High Court Approves Retail Price Ceilings

In a decision that could lead to lower prices for everything from hamburgers and gasoline to cars and computers, the Supreme Court ruled Tuesday that manufacturers and wholesalers can set retail price ceilings for their products.

In its 9-0 ruling, the court overturned a long-standing doctrine that gave retailers the freedom to charge as much as the market would bear.

Until now, advertisements promoting discounts, whether a 99-cent hamburger or a $1,000 auto price break, had to include the warning “at participating stores only” or “at participating dealerships.”

That was required because independent sellers could not be forced to charge the lower price. This “maximum price fixing” had been deemed illegal under antitrust laws in a 1968 high court ruling, Albrecht vs. Herald Company.

Economists and antitrust experts often had derided that decision as mistaken.

Certainly price floors--or “minimum price fixing,” which is banned by law--make sense, they said. Price floors hurt consumers because they prevent retailers from offering discounts.

By contrast, banning price ceilings hurts both consumers, who pay more, and manufacturers, who often sell less, economists said.

On Tuesday, the justices admitted that the 1968 precedent was in error and threw it out.

“We conclude that Albrecht should be overruled,” Justice Sandra Day O’Connor announced for the court. A “considerable body of scholarship” has shown that not all price fixing is harmful, she said. “Low prices benefit consumers regardless of how they are set and . . . they do not threaten competition.”

Tuesday’s decision has the potential to reshape the arrangements between manufacturers and retailers in an array of industries, lawyers said. Now, franchise systems, product manufacturers and wholesalers can negotiate new agreements with retailers that include price ceilings.

“It will take a while for this to work its way through the distribution chain in some industries, but I think franchisers are likely to use this decision very quickly,” said Steven B. Feirman, a Washington lawyer who represented a coalition of familiar companies including Burger King, Wendy’s, Motel 6, General Motors and Pillsbury.

“Franchisers have been very upset at their inability to deliver uniform low prices. It upsets consumers,” he said. “This permits the companies to bring the renegade franchisers into line.”

Officials of the American Petroleum Institute, the American Automobile Manufacturers Assn. and the National Manufacturers Assn. were among those applauding the ruling.

“This is good news for manufacturers and consumers. It frees an auto manufacturer to say to a dealer, ‘Don’t charge any more than X price for a particular model,’ ” said Roy T. Englert Jr., a lawyer who filed a friend-of-the-court brief for the auto manufacturers. A fixed lower price could help the company sell more cars, he said.

The Federal Trade Commission and the Clinton administration had urged the court to end its ban on fixed-price ceilings. The old rule “strips manufacturers of a mechanism that is pro-competitive,” Assistant Atty. Gen. Joel I. Klein, chief of the Justice Department’s antitrust division, told the justices during arguments last month.

Not surprisingly, retailers opposed the change. They said Tuesday’s ruling will allow big companies to squeeze profit margins for small distributors and independent sellers. Because retailers operate in a competitive economy, they have not been able to gouge consumers by marking up their prices, they maintained.

Janet Speelman, executive director of the Automobile Trade Organizations of California, said that the decision will be disastrous for gasoline dealers.

“Under the guise of protecting consumers, it will allow oil companies to eliminate dealers, one at a time, through economic eviction,” said Speelman, whose group represent’s the state’s gasoline dealers.

She said the decision will allow refiners to squeeze dealer profits by raising wholesale prices while lowering retail prices.

An attorney for the 10,000-member Service Station Dealers of America said he doubts the decision will help consumers.

“Prices at the retail level are already very, very competitive,” said attorney Peter Gunst. “I do not believe the decision will have any effect on retail prices.”

The case before the court involved a dispute between a Chicago-area service station owner and a gasoline wholesaler. State Oil Co., the wholesaler, tried to impose price limits for its regular and premium gasoline but the service station owner, Barkat Khan, resisted. He filed suit contending that the arrangement violated antitrust laws.

Khan won in the U.S. Court of Appeals in Chicago, even though Chief Judge Richard Posner wrote an opinion mocking the high court’s 1968 precedent as “unsound when decided,” “moth-eaten” by subsequent scholarship and “increasingly wobbly” in its application. Nonetheless, it is the law until the Supreme Court decides otherwise, said Posner, an antitrust expert.

Ruling in the case (State Oil vs. Khan, 96-871), the Supreme Court took Posner’s advice and overruled its precedent.

“Chief Judge Posner aptly described Albrecht’s infirmities,” O’Connor wrote. Though the court is always cautious about reversing a precedent, she said, the “great weight of scholarly criticism” had convinced the justices that the legal rule prohibiting the setting of maximum retail prices was causing more harm than good.

Tuesday’s decision stops short of saying that manufacturers are entirely free to fix maximum prices, the high court noted.

If a retailer can prove in court that a particular price agreement amounts to an “unreasonable restraint on trade” that hurts consumers, the agreement could still be deemed to violate the antitrust laws, O’Connor said. But such cases are very hard to prove and unlikely to occur often, lawyers said.

In practice, manufacturers and wholesalers will have to work with retailers to establish price levels, lawyers said.

“The trick will be finding the right maximum price, whether you are talking about Nike shoes or supermarket items. You don’t want to set prices too low. That will drive away your retailers. But you don’t want to set them too high either, because that hurts your consumers,” said Mark Davidson, a Washington lawyer for the National Manufacturers Assn.

The case illustrates how manufacturers and retailers often have different interests.

The 1968 case arose in the newspaper industry. Typically, publishers want to set low prices to increase circulation. They make money through advertising.

By contrast, independent distributors earn money from the sale of the paper and would prefer higher prices. At airport newsstands, for example, retailers often charge more for papers than the listed price.

The old ruling in the Albrecht case gave the sellers the freedom to set their own prices. Tuesday’s ruling will allow newspaper companies to insist on lower prices.

Times staff writer Denise Gellene in Los Angeles contributed to this story.