[Senate Hearing 110-342]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 110-342

 
                  THE LEEGIN DECISION: THE END OF THE 
              CONSUMER DISCOUNTS OR GOOD ANTITRUST POLICY?

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 31, 2007

                               __________

                          Serial No. J-110-49

                               __________

         Printed for the use of the Committee on the Judiciary





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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
            Bruce A. Cohen, Chief Counsel and Staff Director
      Michael O'Neill, Republican Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont            ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
                     Jeffrey Miller, Chief Counsel
                Peter Levitas, Republican Chief Counsel



                            C O N T E N T S


                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     2
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     1
    prepared statement...........................................    72

                               WITNESSES

Bolerjack, Stephen, Attorney at Law, Dykema Gossett PLLC, 
  Detroit, Michigan..............................................    10
Harbour, Pamela Jones, Commissioner, Federal Trade Commission, 
  Washington, D.C................................................     5
McDavid, Janet L., Attorney at Law, Hogan & Hatson, Washington, 
  D.C............................................................    11
Pitofsky, Robert, Sheehy Professor of Antitrust Law and 
  Regulation, Georgetown University Law School, Washington, D.C..     6
Syms, Marcy, Chief Executive Officer, SYMS Corp, Secacus, New 
  Jersey.........................................................     8

                         QUESTIONS AND ANSWERS

Responses of Stephen Bolerjack to questions submitted by Senator 
  Kohl...........................................................    25
Responses of Pamela Jones Harbour to questions submitted by 
  Senator Kohl...................................................    29
Responses of Janet L. McDavid to questions submitted by Senator 
  Kohl...........................................................    32
Responses of Robert Pitofsky to questions submitted by Senator 
  Kohl...........................................................    38
Responses of Marcy Syms to questions submitted by Senator Kohl...    40

                       SUBMISSIONS FOR THE RECORD

Bolerjack, Stephen, Attorney at Law, Dykema Gossett PLLC, 
  Detroit, Michigan, statement...................................    41
Harbour, Pamela Jones, Commissioner, Federal Trade Commission, 
  Washington, D.C., statement and attachment.....................    46
McDavid, Janet L., Attorney at Law, Hogan & Hatson, Washington, 
  D.C., statement................................................    74
Pitofsky, Robert, Sheehy Professor of Antitrust Law and 
  Regulation, Georgetown University Law School, Washington, D.C., 
  statement and attachment.......................................    91
Syms, Marcy, Chief Executive Officer, SYMS Corp, Secacus, New 
  Jersey, statement..............................................    98


    THE LEEGIN DECISION: THE END OF THE CONSUMER DISCOUNTS OR GOOD 
                           ANTITRUST POLICY?

                              ----------                              


                         TUESDAY, JULY 31, 2007

                                       U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                                                    Rights,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 10:01 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl and Hatch.

 OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good morning to one and all. We welcome you 
here today. This hearing will be examining an issue with 
profound implications for the prices consumers pay for 
everything from clothing to electronics, and to everyone who 
likes to get a bargain when shopping. Last month, in the Leegin 
decision, a narrow 5-4 Supreme Court majority overturned a 
century-old ban on a manufacturer setting a minimum price below 
which a retailer cannot sell the manufacturer's product.
    Many fear that allowing manufacturers to set minimum retail 
prices will threaten the very existence of discounting and 
discount stores, and lead to higher prices for consumers. For 
nearly a century the rule against vertical price fixing 
permitted discounters to sell goods at the most competitive 
price, and many credit this rule with the rise of today's low-
price, discount retail giants--like Target, Best Buy, Wal-Mart, 
and the Internet site Amazon, which offer consumers a wide 
array of highly desired products at discount prices.
    From my own personal experience in business, I know of the 
dangers of permitting vertical price fixing. My family started 
the Kohl's department stores in 1962, and I worked there for 
many years before we sold the stores in the 1980s. On several 
occasions, we lost lines of merchandise because we tried to 
sell at prices lower than what the manufacturer and our rival 
retailers wanted. For example, when we started Kohl's and were 
just a small competitor to the established retail giants, we 
had serious difficulties obtaining the leading brand name 
jeans. The traditional department stores demanded that the 
manufacturer not sell to us unless we would agree to maintain a 
certain minimum price. Because they did not want to lose the 
business of their biggest customers, that jeans manufacturer 
acquiesced in the demands of the department stores--at least 
until our lawyers told them that they were violating the rule 
against vertical price fixing.
    So I know firsthand the dangers to competition and 
discounting of permitting the practice of vertical price 
fixing. But we do not need to rely on my own experience. For 
nearly 40 years, until 1975 when Congress passed the Consumer 
Goods Pricing Act, Federal law permitted States to enact so-
called fair trade laws legalizing vertical price fixing. 
Studies the Department of Justice conducted in the late 1960s 
indicated that prices were between 18 to 27 percent higher in 
the States that allowed vertical price fixing than the States 
that had not passed such fair trade laws, costing consumers at 
least $2.1 billion per year at that time.
    The likely harm to consumers if vertical price fixing were 
permitted is even greater today. In his dissenting opinion in 
the Leegin case, Justice Breyer estimated that if only 10 
percent of manufacturers engaged in vertical price fixing, then 
the volume of commerce affected today would be $300 billion, 
translating into retail bills that would average $750 to $1,000 
dollars higher for the average family of four every year.
    I am particularly worried about the effect of this new rule 
permitting minimum vertical price fixing on the next generation 
of discount retailers, the next Sam Walton. If new discount 
retailers can be prevented from selling products at a discount 
at the behest of an established retailer worried about the 
competition, we may very well imperil an essential element of 
retail competition that is so beneficial to consumers.
    In the last few decades, millions of consumers have 
benefited from an explosion of retail competition from new 
large discounters in virtually every product, from clothing to 
electronics to groceries, in both ``big box'' stores and on the 
Internet. We will need to carefully examine whether the Supreme 
Court's abrupt change to the settled antitrust rule forbidding 
vertical price fixing will threaten today's vibrant competitive 
retail marketplace and the pocketbooks of consumers, and we 
need to consider whether legislation will be necessary to 
protect the continued existence of consumer discounts.
    [The prepared statement of Senator Kohl appears as a 
submission for the record.]
    So we look forward to the testimony of our distinguished 
panel of witness on this important topic, and I now turn to my 
esteemed colleague, Senator Orrin Hatch, from the State of 
Utah.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE 
                            OF UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. We welcome 
the witnesses here today and, of course, those who are in the 
audience.
    I want to thank you for holding this hearing today. As we 
all know, we are here to discuss the Supreme Court's recent 
decision in Leegin Creative Leather Products v. PSKS, 
Inc...Kay's Kloset.
    But why is that important? Why should a Senate Subcommittee 
turn its attention to a ruling that states minimum resale price 
maintenance agreements, or RPMs, should be judged by the rule 
of reason rather than being per se illegal, as they have been 
for nearly 100 years?
    Simply stated, the seeming dryness of this terminology does 
not reflect the importance of the Leegin decision--a decision 
which will alter the dynamic by which manufacturers enter into 
agreements with retailers and the way in which retailers sell 
their goods to consumers.
    Mr. Chairman, a bit of background on this issue I believe 
is necessary to fully understand the importance of this 
decision. Nearly 100 years ago, the Supreme Court ruled in Dr. 
Miles Medical Co. v. John D. Park & Sons that is was per se 
illegal, ``under Section 1 of the Sherman Act for a 
manufacturer and its distributor to agree on the minimum price 
the distributor can charge for the manufacturer's goods.'' In 
other words, the RPMs were against the law.
    However, this all came to an end last month, when the Court 
in Leegin discarded the per se rule for a test under the rule 
of reason. Under this new decision, RPMs are permitted as long 
as they do not constituted an unreasonable restraint on trade. 
Specifically, the Court has held under the rule of reason ``the 
fact finder weighs all of the circumstances of a case in 
deciding whether a restrictive practice should be prohibited as 
imposing an unreasonable restraint on competition. Appropriate 
factors to take into account include specific information about 
the relevant businesses and restraint's history, nature, and 
effect.''
    Now, why did the Court change its mind? The majority argued 
that the RPMs can stimulate ``interbrand competition--the 
competition among manufacturers selling different brands of the 
type of product--by reducing intrabrand competition--the 
competition among the retailers selling the same brand.'' The 
Court goes on to further justify this decision by stating, as 
they held in Khan, the ``primary purpose of the antitrust laws 
is to protect [interbrand] competition.''
    So what is the effect? One of the most important 
consequences, according to the Court, will be felt in an 
activity called ``free-riding.'' Free-riding can be described 
as when a customer takes advantage of the services and 
information provided by the full-service retailer and then 
makes the actual purchase of the product, for a lesser price, 
at a discount retailer. The Court argues that by permitting 
RPMs, retailers will have less of an ability to compete on 
price, thereby diminishing the opportunities for free-riding to 
occur. It is surmised that retailers will then focus their 
competitive energies on providing better services and shopping 
environments for the consumer in order to distinguish 
themselves in the intrabrand competition.
    Clearly, the Court in Leegin is favoring the manufacturer 
over the retailer, especially the discount retailer. Not 
surprisingly, discount retailers argue that this decision will 
have an adverse effect on their businesses. Specifically, for 
the first time in 100 years, the manufacturer can enter into a 
contract with a retailer that prohibits the retailer from 
selling below a certain price point. Obviously, if a discount 
retailer does not offer a significant advantage in price, 
consumers may very well reconsider where they make their future 
purchases.
    Despite these advantages that the Court confers on the 
manufacturer, a question still persists. Though most economists 
argue in favor of the adoption of the rule of reason for 
determining the permissibility of specific RPMs, does the 
positive effect on the manufacturer outweigh the negative 
effect on the discount retailer?
    That, Mr. Chairman, is one of the central questions that I 
hope that we are able to answer today, and I look forward to 
exploring that topic with our witnesses. We have an excellent 
panel today, and I look forward to listening to all of you.
    Thank you, Mr. Chairman.
    Senator Kohl. Thank you, Senator Hatch.
    Will the witnesses please rise to be sworn in? Do you 
affirm that the testimony you are about to give before the 
Committee will be the truth, the whole truth, and nothing but 
the truth, so help you God?
    Ms. Harbour. I do.
    Mr. Pitofsky. I do.
    Ms. Syms. I do.
    Mr. Bolerjack. I do.
    Ms. McDavid. I do.
    Chairman Kohl. Thank you so much.
    Our first witness today will be Pamela Jones Harbour. 
Commissioner Harbour is currently a Commissioner at the FTC. 
Prior to joining the Commission, Ms. Harbour served as a 
partner at Kaye Scholer, where she handled antitrust matters. 
Prior to joining Kaye Scholer, Ms. Harbour was New York State 
Deputy Attorney General, during which time she argued before 
the U.S. Supreme Court in the landmark price-fixing case State 
Oil v. Khan.
    Also testifying today will be Robert Pitofsky. Mr. Pitofsky 
is the Sheehy Professor of Trade Regulation Law at Georgetown 
University Law Center and also currently serves as counsel for 
Arnold & Porter in Washington, D.C. Mr. Pitofsky was Chairman 
of the FTC from 1995 to 2001, where he also served as a 
Commissioner from 1978 to 1981, and as Director of the Bureau 
of Consumer Protection from 1970 to 1973. He has co-authored 
many books and articles on antitrust and trade regulation.
    Our next witness will be Marcy Syms. Ms. Syms is Chief 
Executive Officer of Syms Corporation, a chain of off-price 
apparel stores. She was one of the first companies to offer 
designer and name brand clothing at discounted prices. Ms. Syms 
is a founding member of the Security Syms School of Business at 
Yeshiva University.
    Also testifying today will be Stephen Bolerjack. Mr. 
Bolerjack is counsel for Dykema in Detroit, Michigan, 
practicing in the cases of antitrust and trade regulation. 
Prior to joining Dykema, Mr. Bolerjack worked for the Ford 
Motor Company, providing antitrust advice on Ford's 
acquisitions and divestitures. He currently serves as Chairman 
of the Competition Task Force of the National Association of 
Manufacturers.
    The final witness will be Janet McDavid. Ms. McDavid is a 
partner at Hogan & Hartson in Washington, D.C. She focuses on 
antitrust and trade regulation, with particular emphasis on 
Government investigations. Ms. McDavid has authored or co-
authored many books and articles and is widely recognized as a 
leading authority on antitrust law.
    We welcome you all here today, and we will take your 
testimony. Statements for the hearing have also been submitted 
by the American Antitrust Institute, Tyler Baker, and Kenneth 
Elzinga. Without objection, these shall be made part of the 
record.
    Ms. Harbour, we would love to hear your testimony.

STATEMENT OF PAMELA JONES HARBOUR, COMMISSIONER, FEDERAL TRADE 
                  COMMISSION, WASHINGTON, D.C.

    Ms. Harbour. Good morning, Chairman Kohl, Senator Hatch. I 
appreciate the opportunity to offer my personal views on the 
proper legal treatment of minimum vertical price fixing. As you 
may know, based on my ``Open Letter'' to the Supreme Court in 
the Leegin case, I have strong opinions on this subject, and I 
would have preferred it if a majority of the Court had adopted 
Justice Breyer's cogent dissent instead.
    I am a Commissioner of the Federal Trade Commission. But 
let me be very clear: the views I express today are entirely my 
own.
    I have submitted a copy of my Open Letter along with my 
written remarks, and I will not rehash the Leegin decision 
today. Instead, I want to focus my comments on a fundamental 
issue of antitrust policy, and that is, what should consumers 
expect from the American antitrust laws and, consequently, the 
American retailing system?
    The Leegin opinion relies on at least two implicit 
assumptions: first, that manufacturers know what is best for 
consumers--even better than retailers, or consumers themselves; 
and, second, that retail competition is not important to the 
American economy or to consumers.
    But these assumptions do not match the reality of the 
American marketplace. Retailers compete by trying to predict 
what consumers want and at what prices. Many retailers promote 
efficiencies, which are passed along in the form of lower 
prices. Other retailers may charge higher prices, but offer 
superior service, higher-quality goods or other amenities. 
Consumers respond to this price and non-price competition by 
voting with their wallets, depending on their preferred mix of 
products, services, and quality at a given price.
    This is the essence of market-based competition. It is 
based on consumer choice. And many--if not most--consumers 
respond strongly to aggressive price competition because we all 
prefer a bargain. The rise of mass merchandisers like Wal-Mart, 
Home Depot, and Burlington Coat Factory illustrates my point.
    But let's think about the post-Leegin world. As a general 
matter of antitrust law, a person who can 
``profitably...maintain prices above a competitive level for a 
significant period of time'' is said to possess actionable 
market power. But the Leegin majority articulates a more 
lenient rule-of-reason standard for minimum vertical price 
fixing. To quote Justice Kennedy's version of the rule, he said 
``pricing effects'' are not enough to establish market power; 
the plaintiff must make a ``further showing of anticompetitive 
conduct.''
    In my mind, this is a virtual euphemism for per se legality 
because it will be extremely difficult for any plaintiff to 
make out a case. Therefore, absent congressional intent or 
action, I envision a post-Leegin world where there is no 
effective check on minimum vertical price fixing.
    And what will this look like to consumers? Well, if you 
were to walk through a mass merchandiser's store, you would see 
thousands of items produced by hundreds of manufacturers. Each 
of these manufacturers could require retailers to enter express 
agreements along the lines of, ``you must sell my products at 
these prices.'' Manufacturers also would be able to dictate a 
variety of other aspects of retail sale, such as shelf 
location, display spacing, and presentation.
    Intrabrand and interbrand competition may continue to 
exist, but only to the extent it benefits manufacturers, not 
consumers. In short, the American marketplace will no longer be 
driven by consumer preferences. And, in my opinion, this is 
wrong.
    My Open Letter explains that our Nation has been down the 
minimum vertical price-fixing road before. Congress enacted the 
Consumer Goods Pricing Act of 1975 to end a decades-long 
experiment of its own design. But Congress declared that 
experiment a failure, finding that minimum vertical price 
fixing harmed consumers by raising prices, decreasing 
distributional efficiencies, and deterring new entry, among 
other things. Had Congress not repealed the fair trade laws in 
1975, it is doubtful that mass merchandisers would even exist 
today.
    As Justice Breyer observed in his Leegin dissent, the 
economic arguments in favor of minimum vertical price fixing 
have not changed appreciably over time. The defendant in Leegin 
made arguments strikingly similar to the ones the Court 
rejected in the 1911 Dr. Miles case and that Congress rejected 
in 1975. There still is no body of sound empirical economic 
evidence to show that minimum vertical price fixing is, on 
balance, more likely than not to benefit consumers.
    Congress repeatedly has turned down calls for legislation 
that would allow minimum vertical price fixing on a national 
scale. There is no justification for Congress to change course. 
Yes, minimum vertical price fixing may sometimes be good for 
consumers, under some limited circumstances. But that is no 
reason to subject all American consumers to higher prices, 
which is virtually certain to be the outcome of Leegin--unless 
Congress intervenes.
    When it comes to close questions of competitive effect, 
American consumers deserve the benefit of the doubt. Therefore, 
I believe Congress should act to shift the burden of proof from 
the consumer onto the producer who imposes pricing restraints.
    In closing, I would be happy to work with the Subcommittee 
to draft statutory language if you choose to do so. Thank you.
    [The prepared statement of Ms. Harbour appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Ms. Harbour.
    Mr. Pitofsky?

STATEMENT OF ROBERT PITOFSKY, SHEEHY PROFESSOR OF ANTITRUST LAW 
 AND REGULATION, GEORGETOWN UNIVERSITY LAW SCHOOL, WASHINGTON, 
                              D.C.

    Mr. Pitofsky. Thank you, Mr. Chairman, Senator Hatch. As 
always, it is an honor to testify before this Committee.
    I agree with the suggestion that the 5-4 majority opinion 
in Leegin was wrong, and not just because it is a 95-year-old 
decision. The Court can make mistakes and rectify them later 
on. But subsequent decisions of the Court have consistently 
supported the Dr. Miles approach. Congress was aware of that 
approach and condoned it. In the past, the Court has paid 
attention to the way Congress felt about the Court's 
interpretation of the antitrust laws.
    Now, I am going to hear the argument that, well, Dr. Miles 
was the Court's statute, they have a right to change it. Of 
course, they do. But the Sherman Act is Congress's statute, and 
if Congress thinks the Sherman Act should be interpreted in a 
certain way, in the past the Court has paid attention to that. 
This majority did not want to qualify or modify Dr. Miles. It 
wanted to overrule it.
    Turning to the merits, the one thing that is clear and 
really not debatable in this entire issue is if you allow 
minimum resale price maintenance, consumers pay more. Now, the 
argument is, yes, they pay more, but they get a good deal. They 
get things in return that make it worthwhile.
    Let me make a general point and then some specific points. 
Generally, if you look at the briefs, if you look at the 
majority opinion, if you look at Janet McDavid's excellent 
presentation today, you will see that the entire case for 
overruling the per se rule is theoretical economic analysis. It 
is 95 years later, and they still have not come up with an iota 
of data, of empirical support, that free riders drive services 
out of the market, that manufacturers introduce minimum resale 
price maintenance in order to attract services. It is all 
Economics 101 theory.
    Specifically, what are the services? The one I have always 
found to be the most persuasive is where you have a new entrant 
coming into a market where there is tough competition. Maybe 
the new entrant has to guarantee the distributors some 
protection in order to get them to take on a less popular 
product. OK. But there are two answers to that. One is in our 
system we ask manufacturers to compete for dealers, not to 
charge consumers a tax to raise the price of the retailers so 
the manufacturer can attract more dealers. Second, if you 
really were troubled by that, then it is easy. Then there ought 
to be an exception for new entrants to the rule about per se 
illegality. We have exceptions for new entrants in other areas 
of per se illegality. Why not here? Why overrule the entire 
structure of distribution?
    Second, the argument is that you get a lot of services. 
Well, if a manufacturer really wants services, they know how to 
get it. If they want more advertising, they contract for it. If 
they want a better service department, they contract for it. 
They pay part of it. What they do not do is raise the minimum 
resale price in the hope that the retailer will know exactly 
what services the manufacturer wants and will introduce them 
automatically without any direction from the manufacturer.
    I looked back at the fair trade period to see which were 
the products that cost consumers $21 billion, that were fair 
traded and, therefore, a rule of reason applied: cosmetics, 
toothpaste, pet food, vitamins, hair shampoo, ammunition, blue 
jeans, men's underwear. What exactly are the services that are 
invited into the market if you raise the price of toothpaste to 
consumers? How about shampoo? Men's underwear--what are the 
services in connection with men's underwear? And besides that, 
if these products are sold in a store with 100, 500, 1,000 
products can anybody really say raising the price of one 
product changes the ambience of the store? This is a gross 
exaggeration of the problems that free riders could possibly 
create.
    Briefly, either we could stick with the per se rule--I 
think that is the right idea--or we could do what we did with 
horizontal price fixing and have what is called a ``BMI 
preliminary.'' The defendant has to explain to the court in a 
quick look why it deserves rule of reason and not per se 
treatment, and only after that will the court give rule-of-
reason treatment.
    The irony now is we treat horizontal price fixing in this 
country--everybody says that is the maximum anticompetitive 
form of behavior--more leniently than we treat vertical price 
fixing. No other country in the world does anything like that.
    By way of conclusion, one quick point. Judge Posner, a 
conservative icon and a man with a reputation for being candid 
about these issues--said the rule of reason in this area of the 
law is infeasible and unsound. He is right. It cannot work. It 
takes too long. It is too expensive. The trials go on for 2 or 
3 years. And, therefore, he said doing away with Dr. Miles is 
only the first step to where we are really going, which is per 
se legality. So that the toothpaste, hair shampoo, and men's 
underwear people can fix minimum resale prices even though 
services have nothing to do with it.
    I think that is where we are going--I think he is right--
unless Congress steps in and restores its authority to 
establish the rules with respect to discounting.
    Thank you very much.
    [The prepared statement of Mr. Pitofsky appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Professor Pitofsky.
    Ms. Marcy Syms?

 STATEMENT OF MARCY SYMS, CHIEF EXECUTIVE OFFICER, SYMS CORP, 
                      SECACUS, NEW JERSEY

    Ms. Syms. Good morning, Chairman Kohl, Ranking Member 
Hatch, and members of the Subcommittee. I am Marcy Syms, the 
Chief Executive Officer of SYMS. Thank you very much for the 
invitation to testify today to the Subcommittee. Please be 
aware that I am neither a lawyer nor an economist, and I will 
limit the scope of my testimony accordingly.
    Let me begin with some background on SYMS. SYMS is an off-
price retailer with 33 stores in 13 States that sells designer 
and brand name clothing at substantial savings to consumers. 
SYMS began in 1959 by selling garments produced by a select 
group of manufacturers that supplied it on the condition that 
it sell their garments with generic labels or remove the brand 
labels at the time of sale. As SYMS began to grow, 
manufacturers began to loosen their control over how SYMS could 
sell to its ``Educated Consumers.'' Today SYMS is able to sell 
brand name clothing with labels attached, as well as advertise 
brand names within its stores, on its website, and through 
customer mailings.
    SYMS purchases most of its merchandise directly from 
manufacturers of brand name and designer clothing. Most of the 
merchandise is first quality and in season. The availability of 
this merchandise is the result of overproduction, canceled 
orders, and other factors. SYMS works on a ``mark up'' system 
unique in retail, even among discount sellers and its ``off-
price'' competitors. Instead of paying manufacturers wholesale 
and selling at a lower markup than its retail competitors, SYMS 
pays below wholesale prices.
    For many years SYMS has relied on the prohibition against 
RPM agreements mandated by the Federal antitrust laws. It has 
invested its capital, structured its business, and built 
customer goodwill in reliance on that prohibition.
    Over the years SYMS has occasionally been pressured by 
manufacturers to stop selling particular merchandise because 
retail competitors that sell at higher prices have complained 
about SYMS's prices. But the prohibition on RPM agreements has, 
I believe, kept in check serious threats to SYMS's ability to 
sell merchandise according to the pricing approach I have 
described. That may well change as manufacturer-oriented RPM 
policies become more prevalent in the clothing industry.
    Let me now briefly outline what I predict will be some of 
the undesirable effects that will attend manufacturer-oriented 
RPM in the retail clothing industry:
    First, the introduction of RPM policies will force discount 
retailers, especially large ones, to pursue strategies other 
than price cutting--the provision of rebates, gifts 
accompanying purchases, and other special offers--in order to 
compete. As a result, consumers will find it difficult to judge 
what they are actually paying for the products they desire and 
the value they are receiving. SYMS's well-known sales approach 
is that consumers should be able to judge exactly what value 
they are receiving and to make purchasing choices accordingly.
    Second, as other witnesses will likely explain, RPM may 
facilitate horizontal price-fixing agreements among 
manufacturers, thereby reducing interbrand competition.
    Third, the retail clothing market is characterized by a 
continually changing and often seasonal product mix. Consumers 
are accustomed to, and benefit from, deep markdowns on seasonal 
items. The introduction of RPM policies will lower a retailer's 
ability to sell end-of-season or out-of-season merchandise by 
discounting. A related problem will be the inability of 
retailers to sell poorly performing merchandise that is 
governed by RPM policies.
    Fourth, the introduction of RPM may create opportunities 
for foreign retailers--or large domestic retailers who set up 
foreign entities to distribute their products via the Internet 
or catalogues--to secure a competitive advantage over domestic 
retailers. This is because foreign retailers will find it 
easier than their domestic counterparts to escape the legal 
consequences of violating RPM policies.
    Fifth, retailers will face increased costs as a result of 
having to ascertain and comply with RPM restrictions that may 
be attached to the products, especially when they purchase 
products--as they often do--from suppliers other than 
manufacturers.
    Sixth, it is already difficult for off-price discount 
retailers in the clothing industry to expand their businesses. 
The limited supply of discount branded products on the 
wholesale market restricts growth. RPM policies will further 
restrict the supply of discounted merchandise. Much of the 
discount merchandise sold by manufacturers consists of off-
season or out-of-season merchandise. Increasing the life cycle 
of an item at full retail will reduce the off-price supply.
    That concludes my prepared testimony. I would be happy to 
answer any questions.
    [The prepared statement of Ms. Syms appears as a submission 
for the record.]
    Chairman Kohl. Thank you, Ms. Syms.
    Mr. Bolerjack?

STATEMENT OF STEPHEN BOLERJACK, ATTORNEY AT LAW, DYKEMA GOSSETT 
                    PLLC, DETROIT, MICHIGAN

    Mr. Bolerjack. Thank you, Mr. Chairman and Senator Hatch. I 
am Steve Bolerjack. I am the Chairman of the Competition Task 
Force of the National Association of Manufacturers, and it is 
an honor and appreciated by the National Association of 
Manufacturers that we have the opportunity to present our views 
here today.
    We believe that the Leegin case represents sound antitrust 
policy. There are primarily three reasons.
    First of all, the unvarying rule is that the rule of reason 
is the accepted standard for antitrust analysis. The per se 
rule should always be reserved for restraints where the courts 
are confident that the restraint would be invalidated under the 
rule of reason all or almost all the time. That is not true of 
resale price maintenance. Even in dissent, Justice Breyer 
indicated that sometimes it will have procompetitive effects, 
sometimes it will have anticompetitive effects. It depends on 
the facts. Leegin will force courts to look at the facts in 
each case and the competitive effect.
    Leegin continues a progression of limiting the per se rule 
in the vertical area, cases between manufacturers and dealers. 
You have heard references to the 1977 decision in Sylvania 
overruling a prior per se ruling regarding what we call non-
price restraints--a location clause in that case. So the 
manufacturer could choose to limit sales to an approved 
location if it did not have an anticompetitive effect.
    You have heard references to the 1997 Khan case on maximum 
resale price maintenance. It permits the manufacturer--or 
seller--to require a maximum resale price, a price ceiling; 
that can be procompetitive, and it can certainly outweigh any 
anticompetitive effects, and it overruled almost 30 years of 
experience under a per se rule that absolutely prohibited that.
    Finally, and I think very importantly, Leegin requires 
courts to look at substance. What is the effect of the 
restraint on competition in a market? Prior to the Leegin case, 
we all spent time in a search for whether or not there was 
sufficient evidence of an agreement between the manufacturer 
and the dealer. And I submit they did not at all look at 
whether or not there was an anticompetitive effect in the 
market. In the Leegin case itself, the per se rule required 
exclusion of expert testimony that there were procompetitive 
benefits to the policy Leegin was following with its Brighton 
merchandise. What this case will do is bring back the ability 
of a manufacturer to use the evidence that it may have 
available to it showing procompetitive benefits, rather than 
following the per se rule where it simply is not permitted to 
defend itself in court using the facts that it would otherwise 
be able to use.
    We think it is also important to note what Leegin did not 
do. Minimum resale price maintenance is not per se legal. This 
is not going back to the fair trade days. The case did not 
eliminate the potential for a challenge to a manufacturer's 
policy if it enters into a minimum resale price maintenance 
agreement.
    What the case says is any of those challenges should be 
decided under the rules that typically apply in a vertical 
case. And the Court also drew a very bright line around efforts 
to use resale price maintenance to enforce horizontal 
agreements, either amongst manufacturers or amongst dealers. 
And they said those agreements are and should continue to be 
per se violations, and to the extent resale price maintenance 
is being used to enforce it, that would not survive a rule-of-
reason challenge. This is not a green light to just raise 
prices without regard to competitive effects.
    So thank you for your time, and later on I would be pleased 
to answer questions.
    [The prepared statement of Mr. Bolerjack appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Bolerjack.
    Ms. McDavid?

    STATEMENT OF JANET L. MCDAVID, ATTORNEY AT LAW, HOGAN & 
                   HARTSON, WASHINGTON, D.C.

    Ms. McDavid. Good morning, Chairman Kohl, Senator Hatch. It 
is a pleasure to be here this morning with my friends Bob 
Pitofsky--who was my antitrust professor--Pamela Jones Harbour 
and Steve Bolerjack--who is my client--and to meet Marcy Syms. 
I am a partner at Hogan & Hartson here in Washington, D.C. I am 
a former Chair of the Antitrust Section of the American Bar 
Association, and I am here today on behalf of the ABA. My 
written statement reflects the position of the ABA, and to the 
extent my remarks today differ from that written statement, 
those views are my own.
    The Supreme Court's recent decision in Leegin holding that 
resale price maintenance should be evaluated under the rule of 
reason rather than under the per se rule is totally consistent 
with the views of the American Bar Association. In reaching 
that decision, the ABA carefully considered the views on both 
sides of the issue and concluded that because resale price 
maintenance can be either benign or procompetitive, it should 
be evaluated under the rule of reason, which is the rule that 
is applied with respect to virtually all other restraints under 
the antitrust laws. It concluded that the basis for the Dr. 
Miles decision was largely discredited and should be 
overturned.
    That does not mean that resale price maintenance will 
always be found to be legal. In circumstances where it produces 
anticompetitive effects, it will be found unlawful under the 
rule of reason. Critics, including those here today, seem 
absolutely confident that there will be anticompetitive 
effects, but they seem significantly less confident that those 
effects can be proved under the rule of reason. That seems to 
me to be inconsistent.
    There has always been a tension between the rule in Dr. 
Miles and a decision only a few years later in Colgate, where 
the Court held that a supplier could refuse to sell to dealers 
that would not charge its resale price as long as it did so 
wholly unilaterally. The rationale was that, absent an 
agreement between the manufacturer and the dealer, there was no 
violation of Section 1 of the Sherman Act. The competitive 
effects were exactly the same. The only question was whether or 
not there was an agreement between the manufacturer and the 
dealer.
    Later, the Court applied the rule of reason to a whole 
range of other vertical restraints, as Mr. Bolerjack has 
explained. Resale price maintenance, which eliminated only one 
form of competition at the intrabrand level was per se illegal; 
whereas, a territorial exclusion clause was evaluated under the 
rule of reason even though it might have a greater 
anticompetitive effect than the resale price maintenance 
arrangement.
    My written statement contains a detailed discussion of the 
economic and legal arguments on this question. I am a 
practicing lawyer, so I would like to talk to you a little bit 
about how this works in the real world.
    When I advise a client on an antitrust question, the first 
things I ask are: What are you going to do? And why are you 
going to do it? That allows me to consider the client's 
business rationale for the conduct, the competitive dynamics in 
the industry, and whether there might be a less restrictive way 
to achieve that objective. But when we counseled in the resale 
price maintenance area, the rule was always different. Instead 
of asking why do you want to do this and what is the effect 
going to be, we spent our time talking about whether there were 
ways to achieve that objective without an agreement. Could you 
suggest resale prices? Could you establish a consignment 
arrangement? Could there be a principal agent relationship? 
Many of these questions made no business sense to the people 
whom I was counseling.
    If the client wanted resale price maintenance, it could 
adopt the Colgate policy: se resale prices completely 
unilaterally and simply terminate any dealer who refused to 
follow that pricing policy. But it had to do so without any 
discussion with the dealer. It did not matter whether that 
dealer was a valuable dealer with a longstanding relationship. 
It simply had to cut them off, because any conversation with 
the dealer ran the risk of an agreement. And as a consequence, 
this became a business rule that businesses could not 
understand.
    There was an amicus brief filed in the Leegin case by the 
Ping golf club manufacturer explaining that it had adopted a 
Colgate policy on resale price maintenance because it felt that 
its club-fitting rules required service by dealers. As a 
result, it terminated on a zero tolerance basis any dealer who 
cut prices. Its representatives could not go out and counsel 
with those dealers. They simply had to cut them off because, 
otherwise, they risked an agreement.
    Concerns by the field representatives were not sent to the 
marketing department. They were sent to the general counsel's 
office, which helped decide whether it was appropriate to 
cutoff the dealer in that circumstance. Ping said it terminated 
nearly 1,000 dealers over 4 years, with a resulting loss in 
outlets that were useful to consumers. It is very hard to 
explain to business people why that rulemakes any sense.
    Lawsuits in this area were also different. Instead of 
thinking about the anticompetitive or procompetitive effects of 
the conduct at issue, as we do in every other antitrust case, 
except a cartel, we spent our time discussing whether or not 
there was an agreement between the manufacturer and the dealer. 
Did the conduct of regional sales representatives somehow cross 
the line between persuasion and coercion so that there was an 
agreement?
    Leegin is an example. As has already been stated, the 
testimony of Ken Elzinga, one of the leading antitrust 
economists in this country, was excluded from evidence at the 
trial as irrelevant because the rationale for the arrangement 
was simply not relevant, and the jury was not allowed to 
consider the procompetitive rationale.
    So cases in this area were always slightly back-assward, 
and the courts tried to find ways to avoid absurd results. We 
spent our time focusing not on the competitive effects of these 
cases, but on whether there was an agreement.
    For these reasons, the Leegin decision is completely 
consistent with the views of the American Bar Association. I 
welcome the opportunity to answer your questions on how this 
works in the real world, and I hope we will have a chance to 
talk about some of the factors that a court might apply as it 
evaluates these cases under a rule-of-reason analysis.
    Thank you.
    [The prepared statement of Ms. McDavid appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much.
    I would like to start by asking Ms. McDavid and Mr. 
Bolerjack the following question and the line of reasoning: 
What problem did Leegin fix? It seems to me, aside from the 
legalities of lawyers and manufacturers, the most important 
part of--or one of the very most important parts of retail 
America is that it provides the consumers the most vigorous 
kind of interaction between themselves and manufacturers and 
stores with the least kinds of obstructions as we feel we need 
to insert into the process to maintain some sense of sanity, 
but that the churning, the interaction is a good thing and not 
a bad thing. Now, if you disagree with that, then perhaps you 
want to make your case. But the kinds of restrictions that we 
want to impose are the least that are necessary.
    So if that is true as a premise, and if we had not had 
minimum price maintenance now for the longest time, why do we 
have to have it now? I mean, what is there that is occurring 
that is making it necessary for manufacturers to be able to set 
a minimum price? As Mr. Pitofsky pointed out, they can now set 
maximum price, and if they could set minimum price, 
theoretically they can set those at the same point. And as Mr. 
Pitofsky pointed out, he thinks maybe that is where we are 
heading. But legally now they can set a maximum and minimum at 
the same level.
    Now, why is that beneficial to the American retail--to 
consumers? Why would you then defend that as something that 
they should have the right to do if they wish if we are 
thinking about the whole panoply of America and retailing and 
the interaction that goes on and all the good things that it 
has provided over the years? Ms. McDavid, would you like to 
comment on that?
    Ms. McDavid. Well, as I explained, Senator, there has been 
resale price maintenance in this country under the Colgate 
doctrine for a long time. The question has always been whether 
it is imposed by the manufacturer unilaterally, resulting in 
the termination of any dealer who does not do it, or whether it 
has been imposed through an agreement. So it has existed, and 
there are a lot of companies, like Ping, who simply cutoff the 
discounters.
    So this system has existed. The problem has been that it is 
inefficient because we end up in the kind of inquiries that I 
have been describing where we do not focus on whether there is 
something good going on here or is it completely neutral or is 
there something bad.
    Manufacturers want the kind of hurly burly you have been 
describing, but they want it at the interbrand level. They want 
Sony and Sharp competing with Matsushita and JVC. They want 
that to be done as a consequence of being able to go into a 
store where you can get the kind of service that tells you the 
difference between those television sets.
    Chairman Kohl. Mr. Bolerjack?
    Mr. Bolerjack. I absolutely agree that what the 
manufacturer is now freed to do in a straightforward fashion 
rather than by setting up its unilateral policy and spending 
the time, money, and effort of trying to track down violations 
of its policy--manufacturers now are free to explain to those 
who sell its product that we want you to take on my 
competition, don't take on one another. And they can go forward 
and set a minimum price floor to try to assure that that does 
not happen. That may bring advantages to them that they cannot 
use today in as efficient a manner. This frees the 
manufacturers to do something like that.
    I would also like to point out that the assumption 
frequently in these matters is that the manufacturer is a 
large, powerful organization with all the power and abilities 
to enforce this in the world. And, frequently, that is not the 
case. It can be a small manufacturer trying to get into 
numerous outlets. In the case here, you had a manufacturer that 
made ladies' leather goods and accessories. They finally got 
into 5,000 different outlets, and for reasons we probably do 
not need to explore in detail, they wanted to try to assure 
that a consumer had a very special boutique-type experience. 
Other manufacturers now might have the ability to undertake 
this policy. A manufacturer that relies--and I think frequently 
they do--on discounting and making sure that their entire 
output is taken and sold will not consider one of these 
policies. It does not do anything for them, and if they impose 
one of these policies and they have a significant market 
position, they are going to have to deal with any litigation 
that comes up. It is not a free pass.
    Ms. McDavid. If I could add, Senator, my experience in the 
very limited time since the Leegin decision--but many of us 
were expecting the Leegin decision for the last year or so--is 
that companies are not jumping at the opportunity to do this. 
They are thinking about it very carefully. They are thinking 
about whether it makes sense for their business. And they are 
also carefully evaluating the risk that their conduct might be 
found to be unlawful in a rule-of-reason analysis.
    I have already advised one client so far that it would be 
very risky for them to do this because of the circumstances in 
which they compete, and they have chosen not to proceed in that 
way, even with a full rule-of-reason analysis. I think that 
companies are going to make individualized decisions based on 
the competitive dynamics that they face in their particular 
space.
    Chairman Kohl. Mr. Pitofsky?
    Mr. Pitofsky. Senator, here is the irony. If five retailers 
got together fixing a minimum price, that is illegal per se. It 
is a horizontal conspiracy. But if the five retailers manage to 
go to the manufacturer and say, do me a favor, stop these price 
wars, give us a minimum price, then, according to the Supreme 
Court, now you are going to have a rule of reason not 
illegality per se. And I just want to add, lawyers know, 
plaintiffs almost never win a rule-of-reason case. A rule-of-
reason case means the kitchen sink is relevant, everything is 
relevant. They take years. Discovery takes years. They are very 
expensive.
    I will give you a piece of data, not theory. Thirty years 
ago, the Supreme Court went from per se to rule of reason with 
respect to territorial allocation: you sell in the Bronx, you 
sell in Queens, you sell in Brooklyn, don't get in each other's 
way. The Court went to rule of reason, it said, oh, it is only 
rule of reason.
    Four plaintiffs have won territorial allocation cases in 
the last 30 years, one every 7 years. I think it will be even 
tougher to win a vertical price-fixing case. I think four cases 
in 30 years is per se legality, and that is where we are 
heading.
    Chairman Kohl. Ms. Harbour?
    Ms. Harbour. Let me give you the bottom line. I think the 
anticompetitive effects of minimum vertical price fixing are 
virtually certain. Prices will go up and consumers will pay 
more money. The procompetitive effects that we hear about are 
theoretical; they are speculative, and they are unproven. And 
let me tell you why.
    None of these empirical studies that we hear about, that we 
have read about, are definitive. There is an acknowledged 
empirical vacuum that leaves these competing theories untested. 
For instance, in 1985, Judge Easterbrook called for more 
rigorous empirical research, but to date, no studies have found 
evidence of the procompetitive benefit relating to minimum 
vertical price fixing.
    These studies are theoretical, and these studies are not 
definitive. But what we do know is that manufacturers will set 
higher prices, and we know this because in 1975 a congressional 
study showed that minimum RPM led to a 27- to 37-percent price 
increase for the American consumer. We know that in that same 
time period, a Stanford University study showed that fair trade 
cost consumers, in 1970s dollars, $6.5 billion a year. We know 
that there was a higher rate of business failure in fair-traded 
States. These States had a 55-percent higher rate of firm 
failure.
    So these are the things we do know, and I do not think that 
the per se rule should be thrown out based on theoretical 
arguments and no empirical data.
    Ms. McDavid. Mr. Chairman, the case that Chairman Pitofsky 
described is actually per se illegal. The dealers getting 
together and asking the manufacturer to impose a price on them 
is illegal. He brought that case when he was at the Federal 
Trade Commission against a group of Chrysler dealers who asked 
Chrysler to boycott discounters who were selling cars on the 
Internet, and it was found to be per se illegal. And do you 
know who brought the complaint to the Federal Trade Commission? 
Chrysler, because it had no incentive to get involved in that 
kind of a conspiracy.
    And the circumstance he posits in which there would have 
only been four territory allocation cases won by plaintiffs, I 
wonder if he disagrees with the Supreme Court's Sylvania 
decision. Bob, didn't you think they did it right?
    Mr. Pitofsky. No, I thought the Supreme Court was right 
about Sylvania. It is a different situation. But price has 
always been treated as different. In Sylvania, the majority 
said this is territorial allocation, that is price, we are not 
touching price. But now this majority is.
    What was your--oh, the dealers. How did the dealers 
effectuate this business about getting the manufacturer to fix 
the price for them? First of all, they are smart enough--most 
of them are smart enough now, not all--not to go as a group to 
the manufacturer. They can go one at a time. Or they do not 
have to go at all. They just let their feelings be known that 
these price wars are killing us and eventually we are going to 
leave you if you do not stop the price wars.
    There is data, actual data, that resale price maintenance 
is more likely to occur where the dealers are well organized in 
trade associations than if the dealers are independent. There 
is nothing like that kind of data, taking the other side of 
this argument, that free riders drive services out of the 
market.
    Chairman Kohl. Chairman Hatch?
    Senator Hatch. Well, I have to add that this has been very 
interesting to me. I think you have all done a very interesting 
job, as far as I am concerned.
    Chairman Pitofsky, recently you wrote an article that 
discusses a common example cited by those who support a rule-
of-reason analysis. Specifically, I am referring to the example 
of the audiovisual dealer that assists the consumer with expert 
advice and then has their sale undercut when the consumer 
leaves and buys the product from a discount store.
    You counter that argument by discussing how such a scenario 
does not apply to low-value textile goods, but does not--I 
guess my question is: Does not the Court recognize this in 
their holding? Simply put, just because one can do something 
like engage in an RPM does not mean that all manufacturers, 
especially those who sell ``commodity priced'' goods, will 
insist upon them? Will the market itself not work this out?
    Mr. Pitofsky. That is the hypothetical that the 
conservative side of this argument always uses: you will go to 
Federated and get an explanation from a fancy service person; 
then you go across the street to the discounter and buy the 
product. I have three reactions.
    One, how often does that happen? I want to see a study of 
that.
    Two, might we not have a ``BMI preliminary''--we can make 
an exception for that kind of situation. The manufacturer comes 
in and says--or the dealer does and says, ``I am having a lot 
of problems with this kind of behavior,'' and the Court, as 
they do under BMI in horizontal market price fixing, says, 
``OK. You have persuaded us. Now we will give you a rule of 
reason. But we are not giving you a rule of reason for men's 
underwear. That does not make any sense to us at all.''
    Third, I am going to make a point for the other side. I 
asked my class, ``How many of you people go to Federated, get 
an explanation, and then go across the street to a discounter 
and buy the product?'' And half the class raised their hands. I 
said, ``You got to be kidding. I did not know that anybody did 
that sort of thing.'' So afterwards, students came up and they 
said, ``Well, what we do is we go to Federated and get the 
explanation,and then we buy it on the Internet.'' That should 
have been the argument in favor of getting rid of a per se 
rule.
    But my answer to that is there is a much more constructive 
way to do it, and that is, simply have a ``BMI preliminary.'' 
Explain that this is the kind of product, high-tech audio 
equipment, computers and so forth, where people get the 
explanation and then buy it somewhere else. Eventually that 
will drive the explanation out of the market. I accept that. 
But that, Justice Breyer said, applies to 10 percent of 
products. I really wonder if it is even 10 percent of products. 
All I know is that an overwhelming majority of the products 
have nothing to do with services. It is just that consumers 
will pay more and retailers will pocket more.
    Ms. Harbour. May I make a comment?
    Senator Hatch. Go ahead.
    Ms. Harbour. If I might just add to Professor Pitofsky's 
comments. I believe the Supreme Court's grounds for overturning 
Dr. Miles, were based on either a misstatement or a 
misunderstanding of the decision. The Leegin plaintiffs were 
wrong when they argued that Dr. Miles was based on what they 
called ``prohibiting restraints against alienation.'' 
Basically, Dr. Miles held that the arrangement between Dr. 
Miles and its 25,000 retailers constrained all downstream 
pricing. The Dr. Miles Court held that this arrangement was the 
functional equivalent of horizontal price-fixing between the 
dealers. So, the Supreme Court did not recognize the functional 
equivalency doctrine. Dr. Miles was grounded in traditional 
antitrust concepts namely, the elimination of competition and 
subsequent harm to consumers. I think that concept was 
overlooked by the Supreme Court.
    I want to talk about for a moment, though, about the free-
rider effect. This effect has been grossly exaggerated in the 
economic literature. It is implausible in many of the product 
areas where RPM is used.
    If you take a look at the Leegin case, and as I had stated 
in my Open Letter regarding ladies' handbags--what are those 
extra services that would justify imposing a price increase to 
consumers? Are ladies' handbags something that would require 
operational expertise, consumer education or a showroom? I 
don't think so. So I think there was no real justification for 
the resale price maintenance scheme in the Leegin case.
    Ms. Syms. I would like to add something, if I may.
    Senator Hatch. Sure.
    Ms. Syms. I think that this whole concept of free ride 
really has to be re-examined in the age of the Internet. We all 
get a free ride. Most of our consumers get their information 
from the Internet. If they want to get educated about something 
now very quickly, they do not have to get in a car; they do not 
have to pay for gas. They just get on their computer, and they 
get all the information they want. So I don't know if this 
free-ride idea--actually, up until reading the case, I did not 
even know there was such a thing. So there you go. I mean, it 
is very esoteric.
    And the truth of the matter is in the merchandise that we 
sell, even though we are selling 40, 50 percent below what a 
regular retailer is, almost 70 percent of the merchandise that 
comes into a Syms store has a hang tag. The manufacturer, the 
brand--we deal directly with the brands, directly with the 
designers. We do not use middlemen. We do not use jobbers. And 
70 percent of the merchandise has a suggested retail price 
hanging right on the garment. So we all--the consumer has a 
guideline; they know. And we have a guideline; we know. But it 
is not something that has to be regimented. The marketplace 
takes care of what the price is going to be based on where it 
is in the seasonality, based on how old the merchandise is. A 
turtleneck is not going to be the same as a new pocketbook from 
Coach.
    You know, there is a sensibleness to this that kind of gets 
lost in some of this discussion, and the consumer knows the 
sense of it.
    Senator Hatch. Well, let me give the other side a chance, 
too. Ms. McDavid, Mr. Bolerjack, if you would care to comment?
    Ms. McDavid. Well, some manufacturers, even manufacturers 
of men's underwear, may have chosen to invest to create a 
premium product. Ms. Syms mentioned Coach handbags. I buy Coach 
handbags. I consider Coach a premium product. Should a 
manufacturer be prevented from cutting off someone whom it 
thinks is undercutting the value of the premium brand it has 
created?
    The ultimate constraint here is going to be the existence 
of interbrand competition, the choice between a Coach handbag 
and an off-brand handbag. A consumer who is prepared to pay for 
a premium product will pay a premium price and perhaps buy a 
product that is subject to resale price maintenance, or a 
Leegin handbag. A consumer who is price focused will buy a 
different brand which is not subject to resale price 
maintenance and is sold at a lesser price. The fact that there 
are price differences does not mean it is anticompetitive.
    Senator Hatch. Professor Pitofsky, you have taught your 
student well, but she is--
    [Laughter.]
    Senator Hatch. She is straying from the course.
    Mr. Bolerjack?
    Mr. Bolerjack. I would just finish up. I agree with, I 
believe it was, what Ms. Syms said. The market will take care 
of this. If a manufacturer goes out and says, I want an 
arrangement with you as a retailer, I want you to carry this in 
an attractive store. I want you to have a listening room for 
stereos, or I want you to have skilled salespeople, I want you 
to take returns, if the customer is unhappy with my product and 
wants their money back, I want you to give it to them, I want 
you to perform warranty work, some of this we can do with 
agreements. But the situation here is if they have priced that 
wrong and they get into resale price maintenance, the 
manufacturer will quickly learn a lesson from his competitors, 
and he will be taught that he cannot maintain that price. 
Competition with other manufacturers will take care of that. As 
Jan said, the interbrand competition.
    Ms. Harbour. Senator, I wanted to add that when thinking 
about these issues we must ask this question: Are the retailers 
the sales agents for the manufacturers? Or are the retailers 
the purchasing agents for the consumers? I believe it is the 
latter. Also, I do not believe that consumers really receive 
the services that are worth the price increases. Or if they do, 
I think the value of such services should be proven by 
empirical data, which to date I do not think it has been.
    Senator Hatch. Well, I have to say this has been really a 
very interesting hearing, and all of you have acquitted 
yourselves very well. I can see why these decisions are so 
difficult to make and why so few lawyers go into antitrust.
    [Laughter.]
    Senator Hatch. But this has been very interesting to me, 
and we will certainly weigh all of your statements very 
carefully. And I am fortunate to work with the distinguished 
Chairman here, and we will get together and see what we need to 
do here.
    Chairman Kohl. Thank you, Chairman Hatch.
    Senator Hatch. After all, he has been in the business, and 
I have just been a poor lawyer.
    Chairman Kohl. I would like to just pursue what we have 
been discussing a little further. You know, we have all kinds 
of varieties of retailing in America. We have the retailers who 
provide lots of services and many employees and a beautiful 
store, valet parking, and higher prices. That is how they 
appeal to their customer.
    Then we have people who are providing medium kinds of 
services, medium kinds of decor, medium kinds of--all kinds of 
attending kinds, and medium prices.
    Then we have people who do it at the lower level. They do 
it on the basis of price, no overhead or very little overhead, 
and they pass that on to their consumers.
    That is American retailing. It has been, and it is good. I 
am sure you would defend that. I would like to hope you would 
defend that. So then why would you say that the manufacturer 
can do away, in effect, with the discounter, with the lower 
level, by saying our minimum price is, and you cannot go below 
that minimum price, which takes away the No. 1 attractiveness 
of that retailer, who perhaps offers very little else other 
than his low price? Why would you say--and that person is 
trying to get the consumer to come in and buy, I mean, 
representing the consumer, as Ms. Harbour said, why would you 
say--or why do you say that that kind of retailing in America 
should be subject to curtailment by the manufacturer? Why would 
you say that?
    Ms. McDavid. I think simply, Senator, that the manufacturer 
should have the choice as to whom it sells. It may say I have a 
luxury product, I want this sold in the store with the valet 
parking, the Nordstrom's-type stores. On the other hand, it may 
say that my brand is not consistent with the discount model, 
and today the manufacturer has the ability to make that 
decision as long as it does so unilaterally without an 
agreement. That is happening today all the time. The Ping golf 
club example is one of those. But as long as there is an array 
of products available that compete with that product, then the 
discount outlets and the medium- priced outlets will all 
remain. The question is: Where is the consumer going to find 
the kind of good that it wants to purchase, at the price it 
wants to purchase, at the quality it wants to purchase? I think 
we would all agree that a Jaguar car is not sold in a discount 
outlet, and that is a perfectly legitimate decision for the 
manufacturer to make.
    Ms. Syms. That is happening today. Syms does not sell Coach 
handbags, and we do not sell it, and they are able to control 
their distribution by just saying we do not produce enough to 
sell to discounters. We sell all of our product and we discount 
all of our product in our own Coach stores.
    And when I referred to one of my points about the foreign 
aspects of this and that a foreign manufacturer might not be 
restricted as an American company might be restricted--and that 
is an issue--many of the larger discounters, like a Wal-Mart, 
like a Target, can go overseas and they can manufacture and 
control costs vertically to the consumer. The smaller 
discounters, the regional discounters, like we are, would not 
have that advantage. So I think that there is also the 
possibility that having this price maintenance will be a 
problem for the smaller discounter, not the larger discounter.
    Chairman Kohl. I think so.
    Now, again, Ms. McDavid, a Supreme Court ruling is to fix 
something that needs to get fixed. What is the problem with the 
way we have the situation now? What is the problem? If they do 
not want to sell to Syms, they do not have to sell to Syms. 
Nothing is stopping them. So what was the problem that was so 
serious that they had to overturn, you know, decades and 
decades of legalism to say that a retailer can now set a 
minimum price. If they did not want to sell to Syms, they did 
not sell to Syms. It was not an issue. They could just say, 
``We are not going to sell to you.'' What was the problem?
    Ms. McDavid. The Colgate policies were cumbersome and often 
did not work in practice. What would happen is the manufacturer 
would say, ``This is the price at which I want my product 
resold, and if you will not do that, I will not sell it to 
you.''
    Now, on paper, that is easy. In practice, it results in the 
circumstance you had in Ping where the discussions with the 
dealers were not coming into the marketing department but were 
coming into the general counsel's office. What would happen in 
practice--and here I would like to quote my friend Pamela Jones 
Harbour in one of the first speeches she gave in the Antitrust 
Section. The policy on paper looked wonderful and complied with 
the law. But you have a regional sales representative out there 
who is going out and talking to the folks in the stores. And 
Pam said that the dialogue went roughly like this:
    ``Charlie, I love you like a brother, but you're chiseling 
on the price.'' And they would have a long discussion about 
whether Charlie really was chiseling on the price or whether 
Charlie was going to start complying with the policy, because 
if Charlie kept chiseling on the price, they were going to cut 
him off. And that led to an agreement, believe it or not, or a 
decision to cutoff Charlie, and Charlie sued and said, ``They 
imposed an agreement on me to comply with the policy.'' And 
that is where the litigation was. The litigation always 
involved the question of whether there was an agreement, 
because the policy itself was fine. It was the implementation 
that was cumbersome and awkward. I do not think we want 
marketing decisions being made in the general counsel's office. 
Frankly, we are not very good at it.
    Ms. Harbour. Since Jan quoted me--
    Chairman Kohl. Another way to say that is we want to make 
it easier, less cumbersome, less difficult for retailers--for 
manufacturers to set their price.
    Ms. McDavid. Exactly.
    Chairman Kohl. Beautiful.
    Ms. Harbour. Chairman Kohl, since--
    Chairman Kohl. Beautiful. I could not agree with you more. 
That is the point of it. But I disagree with it.
    [Laughter.]
    Chairman Kohl. I do not think you can make the argument 
that that serves the American consumer. Clearly - and I 
appreciate that because we have, you know, many parts of the 
American economy and of our country. It serves the interests of 
the manufacturer, and that is fine, if you represent that--that 
is your client and you make the argument, and I appreciate 
that.
    Yes, Ms. Harbour?
    Ms. Harbour. Senator Kohl, since I was quoted, I will tell 
the second part of that hypothetical. Yes, it is true that 
sometimes those Colgate policies would fall apart in the 
marketplace, and, you know, sales reps would say, ``Charlie, I 
love you like a brother, but you got to keep those prices up.''
    But what Jan did not say, in the second part of my hypo, is 
that it is possible to have a clean-cut Colgate policy. What 
happens in the marketplace is that sometimes manufacturers get 
a little cute. They want to implement the ``three strikes you 
are out approach'' or structured termination ``Well, you know, 
get those prices up, we will give you one chance.'' But then 
when it comes to the second chance, sometimes there is an 
implicit coerced agreement, and that is where they get into 
trouble.
    So I think that it is possible to have a clean Colgate 
policy. But, the problem occurs when the salesmen are not 
disciplined and there is a structured termination policy using 
the ``three strikes you are out'' structured termination. This 
is where a lot of the manufacturers get in trouble.
    Chairman Kohl. Mr. Pitofsky?
    Mr. Pitofsky. Just a comment on what we have just heard. I 
am no fan of Colgate. It is a mess. But the solution to Colgate 
is not to overrule Dr. Miles. I mean, it is a non sequitur. You 
want to straighten out Colgate? Good. We are all for it. We 
would pitch in on that.
    Second, let's be clear that we all agree there should be 
high-end, middle, and low-end retailers. They should all be 
protected. But the reason for challenging Dr. Miles was to 
hamper the ability of the low-end discounters to really do 
their job. And you do that by an epithet. You call them free 
riders. You call them names. You call them--you say they are 
not righteous compared to the high end. But the fact of the 
matter is I have not seen poor services in discount operations. 
On the contrary, sometimes the services are better.
    And, finally, as far as discounters are concerned, it is 
quite possible the reason they can discount is because they get 
up earlier, they work harder, they handle their inventory 
better, they bargain better for prices, and they want to pass 
their efficiencies along to consumers.
    What really upsets me is the argument that the manufacturer 
has the right to trump the market and prevent the efficient 
discounter from passing discounts along to consumers. That 
seems to me inconsistent with what American antitrust is about.
    Ms. Harbour. And if I might put a fine point on that, Mr. 
Chairman. There was a study that was done in 1983 by Thomas R. 
Overstreet. It was titled ``Resale Price Maintenance: Economic 
Theories and Empirical Evidence.'' And basically what that 
study found and acknowledged was that traditional wholesalers 
and retailers had lobbied to legalize minimum RPM, and they did 
that, and I quote the report, ``to shield themselves from new 
forms of competition.'' The retailers had argued vigorously 
that competition and falling consumer prices, in their opinion, 
were generally bad for the economy and bad for small business, 
and that motivation is the antithesis of a free and open market 
economy.
    Chairman Kohl. Thank you.
    Anybody else want to make a comment? This has been a great 
hearing.
    Ms. McDavid. One comment, Chairman Kohl.
    Chairman Kohl. Go ahead.
    Ms. McDavid. No one here today has argued that the absolute 
per se rule of Dr. Miles is the right rule. Chairman Pitofsky 
has not taken that view. Commissioner Harbour has not taken 
that view. Certainly we have not taken that view.
    Even Commissioner Harbour and Chairman Pitofsky--
    [Laughter.]
    Ms. McDavid.--have said there could be exceptions for new 
entry there could be exceptions, there could be a BMI sort of 
analysis in which you determine whether the rule of reason 
applies.
    Keep that in mind as you move forward here.
    Chairman Kohl. Mr. Pitofsky?
    Mr. Pitofsky. Well, we have a per se rule against 
horizontal price fixing. It is the toughest rule in the world, 
and the penalties are extreme. But we also have a softening 
effect through BMI which says if once in a blue moon you have 
an argument that your horizontal price fixing is efficient, as 
it turned out it was in BMI, we will listen to you, and if you 
persuade us, we will give you a rule of reason. That does not 
mean we give the other 97 products a rule of reason. We just 
back off a little bit and soften the edges of a per se rule. 
But the value of the per se rule is predictability, certainty, 
short trials, the ability of private plaintiffs to bring cases 
like this. It is the staple now of American antitrust 
enforcement; even though the BMI qualification has been added, 
it did not undermine the horizontal per se rule. And I think a 
similar approach would have been wiser for the majority in 
Leegin, but they were not interested in preserving the virtues 
of the per se rule. They were interested in overruling Dr. 
Miles.
    Ms. Harbour. I absolutely agree with Professor Pitofsky, 
and if the Chairman is interested, I would give you my proposed 
wish list for legislation, if you are so interested.
    Ms. Syms. And I just would like to say one thing. Since we 
have been in business, since 1959, I can recollect in all those 
years only two times where we were involved in any legal kind 
of--you know, between a manufacturer and a retailer, and we 
were one of many. I would make a seventh in my list of 
predictions. I articulated six. I would make a seventh, that 
there would be a lot more litigation with the new rule.
    Ms. McDavid. I would like to comment on the predictability 
point that Chairman Pitofsky made. These cases were not 
predictable for the reasons that Commissioner Harbour and I 
described as to what the dialogue actually looked like in the 
field between the manufacturer representatives and the dealers. 
The manufacturers usually did not know that was happening until 
they actually got sued. There was no predictability at the 
business level, and the lawsuits--there were thousands of 
dealer termination cases. They all turned on the question of 
agreement. Was there enough coercion by that regional sales 
manufacturer to bring the dealer into the agreement. The 
dealers won a lot of these cases. The manufacturers won a lot 
of these cases. But there was lots of litigation, and there was 
no predictability on the outcome because the manufacturer never 
knew what was really happening out there. That is why Ping 
centralized these decisions in the general counsel's office.
    Ms. Harbour. And that is why Congress can fix this with 
proposed legislation.
    Chairman Kohl. Is this an issue that should never have come 
before the Supreme--I mean, is this an issue that belongs in 
Congress?
    Ms. Harbour. Yes.
    Chairman Kohl. Mr. Pitofsky? Professor?
    Mr. Pitofsky. I think the Supreme Court had no need to take 
this case. It was aware that Congress was comfortable with this 
rule, and a conservative majority had said 15, 20 years ago 
that this is price and price is different, as far as we are 
concerned, so we are going to sit tight and rely on Congress's 
attitude toward this rule.
    So I was surprised they granted cert. Once they granted it, 
one has a sense that a very conservative Supreme Court might 
knock off this rule, just as they have found against the 
enforcement side in antitrust several times now. So I think 
they should have stayed away from this one. It was working OK.
    Ms. McDavid. Judges and juries all over the country every 
day in all antitrust cases except cartel cases weigh all of the 
facts and circumstances in evaluating whether a particular kind 
of conduct does or does not have anticompetitive effects. This 
rule should just be the same as all of the others except 
cartels.
    Mr. Bolerjack. I agree completely. There is no issue. The 
Court drew a bright line around cartels. If this is being used 
to enforce cartel behavior, it will be stopped. I think the 
Court also laid out that the courts need to be cautious about 
potential anticompetitive effects. There is no free pass. There 
is not an expectation that this can go forward and no one will 
look at it. It can be challenged.
    And the final point is one Professor Pitofsky talked 
about--I believe he said one case every 7 years resulting from 
the Sylvania decision. There are a lot more than that each year 
dealing with dealer terminations, and they can be used in a 
variety of ways, sometimes as leverage by a customer who seeks 
to force a small manufacturer to continue to supply.
    Chairman Kohl. I remember during John Roberts's 
confirmation hearing--perhaps you recall this, too--he made the 
point that a Supreme Court Justice is really just an umpire. He 
calls the balls and strikes, and it is pretty much not a matter 
of judgment, it is just a matter is it a ball or a strike, and 
virtually anybody looking at it fairly would see most of these 
issues the same way.
    Could we at least agree that that is not entirely true, 
that smart, intelligent people sitting on the Supreme Court can 
and do look at issues and see them differently because they are 
people of different judgments and temperaments, as, for 
example, this case might indicate?
    Ms. McDavid. And there are different implications of these 
policies that can be seen differently by different people.
    Chairman Kohl. Absolutely. What else? Anybody else? Ms. 
Harbour, go right ahead.
    Ms. Harbour. Just to put another fine point on what 
Professor Pitofsky said, I do think that the ability to price 
independently is sacrosanct. Some of the earlier cases held 
that. I think price is the central nervous system of our 
American economy. I believe that prices will go up in the wake 
of Leegin. Consumers will pay more money, and that is the 
bottom line. I believe that the basis for overturning Dr. 
Miles, i.e. the ``new'' economic learning--is not new. These 
are the same arguments that were made in 1911. These arguments 
were rejected by the Dr. Miles court. These were the same 
arguments that were made in 1975. these arguments were rejected 
by Congress. There is nothing new here. The only thing ``new'' 
that has changed is the composition of the Supreme Court and 
its disregard for congressional will and stare decisis.
    Chairman Kohl. Well, it has been a great hearing. We have 
got some obviously very smart people sitting before us, and you 
have given us all the difference sides of the issue, and let's 
see where we go from here. So we thank you all for coming this 
morning.
    [Whereupon, at 11:23 a.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
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