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INTERNET/ANTI-TRUST - Internet Price-Fixing Faces A Popular Uprising

Date: 
April 29, 2010

Lawrence R. Lonergan

In the last decade, consumers have fueled the exponential growth of the Internet distribution channel by shopping online for goods from jet planes to water faucets. Internet-based business operations have exploited the many advantages for the consumer over the traditional “bricks and mortar” distribution model represented by the “Big Box” stores that have little or no Internet presence, but maintain expansive and expensive showrooms to promote their products.

As the on-line merchants have gradually siphoned business away from the more traditional distributors, a conflict has arisen as the two camps vie for customers. Product manufacturers have sided with their established
representatives, and have enacted policies that maintain their profit margins at the expense of consumers, who are denied the clear benefits of the Internet distribution channel

 

The Internet Boom

According to The State of Retailing Online 2008, the 11th annual Shop.org study conducted by Forrester Research, Inc. of 125 retailers, online retail will continue to be a bright spot in the industry with retail sales rising 17 percent in 2008 to $204 billion. The main motivation online shoppers cite is convenience and pricing advantages, although there are plenty of other attractions to shopping online, where customers can

  • Save time by not going to a store
  • Shop when stores are closed
  • Avoid the holiday crowds
  • Find better prices
  • Find more products easily
  • Find products not available in stores
  • Easily compare prices
  • Have gifts sent directly to recipient
  • Avoid wrapping gifts
  • Purchase from wish list
  • Earn loyalty points

When purchasing on the Internet, in just a few clicks, consumers can identify the cheapest retail price for available items very quickly. If an efficient on-line Internet store can offer reduced prices and provide bountiful conveniences, consumers will benefit. Yet, many of the big retail chains resist this competition and force manufacturers to set minimum pricing standards, thereby preventing efficient Internet retailers from selling products more cheaply.

 

Despite the growing prevalence of e-commerce, many manufacturers have shied away from using the Internet as a primary distribution channel for their products. Many manufacturers have disallowed their authorized distributors from selling to Internet resellers, all of whom are wrongly deemed unsuitable or unable to handle various product lines. This is all pure pretext, however. The true reason for the manufacturers’ position is the illegal preservation of the artificial minimum price they set for the resale of their products As a result, consumers are deprived of the attractions and conveniences of purchasing products on line.

 

The Backlash

Not content to see their substantial market share lost to Internet resellers, traditional “showroom” distributors have discretely pressured manufacturers into artificially preserving the substantial margins enjoyed by the bricks-and-mortar stores. The key strategy employed by the distributors to keep the profits rolling in is to sell only merchandise from manufacturers who employ a Minimum Price Policy, a blunt instrument manufacturers wield to prohibit price discounting by so-called “upstart” Internet retailers. The result is that prices are fixed at certain minimum levels, and consumers are forced to pay higher prices for goods.

Price fixing occurs when manufacturers and/or retailers dictate the price at which a product can be sold -- as opposed to allowing companies to sell their products at the lowest price the market will bear. This adversely affects consumers by raising the prices of items they need. So, if the price for a light fixture is set at $200, then, no matter what store you go to, even on the Internet, the price will be the same.

The federal antitrust laws, and cases interpreting those laws, for nearly a century declared such price-fixing policies automatically (per se) illegal, given the obvious effect of keeping consumer prices artificially high. In 2007, however, the United States Supreme Court declared in Leegin Creative Leather Products v PSKS, Inc., 571 U.S. 877 (2007), a very close split decision, that price fixing policies are not necessarily bad for consumers. Using tortured prose and convoluted reasoning, the conservative court declared that victims of price fixing schemes would need to show other “anti-competitive” effects of the schemes, as though the higher prices consumers pay for goods and the resultant lack of discounted goods on the Internet were insufficient to show that competition was adversely affected.

The Supreme Court decision has sided with the Big-Box retailers and manufacturers against the fledgling Internet “e-tailers” and consumers in effectively supporting price-fixing policies. These policies are patently unfair to consumers and Internet retailers alike, and are likely illegal under the laws of several states, including New York and Maryland.

For the Supreme Court, and now for the manufacturers, it does not matter that, because of the relatively low overhead and maintenance associated with on-line retailing, and because many Internet retailers purchase a high volume of products from distributors, e-tailers are able to sell genuine manufacturer products to consumers at sharp discounts. Neither does it matter that Internet resellers provide customer service and assistance to purchasers of the products they sell and employ industry professionals who possess great technical proficiency and who can communicate with customers who experience problems with products.

These price-fixing policies engulf all Internet and e-commerce resellers, an entire global market. By refusing to deal with Internet resellers, penalizing wayward authorized distributors and policing infractions of their price-fixing policies, manufacturers unlawfully restrict competition among resellers to the lasting detriment of consumers.

The Future of Internet Price Restrictions

Recently, legislation has been introduced to reinstitute the per se restriction on price fixing. The “Discount Pricing Consumer Protection Act” (H.R. 3190 / S. 148) is designed specifically to benefit internet discounters. This legislation will allow the e-commerce and bricks-and-mortar distribution chains to openly compete and vie for consumer dollars. This competition will benefit manufacturers, who will see larger numbers of their products sold through a more efficient distribution channel, and consumers will benefit from the lower prices and multitude of benefits available to the internet shopper.

The Internet distribution business model is the wave of the future, whether the bricks-and-mortar distributors like it or not. Their existence is threatened, so they have forced manufacturers to institute artificial price guidelines to stem the tide. These policies effectively limit the amount of product a manufacturer can sell, thereby reducing profits -- so the whole policy is, as one court has put it, "anomalous" or counter-intuitive to a profit-based business model. It is clear that the exclusive distributors have put the squeeze on the manufacturers to limit or cease selling to the Internet resellers -- otherwise, the price-fixing policies would make no sense at all.

No one -- not the Supreme Court, not the manufacturers, not the bricks-and-mortar distributors -- will impede the natural dialectic of economic progress. People want an easy way to shop and buy goods, and the Internet is the way to go. There are Internet resellers who are bucking the system and trying to challenge the price-fixing policies. One reseller, Homecenter.com, has been at the forefront of this uphill battle, and has been trying to clear a path through the price-fixing morass for a few years now. It has not been easy, especially with the road block thrown up by the Supreme Court’s decision in the Leegin matter. Nevertheless, with the Discount Consumer Protection Act and challenges based on state law, it appears the days of paying artificially high prices for goods readily available on the Internet could soon be over.

This article is intended to provide information of
general interest to the public and is not intended to offer legal
advice about specific situations or problems. Mr. Lonergan and his firm,
Woods & Lonergan, do not intend to create an attorney-client
relationship by offering this information, and anyone's review of the
information shall not be deemed to create such a relationship. You
should consult a lawyer if you have legal matter requiring attention. © Lawrence Lonergan and Woods & Lonergan.

Mr. Lonergan is an attorney with Woods & Lonergan, a commercial litigation firm in New York City and can be reached via email at: llonergan@wlesq.com