Bush administration supports price fixing in Texas clothing case

Supreme Court Takes Up Price-Fixing Case

By Pete Yost
Associated Press
via Yahoo News
March 25, 2007

http://news.yahoo.com/s/ap/20070325/ap_on_bi_ge/scotus_kay_s_kloset;_ylt...

When a family-owned retailer in Texas lowered prices on women's fashion accessories, the manufacturer cut off the store's supply. Phil and Kay Smith sued and won in a case now before the Supreme Court that asks whether price-fixing always is illegal. Arguments before the justices were scheduled for Monday.

The manufacturer, Leegin Creative Leather Products Inc. in City of Industry, Calif., is challenging a 1911 Supreme Court ruling that automatically classifies agreements to set minimum prices as anticompetitive.

Leegin says that by maintaining price consistency among niche retailers it sells to, stores can offer improved customer service. That, says the manufacturer, enables smaller stores to compete against rival brands sold by bigger cut-rate competitors.

At issue is whether price floors such as Leegin's always should be treated as illegal or evaluated case by case to see if they are pro-competitive.

The Smiths say they lowered prices by up to 20 percent because several other retailers selling Leegin's Brighton brand also were lowering prices. The Smiths say they and the competing stores were threatened by Leegin with being cut off unless they raised their prices again. Alone among the threatened stores, the Smiths refused to cave in.

"When Leegin stopped shipping to us, my wife and I lost half our business," Phil Smith said in an interview. "Kay and I are back to the same size store we started with 21 years ago."

Discounters and consumer groups say consumers will suffer if the Smiths lose.

"In the Internet age, this is a dagger at the heart of the most consumer-friendly environment we've seen in generations," said Mark Cooper, a spokesman for the Consumer Federation of America.

"Would there ever have been a Sears & Roebuck, an A&P, a Walgreens, a Kmart or a Wal-Mart" absent a ban on minimum pricing agreements? the federation asked in court papers filed in support of Kay's Kloset.

In Leegin v. Kay's Kloset, the Bush administration says it is inappropriate to automatically prohibit price floor agreements when they are not necessarily anticompetitive.

Thirty-seven state attorneys general oppose the administration.

Beginning in the depths of the Depression, congressionally enacted legislation allowed states to exempt price floors from federal antitrust scrutiny. Consumers in those states that took advantage of the federal legislation paid from 19 percent to 27 percent more than consumers in other states, a 1956 Justice Department study concluded.

Congress reversed course in 1975, and President Ford wrote in his signing statement that the new law would "make it illegal for manufacturers to fix the prices of consumer products sold by retailers."

In the Kay's Kloset lawsuit, lawyers for the Smiths tried to make a case for illegal price-fixing. A jury ruled in the Smiths' favor and they were awarded $3.6 million, which the manufacturer wants reversed.

At the trial, the judge barred the testimony of Leegin's economic expert. He would have testified that Leegin lacks market power and that its pricing practices were pro-competitive because they fostered competition with rival brands.

In 2002, before the Smiths were cut off, Phil Smith met with two Justice Department antitrust lawyers in Dallas. He thought a Leegin representative was proposing price-fixing and "I was very uncomfortable because I thought it was wrong."

Nothing resulted from the department discussions, but Smith taped subsequent conversations with Leegin representatives and the Smiths' lawyers played them in their court case against the manufacturer.

The case is Leegin Creative Leather Products Inc. v. PSKS Inc., 06-480.

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