The Days of Dr. Miles May Be Numbered

March 26, 2007

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Supreme Court Justices today will hear arguments over one of the biggest and hoariest precedents in antitrust law — the Dr. Miles rule — revisiting caps on manufacturers' suggested retail prices. The issue at stake is the court's 1911 decision that a manufacturer's requirement that a reseller not price its goods below a set minimum is an automatic violation of the Sherman Antitrust Act.

Today the Supreme Court will hear arguments that it should do away with its nearly century-old opinion in Dr. Miles Medical Co. v. John D. Park & Sons Co., a decision that has meant retailers are free to price products at less than what the manufacturer thinks they should.

Under the rule, established in the 1911 case of Dr. Miles Medical Co. v. John D. Park & Sons Co., minimum prices manufacturers set on what dealers can charge customers for their products are deemed "as illegal per se under the Sherman Act, no matter what evidence might be presented," according to Law.com.

The per se rule has come under increasing attack in recent years as being too rigid to take into account market factors that argue for minimum price setting — including the perceived problem of 'free-rider' discount retailers, who piggyback on the advertising, promotion and informed sales force of other merchants selling the same product.

Simply put, the issue at stake is the court's 1911 decision that a manufacturer's requirement that a reseller not price its goods below a set minimum is a per se (i.e., automatic) violation of the Sherman Antitrust Act.

The Washington Post reports:

Some economists argue that the Dr. Miles rule has outlived its usefulness and is unnecessary as an antitrust weapon in a modern economy. Consumer groups counter that the restriction has saved shoppers hundreds of billions of dollars. ... Although the impact of reversing the rule at this point is debatable — many manufacturers who care to have already found ways around it — the reach of the Dr. Miles decision is vast.

Meanwhile, consumer groups counter that the restriction has saved shoppers hundreds of billions of dollars.

Miles Medical, which Dr. Miles later changed to Miles Laboratories, wanted to set a minimum price for his elixirs, which the Indiana company sold to "jobbers and wholesale druggists, who in turn [sold] to retail druggists for sale to the consumer."

The Washington Post further notes that today's legal battle before the court has drawn a host of interested parties: "On the side of doing away with Dr. Miles are the National Association of Manufacturers (NAM), makers of high-end goods such as Ping golf clubs, and the Bush administration." Opponents of the change are the Consumer Federation of America, discounters such as Burlington Coat Factory and the attorneys general of 36 states.

Those advocating a change argue that such requirements should not be categorically deemed violations but should be evaluated case by case, under a "rule of reason," to decide whether they interfere with market competition.

"It really pertains to the whole economy. Everything from cars to computers to toothpaste," Andrew Gavil, an antitrust expert at Howard University School of Law, tells The Washington Post.

In the current case, California-based manufacturer Leegin Creative Leather is challenging the 1911 Supreme Court ruling that automatically classifies agreements to set minimum prices as anticompetitive. The handbag maker, whose products are made under the brand name Brighton, said it would refuse to sell its goods to any retailer that didn't comply with its "Brighton Retail Pricing and Promotion Policy," which mostly bans discount prices for Brighton products.

This has pretty massive implications for both manufacturers and consumers, not to mention discout-reseller businesses. Tell us what you think about this.

The National Law Journal also provides coverage of the matter.

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