Do these guys benefit more than Marvel from Leegin?
As has been widely reported, last week marked the close of the current session of the United States Supreme Court, which was marked by important decisions addressing abortion, free speech, campaign finance, employee rights under employment discrimination statutes, and racial desegregation in urban school systems. However, there are a broad range of decisions made by the Court which are less provocative, but have a powerful impact on how we all live our lives and conduct our business. One of those decisions could have a significant effect on the comic book industry, and on many industries that are experiencing turbulence due to the growing power of online commerce. In Leegin, the Court reversed a ninety year old case, holding that manufacturers are no longer necessarily barred from entering into retail price maintenance agreements with distributors and retailers.
Retail Price Maintenance agreements, made between a manufacturer and retailer (or with a distributor) set a minimum price for the a product (or a line of products) that a retailer can charge to the consumer. If a manufacturer successfully introduced a set of these agreements to all of its retailers (or distributors), it could eliminate intrabrand competition (i.e. between retailers) and effectively cripple discounters (Amazon, WalMart, Sam’s Club, etc.). These agreements have been illegal for over ninety years, based on the Supreme Court’s interpretation of anti-trust law.
Generally speaking, antitrust law, as developed in statute (The Sherman Act) and litigation is based on the principle that contracts, combinations or business practices that restrain free trade or commerce in the United States are illegal. Although this seems relatively straightforward, determining what restraints are reasonable is one that has vexed the court in the last century. In order to resolve the issue, the Court has adopted a framework that simplifies the process for lower federal courts. The Court decided that one set of business practices was inherently unreasonable, and explicitly designed to reduce competition and lower output. This is the ‘per se’ category of violations. Other practices may be unreasonable based on the circumstances, and are to be evaluated using the ‘Rule of Reason’ approach. This approach allows both parties to argue the merits (or lack thereof) of the practice. Resale price maintenance agreements were deemed per se illegal in 1911, in the famous ‘Dr. Miles’ case, because it served to eliminate competition in the retail market, raise prices for consumers, and discourage efficient business practices.
Over the decades following this decision, many economists (especially from the University of Chicago), free-market legal scholars, and companies have united in opposition to the Court’s position, particularly as the American economy matured and the nature of competition became more complex. There was a growing recognition that price competition was not the only measure of competition and that vertically imposed restraints sometimes had pro-competitive outcomes (as compared to horizontal restraints), particularly the encouragement of inter-brand competition. There was also concern, from the traditional retailers, about the growth of discount chains, which aggressively took advantage of the ban on RPM, and engaged in business practices that made it difficult for the retailers to compete. One of the arguments centered around the “free-rider” problem, which posits that retailers with higher prices provide more P.O.S. (point of sale) services, including staff training (to effectively sell the product), displays, or advice and demonstration of complex products. The problem is that the consumer, now informed and motivated to purchase the product, will go to the discount store to purchase the product at a cheaper price. So, the retailer loses money b/c of the free-riding store, and will be discouraged from spending $ on costly P.O.S., which hurts the manufacturer in its competition against other manufacturers.
In this case, the Court held that retail price maintenance agreements imposed by a manufacturer (in a vertical agreement) should be evaulated using a “rule of reason” standard rather than a “per se” standard. The rule of reason standard allows a court to evaluate the agreements on a case to case basis, without any presumption of invalidity. This review involves an evaluation of the marketplace and the relative market power of the actors to determine whether the restraint is unreasonable. For all practical purposes, this indicates that RPM agreements may be legal if it does not have a deletrious effect on competition. In the case before the Court, the agreement was voluntary, the manufacturer provided incentives to the retailer in exchange for the agreement, and the RPM was done to (1) protect the reputation of the manufacturer; and (2) ensure that the retailer had a margin sufficiently large to adequately promote the product.
Why does this matter to the comics industry? According to two blogs, one maintained by Icarus Publishing, and “Comics Worth Reading“, it does, and is a potential tool to blunt the growing influence of online retailers. With all due respect to both sites, that view relies on an overly broad interpretation of the case.
Retailers in the comic industry (LCS) are facing a threat similar to the paradigmatic traditional retailer. Once dominant in the market, they are facing competition from online retailers (i.e. Amazon), especially in the market for books from the two largest domestic publishers in the super hero genre, DC and Marvel. The discounts that Amazon can provide for comics, especially for trade paperbacks has threatened the profitability of most small retail comic book stores, and contributed towards the decline in the number of non-chain stores. This threat is familiar to anyone who has followed the woes of the brick and mortar book retailers. Some bloggers have theorized that Leegin can offer a solution for retailers under these circumstances. This may be true, but it is highly unlikely.
The situation addressed in Leegin was a unilateral action by a manufacturer to establish its products in the marketplace by guiding retailer behavior. Setting minimum prices ensured that retailers had margins high enough to adequately promote the product. Although it can be argued that comic stores provide these services with (1) “pull and hold” services, as described here: (2) a knowledgeable staff that can recommend new books to interested customers; and (3) posters and other paraphenilia, I don’t think that most stores provide them in a competent enough manner to convince a major publisher to protect them. Customers have complained about the inadequacies of staff at comic book stores for decades, and employees are commonly blamed for dissuading rather than encouraging business. Although Amazon does not provide “pull and hold” services, I think that the amount of revenue that it provides to publishers more than compensates for this (not to mention the fact that “pull and hold” primarily benefits retailers, not any individual publisher).
The blog maintained by Icarus Publishing has argued that “if a certain group of retailers are able to convince publishers that Amazonâ€™s discounting is unfair and harmful to the market, thenâ€¦â€¦”. In reality, this would still be deemed illegal. Leegin reflects a judicial trend of leniency towards vertical price restraints, not a permissive attitude towards horizontal cartels. Justice Kennedy’s opinion specifically identifies “[a] horizontal cartel among competing … retailers that reduces competition in order to increase price” (551 U.S. 13) as a practice that remains unlawful. Any publisher that allows itself to be so convinced risks prosecution. Furthermore, even if a publisher independently chose to engage in this practice, it would still have to present the argument that it is procompetitive.
What publisher would be most interested in doing this? Probably independent publishers that may want to “induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products known to the consumer (551 U.S. 11). As for major publishers, it may be attractive, but not for the explicit purpose of curbing Amazon’s growth. It could be an incentive to coerce retailers (the bad ones) into providing the kinds of ancillary services that could actually serve to support the industry and expand the consumer base.
Note: All quotes from the Leegin opinion are from the preliminary version, available here. It is subject to formal revision (for typographical and other formal errors) prior to publication.