Have you ever wondered how the “manufacturer’s suggested retail price”, or MSRP, came about? You see the phrase all the time in, for example, commercials selling cars. The origin lies in competition (or antitrust) law. In 1911, the United States had recently passed its antitrust legislation (the Sherman Act) and the Supreme Court wanted to ensure that the legislation had some teeth. As a result, it created the “per se” rule which prohibited businesses from setting minimum prices for their products. Thus, car companies could not sell cars for “$25,000 but not lower” or discriminate against any car dealerships that decided to give discounts on prices to lower them below a certain price. Hence the creation of the MSRP. The price was a “suggestion” and there was nothing to legally preclude the sale of the item below the MSRP. This concept has also been implemented in Canada through Section 61 of the Competition Act.
The “per se” rule has long been criticized. The primary criticism has been that the establishment of minimum prices, and the discrimination against those who would discount below the minimum price, is not inherently anti-competitive. To the contrary, manufacturers claim that if something is new technology, there is an advantage to providing minimum prices so that retailers can guarantee that if they put the time and effort into promoting the product and educating the public about the product then they will see a sale, rather than losing the sale to a discounter. Think of it this way: have you ever gone to the specialty store or the small retailer that gives personal service to find out about a product and then when you have had a chance to look at, test, etc. the product you then go to some big-box store or online store to buy the exact same thing because it’s cheaper there than at the specialty store? If this could be prevented, it would (so the argument goes) help to level the playing field among retailers and therefore be good for the economy, mom, home and apple pie.
Yesterday, the U.S. Supreme Court decided in Leegin Creative Leather Products to dispose of the “per se” rule and established a new standard for price maintenance in U.S. antitrust law: the “rule of reason”. Sounds catchy, doesn’t it? The rule of reason recognizes that price maintenance can have both pro-competitive and anti-competitive effects. It will now be up to the courts to determine in each case whether the balance of effects deters competition and, if so, then sanctions will be required against the manufacturer. Some of the factors the courts will have to consider are the number of manufacturers seeking to impose price minimums and the market power of the manufacturer seeking to impose the minimum price.
Does this mean that prices for consumer goods will now go up since discount retailers might be cut off? Possibly. We’ll have to wait and see – especially since it does not automatically follow that the rule of reason will create results that wildly differ from the results if the per se rule had been applied. The difference between the two rules is the starting point, but it’s quite possible that the end point would be the same. It will also be interesting to see what the Canadian courts do with future prosecutions for price maintenance under Section 61 of the Competition Act in light of this change of approach to part of the antitrust regime in the U.S.