A pending decision by the United States Supreme Court is being watched by a number of companies involved in the supply chain.

As INDUSTRIAL DISTRIBUTION went to press in June, the high court had yet to release its decision in Leegin Creative Leather Products Inc. vs. PSKS Inc.

Leegin is a manufacturer of women's clothing and accessories. Its Brighton line was among its more popular and best selling items. Starting in 1997, Leegin's agreements with its retailers required them not to sell Leegin's line of clothing at a discount.

PSKS, a Texas-based chain of retail stores that operates with the name Kay's Kloset, nonetheless sold the Brighton line at a discount. As a result, Leegin cancelled its contract with PSKS in 2002 and stopped all shipments to the stores.

PSKS sued Leegin, maintaining a violation of federal antitrust laws. Leegin argued that its pricing policy (also called “vertical pricing”) helped them, as a small manufacturer, to compete against larger makers of women's accessories and clothing. In addition, Leegin argued that the minimum prices encouraged competition among its retailers in terms of customer service, value-adds and product promotion.

PSKS had argued that Leegin was in violation of the Sherman Act and further pointed to a 1911 Supreme Court decision (Dr. Miles Medical Co. vs. John D. Park & Sons Co.) which ruled that mandatory minimum price agreements were per se illegal under the Sherman Act—meaning they were automatically illegal regardless of the circumstances.

PSKS won a jury verdict in the U.S. District Court of East Texas of $1.2 million which, in accordance with the Sherman Antitrust Act, was tripled.

On appeal, Leegin's attorneys said the rule was essentially outdated and argued that a “rule of reason” should be followed; that is, a rule under which the minimum pricing agreement would be considered illegal only in instances where they could be clearly shown to be anti-competitive.

The U.S. Court of Appeals rejected Leegin's arguments, stating that it would follow the Supreme Court's decision in the Dr. Miles case, in which such pricing policies were illegal regardless of whatever economic or business arguments were presented by the company.

In December, 2006, the U.S. Supreme Court heard the case. It was expected to issue a decision before the latest term concluded (end of June or possibly early July), although it was not required to do so and, in theory, the ruling could wait until October.

Though the decision is being watched by many manufacturers and distributors, it may not affect everyone. Distributors who sell non-commodity products and depend on their value-added features to keep customers may not feel much of a long-term impact.

Michael Kelly, a principal and pricing practice leader at Frank Lynn & Associates, advised restraint, regardless of the Supreme Court's ruling.

Establishing a minimum sale price is a tool that's not for everybody, he explained. For some companies, though, it can be a big opportunity.

“Some manufacturers can have more control on how their product is viewed by the end user in terms of value, branding and position,” he explained. “[For example], let's say distributor A and distributor B are already distributors for the same product and both sell to the same industries. So they decide to start lowering the price. They're then not competing on service but are just throwing the [lowest] price out there.”

If manufacturers think their product is being de-valued unnecessarily, they can use the minimum pricing as a way to avoid having their product misperceived and undervalued, Kelly said.

When applied properly, Kelly thinks this form of vertical pricing can be good for both the manufacturer and the distributor.

“Both the distributor and manufacturer benefit,” Kelly said. “The one who loses is the guy who is just selling on price alone.”

Kelly admits some distributors might initially see this form of pricing as intrusive. But after a while, many see there are potential advantages, such as emphasizing their own company's value-added features and service offerings.

“In most cases, this protects both the distributors and manufacturers,” Kelly explained. “So when they put in the effort to sell something and do the right things, they compete on what really makes them different.”

Selling on considerations other than price can help supply chain partners avoid the perception that an item is a commodity.

“Price can be the best indicator of your value proposition and if people are out there lowering price unnecessarily, that is a real problem in some cases,” Kelly said. “[Vertical pricing] gives everybody more flexibility to control the value of their product and how it's perceived by the customer. … It forces people to compete on the value add and other activities rather than just be all about price.”

Fred Mendelsohn is a partner with Burke, Warren, MacKay & Serritella P.C. in Chicago. He specializes in commercial litigation as well as market channel matters involving dealers, distributors and sales reps. Mendelsohn went back and read the 1911 Dr. Miles case, he said.

“That's been the rule of law for nearly 100 years,” Mendelsohn said. “It's not like Congress hasn't had an opportunity to look at amendments to the Sherman Act and make changes. Congress has never changed that.”

Mendelsohn said he doesn't expect the Supreme Court to reverse that ruling.

“So you have 100 years of this law being in place with no change by Congress and you have subsequent cases by the Supreme Court which have recognized the validity of the determination that price fixing like this is a per se violation of the Sherman Act,” Mendelsohn said. “So I'm not sure anyone will see a change here.”

In the Leegin case, he pointed out, the appellate court's decision was very clear as well. On appeal, Leegin's attempt to emphasize that a “rule of reason” approach should be applied was firmly rejected.

Mendelsohn and others think that to the extent any change will be made, it will eventually come from Congress, not the courts.

“I just don't see how they have a compelling economic argument to overturn the legal precedent here,” Mendelsohn said.

Several organizations filed amicus briefs with the Supreme Court on the Leegin case, including the National Assn. of Manufacturers in support of Leegin's argument.

NAM's brief argued in part that “giving manufacturers the flexibility to establish the price at which their products may be sold can provide a variety of pro-competitive benefits, and can help prevent discount dealers from 'free riding' on the efforts of their competitors.”

NAM argued that the Supreme Court should “consider applying a 'rule of reason' analysis that allows manufacturers to argue why their policies are pro-competitive,” the brief stated.