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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