By and  on June 29, 2007

WASHINGTON — Brands have another weapon to control their image, thanks to the U.S. Supreme Court.

In a decision that eventually could have a major impact on off-pricers, Internet retailers and other discounters, the High Court on Thursday struck down a 96-year-old ban on minimum pricing agreements, giving brands the potential to enforce the lowest price at which their products could be sold.

The 5-4 ruling could reshape the relationship between stores and their suppliers, with retailers that hang their competitive advantage on lower prices potentially being among the first to feel the pain. The decision gives lower courts the leeway to determine, on a case-by-case basis, whether minimum pricing agreements are anticompetitive. Previously, such agreements were illegal on their face.

It will take time for the industry to feel out the boundaries of the new rule, which grew out of a case pitting accessories firm Leegin Creative Leather Products against Kay's Kloset, a boutique operated by PSKS Inc.

Allen Questrom, former chairman and chief executive officer of J.C. Penney Co. Inc., said the ruling will "give manufacturers a little more ammunition" to pull their brands out of stores if the retailer starts discounting the line and hurting the image of the brand.

"Whatever the changes will be, they will be gradual and they will be changes that manufacturers, retailers and consumers will adjust to," said Questrom. "I do not think it will give huge leverage to any one of those three."

Questrom said the ruling would take away an "unfair advantage" that smaller retailers might have when they begin discounting full-price lines in which other retailers have invested time, money and personnel and sell at full price.

"If you take Chanel, you have to do a lot of things to make that work," said Questrom. "You have to have sales people on the floor and visual presentation and if I'm Joe Blow store and I buy Chanel and I discount it because it is the only way I can sell it, that doesn't seem fair either."

The majority opinion, while acknowledging that minimum pricing agreements could be abused by powerful manufacturers or retailers, said such arrangements also could spur competition."With price competition decreased, the manufacturer's retailers compete among themselves over services," reasoned Justice Anthony Kennedy, who was joined in the opinion by Chief Justice John Roberts as well as Justices Antonin Scalia, Clarence Thomas and Samuel Alito.

In the dissenting opinion, Justice Stephen Breyer argued that low-price retailers and Internet sites relied on the longstanding precedent, the reversal of which could have broad impacts.

"What about malls built on the assumption that a discount distributor will remain an anchor tenant?" wrote Breyer, who was joined in the opinion by Justices John Paul Stevens, David Souter and Ruth Bader Ginsburg. "What about home buyers who have taken a home's distance from such a mall into account? What about Americans, producers, distributors and consumers, who have understandably assumed, at least for the last 30 years, that price competition is a legally guaranteed way of life?"

Breyer cited studies that indicated resale price maintenance could cost the average American family of four $750 to $1,000 annually.

"The only safe predictions to make about today's decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles," concluded the dissent.

The court's ruling dealt a financial blow to Phil Smith, co-owner of Kay's Kloset, who will lose the $3.6 million in damages he won on appeal and be forced to start from scratch with a new lawsuit in the U.S. District Court in Texas.

"It's a sad day for consumers and it's a sad day for small business owners," said Smith. "I'm no longer free to price my goods and sell my goods as an independent businessman. Prices will be dictated to me."

Despite the setback Thursday, Smith isn't ready to give up the fight. The case was remanded back to U.S. District Court in Texas, and Smith and his legal team are preparing their argument.

"I look forward to going back to district court to argue other aspects of the case and I believe I will win again," he said.

On the other side, Jerry Kohl, president and founder of Leegin, downplayed the impact of the ruling."Manufacturers and retailers winked at each other [in the past]; now they're going to be able to shake hands," said Kohl. "For 90 years, the court said manufacturers can set prices. That isn't at question here. What's at question is can we shake hands and say, 'OK, I'll do it.'"

The ruling could make it easier for manufacturers to protect their most important assets, their brands.

"Manufacturers who want to maintain a certain brand image associated either with a certain price point or perhaps more importantly a certain retail experience, may now have latitude to set minimum retail price where they did not before," said Jeremy Richardson, a lawyer with Phillips Nizer.

But experts agreed the decision would not immediately and radically change retailing, given the balance of power in the industry.

"Significant retailers, take Wal-Mart, Target or Macy's, have the clout with their manufacturers to negotiate agreements that protect themselves," said Jeff Jaeckel, a partner with Morrison Foerster. "It's hard to imagine Wal-Mart or Target, for example, agreeing not to discount products. They're such significant forces that manufacturers will have to continue doing business with them."

Some question the degree to which the law will make a dent given the realities of the market.

"It will never stand the test of practical commerce," said Bud Konheim, ceo of Nicole Miller. "The ruling works for us, so I should be in favor of it, but I doubt we can dictate retail terms, because when someone buys something it becomes their property. It's like an artist selling his art to someone and then dictating what that person does with it after they buy it."

The pressure point will be where stores are gaining advantage by mixing well-known names with low prices.

"What this case does is it gives a slight advantage to full-price retailers and a slight disadvantage to off-price retailers," said Mallory Duncan, senior vice president and general counsel for the National Retail Federation, which did not take a position on the case since its membership was divided on the issue.

"Under the old rules, you simply had to prove there was an agreement to set prices and that was it, game over," said Duncan. Brands now have a chance to show that a policy of setting prices has competitive benefits.However, Stacy John Haigney, general attorney for Burlington Coat Factory Warehouse Corp., took a rather more ominous view of the decision and the new rule it ushers in.

"We've never been here before," said Haigney. "It can't be helpful to a company like Burlington Coat Factory that bases its business on the ability to sell fine merchandise at the lowest possible profitable price."

Fighting minimum pricing agreements under the new standard is a tall order for stores, he said.

"The place where this is supposed to be sorted out, in the district court, is a place where the economics of litigation will be prohibitive," said Haigney. "I'm hoping that at least sizable discounters have become established enough that people will be afraid of losing our business." — With contributions from Liza Casabona and Whitney Beckett, New York

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