FindLaw: US Supreme Court Opinions: STATE OIL CO. v. KHAN 522 U.S. 3 (1997)

A

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. See, e.g. , Arizona v. Maricopa County Medical Soc., 457 U.S. 332 , 342-343 (1982) (citing United States v. Joint Traffic Assn., 171 U.S. 505 (1898)). 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. 457 U. S., at 343, and n. 13 (citing Board of Trade of Chicago v. United States, 246 U.S. 231 , 238 (1918)).

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 . Northern Pacific R. Co. v. United States , 356 U.S. 1 , 5 (1958). 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." Maricopa County , supra, at 344; see also Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 , 19, n. 33 (1979). 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." FTC v. Indiana Federation of Dentists, 476 U.S. 447 , 458-459 (1986).

A review of this Court's decisions leading up to and beyond Albrecht is relevant to our assessment of the continuing validity of the per se rule established in Albrecht . Beginning with Dr. Miles Medical Co. v. John D. Park & Sons Co. , 220 U.S. 373 (1911), the Court recognized the illegality of agreements under which manufacturers or suppliers set the minimum resale prices to be charged by their distributors. By 1940, the Court broadly declared all business combinations "formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce" illegal per se . United States v. Socony-Vacuum Oil Co., 310 U.S. 150 , 223 (1940). Accordingly, the Court condemned an agreement between two affiliated liquor distillers to limit the maximum price charged by retailers in Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211 (1951), noting that agreements to fix maximum prices, "no less than those to fix minimum prices, cripple the freedom of traders and thereby restrain their ability to sell in accordance with their own judgment." Id. , at 213.

In subsequent cases, the Court's attention turned to arrangements through which suppliers imposed restrictions on dealers with respect to matters other than resale price. In White Motor Co. v. United States, 372 U.S. 253 (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. Id. , at 263. Four years later, in United States v. Arnold, Schwinn & Co. , 388 U.S. 365 (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. Id. , at 379. 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. Id. , at 379-380. The Court drew the line, however, at permitting manufacturers to control product marketing once dominion over the goods had passed to dealers. Id. , at 380. 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. Influenced by its decisions in Socony-Vacuum , KieferStewart , and Schwinn , the Court concluded that it was per se unlawful for the publisher to fix the maximum resale price of its newspapers. 390 U. S., at 152-154. The Court acknowledged that "[m]aximum and minimum price fixing may have different consequences in many situations," but nonetheless condemned maximum price fixing for "substituting the perhaps erroneous judgment of a seller for the forces of the competitive market." Id. , at 152. 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. Id. , at 152-153. 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." Id. , at 153.

In a vigorous dissent, Justice Harlan asserted that the majority had erred in equating the effects of maximum and minimum price fixing. Id. , at 156-168 (Harlan, J., dissenting). Justice Harlan pointed out that, because the majority was establishing a per se rule, the proper inquiry was "not whether dictation of maximum prices is ever illegal, but whether it is always illegal." Id. , at 165-166. He also faulted the majority for conclusively listing "certain unfortunate consequences that maximum price dictation might have in other cases," even as it rejected evidence that the publisher's practice of fixing maximum prices counteracted potentially anticompetitive actions by its distributors. Id ., at 165. Justice Stewart also dissented, asserting that the publisher's maximum price fixing scheme should be properly viewed as promoting competition, because it protected consumers from dealers such as Albrecht, who, as "the only person who could sell for home delivery the city's only daily morning newspaper," was "a monopolist within his own territory." Id. , at 168 (Stewart, J., dissenting).

Nine years later, in Continental T. V., Inc. v. GTE Sylvania Inc. , 433 U.S. 36 (1977), the Court overruled Schwinn , thereby rejecting application of a per se rule in the context of vertical nonprice 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. In our view, the experience of the past 10 years should be brought to bear on this subject of considerable commercial importance."

433 U. S., at 47-49 (footnotes omitted).

The Court considered the historical context of Schwinn , noting that Schwinn 's per se rule against vertical nonprice restrictions came only four years after the Court had refused to endorse a similar rule in White Motor Co. , and that the decision neither explained the "sudden change in position," nor referred to the accepted requirements for per se violations set forth in Northern Pacific R. Co., 433 U. S., at 51-52. The Court then reviewed scholarly works sup porting the economic utility of vertical nonprice restraints. See id. , at 54-57 (citing, e.g. , Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions, 75 Colum. L. Rev. 282 (1975); Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law & Contemp. Prob. 506 (1965)). 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 ." GTE Sylvania, supra , at 58-59.

In GTE Sylvania , the Court declined to comment on Albrecht 's per se treatment of vertical maximum price restrictions, noting that the issue "involve[d] significantly different questions of analysis and policy." 433 U. S., at 51, n. 18. Subsequent decisions of the Court, however, have hinted that the analytical underpinnings of Albrecht were substantially weakened by GTE Sylvania . We noted in Maricopa County that vertical restraints are generally more defensible than horizontal restraints. See 457 U. S., at 348, n. 18. And we explained in 324 Liquor Corp. v. Duffy, 479 U.S. 335 , 341-342 (1987), that decisions such as GTE Sylvania "recognize the possibility that a vertical restraint imposed by a single manufacturer or wholesaler may stimulate interbrand competition even as it reduces intrabrand competition."

Most recently, in ARCO , 495 U.S. 328 (1990), although Albrecht's continuing validity was not squarely before the Court, some disfavor with that decision was signaled by our statement that we would "assume, arguendo , that Albrecht correctly held that vertical, maximum price fixing is subject to the per se rule." 495 U. S., at 335, n. 5. More significantly, we specifically acknowledged that vertical maximum price fixing "may have procompetitive inter brand 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." 495 U. S., at 343, n. 13 (citing several commentators identifying procompetitive effects of vertical maximum price fixing, including, e.g. , P. Areeda & H. Hovenkamp, Antitrust Law #266340.30b, p. 378, n. 24 (1988 Supp.); Blair & Harrison, Rethinking Antitrust Injury, 42 Vand. L. Rev. 1539, 1553 (1989); Easterbrook, Maximum Price Fixing, 48 U. Chi. L. Rev. 886, 887-890 (1981)).

B

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 (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." ARCO , supra, at 340. 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 (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 encourage . . . dealer serv-
 ices . . . has spaced its dealers sufficiently far apart to
 limit competition among them (or even given each of
 them 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 pre-
 vent them from exploiting that monopoly power fully.
 It would do this not out of disinterested malice, but in
 its commercial self-interest.  The 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. See also R. Bork, The Antitrust Paradox 281-282 (1978) ("There could, of course, be no anticonsumer effect from [the type of price fixing considered in Albrecht ], and one suspects that the paper has a legitimate interest in keeping subscriber prices down in order to increase circulation and maximize revenues from advertising"). We recognize that the Albrecht decision presented a number of theoretical justifications for a per se rule against vertical maximum price fixing. But criticism of those premises abounds. The Albrecht decision was grounded in the fear that maximum price fixing by suppliers could interfere with dealer freedom. 390 U. S., at 152. In response, as one commentator has pointed out, "the ban on maximum resale price limitations declared in Albrecht in the name of 'dealer freedom' has actually prompted many suppliers to integrate forward into distribution, thus eliminating the very independent trader for whom Albrecht professed solicitude." 7 P. Areeda, Antitrust Law, #2661635, p. 395 (1989). For example, integration in the newspaper industry since Albrecht has given rise to litigation between independent distributors and publishers. See P. Areeda & H. Hovenkamp, Antitrust Law #266729.7, pp. 599-614 (1996 Supp.).

The Albrecht Court also expressed the concern that maximum prices may be set too low for dealers to offer consumers essential or desired services. 390 U. S., at 152153. But such conduct, by driving away customers, would seem likely to harm manufacturers as well as dealers and consumers, making it unlikely that a supplier would set such a price as a matter of business judgment. See, e.g. , Lopatka, Stephen Breyer and Modern Antitrust: A Snug Fit, 40 Antitrust Bull. 1, 60 (1995); Blair & Lang, Albrecht After ARCO : Maximum Resale Price Fixing Moves Toward the Rule of Reason, 44 Vand. L. Rev. 1007, 1034 (1991). In addition, Albrecht noted that vertical maximum price fixing could effectively channel distribution through large or specially-advantaged dealers. 390 U. S., at 153. It is unclear, however, that a supplier would profit from limiting its market by excluding potential dealers. See, e.g. , Easterbrook, supra , at 905-908. Further, although vertical maximum price fixing might limit the viability of inefficient dealers, that consequence is not necessarily harmful to competition and consumers. See, e.g. , Easterbrook, supra , at 907; Lopatka, supra , at 60.

Finally, Albrecht reflected the Court's fear that maximum price fixing could be used to disguise arrangements to fix minimum prices, 390 U. S., at 153, which remain illegal per se . Although we have acknowledged the possibility that maximum pricing might mask minimum pricing, see Maricopa County , 457 U. S., at 348, we believe that such conduct-as with the other concerns articulated in Albrecht can be appropriately recognized and punished under the rule of reason. See, e.g. , Easterbrook, 48 U. Chi. L. Rev., at 901-904; see also Pitofsky, In Defense of Discounters: The No-Frills Case for a Per Se Rule Against Vertical Price Fixing, 71 Geo. L. J. 1487, 1490, n. 17 (1983).

Not only are the potential injuries cited in Albrecht less serious than the Court imagined, the per se rule established therein could in fact exacerbate problems related to the unrestrained exercise of market power by monopolistdealers. Indeed, both courts and antitrust scholars have noted that Albrecht' s rule may actually harm consumers and manufacturers. See, e.g. , Caribe BMW, Inc. v. Bayerische Motoren Werke Aktiengesellschaft , 19 F. 3d 745, 753 (CA1 1994) (Breyer, C. J.); Areeda, supra , #2661636a, at 395; G. Mathewson & R. Winter, Competition Policy and Vertical Exchange 13-14 (1985). Other commentators have also explained that Albrecht' s per se rule has even more potential for deleterious effect on competition after our decision in GTE Sylvania , because, now that vertical nonprice restrictions are not unlawful per se , the likelihood of dealer monopoly power is increased. See, e.g. , Easterbrook, supra , at 890, n. 20; see also ARCO , 495 U. S., at 343, n. 13. We do not intend to suggest that dealers generally possess sufficient market power to exploit a monopoly situation. Such retail market power may in fact be uncommon. See, e.g. , Business Electronics , 485 U. S., at 727, n. 2; GTE Sylvania , 433 U. S., at 54. Nor do we hold that a ban on vertical maximum price fixing inevitably has anticompetitive consequences in the exclusive dealer context.

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. See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 , 777, and n. 25 (1984). Moreover, neither the parties nor any of the amici curiae have called our attention to any cases in which enforcement efforts have been directed solely against the conduct encompassed by Albrecht 's per se rule.

Respondents argue that reconsideration of Albrecht should require "persuasive, expert testimony establishing that the per se rule has distorted the market." Brief for Respondents 7. Their reasoning ignores the fact that Albrecht itself relied solely upon hypothetical effects of vertical maximum price fixing. Further, Albrech t ' s dire predictions have not been borne out, even though manufacturers and suppliers appear to have fashioned schemes to get around the per se rule against vertical maximum price fixing. In these circumstances, it is the retention of the rule of Albrecht , and not, as respondents would have it, the rule's elimination, that lacks adequate justification. See, e.g. , GTE Sylvania, supra, at 58-59.

Respondents' reliance on Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953) (per curiam) , and Flood v. Kuhn, 407 U.S. 258 (1972), is similarly misplaced, because those decisions are clearly inapposite, having to do with the antitrust exemption for professional baseball, which this Court has described as "an aberration . . . rest[ing] on a recognition and an acceptance of baseball's unique characteristics and needs," id. , at 282. In the context of this case, we infer little meaning from the fact that Congress has not reacted legislatively to Albrecht . In any event, the history of various legislative proposals regarding price fixing seems neither clearly to support nor to denounce the per se rule of Albrecht . Respondents are of course free to seek legislative protection from gasoline suppliers of the sort embodied in the Petroleum Marketing Practices Act, 92 Stat. 322, 15 U.S.C. 2801 et seq . For the reasons we have noted, however, the remedy for respondents' dispute with State Oil should not come in the form of a per se rule affecting the conduct of the entire marketplace.

C

Despite what Chief Judge Posner aptly described as Albrecht 's "infirmities, [and] its increasingly wobbly, moth-eaten foundations," 93 F. 3d, at 1363, there remains the question whether Albrecht deserves continuing respect under the doctrine of stare decisis . The Court of Appeals was correct in applying that principle despite disagreement with Albrecht , for it is this Court's prerogative alone to overrule one of its precedents.

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.' " Agostini v. Felton , 521 U. S. ___, ___ (1997) (slip op., at 29) (quoting Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 , 406 (1932) (Brandeis, J., dissenting)). It "is the preferred course because it promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process." Payne v. Tennessee, 501 U.S. 808 , 827 (1991). This Court has expressed its reluctance to overrule decisions involving statutory interpretation, see, e.g. , Illinois Brick Co. v. Illinois , 431 U.S. 720 , 736 (1977), and has acknowledged that stare decisis concerns are at their acme in cases involving property and contract rights, see, e.g. , Payne, 501 U. S., at 828. Both of those concerns are arguably relevant in this case.

But " [s]tare decisis is not an inexorable command." Ibid . 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." National Soc. of Professional Engineers v. United States, 435 U.S. 679 , 688 (1978). As we have explained, the term "restraint of trade," as used in §1, also "invokes the common law itself, and not merely the static content that the common law had assigned to the term in 1890." Business Electronics , 485 U. S., at 732; see also GTE Sylvania , 433 U. S., at 53, n. 21; McNally v. United States, 483 U.S. 350 , 372-373 (1987) (STEVENS , J., dissenting). Accordingly, this Court has reconsidered its decisions construing the Sherman Act when the theoretical underpinnings of those decisions are called into serious question. See, e.g. , Copperweld Corp. , supra , at 777; GTE Sylvania, supra, at 47-49; Tigner v. Texas , 310 U.S. 141 , 147 (1940).

Although we do not "lightly assume that the economic realities underlying earlier decisions have changed, or that earlier judicial perceptions of those realities were in error," we have noted that "different sorts of agreements" may amount to restraints of trade "in varying times and circumstances," and "[i]t would make no sense to create out of the single term 'restraint of trade' a chronologically schizoid statute, in which a 'rule of reason' evolves with new circumstances and new wisdom, but a line of per se illegality remains forever fixed where it was." Business Electronics, supra, at 731-732. Just as Schwinn was "the subject of continuing controversy and confusion" under the "great weight" of scholarly criticism, GTE Sylvania, supra, at 47-48, Albrecht has been widely criticized since its inception. With the views underlying Albrecht 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 (1996); Patterson v. McLean Credit Union, 491 U.S. 164 , 173 (1989); Rodriguez de Quijas v. Shearson/ American Express, Inc., 490 U.S. 477 , 480-481 (1989).

Although the rule of Albrecht has been in effect for some time, the inquiry we must undertake requires considering " 'the effect of the antitrust laws upon vertical distributional restraints in the American economy today.' " GTE Sylvania, supra, at 53, n. 21 (quoting Schwinn , 388 U. S., at 392 (Stewart, J., concurring in part and dissenting in part)). As the Court noted in ARCO , 495 U. S., at 336, n. 6, there has not been another case since Albrecht in which this Court has "confronted an unadulterated vertical, maximum-price-fixing arrangement." Now that we confront Albrecht directly, we find its conceptual foundations gravely weakened.

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, ruleof-reason analysis will effectively identify those situations in which vertical maximum price fixing amounts to anticompetitive conduct.

There remains the question whether respondents are entitled to recover damages based on State Oil's conduct. Although the Court of Appeals noted that "the district judge was right to conclude that if the rule of reason is applicable, Khan loses," 93 F. 3d, at 1362, its consideration of this case was necessarily premised on Albrecht 's per se rule. Under the circumstances, the matter should be reviewed by the Court of Appeals in the first instance. We therefore vacate the judgment of the Court of Appeals and remand the case for further proceedings consistent with this opinion.

It is so ordered.