October 30, 2008, 12:00 AM

How the Supreme Court Fractured Online Pricing

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And Rugs Direct sends American Express gift cards worth $25 to $100 to some customers following a purchase. “None of our suppliers have said that’s unacceptable because we’re not discounting the product,” Craig says.

But suppliers have objected to another online rug dealer, Rugs USA, e-mailing coupons to customers that could reduce the prices of MAP-priced items. “Previously, as long as you didn’t have it advertised on your web site you were in the clear,” says CEO Koorosh Yaraghi. “Now many of them get on our e-mail lists, and when we send out an e-mail offering a coupon they make complaints about it.”

Instead, he offers a free pad with price-controlled rugs. “As long as you offer a product, they don’t seem to mind.”

Yaraghi also was dropped by one supplier because a Rugs USA affiliate offered a 5% discount coupon for purchases on Rugs USA that could reduce prices to below manufacturer-specified levels.

In order to offer low prices in this new environment, Yaraghi has begun importing his own rugs or buying stock from liquidators, enabling him to set his own prices. Although that requires him to warehouse his own inventory, instead of relying on drop shippers, he says, “It puts us in control of the product.”


Some online retailers are pressing suppliers for more leeway to make offers to customers.

For instance, Xtremez.com, an e-commerce site operated by Paintball Online Inc., sometimes offers a second item for free or at a discount when a customer buys a MAP-protected product. Adam Stites, president, says he lets manufacturers know that if they do not offer him that kind of flexibility their products will not show up as prominently in his marketing materials or search engine advertising. “They’re going to be left behind if they don’t give us any flexibility to market their products,” he says.

The next few years are likely to see more of that kind of push and pull between e-retailers and suppliers over pricing rules, at least until courts, or Congress, clarify how much power manufacturers have to set prices on the web.


The law on minimum price programs is all over the MAP

For decades, an agreement between a manufacturer and a retailer to fix minimum prices was a per se violation of antitrust law. The agreement was automatically illegal-no proof of harm was necessary.

That changed in June 2007 when a 5-4 majority made up of the generally more conservative U.S. Supreme Court justices ruled that such pricing agreements should be judged on a case-by-case basis. The ruling came in a lawsuit brought by retailer PSKS Inc. against the minimum pricing policies of Leegin Creative Leather Products Inc., a manufacturer of women’s accessories. An agreement to maintain prices above a certain level, the majority said, could in some circumstances expand consumer choice, for instance by enabling retailers a sufficient profit margin to offer valuable services with complex products or to allow a newcomer to break into the market.

Many manufacturers have taken this decision as license to impose price-maintenance agreements. And Christopher S. Finnerty, an attorney with WolfBlock LLP who advises manufacturers on such issues, thinks that’s a risky course.

The high court ruling does not mean pricing agreements are automatically legal, and defending an antitrust lawsuit can be expensive, Finnerty says. Even if the manufacturer wins, it could be sued again later if it gains market share, he says.

A legally safer alternative for manufacturers, Finnerty says, is to set a unilateral policy that states it will not sell to dealers who sell below specified prices. That way there is no agreement between manufacturer and retailer, and no antitrust violation.

Such unilateral policies have always been legal, but hard to implement for long, Finnerty says. “The difficulty is that manufacturers engage in fluid conversations with their dealers on a regular basis,” he says. “It’s difficult to interact with someone more than once and not form an agreement.”

Further complicating the legal picture is the fact that 38 states have laws that make price-fixing agreements per se illegal. New York State has made clear its intent to enforce its law, and in March reached a settlement with Herman Miller Inc., a manufacturer of office chairs, which imposed a $750,000 penalty on the manufacturer and required it to refrain from mandating minimum prices.

In addition, 26 other states signed on to a petition drafted by New York to oppose footwear manufacturer Nine West’s appeal to the Federal Trade Commission to be freed from previously imposed restrictions on fixing retail prices. Nine West argues in its petition that the Leegin decision makes such pricing mandates legal.

And in yet another reaction to the Leegin decision, U.S. Sen. Herb Kohl, R-Wis., chairman of the Senate’s antitrust subcommittee, last fall introduced a bill entitled the Discount Pricing Consumer Protection Act that would reverse the impact of the Leegin decision by restoring a ban on manufacturers setting minimum prices. That bill has not emerged from committee.

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