ANTITRUST POLICY

SUPREME COURT

On June 28, 2007, the Supreme Court issued its decision in the case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., DBA Kay’s Kloset…Kay’s Shoes.  The ruling changed a longstanding antitrust rule.  For many years, a minimum resale price maintenance agreement between a manufacturer and distributors or retailers, was considered to be a “per se” vertical price restraint violation of antitrust law.  This means it was presumed to be illegal and, generally, the burden was on the defendants to prove otherwise that the arrangement was reasonable.  The Supreme Court said the proper analysis should be the “rule of reason.”  This means the plaintiff, typically another distributor or retailer, must make the case that the arrangement was anti-competitive and therefore illegal.

The court began by noting per se rules should be confined to restraints “that would always or almost always tend to restrict competition and decrease output.”  It then went on to observe that minimum resale price maintenance agreements can be anti-competitive or pro-competitive. 

On the pro-competitive side the Court said the justifications for vertical price restraints are similar to those for other vertical restraints.  Minimum resale price maintenance can stimulate interbrand competition among manufacturers selling different brands of the same type of product by reducing intrabrand competition among retailers selling the same brand.  A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in services or promotional efforts that aid the manufacturer’s position as against rival manufacturers.  Resale price maintenance may also give consumers more options to choose among low-price, low-service brands; high-price, high-service brands; and brands falling in between.  Absent vertical price restraints, retail services that enhance interbrand competition might be underprovided because discounting retailers can free ride on retailers who furnish services and then capture some of the demand those services generate.  Retail price maintenance can also increase interbrand competition by facilitating market entry for new firms and brands and by encouraging retailer services that would not be provided even absent free riding.

On the anti-competitive side of the ledger, the Court said, unlawful price fixing, designed solely to obtain monopoly profits, is an ever present temptation.  Resale price maintenance may, for example, facilitate a manufacturer cartel or be used to organize retail cartels.   An unlawful manufacturers’ cartel will seek to discover if some manufacturers are undercutting the cartel’s fixed prices.  Resale price maintenance could assist the cartel in identifying price-cutting manufacturers who benefit from the lower prices they offer.   Resale price maintenance, furthermore, could discourage a manufacturer from cutting prices to retailers with the concomitant benefit of cheaper prices to consumers.

According to the Court, a group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance.  In that instance the manufacturer does not establish the practice to stimulate services or to promote its brand but to give inefficient retailers higher profits.  Retailers with better distribution systems and lower cost structures would be prevented from charging lower prices by the agreement.

The Court also said it can also be abused by a powerful manufacturer or retailer.  A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs.  A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network.

The Court concluded that since the rule of reason is designed and used to ascertain whether transactions are anti-competitive or pro-competitive it is the appropriate standard, the plaintiff must make the case.  As the Supreme Court indicated, the factors a court would consider under the rule of reason include the number of manufacturers using the practice, the restraint’s source, and a manufacturer’s market power.

THE FEDERAL TRADE COMMISSION

Changing the function of the Federal Trade Commission (FTC) ought to be a priority for the small business community.  Small businesses continue to face unfair competition from major retailers bent on driving them out of business.  Small businesses in the service industry also find themselves on an uneven playing field with non-traditional major competitors.

The FTC is more concerned with consumer protection than fair competition between businesses.  For the FTC to take action, small businesses have to prove that consumers, not their own businesses, have been harmed. 

Congress created the Robinson-Patman Act in 1936, to supplement the Clayton Antitrust Act.  Section 2(a) of the Act requires sellers to sell to everyone at the same price, while section 2(f) of the Act requires buyers, with the requisite knowledge, to buy from a particular seller at the same price as everyone else.  Sections 2(c), 2(d), and 2(e) - as elaborated by the Commission through the FTC Act - prohibit sellers and buyers from using brokerages, allowances, and services to accomplish indirectly what sections 2(a) and 2(f) directly prohibit. 

Robinson-Patman forbids any person or firm engaged in interstate commerce to discriminate in price to different purchasers of the same commodity when the effect would be to lessen competition or to create a monopoly. 

The FTC and the Supreme Court however, have applied a stricter interpretation of the Robinson-Patman Act.  The Supreme Court in the past has warned against "interpretations of the Robinson-Patman Act which extend beyond the prohibitions of the Act and, in so doing, help give rise to a price uniformity and rigidity in open conflict with the purposes of other antitrust legislation" (Great Atlantic and Pacific Tea Co. v FTC). 

The FTC argues that broad application of the Robinson-Patman Act would be inconsistent with the Commission's general purpose.  For instance the FTC has stated that "the interpretation and application of the Act should be consistent with the interpretation and application of the other antitrust laws whenever possible" (Boise Cascade Corp.).

FTC Statutes

The Commission has enforcement and administrative responsibilities under 46 laws. They are grouped in three categories.  First, statutes relating to both the competition and consumer protection missions; second, statutes relating principally to the competition mission; and third, statutes relating principally to the consumer protection mission.  Below is a list of some key statues. 

Statues Relating to Competition

 

The Clayton Antitrust Act of 1914

The Commission is charged under Sections 3, 7, and 8 of this Act with preventing and eliminating unlawful tying contracts, corporate mergers and acquisitions, and interlocking directorates.  The statute was amended by the Robinson-Patman Act, 49 Stat. 1528, 15 U.S.C. 13, 13b, and 21a, under which the Commission is authorized to prevent certain specified practices involving discriminatory pricing and product promotion. 

The Hart-Scott-Rodino Antitrust Improvement Act of 1976

This Act amended the Clayton Act by requiring companies to file pre-merger notifications with the Federal Trade Commission and the Antitrust Division of the Justice Department.  The Act establishes waiting periods that must elapse before certain acquisitions or tender offers may be consummated and authorizes the enforcement agencies to stay those periods until the companies provide certain additional information about the proposed transaction.

The Webb-Pomerene Act of 1918

Under this statute, the Commission is responsible for receiving certain filings from export trade associations organized under the Act; investigating association operations that may adversely affect competition within the United States; making recommendations to associations for business readjustments deemed necessary to comply with the law; and, where appropriate, making recommendations to the Attorney General for law enforcement action.

International Antitrust Enforcement Assistance Act of 1994

This Act authorizes the Federal Trade Commission and the Justice Department to enter into mutual assistance agreements with foreign antitrust authorities. Under such agreements, U.S. and foreign authorities may share, subject to certain restrictions, evidence of antitrust violations and provide each other with investigatory assistance.

Statutes Relating to Consumer Protection

Textile Fiber Products Identification Act

This statute deals with mandatory content disclosure in the labeling, invoicing, and advertising of textile fiber products.  Under the Act, misbranding is unlawful, as is falsely or deceptively invoicing or advertising textile fiber products.  The Act also directs the Commission to establish a generic name for each man-made fiber that does not as yet have such a name.

The statute was amended by the Drug Price Competition and Patent Term Restoration Act of 1984 (Pub.L.No. 98-417) to require (1) that any textile fiber product processed or manufactured in the United States be so identified, and (2) that mail order promotional materials clearly and conspicuously indicate whether a textile fiber product was processed or manufactured in the United States or was imported.

Fair Packing and Labeling Act

This Act directs the Commission to issue regulations requiring that all consumer commodities other than food, drugs, therapeutic devices, and cosmetics be labeled to disclose net contents, identity of commodity, and name and place of business of the product's manufacturer, packer, or distributor. The Act authorizes additional regulations where necessary to prevent consumer deception (or to facilitate value comparisons) with respect to descriptions of ingredients, slack fill of packages, use of "cents-off" or lower price labeling, or characterization of package sizes.

Petroleum Marketing Act

Subchapter II of this Act authorizes the Commission to prescribe requirements for the calculation and posting of gasoline octane ratings by gasoline distributors and retailers.

Energy Policy Act of 1992

This Act amends the Energy Policy and Conservation Act to require that the Commission issue: (1) disclosure rules to assist consumers in choosing the most efficient incandescent and fluorescent light bulbs; (2) efficiency labeling rules for certain plumbing fixtures; (3) amendments to the Commission's Octane Certification and Posting Rule establishing automotive fuel posting and certification requirements for all liquid automotive fuels, including alternative fuels; and (4) labeling requirements concerning the costs and benefits of non-petroleum alternative fuels and alternative-fueled vehicles.  The Act also requires the Commission to enforce energy efficiency labeling rules issued by the Department of Energy for high intensity discharge lamps, distribution transformers, and small electric motors, and gives the Commission contingent authority to issue efficiency labeling rules for windows, commercial office equipment, and luminaries if the Department of Energy finds that it is appropriate to develop energy efficiency testing procedures for such products.  The Commission's rules can be found at 16 C.F.R. Parts 305, 306, and 309.

Statues Relating to Both Competition and Consumer Protection

The FTC Act

Under this Act, the Commission is empowered, among other things, to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; (c) prescribe trade regulation rules defining with specificity acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices; (d) conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and (e) make reports and legislative recommendations to Congress.

Packers Stockyard Act

Section 406 of this Act (7 U.S.C.  227) extends the Commission's jurisdiction to cover such activities of meat packers as are not related to the sale of livestock, meat products, and the like; transactions in oleomargarine; and retail sales of meat and related products. Other matters involving meat and related products are subject to the Commission's jurisdiction if the Secretary of Agriculture so requests or, in certain circumstances, where action by the Commission is necessary to exercise effective jurisdiction over retail sales of such products.  This statute was amended by the Poultry Producers Financial Protection Act of 1987 (Public Law 100-173, 7, 101 Stat. 917) to vest the Commission with similar authority over poultry product transactions.

ANTITRUST MODERNIZATION COMMISSION

In 2002, Congress passed the Antitrust Modernization Commission Act as part of the 2002 Department of Justice Authorization bill.  This legislation established the  Antitrust Modernization Commission (AMC) in order to provide a complete and extensive report on whether antitrust laws in the United States need to be modernized.  The 12-member commission, which began its work in 2004, submitted its report and recommendations to President Bush on April 2, 2007.

Among the Commission’s several recommendations, the most significant is the call for the repeal of the Robinson-Patman Act.  According to the Commission, the Robinson-Patman Act “appears antithetical to core antitrust principles” and “protects competitors over competition.”  Further, the report indicates that the statute does not effectively protect small businesses, which are adequately protected by the Sherman Act.

As the report pointed out, this is the fourth time that an official report has called for either the full repeal or substantial overhaul of the Robinson-Patman Act.  On May 8, 2007, the House Judiciary Committee’s Antitrust Taskforce conducted a hearing on the AMC’s findings.  While Judiciary Chairman John Conyers (D-MI) acknowledged that there is a lot of room for improving the Robinson-Patman Act, the law should not be repealed altogether. 

These recommendations were discussed at a recent SBLC Board meeting.  It was the feeling of the board that this issue was not as high of a priority as it had been in the past. 

ANALYSIS

In recent years, the distribution and marketing channels in our economy have changed dramatically.  In order to understand the necessity to update antitrust laws and practices, one must first comprehend how the economy and marketplace have been transformed.  For example, the small business community has come to appreciate how the rise of "power buyers" alters the landscape of economic diversity.

In the new economy, large retailers, also known as "power buyers," have emerged as dominant figures, upsetting the traditional competitive balance in the daily consumer goods market.  Some examples of "power buyers" include Wal-Mart, Home Depot, and Target.  In the traditional market, manufacturers "pushed" goods to consumers through the retail stores.  Now, the power buyers "pull" products from the manufacturer.

The problem is the market is faced with both "power buyers" operating under a "consumer pull," and smaller retailers continuing to operate under the traditional "manufacturer push" approach.  As a result, the gap between large and small retailers has been widened and, more importantly, it has also distorted price competition and production selection.

Many "power buyers" have also been successful in eliminating the practice of purchasing goods from brokers and independent salesmen.  This allows them to buy products directly from the manufacturer.  Direct buying by "power buyers" has decreased their cost structure, but removing a large volume of goods from traditional distribution channels has made wholesalers and distributors less efficient and less profitable.  This, in turn, has raised the cost base for independent retailers.

The rise of "power buyers" has caused increased retailer concentration, the weakening of the wholesale sector, and increasing pressures on brand manufacturers.  These factors will ultimately lead to price manipulation and a deterioration in product quality and choice.  "Power buyers" represents one of the major threats to small businesses.

OUTLOOK

We do not expect any significant legislative activity.

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