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In 2007, the U.S. Supreme Court overturned an almost century-old rule in the case of Leegin Creative Leather Products, Inc. vs. PSKS, Inc. The court held that resale price maintenance agreements, which require retailers to adhere to a set price schedule, were not per se (i.e., automatically) illegal.
The Supreme Court reasoned that small and specialty suppliers could not realistically be expected to create a strong dealer network if they were subject to heavy discounting on the Internet and by large corporate chains. Challengers to an RPM agreement would need to show why the agreement was anti-competitive under the rule of reason, and the manufacturer could show it needed to protect its dealers to give them an incentive to stock the manufacturer’s products. Small manufacturers and retail businesses are critically important employment providers. Crippling them exacerbates our current unemployment problems.
Senate Bill S. 148 and House Bill H.R. 3190 now threaten to reverse this decision with little thought to the consequence of its effect on small “Main Street” businesses. Those arguing for its reversal typically do not even mention small business, Main Street or sales taxes.
In the outdoor industry, billion dollar retailers and manufacturers are the norm. Small companies, like ours (NRS Inc., a supplier of paddlesports equipment), cater to specialty stores, which depend on exclusive merchandise to serve their customers. The Leegin decision allows small retailers to carry products not sold by the largest discount chains. In turn, it allows small manufacturers to find and create niche markets for their products, sometimes too small to interest large chains. Though we are becoming important in our paddlesports accessories niche, we exist at the sufferance of multi-billion-dollar outdoor industry companies.
For NRS and other companies, such as Werner Paddles and Astral Buoyancy PFDs, it is vital to support small specialty retailers. Without small retailers, Main Street business districts would surely wither and die. In many towns, it is the local bike, ski and fly-fishing shops that are among the few stores keeping downtown districts alive. Local stores hire local personnel and utilize their expertise. Small business accounts for over 50 percent of the nation’s private workforce. Without them, unemployment would rise and retail districts would further deteriorate. Buyers at local stores pay sales taxes. Close down these small specialty shops, and sales taxes will decrease. State governments depend on these sales taxes for revenue. If these business districts wither and die, property values will decline, as will property taxes.
These small retailers already compete against Internet businesses and huge discount stores. It is small wonder then that when three retailers testified on the bill to repeal Leegin (eBay, sales of $8 billion; Burlington Coat Factory, sales of $2.8 billion; and Syms, sales of $250 million), two of the three were mega companies. The testimony from Burlington’s representative ended with: “In closing, I would like to note that Burlington Coat Factory has yet to feel the negative effects of the Leegin case.” Burlington hasn’t felt any negative effects from Leegin because manufacturers defer to companies such as Burlington, Amazon (sales of $19 billion) and Wal-Mart (sales of $400 billion), which will be the beneficiaries of repealing Leegin.
On the other hand, small manufacturers will suffer from Leegin’s repeal. The small manufacturer relies on its reputation, sufficient margin and low minimum purchase quantities to help retail stores attract customers. To reach their sales targets, large firms must sell in all the major retail outlets, including the big discounters. Small suppliers, on the other hand, need to support the small, specialty Main Street and strip-mall businesses to survive. The Leegin decision has given small firms an important tool to encourage shops to carry their specialty products. Unfortunately, consumer-oriented groups have been misled by advocates for multi-billion dollar companies, which have urged them to testify for the repeal of the Leegin decision.
How is it that the more liberal members of the court voted against the repeal of the per se rule? The dissent of the court unintentionally voted against not only Main Street, but also against the demonstrated need of states and communities not to lose more sales and property tax revenue.
These prospective losses have become critically important now that so many states have a budget crisis. The reason for the minority vote and the present drive to repeal Leegin is a lack of familiarity with the present-day business environment. If this case had come before the court 30 or 40 years ago, it would have made sense to affirm a per se rule for retail price maintenance, but now the economics have irreversibly changed and huge discount stores and Internet behemoths rule the marketplace. Regrettably, liberal voices that should be sticking up for small manufacturers and retailers have been beguiled by talk of maximizing efficiency and protecting the consumer. That’s just it: talk.
Despite the pivotal importance of small business to the United States, small local retailers and manufacturers pick up the crumbs left by giant corporations. There is no lack of competition, and the giant retailers and manufacturers do not want or need retail price maintenance. These manufacturers desire to maximize sales and would no more think of cutting out major discount retailers than they would commit suicide. Major discount retailers do, in fact, take most of the market for a variety of goods. However, it is businesses like the local fly-fishing shop that have the time to focus on and create local enthusiasts.
Repealing Leegin could do great harm to small business, Main Street and state sales tax revenues. Congress does not intend those consequences. Those that want to remove the purported advantage Leegin affords giant corporations could consider a cap limit such that the Leegin rule of reason only applies to corporations with total revenues less than, say, $250 million or $500 million. Then giant corporations could not use Leegin to either raise prices or control the market. A hard cap would remove the objections of those that want to repeal Leegin because the rule of reason raises too high a bar for plaintiffs.
Removing the shield of Leegin would ensure that giant retailers and suppliers continue to grab market share at the expense of small specialty shops and suppliers. The overwhelming market power of these huge companies is ample justification for protecting small businesses with retail price maintenance. The health of the small business sector of the economy and the very survival of the business community of many towns and cities depends on it.
How to take action
To get involved, start by contacting your state’s senators and representatives. You can find their names and contact information on the Library of Congress website at Thomas.gov, as well as senate.gov and house.gov. There are also a number of other sources on the Internet.
My suggestion is to call their offices and ask which staffer covers the judiciary, or more specifically, the “Discount Pricing Consumer Protection Act” – S. 148 and H.R. 3190. If you can’t speak to that person, then send an email.
Also contact Alex Boian, 303-327-3509, and urge the Outdoor Industry Association to become active in the effort to stop this legislation.
And again, please call me or David Blue at NRS, 800-635-5202, if you have questions or we can help in any way.
–Bill Parks, founder and president, NRS Inc.