High Court May Change Stance on Price Ceilings

Can a manufacturer set a retail price ceiling for its product, whether it is a fast-food hamburger, a six-pack of beer, a newspaper or an automobile?

For nearly 30 years, the answer has been no. Retailers and distributors have been free to set their own prices, and manufacturers have been barred from enforcing ceilings on prices.

But the U.S. Supreme Court justices signaled during an oral argument Tuesday that they are ready to overturn that rule. Why, they asked, should the law prevent consumers from receiving lower prices?

“The antitrust law isn’t there to protect merchants,” said Justice Antonin Scalia. “It’s there to protect consumers.”

A decision on the issue, due early next year, could shake up the relationship between manufacturers and retailers in scores of industries. Federal Trade Commission lawyers, who are urging the court to allow retail price ceilings, say that both manufacturers and consumers would benefit.

Retailers, who are fighting the move, say that competition already limits their price markups.

In the case heard by the court Tuesday, a Chicago-area service station owner is battling an oil company over how much he can charge for a gallon of premium gasoline.

But this nickel-and-dime dispute has illuminated a profound shift in thinking about antitrust laws and price fixing.

In the 1960s, when the enthusiasm for antitrust enforcement reached a peak, the high court favored strict, across-the-board rules. In 1968, the court extended its ban on price fixing to include “maximum-price fixing.”

However, legal scholars and economists have widely criticized that decision. Last year, Chief Judge Richard Posner of the U.S. appeals court in Chicago, who is one of the brightest lights in the federal judiciary and a part-time professor of antitrust law at the University of Chicago Law School, derided the 1968 precedent as “increasingly wobbly,” illogical and “moth-eaten.”

Nonetheless, he upheld the rule in the Illinois service station case. The 1968 decision “has not been expressly overruled, and we are to leave the overruling to the [Supreme] Court itself,” Posner wrote.

Knowing an invitation when it sees one, the high court took up the issue to start the new term.

It has received a thick file of briefs from business groups ranging from auto manufacturers to doughnut makers. They argue that they could do more business and give consumers lower prices if they could enforce price ceilings on distributors and retailers.

For example, car makers say that although they can advertise a $1,000 discount on their end-of-the-season models, they cannot force dealers to pass along price cuts to buyers.

Familiar franchisers such as Burger King, Baskin-Robbins, Dunkin’ Donuts and Wendy’s told the court that they want to prevent independent store owners from charging higher prices for their products.

The 1968 case arose in the newspaper industry.

Like most papers, the St. Louis Globe-Democrat used independent dealers to sell its newspaper. It dropped a dealer in the mid-1960s when he decided to charge an extra 10 cents for the paper in his neighborhood. The dealer sued, alleging that he was a victim of illegal price fixing. He won in the Supreme Court in Albrecht vs. Herald Co., the now shaky precedent.

In a brief filed in the current case on behalf of several newspaper companies (not including the Los Angeles Times or Times Mirror Co.), lawyers for the newspaper industry point out that a paper and its distributors have contrary aims.

Newspapers, which earn most of their money through advertising, want to sell as many copies as possible. A lower price helps. By contrast, distributors make money from the sale of the papers and therefore would prefer high prices.

Under the 1968 decision, a newspaper cannot force independent distributors or retailers to charge the set price. That is why newsstands in airports, for example, frequently charge more than the listed price for a newspaper.

Justice Stephen G. Breyer, who like Scalia has taken a special interest in antitrust law, seemed equally certain that the court should abandon its 1968 precedent. By enforcing the rule, “you are requiring consumers to pay higher prices for gasoline,” he told one lawyer.

The acting chief of the Justice Department’s antitrust division also urged the court to permit retail price ceilings.

“This court has an obligation to change the law,” Assistant Atty. Gen. Joel I. Klein told the justices. The current rule “strips manufacturers of a mechanism that is pro-competitive.”