The Forgotten Story of “Fair Trade” Laws

A tale I wrote about many years ago now is that state courts did not stop protecting economic liberty after the U.S. Supreme Court all-but did in the wake of the New Deal. Many state judiciaries continued to find unconstitutional under their own state constitutions various restrictions on the right to earn a living and the right to contract. Perhaps the best example of this is a now long-forgotten form of legislation called “fair trade acts.” They were anything but fair and eventually made illegal via Congressional legislation. But in the meantime a majority of state high courts to address them found them unconstitutional. This week just a short post about what they were and how their story demonstrates protecting economic liberty can be a downright normal thing for judges to do.

The most controversial aspect of “fair trade acts” were “non-signor clauses.” The acts regulated the price at which a buyer of a trade-marked or brand-name product could resell an item as stated in a contract. Thus, if the holder of a brand of watches, Alpha, sold the watches to a retail store, Beta, then Alpha could negotiate a price at which Beta could resell the watches at and the law mandated that Beta had to sell at that price.

What made the acts so controversial is the price mandate did not only apply to the initial buyer but to subsequent buyers even if they weren’t parties to the contract. Thus, if Beta turned around and sold the watches to another store, Gamma, and Gamma then started selling the watches at retail for a lower price, Alpha could sue Gamma for violating the act. Of course, Gamma wasn’t a party to the original contract and had nothing to do with it. The acts, as many courts noted, were essentially a delegation of the legislative power to control prices (itself a constitutionally dodgy type of law in the first place).

Due to a 1911 U.S. Supreme Court decision, the Sherman Act (a federal antitrust law) was interpreted to make these kinds of contracts illegal. However, during the Great Depression there was pressure from various groups for all kinds of price controls, and one result of this was for Congress to allow for states to pass fair trade acts in 1937 with the Miller-Tydings Fair Trade Act. This then led to a majority of states adopting fair trade laws until Congress eventually changed its mind and repealed Miller-Tydings in 1975.

But, although popular in legislatures, during that 38-year window state fair trade acts did not do too well. At least twenty-one state high courts found them unconstitutional under state constitutional due process clauses, or similar clauses protecting the right to contract. That’s almost a majority of the states that adopted the laws. And other states invalidated the laws under other state constitutional grounds.

One of those twenty-one was the Nevada Supreme Court. In the 1962 case of Zale-Las Vegas v. Bulova Watch Co., the court heard a lawsuit brought by the Bulova company against a retailer for selling protects at too good a price under the state fair trade act. The court examined the various other state courts who had already assessed the constitutionality of similar laws and found that even under more modern, and expansive, understandings of the police power, the law violated the state constitution. It quoted a recent similar case from Wyoming stating “such legislation is so grossly unconscionable that courts, as the final arbiters of its reasonableness, must hold the law an unwarranted invasion of the private liberty and property guaranteed by the Constitution of this State.” Further, with a nod to the U.S. Supreme Court’s, even by then, long drought in protecting economic liberty, the Nevada court declared that “We are under no compulsion to follow decisions of the United States Supreme Court which considers such acts in connection with the federal constitution.” And there went the Nevada fair trade law.

If for some reason Congress ever makes it legal for states to adopt these laws again most of these cases remain precedents to take those laws down. Economic liberty runs deep in the state courts, as, in a different kind of case, my colleagues demonstrated last month in Georgia.

Anthony Sanders is the Director of the Center for Judicial Engagement at the Institute for Justice.