing Rules of the
Senate, the Committee finds that no significant regulatory
impact will result from the enactment of S. 148.
VI. Conclusion
The Discount Pricing Consumer Protection Act, S. 148, will
restore the antitrust rule that manufacturer setting of minimum
resale prices is per se illegal under the Sherman Act. In so
doing, it will overturn the Supreme Court's 2007 Leegin
decision. This legislation, by expressly banning minimum resale
price maintenance in all circumstances, will eliminate the harm
to competition created by the Leegin decision and substantially
benefit consumers by enhancing their ability to obtain discount
prices.
VII. Minority Views
----------
MINORITY VIEWS FROM SENATORS SESSIONS, HATCH,
AND KYL
We fully agree with the majority that the antitrust laws
should protect consumers from anticompetitive behavior. But
this bill exposes a disagreement over how the antitrust laws
should be shaped and applied to serve that shared goal. For
decades, the federal courts and antitrust scholars have
understood that antitrust law should be grounded in sound
economics so that the law prohibits conduct that is actually
anticompetitive but does not deter conduct that is in fact
procompetitive. That is the approach that we believe our laws
should continue to follow. Unfortunately, this bill would amend
the substantive language of Section 1 of the Sherman Act for
the first time, without sound economic justification.
In short, because economic scholarship shows that resale
price maintenance agreements can benefit competition and
consumers, the bill's blanket ban of such agreements is
misplaced. The Supreme Court's holding in the Leegin case that
these agreements should be judged based on a rule of reason
test, which the bill would overturn, is sound legal and
economic policy. We believe a wiser course at this time would
be to follow this tradition of allowing court interpretation of
the law to continue, fully recognizing that Congress may act in
the future if court decisions prove unworkable or unwise.
Background
On the surface, the debate over this bill is about the
proper way to police resale price maintenance agreements to
protect competition and maximize consumer welfare. We agree
with the majority that some resale price maintenance agreements
can have anticompetitive consequences that outweigh any benefit
to consumers. But the economic evidence accumulated over
several decades strongly indicates that some resale price
maintenance agreements benefit consumers and improve
competition. We are concerned that a per se ban will block
procompetitive behavior, harming competition in the marketplace
and making consumers worse off.
At a more fundamental level, we are concerned that this
bill reveals a confusion over the proper aims and uses of
antitrust law. The Sherman Act was drafted in broad terms and
courts have applied it for over a century with an eye toward
new developments in economic understanding so as to bar
``unreasonable restraints of trade.'' As the Supreme Court has
repeatedly held in cases going back decades, ``per se rules of
illegality are appropriate only when they relate to conduct
that is manifestly anticompetitive.''\1\ This bill proposes to
amend the Sherman Act by creating an absolute ban on retail
price maintenance agreements, without regard for their real-
world impact on competition or consumer welfare. As the
conclusory and overtly political ``findings'' included in this
bill show, the majority has chosen to ignore the great weight
of economic scholarship, and would freeze in amber a legal rule
that economic analysis shows is already obsolete.
---------------------------------------------------------------------------
\1\See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36,
49-50 (1977).
---------------------------------------------------------------------------
Per Se Antitrust Violations Should Be Reserved Only for Manifestly
Anticompetitive Conduct
This bill openly states that it is intended ``to correct
the Supreme Court's mistaken interpretation of the Sherman
Act'' in Leegin Creative Leather Products, Inc. v. PSKS,
Inc.\2\ This suggests a misunderstanding of both the Sherman
Act and the Court's Leegin decision.
---------------------------------------------------------------------------
\2\551 U.S. 877 (2007).
---------------------------------------------------------------------------
The Leegin Court held that vertical agreements between a
manufacturer and a distributor to set a minimum resale price
(``resale price maintenance agreements'') should be evaluated
under ordinary ``rule of reason'' antitrust analysis. Prior to
Leegin, resale price maintenance agreements had been treated as
``per se'' illegal under the Court's 1911 decision in Dr. Miles
Medical Co. v. John D. Park & Sons Co.\3\ The decision in Dr.
Miles, however, was not based on economic analysis of the
effects of vertical price agreements, and it has been roundly
criticized in antitrust literature for decades.
---------------------------------------------------------------------------
\3\220 U.S. 373 (1911).
---------------------------------------------------------------------------
Under the Supreme Court's precedents, ``[p]er se rules of
illegality are appropriate only when they relate to conduct
that is manifestly anticompetitive,''\4\ where the practice
``lack[s] any redeeming virtue,''\5\ and ``only if courts can
predict with confidence that [the practice] would be
invalidated in all or almost all instances'' under ordinary
``rule of reason'' antitrust analysis.\6\ Such per se rules
have traditionally been confined to restraints ``that would
always or almost always tend to restrict competition and
decrease output.''\7\
---------------------------------------------------------------------------
\4\GTE Sylvania, 433 U.S. at 49-50.
\5\Northwest Wholesale Stationers, Inc. v. Pacific Stationery &
Printing Co., 472 U.S. 284, 289 (1985) (internal quotation marks
omitted).
\6\Leegin, 551 U.S. at 886-87.
\7\Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S.
717, 723 (1988)
---------------------------------------------------------------------------
Moreover, because a ``departure from the rule-of-reason
standard must be based upon demonstrable economic effect rather
than . . . formalistic line drawing,''\8\ the Supreme Court has
held that per se rules are appropriate ``only after courts have
had considerable experience with the type of restraint at
issue.''\9\ And the Court has appropriately been ``reluctan[t]
to adopt per se rules with regard to restraints imposed in the
context of business relationships where the economic impact of
certain practices is not immediately obvious.''\10\
---------------------------------------------------------------------------
\8\GTE Sylvania, 433 U.S. at 58-59.
\9\Leegin, 551 U.S. at 886.
\10\State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
---------------------------------------------------------------------------
In Leegin, the Court reviewed the considerable body of
antitrust economics literature dealing with vertical price
restraints and concluded that the per se rule of Dr. Miles
wasnot supportable. The Court did not hold that all resale price
maintenance agreements were legal. Rather, the Court found that the per
se ban was unjustified, and that antitrust challenges to such
arrangements should instead be evaluated under the ``rule of reason''
analysis that has long been the standard approach in enforcing the
Sherman Act.
While Congress is not strictly bound by the Supreme Court's
careful approach to identifying per se violations of the
Sherman Act, the concerns highlighted by the Court apply
equally to the Legislative Branch and counsel the Congress to
proceed with caution.
No such caution is evident in this bill, which proposes to
ban all resale price maintenance agreements, regardless of
their actual effects on competition and consumer welfare. The
traditional ``rule of reason'' approach of the Sherman Act,
which evaluates resale price maintenance agreements according
to their actual economic effects, is the far wiser course.
Modern Economics Shows That Some Resale Price Maintenance Agreements
Benefit Consumers and Competition
The economic and antitrust literature shows that
procompetitive uses of resale price maintenance agreements are
likely to be common.\11\ As antitrust scholar and federal court
of appeals Judge Richard Posner noted in his influential
treatise on antitrust law, the old judicially created per se
rule against resale price maintenance was ``a sad mistake.
There is neither theoretical basis, nor empirical support, for
thinking the practice generally anticompetitive.''\12\ It would
be no less of a mistake for Congress to repeat the Dr. Miles
Court's error by recreating a per se rule that is unsupported
by the economic evidence.
---------------------------------------------------------------------------
\11\Howard P. Marvel, Resale Price Maintenance and the Rule of
Reason, Antitrust Source,
P.1 (June 2008) available at http://www.abanet.org/antitrust/at-source/
08/06/Jun08-Marvel6=26f.pdf (``Economists have posited an ever-widening
set of conditions under which RPM can increase efficiency.'').
\12\3 Richard A. Posner, Antitrust Law 189 (2d ed. 2001).
---------------------------------------------------------------------------
Professional economists appear to agree with near unanimity
that resale price maintenance agreements can be
procompetitive.\13\ As the majority opinion in the Leegin case
noted, ``economics literature is replete with procompetitive
justifications for a manufacturer's use of resale price
maintenance.''\14\ This point was made forcefully in an amicus
brief signed by 23 economists in the Leegin case:
---------------------------------------------------------------------------
\13\See, e.g., G. Franklin Mathewson & Ralph A. Winter, The Law and
Economics of Resale Price Maintenance, 13 Rev. Indus. Org. 57, 67
(1998); Kenneth Kenneth G. Elzinga & David E. Mills, The Economics of
Resale Price Maintenance, in 3 Issues in Competition Law and Policy
1841 (ABA Section of Antitrust Law 2008), available at http://
www.virginia.edu/economics/Workshops/papers/mills/
RPM%20ABA%20volume%202008.pdf; G. Franklin Mathewson & Ralph A. Winter,
The Incentives for Resale Price Maintenance Under Imperfect
Competition, 21 Econ. Inquiry 337 (1983); Andrew N. Kleit, Efficiencies
Without Economists: The Early Years of Resale Price Maintenance, 59 S.
Econ. J. 597 (1993); Raymond Deneckere et al., Demand Uncertainty and
Price Maintenance: Markdowns as Destructive Competition, 87 Am. Econ.
Rev. 619 (1997).
\14\Leegin, 551 U.S. at 889.
In the theoretical literature, it is essentially
undisputed that minimum RPM [resale price maintenance]
can have procompetitive effects and that under a
variety of market conditions it is unlikely to have
anticompetitive effects. The disagreement in the
literature relates principally to the relative
frequency with which procompetitive and anticompetitive
effects are likely to ensue. The critical issue is the
boundaries of that dispute. Some believe that minimum
RPM is almost always benign and thus should basically
be ignored by antitrust law except when it is part of a
cartel case. Others believe that RPM has been
demonstrated to be anticompetitive in some cases and
thus merits serious antitrust consideration. The
position absent from the literature is that minimum RPM
is most often, much less almost invariably,
anticompetitive. Thus, the economics literature
provides no support for the application of a per se
rule.\15\
---------------------------------------------------------------------------
\15\Brief of Amici Curiae Economists at 16, Leegin Creative Leather
Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (No. 06-480)
(internal citations omitted).
Leading antitrust authorities agree with this economic
analysis and had called for the reversal of the Dr. Miles rule
for years prior to the Leegin case. Professor Herbert Hovenkamp
wrote that the ``Dr. Miles per se rule was unfortunate'' and
``the wrong rule, given that much RPM is competitively benign
in the great majority of situations when it is not being used
to facilitate collusion.''\16\ In his treatise on antitrust
law, co-written with the late Professor Phillip Areeda,
Hovenkamp concluded that ``[t]o the extent that Dr. Miles rests
on the false categorical propositions that resale price
maintenance never benefits manufacturers and always has the
same effects as an illegal dealer cartel, its ruling is ripe
for reexamination.''\17\
---------------------------------------------------------------------------
\16\Herbert Hovenkamp, The Antitrust Enterprise: Principle and
Execution 186, Harvard University Press, 2005.
\17\8 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 217 (2d
ed. 2004).
---------------------------------------------------------------------------
The large body of empirical academic evidence arguing that
minimum resale price agreements can be procompetitive is
supported and brought to life by the convincing anecdotal
evidence offered by the manufacturer parties and amici in the
Leegin case to explain the procompetitive reasons their
businesses chose to establish minimum resale prices.\18\
---------------------------------------------------------------------------
\18\Brief for Petitioner at 22-24, Leegin Creative Leather
Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (No. 06-480); Brief
of PING, Inc. as Amicus Curiae at 5-9, Leegin (No. 06-480).
---------------------------------------------------------------------------
The majority seems to argue that the economic experts cited
above are wrong, and that all resale price maintenance
agreements should be banned. But the majority's arguments are
unconvincing.
It is telling that the majority's report cites no economic
or empirical evidence showing that consumer welfare has been
harmed in the aftermath of the Leegin decision. Instead, the
majority cites to Justice Breyer's prediction in his dissenting
opinion that price increases would occur. This citation to an
economic prediction from the dissentingopinion at the Supreme
Court--not typically the branch to which one looks for economic policy
expertise--is outweighed by the empirical economic evidence discussed
above.
Indeed, insufficient time has elapsed since the Leegin
decision to draw meaningful conclusions about the decision's
economic consequences. Before codifying a per se ban in the
Sherman Act, Congress should wait until the economic evidence
has had time to emerge. This is especially so because, before
the Leegin decision, the per se ban of Dr. Miles ``hindered the
development of an economic understanding of the rationales and
effects of RPM'' because ``[t]he per se rule ma[de] proof of
actual anticompetitive effects immaterial.''\19\ At the very
least, therefore, this bill is premature.
---------------------------------------------------------------------------
\19\Hovenkamp, supra note 16 at 186.
---------------------------------------------------------------------------
Antitrust Law Should Be Based on Sound Economic Principles
The past thirty years have led to broad consensus among
scholars, practitioners, and judges that antitrust should be
grounded in sound economics and that ``antitrust protects
competition, not competitors, and that it does so to ensure
consumer welfare.''\20\ In the absence of these basic, guiding
principles, there would be a significant risk that antitrust
rules--some of which can have a profound impact on the market--
would turn instead on the personal biases or political beliefs
of judges.\21\
---------------------------------------------------------------------------
\20\See, e.g., Antitrust Modernization Commission, Report and
Recommendations 4 (2007).
\21\See Hon. Douglass H. Ginsburg, Gauer Distinguished Lecture in
Law and Public Policy, AEI Legal Center for the Public Interest:
Original Public Meaning of the Constitution: Out of Exile? (Sept. 23,
2008) (describing the pre-economic Supreme Court antitrust
jurisprudence as an ``ad hoc and incoherent'' ``assortment of vague
and, ironically, anti-competitive social and political goals'').
---------------------------------------------------------------------------
This consensus that antitrust law is most appropriately
based on sound economics has led the courts to grow
increasingly reluctant to treat vertical restraints as per se
antitrust violations. As the majority opinion in Leegin
discusses, this trend began almost immediately after the Dr.
Miles case was decided, starting with the Court's decision in
U.S. v. Colgate & Co.\22\ That decision undercut Dr. Miles by
permitting a manufacturer to announce suggested resale prices
and refuse to deal with distributors who do not follow them.
---------------------------------------------------------------------------
\22\250 U.S. 300 (1919).
---------------------------------------------------------------------------
Spurred by significant advancements and interest in the
study of economics during the middle of the 20th Century, the
Court began to rest antitrust law more firmly on economic
principles. In 1977, the Court overturned the per se rule for
vertical nonprice restraints (such as agreements on product
placement) and adopted a rule of reason analysis.\23\ In 1984,
the Court required plaintiffs alleging an illegal vertical
price restraint to produce evidence showing that a manufacturer
and its distributors were unlikely to have acted
independently.\24\ And in 1988, the Court chipped away at Dr.
Miles once again, holding that the per se rule did not apply to
an agreement between a manufacturer and a distributor to
terminate a contract if the distributor were to engage in
price-cutting.\25\ Finally, and as recently as 1997, the Court
overturned a nearly 30-year old precedent that had made
vertical maximum price-fixing agreements per se illegal.\26\
The Court reached this conclusion, as the Leegin majority
noted, after assessing ``commentary and real experience.''
---------------------------------------------------------------------------
\23\GTE Sylvania, 433 U.S., at 57-59.
\24\Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984).
\25\Business Electronics Corp., supra, 485 U.S. 717 (1988).
\26\State Oil Co. v. Khan, 522 U.S. 3 (1997).
---------------------------------------------------------------------------
The majority's report does not deny that the Court has been
steadily moving away from per se rules, including in the
context of vertical restraints between a manufacturer and
retailer. The Leegin decision was not an aberration. Nor was it
``activist.'' It was instead a faithful application of the
scholarly view--recognized by the Court itself in a series of
post-Dr. Miles cases--that most restraints cannot be deemed
either anticompetitive or procompetitive without looking at
specific facts and circumstances.
The majority argues that the costs of bringing an antitrust
suit under the rule of reason standard will deter plaintiffs
from challenging even anticompetitive agreements. But the
antitrust law has mechanisms to encourage plaintiffs to bring
suit, such as treble damages and fee shifting,\27\ so that a
fair hearing of arguments both for and against a resale price
maintenance can occur.
---------------------------------------------------------------------------
\27\See Abbott B. Lipsky, Jr., Private Damage Remedies: Treble
Damages, Fee Shifting, and Prejudgment Interest, Testimony before the
Antitrust Modernization Commission (2005), available at http://
govinfo.library.unt.edu/amc/commission_hearings/pdf/Lipsky.pdf
(``Applying a damage multiple and a fee-shifting provision to antitrust
litigation has had the demonstrable effect of encouraging private
supplementation of public enforcement, thereby enhancing whatever
deterrent, compensatory and exemplary remedial effects the system would
have otherwise produced, ceteris paribus.'').
---------------------------------------------------------------------------
We agree with the majority that a resale price maintenance
agreement used to facilitate horizontal collusion would be
anticompetitive. In the majority's example, of course, the
primary antitrust violation is the horizontal collusion among
manufacturers, not the vertical price maintenance arrangements
that might facilitate enforcement of such horizontal collusion.
Even so, a vertical price maintenance agreement used to
facilitate horizontal collusion would fail under Leegin's rule
of reason test.
The Majority's Concerns Over Resale Price Maintenance Do Not Justify
the Extraordinary Step of Amending the Sherman Act
The Sherman Act has been a model of simplicity for over a
century. Since its enactment in 1890, courts have been given
the latitude to fine-tune their understanding of what is, and
is not, an unreasonable restraint of trade based on experience
and a continually developing understanding of economics.
The bill would set the Sherman Act on a different course
by, for the first time ever, designating a specific type of
agreement as an unreasonable restraint of trade. Worse yet, it
will freeze in place a view of resale price maintenance
agreements that is, in most experts' opinions, at least a half-
century out of date--a view that mistakenly treats price as the
only consideration for measuring consumer welfare and that
ignores the well-documented free-riding problems that can drive
competition out of the market, harmingconsumers in the long
run. We readily acknowledge the importance of internet discounters to
the growth of our economy and we recognize the valuable role that
traditional discount retailers like Target, Walmart, Syms, or Kohl's
play in the marketplace. But economic scholarship makes clear that
consumer welfare and economic output are maximized when consumers are
able to choose from a range of products with varying levels of quality
and service; such diversity in the market may be unsustainable if
resale price maintenance is flatly banned.
We are also concerned that this legislation, by
fundamentally changing the text of the law that the Supreme
Court has called the ``the Magna Carta of free
enterprise,''\28\ may have unintended consequences in other
applications of the Sherman Act. We do not know, for instance,
whether or how this bill might be read to affect the numerous
pre-Leegin decisions that chipped away at the holding in Dr.
Miles. The majority report claims, for example, that this
legislation will have no impact on ``the rule of U.S. v.
Colgate & Co., 250 U.S. 300 (1919), that a manufacturer does
not violate antitrust law by refusing to do business with
distributors, including distributors that fail to adhere to a
unilaterally announced pricing policy.'' But this assurance is
not supported by the text of the legislation; a distributor who
believes his contracts were terminated because of ``excess''
discounting would assuredly allege that he was the victim of a
``conspiracy . . . setting a minimum price.''\29\ And it is
certainly conceivable that courts might interpret Congress's
actions in this area as exhibiting a generalized desire for the
courts to move away from the historical use of the Sherman Act
as a common law tool to promote competition. These issues,
which are largely unaddressed by the majority's report,
highlight the need to exercise extreme caution before amending
a statute that has been the cornerstone of antitrust
jurisprudence for over a century.
---------------------------------------------------------------------------
\28\United States v. Topco Associates, Inc., 405 U.S. 596, 610
(1972).
\29\Indeed, this claim that the bill will preserve the Colgate
rule, thus allowing what amounts to back-door resale price maintenance
through ``minimum advertized prices'' and other such machinations,
further suggests that this legislation has less to do with antitrust
law than with political posturing. As Marvel notes in his article for
the ABA Antitrust Section, ``Terminating dealers who discount one's
products is not a less restrictive approach than encouraging them to
continue to sell the products at the preferred price.'' Marvel, Resale
Price Maintenance and the Rule of Reason, Antitrust Source, June 2008,
at p.6. Colgate allows manufacturers to maintain an exclusive brand
image by refusing to deal with certain retailers, but such efforts at
product differentiation are less directly beneficial to consumers than
resale price maintenance arrangements that require retailers to provide
a higher level of customer service in exchange for a guaranteed minimum
retail price.
---------------------------------------------------------------------------
Conclusion
This bill would outlaw all resale price maintenance, in
contravention to the great weight of economic evidence, even in
those situations where such activity is likely to be
procompetitive. Like the Court, we believe that the ``rule of
reason'' is the appropriate standard in such cases.
We decline to join the majority's effort, under the false
guise of being faithful to precedent, to ignore the economic
scholarship and judicial decisions to recreate by statute a
judicial rule that has long been seen as a relic from a pre-
economic, populist era in antitrust law. We therefore cannot
support this legislation, and we hope that this bill does not
signal a broader desire within the Congress to jettison the
strides that have been made to ground antitrust law in sound
economics.
Jeff Sessions.
Orrin Hatch.
Jon Kyl.
VIII. Changes to Existing Law Made by the Bill, as Reported
In compliance with paragraph 12 of rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
S. 148, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
UNITED STATES CODE
TITLE 15--COMMERCE AND TRADE
CHAPTER 1--Monopolies and Combinations in Restraint of Trade
Subchapter I--Federal Trade Commission
SHERMAN ACT (15 U.S.C. Sec. 1)
SEC. 1 (15 U.S.C. 1). TRUSTS, ETC., IN RESTRAINT OF TRADE ILLEGAL;
PENALTY.
Every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared
to be illegal. 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. Every person who shall make
any contract or engage in any combination or conspiracy hereby
declared to be illegal shall be deemed guilty of a felony, and,
on conviction thereof, shall be punished by fine not exceeding
$100,000,000 if a corporation, or, if any other person,
$1,000,000, or by imprisonment not exceeding 10 years, or by
both said punishments, in the discretion of the court.