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 Supreme Court reverses precedent on retail price fixing!
Los Angeles, July 2 – If you think the Supreme Court isn’t important, guess again.
In a decision which did not get as much play as those on school integration and campaign funding, Justice Anthony Kennedy’s decision in Leegin Creative Leather Products vs. PSKS, Inc. dba Kay’s Kloset now makes it potentially legal for manufacturers – including cigar manufacturers – to set minimum retail prices for their products.
Announced on Thursday, June 28, the decision – by a 5-4 vote – overturned a 1911 decision in Dr. Miles Medical Co. vs. John D. Park & Sons Co., (220 U.S. 373) in which the Court held that it is illegal “for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods.”
Instead of this immutable rule, Justice Kennedy prefers the “rule of reason” and wrote that:
• “Minimum resale price maintenance can stimulate interbrand competition – the competition between manufacturers selling different brands of the same type of product – by reducing intrabrand competition – the competition among retailers selling the same brand.”
• “A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; 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 inbetween.”
• “Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate.”
• “With price competition decreased, the manufacturer’s retailers compete among themselves over services.”
So what does this mean?
Subject to unreasonable abuse – such as every cigar manufacturer and distributor adopting the practice – the decision will allow cigar makers to set minimum retail prices below which their brands and shapes cannot be sold. It may begin the level the field between the large national discount shops such as Famous Smoke Shop, J-R Cigars, Mike’s Cigars and many others and retailers, who have long decried the ability of these large enterprises to deeply discount popular brands while brick-and-mortar retailers (which all three of the above are also, by the way) maintain suggested retail prices.
But maybe not . . .
In fact, the pressure on cigar discounters has never been greater. In recent years, the largest players in the U.S. cigar market such as Altadis U.S.A. and General Cigar, have introduced brands which they demand stay in stores and not be sold by mail or online; the Montecristo Classic line and the Partagas 160 Signature Series are examples of this.
But the large discount houses have not been successful without reason. Look for several continuing reasons why these sellers will prosper:
• Discounters sell primarily in interstate commerce and are able to avoid charging state tobacco taxes; such taxes, if due at all, are the responsibility of the person ordering cigars from out of state (as if anyone actually bothers to pay them). To the extent that states will recognize this and limit their in-state taxes to a modest amount – 50 cents per cigar in some states – states can dramatically increase their tax revenue from cigar stores by reviving “box sales” in local stores.
• Discounters selling in interstate commerce do not have to collect state sales taxes; this is not about to change, along some states are trying to collect these taxes.
• Discounters will continue to offer more “packages” around boxes of cigars such as free five-packs, ashtrays, lighters, artwork, coffee, cutters, cigar cases, humidors and so on. Essentially, they take the money they would not have collected because of their discounted pricing and turn it into additional goods that give the consumer a reason to buy from them instead of their local smokeshop.
• More and more of the discount houses will work with manufacturers to create their own brands or special versions of existing brands. J-R Cigars owns dozens of trademarks and has commissioned its own versions of H. Upmann, Montecristo and many others. Same for Famous, Mike’s and others. This will increase and will create some confusion in the marketplace, but it’s an exciting time to be a cigar consumer.
Of course, manufacturer price controls are not new in the cigar industry. Just look at Davidoff.
Through its creation of an “Appointed Merchant” network to sell its top-end Davidoff line, it has carefully controlled who sold what at what price, even by mail and online. If there were any doubts about the validity of such a program, the Supreme Court has eliminated them.
The new decision in Leegin, as the case will be known, formally sanctions a practice pioneered by Davidoff and which has been steadily spreading to other manufacturers, especially over the past three years. By the end of this year, it may not be easy to find many discounts on the top brands. But it will be interesting to see how much free stuff comes with a box of cigars in the future!
If the past is any indication, cigar enthusiasts may need a storage cabinet to put alongside their humidors to store all the additional goodies they are likely to get.
~ Rich Perelman
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