Price verdict threatens future of discounting - Supreme court verdict on price cutting

Discount Store News, May 23, 1988

Price Verdict Threatens Future of Discounting

WASHINGTON--In a major legal setback for consumers and the discount store industry, the U.S. Supreme Court opened the door for full-margin retailers to conspire with manufacturers to prevent price cutting by competing retailers.

The ruling, which will leave discounters vulnerable to termination by key suppliers, held that as long as there is no agreement to set specific prices or price levels, it is no longer automatically illegal for a supplier and a higher-priced dealer to conspire to cut off sales to a competitor.

The decision in the case of Business Electronics Corp. vs. Sharp undermines 77 years of legal precedent whereby such agreements have been treated as automatic violations of federal antitrust law.

The 6-2 verdict has already come under heavy fire from the International Mass Retail Association as "harmful to consumers and price competition."

According to IMRA government relations vice president Robert Verdisco, "The court's unfortunate decision means that higher-priced retailers will not only be able to complain to their suppliers about more-efficient, lower-priced competitors, but can also try to coerce an agreement to eliminate their competition."

The net result "is likely to be lessened competition and higher prices for the nation's consumers," he predicted.

In contrast, Reagan administration antitrusters called the ruling a "step in the right direction" and an indication that the Supreme Court recognizes the importance of regulating trade to promote maximum economic efficiency.

Significantly, however, the high court stopped short of declaring that all forms of retail price maintenance may no longer be treated as per se or automatically illegal - a position argued by administration officials at both the Justice Department and the Federal Trade Commission.

Instead, the court effectively changed the definition of RPM to exclude conspiracies which stop short of establishing specific price levels.

Under the standard laid down in BEC vs. Sharp, it is automatically illegal for a vendor to strike an agreement with one or more retailers to prohibit the sale of a product below a "suggested" list price. But it is not automatically illegal to conspire to terminate retailers whose low prices offend competing retailers.

That curious ruling stemmed from a relatively straightforward, 15-year-old dispute between two authorized distributors of Sharp electronic calculators in Houston, Texas. One dealer, BEC, sold the vendor's products at below "list" prices. The other, Hartwell, repeatedly complained to Sharp about BEC's discounting.

In June of 1973 Hartwell threatened to stop selling Sharp's products altogether unless transactions with BEC were terminated within 30 days. The vendor responded to that ultimatum by cutting off sales to BEC in July.

The discounter filed suit in federal court and was awarded $1.8 million in treble damages due to the conspiracy.

The appeals court for the 5th Federal Circuit reversed that verdict, however, ruling that in order for the conspiracy between Sharp and Hartwell to be per se illegal, Hartwell "must expressly or impliedly agree to set its prices at some level, though not at a specific one." The agreement is not automatically unlawful, the court added, unless the retail conspirator "cannot retain complete freedom to set whatever price it chooses."

In upholding that decision, the U.S. Supreme Court held that the termination of a discounter under the conditions present in the BEC vs. Sharp case is not "conduct that is manifestly anti-competitive."

"There has been no showing here that an agreement between a manufacturer and a dealer to terminate a `price cutter,' without further agreement on the price or price levels to be charged by the remaining dealer, almost always tends to restrict competition and reduce output," Justice Scalia wrote on behalf of the court's majority.

A ruling against the manufacturer in this case, he reasoned, would make it too easy for discounters to win groundless treble damage RPM suits against innocent suppliers.

"Any agreement between a manufacturer and a dealer to terminate another dealer who happens to have charged lower prices can be alleged to have been directed against the terminated dealer's `price cutting,'" Scalia maintained. "In the vast majority of cases, it will be extremely difficult for the manufacturer to convince a jury that its motivation was to ensure adequate services, since price cutting and some measure of service cutting usually go hand in hand."

Even manufacturer trade restraints "that do not result in dealer termination, such as the initial granting of an exclusive territory or the requirement that certain services be provided, can be attacked as designed to allow existing dealers to charge higher prices," Scalia lectured. "Manufacturers would be likely to forego legitimate and competitively useful conduct rather than risk treble damages and perhaps even criminal penalties."

Ironically, Scalia's opinion was peppered with references to "Chicago School" jurist Robert Bork - one of President Reagan's unsuccessful 1987 Supreme Court nominees, and a leading advocate of allowing vendors to dictate the prices paid by consumers.