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VERTICAL RESALE PRICE CEILINGS MAY BE LAWFUL

By: George W. Keeley

In a highly-anticipated decision, the U.S. Supreme Court overruled itself and held that vertical maximum resale price fixing is no longer "per se" illegal. The ruling in State Oil Co. v. Khan, No. 96-871, reversed a 29-year old decision that had found a supplier's establishment of maximum resale prices with its dealer/distributor to be a violation of the antitrust laws. When a practice is deemed illegal "per se", the mere act of engaging in the conduct is unlawful and no showing of harm to competition is necessary. Whereas Khan dealt with maximum resale price fixing - - a supplier and a dealer/distributor setting a maximum price at which the dealer/distributor may resell the supplier's products - - similar arrangements to fix minimum prices are still clearly illegal per se.

Background

In Khan, a retail dealer entered into a contract with State Oil Co., a petroleum supplier, which set a maximum suggested retail price for the sale of gasoline. The supplier sold gasoline to Khan at 3.25 cents below the suggested retail price. Under the agreement, Khan was free to charge any price for the gasoline. However, if he charged a price above the suggested retail price, the contract required Khan to rebate the excess between his higher price and the suggested retail price to State Oil.

The court of appeals ruled that the contract was a vertical maximum price fixing agreement which, following the Supreme Court's 1968 decision in Albrecht v. Herald Co., must be declared illegal per se. However, the court of appeals criticized the Supreme Court precedent it was legally bound to follow and described the Albrecht decision as being "unsound when decided" and "inconsistent with later decisions."

Albrecht Overruled

Antitrust scholars have roundly attacked Albrecht from its inception, arguing that vertically-imposed maximum price restrictions might actually promote competition in some cases. In 1977, the Supreme Court began shifting its position on vertical restraints by overturning an earlier case which condemned vertical non-price restrictions, such as a manufacturer's assignment of exclusive territories to its dealer/distributors.

The Supreme Court unanimously overruled Albrecht's per se illegal ruling of vertically imposed maximum prices, in favor of a rule of reason analysis. In so doing, the Court did not find that a vertical maximum price fixing agreement was legal in every instance - - only that it needed to be subjected to further analysis under the rule of reason test. Under rule of reason, the court must examine the subject activity and determine whether it creates an unreasonable restraint on competition.

The Court noted that valid concerns exist that suppliers could interfere with dealer freedom, that maximum prices may be set too low, that such schemes could favor large or specially-advantaged dealers and that maximum price fixing could perhaps be used to fix minimum prices. The Court found that all of these issues could still be discovered and punished as anticompetitive behavior under the antitrust laws using the rule of reason.

Conclusion

The Court found that fixing a maximum resale price may promote competition by preventing a dealer/distributor with substantial market power or an exclusive territory from exploiting that position. Although the per se rule for vertical maximum price fixing has been overruled, the significance of the Court's action has yet to be determined. Finally, this ruling does not change the long-established rule that horizontal maximum price-fixing agreements (i.e., agreements between competitors) remain illegal per se under the antitrust laws.