High Court Ruling Hits Discounters : Undercuts Ban on Halting Supplies to Price-Cutters

The Supreme Court, in a major defeat for discount stores and their bargain-hunting customers, ruled Monday that a manufacturer and his dealers may agree to halt supplies to a price-cutting retailer.

By a 6-2 vote, the high court sharply undercut the nearly 80-year-old legal rule that bans such arrangements between manufacturers and dealers.

The court opinion, by Justice Antonin Scalia, represents a victory for the Reagan Administration and manufacturers who have long complained that they should be permitted to drop “free riders”--those discounters who slash prices but do not provide full service to customers.

Higher Prices

The practical effect of the ruling will be to permit manufacturers to sell only to those retailers they chose--very likely those with nice showrooms, well-trained sales personnel and higher prices.

“I think the decision will be especially galling to the educated consumer,” said University of Illinois law professor Stephen Ross, who said the shopper who would prefer a lower price rather than “high-priced dealers with fancy showrooms” will lose out because of the decision.

A coalition of economic conservatives, manufacturers and “full-service retailers” who spend heavily for showrooms, advertising and well-trained salesmen supported the court’s ruling. At the same time, liberal economists, discount retailers and consumer advocates were surprised and displeased by the outcome.

‘Suggested’ Prices

Under Monday’s ruling, manufacturers may force retailers to charge their “suggested retail prices” by dropping any dealers who sell at a discount, without fear of being sued for damages. Previously, any move to drop price-cutters was viewed as a price-fixing conspiracy in violation of the antitrust laws.

Scalia said the discounter may win damages only if he can prove that there was “some agreement on price or price levels” between the manufacturer and the remaining dealers. According to antitrust experts, only manufacturers who “blundered” into writing down such an agreement would need to fear an antitrust suit.

This move toward looser enforcement of the antitrust laws marks a sharp departure for the high court.

In the Sherman Act of 1890, Congress outlawed all business agreements that were “in restraint of trade.” Based on this law, the Supreme Court in 1911 declared that any price-fixing move by manufacturers and dealers was automatically illegal. Although this doctrine has been repeatedly challenged by businessmen, the courts have rigidly adhered to it.

In 1977, the high court gave manufacturers part of what they wanted by ruling that they may give dealers “exclusive territories,” as long as they did not conspire to fix prices.

The court’s latest ruling goes much further by allowing manufacturers and high-priced retailers to work together to drive out discounters without running afoul of the 1911 rule.

This case arose in Houston when a discount dealer for the Sharp Electronics Corp. was dropped after complaints from a competing, high-price dealer. At one point in 1973, the high-price retailer gave Sharp an “ultimatum” that it would stop selling Sharp’s business calculators unless Sharp dropped the discounter, Business Electronics Corp. Three weeks later, Sharp agreed and terminated BEC.

Lawyers for BEC filed an antitrust suit against Sharp, and a jury ruled for the discounter after concluding that the manufacturer had entered into “an agreement . . . to eliminate price cutting.” BEC was awarded $600,000 in damages, and this amount was trebled as required by the antitrust laws.

Judgment Vacated

However, the U.S. 5th Circuit Court of Appeals vacated the judgment. Its three-judge panel concluded that Sharp and its high-price retailer may have wanted to eliminate price competition but BEC must prove such an agreement “to set resale prices” before it can win.

Scalia upheld this ruling, saying there are other “quite plausible” reasons for Sharp’s action, such as a desire to ensure that customers get “better service” from its dealers.

The ruling will have a “market-freeing effect,” Scalia said, by permitting manufacturers to set up distribution systems without fear of government interference. His former appeals court colleague, Judge Robert H. Bork, argued in a 1977 book, “The Anti-Trust Paradox,” that the court should allow price fixing between manufacturers and dealers in marketing a product, while preserving competition between brands.

Customer Benefit Seen

On the other side, liberal economists and consumer advocates say customers benefit from brisk competition among retailers selling the same brand of product.

Regardless of the impact it will have on markets, Scalia’s 16-page opinion appears to conflict with two other conservative tenets: judicial restraint and a reliance on the original intent of a law.

In 1983, when the Reagan Administration urged the Supreme Court to scrap the 1911 rule prohibiting price fixing between manufacturers and dealers, Congress quickly passed a measure forbidding Justice Department officials to advocate such action. Congress has affirmed its support for the old rule each year since then.

Sen. Howard M. Metzenbaum (D-Ohio), chairman of the Senate subcommittee on antitrust policy, called Monday’s high court ruling “shocking” and predicted that Congress will move to reverse it.

Option for Consumers

“We want consumers to have the option of going to discounters,” said Eddie Correia, counsel for the antitrust subcommittee. “This decision legalizes the high-price retailer moving to get rid of the pesky discounter.”

Robert Verdisco, vice president of governmental affairs for the International Mass Retail Assn., a trade group representing discount retailers in the more than $100-billion industry, called the court’s decision “terrible.”

“Our feeling is this kind of decision will hurt the consumer and will hurt the discount retailers,” Verdisco said. “I think, ultimately, we might see a rise in prices to the consumers.”

In dissent, Justice John Paul Stevens argued that the case presented a “simple and naked” violation of the antitrust laws because a high-price dealer had conspired with a manufacturer to eliminate the competition from a discounter. He was joined by Justice Byron R. White (BEC vs. Sharp, 85-1910).