By and  on June 19, 2007

WASHINGTON — As the U.S. Supreme Court weighs the rights of brands against those of retailers, the power to control prices hangs in the balance.

The case in question pits accessories firm Leegin Creative Leather Products against Kay's Kloset, a boutique operated by PSKS Inc., and tests whether a brand can dictate a minimum price to retailers in a legally binding way.

The practice is currently prohibited under the antitrust laws and might fall particularly hard upon off-price and independent retailers if it is decided for Leegin. The Supreme Court did not issue a ruling on Monday and it adjourns at the end of the month.

"This could hurt people like Burlington Coat Factory, who have offered our products substantially below the prevailing keystone markup and our customers come to us for our prices," said Stacy John Haigney, general attorney for the retailer. "Theoretically, if this decision goes through, manufacturers can start demanding that Burlington Coat Factory start charging higher prices."

Such a decision might just come to pass.

"That's the way the wind is blowing," said Haigney, who noted the off-pricer and department stores have both found a prosperous niche in the market.

"There's plenty of room for both of us, but this change in the law [should it come] might tip the scale in their favor," he said.

In an attempt to compete against larger brands, Leegin a decade ago began requiring retailers to adhere to a minimum price. Kay's balked at the policy and, in 2001, began selling the firm's leather goods at a 20 percent discount. The brand pulled its product from the store and a lawsuit ensued that was at first decided for Kay's, which won damages of $3.6 million.

The appeals process brought the case to the nation's highest court. The Supreme Court's decision could overturn nearly a century of legal precedent dictating that all price-fixing agreements are automatically illegal, giving judges in future cases more leeway to decide the appropriateness of such pricing policies.

If the Supreme Court overturns the precedent, it would make it easier for manufacturers to protect their brands from discounting. Retailers, however, would be left with less flexibility to move merchandise and set prices in their own stores.Even if the precedent were overturned, the equivalent of a legal earthquake, it would, at first, be just a tremor on the retail landscape. Stores such as Wal-Mart, Target and Macy's have economies of scale that give them bargaining power with manufacturers and suppliers, while online outlets or smaller chains might experience more fallout.

Justices appeared to be divided during oral arguments in the case in March, with at least some indicating they were open to considering a revision of the law.

"We have shown our willingness to update the antitrust law when sound economic doctrine suggests it is necessary," argued Justice Antonin Scalia.

However, Justice David Souter questioned whether the court should wade into such waters.

"This case is going to be very significant in the sort of battle between Wal-Mart and the Main Street stores," he said. "Why should this court in effect take a shot in the dark at resolving that, as distinct from leaving it to Congress?"

The stakes are high for Phil Smith, co-owner of Kay's Kloset, as well as for retailers as a whole.

"It would essentially remove price competition from our economy," said Smith, referring to a decision against his small suburban Dallas shop.

On the flip side, Jerry Kohl, president and founder of Leegin, who sells the Brighton accessories line to 5,000 specialty stores, as well in 112 company-owned stores operating under the name Brighton Collectibles, said this case is not about price fixing.

"It's about whether manufacturers can talk to their [retail] customers" about pricing policies, without the fear of violating antitrust laws, he said.

The nuanced legal question leaves the case open to any number of interpretations.

"Where you stand depends on where you sit, and in this case there are a lot of different seats," said Jeremy Richardson, a lawyer with Phillips Nizer who is not affiliated with the Leegin case.

For luxury goods manufacturers, the ability to set a minimum resale price could allow them to extend their brand into new channels without fear of brand dilution.

"Luxury brands thrive on promoting a certain product identity and a certain exclusiveness, and obviously don't want their products to be sold at discount because that's contrary to their brand identity," Richardson said.The push and pull over price tags is nothing new in the often love-hate relationship between stores and their vendors.

"This is an old story," said Bud Konheim, chief executive officer of Nicole Miller Inc. "In free enterprise, the customer sets the price. You can start with a price, but in the end, you get what people are willing to pay for it. This business of you control the price after it leaves your hands gets to be very dicey."

Economics might ultimately trump legal nuance when it comes to the latest fashions or big designer names.

"A lot of these laws, while we have to abide by them, have questionable efficacy because, at the end, supply and demand determines what price is," said Jeffry Aronsson, chairman of the Aronsson Group and former ceo for Donna Karan International. "It's going to depend on how strong the brand is, how good the product is." — With contributions from Liza Casabona, New York

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