State Oil Co. v. Khan

• Citation: 139 L.Ed.2d 199,522 U.S. 3,118 S.Ct. 275
• Decision Date: 04 November 1997
• Docket Number: 96871
• Parties: STATE OIL COMPANY, Petitioner, v. Barkat U. KHAN and Khan & Associates, Inc
• Court: United States Supreme Court

522 U.S. 3

118 S.Ct. 275

139 L.Ed.2d 199

STATE OIL COMPANY, Petitioner,

v Barkat U. KHAN and Khan & Associates, Inc.

No. 96-871

Supreme Court of the United States

Argued Oct. 7, 1997.

Decided Nov. 4, 1997.

Syllabus^*

Respondents' agreement to lease and operate a gas station obligated them to buy gasoline from petitioner State Oil Company at a price equal to a suggested retail price set by State Oil, less a specified profit margin, required them to rebate any excess to State Oil if they charged customers more than the suggested price, and provided that any decrease due to sales below the suggested price would reduce their margin. After they fell behind in their lease payments and State Oil commenced eviction proceedings, respondents brought this suit in federal court, alleging in part that, by preventing them from raising or lowering retail gas prices, State Oil had violated §1 of the Sherman Act. The District Court entered summary judgment for State Oil on this claim, but the Seventh Circuit reversed on the basis of Albrecht v. Herald Co., 390 U.S. 145, 152-154, 88 S.Ct. 869, 872-73, 19 L.Ed.2d 998 (1968), in which this Court held that vertical maximum price fixing is a per se antitrust violation. Although the Court of Appeals characterized Albrecht as "unsound when decided'' and "inconsistent with later decisions,'' it felt constrained to follow that decision.

Held: Albrecht is overruled. Pp. ___-___.

(a) Although most antitrust claims are analyzed under a "rule of reason,'' under which the court reviews a number of relevant factors, see, e.g., Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 342-343, 102 S.Ct. 2466, 2472-2473, 73 L.Ed.2d 48, some types of restraints on trade have such predictable and pernicious anticompetitive effect, and such limited potential for procompetitive benefit, that they are deemed unlawful per se, see, e.g., Northern Pacific R. Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545. A review of this Court's pertinent decisions is relevant in assessing the continuing validity of the Albrecht per se rule. See, e.g., Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211, 213, 71 S.Ct. 259, 260-261, 95 L.Ed. 219 (maximum resale price fixing illegal per se); United States v. Arnold, Schwinn & Co., 388 U.S. 365, 379-380, 87 S.Ct. 1856, 1865-1866, 18 L.Ed.2d 1249 (vertical nonprice restrictions illegal per se); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 47-49, 58-59, 97 S.Ct. 2549, 2556-2557, 2561-2562, 53 L.Ed.2d 568 (overruling Schwinn). A number of this Court's later decisions have hinted that Albrecht's analytical underpinnings were substantially weakened by GTE Sylvania see, e.g., Maricopa County, supra, at 348, n. 18, 102 S.Ct., at 2475, n. 18; 324 Liquor Corp. v. Duffy, 479 U.S. 335, 341-342, 107 S.Ct. 720, 723-724, 93 L.Ed.2d 667 (1987); Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 335, n. 5, 343, n. 13, 110 S.Ct. 1884, 1890, n. 5, 1894, n. 13 and there is a considerable body of scholarship discussing the procompetitive effects of vertical maximum price fixing. Pp. ___-___.

(b) Informed by the foregoing decisions and scholarship, and guided by the general view that the antitrust laws' primary purpose 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, 99 L.Ed.2d 808, and that condemnation of practices resulting in lower consumer prices is disfavored, Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 594, 106 S.Ct. 1348, 1359-1360, 89 L.Ed.2d 538, this Court finds it difficult to maintain that vertically-imposed maximum prices could harm consumers or competition to the extent necessary to justify their per se invalidation Albrecht's theoretical justifications for its per se rule that vertical maximum price fixing could interfere with dealer freedom, restrict dealers' ability to offer consumers essential or desired services, channel distribution through large or specially-advantaged dealers, or disguise minimum price fixing schemes have been abundantly criticized and can be appropriately recognized and punished under the rule of reason. Not only are they less serious than the Albrecht Court imagined, but other courts and antitrust scholars have noted that the per se rule could in fact exacerbate problems related to the unrestrained exercise of market power by monopolist-dealers. For these reasons, and because Albrecht is irrelevant to ongoing Sherman Act enforcement, see Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 777, and n. 25, 104 S.Ct. 2731, 2744-2745, and n. 25, 81 L.Ed.2d 628, and there are apparently no cases in which enforcement efforts have been directed solely against the conduct condemned in Albrecht, there is insufficient economic justification for the per se rule. Respondents' arguments in favor of the rule that its elimination should require persuasive, expert testimony establishing that it has distorted the market, and that its retention is compelled by Toolson v. New York Yankees, Inc., 346 U.S. 356, 74 S.Ct. 78, 98 L.Ed. 64, and Flood v. Kuhn, 407 U.S. 258, 92 S.Ct. 2099, 32 L.Ed.2d 728 (1972) are unavailing. Pp. ___-___.

(c) Albrecht does not deserve continuing respect under the doctrine of stare decisis. Stare decisis is not an inexorable command, particularly in the area of antitrust law, where there is a competing interest in recognizing and adapting to changed circumstances and the lessons of accumulated experience. See, e.g., National Soc. of Professional Engineers v. United States, 435 U.S. 679, 688, 98 S.Ct. 1355, 1363-1364, 55 L.Ed.2d 637. Accordingly, this Court has reconsidered its decisions construing the Sherman Act where, as here, the theoretical underpinnings of those decisions are called into serious question. See, e.g., Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568. Because Albrecht has been widely criticized since its inception, and the views underlying it have been eroded by this Court's precedent, there is not much of that decision to salvage. See, e.g., Neal v. United States, 516 U.S. 284, 295, 116 S.Ct. 763, 769, 133 L.Ed.2d 709. In overruling Albrecht, the Court does not hold that all vertical maximum price fixing is per se lawful, but simply that it should be evaluated under the rule of reason, which can effectively identify those situations in which it amounts to anticompetitive conduct. The question whether respondents are entitled to recover damages in light of this Court's overruling of Albrecht should be reviewed by the Court of Appeals in the first instance. Pp. ___-___.

93 F.3d 1358, vacated and remanded.

O'CONNOR, J., delivered the opinion for a unanimous Court.

John Baumgartner argued for the Petitioner.

Joel I. Klein for the U.S. as amicus curiae.

Anthony S. Divincenzo for the Respondents.

Pamela J. Harbour for the State of New York as amicus curiae.

Justice O'CONNOR delivered the opinion of the Court.

Under §1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. §1, " [e]very contract, combination . . . , or conspiracy, in restraint of trade'' is illegal. 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.

I

Respondents, Barkat U. Khan and his corporation, entered into an agreement with petitioner, State Oil Company, to lease and operate a gas station and convenience store owned by State Oil. The agreement provided that respondents would obtain the station's gasoline supply 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. Under the agreement, respondents could charge any amount for gasoline sold to the station's customers, but if the price charged was higher than State Oil's suggested retail price, the excess was to be rebated to State Oil. Respondents could sell gasoline for less than State Oil's suggested retail price, but any such decrease would reduce their 3.25 cents-per-gallon margin.

About a year after respondents began operating the gas station, they fell behind in lease payments. State Oil then gave notice of its intent to terminate the agreement and commenced a state court proceeding to evict respondents. At State Oil's request, the state court appointed a receiver to operate the gas station. The receiver operated the station for several months without being subject to the price restraints in respondents' agreement with State Oil. According to respondents, the receiver obtained an overall profit margin in excess of 3.25 cents per gallon by lowering the price of regular-grade gasoline and raising the price of premium grades.

Respondents sued State Oil in the United States District Court for the Northern District of Illinois, alleging in part that State Oil had engaged in price fixing in violation of §1 of the Sherman Act by preventing respondents from raising or lowering retail gas prices. According to the complaint, but for the agreement with State Oil, respondents could have charged different prices based on the grades of gasoline, in the same way that the receiver had, thereby achieving increased sales and profits. State Oil responded that the agreement did not actually prevent respondents from setting gasoline prices, and that, in substance, respondents did not allege a violation of antitrust laws by their claim that State Oil's suggested retail price was not optimal.

The District Court found that the allegations in the complaint did not state a per se violation of the Sherman Act because they did not establish the sort of "manifestly anticompetitive implications or pernicious effect on competition'' that would justify per se prohibition of...