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SEN. KOHL: (Sounds gavel) Good afternoon. This hearing will come to order.
Today, we will examine an issue with far reaching impact on the prices consumers pay for everything from clothing to electronics, and to everyone who likes to get a bargain when shopping. Two years ago, we held a hearing on the Supreme Court's 5 to 4 decision in the Leegin case in 2007, which abolished a fundamental anti-trust rule, that manufacturers cannot set minimum retail prices. At that hearing, we heard warnings that this decision would imperil discount shopping, that consumers have learned to take for granted.
Our experience since the Leegin decision has given credence to these fears, and it comes at exactly the wrong time, just as millions of consumers face a serious recession and depend on bargain shopping more than ever to balance the family budget. That is why I've introduced legislation to overturn what I believe is this misguided Supreme Court ruling. For nearly a century, the rule against vertical price fixing permitted discounters to sell goods at the most competitive price.
Many credit this rule with the rise of today's low price discount retail outlets, stores like Burlington Coat Factory, and the Internet site e-bay, both witnesses today, not to mention such retail giants as Target, Best Buy and Walmart, all of which offer consumers a wide array of highly desired products at discount prices. We have already began to see the manufacturers set minimum retail prices resulting in higher prices for consumers. Some antitrust experts suggest that there are an estimated 5,000 companies using minimum pricing policies.
Last year, at the outset of the holiday shopping season, Sony announced a no discount rule prohibiting discount retailers from cutting the price on a number of its most in demand top end products, including some flat screen TVs as well as digital cameras. The Wall Street Journal has reported that a new business has materialized for companies that scour the Internet in search of retailers selling discount products. When such bargain sellers are detected, the manufacturer is alerted so that it can demand that the discounting stop. Even the discounting of toys at pre-Christmas sales was targeted.
I know from my own experiences in the retail industry that established retailers can take advantage of vertical price fixing to halt discounting dead in it tracks. In order to eliminate low price competition from smaller retailers, large retailers can demand that manufacturers forbid discount pricing. These large retailers have a bargaining power with manufacturers to make these demands stick, all to the detriment of upstart discount competitors and consumers. Our common sense worry is that allowing manufacturers to bar discounting will lead to higher prices, is borne out by basic economics.
In his dissenting opinion in Leegin, Justice Breyer estimated that if only ten percent of manufacturers engaged in vertical price fixing, retail bills would average $750 to $1,000 higher for the average family of four annually. For this reason, I've introduced the Discount Pricing Consumer Protection Act, co-sponsored by Senator Whitehouse. Our bill, which is endorsed by 35 state attorneys general, and all major consumers organizations, will simply make it clear that when manufacturers prohibit discounting, they violate the antitrust laws and thereby restore a clear legal rule that has stood since 1911.
In the last two decades, millions of consumers have benefitted from an explosion of retail competition from new large discounters in virtually every product from clothing to electronics to groceries, in both big box stores and on the Internet. We've all taken for granted our ability to walk into discount retailers and buy brand name products at sharply discounted prices. It is essential that Congress act swiftly to enact my bill, and to once again make the setting of minimum retail prices illegal. I look forward to the testimony today of our distinguished witnesses on this important topic.
Our first witness who will be testifying today is Pamela Jones Harbour. Ms. Harbour has been a commissioner of the FTC since 2003. Prior to joining the FTC, Ms. Harbour served as partner at Kaye Scholer Law Firm and was the New York State Deputy Attorney General.
Next, we will have Tod Cohen. Mr. Cohen serves as vice president and deputy general counsel of government relations at e-Bay. He began his legal career at the law firm of Covington and Burling and was vice president and counsel for New Media for the Motion Picture Association of America before joining e-Bay.
Our next witness will be Stacy Haigney. Mr. Haigney is an in house attorney at Burlington Coat Factory. He has almost four years of experience as an antitrust attorney, and he was a founding partner of the firm Castor and Haigney, before working, as he presently does, for Burlington Coat Factory.
And finally, we'll have James Wilson. Mr. Wilson is a partner at Vorys, Sater, Seymour and Pease in Columbus, Ohio and is the current chair of the section of antitrust law of the American Bar Association. He testifies today on behalf of the ABA. Before we swear in our witnesses, I would like to call on the ranking member, Orrin Hatch, for any comments he might make.
SEN. ORRIN G. HATCH (R-UT): Well, thank you, Mr. Chairman. It's a pleasure always to -- (inaudible) -- It's always a pleasure to work with you and I really appreciate our friendship and our working together.
Today's topic of vertical priced fixing is not new to this subcommittee. It's been almost two years since the Supreme Court reached its 5 to 4 decision in Leegin Creative Leather Products versus PSKS, Inc., Kay's Kloset, and the subcommittee held its subsequent hearing on the court's ruling. Now this decision has and will have an important effect on our nation's economy and especially on discount retailers.
Therefore, Mr. Chairman, with your enormous expertise in this area, I look forward to learning more of your thoughts and perspectives on the issues behind your legislation S.148, the Discount Pricing Consumer Protection Act. To some, the topic of vertical price fixing, or minimum resale price maintenance, is as dry as week old bread. However, the contrary is true. This is an important topic. At stake is how and at what price consumers will buy a variety of goods and the dynamics by which manufactures will enter into agreements with retailers.
Mr. Chairman, a bit of background is necessary to fully understand the importance of this issue. Nearly 100 years ago, the Supreme Court ruled in Dr. Miles Medical Company versus John D. Park and Sons that it was per se illegal "under Section One of the Sherman Act, for a manufacturer and its distributor to agree on the minimum price a distributor can charge for the manufacturer's goods." In order words, vertical pricing was against the law. However, this all came to an end nearly two years ago, when the court in Leegin discarded the per se rule for the test under the rule of reason.
Under this new decision, vertical price fixing is permitted as long as it does not constitute an unreasonable restraint on trade. Specifically, the court has held under the rule of reason, "the fact finder weighs all of the circumstances of the case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. Appropriate factors to take into account include specific information about the relevant benefits and restraints history, nature and effect." Now the court's majority ruled or argued, that vertical price fixing can stimulate "inner brand competition, the competition among manufacturers selling different brands of the same type of product, by reducing intrabrand competition, the competition among retailers selling the same brand."
Now, the court goes on further to say that this decision, or to justify this decision by stating, as they held in Collin, the "primary purpose of the antitrust laws is to protect what really amounts to inner brand competition." The court appeared to be very concerned about the activity called "free riding." Free riding can be described as when a customer takes advantage of the services and information provided by a full service retailer and then makes the actual purchase of the product for a lesser price at a discount retailer. The court argues that by permitting vertical price fixing, retailers who have less of an ability to compete on price, thereby diminishing the opportunities for free riding to occur.
It is surmised that retailers will then focus their competitive energies on providing better services in shopping environments for the customer in order to distinguish themselves in the intrabrand competition. Clearly, the court in Leegin is favoring the manufacturer over the retailer, especially the discount retailer. Not surprisingly, discount retailers argue that this decision will have an adverse effect on their businesses, since they could have additional difficulties in charging a lower price.
Now this is a matter with which I am particularly concerned. Will the Leegin decision result in the unintended consequence of hindering the development of the next generation of discount retailers by enabling manufacturers to set a minimum price for their goods? Though I do not know the position of Stanford's Thomas Sowell on this issue, I am mindful of the point, albeit in a different context, that he made in his book in economics. He said this. "Lower costs reflected in lower prices is what made A&P the world's leading retail chain in the first half of the 20th century.
Similarly, lower costs reflected in lower prices was what enabled other supermarket chains to take A&P's customers away in the second half of the 20th century. And while -- (inaudible) -- succeeded in one era and failed in another, what is far more important is that the economy as a whole succeeded in both eras in getting its groceries at the lower prices possible at the time, from whichever company happened to have the lowest prices. So does the economy and consumer succeed in the long run under Leegin? Now that's the crux of the matter, and why we'll put the same question to our witnesses today.
I'll have to do it in writing because of an intelligence committee hearing that I have to go to, but I asked that question two years ago. Does a positive effect on the manufacturer competition created by Leegin outweigh the negative effect on the discount retailer? So I look forward to the panel answering that question and others as well, and Mr. Chairman, I really appreciate you holding this hearing, and hope that we can help resolve some of these conflicts and problems that exist in the best interest of everybody. I'm very grateful to have all you folks here.
Welcome to you, and please forgive me for having to run to the intelligence committee but I've got three conflicts right now at 2:30. I'm going to, as always, leave it in the hands of my dear chairman. Thank you, Mr. Chairman.
SEN. KOHL: Thanks so much, Senator Hatch.
SEN. EDWARD E. KAUFMAN (D-DE): Thank you, Mr. Chairman and thank you for holding this very important hearing.
You know, for a long time, there has been discussion on the Hill. Conservatives say that the judges on the left who engage in activism from the bench. They say conservative judges stick to calling balls and strikes of the law, while more liberal jurists insert their political philosophy into their opinions. Well, Mr. Chairman, the Leegin case, proves that activism is in the eyes of the beholder. With respect to vertical price fixing, it was the addition of two conservatives to the court, Justices Roberts and Lee, that led to the reversal of 96 years of unbroken precedent.
This case, plain and simple, represents the elevation of big manufacturers' interests over those of the consumer, and this court acted because it decided to embrace a different economic theory, not because any facts or circumstances changed. In my book, that is judicial activism. For too long, we've been complacent. We've had complacent antitrust enforcement. During the previous administration, regulators seemed to forget that the consumer should be the beneficiary and was designed to be the beneficiary of our antitrust laws, and with this poorly reasoned and radical departure from precedent in the Leegin case, the United States Supreme Court, in my opinion, has itself gotten into the act.
Well, Mr. Chairman, it's time to once again focus ourselves on how antitrust law operates to protect or harm the consumer. It can come as a surprise to no one, that setting of price floors leads to elevation of consumer prices. It prevents price competition out of the paternalistic notion that consumers, many of whom are struggling to get by, especially in these economic times, don't want the lowest prices possible, but would rather have a fancy store, even if it means they can't pay all their bills. I reject this notion and I look forward to testimony from these witnesses on this important issue, and again, thank you, Mr. Chairman.
SEN. KOHL: Thank you very much, Senator Kaufman.
We'll start our testimony after you all are sworn in. Would you rise and raise your right hand? Do you swear that the testimony you are about to give before this committee will be the truth, the whole truth and nothing but the truth, so help you God?
MS. HARBOUR: I do.
MR. COHEN: I do.
MR. WILSON: I do.
MR. HAIGNEY: I do.
SEN. KOHL: Thank you so much.
We'll start with you, Ms. Harbour, and we request that you and the other witnesses hold your statements, please, to five minutes and we will put into the record anything else that you may have to say. Ms. Harbour.
MS. HARBOUR: Thank you, Chairman Kohl and members of the subcommittee.
I appreciate this opportunity to share with you my personal views on minimum vertical price fixing. During my oral remarks, there are three points that I would like to make. First, the Supreme Court has decided to repeat an already failed experiment with RPM, that flaunts Congressional intents and harms consumers. Second, the lower court's evaluation of RPM under the rule of reason will reward price fixing merchants and manufacturers and will further punish victims, i.e., consumers and non-conspiring merchants.
Third, RPM should be presumed to be harmful to competition until a manufacturer has factually shown that its use of RPM benefits consumers more than it harms them.
The Supreme Court's 2007 Leegin decision gave manufacturers the right to set minimum retail prices for consumer goods, guaranteeing higher consumer prices. This is bad economic and legal policy. It gives excessively short shrift to consumer preferences, the supposed driving force behind the market.
Post Leegin and absent action by Congress consumer preferences will be subordinated to the interests of manufacturers and merchants of blanded consumer goods, and in these tough economic times, it is especially wrong to saddle consumers with higher prices for daily necessities, while providing no countervailing benefits. RPM advocates essentially ask us to believe that consumers are better off when they pay higher prices for the daily necessities of life because the benefits to manufacturers and retailers eventually will trickle down to consumers. According to the logic of the Leegin court, it is preferable to maximize the welfare of conspiring manufacturers and merchants, even though the antitrust laws are designed to put consumer interest first.
The Leegin decision cannot be reconciled with the legislative history of the antitrust laws. Congress never adopted nor endorsed a preference for RPM at the federal level. Congress did create an exemption, an antitrust exemption, for RPM under state fair trade statutes. However, Congress ultimately graded that, a 37-year-old natural experiment, graded it a failure, and in 1975, the fair trade exemptions were repealed in favor of per se illegality.
Congress did so because RPM had been a dismal, if not disastrous detour from sound public policy. RPM raised consumer prices by as much as 37 percent. RPM lowered sales levels. It increased the frequency of business failure. RPM created entry barriers. It distorted retailer incentives, and RPM generally retarded retail competition.
Even if the Leegin majority can overlook these Congressional findings, I cannot. I ask, are we falling into a Groundhog Day vortex, where we are doomed to endlessly repeat the same mistakes over and over again? Competition policy can and should do a better job of protecting consumers. But I do worry that Congress may someday be called upon to write yet another report detailing the disastrous harms inflicted on consumers during the court's current experiment with RPM, and we know who is paying for this experiment. Sadly, it is the American consumer.
Indeed, if you believe what you read in the newspapers, consumers already are paying that price. The court's new experiment has led many consumers to incur RPM price premiums, even in these trying times. Since the court decided Leegin, the number of companies using some version of RPM have increased significantly. The use of third party monitoring services by manufacturers to identify, police and then discipline Internet discounting, has rapidly expanded. Some discounters have been terminated by as many as 25 percent of their suppliers and other discounters like PSKS, the plaintiffs in the Leegin case, have gone out of business and have been unable to get the courts to consider the merits of their claims under the rule of reason.
Consumers do not realize that they are currently paying substantial RPM premiums. Not surprisingly, the manufacturers who impose these premiums are unlikely to notify customers that the discounts are no longer available, nor are retailers who support the RPM premiums particularly interested in telling their customers that prices were too low before discounting was eliminated. The Leegin court claimed that it intended the rule of reason to weed out competitively harmful uses of RPM, but good intentions will not cure a bad rule of law. The rule of reason tends to be a euphemism for the absence of liability.
Potentially good RPM cases are already being dismissed without any hearing on the merits. The reality of litigation dictates that when the facts are equally probative of guilt or innocence, then depending on which theory is adopted to evaluate them, then usually the party that has the burden of proof loses. If full blown rule of reason analysis is applied in RPM cases, the burden of proof will be placed on the victims, not on the defendants, who imposed the RPM policy to begin with. The FTC is doing its best to further the development of the real world effects and the real world facts about the effects of RPM by holding a series of workshops, but any answers may be a decade or more away. Consumers need relief today.
In conclusion, when it comes to the RPM debate, one simple fact is indisputable. RPM guarantees that consumers will pay higher prices, and until it is proven otherwise, I will continue to believe that consumers are very unlikely to gain any countervailing benefits in return for these higher prices. Thank you.
SEN. KOHL: Thank you, Ms. Harbour.
MR. COHEN: Chairman Kohl, I am Tod Cohen, Vice President and Deputy General Counsel for Government Relations at e-Bay.
Thank you for the invitation to speak today about S.148, the Discount Pricing Consumer Protection Act, and the impact of the Supreme Court's Leegin decision, in particular on small and mid size retailers who use the Internet. E-Bay and our users support your legislation to reinstate a per se rule prohibiting retail price fixing. Founded in 1995, e-Bay connects hundreds of millions of people around the world every day. The company's online platforms empower individuals and small businesses to meet and engage in open trade on a local, national and international basis.
We believe that the efficiency and consumer benefits of the open Internet can be immense. Businesses use it to offer lower prices, greater choice and great values to consumers. Consumers use it to more easily find, compare and purchase products. Unleashed, it can be a game changer, and we are still in the innovation stage of retail on the Internet, with new retail business models benefitting consumers, retailers and the overall economy. The Internet is part of every serious 21st century retail strategy, whether massive brick and click retailers with websites and big box stores, large remote Internet and catalog retailers with nationally known brand names, or small businesses who are building new Internet businesses or integrating the Internet into an existing small shop to survive and grow in today's highly competitive retail environment.
The Internet is also used by manufacturers, including the most elite and specialized, to reach customers with information and more and more with products. And the Internet is critical to more consumers every day. It is the greatest source of product information ever created. I mention these facts because sometimes people paint this issue as being about Internet retailers and discounters on one side and non-Internet retailers on the other. Nothing could be farther from the reality. In short, everyone in retail uses the Internet but there are big differences in how the Internet is used.
On one side are established networks of manufacturers and retailers who want to reinforce or enhance established retail business models. They are threatened by the Internet when it is harnessed to offer consumers better deals and more information outside the established incumbent retail networks. On the other side are innovators with new business models. They are almost always small to mid size businesses. They use new technologies to offer consumers better deals, more information and new services.
We believe that the Leegin decision is undermining consumer benefits delivered by innovative retailers, especially on the Internet. There is evidence that small and mid-sized Internet retailers are a primary target of aggressive RPM policies. E-Bay's own experiences confirm that many large established businesses attempt to limit low brand, intra, low price, intrabrand competition, by continually scanning our platforms to identify sellers offering their products at lower prices. They then use a range of tools to identify the seller and stop low price competition.
Many e-Bay sellers have been targeted by manufacturers and large retail partners with various tactics to take down their listings and discredit their sales. The Leegin decision has clearly been interpreted by many as a legal green light to more aggressively thwart low price competition. Established retailers and manufacturers attempting to enforce traditional business models can tend to be innovative Internet retailers, are able to offer lower prices to consumers because they free ride on their traditional retail counterparts. The truth is that the Internet turns the traditional free rider justification for RPM on its head. Internet retailers and services provide significant pre-sale information to consumers.
The open Internet has completely revolutionized the consumer information experience. Consumers regularly turn to the Internet to search for product information, make product comparisons and check prices before visiting and purchasing from established retailers. In fact, it could be argued that the most established manufacturers and largest retail partners are free riding on the tremendous consumer information tools created by Internet innovators. From a competition policy and consumer benefit perspective, the traditional free rider argument for RPM policies as applied to the Internet should be put to rest.
Innovative Internet retail models simply expose incumbents to new competitive threats and more innovative forms of retailing. Protection from new and innovative retail models was always a likely reason for RPM and we think that is even more true in the Internet age. This committee should aggressively scrutinize the Leegin decision and enact S.148 to reinstate a per se rule against retail price fixing and protect consumers and retail innovators. Thank you, Mr. Chairman and members of the subcommittee.
SEN. KOHL: Thank you, Mr. Cohen.
MR. HAIGNEY: Good afternoon, Mr. Chairman and members of the subcommittee.
I'm Stacy Haigney, general attorney at the Burlington Coat Factory. I'm personally in charge of our trade regulation. I'm very delighted to have this opportunity to come here and express my company's support for S.148, which will address an extremely serious competitive issue in the market and foster consumer welfare immeasurably. I believe that the story of Burlington Coat Factory is the best evidence I know for why S.148 should pass. Burlington Coat Factory was founded by Monroe G. Milstein in 1972. He had one store at that time. It was a discount store.
What he did was, at that point, sold coats, 25 percent below what they would be available in department stores. Then in 1975, Congress repealed the so-called fair trade laws. This opened up a world of opportunity for Mr. Milstein and his company. He not only sold coats thereafter. Burlington Coat Factory sold every kind of apparel and accessory that you can think of, and we sold them all according to Mr. Milstein's original philosophy, namely, give the customer full lines of in season merchandise such as one would find at a department store for 25 percent below, approximately, what was being charged at the full price retailers.
This philosophy was the basis of Burlington Coat Factory's success, and we've gone from the one store in 1972 to approximately 400 today, including at least one in the state of every senator on this committee, on this subcommittee, I'm sorry. But there was no possibility that this approach would have worked, had the fair trade laws not been repealed. In fact, there were no retailers like Burlington Coat Factory prior to that repeal, retailers of the size of Burlington Coat Factory. There is no doubt in my mind, or in Mr. Milstein's mind, when he still ran the company, or in Tom Kingsbury's mind, who is now our CEO, that had the Leegin case been in force in 1975, we probably would have stayed in one store on Route 130, in Burlington, New Jersey.
Now, we have, I feel, that the retail market has done pretty well in the intervening years, and all of a sudden, in the year 2007, apropos of no need that I can see, the Supreme Court decided to deep six 98 years of antitrust jurisprudence by the Leegin decision, and in aid of what? As I understand them, the concept is that maybe, if you fix prices at a high level, perhaps the retailer will take some of the extra money the retailer earns and maybe apply it to services which might be of use to the manufacturer. For this, we throw away 98 years of antitrust jurisprudence and what the Congress has stated over and over again.
Many times, the question of whether or not this per se rule should remain the rule has come before Congress, as it did in 1975, and on every occasion, Congress has adhered to the per se rule. And in 1975, it had tremendous bipartisan support before President Ford signed the bill. And the reason was is that the empirical evidence was overwhelming that retail price fixing, as Ms. Harbour pointed out, was a catastrophe for competition and for the consumer.
Now, I have to say that it is grotesque from the point of view of an off price retailer to even hear someone say that higher prices can lead to more competition. I frankly don't get that point. It certainly isn't, in the apparel industry, it is a complete non sequitur.
Finally, let me just state, I see my time is running out, that there are no free riders in the apparel industry. People don't need advance services to help them put on a coat and try on a dress. Our customers are well educated, and what they want is the best bargain available, and that's what Burlington Coat Factory gives them and that's what S.148 will guarantee, that Burlington Coat Factory will continue to give them in the future. Thank you, Mr. Chairman.
SEN. KOHL: Thank you, Mr. Haigney.
Now we call on Mr. Wilson.
MR. WILSON: Thank you, Mr. Chairman and members of the subcommittee.
On behalf of the American bar Association, which has over 400,000 members, I thank you for the opportunity to appear this morning. As chair of the antitrust section of the American Bar Association, I've been authorized to express the views of the ABA on this important issue. In contrast to the other witnesses this afternoon, Mr. Chairman, the ABA's position is that the Leegin decision was correctly decided.
In February of 2007, the House of Delegates of the American Bar Association adopted the resolution proposed by our section, which stated that Section One of the Sherman Act should not be interpreted to apply a rule of per se elect, that illegality to agreements between a buyer and seller, setting the price at which a buyer may resell goods or services purchased from the seller. You may ask why did we propose that position and when did the ABA adopt it? We derived this position from the basic principle of the antitrust jurisprudence that the rule of reason identified in Standard Oil of Ohio vs. The United States, in 1911, is the fundamental standard that governs the evaluation of all restraints of trade.
Any departure from the rule of reason standard must be based on a demonstrable economic effect rather than formalist line drawing. Only when a specific type of restraint produces a predictable and pernicious anticompetitive effect and has limited potential for pro competitive benefits, will and should the Supreme Court deem it unlawful, per se. The Supreme Court's decision over nearly a century since adopting the rule of reason standard, have carefully examined the procompetitive and anticompetitive effects of specific practices to determine whether they warrant treatment as the anticompetitive behavior under all circumstances, and are thus classified as per se, or if they in some situations show procompetitive benefits, and therefore, should be evaluated under the rule of reason.
Like many of these vertical restraints that the Supreme Court in recent years, that is over the last 30 years, has found should be evaluated under a rule of reason test, minimum resale price maintenance agreements may stimulate competition among resellers and waive the produced material benefits to consumers which would not otherwise be available, absent the ability of manufacturers and distributors to set resale prices. As outlined in our report to the House of Delegates, there are several reasons that the section antitrust law believes that the issue of resale price maintenance should not be a per se violation of the antitrust laws.
First, most of the significant economic literature regarding minimum resale price maintenance finds that it is more likely to be used by manufacturers to achieve efficiencies in distribution of their products rather than to enable dealers to maintain significant margins. Secondly, empirical studies of minimum resale price maintenance have not established that the practice is invariably anticompetitive, and I would specifically point to work that was done by the FTC staff in the 1980s and the early 1990s that made that finding, that there are many occasions in which resale price maintenance is not anticompetitive.
Third, manufacturers and suppliers have developed practices of achieving the same effects of minimum resale price maintenance without actually entering into agreements on resale pricing. This testimony that I've heard today about the dramatic shift that would be obtained by this legislation simply does not square with how the market was before the Leegin decision.
The reality is that as long as the Colgate Doctrine, allowing individual manufacturers and distributors to choose to whom they will sell exists, the effects that I've heard from the other witnesses today are unlikely to be achieved.
Finally, the first state prohibition on minimum resale price maintenance, in force for several decades, has had the effect of enhancing the market power of very large scale retailers that carry a wide variety of products. Conversely, it has harmed smaller retailers who try to compete with those large retailers, not on price, where they cannot compete, but on the basis of quality and service. For these reasons, the ABA supports the position that under the federal antitrust laws, agreements between a buyer and seller setting the resale price should not be, per se, illegal. Thank you, Mr. Chairman.
SEN. KOHL: Thank you, Mr. Wilson.
SEN. AMY KLOBUCHAR (D-MN): Thank you very much, Senator Kohl, for holding this interesting hearing, and I know you bring to this hearing your perspective as a retailer yourself, as someone who owns stores.
I bring the perspective of a shopper at stores, so I think we make a good pair, here, -- (laughter) -- looking at this issue, and I think especially now, when we have consumers who are so strapped, it's very important, Ms. Harbour, to look at this, and I'm very glad the FTC is holding these workshops to try to figure this out, because, for a lot of my constituents, every penny counts right now. Every penny saved counts.
And so, they're looking at these things, even though they may not understand what the Leegin decision is, or understood this idea of vertical price fixing. I think we owe it to them to look at this very carefully.
Ms. Harbour, how much do you know right now about the impact of the Leegin decision? In your written statement and what you said today, you mentioned that the number of companies engaged in resale price maintenance has significantly increased, and that some suppliers have stopped working with some suppliers. Can you tell us more about what hard evidence you have and do you think that this financial crisis, also, that we have to look at that separately?
MS. HARBOUR: At this point, I don't have any additional hard evidence but we are, at the Federal Trade Commission, holding workshops. We will be looking very closely at this issue. Since the Leegin decision came down, it's been about two years. Maybe we'll start seeing some natural experiments where we can look at the effects of this ruling, but what I testified to, we have seen that.
There has been some discussions in some of the newspaper articles, the Wall Street Journal, about the use of some of the shopping bots that are trolling and policing the Internet and going back to the manufacturers and letting them know about price, and then those discounters are being disciplined and prices have been increased to the consumer. So the effect that we do know about is that prices to the American consumer have indeed been elevated. As far as additional effects, we will be looking very closely for some of those.
SEN. KLOBUCHAR: Okay. Mr. Cohen, do you want to talk, adding to what Ms. Harbour said, about just your perspective about prices? Do you have any numbers on the rise of resale price maintenance being used against Internet retailers, and are these numbers different for retailers that are 100 percent based on the Internet, like Amazon.com versus multi channel retailers, stores that have an extensive Internet presence?
MR. COHEN: Senator Klobuchar, we have two different examples that we believe show the pernicious effect of the post Leegin world. First is an increase in the number of take down reports we receive from different companies and agents of rights owners and brands owners in which they have increased the number of complaints we've received to take down lower priced listings. That's been, a company called Net Enforcers, sent in over 1.2 million notice and take down requests, a margin of which a significant number were based on lower prices.
We've seen that post Leegin and admittance from different manufacturers that the reason why they were seeking information on our sellers was because the violation of -- (inaudible) -- retail price minimum standards. The second area we are engaged in a series of research ourselves to see in specific categories whether there has been a change in pricing over time in specific categories. We have not completed that research. When that is completed, we'll submit that immediately to the committee.
SEN. KLOBUCHAR: Very good. I mean, this is when Justice Breyer issued his dissent in the case. I know that this is -- (inaudible) -- I know when he issued his dissent, he talked about that the only safe predictions to make about today's decisions are that it will likely raise the price of goods at retail. And to me, right now, when we're in this difficult consumer market, especially when there's actually slashing of prices going on because of the market, if we're seeing increases, I think they could be even worse if we were not in a hard economic time.
So I think it's important when we look at these numbers, we consider that as well. Mr. Wilson, I listened to your testimony, and I guess I would have one question. If we in fact found out that the prices have increased as Ms. Harbour believes they have, would that be enough for you to believe that we need to reexamine this Leegin decision and look at legislation that Senator Kohl has introduced?
MR. WILSON: Senator, I guess the question I would ask is whether the prices had increased and the current law was ineffective. Because after all, resale price maintenance is not, per se, legal today, if simply evaluated under the standard by which most anticompetitive conduct is evaluated, the rule of reason. If resale price maintenance is as pernicious as the other witnesses have said, it should be very difficult to present a defense to a rule of reason case.
After all, the defense in a rule of reason case is proof that there are procompetitive effects here. What I have seen is that the courts since Leegin, there have been about 60 decisions citing it, less than half of them in actually applying the rule of reason, but they have not created some awkward or weak rule of reason test here. They have applied a rule of reason test that is consistent with how it is applied in other areas. We look forward to, at the section, to offering our comments to the FTC in their workshops on exactly that area.
SEN. KLOBUCHAR: And I appreciate that, that the courts may have been reasonable in doing their rule of reason. But I think our role here and our duty and the FTC's duty is beyond that, and it's really looking at if there has been a bad effect on consumers because of this, and right now, my view is, we just can't hit on consumers anymore, that they've had it, they are having very difficult economic times and so that's why I think the workshops that the FTC does and other evidence that we have here is very important because if, you know, this was a very close Supreme Court decision with a vigorous dissent, and this is really, in the end, a policy matter for the Congress to consider. So I appreciate what you said about the rules, but I think if we saw some pattern here of increased prices as we saw back in -- who was bringing up 1975 and what happened? Mr. Haigney?
MR. HAIGNEY: Haigney.
SEN. KLOBUCHAR: Sorry.
MR. HAIGNEY: Yes. In 1975 there was extensive empirical evidence presented to the Congress to show, and I think Ms. Harbour actually cited the figures, to show a drastic increase in prices in states that continued to free trade, so-called, and a diminution in sales in those states. I mean these were hard core numbers, not just economic --
SEN. KLOBUCHAR: Do you think it would be useful, if we want to have that kind of clear empirical comparison? Merrill Lynch has just passed their law, and gone back to the old ways. Do you think it would be useful to have more states do this?
MR. HAIGNEY: It would certainly be better than nothing, but I'd much prefer it --
SEN. KLOBUCHAR: You'd prefer it done nationally, federally, it'd be a lot easier than creating a national study for us to look at.
MR. HAIGNEY: That's right, Senator.
SEN. KLOBUCHAR: All right.
Okay. Anyone want to add to any of that?
MR. COHEN: Senator, if I could? I would just point out that if you adopt the rule that the legislation proposes, then procompetitive effects are no longer considered and so you have in effect lost any procompetitive effects that exist today.
MS. HARBOUR: May I address the procompetitive effects --
SEN. KLOBUCHAR: Sure.
MS. HARBOUR: From the statement about the empirical evidence that is out there and also the Federal Trade Commission and some of the empirical work it has done as well. None of the empirical studies to date are definitive and there is an acknowledged empirical vacuum that leaves all of these competing theories untested. It was referenced about a Federal Trade Commission study.
It was done by a very well respected economist, Paulina Ferrido (sp). That study basically found that there was no basis for concluding that minimum RPM is anticompetitive but I want to note that Paulina Ferrido (sp) herself acknowledged that her study did very little to fill the empirical vacuum and her study did not test for the hypothesized consumer benefits directly, so it didn't test for the consumer benefits. It only determined whether the procompetitive explanations had, what she said, limited plausibility.
So basically, these studies are not definitive and also, Justice Breyer in the Leegin dissent discounted the study by saying that it equated the failure of plaintiffs to allege collusion with the absence of collusion, and basically it overlooked the tacit form that collusion may take. So these studies are not definitive and they've been cited as being so, but they are not.
SEN. KLOBUCHAR: All right. Thank you very much. I appreciate that.
SEN. KOHL: Thank you very much, Senator Klobuchar.
Well, you all know where I'm coming from on this piece of legislation. Obviously, I'm the sponsor of it. But I want to take a look at it from another point of view, and that's the point of view of the manufacturer, who goes to great pains and at great length and great expense to build a product and a brand into something that is desired by consumers, in many cases regardless of the high price, but the manufacturer has done such a good job of appealing to consumers on the basis of the quality of his brand, that consumers go way out of their way to find that product and buy it, regardless of its price.
And that adds to the manufacturer's prosperity as well as to the store who's selling it, because they're not discounting it. When it's a model, a way of doing business, you know, it's a free country and people have a right to do that, if they can be successful. Now, under our legislation, what is likely to happen? Well, discounters will buy the merchandise and beat the hell out of their price you know, and draw customers thereby, but also make it very, very difficult for the traditional retailer to maintain their price, and for the manufacturer to have the price maintained as he or she might wish to do.
After all, it's their product. And the manufacturer, by virtue of, let's say, discounters selling maybe ten percent of the value of the brand, but driving the price so low in the minds of the customers, and thereby making it very difficult for traditional retailers to carry that brand at a maintained price, that the manufacturer could lose an enormous amount of business, just by virtue of the fact that a very limited amount of discount retailers are driving the price of that particular brand, or the merchandise on that brand, the category of that brand, right down into the basement. Now is that fair?
Is that fair to the manufacturer, you know, who, after all built this business, certain ideas, certain concept, does business with traditional retailers who maintain the price, and here he is in a position whereby a limited amount of discounters can almost kill that category for the manufacturer at a profitable price. Is that fair? Doesn't that manufacturer have a right, once he produces a product, to have that product sold at a price that he regards as fair? What's wrong with that, Mr. Haigney?
MR. HAIGNEY: Well, Mr. Chairman, long before Leegin was decided, the Supreme Court decided the case of Sylvania, and in that case, it gave the manufacturer all the power anyone could reasonably want to control its distribution. The only power that it didn't give to the manufacturer was the power to control price. But it overruled the Schwein case which had made vertical restraints, per se, violation, and the Sylvania case made, effectively, all vertical restraints except price fixing, into per se legal restraints.
The result is that the manufacturers, if they want their merchandise sold in only the fanciest stores, just sell to the fanciest stores. Cut off the dealers who try and depart from this distribution scheme. There's nothing wrong with it under Sylvania, and there are plenty of products out there, that Burlington Coat Factory cannot have, because those manufacturers want to maintain the snob appeal of their product.
Perfectly legitimate and I have no argument with it. But the important point is that this right was given to the manufacturers by Sylvania in 1977. The Leegin case is a complete non sequitur. The additional power to fix the price adds noting to the powers of vertical restraint that were given to the manufacturers by Sylvania.
SEN. KOHL: All right. But let me follow that. So you're saying that even prior to Leegin, manufacturers had a way of keeping their goods out of the hands of discount retailers, if that's what they wanted to do.
MR. HAIGNEY: That's correct, Mr. Chairman.
SEN. KOHL: And yet you said, during your testimony, that had Leegin been in effect, Burlington wouldn't be here today. But what is the difference? If manufacturers had the power prior to Leegin to keeping whatever merchandise they want out of the hands of discount retailers, then what did Leegin do except to certify that?
MR. HAIGNEY: Well, first of all, Mr. Chairman, they had the power. They had the right, but they didn't exercise it. They wanted to sell. At most, there are a few manufacturers who don't want to see their merchandise in off price stores, and that is their right. But most do want to see us. Most people are very happy to sell us their merchandise. We pay the same price as any full price retailer and most manufacturers are happy to get that price, particularly in a time like the present, and so, yes, they could have, theoretically, prevented us from getting the merchandise, but they didn't because they didn't want to.
SEN. KOHL: Well, they still don't have to, even under Leegin.
MR. HAIGNEY: Absolutely. They could still --
SEN. KOHL: Well, what did Leegin, I guess what I'm trying to understand from the point of view of a retailer, if prior to Leegin the manufacturer could keep the merchandise out of the hands of the discounter, and now that we have Leegin, they can still keep their merchandise out of the hands of the discounter, what's changed?
MR. HAIGNEY: Well, what's changed is that those manufacturers who are the majority, who do sell to stores like Burlington Coat Factory, would have the power suddenly, or have the power under Leegin to fix our retail prices. Now we are "an off price retailer."
Our entire competitive philosophy is based on giving value and low prices. So if the manufacturer can now, in addition, he can let us have the merchandise, but we must sell it at the same price that it's carried at a full price retailer, that would put us out of business, at least with respect to that line of goods.
SEN. KOHL: Yeah, but, I didn't want to push this too far. I just wanted to make it clear. Prior to Leegin, he still, as you have said, could decide not to sell the merchandise to a discounter.
MR. HAIGNEY: That's right. Or to anybody.
SEN. KOHL: So, yes, Ms. Harbour.
What's changed? Why is Leegin such a poisonous thing, if prior to Leegin, the merchandise could still be kept out of the hands of a discounter by a manufacturer acting in an intelligent way?
MS. HARBOUR: What is poisonous about Leegin is that going forward, there will be no more Burlington Coat Factories. There will be no more Costcos. There will be no more Walmarts.
SEN. KOHL: Okay.
MS. HARBOUR: That is the danger. These innovators, these low cost retailers, these Internet innovators, they won't exist now because they won't have the opportunity to enter the market. That's what changed.
SEN. KOHL: At what point, you're saying Leegin cuts off or seriously damages the possibility of the new discounter even getting a foothold?
MS. HARBOUR: For instance, if you were on the Internet and you want to sell a branded product below cost to get a consumer following, the manufacturer can cut you off at the knees and you never can get a toehold into the market. That's what's so pernicious about Leegin.
SEN. KOHL: That's a good point.
MR. COHEN: Mr. Chairman, I also think that we've seen post Leegin the very visibility and price transparency that the Internet has created, the ability for manufacturers to do a significant increased amount of policing that would have been impossible in the pre-Leegin world.
The ability to see pricing every day, real time, has put a dampening effect, we believe, on inflation, really driven prices down. But that has also allowed people who want to enforce their pricing schemes to go after discounters and, more importantly, from our perspective, to find out where there were leaks in their distribution chain, so that they were paid for the product. They are under intense pressure from other retailers, larger retailers, to not allow any discounting, and then therefore, they go after our small sellers and try to find out exactly who those small sellers are, which they wouldn't have been able to do in a pre-Leegin world.
SEN. KOHL: Mr. Wilson?
MR. WILSON: Yes, Senator. I guess I don't fully agree with the economic premise that the other witnesses have suggested exists here. First of all, let's remember that this manufacturer, in your hypothetical, is presumably working in a competitive market place. Therefore, that manufacturer has to make certain decisions as to how they're going to go to market. Are they going to go to market as the lowest cost, or are they going to try to create the perception of quality in your hypothetical? If it's the latter, then their perception of quality gives every other manufacturer either the incentive to increase their quality or decrease their price.
So overall, in the market place, in your hypothetical, prices should decrease or quality should increase or both. With respect to the notion of what difference does Leegin make in this, what I believe, where it makes a difference is that it allows the manufacturer to continue the relationship with the discounting retailer. Under the pre-existing law, the manufacturer, in effect, had to execute the death penalty in its relationship with that retailer.
It had to say, "You have sold at below the prices I've suggested. I am no longer going to do business with you. Period." And those manufacturers were at risk if they did that and then re-established a relationship because courts would presume an agreement from that back and forth relationship. After Leegin, what the relationship is, in effect, is that the manufacturer can again say, "You don't have my permission to do that. You have violated our agreement. We have a contractual dispute here. I can terminate you, or I can simply have a contractual dispute with you, and continue to do business with you."
SEN. KOHL: Ms. Harbour?
MS. HARBOUR: May I address that? I think that RPM protects inefficient retailers. If you have on the minimum resale price policy, you could have retailer one selling a quality good, but retailer two, because they would be protected in that intrabrand competition, the quality could be subpar and yet they could still charge the resale price maintenance maintained price and not, in effect, keep the product at top quality. So I think it has the potential to protect retailers who are not selling top quality intrabrand merchandise.
SEN. KOHL: Mm-hmm.
MR. COHEN: May I submit to the record a letter one of our sellers received from a company called Captive Works where they said, "Dear David, Please do not list the receiver at less than $149. Otherwise it will be reported and taken off. We need to have a steady price from all the sellers so everybody will be making money. Your prices were less than everybody else, and if you see someone else with a lower price, be sure that they will be taken down soon. Thanks, Roffie."
And that's the real world experience that our sellers are experiencing every day, and that, whereas the hypothetical and theoretical viewpoint of antitrust and interbrand versus intrabrand competition, we have to live with the reality that lower prices are not being able to be delivered to buyers.
SEN. KOHL: Yeah, Mr. Haigney?
MR. HAIGNEY: Mr. Chairman, I'd just quickly to respond to Mr. Wilson. His hypothetical does not coincide with the real world that I know. We're speaking in the apparel off price world. He said that the manufacturer could fix a high price with the consent of a retailer and go on and do business afterwards, and the reality is that when your principle means of competition is low prices, you simply can't continue to do business with that person. I mean the fact of the matter is, Burlington Coat Factory cannot sell at those prices and be Burlington Coat Factory. And I don't think any other off price merchants who roughly have our business model could either.
I also question the whole idea that the manufacturer's notion of distribution should always be paramount and that retailers who, after all, are the ones who actually sell the product and know the customers, somehow under the Leegin majority, our views are not considered legitimate. Only the manufacturer has the right to determine what's going to happen to a product, which is our property by the time that we are reselling it to the public.
SEN. KOHL: You now, Mr. Wilson, historically, we've been a consumer driven society, a consumer driven economy. We still are. Eighty percent of our economy are done by people who are buying goods on a daily basis, and competition has very much defined the growth of the American economy. It very much defines capitalism, competition. Naturally, people who are in a position to try and do business without having to deal with competition, that's the way they want it.
But in our capitalistic society, we try to encourage competition, thinking that's the best way, although not perfect, the best way to proceed. And that's what pre-Leegin, or if we ever get to post- Leegin, that's the premise. That competition is the best way to drive the American economy and serve the American consumer while still preserving the rights of all manufacturers to try and make a profit, in that kind of a context. And pre-Leegin, as we have not established, there's still a way, or was a way or would be a way, even under our legislation, for a manufacturer to elect not to do business with a discounter as long, as they cut off that discounter without saying, it's because of price and price only. You know that.
But in that, a reasonable balance to encourage competition, to set up rules and regulations that will allow for competition, based on price, among other things? Service, quality, but also price? But also preserve the right of a manufacturer when he or she decides that they don't want to do business because that person is cutting the price too much. They can find a way not to do business.
Isn't that a decent balance for it? Well, what is your problem with that?
MR. WILSON: Well, Senator, let me first of all say that our section of the ABA fully endorsed the notion that competition needs to be the basis for our economy and our society, and I think, notwithstanding recent events, we have proven that competition is the best way to have a thriving economy. Our concern in the legislation is that, in establishing a per se test, it eliminates the ability for courts to recognize situations in which he procompetitive benefit of a particular resale price maintenance arrangement outweigh the anticompetitive effects. In situations where such procompetitive benefits outweigh the anticompetitive effects, consumers benefit from the resale price maintenance.
The section and the ABA have never taken the position that resale price maintenance should be, per se, legal. Our view is simply that the sound rule of antitrust, that the balancing of anticompetitive and procompetitive effects should apply in this arena as it does in virtually every other arena of our economy.
SEN. KOHL: Ms. Harbour?
MS. HARBOUR: I would just like to respond to that. Mr. Wilson was talking about the procompetitive benefits of resale price maintenance. I guess what I would say is then the proponents of them should prove it. That's really all I'm asking here. Why put the sum on the scale on the side of the business that is imposing this RPM, give the consumer the benefit of the doubt, and that's what we haven't seen.
We haven't seen the proof of the procompetitive benefits of those manufacturers who are imposing the RPM. What we get is we get theoretical assumptions about what those benefits are. All we're asking, prove it. Even in Leegin, the Supreme Court did not make the proponents of RPM in Leegin to prove what those benefits were for the ladies' handbags. So going forward, if you shift the burden of proof, shift it from the victim, shift it from the consumed, shift it onto the manufacturer who is improving the RPM. Let them bear the burden of proof for the elevated prices that they are foisting on the American consumer.
SEN. KOHL: Good. Anybody else have another comment to make?
MR. HAIGNEY: Yes, Mr. Chairman, just briefly on the rule of reason. Now, let me say this. Plaintiffs don't win rule of reason cases in this field. The rule of reason requires the plaintiff to prove an immense amount of economic data. He has to prove what the market is. He has to prove that the defendant has power in that market. He has to prove that competition as a whole within that market was somehow harmed by the individual act harming this plaintiff.
Now, most plaintiffs in these cases are small companies who are starting out, trying to get a foothold. They have their most important line cut off because of their unwillingness to live up to a price fixing agreement. They go to court. Now, when it was per se, all they had to do was prove the existence of the price fixing agreement and the fact that they were cut off because they didn't follow it, and then add up their damages of how much they lost.
That little company could probably bring that lawsuit with the local lawyer, and it probably, that guy might take it on spec. To win a rule of reason case, that local company would have to hire, I don't know ten economists, really high level attorneys, and launch a two, three, four year exploration of whatever market it happened to be. That is, if he could satisfy the very strict rule of pleadings requirements for the Twombly case, and other decisions of the Supreme Court that have pretty much put plaintiffs out of business at the pleading stage.
So, the per se rule is not the way to go. I'm sorry, the rule of reason is not the way to go. The per se rule is the only way that a small plaintiff could ever get a remedy for RPMs anti- competitiveness.
SEN. KOHL: Thank you. Anything else, folks?
I think it's been a good hearing. I think we've laid out the pros and cons of the issue and it is really important to our American economy to try to come up with the right decision on this, and in that sense, this hearing has been very informative. We appreciate your coming. Thank you so much.
MR. HAIGNEY: Thank you, Mr. Chairman.