Business 8th Edition by Marianne Jennings

Exercise 22

State Oil v Khan
522 U.S. 3 (1997)
Fill It Up, but Only at My Price
Facts
Barkat U. Khan and his corporation (respondents) entered into an agreement with State Oil (petitioner) to lease and operate a gas station and convenience store owned by State Oil. The agreement provided that Mr. Khan would obtain the gasoline supply for the sta-* tion from State Oil at a suggested retail price set by State Oil, less a margin of 3.25 cents per gallon. Mr. Khan could charge any price he wanted, but if he charged more than State Oil's suggested retail price, the excess was rebated to State Oil. Mr. Khan could sell the gasoline for less than State Oil's suggested retail price, but the difference came out of his allowed margin.
After a year, Mr. Khan fell behind on his lease payments, and State Oil began proceedings for eviction. The court had Mr. Khan removed and appointed a receiver to operate the station. The receiver operated the gas station without the price constraints and received an overall profit margin above the 3.25 cents imposed on Mr. Khan.
Mr. Khan filed suit, alleging that the State Oil agreement was a violation of Section 1 of the Sherman Act because State Oil was controlling prices. The district court held that there was no per se violation and that Mr. Khan had failed to demonstrate antitrust injury. The Court of Appeals reversed, and State Oil appealed.
Judicial Opinion
O'CONNOR, Justice
In Albrecht v Herald Co., 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed.2d 998 (1968), this Court held that vertical maximum price fixing is a per se violation of that statute. In this case, we are asked to reconsider that decision in light of subsequent decisions of this Court. We conclude that Albrecht should be overruled.
Although the Sherman Act, by its terms, prohibits every agreement "in restraint of trade" this Court has long recognized that Congress intended to outlaw only unreasonable restraints.
As a consequence, most antitrust claims are analyzed under a "rule of reason," according to which the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint's history, nature, and effect.
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...
In White Motor Co. v United States , 372 U.S. 253, 83 S.Ct. 696,9 L.Ed.2d 738 (1963), the Court considered the validity of a manufacturer's assignment of exclusive territories to its distributors and dealers. The Court determined that too little was known about the competitive impact of such vertical limitations to warrant treating them as per se unlawful.
Four years later, in United States v Arnold , Schwinn Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed. 2d 1249 (1967), the Court reconsidered the status of exclusive dealer territories and held that, upon the transfer of title to goods to a distributor, a supplier's imposition of territorial restrictions on the distributor was "so obviously destructive of competition" as to constitute a per se violation of the Sherman Act. In Schwinn , the Court acknowledged that some vertical restrictions, such as the conferral of territorial rights or franchises, could have procompetitive benefits by allowing smaller enterprises to compete, and that such restrictions might avert vertical integration in the distribution process. The Court drew the line, however, at permitting manufacturers to control product marketing* once dominion over the goods had passed to dealers.
Albrecht , decided the following Term, involved a newspaper publisher who had granted exclusive territories to independent carriers subject to their adherence to a maximum price on resale of the newspapers to the public...
Albrecht was animated in part by the fear that vertical maximum price fixing could allow suppliers to discriminate against certain dealers, restrict the services that dealers could afford to offer customers, or disguise minimum price fixing schemes. The Court rejected the notion (both on the record of that case and in the abstract) that, because the newspaper publisher "granted exclusive territories, a price ceiling was necessary to protect the public from price gouging by dealers who had monopoly power in their own territories."
Nine years later, in Continental T. V., Inc. v GTE Sylvania , Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), the Court overruled Schwinn , thereby rejecting application of a per se rule in the context of vertical non-price restrictions. The Court acknowledged the principle of stare decisis , but explained that the need for clarification in the law justified reconsideration of Schwinn;
Since its announcement , Schwinn has been the subject of continuing controversy and confusion , both in the scholarly journals and in the federal courts. The great weight of scholarly opinion has been critical of the decision , and a number of the federal courts confronted with analogous vertical restrictions have sought to limit its reach.
Thus, our reconsideration of Albrecht's continuing validity is informed by several of our decisions, as well as a considerable body of scholarship discussing the effects of vertical restraints. Our analysis is also 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. 717,726,108 S.Ct. 1515,1520-1521,99 L.Ed.2d 808 (1988). ''Low prices," we have explained, "benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition" Our interpretation of the Sherman Act also incorporates the notion that condemnation of practices resulting in lower prices to consumers is "especially costly" because "cutting prices in order to increase business often is the very essence of competition." Matsushita Elec. Industrial Co. v Zenith Radio Corp., 475 U.S. 574,594, 106 S.Ct. 1348,1360, 89 L.Ed.2d 538 (1986).
So informed, we find it difficult to maintain that vertically-imposed maximum prices could harm consumers or competition to the extent necessary to justify their per se invalidation. As Chief Judge Posner wrote for the Court of Appeals in this case:
As for maximum resale price fixing , unless the supplier is a monopsonist he cannot squeeze his dealers' margins below a competitive level; the attempt to do so would just drive the dealers into the arms of a competing supplier. A supplier might , however' , fix a maximum resale price in order to prevent his dealers from exploiting a monopoly position.... [ S]uppose that State Oil , perhaps to mcourage.. dealer seivices.. has spaced its dealers sufficiently far apart to limit competition among them (or even given each oftliem an exclusive territory)' , and suppose further that Union 76 is a sufficiently distinctive and popular brand to give the dealers in it at least a modicum of monopoly power. Then State Oil might want to place a ceiling on the dealers' resale prices in order to prevent them from exploiting that monopoly powerfully. It would do this not out of disinterested malice , but in its commercial self-interest. Vie higher the price at which gasoline is resold , the smaller the volume sold , and so the lower the profit to the supplier if the higher profit per gallon at the higher price is being snared by the dealer. 93 F.3d, at 1362.
Further, although vertical maximum price fixing m ight limit the viability of inefficient dealers, that consequence is not necessarily harmful to competition and consumers.
After reconsidering Albrecht's rationale and the substantial criticism the decision has received, however, we conclude that 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....
We approach the reconsideration of decisions of this Court with the utmost caution. Stare decisis reflects "a policy judgment that 'in most matters it is more important that the applicable rule of law be settled than that it be settled right/*
But "[s]tare decisis is not an inexorable command." In the area of antitrust law, there is a competing interest, well-represented in this Court's decisions, in recognizing and adapting to changed circumstances and the lessons of accumulated experience. Thus, the general presumption that legislative changes should be left to Congress has less force with respect to the Sherman Act in light of the accepted view that Congress "expected the courts to give shape to the statute's broad mandate by drawing on common-law tradition."
In overruling Albrecht , we of course do not hold that all vertical maximum price fixing is per se lawful. Instead, vertical maximum price fixing, like the majority of commercial arrangements subject to the antitrust laws, should be evaluated under the rule of reason. In our view, rule-of-reason analysis will effectively identify those situations in which vertical maximum price fixing amounts to anticompetitive conduct....
We therefore vacate the judgment of the Court of Appeals and remand the case for further proceedings consistent with this opinion.
Remanded.
What were the terms of Mr. Khan's lease?