California Apparel News

Supreme Court decision provides luxury labels with a new weapon in retail pricing and brand integrity

Try discussing brand integrity with any fashion or luxury- brand executive. Irrespective of whether the executive is a designer, marketer or in-house legal counsel, one topic inevitably arises: How can a luxury brand maintain its status if it ends up on the shelves and racks of off-price retailers, discount mass-retailers or warehouse club stores?

While discount retail serves a respectable purpose, its root philosophy is generally inconsistent with the interests of fashion and luxury-brand owners. The impact of this inconsistency to brand owners should not be underestimated. In the apparel world, two of the most influential factors in shaping a brand’s identity (apart from the product itself) are the product’s price and the environment in which it retails. For brands higher up the luxury food chain (and for brands endeavoring to climb that food chain), these two factors are critical to the marketing effort.

Fashion-brand owners, whether start-up or established, generally exert considerable effort to differentiate their product. Price-point considerations must take into account the psychological impact on the consumer, as well as the impact to the company’s bottom line. Distribution decisions are equally deliberate. In many cases, brand owners (or their distributors) will attempt to position products directly in the marketplace by handpicking which retailers receive goods.

But those efforts could prove fruitless if the retailer opts to close out the product.

If a store has over-purchased or is otherwise unhappy with a particular product’s sell-through, the store can cut its losses by reselling unwanted merchandise on jobbers, brokers and off-price retailers.

Given consumers’ intrinsic tendency toward associating brand quality and cachet with a brand’s surrounding retail environment, luxury-brand owners have reason for concern when products that are artfully designed, priced and positioned to differentiate themselves end up sharing rack space in deep-discount retail graveyards with underperforming, low-quality and, in some circumstances, counterfeit goods.

In June, the United States Supreme Court handed down a decision that could provide a measure of protection for luxury brands looking to ensure their products are sold in the environment—and at a price—that is consistent with the company’s brand message.

The case, Leegin Creative Leather Products v. PSKS, was brought by PSKS, a clothing retailer doing business as Kay’s Kloset, against Leegin Creative Leather Products, the manufacturer of Brighton-branded leather accessories for women. In an effort to position Brighton as an upscale brand sold only in boutique stores, Leegin adopted a policy refusing to sell the Brighton line to retail stores reselling the products below the suggested retail price. In order to do business with Leegin, retailers had to agree not to discount the Brighton products.

In effect, Leegin had set a “vertical price-maintenance agreement” (or “VPMA”). VPMAs enable brand owners to set certain economic parameters that retailers must comply with when reselling goods—most commonly, these accords set minimum prices below which a product may not be sold. In doing so, VPMAs grant brand owners the ability to regulate price and retail environment. By ensuring that a product retails at the brand owner’s desired price point, VPMAs have the follow-on effect of restricting a retailer’s ability to resell merchandise at lower prices to discount retailers.

However, for more than 100 years, VPMAs were deemed illegal. Until the Leegin decision, vertical price maintenance was considered an illegal restraint on trade and competition.

In the Leegin case, the accessories manufacturer discovered Kay’s Kloset was in breach of its policy by discounting the Brighton leather goods 20 percent below the set retail price. Refusing to adhere to the suggested minimum resale price, Kay’s Kloset brought suit against Leegin, claiming the agreement constituted illegal price fixing in violation of antitrust laws.

Siding with Leegin, the Supreme Court noted that “[v]ertical agreements establishing minimum resale prices can have either pro-competitive or anti-competitive effects, depending on the circumstances in which they are formed.” As such, resale price-fixing agreements cannot be concluded as illegal on their face because they do not always or almost always tend to restrict competition and decrease output.

According to the decision, VPMAs in which manufacturers and retailers agree on price floors for the resale of products to consumers are not illegal on their face and must be evaluated on a case-by-case basis.

Given this recent, extraordinary development, brand owners should strongly consider incorporating vertical price maintenance into their marketing plans. But beware. Not all VPMAs are created equal, and, as the Supreme Court made clear, not all are legal.

Brand owners should consult with their attorneys to ensure VPMAs are carefully drafted to comport with the guidelines set forth in the Leegin decision.

James S. Williams is the chair of the fashion and luxury-brand industry group at Loeb & Loeb. His practice centers on the management of intellectual-property portfolios and celebrity name and likeness assets. His clients include 7 For All Mankind, True Religion, Juicy Couture and Planet Blue. He is also a member of the Licensing Executives Society, Fashion Business Inc. and The International Anti- Counterfeiting Coalition. Comments and questions can be directed to jwilliams@loeb.com or (310) 282-2336.