Report text available as:

  • TXT
  • PDF   (PDF provides a complete and accurate display of this text.) Tip ?
                                                       Calendar No. 473
111th Congress                                                   Report
                                 SENATE
 2d Session                                                     111-227

======================================================================



 
                DISCOUNT PRICING CONSUMER PROTECTION ACT

                                _______
                                

                  July 21, 2010.--Ordered to be printed

                                _______
                                

Mr. Leahy, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 148]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to which was referred the 
bill (S. 148), to restore the rule that agreements between 
manufacturers and retailers, distributors, or wholesalers to 
set the minimum price below which the manufacturer's product or 
service cannot be sold violates the Sherman Act, having 
considered the same, reports favorably thereon, without 
amendment, and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
  I. Background and Purpose of the Discount Pricing Consumer Protection 
     Act..............................................................2
 II. History of the Bill and Committee Consideration..................6
III. Section-by-Section Summary of the Bill...........................6
 IV. Congressional Budget Office Cost Estimate........................7
  V. Regulatory Impact Evaluation.....................................8
 VI. Conclusion.......................................................8
VII. Minority Views of Senators Sessions, Hatch, and Kyl..............9
VIII.Changes to Existing Law Made by the Bill, as Reported...........16


 I. Background and Purpose of the Discount Pricing Consumer Protection 
                                  Act

    This legislation is intended to restore the automatic 
(``per se'') ban on manufacturer setting of minimum resale 
prices (a practice known as ``minimum resale price 
maintenance''). Minimum resale price maintenance results in 
higher prices to consumers. Until the recent Supreme Court 
decision in Leegin Creative Leather Products, Inc. v. PSKS, 
Inc.,\1\ these agreements had been per se illegal for nearly a 
full century under the antitrust laws. This legislation 
reinstates that per se ban.
---------------------------------------------------------------------------
    \1\551 U.S. 877 (2007).
---------------------------------------------------------------------------
    The antitrust laws forbade manufacturers from setting 
minimum resale prices.\2\ Three years ago, in its 5-4 decision 
in Leegin, the Supreme Court overturned this per se 
prohibition. Instead, the narrow majority in Leegin directed 
that minimum resale price maintenance be evaluated on a case-
by-case basis under the ``rule of reason'' approach, pursuant 
to which the anticompetitive effects of the conduct are weighed 
against its likely pro-competitive benefits.
---------------------------------------------------------------------------
    \2\Dr. Miles Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
---------------------------------------------------------------------------
    The per se rule banning minimum resale price maintenance by 
manufacturers enabled retail discounting and permitted vigorous 
price competition to flourish. The dissenting opinion in Leegin 
predicted that, if only 10 percent of manufacturers imposed 
resale price maintenance policies under the new interpretation 
of the law, the average family of four's retail bills would 
increase between $750 and $1000.\3\ Since the Leegin decision, 
it has been reported that over 5,000 manufacturers have 
implemented minimum price policies.\4\ These policies have 
appeared in various industries, including electronics, apparel, 
toys, home furnishings, and others. If minimum resale price 
maintenance continues to be permitted, prices for a myriad of 
consumer goods are likely to increase, consumer access to 
discounted products will decline, and retail competition will 
be inhibited.
---------------------------------------------------------------------------
    \3\Leegin, 551 U.S. at 926 (Breyer, J., dissenting).
    \4\Joseph Pereira, State Law Targets `Minimum Pricing', Wall St. J. 
at D1 (E. ed. April 28, 2009).
---------------------------------------------------------------------------
    This legislation is necessary to prevent this consumer 
harm. Rule of reason analysis, adopted by the Leegin court, is 
insufficient to prevent anticompetitive minimum resale price 
maintenance agreements, given the practical difficulties that 
plaintiffs face in bringing a successful case. In antitrust 
cases, rule of reason requires ``the factfinder [to] weigh all 
the circumstances of a case in deciding whether a restrictive 
practice should be prohibited as imposing an unreasonable 
restraint on competition.''\5\ ``Appropriate factors to take 
into account `include specific information about the relevant 
business' and `the restraint's history, nature, and 
effect.'''\6\ Whether the businesses involved have ``market 
power'' is a ``further, significant consideration.''\7\ 
Further, the ``plaintiff bears the burden of proving that a 
restraint has a substantial anticompetitive effect.''\8\ The 
restraint's anticompetitive effect must be ``significant'' to 
establish liability under the rule of reason,\9\ and the 
plaintiff must prove that ``the restraint is likely to have a 
substantial, adverse effect on competition by engaging in an 
analysis of the [relevant] market to predict the restraint's 
effect. . . .''\10\
---------------------------------------------------------------------------
    \5\Leegin, 551 U.S. at 885 (quoting Continental T.V. Inc. v. GTE 
Sylvania Inc., 433 U.S. 36, 49 (1977)).
    \6\Id. at 885 (quoting State Oil Co. v. Khan, 522 U.S. 3, 10 
(1997)).
    \7\Id. at 885-86.
    \8\ABA Section of Antitrust Law, Antitrust Law Developments, at 55 
(4th ed. 1997) (citing U.S. v. Arnold, Schwinn & Co., 388 U.S. 365, 374 
n. 5 (1967)).
    \9\Id. at 55.
    \10\Id. at 59 (citing Copperweld Corp. v. Independence Tube Corp., 
467 U.S. 752, 768 (1984) (noting that the rule of reason is ``an 
inquiry into market power and market structure designed to assess the 
combination's actual effect'')).
---------------------------------------------------------------------------
    The likely antitrust plaintiffs in minimum resale price 
maintenance cases--small discount retailers and consumers 
likely will not have the economic resources to successfully 
bring these actions. Given the substantial legal burdens, 
requiring litigants to prove minimum resale price maintenance 
illegal under the rule of reason is both costly and time 
consuming.\11\ Testimony from economic experts regarding the 
market, the market power of the parties to the restraint, and 
the likely impact on competition is typically required in such 
a case; oftentimes involving highly complex economic 
modeling.\12\
---------------------------------------------------------------------------
    \11\See H. Hovenkamp, The Antitrust Enterprise 105 (2005) 
(litigating a rule of reason case is ``one of the most costly 
procedures in antitrust practice''). See also, M.A. Carrier, The Rule 
of Reason: An Empirical Update for the 21st Century, 16 Geo. Mason L. 
Rev. 827, 830 (finding that out of 222 reported Federal antitrust cases 
decided under the rule of reason in the last decade, the plaintiff 
prevailed in only one).
    \12\As Justice Breyer pointed out in dissent in Leegin, requiring 
proof of ``market power'' ``invites lengthy time-consuming argument 
among competing experts, as they seek to apply abstract, highly 
technical, criteria to ill-defined markets.'' 551 U.S. at 917 (Breyer, 
J., dissenting).
---------------------------------------------------------------------------
    Two prominent discount retailers that testified in hearings 
on this issue before the Judiciary Committee's Subcommittee on 
Antitrust, Competition Policy and Consumer Rights (``Antitrust 
Subcommittee'') stated their companies did not believe the rule 
of reason standard would be effective in halting 
anticompetitive behavior, as they would be unlikely to bring a 
rule of reason case challenging minimum resale price 
maintenance.\13\
---------------------------------------------------------------------------
    \13\Marcy Syms, CEO of Syms discount clothing stores, stated in an 
answer to a written question from Senator Kohl as to whether she would 
be likely to bring a rule of reason case challenging minimum resale 
price maintenance, that ``[i]t would be very unlikely for SYMS to bring 
an antitrust suit [under the rule of reason]. We would not have the 
resources, knowledge or a strong enough position in the market place to 
make such action prudent.'' The Leegin Decision: The End of the 
Consumer Discounts or Good Antitrust Policy?: Hearing Before Senate 
Subcommittee on Antitrust, Competition Policy and Consumer Rights of 
the Committee on the Judiciary, S. Hrg. 110-342 (2007) at 40 (August 
24, 2007 letter to Sen. Herb Kohl from Marcy Syms). Likewise, Stacy 
Haigney, counsel to Burlington Coat Factory, testified that ``the cost 
[of pursuing a rule of reason antitrust case] is more than likely to be 
well into the seven figures. Burlington Coat Factory cannot afford that 
kind of expenditure and disruption of its business in a litigation 
which . . . is far from certain to succeed. Thus, as a practical 
matter, the Leegin case deprives Burlington Coat Factory of any remedy 
should it become a victim of vertical price fixing.'' The Discount 
Pricing Consumer Protection Act: Do We Need to Restore the Ban on 
Vertical Price Fixing?: Hearing Before the Subcommittee on Antitrust, 
Competition Policy and Consumer Rights of the Committee on the 
Judiciary, S. Hrg. 111-267 [hereinafter 2009 Antitrust Subcommittee 
Vertical Price Fixing Hearing] at 33. Haigney also described the 
considerable hurdles that a discount retailer would need to overcome to 
establish a rule of reason case challenging minimum resale price 
maintenance. According to Haigney, in light of the Supreme Court's 
decision in Bell Atlantic Corp. v. Twombly, 55 U.S. 544 (2007), 
requiring an antitrust plaintiff to plead a ``plausible'' antitrust 
claim, ``without any discovery, a plaintiff must undergo the effort and 
expense of putting together a complex economic analysis of the market, 
the history of the restraint, the relative market shares of the product 
and the parties, etc., simply to survive a motion to dismiss. Assuming 
that this hurdle can be surmounted, the plaintiff would then have to 
embark upon years of document-rich discovery and motion practice 
against a well-heeled adversary with numerous depositions, including of 
multiple experts on both sides.'' Id. at 20 & 33.
---------------------------------------------------------------------------
    These concerns are supported by evidence that the current 
law is not deterring resale price maintenance agreements. While 
it has been less than three years since the Leegin decision, 
more than 5,000 companies have reportedly implemented minimum 
pricing policies.\14\ A new industry referred to as ``internet 
monitors'' has emerged since the Leegin decision. As part of 
their efforts to enforce minimum resale pricing policies, 
manufacturers hire these companies to monitor retail prices on 
the Internet. After noticing low prices, the internet monitors 
report the low prices to manufacturers, who then demand the 
retailer raise their prices to the manufacturers' minimums.\15\
---------------------------------------------------------------------------
    \14\Joseph Pereira, State Law Targets `Minimum Pricing', Wall St. 
J. (E. ed.), April 28, 2009, at D1.
    \15\2009 Antitrust Subcommittee Vertical Price Fixing Hearing, 
supra at n.13, (Written Testimony of FTC Commissioner Pamela Jones 
Harbour [hereinafter Harbour Written Testimony]) at 119; Id. at 13 (Tod 
Cohen, eBay Vice President and Deputy General Counsel for Government 
Relations, testified that since the Leegin decision, one internet 
monitoring company, alone, has sent over 1.2 million ``notice and 
takedown'' requests to the eBay site); Joseph Pereira, Discounters, 
Monitors Face Battle On Minimum Pricing, Wall St. J. (E. ed.), Dec. 4, 
2008, at A1.
---------------------------------------------------------------------------
    In addition, at the Antitrust Subcommittee's May 2009 
hearing on S. 148, former FTC Commissioner Pamela Jones Harbour 
testified that since the Leegin decision ``the number of 
companies using RPM has substantially increased,'' ``some 
discounters had been terminated by as many as a quarter of 
their suppliers,'' and other discounters (including PSKS, Inc., 
the plaintiff in the Leegin case) have gone out of business, 
unable to get the courts to ``even consider the merits of their 
claims under the rule of reason.''\16\ This testimony is 
supported by reports received by Antitrust Subcommittee staff 
from Internet retailers that manufacturers are implementing 
policies forbidding Internet retailers from listing discounted 
prices on the Internet retailer's web page for that product. 
Only after potential customers add the product to their 
Internet ``shopping cart'' does that customer see the 
discounted price. Among other things, this prevents web 
applications that identify low prices on the Internet for 
consumers from finding the sale price for the product. This has 
the effect of stifling price competition on the Internet.
---------------------------------------------------------------------------
    \16\Harbour Written Testimony, at 119-120.
---------------------------------------------------------------------------
    There are many other examples of the implementation of 
minimum resale price maintenance since the announcement of the 
Leegin decision, including Sony's decision to implement a 
program mandating minimum retail prices on certain high end 
electronics,\17\ efforts to forbid retailers from discounting 
toys during the 2008 holiday shopping season,\18\ and Avis' 
Rent-A-Car policy forbidding its independently owned 
franchisees from renting cars below Avis' minimum prices in 
Alaska.\19\
---------------------------------------------------------------------------
    \17\Cecile Kohrs Lindell, Sony Upsets Holiday Shoppers, Antitrust 
Attorneys, The Deal, Nov. 24, 2008, http://www.thedeal.com/dealscape/
2008/11/sony_upsets_holiday_shoppers_a.php (last visited Dec. 3, 2008).
    \18\Joseph Pereira, Why Some Toys Don't Get Discounted--
Manufacturers Set Price Minimums That Retailers Must Follow Or Risk 
Getting Cut Off; Shopping Around for `Rock Band 2', Wall St. J. (E. 
ed.), Dec. 24, 2008, at D.1.
    \19\Joseph Pereira, Price Fixing Makes Comeback After Supreme Court 
Ruling, Wall St. J. (E. ed.), Aug. 18, 2008, at A.1.
---------------------------------------------------------------------------
    Past empirical studies further demonstrated the negative 
effect of minimum price agreements. In 1975 Congress repealed 
the Miller-Tydings Fair Trade Act\20\ and the McGuire Act\21\ 
which permitted individual States to enact ``fair trade'' laws 
authorizing minimum resale price maintenance agreements. At the 
time of the repeal, 36 States permitted minimum resale pricing. 
A study conducted by the Department of Justice found minimum 
resale price maintenance policies in the States that permitted 
this practice raised prices by 19% to 27%.\22\ Additionally, in 
1983, the Federal Trade Commission staff, after studying 
numerous pricing surveys, concluded that the surveys 
``indicate[d] that [resale price maintenance] in most cases 
increased the prices of products sold.''\23\
---------------------------------------------------------------------------
    \20\50 Stat. 693.
    \21\66 Stat. 631.
    \22\Leegin, 551 U.S. at 912 (opinion of Breyer, J., dissenting) 
(citing Hearings on H.R. 2384 before the Subcommittee on Monopolies and 
Commercial Law of the House Committee on the Judiciary, 94th Cong., 1st 
Sess., 122 (1975) (statement of Keith I. Clearwaters, Deputy Assistant 
Attorney General, Antitrust Division)).
    \23\T. Overstreet, Bureau of Economics Staff Report to the FTC, 
Resale Price Maintenance: Empirical Theories and Empirical Evidence 160 
(1983).
---------------------------------------------------------------------------
    The Supreme Court's rationale for subjecting resale price 
agreements to a rule of reason analysis, rather than a per se 
ban, is to promote competition among manufacturers selling 
different brands of the same type of product.\24\ However, 
banning minimum resale price maintenance itself may actually 
enhance this ``interbrand competition.'' If a manufacturer of a 
product bans its retailers from selling its products at a 
discount, then competing manufacturers will not feel the 
competitive pressure to reduce the retail price of their 
competing products. Allowing resale price maintenance could 
actually make it easier for competing manufacturers to collude. 
As Justice Breyer explained in his dissenting opinion in 
Leegin:
---------------------------------------------------------------------------
    \24\Leegin, 551 U.S. at 889.

          Resale price maintenance agreements can help to 
        reinforce the competition-inhibiting behavior of firms 
        in concentrated industries. In such industries firms 
        may tacitly collude, i.e., observe each other's pricing 
        behavior, each understanding that price cutting by one 
        firm is likely to trigger price competition by all. . . 
        . [R]esale price maintenance agreements will tend to 
        prevent price competition from ``breaking out'' and 
        they will thereby tend to stabilize producer 
        prices.\25\
---------------------------------------------------------------------------
    \25\Id. at 911 (opinion of Breyer, J., dissenting) citing 8 P. 
Areeda and H. Hovenkamp para.1632d, at 321-323 (2d ed. 2004).

    Thus, allowing resale price maintenance makes it very easy 
for the formation of implicit agreements between competing 
manufacturers to keep prices artificially inflated.\26\ Such 
collusion is nearly impossible to prove and ultimately harms 
the consumer.\27\
---------------------------------------------------------------------------
    \26\The majority opinion in Leegin noted that ``[r]esale price 
maintenance may, for example, facilitate a manufacturer cartel.'' 
Leegin, 551 U.S. at 892 (citing Business Electronics Corp. v. Sharp 
Electronics Corp., 485 U.S. 717, 725 (1988)).
    \27\Additionally, the per se rule of liability for minimum resale 
price maintenance has the strong advantage of being a bright line rule, 
eliminating all of the uncertainty associated with a lengthy and 
complicated litigation inherent in rule of reason antitrust cases. The 
per se rule enables businesses to more clearly understand what is 
permissible and what is not with respect to vertical price restraints; 
the rule of reason, by contrast, may lead to uncertainty as to what 
conduct is forbidden and what is allowed, and under what circumstances.
---------------------------------------------------------------------------
    A ban on minimum resale price maintenance is essential to 
maintaining vibrant competition among retailers. Indeed, the 
ban on minimum resale price maintenance greatly aided the rise 
of today's low price, discount retailers--stores such as 
Target, Walmart, and Syms--as well as giant Internet 
discounters such as Amazon and eBay--which have been so 
successful in challenging incumbent retailers. All of these 
companies offer consumers a wide array of highly desired 
products at discount prices. Eliminating the ban on minimum 
resale price maintenance runs the substantial risk of blocking 
new discount retailers from getting a competitive foothold 
necessary for their survival. If new discount retailers are 
prevented from selling products at the behest of large, 
incumbent retailers because of the pressure these incumbents 
put on manufacturers to forbid discounting, then an essential 
element of retail competition so beneficial to consumers may be 
imperiled. Enactment of S. 148 will keep discount retail 
competition alive.\28\
---------------------------------------------------------------------------
    \28\Nothing in this legislation will alter the rule of U.S. v. 
Colgate & Co., 250 U.S. 300 (1919), that a manufacturer does not 
violate antitrust law by refusing to do business with distributors, 
including distributors that fail to adhere to a unilaterally announced 
pricing policy, nor is it the intent of this legislation to do so. Thus 
the opposition to the bill on the grounds that certain high end 
manufacturers will not be able to control where their products are 
sold, and that the reputation of these brands will suffer if their 
products are sold at a discount outlet, is not well founded. Under the 
Colgate doctrine, a manufacturer is always free to choose which 
retailers may or may not sell its products. Enactment of this bill will 
not force any manufacturer to have its product sold at any store it 
finds undesirable.
---------------------------------------------------------------------------

          II. History of the Bill and Committee Consideration

    The Discount Pricing Consumer Protection Act was first 
introduced in the 110th Congress by Senator Kohl on October 30, 
2007 (S. 2261). The bill had three cosponsors (Senators Biden, 
Clinton, and Whitehouse). It was referred to the Committee on 
the Judiciary. No further action was taken on S. 2261 in the 
110th Congress.
    On January 6, 2009, Senator Kohl introduced the Discount 
Pricing Consumer Protection Act in the 111th Congress (S. 148). 
The bill has 10 cosponsors (Senators Durbin, Feinstein, 
Feingold, Franken, Kaufman, Klobuchar, Schumer, Specter, 
Whitehouse, and Wyden). It was referred to the Committee on the 
Judiciary. The Committee held a hearing titled ``The Discount 
Pricing Consumer Protection Act: Do We Need to Restore the Ban 
on Vertical Price Fixing?'' on May 19, 2009. Testimony was 
received from Pamela Jones Harbour, Commissioner, Federal Trade 
Commission; Tod Cohen, Vice President and Deputy General 
Counsel, eBay; Stacy Haigney, General Attorney, Burlington Coat 
Factory; and James Wilson, Partner, Vorys, Sater, Seymour & 
Pease, LLP.
    The Senate Judiciary Committee considered the legislation 
on March 18, 2010, and voted to report the Discount Pricing 
Consumer Protection Act, without amendment, favorably to the 
Senate by voice vote.

              III. Section-by-Section Summary of the Bill


Section 1. Short title

    This section provides that the legislation may be cited as 
the ``Discount Pricing Consumer Protection Act.''

Section 2. Congressional findings and declarations of purposes

    This section contains congressional findings and 
declarations of purposes.

Section 3. Prohibition on vertical price fixing

    Subsection (a) amends Section 1 of the Sherman Act by 
adding a provision stating that ``[a]ny contract, combination, 
conspiracy or agreement setting a minimum price below which a 
product or service cannot be sold by a retailer, wholesaler or 
distributor violates this Act.''
    Subsection (b) provides that this Act shall take effect 90 
days after the date of enactment.

             IV. Congressional Budget Office Cost Estimate

    The Committee sets forth, with respect to the bill, S. 148, 
the following estimate and comparison prepared by the Director 
of the Congressional Budget Office under section 402 of the 
Congressional Budget Act of 1974:

                                                    March 25, 2010.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 148, the Discount 
Pricing Consumer Protection Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Mark 
Grabowicz.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

S. 148--Discount Pricing Consumer Protection Act

    S. 148 would prohibit agreements between manufacturers and 
wholesalers, distributors, or retailers to set minimum prices 
for a product or service. The bill would negate the effects of 
a 2007 Supreme Court decision (Leegin Creative Leather 
Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007)) that permits 
minimum price agreements in certain cases.
    Based on information from the Department of Justice, CBO 
estimates that implementing the bill would have no significant 
effect on the department's spending to handle cases involving 
minimum price agreements.
    Pay-as-you-go procedures would apply to the legislation 
because violators of the bill's provisions could be subject to 
civil and criminal fines. Criminal fines are deposited as 
revenues in the Crime Victims Fund and later spent. However, 
CBO estimates that any additional revenues and direct spending 
would not be significant in each year.
    S. 148 contains no intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    Prohibiting agreements between manufacturers and 
wholesalers, distributors, or retailers to set minimum retail 
prices would impose a private-sector mandate as defined in 
UMRA. Any existing or future agreements that set such prices 
would be a violation of antitrust law.
    The cost of that mandate would be the forgone net income 
resulting from prohibiting such agreements; however, how such 
prohibitions would affect industry income is uncertain for 
several reasons. Although a large number of firms could be 
affected by the mandate, contracts involving pricing policies 
are confidential and can vary widely across markets. Further, 
the cost of the legislation would be mitigated to some extent 
because several states already prohibit such contracts and 
because firms could continue to use noncontractual policies 
that have the effect of setting minimum resale prices. 
Consequently, CBO cannot determine whether the cost of the 
mandate would exceed the annual threshold established in UMRA 
for private-sector mandates ($141 million in 2010, adjusted 
annually for inflation).
    On March 5, 2010, CBO transmitted a cost estimate for H.R. 
3190, the Discount Pricing Consumer Protection Act of 2009, as 
ordered reported by the House Committee on the Judiciary on 
January 13, 2010. The two bills are similar, and the cost 
estimates are the same.
    The CBO staff contacts for this estimate are Mark Grabowicz 
(for federal costs) and Marin Randall (for the private-sector 
impact). The estimate was approved by Theresa Gullo, Deputy 
Assistant Director for Budget Analysis.

                    V. Regulatory Impact Evaluation

    In compliance with rule XXVI of the Standing Rules of the 
Senate, the Committee finds that no significant regulatory 
impact will result from the enactment of S. 148.

                             VI. Conclusion

    The Discount Pricing Consumer Protection Act, S. 148, will 
restore the antitrust rule that manufacturer setting of minimum 
resale prices is per se illegal under the Sherman Act. In so 
doing, it will overturn the Supreme Court's 2007 Leegin 
decision. This legislation, by expressly banning minimum resale 
price maintenance in all circumstances, will eliminate the harm 
to competition created by the Leegin decision and substantially 
benefit consumers by enhancing their ability to obtain discount 
prices.

                          VII. Minority Views

                              ----------                              


             MINORITY VIEWS FROM SENATORS SESSIONS, HATCH, 
                                AND KYL

    We fully agree with the majority that the antitrust laws 
should protect consumers from anticompetitive behavior. But 
this bill exposes a disagreement over how the antitrust laws 
should be shaped and applied to serve that shared goal. For 
decades, the federal courts and antitrust scholars have 
understood that antitrust law should be grounded in sound 
economics so that the law prohibits conduct that is actually 
anticompetitive but does not deter conduct that is in fact 
procompetitive. That is the approach that we believe our laws 
should continue to follow. Unfortunately, this bill would amend 
the substantive language of Section 1 of the Sherman Act for 
the first time, without sound economic justification.
    In short, because economic scholarship shows that resale 
price maintenance agreements can benefit competition and 
consumers, the bill's blanket ban of such agreements is 
misplaced. The Supreme Court's holding in the Leegin case that 
these agreements should be judged based on a rule of reason 
test, which the bill would overturn, is sound legal and 
economic policy. We believe a wiser course at this time would 
be to follow this tradition of allowing court interpretation of 
the law to continue, fully recognizing that Congress may act in 
the future if court decisions prove unworkable or unwise.
Background
    On the surface, the debate over this bill is about the 
proper way to police resale price maintenance agreements to 
protect competition and maximize consumer welfare. We agree 
with the majority that some resale price maintenance agreements 
can have anticompetitive consequences that outweigh any benefit 
to consumers. But the economic evidence accumulated over 
several decades strongly indicates that some resale price 
maintenance agreements benefit consumers and improve 
competition. We are concerned that a per se ban will block 
procompetitive behavior, harming competition in the marketplace 
and making consumers worse off.
    At a more fundamental level, we are concerned that this 
bill reveals a confusion over the proper aims and uses of 
antitrust law. The Sherman Act was drafted in broad terms and 
courts have applied it for over a century with an eye toward 
new developments in economic understanding so as to bar 
``unreasonable restraints of trade.'' As the Supreme Court has 
repeatedly held in cases going back decades, ``per se rules of 
illegality are appropriate only when they relate to conduct 
that is manifestly anticompetitive.''\1\ This bill proposes to 
amend the Sherman Act by creating an absolute ban on retail 
price maintenance agreements, without regard for their real-
world impact on competition or consumer welfare. As the 
conclusory and overtly political ``findings'' included in this 
bill show, the majority has chosen to ignore the great weight 
of economic scholarship, and would freeze in amber a legal rule 
that economic analysis shows is already obsolete.
---------------------------------------------------------------------------
    \1\See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 
49-50 (1977).
---------------------------------------------------------------------------
Per Se Antitrust Violations Should Be Reserved Only for Manifestly 
        Anticompetitive Conduct
    This bill openly states that it is intended ``to correct 
the Supreme Court's mistaken interpretation of the Sherman 
Act'' in Leegin Creative Leather Products, Inc. v. PSKS, 
Inc.\2\ This suggests a misunderstanding of both the Sherman 
Act and the Court's Leegin decision.
---------------------------------------------------------------------------
    \2\551 U.S. 877 (2007).
---------------------------------------------------------------------------
    The Leegin Court held that vertical agreements between a 
manufacturer and a distributor to set a minimum resale price 
(``resale price maintenance agreements'') should be evaluated 
under ordinary ``rule of reason'' antitrust analysis. Prior to 
Leegin, resale price maintenance agreements had been treated as 
``per se'' illegal under the Court's 1911 decision in Dr. Miles 
Medical Co. v. John D. Park & Sons Co.\3\ The decision in Dr. 
Miles, however, was not based on economic analysis of the 
effects of vertical price agreements, and it has been roundly 
criticized in antitrust literature for decades.
---------------------------------------------------------------------------
    \3\220 U.S. 373 (1911).
---------------------------------------------------------------------------
    Under the Supreme Court's precedents, ``[p]er se rules of 
illegality are appropriate only when they relate to conduct 
that is manifestly anticompetitive,''\4\ where the practice 
``lack[s] any redeeming virtue,''\5\ and ``only if courts can 
predict with confidence that [the practice] would be 
invalidated in all or almost all instances'' under ordinary 
``rule of reason'' antitrust analysis.\6\ Such per se rules 
have traditionally been confined to restraints ``that would 
always or almost always tend to restrict competition and 
decrease output.''\7\
---------------------------------------------------------------------------
    \4\GTE Sylvania, 433 U.S. at 49-50.
    \5\Northwest Wholesale Stationers, Inc. v. Pacific Stationery & 
Printing Co., 472 U.S. 284, 289 (1985) (internal quotation marks 
omitted).
    \6\Leegin, 551 U.S. at 886-87.
    \7\Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 
717, 723 (1988)
---------------------------------------------------------------------------
    Moreover, because a ``departure from the rule-of-reason 
standard must be based upon demonstrable economic effect rather 
than . . . formalistic line drawing,''\8\ the Supreme Court has 
held that per se rules are appropriate ``only after courts have 
had considerable experience with the type of restraint at 
issue.''\9\ And the Court has appropriately been ``reluctan[t] 
to adopt per se rules with regard to restraints imposed in the 
context of business relationships where the economic impact of 
certain practices is not immediately obvious.''\10\
---------------------------------------------------------------------------
    \8\GTE Sylvania, 433 U.S. at 58-59.
    \9\Leegin, 551 U.S. at 886.
    \10\State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
---------------------------------------------------------------------------
    In Leegin, the Court reviewed the considerable body of 
antitrust economics literature dealing with vertical price 
restraints and concluded that the per se rule of Dr. Miles 
wasnot supportable. The Court did not hold that all resale price 
maintenance agreements were legal. Rather, the Court found that the per 
se ban was unjustified, and that antitrust challenges to such 
arrangements should instead be evaluated under the ``rule of reason'' 
analysis that has long been the standard approach in enforcing the 
Sherman Act.
    While Congress is not strictly bound by the Supreme Court's 
careful approach to identifying per se violations of the 
Sherman Act, the concerns highlighted by the Court apply 
equally to the Legislative Branch and counsel the Congress to 
proceed with caution.
    No such caution is evident in this bill, which proposes to 
ban all resale price maintenance agreements, regardless of 
their actual effects on competition and consumer welfare. The 
traditional ``rule of reason'' approach of the Sherman Act, 
which evaluates resale price maintenance agreements according 
to their actual economic effects, is the far wiser course.

Modern Economics Shows That Some Resale Price Maintenance Agreements 
        Benefit Consumers and Competition

    The economic and antitrust literature shows that 
procompetitive uses of resale price maintenance agreements are 
likely to be common.\11\ As antitrust scholar and federal court 
of appeals Judge Richard Posner noted in his influential 
treatise on antitrust law, the old judicially created per se 
rule against resale price maintenance was ``a sad mistake. 
There is neither theoretical basis, nor empirical support, for 
thinking the practice generally anticompetitive.''\12\ It would 
be no less of a mistake for Congress to repeat the Dr. Miles 
Court's error by recreating a per se rule that is unsupported 
by the economic evidence.
---------------------------------------------------------------------------
    \11\Howard P. Marvel, Resale Price Maintenance and the Rule of 
Reason, Antitrust Source, 
P.1 (June 2008) available at http://www.abanet.org/antitrust/at-source/
08/06/Jun08-Marvel6=26f.pdf (``Economists have posited an ever-widening 
set of conditions under which RPM can increase efficiency.'').
    \12\3 Richard A. Posner, Antitrust Law 189 (2d ed. 2001).
---------------------------------------------------------------------------
    Professional economists appear to agree with near unanimity 
that resale price maintenance agreements can be 
procompetitive.\13\ As the majority opinion in the Leegin case 
noted, ``economics literature is replete with procompetitive 
justifications for a manufacturer's use of resale price 
maintenance.''\14\ This point was made forcefully in an amicus 
brief signed by 23 economists in the Leegin case:
---------------------------------------------------------------------------
    \13\See, e.g., G. Franklin Mathewson & Ralph A. Winter, The Law and 
Economics of Resale Price Maintenance, 13 Rev. Indus. Org. 57, 67 
(1998); Kenneth Kenneth G. Elzinga & David E. Mills, The Economics of 
Resale Price Maintenance, in 3 Issues in Competition Law and Policy 
1841 (ABA Section of Antitrust Law 2008), available at http://
www.virginia.edu/economics/Workshops/papers/mills/
RPM%20ABA%20volume%202008.pdf; G. Franklin Mathewson & Ralph A. Winter, 
The Incentives for Resale Price Maintenance Under Imperfect 
Competition, 21 Econ. Inquiry 337 (1983); Andrew N. Kleit, Efficiencies 
Without Economists: The Early Years of Resale Price Maintenance, 59 S. 
Econ. J. 597 (1993); Raymond Deneckere et al., Demand Uncertainty and 
Price Maintenance: Markdowns as Destructive Competition, 87 Am. Econ. 
Rev. 619 (1997).
    \14\Leegin, 551 U.S. at 889.

          In the theoretical literature, it is essentially 
        undisputed that minimum RPM [resale price maintenance] 
        can have procompetitive effects and that under a 
        variety of market conditions it is unlikely to have 
        anticompetitive effects. The disagreement in the 
        literature relates principally to the relative 
        frequency with which procompetitive and anticompetitive 
        effects are likely to ensue. The critical issue is the 
        boundaries of that dispute. Some believe that minimum 
        RPM is almost always benign and thus should basically 
        be ignored by antitrust law except when it is part of a 
        cartel case. Others believe that RPM has been 
        demonstrated to be anticompetitive in some cases and 
        thus merits serious antitrust consideration. The 
        position absent from the literature is that minimum RPM 
        is most often, much less almost invariably, 
        anticompetitive. Thus, the economics literature 
        provides no support for the application of a per se 
        rule.\15\
---------------------------------------------------------------------------
    \15\Brief of Amici Curiae Economists at 16, Leegin Creative Leather 
Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (No. 06-480) 
(internal citations omitted).

    Leading antitrust authorities agree with this economic 
analysis and had called for the reversal of the Dr. Miles rule 
for years prior to the Leegin case. Professor Herbert Hovenkamp 
wrote that the ``Dr. Miles per se rule was unfortunate'' and 
``the wrong rule, given that much RPM is competitively benign 
in the great majority of situations when it is not being used 
to facilitate collusion.''\16\ In his treatise on antitrust 
law, co-written with the late Professor Phillip Areeda, 
Hovenkamp concluded that ``[t]o the extent that Dr. Miles rests 
on the false categorical propositions that resale price 
maintenance never benefits manufacturers and always has the 
same effects as an illegal dealer cartel, its ruling is ripe 
for reexamination.''\17\
---------------------------------------------------------------------------
    \16\Herbert Hovenkamp, The Antitrust Enterprise: Principle and 
Execution 186, Harvard University Press, 2005.
    \17\8 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 217 (2d 
ed. 2004).
---------------------------------------------------------------------------
    The large body of empirical academic evidence arguing that 
minimum resale price agreements can be procompetitive is 
supported and brought to life by the convincing anecdotal 
evidence offered by the manufacturer parties and amici in the 
Leegin case to explain the procompetitive reasons their 
businesses chose to establish minimum resale prices.\18\
---------------------------------------------------------------------------
    \18\Brief for Petitioner at 22-24, Leegin Creative Leather 
Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (No. 06-480); Brief 
of PING, Inc. as Amicus Curiae at 5-9, Leegin (No. 06-480).
---------------------------------------------------------------------------
    The majority seems to argue that the economic experts cited 
above are wrong, and that all resale price maintenance 
agreements should be banned. But the majority's arguments are 
unconvincing.
    It is telling that the majority's report cites no economic 
or empirical evidence showing that consumer welfare has been 
harmed in the aftermath of the Leegin decision. Instead, the 
majority cites to Justice Breyer's prediction in his dissenting 
opinion that price increases would occur. This citation to an 
economic prediction from the dissentingopinion at the Supreme 
Court--not typically the branch to which one looks for economic policy 
expertise--is outweighed by the empirical economic evidence discussed 
above.
    Indeed, insufficient time has elapsed since the Leegin 
decision to draw meaningful conclusions about the decision's 
economic consequences. Before codifying a per se ban in the 
Sherman Act, Congress should wait until the economic evidence 
has had time to emerge. This is especially so because, before 
the Leegin decision, the per se ban of Dr. Miles ``hindered the 
development of an economic understanding of the rationales and 
effects of RPM'' because ``[t]he per se rule ma[de] proof of 
actual anticompetitive effects immaterial.''\19\ At the very 
least, therefore, this bill is premature.
---------------------------------------------------------------------------
    \19\Hovenkamp, supra note 16 at 186.
---------------------------------------------------------------------------

Antitrust Law Should Be Based on Sound Economic Principles

    The past thirty years have led to broad consensus among 
scholars, practitioners, and judges that antitrust should be 
grounded in sound economics and that ``antitrust protects 
competition, not competitors, and that it does so to ensure 
consumer welfare.''\20\ In the absence of these basic, guiding 
principles, there would be a significant risk that antitrust 
rules--some of which can have a profound impact on the market--
would turn instead on the personal biases or political beliefs 
of judges.\21\
---------------------------------------------------------------------------
    \20\See, e.g., Antitrust Modernization Commission, Report and 
Recommendations 4 (2007).
    \21\See Hon. Douglass H. Ginsburg, Gauer Distinguished Lecture in 
Law and Public Policy, AEI Legal Center for the Public Interest: 
Original Public Meaning of the Constitution: Out of Exile? (Sept. 23, 
2008) (describing the pre-economic Supreme Court antitrust 
jurisprudence as an ``ad hoc and incoherent'' ``assortment of vague 
and, ironically, anti-competitive social and political goals'').
---------------------------------------------------------------------------
    This consensus that antitrust law is most appropriately 
based on sound economics has led the courts to grow 
increasingly reluctant to treat vertical restraints as per se 
antitrust violations. As the majority opinion in Leegin 
discusses, this trend began almost immediately after the Dr. 
Miles case was decided, starting with the Court's decision in 
U.S. v. Colgate & Co.\22\ That decision undercut Dr. Miles by 
permitting a manufacturer to announce suggested resale prices 
and refuse to deal with distributors who do not follow them.
---------------------------------------------------------------------------
    \22\250 U.S. 300 (1919).
---------------------------------------------------------------------------
    Spurred by significant advancements and interest in the 
study of economics during the middle of the 20th Century, the 
Court began to rest antitrust law more firmly on economic 
principles. In 1977, the Court overturned the per se rule for 
vertical nonprice restraints (such as agreements on product 
placement) and adopted a rule of reason analysis.\23\ In 1984, 
the Court required plaintiffs alleging an illegal vertical 
price restraint to produce evidence showing that a manufacturer 
and its distributors were unlikely to have acted 
independently.\24\ And in 1988, the Court chipped away at Dr. 
Miles once again, holding that the per se rule did not apply to 
an agreement between a manufacturer and a distributor to 
terminate a contract if the distributor were to engage in 
price-cutting.\25\ Finally, and as recently as 1997, the Court 
overturned a nearly 30-year old precedent that had made 
vertical maximum price-fixing agreements per se illegal.\26\ 
The Court reached this conclusion, as the Leegin majority 
noted, after assessing ``commentary and real experience.''
---------------------------------------------------------------------------
    \23\GTE Sylvania, 433 U.S., at 57-59.
    \24\Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984).
    \25\Business Electronics Corp., supra, 485 U.S. 717 (1988).
    \26\State Oil Co. v. Khan, 522 U.S. 3 (1997).
---------------------------------------------------------------------------
    The majority's report does not deny that the Court has been 
steadily moving away from per se rules, including in the 
context of vertical restraints between a manufacturer and 
retailer. The Leegin decision was not an aberration. Nor was it 
``activist.'' It was instead a faithful application of the 
scholarly view--recognized by the Court itself in a series of 
post-Dr. Miles cases--that most restraints cannot be deemed 
either anticompetitive or procompetitive without looking at 
specific facts and circumstances.
    The majority argues that the costs of bringing an antitrust 
suit under the rule of reason standard will deter plaintiffs 
from challenging even anticompetitive agreements. But the 
antitrust law has mechanisms to encourage plaintiffs to bring 
suit, such as treble damages and fee shifting,\27\ so that a 
fair hearing of arguments both for and against a resale price 
maintenance can occur.
---------------------------------------------------------------------------
    \27\See Abbott B. Lipsky, Jr., Private Damage Remedies: Treble 
Damages, Fee Shifting, and Prejudgment Interest, Testimony before the 
Antitrust Modernization Commission (2005), available at http://
govinfo.library.unt.edu/amc/commission_hearings/pdf/Lipsky.pdf 
(``Applying a damage multiple and a fee-shifting provision to antitrust 
litigation has had the demonstrable effect of encouraging private 
supplementation of public enforcement, thereby enhancing whatever 
deterrent, compensatory and exemplary remedial effects the system would 
have otherwise produced, ceteris paribus.'').
---------------------------------------------------------------------------
    We agree with the majority that a resale price maintenance 
agreement used to facilitate horizontal collusion would be 
anticompetitive. In the majority's example, of course, the 
primary antitrust violation is the horizontal collusion among 
manufacturers, not the vertical price maintenance arrangements 
that might facilitate enforcement of such horizontal collusion. 
Even so, a vertical price maintenance agreement used to 
facilitate horizontal collusion would fail under Leegin's rule 
of reason test.

The Majority's Concerns Over Resale Price Maintenance Do Not Justify 
        the Extraordinary Step of Amending the Sherman Act

    The Sherman Act has been a model of simplicity for over a 
century. Since its enactment in 1890, courts have been given 
the latitude to fine-tune their understanding of what is, and 
is not, an unreasonable restraint of trade based on experience 
and a continually developing understanding of economics.
    The bill would set the Sherman Act on a different course 
by, for the first time ever, designating a specific type of 
agreement as an unreasonable restraint of trade. Worse yet, it 
will freeze in place a view of resale price maintenance 
agreements that is, in most experts' opinions, at least a half-
century out of date--a view that mistakenly treats price as the 
only consideration for measuring consumer welfare and that 
ignores the well-documented free-riding problems that can drive 
competition out of the market, harmingconsumers in the long 
run. We readily acknowledge the importance of internet discounters to 
the growth of our economy and we recognize the valuable role that 
traditional discount retailers like Target, Walmart, Syms, or Kohl's 
play in the marketplace. But economic scholarship makes clear that 
consumer welfare and economic output are maximized when consumers are 
able to choose from a range of products with varying levels of quality 
and service; such diversity in the market may be unsustainable if 
resale price maintenance is flatly banned.
    We are also concerned that this legislation, by 
fundamentally changing the text of the law that the Supreme 
Court has called the ``the Magna Carta of free 
enterprise,''\28\ may have unintended consequences in other 
applications of the Sherman Act. We do not know, for instance, 
whether or how this bill might be read to affect the numerous 
pre-Leegin decisions that chipped away at the holding in Dr. 
Miles. The majority report claims, for example, that this 
legislation will have no impact on ``the rule of U.S. v. 
Colgate & Co., 250 U.S. 300 (1919), that a manufacturer does 
not violate antitrust law by refusing to do business with 
distributors, including distributors that fail to adhere to a 
unilaterally announced pricing policy.'' But this assurance is 
not supported by the text of the legislation; a distributor who 
believes his contracts were terminated because of ``excess'' 
discounting would assuredly allege that he was the victim of a 
``conspiracy . . . setting a minimum price.''\29\ And it is 
certainly conceivable that courts might interpret Congress's 
actions in this area as exhibiting a generalized desire for the 
courts to move away from the historical use of the Sherman Act 
as a common law tool to promote competition. These issues, 
which are largely unaddressed by the majority's report, 
highlight the need to exercise extreme caution before amending 
a statute that has been the cornerstone of antitrust 
jurisprudence for over a century.
---------------------------------------------------------------------------
    \28\United States v. Topco Associates, Inc., 405 U.S. 596, 610 
(1972).
    \29\Indeed, this claim that the bill will preserve the Colgate 
rule, thus allowing what amounts to back-door resale price maintenance 
through ``minimum advertized prices'' and other such machinations, 
further suggests that this legislation has less to do with antitrust 
law than with political posturing. As Marvel notes in his article for 
the ABA Antitrust Section, ``Terminating dealers who discount one's 
products is not a less restrictive approach than encouraging them to 
continue to sell the products at the preferred price.'' Marvel, Resale 
Price Maintenance and the Rule of Reason, Antitrust Source, June 2008, 
at p.6. Colgate allows manufacturers to maintain an exclusive brand 
image by refusing to deal with certain retailers, but such efforts at 
product differentiation are less directly beneficial to consumers than 
resale price maintenance arrangements that require retailers to provide 
a higher level of customer service in exchange for a guaranteed minimum 
retail price.
---------------------------------------------------------------------------

Conclusion

    This bill would outlaw all resale price maintenance, in 
contravention to the great weight of economic evidence, even in 
those situations where such activity is likely to be 
procompetitive. Like the Court, we believe that the ``rule of 
reason'' is the appropriate standard in such cases.
    We decline to join the majority's effort, under the false 
guise of being faithful to precedent, to ignore the economic 
scholarship and judicial decisions to recreate by statute a 
judicial rule that has long been seen as a relic from a pre-
economic, populist era in antitrust law. We therefore cannot 
support this legislation, and we hope that this bill does not 
signal a broader desire within the Congress to jettison the 
strides that have been made to ground antitrust law in sound 
economics.
                                   Jeff Sessions.
                                   Orrin Hatch.
                                   Jon Kyl.
      VIII. Changes to Existing Law Made by the Bill, as Reported

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
S. 148, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                           UNITED STATES CODE

                      TITLE 15--COMMERCE AND TRADE

      CHAPTER 1--Monopolies and Combinations in Restraint of Trade

                 Subchapter I--Federal Trade Commission

SHERMAN ACT (15 U.S.C. Sec. 1)

SEC. 1 (15 U.S.C. 1). TRUSTS, ETC., IN RESTRAINT OF TRADE ILLEGAL; 
                    PENALTY.

    Every contract, combination in the form of trust or 
otherwise, or conspiracy, in restraint of trade or commerce 
among the several States, or with foreign nations, is declared 
to be illegal. Any contract, combination, conspiracy or 
agreement setting a minimum price below which a product or 
service cannot be sold by a retailer, wholesaler, or 
distributor shall violate this Act. Every person who shall make 
any contract or engage in any combination or conspiracy hereby 
declared to be illegal shall be deemed guilty of a felony, and, 
on conviction thereof, shall be punished by fine not exceeding 
$100,000,000 if a corporation, or, if any other person, 
$1,000,000, or by imprisonment not exceeding 10 years, or by 
both said punishments, in the discretion of the court.