On June 28, the U.S. Supreme Court overturned a nearly century-old anti-trust precedent that may permit manufacturers of decorative plumbing and hardware to set minimum pricing for their products.
Leegin Creative Leather Products, Inc. is a high-end purse and leather goods manufacturer that produces products under the brand name Brighton. Its approach to retail is not dissimilar to many manufacturers of decorative plumbing and hardware.
Leegin depends exclusively upon the independent channel for its distribution. Company president Jerry Kohl believes that his best chance for success is to partner with specialty retailers whose staffs have superior knowledge and whose owners are committed to providing exceptional service. Kohl believes that independent specialty retailers treat customers better and provide a superior shopping experience than do large, multi-branch retailers or national department stores.
By the mid-1990s, Leegin expanded the Brighton line to include handbags and other accessories. One of Leegin’s 5,000 boutiques was PSKS, Inc., which operated a retail store by the name of Kay’s Kloset in Lewisville, TX. Kay’s Kloset first purchased products from Leegin in 1995. The store promoted Brighton products in its ads and held special events revolving around Brighton products in the store. The company claimed that Brighton was its most important brand, once responsible for 40-50% of its profits.
In 1997, Leegin sent Brighton retailers the “Brighton Retail Pricing and Promotion Policy,” that indicated Leegin would not provide products to anyone selling below the minimum-pricing levels it established (except for products that were not selling). Leegin wrote to its customers, “In this age of mega stores like Macy’s, Bloomingdales, etc., consumers are perplexed by the promises of product quality and support of product which we believe is lacking in these large stores. Consumers are further confused by the ever-popular sale, sale, sale.
“We at Leegin choose to break away from the pack by selling [at] specialty stores; specialty stores that offer the customer great quality merchandise, superb service and support of the Brighton product 365 days a year on a consistent basis.
“We realize that half the equation is Leegin producing great quality Brighton products and the other half is you, our retailer, creating great-looking stores selling our products in a quality manner.”
In 1998, Leegin created its Heart Store Program, providing incentives to retailers that would support Brighton products and agree to sell at Leegin’s suggested retail pricing. The stated purpose for the minimum pricing policy was to enhance the brand’s image and reputation by ensuring that its retailers would have sufficient margins to provide superior customer service.
In December 2002, Leegin discovered that Kay’s Kloset had discounted the entire Brighton line by 20%. Kay stated that its discounting practices were a matter of survival because other retailers in the area also were discounting Brighton products below Leegin’s suggested minimum pricing. Leegin requested that Kay discontinue its discounting practices. When Kay refused, Leegin suspended all shipments of its products to Kay’s Kloset. Kay responded by filing an action arguing that Leegin had coerced retailers into illegal agreements to fix pricing.
Kay’s Kloset received a settlement for damages plus legal fees that brought the judgment to nearly $4 million.
Leegin unsuccessfully appealed the ruling, after which the Supreme Court of the U.S. granted certiorari and decided to hear the case. In a five-to-four decision, the Supreme Court ruled in favor of Leegin’s appeal and, in doing so, overturned a 1911 anti-trust precedent established in the case of Dr. Miles Medical Company v. John D. Park & Sons Co. The Dr. Miles case established the rule that it is a per se violation of the Sherman Anti-Trust Act for a manufacturer to set the price a distributor can charge for a manufacturer’s goods. The per se rule means that a plaintiff suing for damages under the Sherman Act need only prove that the manufacturer had a policy establishing a minimum resale price and that the plaintiff was damaged as a result of that policy. There is no defense against a per se illegality.
Rule of Reason
In overturning the Dr. Miles decision, the Supreme Court stated that agreements establishing minimum prices for which goods can be sold must now be considered under the “rule of reason.” Under the rule of reason standard, the fact finder must weigh all of the circumstances in deciding whether a restrictive practice imposes an unreasonable restraint on competition. The issue to be decided is not whether the practice of setting minimum pricing is restrictive, but if the practice is so restrictive as to impose an unreasonable restraint on competition. As a consequence, a plaintiff attempting to sue under the Sherman Act must bear a considerably heavier burden of proof than before.
In its justification why the rule of reason should apply to resale price maintenance policies, the Court used as an example how some discount retailers get a “free ride” on the efforts of other, non-discounting retailers. Justice Kennedy, in writing the majority opinion, presumably takes a shot at Internet retailers who benefit from brick-and-mortar showrooms. Kennedy wrote: “Consumers might learn…about the benefits of a manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations or hires and trains knowledgeable employees…If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back on its services to a lower level than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider.”
Impact on DPH Showrooms
Justice Kennedy’s words are music to the ears of the independent decorative plumbing and hardware channel. Permitting manufacturers to set minimum pricing provides incentives to motivate dealers to invest in their showrooms and commit to staff education and training. Doing so allows the dealer to be more competitive without the fear of customers being educated in the showroom, only to turn around and buy products on the Internet or from a wholesale discounter or buying club.
The majority decision also found that providing manufacturers the ability to set minimum pricing promotes new products in the marketplace because retailers will be willing to sell those products if they know they don’t have to compete with discounters.
The ruling is not a slam-dunk for minimum pricing, however. The Court pointed out that minimum pricing could have anti-competitive consequences if:
- Numerous manufacturers in a given industry adopt minimum pricing policies with their retailers.
- A cartel of dealers is the impetus for manufacturers to establish minimum pricing policies.
- Manufacturers and/or dealers are of sufficient size to have significant influence over the market.
The immediate impact on the decorative plumbing and hardware industry most likely will be minimal. There will likely be a handful of specialty manufacturers committed to limited distribution that will impose minimum-pricing polices. Others are likely to adopt a wait-and-see approach because they do not have the resources to sustain a protracted legal battle.
There are not many in our industry that will test the waters. Then again, the DPH industry may not have to. Other industries, appliances and electronics in particular, are more likely to set minimum pricing because those industries appear to have considerable price support mechanisms already in place.
Even if some manufacturers elect to set minimum-pricing policies, the likelihood that their actions will result in an anti-trust claim is small. There is a strong argument that there is no one manufacturer or dealer or group that has the market strength to have an adverse effect on the consuming public if they were to impose and/or require minimum pricing.
The change in the law also refocuses the spotlight on manufacturer-dealer relationships. Dealers that invest in their showrooms, staff and merchandise will look to forge stronger partnerships with manufacturers that are willing to establish minimum-pricing policies. Kate Brady, of The Plumbing Gallery in Sarasota, FL, claims that the Leegin decision “does level the playing field and down the road may result in some products disappearing from showrooms. Why give floor space to a product line that continues to be sold cheaply?”
Likewise, dealers need to recognize that minimum pricing policies are a two-way street. Dealers that want manufacturers to establish minimum pricing need to commit to manufacturers by supporting the lines that are supporting them. For a true partnership to work, dealers and manufacturers need to equally focus on each other’s needs. Why should a manufacturer establish minimum pricing if a dealer will carry five, six or seven other similar or competing lines from manufacturers that don’t make similar commitments?
The response from the dealer that the price point alone is determining the sale isn’t an answer. As DPHA past president Bill Fiddler stated in a recent DPHA Web site posting: “Research data shows that 8.4% of purchasing decisions are made on price. That means that 91.6% of purchases are decided on other factors.”
Jamie Gregg is CEO of Colonial Bronze, an 80-year-old manufacturer of decorative accessories headquartered in Torrington, CT. Colonial Bronze is a charter member of the Decorative Plumbing & Hardware Association. Gregg served as the organization’s second president and continues to serve on the DPHA Board of Directors. Prior to joining Colonial Bronze, he served as an Assistant U.S. Attorney in Manhattan and is a member of the New York and Connecticut bars.
“DPH Prerspectives” is published in Kitchen & Bath Design News under the terms of an exclusive industry alliance between KBDN and the Bethesda, MD-based DPHA.
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