State Oil Co. v. Khan

United States Supreme Court
522 U.S. 3 (1997)

ELI5:

Rule of Law:

Vertical maximum price fixing is not a per se violation of the Sherman Act, but should instead be evaluated under the rule of reason to determine if it constitutes an unreasonable restraint on competition.

Facts:

Barkat Khan entered into an agreement with State Oil Company to lease and operate a gas station.
The agreement stipulated that Khan would purchase gasoline from State Oil at a price equal to a suggested retail price set by State Oil, less a margin of 3.25 cents per gallon.
If Khan charged customers more than the suggested retail price, he was required to rebate the excess amount to State Oil.
If Khan charged less than the suggested retail price, his 3.25 cents-per-gallon margin would be reduced.
After Khan fell behind on lease payments, State Oil initiated eviction proceedings.
A court-appointed receiver took over the station and, not being subject to the pricing agreement, earned a higher profit margin by lowering the price of regular gasoline and raising the price of premium grades.
Khan alleged that the pricing agreement with State Oil prevented him from making similar profitable pricing decisions.

Procedural Posture:

Barkat Khan sued State Oil in the U.S. District Court for the Northern District of Illinois, alleging a violation of the Sherman Act.
The District Court granted summary judgment to State Oil, concluding that Khan failed to demonstrate antitrust injury or harm to competition under the rule of reason.
Khan, as appellant, appealed to the U.S. Court of Appeals for the Seventh Circuit.
The Court of Appeals reversed the District Court's decision, finding itself bound by the precedent of Albrecht v. Herald Co. to hold that the pricing scheme was a per se antitrust violation, despite expressing criticism of Albrecht.
The U.S. Supreme Court granted certiorari to consider whether State Oil's conduct constituted a per se violation of the Sherman Act.

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Issue:

Does a vertical maximum price fixing agreement constitute a per se violation of § 1 of the Sherman Act?

Opinions:

Majority - Justice O'Connor

No, a vertical maximum price fixing agreement does not constitute a per se violation of § 1 of the Sherman Act. The Court overruled its prior decision in Albrecht v. Herald Co., which had established the per se rule. The Court's reasoning was that the theoretical harms identified in Albrecht—such as interfering with dealer freedom, setting prices too low for dealers to provide services, or disguising minimum price fixing schemes—were less serious than imagined and could be addressed under the rule of reason. Furthermore, the Court recognized the procompetitive potential of vertical maximum price fixing, particularly in preventing dealers with monopoly power from price-gouging consumers. The Court concluded that there was insufficient economic justification for a per se rule, as subsequent economic analysis and case law, like Continental T. V., Inc. v. GTE Sylvania Inc., had eroded Albrecht's analytical foundations.

Analysis:

This decision represents a significant shift in antitrust jurisprudence, explicitly overruling a 30-year-old precedent. By moving vertical maximum price fixing from the per se category to the rule of reason, the Court signaled its increasing reliance on economic analysis and its skepticism towards bright-line rules for vertical restraints. This ruling provides suppliers with greater flexibility in structuring their distribution and pricing policies without the threat of automatic illegality. It solidifies the principle that the primary purpose of antitrust law is to protect interbrand competition and consumer welfare, rather than to protect individual competitors' freedom of action.

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