If you regularly buy contact lenses in the United States, you might have noticed that the price of your preferred contacts is the same wherever you look. This is because several top contact lens manufacturers recently decided to set a minimum price for their contacts. If a retailer undercuts this price, it could lose out on the ability to buy popular contact lens brands on the wholesale market.
It’s hardly unusual for a company to set a price below which retailers may not sell its products. If you try to buy a new iPhone, odds are you’ll find most stores selling it for the same price—and that’s exactly what Apple wants. The same goes for many other goods, such as golf clubs and many luxury fashion items.
And while this price floor may sound like bad news for consumers, many people pay less today for contacts than before the major manufacturers announced their “unilateral” pricing policy. Getting the best deal on contacts once involved navigating through complicated rebate schemes. But now, the price for a particular type of contact lens is generally transparent and consistent across the country. The downside: Some savvy consumers pay more for contacts than they used to.
In general, it’s not against the law for companies to decide to do business only with retailers who don’t undercut a specified price. Although many manufacturers don’t care how much retailers mark up their goods, some companies think they’re better off with their products selling for a uniform price. And businesses that sell popular items aren’t the only ones who like unilateral pricing policies; consumers stand to benefit as well.
Consider the Apple Store. Across the world, its luxurious locations showcase Apple’s lineup of expensive electronics—yet the Apple Store typically sells iPhones, MacBooks, and other devices for the same price as any nearby electronics retailer. One reason Apple can staff its stores with well-compensated product experts (the Apple “geniuses”) is that it doesn’t have to worry about consumers walking into an Apple Store, getting buying advice, then crossing the street to Best Buy and buying an iDevice for $50 less.
A similar dynamic exists in the contacts lens business. When optometrists spend time with their patients, they not only provide a prescription, but also help them decide the best type of contact lenses to purchase. Consumers are free to buy their contacts from a variety of sources, but many contacts are sold by optometrists. Before contact lens manufacturers announced uniform nationwide prices, many consumers would shop around for good deals, undercutting optometrists’ incentive to give the best service possible.
Naturally, some big contacts retailers aren’t fans of the new pricing system. 1-800-CONTACTS, a big mail-order contacts seller based in Utah, is particularly incensed about its inability to undercut competitors’ prices. So the company lobbied the Utah legislature to pass a law prohibiting contacts lens manufacturers from selling only to retailers that abide by a minimum pricing policy. And in March 2015, Utah’s governor signed into law an amendment to the state’s Contact Lens Consumer Protection Act that makes it illegal for a contact lens manufacturer to try to control the prices at which its products are sold.
Utah’s law will have nationwide effects, because 99 percent of 1-800-CONTACTS’ sales go to out-of-state residents. In fact, 1-800-CONTACTS accounts for about 10 percent of contact lens sales in the U.S.
Under the Utah law, the big contact lens manufacturers have a choice: They can either abandon their unilateral pricing policy—going back to the world of complicated rebates and price shopping—or they can live with 1-800-CONTACTS and other Utah-based retailers selling contacts for lower prices than optometrists and retailers in the other 49 states. Either way, 1-800-CONTACTS wins, even as contacts manufacturers—and, arguably, consumers—lose.
Before Utah’s new law upends nationwide contacts pricing, however, the state must overcome a serious roadblock: a constitutional challenge brought by several contact lens manufacturers.
To understand the case against Utah’s law, a brief refresher on Article I of the Constitution is helpful. Under a constitutional doctrine known as the “dormant” Commerce Clause, states aren’t allowed to unreasonably burden interstate commerce or discriminate against out-of-state companies, as Hans Bader and I explain in a recent paper. This principle comes from the text of the Commerce Clause, which gives Congress—and Congress alone—the power to “regulate Commerce … among the several states.” And as the Supreme Court has explained, the Commerce Clause affords “protection from state legislation inimical to the national commerce.”
Utah’s law plainly runs afoul of the Commerce Clause. The law’s aim is to favor 1-800-CONTACTS over retailers outside of Utah—where unilateral pricing remains legal—to the detriment of contact lens manufacturers, all of whom are based outside of Utah. And Utah’s law does not seek merely to protect Utah consumers, who represent a small fraction of 1-800-CONTACTS sales (about 1 percent of the U.S. population lives in Utah), but instead affects consumers across the nation. Simply put, the obvious and intended consequence of Utah’s law, if allowed to stand, will be the demise of unilateral contact lens pricing.
To be sure, not everyone believes unilateral pricing is in consumers’ best interest. But the proper place to debate the merits of this business model is in Congress, not in state capitals. Our Constitution does not permit each state to act as a self-interested fiefdom, protecting local businesses at the expense of national commerce. Utah’s law deserves to fall.