On November 4, 1997, the U.S. Supreme Court decided State Oil Company v. Barkat U. Khan, ___ U.S. ___, 118 S.Ct. 275, 66 USLW 4001, 1997 WL 679424, 97 C.D.O.S. 8447 (1997). The issues before the Court were whether State Oil's controls on the maximum resale prices of the gas station operators to whom it sold gasoline were per se illegal under Albrecht v. Herald Co., 390 U.S. 145 (1968), and whether Khan was entitled to recover damages based on those resale limitations. The Court held that Albrecht should be overruled and that maximum resale price maintenance agreements between a supplier and its reseller customers should be tested under the Rule of Reason and not the per se rule. It then remanded the case to the Seventh Circuit Court of Appeals.
I. WHAT ARE THE IMPLICATIONS OF THE DECISION?
A. A supplier's control over the maximum resale prices that its distributors and dealers may charge will be tested under the Sherman Act's Rule of Reason. As a consequence, it will be very difficult for a reseller to make a case that a supplier's control over the reseller's maximum price levels constitutes an unreasonable restraint of trade under the Rule of Reason test, even if the supplier has market power.
B. Vertical minimum resale price maintenance is still illegal per se. Don't look for this rule to change anytime soon.
C. State antitrust law is unaffected by this decision. Therefore, caution must still be exercised, because vertical maximum resale price maintenance may still be illegal under state antitrust law. Thirty-three states and Guam joined in an amicus curiae brief in this case, taking the position that the per se rule ought to be retained. It should be remembered that, during the 1980's when the U.S. Department of Justice was unofficially treating resale price under the Rule of Reason, state attorneys general were attacking such restrictions as per se illegal in civil and misdemeanor criminal cases.
D. California was not among the states signing onto the amicus brief submitted by New York. Yet, under California case law, minimum and maximum resale price maintenance are treated as per se illegal. There are some signs that California courts are following the lead of their federal brethren and recognizing the greater importance of interbrand competition over intrabrand competition, which was an important consideration for the Supreme Court in this case. However, these signals have been in cases involving non-price resale restrictions. These cases did not deal with pricing practices and in such situations the basic rule in California is still that any interference with the free market forces in setting prices is illegal per se.
E. The Court seems to be signaling caution in applying the per se label to business conduct. It is not willing to use the per se rule against conduct that has not already been clearly established to have anticompetitive effects. If there is the possibility of procompetitive effects, the Court seems to be saying that the conduct must be tested under the Rule of Reason.
II. FACTS
Khan leased and operated a gas station and convenience store from State Oil Company. State Oil sold gasoline to Khan at a suggested retail price less 3.25 cents. The contract provided that Khan could charge any price he wanted but if he charged more than the suggested resale price, the excess was to be rebated to State Oil Company. Any sales below the suggested resale price would reduce the 3.25 cents-per-gallon margin. Khan fell on hard financial times and the station was placed in receivership. During the period the receiver ran the station, there were no controls on the resale prices charged by the receiver and it achieved a profit margin greater than 3.25 cents by lowering the price of regular grade gasoline below the suggested resale price and raising the price of premium gasoline above its suggested resale price.
III. PROCEEDINGS BELOW
The trial court had refused to apply the per se rule to State Oil Company's resale price restrictions, concluding that they were not "manifestly anticompetitive" and did not have the requisite "pernicious effect on competition" needed to support the application of the per se rule. Subsequently, it granted summary judgment in favor of State Oil Company on the grounds that Khan had failed to establish antitrust injury or harm to competition. See 118 S.Ct. at 278-279. The Court of Appeals for the Seventh Circuit reluctantly reversed. Although Chief Judge Posner believed that Albrecht was "'unsound when decided'" and "'inconsistent with later decisions'" of the Supreme Court, he was constrained by stare decisis to hold State Oil Company's conduct to be per se illegal. 118 S.Ct. at 279. (Chief Judge Posner actually and "aptly"-according to the Supreme Court-described Albrecht's "'infirmities, [and] its increasingly wobbly, moth-eaten foundations.'" 118 S.Ct. at 284.) The Supreme Court reversed and remanded to the Seventh Circuit to consider whether Khan had been injured by State Oil Company's conduct under the Rule of Reason.
IV. DISCUSSION
In considering the Albrecht holding, the Court noted that the Rule of Reason is normally applied to test business conduct under the antitrust laws.
"Some types of restraints, however, have such predictable and pernicious anticompetitive effect, and such limited potential for procompetitive benefit, that they are deemed unlawful per se. [Citation omitted.] Per se treatment is appropriate '[o]nce experience with a particular kind of restraint enables the Court to predict with confidence that the rule of reason will condemn it.' [Citation omitted.] Thus, we have expressed reluctance to adopt per se rules with regard to 'restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.' [Citation omitted.]"
118 S.Ct. at 279. In light of these guidelines, the Court reviewed the history of decisions up to and beyond Albrecht. See 118 S.Ct. at 279-282. It began with Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), where the Court held that suppliers may not impose minimum resale prices on their resellers. Next, in United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940), the Court held that any combination "'formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity' is illegal per se." In Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211 (1951), the Court held that a maximum resale price agreement between affiliated companies was illegal. In 1963, the Court refused to hold vertically imposed exclusive territorial restrictions illegal per se because too little was known about their competitive effects. White Motor Co. v. United States, 372 U.S. 253 (1963). Just four years later, in United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), the Court reconsidered the question and held that territorial restrictions were "'so obviously destructive of competition' as to constitute a per se violation of the Sherman Act." 118 S.Ct. at 280. The Court recognized that there may be benefits in a supplier assigning territories or franchises to consignees, but drew the line at the point where a supplier passes title and dominion of the products to the actual resellers. Decided next term, Albrecht held that a newspaper publisher could not impose maximum resale prices for its papers sold by independent newspaper carriers, and that such conduct was illegal per se. Justices Harlan and Stewart dissented, noting that the control of resale prices could benefit consumers by protecting them from resellers that had an effective monopoly in their territories. Nine years later, in Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), the Court overruled Schwinn and rejected the application of the per se rule to non-price vertical restrictions.
"The Court concluded that, because 'departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than-as in Schwinn-upon formalistic line drawing,' the appropriate course would be 'to return to the rule of reason that governed vertical restrictions prior to Schwinn.'"
118 S.Ct. at 281. The Court noted that it had declined to address Albrecht in its Schwinn decision on the grounds that the issue "'involve[d] significantly different questions of analysis and policy.'" 118 S.Ct. at 281. However, the Court further noted that its subsequent decisions laid the foundation for questioning the analytical underpinnings of Albrecht. For example, it had observed that vertical restraints are more defensible than horizontal restraints (Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 348 n.18 (1982)), and may stimulate interbrand competition even as it reduces intrabrand competition (324 Liquor Corp. v. Duffy, 479 U.S. 335, 341-42 (1987)). Most recently, in Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 343 n.13 (1990), the Court
"specifically acknowledged that vertical maximum price fixing 'may have procompetitive interbrand effects,' and pointed out that, in the wake of GTE Sylvania, '[t]he procompetitive potential of a vertical maximum price restraint is more evident . . . than it was when Albrecht was decided, because exclusive territorial arrangements and other nonprice restrictions were unlawful per se in 1968.'"
118 S.Ct. at 281. The Court stated it would be
"guided by our general view that the primary purpose of the antitrust laws is to protect interbrand competition. See, e.g., Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 726 (1988). 'Low prices,' we have explained, 'benefit consumers regardless of how those prices are set . . . .'"
118 S.Ct. at 282. Against, this backdrop, the Court addressed the points pro and con relating to vertical maximum resale price maintenance (see 118 S.Ct. at 282-283):
- If a reseller has a monopoly position in a territory, allowing a supplier to control the reseller's maximum prices will protect consumers from the exercise of monopoly power. Indeed, after the GTE Sylvania decision, suppliers typically give territorial exclusivity and prevent sales into those territories. This fact increases the likelihood of resellers having market power in particular territories that could be exploited to the detriment of consumers absent a supplier's ability to establish maximum resale prices.
- Suppliers have a legitimate interest in keeping reseller prices low in order to maximize sales of their products and, thus, their profits.
- The Albrecht concern about the reseller's freedom to price as they deem appropriate for their needs has caused some suppliers to integrate forward and replace those dealers. Albrecht gave those terminated dealers a Pyrrhic victory.
- Albrecht also expressed concern about the advantages more efficient dealers had over less efficient competing dealers. The Court here noted that "it is unclear . . . that a supplier would profit from limiting its market by excluding potential dealers." In other words, suppliers do not necessarily have any incentive to channel product through large dealers to the exclusion of smaller dealers and, thus, limit their market coverage. Also, the fact that inefficient dealers may suffer "is not necessarily harmful to competition and consumers."
- The fear that maximum resale price fixing could be used to disguise minimum resale price fixing is a concern that can be adequately addressed under the Rule of Reason.
The Court, thus, concluded that
"[a]fter reconsidering Albrecht's rationale and the substantial criticism the decision has received, . . . there is insufficient economic justification for per se invalidation of vertical maximum price fixing. That is so not only because it is difficult to accept the assumptions underlying Albrecht, but also because Albrecht has little or no relevance to ongoing enforcement of the Sherman Act."
118 S.Ct. at 283.
The Court recognized the importance of stare decisis but embraced "a competing interest, well-represented in this Court's decisions, in recognizing and adapting to changed circumstances and the lessons of accumulated experience." 118 S.Ct. at 284. It pointed out that, in the context of the Sherman Act, it has not hesitated to reconsider prior decisions "when the theoretical underpinnings of those decisions are called into serious question." 118 S.Ct. at 284. Ultimately, it concluded that stare decisis would not stand in the way and Albrecht must go: As was the case with Schwinn, "Albrecht has been widely criticized [by scholars] since its inception. With the views underlying Albrecht eroded by this court's precedent, there is not much of that decision to salvage." 118 S.Ct. at 285.