[Senate Hearing 110-342]
[From the U.S. Government Publishing Office]
S. Hrg. 110-342
THE LEEGIN DECISION: THE END OF THE
CONSUMER DISCOUNTS OR GOOD ANTITRUST POLICY?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 31, 2007
__________
Serial No. J-110-49
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Michael O'Neill, Republican Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland TOM COBURN, Oklahoma
Jeffrey Miller, Chief Counsel
Peter Levitas, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 2
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 1
prepared statement........................................... 72
WITNESSES
Bolerjack, Stephen, Attorney at Law, Dykema Gossett PLLC,
Detroit, Michigan.............................................. 10
Harbour, Pamela Jones, Commissioner, Federal Trade Commission,
Washington, D.C................................................ 5
McDavid, Janet L., Attorney at Law, Hogan & Hatson, Washington,
D.C............................................................ 11
Pitofsky, Robert, Sheehy Professor of Antitrust Law and
Regulation, Georgetown University Law School, Washington, D.C.. 6
Syms, Marcy, Chief Executive Officer, SYMS Corp, Secacus, New
Jersey......................................................... 8
QUESTIONS AND ANSWERS
Responses of Stephen Bolerjack to questions submitted by Senator
Kohl........................................................... 25
Responses of Pamela Jones Harbour to questions submitted by
Senator Kohl................................................... 29
Responses of Janet L. McDavid to questions submitted by Senator
Kohl........................................................... 32
Responses of Robert Pitofsky to questions submitted by Senator
Kohl........................................................... 38
Responses of Marcy Syms to questions submitted by Senator Kohl... 40
SUBMISSIONS FOR THE RECORD
Bolerjack, Stephen, Attorney at Law, Dykema Gossett PLLC,
Detroit, Michigan, statement................................... 41
Harbour, Pamela Jones, Commissioner, Federal Trade Commission,
Washington, D.C., statement and attachment..................... 46
McDavid, Janet L., Attorney at Law, Hogan & Hatson, Washington,
D.C., statement................................................ 74
Pitofsky, Robert, Sheehy Professor of Antitrust Law and
Regulation, Georgetown University Law School, Washington, D.C.,
statement and attachment....................................... 91
Syms, Marcy, Chief Executive Officer, SYMS Corp, Secacus, New
Jersey, statement.............................................. 98
THE LEEGIN DECISION: THE END OF THE CONSUMER DISCOUNTS OR GOOD
ANTITRUST POLICY?
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TUESDAY, JULY 31, 2007
U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 10:01 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl and Hatch.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good morning to one and all. We welcome you
here today. This hearing will be examining an issue with
profound implications for the prices consumers pay for
everything from clothing to electronics, and to everyone who
likes to get a bargain when shopping. Last month, in the Leegin
decision, a narrow 5-4 Supreme Court majority overturned a
century-old ban on a manufacturer setting a minimum price below
which a retailer cannot sell the manufacturer's product.
Many fear that allowing manufacturers to set minimum retail
prices will threaten the very existence of discounting and
discount stores, and lead to higher prices for consumers. For
nearly a century the rule against vertical price fixing
permitted discounters to sell goods at the most competitive
price, and many credit this rule with the rise of today's low-
price, discount retail giants--like Target, Best Buy, Wal-Mart,
and the Internet site Amazon, which offer consumers a wide
array of highly desired products at discount prices.
From my own personal experience in business, I know of the
dangers of permitting vertical price fixing. My family started
the Kohl's department stores in 1962, and I worked there for
many years before we sold the stores in the 1980s. On several
occasions, we lost lines of merchandise because we tried to
sell at prices lower than what the manufacturer and our rival
retailers wanted. For example, when we started Kohl's and were
just a small competitor to the established retail giants, we
had serious difficulties obtaining the leading brand name
jeans. The traditional department stores demanded that the
manufacturer not sell to us unless we would agree to maintain a
certain minimum price. Because they did not want to lose the
business of their biggest customers, that jeans manufacturer
acquiesced in the demands of the department stores--at least
until our lawyers told them that they were violating the rule
against vertical price fixing.
So I know firsthand the dangers to competition and
discounting of permitting the practice of vertical price
fixing. But we do not need to rely on my own experience. For
nearly 40 years, until 1975 when Congress passed the Consumer
Goods Pricing Act, Federal law permitted States to enact so-
called fair trade laws legalizing vertical price fixing.
Studies the Department of Justice conducted in the late 1960s
indicated that prices were between 18 to 27 percent higher in
the States that allowed vertical price fixing than the States
that had not passed such fair trade laws, costing consumers at
least $2.1 billion per year at that time.
The likely harm to consumers if vertical price fixing were
permitted is even greater today. In his dissenting opinion in
the Leegin case, Justice Breyer estimated that if only 10
percent of manufacturers engaged in vertical price fixing, then
the volume of commerce affected today would be $300 billion,
translating into retail bills that would average $750 to $1,000
dollars higher for the average family of four every year.
I am particularly worried about the effect of this new rule
permitting minimum vertical price fixing on the next generation
of discount retailers, the next Sam Walton. If new discount
retailers can be prevented from selling products at a discount
at the behest of an established retailer worried about the
competition, we may very well imperil an essential element of
retail competition that is so beneficial to consumers.
In the last few decades, millions of consumers have
benefited from an explosion of retail competition from new
large discounters in virtually every product, from clothing to
electronics to groceries, in both ``big box'' stores and on the
Internet. We will need to carefully examine whether the Supreme
Court's abrupt change to the settled antitrust rule forbidding
vertical price fixing will threaten today's vibrant competitive
retail marketplace and the pocketbooks of consumers, and we
need to consider whether legislation will be necessary to
protect the continued existence of consumer discounts.
[The prepared statement of Senator Kohl appears as a
submission for the record.]
So we look forward to the testimony of our distinguished
panel of witness on this important topic, and I now turn to my
esteemed colleague, Senator Orrin Hatch, from the State of
Utah.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. We welcome
the witnesses here today and, of course, those who are in the
audience.
I want to thank you for holding this hearing today. As we
all know, we are here to discuss the Supreme Court's recent
decision in Leegin Creative Leather Products v. PSKS,
Inc...Kay's Kloset.
But why is that important? Why should a Senate Subcommittee
turn its attention to a ruling that states minimum resale price
maintenance agreements, or RPMs, should be judged by the rule
of reason rather than being per se illegal, as they have been
for nearly 100 years?
Simply stated, the seeming dryness of this terminology does
not reflect the importance of the Leegin decision--a decision
which will alter the dynamic by which manufacturers enter into
agreements with retailers and the way in which retailers sell
their goods to consumers.
Mr. Chairman, a bit of background on this issue I believe
is necessary to fully understand the importance of this
decision. Nearly 100 years ago, the Supreme Court ruled in Dr.
Miles Medical Co. v. John D. Park & Sons that is was per se
illegal, ``under Section 1 of the Sherman Act for a
manufacturer and its distributor to agree on the minimum price
the distributor can charge for the manufacturer's goods.'' In
other words, the RPMs were against the law.
However, this all came to an end last month, when the Court
in Leegin discarded the per se rule for a test under the rule
of reason. Under this new decision, RPMs are permitted as long
as they do not constituted an unreasonable restraint on trade.
Specifically, the Court has held under the rule of reason ``the
fact finder weighs all of the circumstances of a case in
deciding whether a restrictive practice should be prohibited as
imposing an unreasonable restraint on competition. Appropriate
factors to take into account include specific information about
the relevant businesses and restraint's history, nature, and
effect.''
Now, why did the Court change its mind? The majority argued
that the RPMs can stimulate ``interbrand competition--the
competition among manufacturers selling different brands of the
type of product--by reducing intrabrand competition--the
competition among the retailers selling the same brand.'' The
Court goes on to further justify this decision by stating, as
they held in Khan, the ``primary purpose of the antitrust laws
is to protect [interbrand] competition.''
So what is the effect? One of the most important
consequences, according to the Court, will be felt in an
activity called ``free-riding.'' Free-riding can be described
as when a customer takes advantage of the services and
information provided by the full-service retailer and then
makes the actual purchase of the product, for a lesser price,
at a discount retailer. The Court argues that by permitting
RPMs, retailers will have less of an ability to compete on
price, thereby diminishing the opportunities for free-riding to
occur. It is surmised that retailers will then focus their
competitive energies on providing better services and shopping
environments for the consumer in order to distinguish
themselves in the intrabrand competition.
Clearly, the Court in Leegin is favoring the manufacturer
over the retailer, especially the discount retailer. Not
surprisingly, discount retailers argue that this decision will
have an adverse effect on their businesses. Specifically, for
the first time in 100 years, the manufacturer can enter into a
contract with a retailer that prohibits the retailer from
selling below a certain price point. Obviously, if a discount
retailer does not offer a significant advantage in price,
consumers may very well reconsider where they make their future
purchases.
Despite these advantages that the Court confers on the
manufacturer, a question still persists. Though most economists
argue in favor of the adoption of the rule of reason for
determining the permissibility of specific RPMs, does the
positive effect on the manufacturer outweigh the negative
effect on the discount retailer?
That, Mr. Chairman, is one of the central questions that I
hope that we are able to answer today, and I look forward to
exploring that topic with our witnesses. We have an excellent
panel today, and I look forward to listening to all of you.
Thank you, Mr. Chairman.
Senator Kohl. Thank you, Senator Hatch.
Will the witnesses please rise to be sworn in? Do you
affirm that the testimony you are about to give before the
Committee will be the truth, the whole truth, and nothing but
the truth, so help you God?
Ms. Harbour. I do.
Mr. Pitofsky. I do.
Ms. Syms. I do.
Mr. Bolerjack. I do.
Ms. McDavid. I do.
Chairman Kohl. Thank you so much.
Our first witness today will be Pamela Jones Harbour.
Commissioner Harbour is currently a Commissioner at the FTC.
Prior to joining the Commission, Ms. Harbour served as a
partner at Kaye Scholer, where she handled antitrust matters.
Prior to joining Kaye Scholer, Ms. Harbour was New York State
Deputy Attorney General, during which time she argued before
the U.S. Supreme Court in the landmark price-fixing case State
Oil v. Khan.
Also testifying today will be Robert Pitofsky. Mr. Pitofsky
is the Sheehy Professor of Trade Regulation Law at Georgetown
University Law Center and also currently serves as counsel for
Arnold & Porter in Washington, D.C. Mr. Pitofsky was Chairman
of the FTC from 1995 to 2001, where he also served as a
Commissioner from 1978 to 1981, and as Director of the Bureau
of Consumer Protection from 1970 to 1973. He has co-authored
many books and articles on antitrust and trade regulation.
Our next witness will be Marcy Syms. Ms. Syms is Chief
Executive Officer of Syms Corporation, a chain of off-price
apparel stores. She was one of the first companies to offer
designer and name brand clothing at discounted prices. Ms. Syms
is a founding member of the Security Syms School of Business at
Yeshiva University.
Also testifying today will be Stephen Bolerjack. Mr.
Bolerjack is counsel for Dykema in Detroit, Michigan,
practicing in the cases of antitrust and trade regulation.
Prior to joining Dykema, Mr. Bolerjack worked for the Ford
Motor Company, providing antitrust advice on Ford's
acquisitions and divestitures. He currently serves as Chairman
of the Competition Task Force of the National Association of
Manufacturers.
The final witness will be Janet McDavid. Ms. McDavid is a
partner at Hogan & Hartson in Washington, D.C. She focuses on
antitrust and trade regulation, with particular emphasis on
Government investigations. Ms. McDavid has authored or co-
authored many books and articles and is widely recognized as a
leading authority on antitrust law.
We welcome you all here today, and we will take your
testimony. Statements for the hearing have also been submitted
by the American Antitrust Institute, Tyler Baker, and Kenneth
Elzinga. Without objection, these shall be made part of the
record.
Ms. Harbour, we would love to hear your testimony.
STATEMENT OF PAMELA JONES HARBOUR, COMMISSIONER, FEDERAL TRADE
COMMISSION, WASHINGTON, D.C.
Ms. Harbour. Good morning, Chairman Kohl, Senator Hatch. I
appreciate the opportunity to offer my personal views on the
proper legal treatment of minimum vertical price fixing. As you
may know, based on my ``Open Letter'' to the Supreme Court in
the Leegin case, I have strong opinions on this subject, and I
would have preferred it if a majority of the Court had adopted
Justice Breyer's cogent dissent instead.
I am a Commissioner of the Federal Trade Commission. But
let me be very clear: the views I express today are entirely my
own.
I have submitted a copy of my Open Letter along with my
written remarks, and I will not rehash the Leegin decision
today. Instead, I want to focus my comments on a fundamental
issue of antitrust policy, and that is, what should consumers
expect from the American antitrust laws and, consequently, the
American retailing system?
The Leegin opinion relies on at least two implicit
assumptions: first, that manufacturers know what is best for
consumers--even better than retailers, or consumers themselves;
and, second, that retail competition is not important to the
American economy or to consumers.
But these assumptions do not match the reality of the
American marketplace. Retailers compete by trying to predict
what consumers want and at what prices. Many retailers promote
efficiencies, which are passed along in the form of lower
prices. Other retailers may charge higher prices, but offer
superior service, higher-quality goods or other amenities.
Consumers respond to this price and non-price competition by
voting with their wallets, depending on their preferred mix of
products, services, and quality at a given price.
This is the essence of market-based competition. It is
based on consumer choice. And many--if not most--consumers
respond strongly to aggressive price competition because we all
prefer a bargain. The rise of mass merchandisers like Wal-Mart,
Home Depot, and Burlington Coat Factory illustrates my point.
But let's think about the post-Leegin world. As a general
matter of antitrust law, a person who can
``profitably...maintain prices above a competitive level for a
significant period of time'' is said to possess actionable
market power. But the Leegin majority articulates a more
lenient rule-of-reason standard for minimum vertical price
fixing. To quote Justice Kennedy's version of the rule, he said
``pricing effects'' are not enough to establish market power;
the plaintiff must make a ``further showing of anticompetitive
conduct.''
In my mind, this is a virtual euphemism for per se legality
because it will be extremely difficult for any plaintiff to
make out a case. Therefore, absent congressional intent or
action, I envision a post-Leegin world where there is no
effective check on minimum vertical price fixing.
And what will this look like to consumers? Well, if you
were to walk through a mass merchandiser's store, you would see
thousands of items produced by hundreds of manufacturers. Each
of these manufacturers could require retailers to enter express
agreements along the lines of, ``you must sell my products at
these prices.'' Manufacturers also would be able to dictate a
variety of other aspects of retail sale, such as shelf
location, display spacing, and presentation.
Intrabrand and interbrand competition may continue to
exist, but only to the extent it benefits manufacturers, not
consumers. In short, the American marketplace will no longer be
driven by consumer preferences. And, in my opinion, this is
wrong.
My Open Letter explains that our Nation has been down the
minimum vertical price-fixing road before. Congress enacted the
Consumer Goods Pricing Act of 1975 to end a decades-long
experiment of its own design. But Congress declared that
experiment a failure, finding that minimum vertical price
fixing harmed consumers by raising prices, decreasing
distributional efficiencies, and deterring new entry, among
other things. Had Congress not repealed the fair trade laws in
1975, it is doubtful that mass merchandisers would even exist
today.
As Justice Breyer observed in his Leegin dissent, the
economic arguments in favor of minimum vertical price fixing
have not changed appreciably over time. The defendant in Leegin
made arguments strikingly similar to the ones the Court
rejected in the 1911 Dr. Miles case and that Congress rejected
in 1975. There still is no body of sound empirical economic
evidence to show that minimum vertical price fixing is, on
balance, more likely than not to benefit consumers.
Congress repeatedly has turned down calls for legislation
that would allow minimum vertical price fixing on a national
scale. There is no justification for Congress to change course.
Yes, minimum vertical price fixing may sometimes be good for
consumers, under some limited circumstances. But that is no
reason to subject all American consumers to higher prices,
which is virtually certain to be the outcome of Leegin--unless
Congress intervenes.
When it comes to close questions of competitive effect,
American consumers deserve the benefit of the doubt. Therefore,
I believe Congress should act to shift the burden of proof from
the consumer onto the producer who imposes pricing restraints.
In closing, I would be happy to work with the Subcommittee
to draft statutory language if you choose to do so. Thank you.
[The prepared statement of Ms. Harbour appears as a
submission for the record.]
Chairman Kohl. Thank you, Ms. Harbour.
Mr. Pitofsky?
STATEMENT OF ROBERT PITOFSKY, SHEEHY PROFESSOR OF ANTITRUST LAW
AND REGULATION, GEORGETOWN UNIVERSITY LAW SCHOOL, WASHINGTON,
D.C.
Mr. Pitofsky. Thank you, Mr. Chairman, Senator Hatch. As
always, it is an honor to testify before this Committee.
I agree with the suggestion that the 5-4 majority opinion
in Leegin was wrong, and not just because it is a 95-year-old
decision. The Court can make mistakes and rectify them later
on. But subsequent decisions of the Court have consistently
supported the Dr. Miles approach. Congress was aware of that
approach and condoned it. In the past, the Court has paid
attention to the way Congress felt about the Court's
interpretation of the antitrust laws.
Now, I am going to hear the argument that, well, Dr. Miles
was the Court's statute, they have a right to change it. Of
course, they do. But the Sherman Act is Congress's statute, and
if Congress thinks the Sherman Act should be interpreted in a
certain way, in the past the Court has paid attention to that.
This majority did not want to qualify or modify Dr. Miles. It
wanted to overrule it.
Turning to the merits, the one thing that is clear and
really not debatable in this entire issue is if you allow
minimum resale price maintenance, consumers pay more. Now, the
argument is, yes, they pay more, but they get a good deal. They
get things in return that make it worthwhile.
Let me make a general point and then some specific points.
Generally, if you look at the briefs, if you look at the
majority opinion, if you look at Janet McDavid's excellent
presentation today, you will see that the entire case for
overruling the per se rule is theoretical economic analysis. It
is 95 years later, and they still have not come up with an iota
of data, of empirical support, that free riders drive services
out of the market, that manufacturers introduce minimum resale
price maintenance in order to attract services. It is all
Economics 101 theory.
Specifically, what are the services? The one I have always
found to be the most persuasive is where you have a new entrant
coming into a market where there is tough competition. Maybe
the new entrant has to guarantee the distributors some
protection in order to get them to take on a less popular
product. OK. But there are two answers to that. One is in our
system we ask manufacturers to compete for dealers, not to
charge consumers a tax to raise the price of the retailers so
the manufacturer can attract more dealers. Second, if you
really were troubled by that, then it is easy. Then there ought
to be an exception for new entrants to the rule about per se
illegality. We have exceptions for new entrants in other areas
of per se illegality. Why not here? Why overrule the entire
structure of distribution?
Second, the argument is that you get a lot of services.
Well, if a manufacturer really wants services, they know how to
get it. If they want more advertising, they contract for it. If
they want a better service department, they contract for it.
They pay part of it. What they do not do is raise the minimum
resale price in the hope that the retailer will know exactly
what services the manufacturer wants and will introduce them
automatically without any direction from the manufacturer.
I looked back at the fair trade period to see which were
the products that cost consumers $21 billion, that were fair
traded and, therefore, a rule of reason applied: cosmetics,
toothpaste, pet food, vitamins, hair shampoo, ammunition, blue
jeans, men's underwear. What exactly are the services that are
invited into the market if you raise the price of toothpaste to
consumers? How about shampoo? Men's underwear--what are the
services in connection with men's underwear? And besides that,
if these products are sold in a store with 100, 500, 1,000
products can anybody really say raising the price of one
product changes the ambience of the store? This is a gross
exaggeration of the problems that free riders could possibly
create.
Briefly, either we could stick with the per se rule--I
think that is the right idea--or we could do what we did with
horizontal price fixing and have what is called a ``BMI
preliminary.'' The defendant has to explain to the court in a
quick look why it deserves rule of reason and not per se
treatment, and only after that will the court give rule-of-
reason treatment.
The irony now is we treat horizontal price fixing in this
country--everybody says that is the maximum anticompetitive
form of behavior--more leniently than we treat vertical price
fixing. No other country in the world does anything like that.
By way of conclusion, one quick point. Judge Posner, a
conservative icon and a man with a reputation for being candid
about these issues--said the rule of reason in this area of the
law is infeasible and unsound. He is right. It cannot work. It
takes too long. It is too expensive. The trials go on for 2 or
3 years. And, therefore, he said doing away with Dr. Miles is
only the first step to where we are really going, which is per
se legality. So that the toothpaste, hair shampoo, and men's
underwear people can fix minimum resale prices even though
services have nothing to do with it.
I think that is where we are going--I think he is right--
unless Congress steps in and restores its authority to
establish the rules with respect to discounting.
Thank you very much.
[The prepared statement of Mr. Pitofsky appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Professor Pitofsky.
Ms. Marcy Syms?
STATEMENT OF MARCY SYMS, CHIEF EXECUTIVE OFFICER, SYMS CORP,
SECACUS, NEW JERSEY
Ms. Syms. Good morning, Chairman Kohl, Ranking Member
Hatch, and members of the Subcommittee. I am Marcy Syms, the
Chief Executive Officer of SYMS. Thank you very much for the
invitation to testify today to the Subcommittee. Please be
aware that I am neither a lawyer nor an economist, and I will
limit the scope of my testimony accordingly.
Let me begin with some background on SYMS. SYMS is an off-
price retailer with 33 stores in 13 States that sells designer
and brand name clothing at substantial savings to consumers.
SYMS began in 1959 by selling garments produced by a select
group of manufacturers that supplied it on the condition that
it sell their garments with generic labels or remove the brand
labels at the time of sale. As SYMS began to grow,
manufacturers began to loosen their control over how SYMS could
sell to its ``Educated Consumers.'' Today SYMS is able to sell
brand name clothing with labels attached, as well as advertise
brand names within its stores, on its website, and through
customer mailings.
SYMS purchases most of its merchandise directly from
manufacturers of brand name and designer clothing. Most of the
merchandise is first quality and in season. The availability of
this merchandise is the result of overproduction, canceled
orders, and other factors. SYMS works on a ``mark up'' system
unique in retail, even among discount sellers and its ``off-
price'' competitors. Instead of paying manufacturers wholesale
and selling at a lower markup than its retail competitors, SYMS
pays below wholesale prices.
For many years SYMS has relied on the prohibition against
RPM agreements mandated by the Federal antitrust laws. It has
invested its capital, structured its business, and built
customer goodwill in reliance on that prohibition.
Over the years SYMS has occasionally been pressured by
manufacturers to stop selling particular merchandise because
retail competitors that sell at higher prices have complained
about SYMS's prices. But the prohibition on RPM agreements has,
I believe, kept in check serious threats to SYMS's ability to
sell merchandise according to the pricing approach I have
described. That may well change as manufacturer-oriented RPM
policies become more prevalent in the clothing industry.
Let me now briefly outline what I predict will be some of
the undesirable effects that will attend manufacturer-oriented
RPM in the retail clothing industry:
First, the introduction of RPM policies will force discount
retailers, especially large ones, to pursue strategies other
than price cutting--the provision of rebates, gifts
accompanying purchases, and other special offers--in order to
compete. As a result, consumers will find it difficult to judge
what they are actually paying for the products they desire and
the value they are receiving. SYMS's well-known sales approach
is that consumers should be able to judge exactly what value
they are receiving and to make purchasing choices accordingly.
Second, as other witnesses will likely explain, RPM may
facilitate horizontal price-fixing agreements among
manufacturers, thereby reducing interbrand competition.
Third, the retail clothing market is characterized by a
continually changing and often seasonal product mix. Consumers
are accustomed to, and benefit from, deep markdowns on seasonal
items. The introduction of RPM policies will lower a retailer's
ability to sell end-of-season or out-of-season merchandise by
discounting. A related problem will be the inability of
retailers to sell poorly performing merchandise that is
governed by RPM policies.
Fourth, the introduction of RPM may create opportunities
for foreign retailers--or large domestic retailers who set up
foreign entities to distribute their products via the Internet
or catalogues--to secure a competitive advantage over domestic
retailers. This is because foreign retailers will find it
easier than their domestic counterparts to escape the legal
consequences of violating RPM policies.
Fifth, retailers will face increased costs as a result of
having to ascertain and comply with RPM restrictions that may
be attached to the products, especially when they purchase
products--as they often do--from suppliers other than
manufacturers.
Sixth, it is already difficult for off-price discount
retailers in the clothing industry to expand their businesses.
The limited supply of discount branded products on the
wholesale market restricts growth. RPM policies will further
restrict the supply of discounted merchandise. Much of the
discount merchandise sold by manufacturers consists of off-
season or out-of-season merchandise. Increasing the life cycle
of an item at full retail will reduce the off-price supply.
That concludes my prepared testimony. I would be happy to
answer any questions.
[The prepared statement of Ms. Syms appears as a submission
for the record.]
Chairman Kohl. Thank you, Ms. Syms.
Mr. Bolerjack?
STATEMENT OF STEPHEN BOLERJACK, ATTORNEY AT LAW, DYKEMA GOSSETT
PLLC, DETROIT, MICHIGAN
Mr. Bolerjack. Thank you, Mr. Chairman and Senator Hatch. I
am Steve Bolerjack. I am the Chairman of the Competition Task
Force of the National Association of Manufacturers, and it is
an honor and appreciated by the National Association of
Manufacturers that we have the opportunity to present our views
here today.
We believe that the Leegin case represents sound antitrust
policy. There are primarily three reasons.
First of all, the unvarying rule is that the rule of reason
is the accepted standard for antitrust analysis. The per se
rule should always be reserved for restraints where the courts
are confident that the restraint would be invalidated under the
rule of reason all or almost all the time. That is not true of
resale price maintenance. Even in dissent, Justice Breyer
indicated that sometimes it will have procompetitive effects,
sometimes it will have anticompetitive effects. It depends on
the facts. Leegin will force courts to look at the facts in
each case and the competitive effect.
Leegin continues a progression of limiting the per se rule
in the vertical area, cases between manufacturers and dealers.
You have heard references to the 1977 decision in Sylvania
overruling a prior per se ruling regarding what we call non-
price restraints--a location clause in that case. So the
manufacturer could choose to limit sales to an approved
location if it did not have an anticompetitive effect.
You have heard references to the 1997 Khan case on maximum
resale price maintenance. It permits the manufacturer--or
seller--to require a maximum resale price, a price ceiling;
that can be procompetitive, and it can certainly outweigh any
anticompetitive effects, and it overruled almost 30 years of
experience under a per se rule that absolutely prohibited that.
Finally, and I think very importantly, Leegin requires
courts to look at substance. What is the effect of the
restraint on competition in a market? Prior to the Leegin case,
we all spent time in a search for whether or not there was
sufficient evidence of an agreement between the manufacturer
and the dealer. And I submit they did not at all look at
whether or not there was an anticompetitive effect in the
market. In the Leegin case itself, the per se rule required
exclusion of expert testimony that there were procompetitive
benefits to the policy Leegin was following with its Brighton
merchandise. What this case will do is bring back the ability
of a manufacturer to use the evidence that it may have
available to it showing procompetitive benefits, rather than
following the per se rule where it simply is not permitted to
defend itself in court using the facts that it would otherwise
be able to use.
We think it is also important to note what Leegin did not
do. Minimum resale price maintenance is not per se legal. This
is not going back to the fair trade days. The case did not
eliminate the potential for a challenge to a manufacturer's
policy if it enters into a minimum resale price maintenance
agreement.
What the case says is any of those challenges should be
decided under the rules that typically apply in a vertical
case. And the Court also drew a very bright line around efforts
to use resale price maintenance to enforce horizontal
agreements, either amongst manufacturers or amongst dealers.
And they said those agreements are and should continue to be
per se violations, and to the extent resale price maintenance
is being used to enforce it, that would not survive a rule-of-
reason challenge. This is not a green light to just raise
prices without regard to competitive effects.
So thank you for your time, and later on I would be pleased
to answer questions.
[The prepared statement of Mr. Bolerjack appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Bolerjack.
Ms. McDavid?
STATEMENT OF JANET L. MCDAVID, ATTORNEY AT LAW, HOGAN &
HARTSON, WASHINGTON, D.C.
Ms. McDavid. Good morning, Chairman Kohl, Senator Hatch. It
is a pleasure to be here this morning with my friends Bob
Pitofsky--who was my antitrust professor--Pamela Jones Harbour
and Steve Bolerjack--who is my client--and to meet Marcy Syms.
I am a partner at Hogan & Hartson here in Washington, D.C. I am
a former Chair of the Antitrust Section of the American Bar
Association, and I am here today on behalf of the ABA. My
written statement reflects the position of the ABA, and to the
extent my remarks today differ from that written statement,
those views are my own.
The Supreme Court's recent decision in Leegin holding that
resale price maintenance should be evaluated under the rule of
reason rather than under the per se rule is totally consistent
with the views of the American Bar Association. In reaching
that decision, the ABA carefully considered the views on both
sides of the issue and concluded that because resale price
maintenance can be either benign or procompetitive, it should
be evaluated under the rule of reason, which is the rule that
is applied with respect to virtually all other restraints under
the antitrust laws. It concluded that the basis for the Dr.
Miles decision was largely discredited and should be
overturned.
That does not mean that resale price maintenance will
always be found to be legal. In circumstances where it produces
anticompetitive effects, it will be found unlawful under the
rule of reason. Critics, including those here today, seem
absolutely confident that there will be anticompetitive
effects, but they seem significantly less confident that those
effects can be proved under the rule of reason. That seems to
me to be inconsistent.
There has always been a tension between the rule in Dr.
Miles and a decision only a few years later in Colgate, where
the Court held that a supplier could refuse to sell to dealers
that would not charge its resale price as long as it did so
wholly unilaterally. The rationale was that, absent an
agreement between the manufacturer and the dealer, there was no
violation of Section 1 of the Sherman Act. The competitive
effects were exactly the same. The only question was whether or
not there was an agreement between the manufacturer and the
dealer.
Later, the Court applied the rule of reason to a whole
range of other vertical restraints, as Mr. Bolerjack has
explained. Resale price maintenance, which eliminated only one
form of competition at the intrabrand level was per se illegal;
whereas, a territorial exclusion clause was evaluated under the
rule of reason even though it might have a greater
anticompetitive effect than the resale price maintenance
arrangement.
My written statement contains a detailed discussion of the
economic and legal arguments on this question. I am a
practicing lawyer, so I would like to talk to you a little bit
about how this works in the real world.
When I advise a client on an antitrust question, the first
things I ask are: What are you going to do? And why are you
going to do it? That allows me to consider the client's
business rationale for the conduct, the competitive dynamics in
the industry, and whether there might be a less restrictive way
to achieve that objective. But when we counseled in the resale
price maintenance area, the rule was always different. Instead
of asking why do you want to do this and what is the effect
going to be, we spent our time talking about whether there were
ways to achieve that objective without an agreement. Could you
suggest resale prices? Could you establish a consignment
arrangement? Could there be a principal agent relationship?
Many of these questions made no business sense to the people
whom I was counseling.
If the client wanted resale price maintenance, it could
adopt the Colgate policy: se resale prices completely
unilaterally and simply terminate any dealer who refused to
follow that pricing policy. But it had to do so without any
discussion with the dealer. It did not matter whether that
dealer was a valuable dealer with a longstanding relationship.
It simply had to cut them off, because any conversation with
the dealer ran the risk of an agreement. And as a consequence,
this became a business rule that businesses could not
understand.
There was an amicus brief filed in the Leegin case by the
Ping golf club manufacturer explaining that it had adopted a
Colgate policy on resale price maintenance because it felt that
its club-fitting rules required service by dealers. As a
result, it terminated on a zero tolerance basis any dealer who
cut prices. Its representatives could not go out and counsel
with those dealers. They simply had to cut them off because,
otherwise, they risked an agreement.
Concerns by the field representatives were not sent to the
marketing department. They were sent to the general counsel's
office, which helped decide whether it was appropriate to
cutoff the dealer in that circumstance. Ping said it terminated
nearly 1,000 dealers over 4 years, with a resulting loss in
outlets that were useful to consumers. It is very hard to
explain to business people why that rulemakes any sense.
Lawsuits in this area were also different. Instead of
thinking about the anticompetitive or procompetitive effects of
the conduct at issue, as we do in every other antitrust case,
except a cartel, we spent our time discussing whether or not
there was an agreement between the manufacturer and the dealer.
Did the conduct of regional sales representatives somehow cross
the line between persuasion and coercion so that there was an
agreement?
Leegin is an example. As has already been stated, the
testimony of Ken Elzinga, one of the leading antitrust
economists in this country, was excluded from evidence at the
trial as irrelevant because the rationale for the arrangement
was simply not relevant, and the jury was not allowed to
consider the procompetitive rationale.
So cases in this area were always slightly back-assward,
and the courts tried to find ways to avoid absurd results. We
spent our time focusing not on the competitive effects of these
cases, but on whether there was an agreement.
For these reasons, the Leegin decision is completely
consistent with the views of the American Bar Association. I
welcome the opportunity to answer your questions on how this
works in the real world, and I hope we will have a chance to
talk about some of the factors that a court might apply as it
evaluates these cases under a rule-of-reason analysis.
Thank you.
[The prepared statement of Ms. McDavid appears as a
submission for the record.]
Chairman Kohl. Thank you very much.
I would like to start by asking Ms. McDavid and Mr.
Bolerjack the following question and the line of reasoning:
What problem did Leegin fix? It seems to me, aside from the
legalities of lawyers and manufacturers, the most important
part of--or one of the very most important parts of retail
America is that it provides the consumers the most vigorous
kind of interaction between themselves and manufacturers and
stores with the least kinds of obstructions as we feel we need
to insert into the process to maintain some sense of sanity,
but that the churning, the interaction is a good thing and not
a bad thing. Now, if you disagree with that, then perhaps you
want to make your case. But the kinds of restrictions that we
want to impose are the least that are necessary.
So if that is true as a premise, and if we had not had
minimum price maintenance now for the longest time, why do we
have to have it now? I mean, what is there that is occurring
that is making it necessary for manufacturers to be able to set
a minimum price? As Mr. Pitofsky pointed out, they can now set
maximum price, and if they could set minimum price,
theoretically they can set those at the same point. And as Mr.
Pitofsky pointed out, he thinks maybe that is where we are
heading. But legally now they can set a maximum and minimum at
the same level.
Now, why is that beneficial to the American retail--to
consumers? Why would you then defend that as something that
they should have the right to do if they wish if we are
thinking about the whole panoply of America and retailing and
the interaction that goes on and all the good things that it
has provided over the years? Ms. McDavid, would you like to
comment on that?
Ms. McDavid. Well, as I explained, Senator, there has been
resale price maintenance in this country under the Colgate
doctrine for a long time. The question has always been whether
it is imposed by the manufacturer unilaterally, resulting in
the termination of any dealer who does not do it, or whether it
has been imposed through an agreement. So it has existed, and
there are a lot of companies, like Ping, who simply cutoff the
discounters.
So this system has existed. The problem has been that it is
inefficient because we end up in the kind of inquiries that I
have been describing where we do not focus on whether there is
something good going on here or is it completely neutral or is
there something bad.
Manufacturers want the kind of hurly burly you have been
describing, but they want it at the interbrand level. They want
Sony and Sharp competing with Matsushita and JVC. They want
that to be done as a consequence of being able to go into a
store where you can get the kind of service that tells you the
difference between those television sets.
Chairman Kohl. Mr. Bolerjack?
Mr. Bolerjack. I absolutely agree that what the
manufacturer is now freed to do in a straightforward fashion
rather than by setting up its unilateral policy and spending
the time, money, and effort of trying to track down violations
of its policy--manufacturers now are free to explain to those
who sell its product that we want you to take on my
competition, don't take on one another. And they can go forward
and set a minimum price floor to try to assure that that does
not happen. That may bring advantages to them that they cannot
use today in as efficient a manner. This frees the
manufacturers to do something like that.
I would also like to point out that the assumption
frequently in these matters is that the manufacturer is a
large, powerful organization with all the power and abilities
to enforce this in the world. And, frequently, that is not the
case. It can be a small manufacturer trying to get into
numerous outlets. In the case here, you had a manufacturer that
made ladies' leather goods and accessories. They finally got
into 5,000 different outlets, and for reasons we probably do
not need to explore in detail, they wanted to try to assure
that a consumer had a very special boutique-type experience.
Other manufacturers now might have the ability to undertake
this policy. A manufacturer that relies--and I think frequently
they do--on discounting and making sure that their entire
output is taken and sold will not consider one of these
policies. It does not do anything for them, and if they impose
one of these policies and they have a significant market
position, they are going to have to deal with any litigation
that comes up. It is not a free pass.
Ms. McDavid. If I could add, Senator, my experience in the
very limited time since the Leegin decision--but many of us
were expecting the Leegin decision for the last year or so--is
that companies are not jumping at the opportunity to do this.
They are thinking about it very carefully. They are thinking
about whether it makes sense for their business. And they are
also carefully evaluating the risk that their conduct might be
found to be unlawful in a rule-of-reason analysis.
I have already advised one client so far that it would be
very risky for them to do this because of the circumstances in
which they compete, and they have chosen not to proceed in that
way, even with a full rule-of-reason analysis. I think that
companies are going to make individualized decisions based on
the competitive dynamics that they face in their particular
space.
Chairman Kohl. Mr. Pitofsky?
Mr. Pitofsky. Senator, here is the irony. If five retailers
got together fixing a minimum price, that is illegal per se. It
is a horizontal conspiracy. But if the five retailers manage to
go to the manufacturer and say, do me a favor, stop these price
wars, give us a minimum price, then, according to the Supreme
Court, now you are going to have a rule of reason not
illegality per se. And I just want to add, lawyers know,
plaintiffs almost never win a rule-of-reason case. A rule-of-
reason case means the kitchen sink is relevant, everything is
relevant. They take years. Discovery takes years. They are very
expensive.
I will give you a piece of data, not theory. Thirty years
ago, the Supreme Court went from per se to rule of reason with
respect to territorial allocation: you sell in the Bronx, you
sell in Queens, you sell in Brooklyn, don't get in each other's
way. The Court went to rule of reason, it said, oh, it is only
rule of reason.
Four plaintiffs have won territorial allocation cases in
the last 30 years, one every 7 years. I think it will be even
tougher to win a vertical price-fixing case. I think four cases
in 30 years is per se legality, and that is where we are
heading.
Chairman Kohl. Ms. Harbour?
Ms. Harbour. Let me give you the bottom line. I think the
anticompetitive effects of minimum vertical price fixing are
virtually certain. Prices will go up and consumers will pay
more money. The procompetitive effects that we hear about are
theoretical; they are speculative, and they are unproven. And
let me tell you why.
None of these empirical studies that we hear about, that we
have read about, are definitive. There is an acknowledged
empirical vacuum that leaves these competing theories untested.
For instance, in 1985, Judge Easterbrook called for more
rigorous empirical research, but to date, no studies have found
evidence of the procompetitive benefit relating to minimum
vertical price fixing.
These studies are theoretical, and these studies are not
definitive. But what we do know is that manufacturers will set
higher prices, and we know this because in 1975 a congressional
study showed that minimum RPM led to a 27- to 37-percent price
increase for the American consumer. We know that in that same
time period, a Stanford University study showed that fair trade
cost consumers, in 1970s dollars, $6.5 billion a year. We know
that there was a higher rate of business failure in fair-traded
States. These States had a 55-percent higher rate of firm
failure.
So these are the things we do know, and I do not think that
the per se rule should be thrown out based on theoretical
arguments and no empirical data.
Ms. McDavid. Mr. Chairman, the case that Chairman Pitofsky
described is actually per se illegal. The dealers getting
together and asking the manufacturer to impose a price on them
is illegal. He brought that case when he was at the Federal
Trade Commission against a group of Chrysler dealers who asked
Chrysler to boycott discounters who were selling cars on the
Internet, and it was found to be per se illegal. And do you
know who brought the complaint to the Federal Trade Commission?
Chrysler, because it had no incentive to get involved in that
kind of a conspiracy.
And the circumstance he posits in which there would have
only been four territory allocation cases won by plaintiffs, I
wonder if he disagrees with the Supreme Court's Sylvania
decision. Bob, didn't you think they did it right?
Mr. Pitofsky. No, I thought the Supreme Court was right
about Sylvania. It is a different situation. But price has
always been treated as different. In Sylvania, the majority
said this is territorial allocation, that is price, we are not
touching price. But now this majority is.
What was your--oh, the dealers. How did the dealers
effectuate this business about getting the manufacturer to fix
the price for them? First of all, they are smart enough--most
of them are smart enough now, not all--not to go as a group to
the manufacturer. They can go one at a time. Or they do not
have to go at all. They just let their feelings be known that
these price wars are killing us and eventually we are going to
leave you if you do not stop the price wars.
There is data, actual data, that resale price maintenance
is more likely to occur where the dealers are well organized in
trade associations than if the dealers are independent. There
is nothing like that kind of data, taking the other side of
this argument, that free riders drive services out of the
market.
Chairman Kohl. Chairman Hatch?
Senator Hatch. Well, I have to add that this has been very
interesting to me. I think you have all done a very interesting
job, as far as I am concerned.
Chairman Pitofsky, recently you wrote an article that
discusses a common example cited by those who support a rule-
of-reason analysis. Specifically, I am referring to the example
of the audiovisual dealer that assists the consumer with expert
advice and then has their sale undercut when the consumer
leaves and buys the product from a discount store.
You counter that argument by discussing how such a scenario
does not apply to low-value textile goods, but does not--I
guess my question is: Does not the Court recognize this in
their holding? Simply put, just because one can do something
like engage in an RPM does not mean that all manufacturers,
especially those who sell ``commodity priced'' goods, will
insist upon them? Will the market itself not work this out?
Mr. Pitofsky. That is the hypothetical that the
conservative side of this argument always uses: you will go to
Federated and get an explanation from a fancy service person;
then you go across the street to the discounter and buy the
product. I have three reactions.
One, how often does that happen? I want to see a study of
that.
Two, might we not have a ``BMI preliminary''--we can make
an exception for that kind of situation. The manufacturer comes
in and says--or the dealer does and says, ``I am having a lot
of problems with this kind of behavior,'' and the Court, as
they do under BMI in horizontal market price fixing, says,
``OK. You have persuaded us. Now we will give you a rule of
reason. But we are not giving you a rule of reason for men's
underwear. That does not make any sense to us at all.''
Third, I am going to make a point for the other side. I
asked my class, ``How many of you people go to Federated, get
an explanation, and then go across the street to a discounter
and buy the product?'' And half the class raised their hands. I
said, ``You got to be kidding. I did not know that anybody did
that sort of thing.'' So afterwards, students came up and they
said, ``Well, what we do is we go to Federated and get the
explanation,and then we buy it on the Internet.'' That should
have been the argument in favor of getting rid of a per se
rule.
But my answer to that is there is a much more constructive
way to do it, and that is, simply have a ``BMI preliminary.''
Explain that this is the kind of product, high-tech audio
equipment, computers and so forth, where people get the
explanation and then buy it somewhere else. Eventually that
will drive the explanation out of the market. I accept that.
But that, Justice Breyer said, applies to 10 percent of
products. I really wonder if it is even 10 percent of products.
All I know is that an overwhelming majority of the products
have nothing to do with services. It is just that consumers
will pay more and retailers will pocket more.
Ms. Harbour. May I make a comment?
Senator Hatch. Go ahead.
Ms. Harbour. If I might just add to Professor Pitofsky's
comments. I believe the Supreme Court's grounds for overturning
Dr. Miles, were based on either a misstatement or a
misunderstanding of the decision. The Leegin plaintiffs were
wrong when they argued that Dr. Miles was based on what they
called ``prohibiting restraints against alienation.''
Basically, Dr. Miles held that the arrangement between Dr.
Miles and its 25,000 retailers constrained all downstream
pricing. The Dr. Miles Court held that this arrangement was the
functional equivalent of horizontal price-fixing between the
dealers. So, the Supreme Court did not recognize the functional
equivalency doctrine. Dr. Miles was grounded in traditional
antitrust concepts namely, the elimination of competition and
subsequent harm to consumers. I think that concept was
overlooked by the Supreme Court.
I want to talk about for a moment, though, about the free-
rider effect. This effect has been grossly exaggerated in the
economic literature. It is implausible in many of the product
areas where RPM is used.
If you take a look at the Leegin case, and as I had stated
in my Open Letter regarding ladies' handbags--what are those
extra services that would justify imposing a price increase to
consumers? Are ladies' handbags something that would require
operational expertise, consumer education or a showroom? I
don't think so. So I think there was no real justification for
the resale price maintenance scheme in the Leegin case.
Ms. Syms. I would like to add something, if I may.
Senator Hatch. Sure.
Ms. Syms. I think that this whole concept of free ride
really has to be re-examined in the age of the Internet. We all
get a free ride. Most of our consumers get their information
from the Internet. If they want to get educated about something
now very quickly, they do not have to get in a car; they do not
have to pay for gas. They just get on their computer, and they
get all the information they want. So I don't know if this
free-ride idea--actually, up until reading the case, I did not
even know there was such a thing. So there you go. I mean, it
is very esoteric.
And the truth of the matter is in the merchandise that we
sell, even though we are selling 40, 50 percent below what a
regular retailer is, almost 70 percent of the merchandise that
comes into a Syms store has a hang tag. The manufacturer, the
brand--we deal directly with the brands, directly with the
designers. We do not use middlemen. We do not use jobbers. And
70 percent of the merchandise has a suggested retail price
hanging right on the garment. So we all--the consumer has a
guideline; they know. And we have a guideline; we know. But it
is not something that has to be regimented. The marketplace
takes care of what the price is going to be based on where it
is in the seasonality, based on how old the merchandise is. A
turtleneck is not going to be the same as a new pocketbook from
Coach.
You know, there is a sensibleness to this that kind of gets
lost in some of this discussion, and the consumer knows the
sense of it.
Senator Hatch. Well, let me give the other side a chance,
too. Ms. McDavid, Mr. Bolerjack, if you would care to comment?
Ms. McDavid. Well, some manufacturers, even manufacturers
of men's underwear, may have chosen to invest to create a
premium product. Ms. Syms mentioned Coach handbags. I buy Coach
handbags. I consider Coach a premium product. Should a
manufacturer be prevented from cutting off someone whom it
thinks is undercutting the value of the premium brand it has
created?
The ultimate constraint here is going to be the existence
of interbrand competition, the choice between a Coach handbag
and an off-brand handbag. A consumer who is prepared to pay for
a premium product will pay a premium price and perhaps buy a
product that is subject to resale price maintenance, or a
Leegin handbag. A consumer who is price focused will buy a
different brand which is not subject to resale price
maintenance and is sold at a lesser price. The fact that there
are price differences does not mean it is anticompetitive.
Senator Hatch. Professor Pitofsky, you have taught your
student well, but she is--
[Laughter.]
Senator Hatch. She is straying from the course.
Mr. Bolerjack?
Mr. Bolerjack. I would just finish up. I agree with, I
believe it was, what Ms. Syms said. The market will take care
of this. If a manufacturer goes out and says, I want an
arrangement with you as a retailer, I want you to carry this in
an attractive store. I want you to have a listening room for
stereos, or I want you to have skilled salespeople, I want you
to take returns, if the customer is unhappy with my product and
wants their money back, I want you to give it to them, I want
you to perform warranty work, some of this we can do with
agreements. But the situation here is if they have priced that
wrong and they get into resale price maintenance, the
manufacturer will quickly learn a lesson from his competitors,
and he will be taught that he cannot maintain that price.
Competition with other manufacturers will take care of that. As
Jan said, the interbrand competition.
Ms. Harbour. Senator, I wanted to add that when thinking
about these issues we must ask this question: Are the retailers
the sales agents for the manufacturers? Or are the retailers
the purchasing agents for the consumers? I believe it is the
latter. Also, I do not believe that consumers really receive
the services that are worth the price increases. Or if they do,
I think the value of such services should be proven by
empirical data, which to date I do not think it has been.
Senator Hatch. Well, I have to say this has been really a
very interesting hearing, and all of you have acquitted
yourselves very well. I can see why these decisions are so
difficult to make and why so few lawyers go into antitrust.
[Laughter.]
Senator Hatch. But this has been very interesting to me,
and we will certainly weigh all of your statements very
carefully. And I am fortunate to work with the distinguished
Chairman here, and we will get together and see what we need to
do here.
Chairman Kohl. Thank you, Chairman Hatch.
Senator Hatch. After all, he has been in the business, and
I have just been a poor lawyer.
Chairman Kohl. I would like to just pursue what we have
been discussing a little further. You know, we have all kinds
of varieties of retailing in America. We have the retailers who
provide lots of services and many employees and a beautiful
store, valet parking, and higher prices. That is how they
appeal to their customer.
Then we have people who are providing medium kinds of
services, medium kinds of decor, medium kinds of--all kinds of
attending kinds, and medium prices.
Then we have people who do it at the lower level. They do
it on the basis of price, no overhead or very little overhead,
and they pass that on to their consumers.
That is American retailing. It has been, and it is good. I
am sure you would defend that. I would like to hope you would
defend that. So then why would you say that the manufacturer
can do away, in effect, with the discounter, with the lower
level, by saying our minimum price is, and you cannot go below
that minimum price, which takes away the No. 1 attractiveness
of that retailer, who perhaps offers very little else other
than his low price? Why would you say--and that person is
trying to get the consumer to come in and buy, I mean,
representing the consumer, as Ms. Harbour said, why would you
say--or why do you say that that kind of retailing in America
should be subject to curtailment by the manufacturer? Why would
you say that?
Ms. McDavid. I think simply, Senator, that the manufacturer
should have the choice as to whom it sells. It may say I have a
luxury product, I want this sold in the store with the valet
parking, the Nordstrom's-type stores. On the other hand, it may
say that my brand is not consistent with the discount model,
and today the manufacturer has the ability to make that
decision as long as it does so unilaterally without an
agreement. That is happening today all the time. The Ping golf
club example is one of those. But as long as there is an array
of products available that compete with that product, then the
discount outlets and the medium- priced outlets will all
remain. The question is: Where is the consumer going to find
the kind of good that it wants to purchase, at the price it
wants to purchase, at the quality it wants to purchase? I think
we would all agree that a Jaguar car is not sold in a discount
outlet, and that is a perfectly legitimate decision for the
manufacturer to make.
Ms. Syms. That is happening today. Syms does not sell Coach
handbags, and we do not sell it, and they are able to control
their distribution by just saying we do not produce enough to
sell to discounters. We sell all of our product and we discount
all of our product in our own Coach stores.
And when I referred to one of my points about the foreign
aspects of this and that a foreign manufacturer might not be
restricted as an American company might be restricted--and that
is an issue--many of the larger discounters, like a Wal-Mart,
like a Target, can go overseas and they can manufacture and
control costs vertically to the consumer. The smaller
discounters, the regional discounters, like we are, would not
have that advantage. So I think that there is also the
possibility that having this price maintenance will be a
problem for the smaller discounter, not the larger discounter.
Chairman Kohl. I think so.
Now, again, Ms. McDavid, a Supreme Court ruling is to fix
something that needs to get fixed. What is the problem with the
way we have the situation now? What is the problem? If they do
not want to sell to Syms, they do not have to sell to Syms.
Nothing is stopping them. So what was the problem that was so
serious that they had to overturn, you know, decades and
decades of legalism to say that a retailer can now set a
minimum price. If they did not want to sell to Syms, they did
not sell to Syms. It was not an issue. They could just say,
``We are not going to sell to you.'' What was the problem?
Ms. McDavid. The Colgate policies were cumbersome and often
did not work in practice. What would happen is the manufacturer
would say, ``This is the price at which I want my product
resold, and if you will not do that, I will not sell it to
you.''
Now, on paper, that is easy. In practice, it results in the
circumstance you had in Ping where the discussions with the
dealers were not coming into the marketing department but were
coming into the general counsel's office. What would happen in
practice--and here I would like to quote my friend Pamela Jones
Harbour in one of the first speeches she gave in the Antitrust
Section. The policy on paper looked wonderful and complied with
the law. But you have a regional sales representative out there
who is going out and talking to the folks in the stores. And
Pam said that the dialogue went roughly like this:
``Charlie, I love you like a brother, but you're chiseling
on the price.'' And they would have a long discussion about
whether Charlie really was chiseling on the price or whether
Charlie was going to start complying with the policy, because
if Charlie kept chiseling on the price, they were going to cut
him off. And that led to an agreement, believe it or not, or a
decision to cutoff Charlie, and Charlie sued and said, ``They
imposed an agreement on me to comply with the policy.'' And
that is where the litigation was. The litigation always
involved the question of whether there was an agreement,
because the policy itself was fine. It was the implementation
that was cumbersome and awkward. I do not think we want
marketing decisions being made in the general counsel's office.
Frankly, we are not very good at it.
Ms. Harbour. Since Jan quoted me--
Chairman Kohl. Another way to say that is we want to make
it easier, less cumbersome, less difficult for retailers--for
manufacturers to set their price.
Ms. McDavid. Exactly.
Chairman Kohl. Beautiful.
Ms. Harbour. Chairman Kohl, since--
Chairman Kohl. Beautiful. I could not agree with you more.
That is the point of it. But I disagree with it.
[Laughter.]
Chairman Kohl. I do not think you can make the argument
that that serves the American consumer. Clearly - and I
appreciate that because we have, you know, many parts of the
American economy and of our country. It serves the interests of
the manufacturer, and that is fine, if you represent that--that
is your client and you make the argument, and I appreciate
that.
Yes, Ms. Harbour?
Ms. Harbour. Senator Kohl, since I was quoted, I will tell
the second part of that hypothetical. Yes, it is true that
sometimes those Colgate policies would fall apart in the
marketplace, and, you know, sales reps would say, ``Charlie, I
love you like a brother, but you got to keep those prices up.''
But what Jan did not say, in the second part of my hypo, is
that it is possible to have a clean-cut Colgate policy. What
happens in the marketplace is that sometimes manufacturers get
a little cute. They want to implement the ``three strikes you
are out approach'' or structured termination ``Well, you know,
get those prices up, we will give you one chance.'' But then
when it comes to the second chance, sometimes there is an
implicit coerced agreement, and that is where they get into
trouble.
So I think that it is possible to have a clean Colgate
policy. But, the problem occurs when the salesmen are not
disciplined and there is a structured termination policy using
the ``three strikes you are out'' structured termination. This
is where a lot of the manufacturers get in trouble.
Chairman Kohl. Mr. Pitofsky?
Mr. Pitofsky. Just a comment on what we have just heard. I
am no fan of Colgate. It is a mess. But the solution to Colgate
is not to overrule Dr. Miles. I mean, it is a non sequitur. You
want to straighten out Colgate? Good. We are all for it. We
would pitch in on that.
Second, let's be clear that we all agree there should be
high-end, middle, and low-end retailers. They should all be
protected. But the reason for challenging Dr. Miles was to
hamper the ability of the low-end discounters to really do
their job. And you do that by an epithet. You call them free
riders. You call them names. You call them--you say they are
not righteous compared to the high end. But the fact of the
matter is I have not seen poor services in discount operations.
On the contrary, sometimes the services are better.
And, finally, as far as discounters are concerned, it is
quite possible the reason they can discount is because they get
up earlier, they work harder, they handle their inventory
better, they bargain better for prices, and they want to pass
their efficiencies along to consumers.
What really upsets me is the argument that the manufacturer
has the right to trump the market and prevent the efficient
discounter from passing discounts along to consumers. That
seems to me inconsistent with what American antitrust is about.
Ms. Harbour. And if I might put a fine point on that, Mr.
Chairman. There was a study that was done in 1983 by Thomas R.
Overstreet. It was titled ``Resale Price Maintenance: Economic
Theories and Empirical Evidence.'' And basically what that
study found and acknowledged was that traditional wholesalers
and retailers had lobbied to legalize minimum RPM, and they did
that, and I quote the report, ``to shield themselves from new
forms of competition.'' The retailers had argued vigorously
that competition and falling consumer prices, in their opinion,
were generally bad for the economy and bad for small business,
and that motivation is the antithesis of a free and open market
economy.
Chairman Kohl. Thank you.
Anybody else want to make a comment? This has been a great
hearing.
Ms. McDavid. One comment, Chairman Kohl.
Chairman Kohl. Go ahead.
Ms. McDavid. No one here today has argued that the absolute
per se rule of Dr. Miles is the right rule. Chairman Pitofsky
has not taken that view. Commissioner Harbour has not taken
that view. Certainly we have not taken that view.
Even Commissioner Harbour and Chairman Pitofsky--
[Laughter.]
Ms. McDavid.--have said there could be exceptions for new
entry there could be exceptions, there could be a BMI sort of
analysis in which you determine whether the rule of reason
applies.
Keep that in mind as you move forward here.
Chairman Kohl. Mr. Pitofsky?
Mr. Pitofsky. Well, we have a per se rule against
horizontal price fixing. It is the toughest rule in the world,
and the penalties are extreme. But we also have a softening
effect through BMI which says if once in a blue moon you have
an argument that your horizontal price fixing is efficient, as
it turned out it was in BMI, we will listen to you, and if you
persuade us, we will give you a rule of reason. That does not
mean we give the other 97 products a rule of reason. We just
back off a little bit and soften the edges of a per se rule.
But the value of the per se rule is predictability, certainty,
short trials, the ability of private plaintiffs to bring cases
like this. It is the staple now of American antitrust
enforcement; even though the BMI qualification has been added,
it did not undermine the horizontal per se rule. And I think a
similar approach would have been wiser for the majority in
Leegin, but they were not interested in preserving the virtues
of the per se rule. They were interested in overruling Dr.
Miles.
Ms. Harbour. I absolutely agree with Professor Pitofsky,
and if the Chairman is interested, I would give you my proposed
wish list for legislation, if you are so interested.
Ms. Syms. And I just would like to say one thing. Since we
have been in business, since 1959, I can recollect in all those
years only two times where we were involved in any legal kind
of--you know, between a manufacturer and a retailer, and we
were one of many. I would make a seventh in my list of
predictions. I articulated six. I would make a seventh, that
there would be a lot more litigation with the new rule.
Ms. McDavid. I would like to comment on the predictability
point that Chairman Pitofsky made. These cases were not
predictable for the reasons that Commissioner Harbour and I
described as to what the dialogue actually looked like in the
field between the manufacturer representatives and the dealers.
The manufacturers usually did not know that was happening until
they actually got sued. There was no predictability at the
business level, and the lawsuits--there were thousands of
dealer termination cases. They all turned on the question of
agreement. Was there enough coercion by that regional sales
manufacturer to bring the dealer into the agreement. The
dealers won a lot of these cases. The manufacturers won a lot
of these cases. But there was lots of litigation, and there was
no predictability on the outcome because the manufacturer never
knew what was really happening out there. That is why Ping
centralized these decisions in the general counsel's office.
Ms. Harbour. And that is why Congress can fix this with
proposed legislation.
Chairman Kohl. Is this an issue that should never have come
before the Supreme--I mean, is this an issue that belongs in
Congress?
Ms. Harbour. Yes.
Chairman Kohl. Mr. Pitofsky? Professor?
Mr. Pitofsky. I think the Supreme Court had no need to take
this case. It was aware that Congress was comfortable with this
rule, and a conservative majority had said 15, 20 years ago
that this is price and price is different, as far as we are
concerned, so we are going to sit tight and rely on Congress's
attitude toward this rule.
So I was surprised they granted cert. Once they granted it,
one has a sense that a very conservative Supreme Court might
knock off this rule, just as they have found against the
enforcement side in antitrust several times now. So I think
they should have stayed away from this one. It was working OK.
Ms. McDavid. Judges and juries all over the country every
day in all antitrust cases except cartel cases weigh all of the
facts and circumstances in evaluating whether a particular kind
of conduct does or does not have anticompetitive effects. This
rule should just be the same as all of the others except
cartels.
Mr. Bolerjack. I agree completely. There is no issue. The
Court drew a bright line around cartels. If this is being used
to enforce cartel behavior, it will be stopped. I think the
Court also laid out that the courts need to be cautious about
potential anticompetitive effects. There is no free pass. There
is not an expectation that this can go forward and no one will
look at it. It can be challenged.
And the final point is one Professor Pitofsky talked
about--I believe he said one case every 7 years resulting from
the Sylvania decision. There are a lot more than that each year
dealing with dealer terminations, and they can be used in a
variety of ways, sometimes as leverage by a customer who seeks
to force a small manufacturer to continue to supply.
Chairman Kohl. I remember during John Roberts's
confirmation hearing--perhaps you recall this, too--he made the
point that a Supreme Court Justice is really just an umpire. He
calls the balls and strikes, and it is pretty much not a matter
of judgment, it is just a matter is it a ball or a strike, and
virtually anybody looking at it fairly would see most of these
issues the same way.
Could we at least agree that that is not entirely true,
that smart, intelligent people sitting on the Supreme Court can
and do look at issues and see them differently because they are
people of different judgments and temperaments, as, for
example, this case might indicate?
Ms. McDavid. And there are different implications of these
policies that can be seen differently by different people.
Chairman Kohl. Absolutely. What else? Anybody else? Ms.
Harbour, go right ahead.
Ms. Harbour. Just to put another fine point on what
Professor Pitofsky said, I do think that the ability to price
independently is sacrosanct. Some of the earlier cases held
that. I think price is the central nervous system of our
American economy. I believe that prices will go up in the wake
of Leegin. Consumers will pay more money, and that is the
bottom line. I believe that the basis for overturning Dr.
Miles, i.e. the ``new'' economic learning--is not new. These
are the same arguments that were made in 1911. These arguments
were rejected by the Dr. Miles court. These were the same
arguments that were made in 1975. these arguments were rejected
by Congress. There is nothing new here. The only thing ``new''
that has changed is the composition of the Supreme Court and
its disregard for congressional will and stare decisis.
Chairman Kohl. Well, it has been a great hearing. We have
got some obviously very smart people sitting before us, and you
have given us all the difference sides of the issue, and let's
see where we go from here. So we thank you all for coming this
morning.
[Whereupon, at 11:23 a.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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