In case you haven't yet heard about the Supreme Court's June 28th ruling on "Leegin Creative Leather Products vs. PSKS, Inc. dba Kay’s Kloset," the Court ruled that it is now legal for a manufacturer to set the minimum price a distributor can charge for the manufacturer’s goods. In the 5-4 ruling, Justice Anthony Kennedy’s decision overturned the 1911 "Dr. Miles Medical Co. vs. John D. Park & Sons Co." decision, which until now, made it illegal to do so. Therefore, the new law applies to all manufacturers, including exporters of premium handmade cigars.
If you can bear with a little legal mumbo jumbo, the following excerpts illustrate some of the key points of the decision and should help give you a better understanding of why the Court ruled the way it did.
Justice Kennedy writes: "A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; [competition between manufacturers who sell different brands of the same type of product.] this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in-between.”
Kennedy later adds, "If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer retailers compete among themselves over services."
The other side of the argument
Justice Breyer, who dissented with Justices Stevens, Souter and Ginsburg, wrote: "The fact that a rule of law has become ‘embedded’ in our ‘national culture’ argues strongly against overruling…The per se rule forbidding minimum resale price maintenance agreements has long been ‘embedded’ in the law of antitrust. It involves price, the economy's 'central nervous system'…It reflects a basic antitrust assumption (that consumers often prefer lower prices to more service). It embodies a basic antitrust objective (providing consumers with a free choice about such matters). And it creates an easily administered and enforceable bright line, ‘Do not agree about price,’ that businesses as well as lawyers have long understood…The Court suggests that it is following the common-law tradition…In sum, every stare decisis concern [the doctrine that, once a court has laid down a principle of law applicable to a certain set of facts, it will adhere to that principle and apply it to future cases where the facts are substantially the same] this Court has ever mentioned counsels against overruling here…The only safe predictions to make about today's decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles. I do not believe that the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing."
What does all of this mean to you, the cigar consumer? Some of the ruling's consequences are yet to be seen, but one thing's for sure: Cigar makers will now be able to set minimum retail prices for their brands and respective frontmarks. Accordingly, retailers will be prohibited by law from selling below the manufacturer's set minimum price. It may help level competition among the big online retailers, while giving the B&M cigar stores a leg up, but, as Justice Breyer noted, expect prices to go up regardless of where you purchase your cigars.
So, will cigar smokers abandon online "cigar discounters" if the prices are equivalent to their corner cigar store? Probably not. Online retailers will still have a considerable amount of market power; the ability to offer bigger selection, save customers state sales taxes where applicable, offer free cigars, shipping, and other premiums, as well as provide a wider range of customer service. It will also be incumbent upon mass merchants to be more creative in their marketing and new customer acquisition efforts.
How this decision will play out in the months ahead should prove to be even more provocative after the RTDA convenes in Houston next month when the manufacturers meet the retailers face-to-face.
