[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
BYE BYE BARGAINS? RETAIL PRICE FIXING, THE LEEGIN DECISION AND ITS
IMPACT ON CONSUMER PRICES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS AND
COMPETITION POLICY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
APRIL 28, 2009
__________
Serial No. 111-37
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
LUIS V. GUTIERREZ, Illinois JASON CHAFFETZ, Utah
BRAD SHERMAN, California TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Courts and Competition Policy
HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman
JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia JASON CHAFFETZ, Utah
ROBERT WEXLER, Florida BOB GOODLATTE, Virginia
CHARLES A. GONZALEZ, Texas F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MELVIN L. WATT, North Carolina DARRELL ISSA, California
BRAD SHERMAN, California GREGG HARPER, Mississippi
[Vacant]
Christal Sheppard, Chief Counsel
Blaine Merritt, Minority Counsel
C O N T E N T S
----------
APRIL 28, 2009
Page
OPENING STATEMENTS
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Chairman, Subcommittee
on Courts and Competition Policy............................... 1
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Ranking Member, Subcommittee on
Courts and Competition Policy.................................. 2
The Honorable Brad Sherman, a Representative in Congress from the
State of California, and Member, Subcommittee on Courts and
Competition Policy............................................. 3
The Honorable Jason Chaffetz, a Representative in Congress from
the State of Utah, and Member, Subcommittee on Courts and
Competition Policy............................................. 5
WITNESSES
Ms. Pamela Jones Harbour, Commissioner, Federal Trade Commission,
Washington, DC
Oral Testimony................................................. 6
Prepared Statement............................................. 9
Mr. Thomas G. Hungar, Partner, Gibson, Dunn & Crutcher, LLP,
Washington, DC
Oral Testimony................................................. 35
Prepared Statement............................................. 37
Mr. Tod Cohen, Vice President, Deputy General Counsel for
Government Relations, eBay Incorporated, San Jose, CA
Oral Testimony................................................. 64
Prepared Statement............................................. 66
Mr. Richard M. Brunell, Director of Legal Advocacy, American
Antitrust Institute, Newton, MA
Oral Testimony................................................. 71
Prepared Statement............................................. 73
APPENDIX
Material Submitted for the Hearing Record........................ 127
BYE BYE BARGAINS? RETAIL PRICE FIXING, THE LEEGIN DECISION AND ITS
IMPACT ON CONSUMER PRICES
----------
TUESDAY, APRIL 28, 2009
House of Representatives,
Subcommittee on Courts and
Competition Policy
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:04 p.m., in
room 2141, Rayburn House Office Building, the Honorable
Honorable Henry C. ``Hank'' Johnson, Jr. (Chairman of the
Subcommittee) presiding.
Present: Representatives Johnson, Sherman, Coble, Chaffetz,
Sensenbrenner, and Goodlatte.
Mr. Johnson. This hearing is now in session. I want to
thank everybody for being here. This issue has been around from
before I was born. It is great to be in the time where we can
deal with this particular issue and other similar issues,
especially given the economic crisis that has, in part, been
caused by laissez-faire attitudes.
And so I am glad to be here today. Got some serious issues,
of course. One of our big concerns is how our previous policies
have impacted certain groups, particularly consumers, and have
we ended up with a situation where prices that consumers pay
are artificially set, or are those subject to the ``free
marketplace,'' as has been our financial industry.
Even former President Ronald Reagan condemned retail price
fixing because it stifles competition, and adds to inflation.
His view was that it was completely lacking in any kind of
benefits to the consumer. Justice Kennedy has stated in the
Leegin decision that, if we continue to operate as we have been
doing, it will cost the average consumer anywhere from about
$750 to $1,000 extra. And so, of course, inflation has taken
that cost even further for our consumers who can now least
afford to bear the brunt of our economic crisis that they had a
very minor role in causing.
And so what is the benefit to the consumers? This Congress
has consistently stated over almost the past 100 years that, if
there is no benefit to consumers, then allowing manufacturers
to set retail pricing is disfavored.
After assurances that the Administration had no intention
of changing the longstanding policy, a dramatic policy shift
took place in the last Administration. And I believe it harms
consumers. Of course, I am always ready to listen and be
educated on all sides of an issue, and I look forward to us
doing that, starting today.
While some may argue that there are some competitive
justifications for resale price maintenance agreements that
benefit consumers, I am not yet convinced that that
justification is actually the most prudent one for today's
times.
Will manufacturers take advantage of recent court decisions
and increasingly dictate minimum retail prices? Why would they
not do that? The consumer is kind of like a drowning person,
who just reaches out, and it doesn't matter who they grab hold
to. We have a lot of desperation, quite frankly, that has
already been felt by the average consumer, and it continues.
So we really must be careful in making sure that, as we try
to save the victim who is drowning, that we don't get pulled
down and drown ourselves.
So our respected colleagues in the Senate have already
introduced legislation that would overturn the Leegin decision
and, once again, make minimum retail price fixing illegal. Not
that the House follows necessarily in lock-step the Senate.
Sometimes we would really love for our friends in the Senate to
yield to us and do what we want them to do. However, it is not
always possible, but I remain hopeful in that regard.
Now, thank you all for listening to my comments. And now I
will turn it over to my colleague, our esteemed Ranking Member,
Mr. Howard Coble.
Mr. Coble. Mr. Chairman, thank you for elevating me to the
``esteemed'' status. I am not sure I deserve that, but I
appreciate that, nonetheless.
Good to have you all with us, folks.
Mr. Chairman, thank you for calling the hearing of the
Courts and Competitive Competition Policy Subcommittee. Since
1911, the Supreme Court has held the agreements between a
manufacturer and their retailer to set the minimum price that
the retailer can sell the manufacturer's good, also know as
resale price maintenance, are a per se violation of the
antitrust laws.
However, in the 98 years since this decision, the Supreme
Court has moved away from most per se standards to a rule of
reason standard. Under the rule of reason standard, both the
plaintiff and the defendant put forth evidence of the relative
pro and anti-competitive effects of a given practice and the
courts decide whether the challenged practice constitutes an
unreasonable restraint of trade.
By contrast, under a per se standard, once the plaintiff
proves the basic elements of its claim, that the manufacturer
did, in fact, enter into a price agreement with a retailer,
then the liability, as I understand it, Mr. Chairman,
automatically attaches.
In 2007, in a case called Leegin v. PSKS, the Supreme Court
continued its trend away from per se rules and held that resale
price maintenance would be evaluated under the rule of reason.
The decision was not without controversy. The Bush
administration's Department of Justice, along with the Federal
Trade Commission, filed an amicus brief in favor of the
position ultimately adopted by the Supreme Court.
However, some 37 states filed an amicus brief in favor of
retaining the per se standard. Following the Supreme Court's
decision, Senator Kohl introduced a bill to legislatively
repeal the Leegin decision. He has reintroduced the bill this
year. And I would note, as best I can tell, Mr. Chairman, there
is no similar or companion bill in the House, at least at this
juncture.
Prior to going back to a per se standard, this Committee
and the court should take a hard look at the actual facts
supporting resale price maintenance, it seems to me. It may be
that there are some occasions where it is justified and some
where, conversely, it is not. That is where the rule of
reasoning comes in. It allows the courts to conduct the kind of
detailed fact-finding necessary to determine the actual harm
and benefits to consumers of resale price maintenance.
Whatever the methodology, we benefit when competition is
protected and promoted. After only 2 years of rule of reason
analysis, I am not sure that the record has been established to
warrant a return to the old rule. However, I trust that this
Committee will continue to keep an eye on the situation to
ensure that consumers are seeing a benefit from this treatment
of resale price maintenance.
And with that, I will conclude and join you, Mr. Chairman,
and welcome our witnesses today. And I yield back the balance
of my time.
Mr. Johnson. Thank you for your opening statement, my good
friend, Mr. Coble.
And now, we shall recognize my colleague from California.
And don't be fooled by the hairstyle that he is employing right
now, because he is younger than I am.
So I want to give my friend, Mr. Brad Sherman, an
opportunity to make an opening statement.
Mr. Sherman. It is so nice to be younger than someone. As
to my hairstyle, I actually cut it this way to facilitate the
fact that I hand out plastic combs throughout my district. And
given this hairstyle, people then remember the plastic comb. So
I actually----
Mr. Johnson. I do appreciate you giving me mine, also.
Mr. Sherman. Absolutely. And I would ordinarily have as
much use for it as the gentleman from Utah, except for the fact
that, in order to raise my name ID in my district, I cut it
distinctively.
Now, as to the matter at hand, there are two sides to this
argument. The side against resale price maintenance is simple,
but might very well be compelling, and that is discounts mean
lower prices.
The arguments against a per se rule are more complex. One
of those isn't just government should be laissez-faire. One
counter to that is maybe manufacturers should be laissez-faire
and let retailers have the freedom to do what they want.
The second is that, in the absence of true vertical
integration, the manufacturers' interests are not necessarily
hostile to those of the consumer. The manufacturer wants to
move as many products as possible, and if they believe that,
with resale price maintenance, they get the full panoply of
services provided to the ultimate consumer, then they may be
allied with the consumers' arguable long-term interest.
The argument put forward most commonly is the free rider,
that consumers will learn about a product, see a demonstration,
get advice on which model to buy and how to use it from one
retailer, and then go online or down the street and buy it from
a discounter. Even if we were to believe that resale price
maintenance provides consumers with more service, that still
may mean that we decide, on balance, they would rather have the
lower prices.
One could say, if you want a consultant, hire one. Pay them
by the hour. Don't make everybody in your community pay a
higher price for this or that product just because some
consumers want some advice on how to use the product. We don't
necessarily have to bundle services and advice on the one hand
with the physical product on the other.
We have a number of routes we can take here in Congress.
One is to go back to sleep and let the courts decide
everything. It is easier that way, but I think that is an
abdication of our responsibilities. I think it is Congress,
rather than the courts, that can best decide what is really in
the interests of consumers.
A second approach is to just go with a per se rule. That is
what we had in this country for many years, perhaps imposed by
the courts, but we in Congress could resurrect that rule that,
as the Chairman points out, has been pretty much the rule for
our lifetimes, even his longer lifetime.
And another approach would be to see if there are
particular industries where the advantage of resale price
maintenance outweighs its disadvantage, allow it in those few
industries or those few products, and prohibit it with the
rest.
I would point out that the product we buy most that needs
the most service, the most demonstration, is the automobile,
and there we do not see--I have not seen an unwillingness of
retailers to take me out on a test drive even though there was
no resale price maintenance. There is a franchise governing a
certain territory, but the fact that most of us live in urban
areas means that we can easily go to any of the other
franchisees, and now we can go online as well.
So one wonders whether we really need to get away from
decades of discounting being legal when I have had no trouble
getting people to want to sell me a car and to spend all the
time that I ask for showing me how to use it, comparing it to
their other products, et cetera.
So I don't know whether the old rule actually deprived us
of the service, the advice, the attention that consumers want.
I do know that the old rule maximized discounts for consumers.
And I look forward to learning more about this issue.
I yield back.
Mr. Johnson. Thank you, Mr. Sherman, for your opening
statement.
And next, we will have an opening statement from my good
friend, Jason Chaffetz, newly elected out of Utah. And I am
going to take Chairman's privilege to reveal some confidential
communications that he and I have been engaged in. And I know
that you would not be offended if I were to reveal--I must
disclose, as a matter of fact, he and I have talked about so
many things, but I tell you, the biggest thing that I have
learned from Jason thus far is the products that he uses, Mr.
Sherman, to ensure that he makes a good appeal to his
constituents as well.
So without any further ado--don't believe his hair, either,
because he has done a good job of his public relations
projection. So without any further ado, Mr. Chaffetz, please?
Mr. Chaffetz. Well, thank you, Mr. Chairman. I simply
wanted to say thank you for calling this hearing. It is an
important topic in which we need to dive deep, and I do
appreciate all of you that have contributed to this. I wanted
to thank the Chairman for recognizing that and this important
issue and calling this hearing.
I would note for the record that I have never owned a comb
in my life, and especially since I learned about the miracle of
hair styling gel, which has come to serve me well. So, for the
record, so noted.
And I appreciate it, and look forward to listening and
hearing from you rather than being heard. So thank you.
Mr. Johnson. Thank you, my good friend. By the way, to
clarify our discussions, though they have included Brylcreem
and those kind of things, we have also been talking about the
Just For Men kind of thing. So that is what I really appreciate
you for, for enlightening me on that, so I appreciate it. Thank
you.
Let me introduce our witnesses for today's hearing. First
is Commissioner Pamela Jones Harbour of the Federal Trade
Commission. Ms. Harbour was sworn in as a commissioner of the
FTC on August 4, 2003. Commissioner Harbour was previously a
partner at the law firm Kaye Scholer, LLP, and she also spent
11 years as a New York State deputy attorney general, during
which time she argued before the Supreme Court in a number of
cases, including State Oil v. Khan, which has been a landmark
antitrust price fixing case.
Commissioner Harbour received her law degree from Indiana
University School of Law, and she obtained her bachelor's
degree in music from the Indiana University School of Music.
Welcome, ma'am.
Next is Mr. Thomas Hungar, a partner in the Washington, DC
office of Gibson, Dunn & Crutcher. Mr. Hungar served as a US
deputy solicitor general from 2003 to 2008, and he has argued
24 times before our Supreme Court. And in fact, he was
intimately involved as one of the attorneys in the Leegin case
on behalf of the petitioners.
Mr. Hungar previously clerked for Justice Kennedy and is a
graduate of Willamette University and also Yale Law School.
Welcome, sir.
Next is Mr. Tod Cohen, who is vice president, deputy
general counsel for government relations at eBay. Prior to
eBay, Mr. Cohen was the vice president and counsel of New Media
for the Motion Picture Association of America. And before that,
he was European legal counsel and vice president for the
Business Software Alliance.
Upon graduating from the University of Utah, Mr. Cohen
served as a congressional aide prior to attending George
Washington University law school. We appreciate you being here
today, Mr. Cohen.
And finally, we have Mr. Richard Brunell, who is the
director of legal advocacy for the American Antitrust
Institute. Mr. Brunell is a guest lecturer at Boston College
Law School, and he wrote one of the amicus briefs in Leegin.
Mr. Brunell is a graduate of Swarthmore College and also
the Harvard Law School, where he was an editor of the Harvard
Law Review, just like our newly elected President.
I want to thank you all for your willingness to come today
and participate in our hearing because, quite frankly, we have
found it difficult to have--we want to have--well, our goal is
to always have equality in terms of the views that are
expressed, because it is an educational process for us. But
unfortunately, we were unsuccessful at twisting the arms of
some interests to take a stand today.
And I am sure that they have stands that they have taken.
And I am sure that they are watching everything that is going
on regarding this issue, particularly my appearance here today,
mine in particular, of course. So I expect that we would be in
full discussions about things as we proceed, and we will have
other hearings where we are going to hear more views than we
will hear today.
So without objection, your written statements will be
placed into the record, and we would ask that you limit your
oral remarks to 5 minutes. And you will note that we have a
lighting system that starts with a green light. And at 4
minutes, it turns yellow.
I know that real connection between green and yellow. I
learned that in pre-K, I guess, in terms of mixing the paint
and everything.
And of course, somewhere about a minute later, you will see
that ominous red light that appears. And so I know a lot of
folks don't particular--you get wound up and everything, but we
shall assist you as best we can in that regard.
So I appreciate, once again, you all coming. And after each
witness has presented his or her own testimony, Subcommittee
Members will be, of course, permitted to ask questions subject
to the 5-minute rule.
Commissioner Harbour, please proceed with your testimony.
TESTIMONY OF PAMELA JONES HARBOUR, COMMISSIONER, FEDERAL TRADE
COMMISSION, WASHINGTON, DC
Ms. Harbour. Thank you.
Chairman Johnson, Ranking Member Coble and Members of the
Subcommittee, I appreciate this opportunity to share with you
my personal views on minimum vertical price fixing, sometimes
referred to as resale price maintenance (``RPM''), or margin
maintenance.
During my oral remarks, there are three points that I would
like to make.
First, the Supreme Court has decided to repeat an already
failed experiment with RPM that flaunts congressional intent
and harms consumers.
Second, the lower court's evaluation of RPM under the rule
of reason will reward price fixing merchants and manufacturers,
and will further punish the victims, i.e., consumers and non-
conspiring merchants.
Third, RPM should be presumed to be harmful to competition
until a manufacturer has factually shown that its use of RPM
benefits consumers more than it harms them.
The Supreme Court's 2007 Leegin decision gave manufacturers
the right to set minimum resale prices for consumer goods,
guaranteeing higher consumer prices. This is bad economic and
legal policy. It gives excessively short shrift to consumer
preferences, the supposed driving force behind the market.
Post-Leegin and absent action by Congress, consumer
preferences will be subordinated to the interests of
manufacturers and merchants of branded consumer goods. In these
tough economic times, it is especially wrong to saddle
consumers with higher prices for daily necessities while
providing no countervailing benefit.
RPM advocates essentially ask us to believe that consumers
are better off when they pay higher prices for the daily
necessities of life because the benefits to manufacturers and
retailers eventually will trickle down to consumers. According
to the logic of the Leegin court, it is preferable to maximize
the welfare of conspiring manufacturers and merchants even
though the antitrust laws are designed to put consumers'
interests first.
The Leegin decision cannot be reconciled with the
legislative history of the antitrust laws. Congress has never
adopted nor endorsed a preference for RPM at the Federal level.
Congress did create an antitrust exception for RPM under
the state fair trade statutes. However, Congress ultimately
graded its 37-year natural experiment with RPM as a monumental
failure. In fact, in 1975, the fair trade exemptions were
repealed in favor of per se illegality. Congress did so because
RPM had been a dismal, if not disastrous, detour from sound
public policy.
RPM raised consumer prices by as much as 37 percent. It
lowered sales levels. It increased the frequency of business
failures. It created entry barriers. It distorted retailer
incentives, and it generally retarded retail competition.
Even if the Leegin majority can overlook these
congressional findings, I cannot. I ask, are we falling into a
Groundhog Day vortex where we are doomed to endlessly repeat
the same mistakes over and over again? Competition policy can
and should do a better job of protecting consumers, but I do
worry that Congress may some day be called upon to write yet
another report detailing the disastrous harms inflicted on
consumers during the Supreme Court's current experiment with
RPM.
And we know who is paying for this experiment. Sadly, it is
the American consumer. Both intra-brand competition and inter-
brand competition provide important benefits to consumers.
Existing case law, however, consistently denigrates the
importance of intra-brand competition.
Justice Powell's footnote in GTE Sylvania declaring the
primacy of inter-brand competition, finds no support in the
legislative history of the antitrust laws, but the courts
routinely, even rotely, cite it as authority.
In GTE Sylvania, the court was rebelling against the
Warren's court's alleged formalistic line drawing to support
liability. Yet the Leegin opinion, the Leegin majority, appears
to have drawn similarly formalistic lines to short-circuit the
RPM inquiry in the opposite direction and, in doing so, has
effectively created the very presumption of per se legality
that the court purports to disclaim.
This court's line drawing is devoid of substance. Labels
have again replaced rigorous analysis, and the law and the
American consumer are suffering because of it.
The Leegin court claimed that it intended the rule of
reason to weed out competitively harmful uses of RPM, but good
intentions will not cure a bad rule of law. The rule of reason
tends to be a euphemism for the absence of liability.
Potentially good RPM cases are already being dismissed without
any hearing on the merits. These threshold presumptions must be
established before the rule of reason can become a workable
tool for combating harmful uses of RPM.
There are economic theories praising RPM and other theories
condemning it, but none of theories on either side of the aisle
are supported by any systematic body of empirical evidence. At
best, we have strongly held beliefs about the effects of RPM,
sometimes bordering on the almost religious, but we are missing
facts, which are the building blocks of litigation.
The realities of litigation dictate that, when the facts
are equally probative of guilt or innocence, depending on which
theory is adapted to advocate them, then usually the party that
has the burden of proof loses. If full-blown rule of reason
analysis is applied in RPM cases, the burden of proof would be
placed on the victims, or the burden of proof will be placed on
the victim, but it won't be placed on the defendants who impose
the RPM policy.
The FTC is doing its best to further the development of
real-world facts about the effects of RPM by holding a series
of workshops, but any answers will be more than a decade away.
Consumers need relief today.
In conclusion, when it comes to the RPM debate, one simple
fact is indisputable: RPM guarantees that consumers will pay
higher prices. And until it is proven otherwise, I will
continue to believe that consumers are very unlikely to gain
any countervailing benefits in return for these higher prices.
Thank you.
[The prepared statement of Ms. Harbour follows:]
Prepared Statement of Pamela Jones Harbour
ATTACHMENT 1
ATTACHMENT 2
__________
Mr. Johnson. Thank you.
And now we will move on to Mr. Hungar. You ready, sir?
TESTIMONY OF THOMAS G. HUNGAR, PARTNER, GIBSON, DUNN &
CRUTCHER, LLP, WASHINGTON, DC
Mr. Hungar. Thank you, Chairman Johnson, Ranking Member
Coble and Members of the Committee. It is a great honor to
testify before you today on the subject of resale price
maintenance, or RPM.
I note that I am pretty seriously outnumbered on this panel
by opponents of RPM, but it is important to remember that among
those in the best position to understand the true effects of
RPM, namely economists who have actually studied the issue,
there is an even more lopsided breakdown, except it runs in the
opposite direction. There is a widespread consensus among
economists that RPM can achieve pro-competitive ends and
advance the interests of consumers in obtaining better
services, more information, and wider selection.
The evidence is overwhelming that RPM can, and often does,
have pro-comprehensive effects that benefit consumers. It can
encourage inter-brand competition, prevent free riding,
facilitate brand entry, ensure that retailers provide costly
but beneficial point-of-sale services, encourage retailers to
maintain adequate inventories despite uncertain demand, and
give customers peace of mind.
In fact, Pauline Ippolito, who currently heads the Bureau
of Economics at Commissioner Harbour's agency, did an extensive
study of RPM a few years ago and concluded that the principal
anti-competitive explanation for RPM, namely that it can
facilitate or conceal cartel activity, lacks explanatory power
for the vast majority of RPM uses, while the pro-competitive,
service and sales enhancing explanations, potentially explain
the vast majority of RPM uses.
She concluded, ``These findings are consistent with the
view that a relaxation of the broad per se standard prohibiting
RPM was warranted.'' And again, she is the acting head of the
Bureau of Economics at the FTC.
Most of the counter-arguments advanced by my fellow
panelists today rest at bottom on the unstated assumption that,
as a result of the Leegin decision, RPM will become universal,
or at least widespread in the economy. But there isn't the
slightest reason to believe that is true. Wal-Mart, Costco,
Amazon.com and other large discounters dominate the retail
scene in today's economy, and that is not going to change.
Where consumers value price over service, discount
strategies will thrive and RPM strategies will fail, along with
those manufacturers that adopt them. But in those markets where
RPM is an efficient means of meeting the demands of a
particular segment of the consuming public, there is no basis,
in logic or experience, for denying that flexibility to a
manufacturer.
Arguments against RPM also fail to take account of the fact
that manufacturers could achieve the same price effects through
other means, even under the old Dr. Miles rule: through Colgate
policies or vertical integration. So the effect of Leegin is
only to make it possible for manufacturers to achieve the same
results more efficiently, and efficiency gains are pro-
competitive by any measure.
Commissioner Harbour and other opponents complain that it
will be too difficult for parties challenging RPM to satisfy
the rule of reason test under Leegin, but, if true, that is
merely a concession that RPM can't be shown to be anti-
competitive, which is hardly a good reason for banning or
restricting it. Under the rule of reason, a plaintiff can meet
its burden either by showing actual anti-competitive effects or
by means of a market analysis.
And plaintiffs, including the FTC, do prevail in
challenging vertical practices under the rule of reason. Even
the cases cited by Mr. Brunell show that plaintiffs don't
always lose.
There is no basis for departing from the rule of reason
approach that the courts use to analyze all other vertical
restraints, especially since it is undisputed that non-price
restraints can have the same price effects as RPM. Congress
should not legislate hastily on the basis of rhetoric and
speculation rather than actual experience and evidence.
I urge you to preserve the flexibility of the Sherman Act,
and let the courts do their jobs and gain experience judging
RPM under the rule of reason.
Thank you.
[The prepared statement of Mr. Hungar follows:]
Prepared Statement of Thomas G. Hungar
__________
Mr. Johnson. Thank you, Mr. Hungar.
Now, Mr. Cohen, will you proceed, sir?
TESTIMONY OF TOD COHEN, VICE PRESIDENT, DEPUTY GENERAL COUNSEL
FOR GOVERNMENT RELATIONS, eBAY INCORPORATED, SAN JOSE, CA
Mr. Cohen. Chairman Johnson, Ranking Member Coble and
Members of the Subcommittee, my name is Tod Cohen, Vice
President and Deputy General Counsel for Government Relations
for eBay. Thank you for the invitation to speak today about the
negative impact of the Supreme Court's Leegin decision, in
particular on small and mid-size retailers who use the Internet
and whose benefits to help consumers are being crippled by the
very visibility created by the Internet.
We support Congress legislatively intervening and
reinstating a per se rule prohibiting retail price fixing.
Founded in 1995, eBay connects hundreds of millions of
people around the world every day. The company's online
platforms empower individuals and small businesses to meet and
engage in open trade on a local, national and international
basis.
We believe that the efficiency and consumer benefit to the
open Internet can be immense. Businesses use it to offer lower
prices, greater choice, and great values to consumers.
Consumers use it to more easily find, compare and purchase
products.
Unleashed, it is a game-changer, and we are still in the
innovation stage of retail on the Internet, with new retail
business models benefiting consumers, retailers and the overall
economy. The Internet is part of every serious 21st century
retail strategy, whether massive brick-and-click retailers with
websites and big box stores, large remote Internet and catalog
retailers with nationally known brand names or small businesses
who are building new Internet businesses or integrating the
Internet into an existing small shop to survive and grow in
today's highly competitive retail environment.
The Internet is also used by manufacturers, including the
most elite and specialized, to reach consumers with
information, and more and more with products. And the Internet
is critical to more consumers every day. It is the greatest
source of product information ever created.
I mention these facts because sometimes people paint this
issue as being about Internet retailers and discounters on one
side and non-Internet retailers on the other. Nothing could be
farther from reality. In short, everyone in retail uses the
Internet, but there are big differences on how the Internet is
used.
On one side are established networks of manufacturers and
retailers who want to reinforce or enhance established and
highly profitable retailing business models. They are
threatened by the Internet when it is harnessed to offer
consumers better deals and more information outside the
established incumbent retail networks.
On the other side are innovators with new business models.
They are almost always small to medium-size businesses. They
use new technologies to offer consumers better deals, more
information, and new services.
We believe that the Leegin decision is undermining consumer
benefits delivered by innovative retailers, especially on the
Internet. There is evidence that small and mid-size Internet
retailers are the primary target of aggressive post-Leegin
retail price fixing policies.
EBay's own experiences confirm that many large, established
businesses attempt to limit low price intra- and inter-brand
competition by continually scanning our platforms to identify
sellers offering their products at lower prices. They then use
a range of tools to identify these sellers and stop low-price
competition using different tactics, depending on the
circumstances of the sellers. The Leegin decision has clearly
been interpreted as a legal green light to more aggressively
thwart low-price competition.
Established retailers and manufacturers attempting to
enforce traditional business models contend that innovative
Internet retailers are able to offer lower prices to consumers
because they ``free ride'' on their traditional retail
counterparts.
The truth is that the Internet turns the traditional free-
rider justification for RPM on its head. Internet retailers and
services provide significant pre-sale price information to
consumers. The open Internet has completely revolutionized the
consumer information experience.
Consumers regularly turn to the Internet to search for
product information, make product comparisons, and check prices
before visiting and purchasing from established retailers. In
fact, it could even be argued that the largest and most
established retailers and their largest retailer partners are
free riding on the tremendous consumer information tools
created by Internet innovators.
From a competition policy and consumer benefit perspective,
the traditional rider free argument for RPM policies as applied
to the Internet should be put to rest. Innovation Internet
retail models simply expose incumbents to new competitive
threats and more innovative forms of retailing.
Protection from new and innovative retail models was always
a likely reason for RPM, and we think it is even more true in
the Internet age. Therefore, we ask this committee to
aggressively scrutinize the Leegin decision and adopt
appropriate measures to protect consumers and retail
innovators.
Thank you, Mr. Chairman, and Members of the Subcommittee.
[The prepared statement of Mr. Cohen follows:]
Prepared Statement of Tod Cohen
__________
Mr. Johnson. Thank you, Mr. Cohen.
And last but not least, we will ask Mr. Brunell to commence
your opening statement.
TESTIMONY OF RICHARD M. BRUNELL, DIRECTOR OF LEGAL ADVOCACY,
AMERICAN ANTITRUST INSTITUTE, NEWTON, MA
Mr. Brunell. Chairman Johnson, Ranking Member Coble and
Members of the Subcommittee, I am Richard Brunell, director of
legal advocacy for the American Antitrust Institute. Thank you
for this opportunity to present the views of AAI on the Leegin
decision.
We believe that consumer welfare and economic innovation
are best served when retailers are free to engage in
discounting, and therefore we urge Congress to restore some
version of the per se rule. We have had 22 months since the
Leegin decision, and we have learned a few things since then.
As expected, the use of resale price maintenance programs
appears to have increased even though antitrust counselors have
advised caution because some state attorneys general have taken
the position that RPM remains per se illegal under state laws,
and other states have passed, or may pass, their own Leegin
repealer bills.
We also believe that there has been a greater use of
Colgate policies and minimum advertised price policies to
enforce minimum resale prices. Allowing manufacturers to
forestall discounting by legitimate retailers is problematic at
any time, but we agree that it is particularly unfortunate
during this time of deep recession when consumers depend on
discounts to make ends meet, and manufacturers may be more
pressured than ever to use RPM to forestall retail price wars.
Another thing we have learned in the 22 months since Leegin
is that the so-called rule of reason adopted by the Supreme
Court is, in effect, a rule of virtual per se legality. Now,
the court said that RPM agreements were to be evaluated on a
case-by-case basis, and courts would have to be diligent in
eliminating anti-competitive uses from the market.
However, in most of the cases decided since the Leegin
decision, the lower courts have summarily dismissed the
complaints because the alleged relevant markets were said to be
too narrow as a matter of law. Plaintiffs were not even allowed
to try to prove their cases.
Now, the problem with the rule of reason is not just that
it requires a plaintiff to prove a relevant market, to prove
that the defendant has market power, which is a difficult and
expensive proposition even if the plaintiff gets by a motion to
dismiss. The problem is that the Supreme Court fundamentally
misunderstood the nature of the anti-competitive harm from
resale price maintenance.
The court and its Chicago School supporters look at higher
prices that result from RPM and they say, ``So what?'' They
assume that the manufacturers' and consumers' interests are
congruent. The manufacturer would prefer its retailers to sell
at lower prices, and therefore, if the manufacturer adopts RPM,
well, it must be because it will somehow increase demand for
its product, notwithstanding the higher prices.
Under this view, higher prices are only anti-competitive
when they result from collusion among manufacturers or
retailers. And if that is the anti-competitive theory, then no
plaintiffs will ever win a resale price maintenance case.
The critics of RPM, notably including Congress when it
repealed the fair trade laws in 1975, look at higher prices,
and they see harm to consumers. When a manufacturer announces
that it will not permit prices to fall below a certain level,
they are rightly suspicious. They know that manufacturers are
not fond of retail discounting when it puts downward pressure
on wholesale prices, and that a fixed retail price on one
product can put a floor under the price of competing products
that are not even subject to RPM.
So when they see higher prices that result from RPM, they,
and Commissioner Harbour and many others, say, ``Show me the
consumer benefit.'' Yet, the business justifications generally
offered for RPM, including those suggested by Mr. Hungar,
provide no real benefits to consumers. Economists may see a
theoretical benefit, but, in reality, there are no real
benefits.
A common justification is that RPM allows a manufacturer to
buy better distribution or shelf space from retailers that
carry competing brands. But while this may increase the
manufacturer's sales, it does not benefit consumers. On the
contrary, it can give retailers an incentive to push the
product with the largest margin protected by RPM even when the
product may be inferior to competing products.
Another common justification, of course, is the free rider
theory. But even if this is a plausible concern in some cases,
RPM is a poor mechanism for addressing it.
RPM is also frequently touted as a tool to maintain the
brand image of high-end products. And if one looks at the Wall
Street Journal in the series they have had on RPM, you see that
a lot of the manufacturers that are interested in RPM are the
high-end manufacturers of fashion products.
Let me just conclude by noting that, even where RPM could
have some possible justifications, it has one anti-competitive
effect that is universal. And that is it tends to prevent more
efficient retailers, who have expert local knowledge of the
needs and shopping behavior of their customers, from passing on
the benefits of their lower costs to consumers.
This centralization of decision-making not only harms
consumers in the short run, it slows down innovation and
productivity in the retail sector by impairing this essential
competitive tool for innovative retailers to gain market share.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Brunell follows:]
Prepared Statement of Richard M. Brunell
__________
Mr. Johnson. You are quite welcome, Mr. Brunell.
At this time, we will begin the questioning, and I will
grant myself as much time as I may consume.
I want to ask you all about some written testimony by Mr.
Hungar. And Mr. Hungar says that ``Sales efforts focused on
factors other than price may be more effective at serving the
interest of consumers.'' And if I could get you all to respond
to that statement with your concise response, we would
appreciate it, starting with Commissioner Harbour, and then to
Mr. Cohen, and also Mr. Brunell. And if necessary, we will give
Mr. Hungar an opportunity to clarify anything that may need to
be clarified.
Proceed.
Ms. Harbour. I believe that, in Mr. Hungar's written
testimony, the sentence before that talked about how consumers
who don't value the services, but would prefer lower prices,
would be inclined to shop at discount stores. But there are
consumers who would value those services, and then would be
willing to pay a higher price.
The consumer should vote with his or her pocketbook. They
should not be dictated to about which prices they should buy
consumer goods at.
Also, Mr. Hungar talked about how parties--how those who
are against RPM basically talked about how the rule of reason
was very difficult to satisfy and thought that that was in
favor of the argument that it was very difficult and it inured
against them. I guess what I would like to say there is there
should be a presumption of illegality, and it should be on the
part of the manufacturers to overcome that presumption. Let's
shift the burden away from the American consumer, away from the
victim of the higher prices, and let the manufacturers who are
proposing the higher prices have the burden of proof.
Mr. Johnson. Thank you, Commissioner.
Before we go to Mr. Cohen, I want to recognize the fact
that we have been joined by the distinguished gentleman from
Virginia, Mr. Goodlatte. Welcome, sir.
Mr. Goodlatte. Thank you, Mr. Chairman.
Mr. Cohen. Mr. Chairman, I think that factors other than
price, one of the concerns we have is that price uniformity is
what exists across for small- and medium-sized companies who
want to use and sell goods, they are forced into a price
uniformity. Consumers don't get a choice any longer as to where
they want to choose, if price is taken out of the equation, and
that large retailers have a lower price but may not be able to
deliver the services also.
So that at least if we have price transparency and price
elasticity and the allowance for people to choose where they
want to buy, then that is the key measurement that should occur
here. That is what is being limited by retailers and retail
price maintenance post-Leegin.
Mr. Brunell. I would just concur that, when retailers are
free to decide what price they will sell at, you end up with a
market that has both high service and high-price retailers, and
low service and low-price retailers, and that ultimately is for
the benefit of consumers.
Mr. Johnson. Thank you.
Mr. Hungar, do you wish to be in line for a response or
anything?
Mr. Hungar. Thank you, Mr. Chairman. Just a couple brief
points.
First of all, the concerns that are expressed seem to
assume that RPM will be somehow enacted across the entire
relevant market, and therefore somehow people's choices will be
limited. But of course, the reality is there is no reason to
believe that. We saw, even at the height of the fair trade era
when the law was much more favorable to RPM than it is under a
rule of reason test, at most, 5 to 10 percent of the economy
was affected by RPM.
So the idea that consumer choice will be limited because
everyone will adopt RPM has yet to be seen. And experience
suggests the opposite. And if consumers don't value what the
RPM system is producing in terms of extra services, they will
go elsewhere, and the RPM manufacturer will fail or change its
policy. That is consumer choice.
And then, the other point is, the fact of the matter is, as
the economic analysis indicates in some of the testimony before
the FTC, retailers and manufacturers have different incentives,
and RPM can encourage the retailers to focus on providing the
benefits and the services and the promotional activities that
will advance the interests of the manufacturer in inter-brand
competition.
Thank you.
Mr. Johnson. Thank you, Mr. Hungar.
And my dear great-great-great grandmother has always been
known as a impulse buyer, and so yesterday she was looking at--
shopping on the Internet, as the elderly usually do, and in her
spare time while she is home from work. And she came across a
deal on a laptop computer, and then that impulse kicked in.
Instead of just ordering it online, she put on her tennis shoes
and decided, ``I am going to go right now to the retail outlet,
and I am going to purchase my item there, because I want it
now.''
And so I have two questions. Tell me who is the free rider,
if any, in that instance? And also, isn't it the retail store
that is getting the free ride off the Internet? And to use your
words, sir, isn't it the service provider free riding off of
the discounter, as well?
Mr. Hungar. I haven't seen any analysis of the question
whether you would call that a free-riding situation. But
certainly, that context is one in which the free-rider issue
can arise because, although as Mr. Cohen pointed out, there are
many circumstances in which there is every reason to think that
Internet sales are most advantageous at the lowest price
possible, there are certainly circumstances with complex goods,
such as a computer, where many consumers value the opportunity
to go actually see the product, have it explained to them by a
live person rather than by computer-ese, and have an
opportunity to touch and feel and decide whether it is the
right thing for them.
And of course, the problem is it costs money to do that,
and not everyone is an impulse buyer, as you suggested. And so
for those people who aren't impulse buyers--and frankly, I have
done this myself, go and decide which product you want at the
showroom and then purchase it online where it is cheaper. But
of course, if enough people do that in enough length of time,
then of course it becomes prohibitively expensive to have
showrooms, and we are all worse off.
Mr. Johnson. Anyone else have a response to Mr. Hungar?
Ms. Harbour. Yes, I would like to respond.
Chairman Johnson, I think you hit it exactly on the head. I
do think that, when your grandmother went to the Internet----
Mr. Johnson. No, no, no, my great-great-great grandmother.
Ms. Harbour. Right. Excuse me, so your great-great-great
grandmother, when she went to the Internet----
Mr. Johnson. Yesterday.
Ms. Harbour [continuing]. And she did the research. She
probably learned quite a bit about that computer. And then she
went to her electronics store and looked at it, and maybe
purchased it.
I believe that the electronics store was free riding on the
Internet, and that is precisely what Mr. Cohen from eBay was
talking about. These forms of innovative retailing, if RPM is
allowed to remain in place, I believe that prices on the
Internet will be elevated.
There are things called shop-bots that troll the Internet
looking for prices, and manufacturers are using these shop-bots
to police their pricing. And if they see that a price is below
the resale price, they will contact the store and tell them to
raise the price of the goods. I don't think that this is in the
interests of the American consumer, so I do think it is a free
ride, and I agree with you.
Mr. Johnson. Thank you.
Mr. Cohen?
Mr. Cohen. Yes. I want to follow up a little bit on what
the Commissioner was saying with regard to how they are
policing and going after lower price sellers.
One of the concerns we have had was a company called Net
Enforcers, which represents brand owners and others and large
retailers. They scan our platform and identify sellers who are
offering at lower prices.
And last year, the Net Enforcer people attempted to shut
down more than 1.2 million listings on eBay claiming that there
were trademark or copyright infringements. In general, they
were most around the area of copyright infringement on the
images that were used by the seller, the text. That is true
that those were copyright infringements.
But we have seen an acceleration by those who use these
trademark and copyright violation claims when they are asking
us to take down the seller pages. When the sellers we examined,
the sellers they are going after, they are the sellers that are
at the lower prices, not at the MAP prices. And the MAP price
sellers who are using the same photos, same copyrights, same
trademark, are not being asked to have their listings taken
down.
So we are certain that the concern is is that it is a
pricing issue. It is not a copyright or trademark issue. And
that is where our interest has been in, to show that, post-
Leegin, aggressive MAP pricing schemes are being attempted
across the Internet.
Mr. Johnson. All right. Thank you.
And last, Mr. Brunell?
Mr. Brunell. I would just point out that this whole free
rider argument has been around for a long time, and it was
before the Congress in 1975 when Congress outlawed a fair
trade.
And the usual response is, well, if services for brick-and-
mortar retailers are necessary and important, then why can't
the manufacturer just pay the retailers, provide promotional
allowances or what have you for those services?
Mr. Johnson. Thank you, Mr. Brunell.
And now, I will ask Mr. Coble to commence his questions.
Mr. Coble. Thank you, Mr. Chairman, and you can call me
into a halt whenever you think the time is appropriate, in view
of the vote.
Mr. Hungar, you noted a number of justifications for RPM,
but you also stated that there could be good RPM and bad RPM. I
want to ask you to give us an example of a bad RPM.
And I want to ask you also your opinion as to whether you
favor a statute to address those circumstances, or do you
believe that the courts are better suited to devise those rules
on a case-by-case basis?
Mr. Hungar. Thank you.
An example of bad RPM would be resale price maintenance
that is used to enforce and permit policing of a manufacturer
cartel, where they can easily tell whether there has been any
cheating because each of the manufacturers has a stated resale
price maintenance policy for its retailers, and so the
retailers are all forced to price at the same level, thereby
concealing a cartel.
And of course, a horizontal cartel is, per se, illegal, and
resale price maintenance in conjunction with that activity
would certainly violate the rule of reason.
I don't think that there is any need for a statute, nor is
there any basis for legislating at this point. Much of the bad
RPM, such as the example I gave, comes in conjunction with
activity that the courts are already very well equipped to deal
with.
But we have not had sufficient experience with the wide
range of RPM policies that can be imposed to make any sort of
informed judgment about precisely where, as a legislative
matter, to draw the line, which is exactly why we should
benefit from the genius of the Sherman Act, which is the
flexibility it provides the courts to carefully examine
different situations in the particular context in which they
arise and determine what the appropriate response is.
And on this line, I would just point out that Commissioner
Harbour, in her written testimony, actually has, I think, a
very forthright admission that is very probative on the point
that this is not the time for Congress to legislate. She says,
``The lack of empirical research regarding the effects of RPM
is a further complication.'' And she says, ``There are economic
theories praising RPM and other theories condemning it, but
none of these theories on either side are supported by any
systematic body of empirical evidence.''
Now, I would say there is evidence, such as the Ippolito
article I pointed to on the side that RPM is not generally or
primarily anti-competitive. But putting that aside, she says,
``At best, we have strongly held beliefs about the effects of
RPM, sometimes bordering almost on the religious, but we are
missing facts, which are the building blocks of litigation.''
Well, I would submit that facts should also be the building
blocks of legislation. And it would be unwise and inappropriate
and premature for this body to act until sufficient facts have
been generated, and the judicial system is the best forum for
doing that.
Mr. Coble. Thank you.
Commissioner Harbour, let me put a quick question to you,
in view of the time. If a prominent manufacturer of handbags
engages in RPM, does not that give an incentive to other
handbag manufacturers to enter that market and sell their goods
for a little below that which the RPM manufacturer is selling
his goods? Does this not, in fact, enhance competitive between
brands for sales of handbags?
Ms. Harbour. Not if you are a woman who loves a particular
brand of handbag, and I will call it Handbag X. If that is the
only handbag you want to buy because it is designer, and you
only want to carry that, if Handbag Y is selling for less
money, you don't want that.
This is called intra-brand competition. Once you decide, as
a consumer, what handbag you want, then it doesn't matter what
other brands are selling. You are going to buy the one you
want. So I disagree with that premise.
But I must respond to Mr. Hungar. He made a few comments
that I just feel compelled to respond to.
Mr. Coble. Well, let me weigh in on your answer.
I guess, because of my frugality, Mr. Chairman, I would opt
for the cheaper good, but that is the difference in males and
females, I guess.
Ms. Harbour. But that is your right as a consumer, and you
should be able to do that. But let me just say for the record
that this is the time to legislate. You can mischaraterize my
testimony however you want to, but I want to make it perfectly
clear: it is definitely time to legislate.
There is another thing that Mr. Hungar said that I want to
push back on. He basically said that RPM is not going to be
enacted across all of the relevant markets, and that it really
only affects about 5 to 10 percent of the economy.
Well, back in 1975 when Congress looked at this issue,
Congress determined that the dollar amount was in the millions
of dollars. That was back in--actually, no, they said it was in
the billions of dollars, back in 1975. The effect of RPM was in
the billions of dollars.
Now, we are looking at 2009. That is more than 33 years
later. So the effect of RPM, if one could do an empirical
analysis, would probably be much greater in this day and age.
So I wanted to definitely talk about that.
And Mr. Hungar was asked about his opinion of the good uses
of RPM. Well, that is what the question is. We know what the
anti-competitive effects of RPM are. They are higher prices.
What is the pro-competitive benefit of RPM?
Mr. Johnson. And I want to stop you right there.
Mr. Coble, along with every other Congressperson, has been
called to the floor for three votes. And those three should not
take more than about 35 minutes or so for us to get back here.
So if you would hang out, we would appreciate it, and we will
see you as soon as we can.
We will now take a recess.
[Recess.]
Mr. Johnson. We are now back in this hearing, and I am
going to turn it back over to the Ranking Member, Mr. Coble, if
you have any follow ups or anything like that.
Mr. Coble. I think I am okay.
Mr. Johnson. Okay. All right. Thank you.
So we will now yield the floor to Mr. Brad Sherman.
Mr. Sherman. Mr. Hungar, one thing I never thought I would
do in Congress is to disagree with someone who used the phrase,
``Genius of the Sherman Act.'' And in fact, we are much better
off that that act passed than the regime that applied before.
But you have put forward the genius of the Sherman Act as
the concept that we will have the courts decide, and,
ultimately, the Supreme Court decide what economic policy is in
the interest of consumers. And to have the idea that our
economic policy would be determined by an entity that has no
economists on staff, that obtains no information except what is
presented to them inside their own building, and hears orally
from no one except an attorney, that that would be the entity
that would devise economic policy is absurd on its face.
In fact, it is one that only lawyers would even think of
countenancing. I think it is obvious that Congress has
delegated its responsibility and its authority by passing a
rather vague statute, and that what we are engaged in here is
the idea of perhaps drafting a more precise statute.
And to think that we should defer to an entity that takes
pride in the fact that they never talk to real consumers--God
forbid a Supreme Court justice should talk to somebody at
Costco. That would be ex parte. They would vilify the concept
that it could affect them.
We here in Congress are in Costco every day, at least one
of us. We talk to real consumers. And oh, by the way, we are
accountable to them. And to think that the right form of
government is one where nine people who take pride in never
talking to any consumer, who take pride in the fact that they
are immune from any accountability to any consumer, that that
is the body that should make economic policy, that concept is a
blot on the Sherman family name.
And the idea here is that, somehow, consumers benefit
because, up until the recent court decision, we didn't have
legal resale price maintenance agreements. And so if someone
wanted higher prices and more service, they might be denied
that opportunity.
Now, I, unlike the Supreme Court, talk to a lot of
consumers about public policy and have those conversations
influence my decision. But I can't talk to all of them. Do you
know of any poll or market survey where Americans said, ``Damn
it, we are being deprived of the opportunity to find some
retailer that will charge us higher prices and provide better
service?'' Is there any evidence that this unavailable,
mythical, more-service, higher-price retailer is desired by
consumers? They just can't find it?
Mr. Hungar. Well, I think, first, on the genius of the
Sherman Act, which I continue to adhere to, my point about the
genius of the Sherman Act is that Congress did not attempt, in
writing the Sherman Act, to proscribe a detailed code of
conduct that addresses every particular type of practice.
Mr. Sherman. Well, excuse me. Businesses have to deal with
a real world where they have to know what the rules are. The
vaguer those rules, the higher the attorney's fees and the more
vagueness they have to operate with.
And if Congress doesn't provide detailed rules, then either
there are no rules and you have to guess at them, or nine
people, deprived intentionally of any contact with normal
humans in terms of gathering information about public policy,
are going to make those rules. And in fact, the antitrust law
fills tens of volumes, and the portion of it written by
Congress is barely a pamphlet.
So to say that businesses are going to operate without
rules is absurd. And to say that those rules should be written
by those who we defer to because we are unwilling to do our
job, I just hope that concept is not associated with my
surname.
Mr. Hungar. Well, with all due respect, Section 1 of the
Sherman Act, I believe, is one sentence long, and that is what
we are talking about here, the fact that----
Mr. Sherman. Exactly. And if Congress----
Mr. Hungar [continuing]. Of the law.
Mr. Sherman [continuing]. Would do its job, it would be
several pages long and the rules that business operated under
would be decided by democracy instead of an institution that
prides itself on being removed from the reach of consumers.
Your theory of government is fundamentally anti-democratic.
Mr. Hungar. I am not suggesting that Congress doesn't have
the power. Of course it has the power to prescribe detailed----
Mr. Sherman. But you praised those who went before us for
not exercising that power, for deferring----
Mr. Hungar. Well, Congress did exercise the power in the
Sherman Act, and the genius of the Sherman Act is that it bans
unreasonable restraints on trade. But Congress recognized that
you can't possibly identify and try to legislate regarding the
infinite number of different possible situations in which
different arrangements can be imposed. And therefore the
courts, because they can do a case-by-case careful analysis
that considers all the facts, that has economists come and
testify in the courts, and they do that in all these cases----
Mr. Sherman. Well, we are not here--sir, reclaiming my
time, we are here dealing with a Supreme Court decision,
ultimately the rules. I mean, the rule for a business isn't,
``Well, we will go to court, and we will figure it out what it
is, because you can't run a business that way.
And the only rule that you can adhere to is one set forth
by the highest court in the land. And to say that this anti-
democratic institution should be deferred to by the elected
representatives of the people is certainly not genius. It is
what has happened.
But I would ask you to use my time to address my question,
and that is, can you identify a circumstance in which the vast
majority of consumers have said, ``Well, at least in this
circumstance, we are deprived of the opportunity to pay higher
prices. We want to pay higher prices, and we want more service
than is available at the highest priced retailer in our
community.''
Mr. Hungar. Well, I think that the variety of types of
sales efforts made by different types of retailers and
manufacturers show that some consumers clearly do value the--
service.
Mr. Sherman. Oh, clearly. I mean, up until this case, there
was a wide variety of different stores offering different
levels of service and different prices. We didn't have resale
price maintenance agreements. And if I wanted to go to
Nordstrom's instead of Shirts 'R Us, I was free to do so.
Do you have proof that 2006 was a terrible year for
consumers because they were being deprived of the benefit of
greater service and greater information about a product, and
greater prices? I mean, what was the matter with 2006?
Nordstrom's was there.
Mr. Hungar. As Commissioner Harbour said in her testimony,
we don't have empirical evidence either way, and therefore
there is, in my view, no basis for the Congress to legislate.
Mr. Sherman. Ah, but we do, because we are not a court. We
actually talk to real people. Got 535 of us. And it may not be
a scientific poll, but it is probably better than most real
pollsters.
I have never had a constituent complain that prices were
too low. I have heard them complain about bad service at this
or that store, but they were always aware, and before the
decision, that there was a higher-priced store they could go
to.
I have received at least 1,000 complaints about high
prices, and not a single consumer has ever said, ``I want to
pay even more than is being charged at the highest-priced store
in the San Fernando Valley because I want better service than
is being provided at the most exclusive store in the San
Fernando Valley,'' let alone anybody--they could always drive
to Beverly Hills if they wanted to.
But even people who were confined to my own community, is
there any evidence that 2006 was a year in which consumers
could not find the high-price, high-service combination that
you say they often want?
Mr. Hungar. Well, you need to remember that, even under the
Dr. Miles regime, manufacturers could impose minimum retail
prices through either vertical integration or through the
Colgate policy, which allowed them to terminate any discounting
retailer. So it is not really----
Mr. Sherman. But the law we had in 2006 is what I am
talking about, because we could pass the 2006 Law Restoration
Act and put resale price maintenance agreements back where they
were in 2006. Is there any evidence that there is any group of
consumers that would be disadvantaged by such a policy?
Mr. Hungar. Well, again----
Mr. Sherman. Given the fact that, in 2006, at least in the
San Fernando Valley, there were plenty of high-priced stores
with great service.
Mr. Hungar. There is no evidence that there would be any
group of consumers who would be advantaged, either. Remember
that, in 2006, the law was that a manufacturer could impose
minimum prices through a Colgate policy and terminate any----
Mr. Sherman. In 2006, we went on eBay and we got great
prices.
Mr. Hungar. And you do today, as well.
Mr. Sherman. Ah, but we have, what, Mr. Cohen, how many
different things have you been asked to take down?
Mr. Cohen. From the Net Enforcers, just one company that
was seeing to enforce MAP pricing on our site, there were 1.2
million listings that they claimed that they sought to have
taken down last year in 2008.
Mr. Sherman. Hmm.
Now, I would point out that this whole idea of free riding
was a concept invented and discussed before the Internet. Now,
when I want information, I go to the Internet. When some new
company wants to start and they want access to the market, they
often start as an e-retailer. And in terms of investing in
inventories, which is some justification for retail price--I
mean, if you only need one inventory to service the whole
country because you are an Internet retailer.
Mr. Cohen, your testimony talks about how the Internet is
changing the concept of free riding. Do you have any data that
back up the assertion that there has been a change? And is it
now the case that, with the Internet, there are ways to get
information and to deal with inventory maintenance and market
access that substitute for the perceived benefits, or alleged
benefits, of retail price agreements?
Mr. Cohen. Congressman Sherman, a Wall Street Journal
article highlights the new generation of how consumers are
benefiting in this, and that they are looking it up online
first and then buying it offline.
And the article references that cars, homes, personal
computers, medical care, are areas where nearly four out of
five shoppers say they gather information on their own from the
Web before buying--92 percent of the respondents said that they
had more confidence in the information they seek out online
than anything coming from the traditional sales clerk or the
offline. So--that there is even more value to the information
they find online, and that nearly 70 percent of Americans say
they consult product reviews or consumer ratings before they
make their buying decisions, and spend at least 30 minutes
online every week to help them decide what and whether to buy.
I would ask the Chairman and the Ranking Member to submit
to the record the article that has the background data that was
used by the Wall Street Journal in this article.
Mr. Sherman. So moved. I assume there is no objection and
it will be made part of the record.
Mr. Johnson. Without any objection, so ordered.
[The information referred to follows:]
__________
Mr. Sherman. Now, a lot of this Internet information is not
free rider in the sense that I am going to one retailer,
getting all this wonderful information that they paid thousands
of dollars to put up on the Internet, and then going to another
retailer. Usually, at least in my case, I am going to a
manufacturer's website, or I am going to articles that are
written.
When you describe this gathering of information, is much of
it a circumstance where one retailer is providing the
information and another retailer is getting the sale?
Mr. Cohen. It is literally every possible permutation you
can think of. So for example, people use our sites to gather
pricing information, right? They will search on eBay. They will
search on shopping.com to find all the different prices that
are available for the product that they want.
They will use Amazon to look at product reviews, and then
purchase off of eBay. They will purchase on Amazon. So there is
both--within different Internet retailers, within different
marketplaces, we all have the example of doing it ourselves to
go online to gather up information.
We know from our own empirical evidence that a staggering
percentage of people that come and use our site never purchase
on our site. So there is some information that they are
gathering from that that they are finding useful in their
purchasing decision. And we can also submit to the record some
of that information, too.
Mr. Sherman. Mr. Brunell, is there any way to identify
particular niches of products where perhaps we should the
current court's decision to persist, or must we paint with a
broad brush here and have one rule for golf tees and computers?
Mr. Brunell. I don't really think there is a basis to have
a separate rule for different industries, but there may be
instances, for example the one that Justice Breyer cites in the
dissent in Leegin, of resale price maintenance as being used by
a new entrant in a business as being an example where he
suggests that perhaps you should have an exception to the per
se rule.
So there might be particular instances where Congress could
define specific types of instances where a different rule might
apply, but there is no basis for treating industries
differently.
Mr. Sherman. So whether it is CAT scan machines or
nuclear--there is no particular product which you are
convinced, ``Aha, there we need the manufacturer to control,''
although usually there is not a retailer for a nuclear plant.
Mr. Brunell. The answer is typically that there are other
tools that manufacturers can use to ensure that services are
provided, promotional allowances and so forth that are, indeed,
quite common so that the purported benefit of resale price
maintenance, even under the Chicago School theory, is not so
much that the services are provided under their theory, but
that it might be, in their view, perhaps more costly for a
manufacturer to pay for promotional services, let's say, rather
than have resale price maintenance. There is no evidence, of
course, that that is the case, but that is the theory.
Mr. Sherman. Commissioner Harbour, I have got an unusual
question for you. Were you appointed by President Bush?
Ms. Harbour. I am an Independent, and I was nominated by
the majority leader, Senator Daschle at the time, Majority
Leader Daschle. Then, my name went to the White House, and
President Bush passed on it. And then, my name went to
Congress, and I was confirmed by the full Congress.
Mr. Sherman. That is a process that might have yielded a
different result if President Bush had simply selected without
Mr. Daschle's input. And I think in this case, the process was
quite successful.
I will yield back.
Mr. Johnson. Thank you, Mr. Sherman.
And do we have any more questions coming from any of our
many Members of the panel who are here today? Seeing nobody,
and hearing from no one, Mr. Coble, do you have any objections
to us concluding this hearing at this time?
Mr. Coble. Much to the satisfaction of probably the
witnesses, I have no objection at all, Mr. Chairman.
Mr. Johnson. Well, I agree. I think they have been tortured
long enough, and not by any one particular person, but just by
being here as long as you have. And we do sincerely appreciate
your coming today.
This hearing is adjourned.
[Whereupon, at 5:09 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record