State Oil Co. v. Khan - 522 U.S. 3, 118 S. Ct. 275 (1997)

Rule:

Although the Sherman Act, 15 U.S.C.S. § 1, by its terms, prohibits every agreement in restraint of trade, 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. 

Facts:

Respondents Barkat U. Khan and Khan & Associates Inc., entered into an agreement with petitioner State Oil Company, to lease and operate a gas station and convenience store owned by petitioner. The agreement provided that respondents would obtain the gasoline supply from petitioner at a price equal to a suggested retail price (SRP) set by the latter. Under the agreement, respondents could charge any amount for gasoline sold to the station's customers, but if the price charged was higher than petitioner’s SRP, the excess was to be rebated to petitioner. Respondents could sell gasoline for less than petitioner’s suggested retail price, but any such decrease would reduce the margin. A year after respondents began its operation, they fell behind in lease payments. Petitioner then gave notice of its intent to terminate the agreement and commenced a state court proceeding to evict respondents. At petitioner’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. According to respondents, the receiver obtained an overall profit margin by lowering the price of regular-grade gasoline and raising the price of premium grades. Respondents then sued petitioner alleging in part that petitioner 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, 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. Petitioner responded that the agreement did not actually prevent respondents from setting gasoline prices, and that respondents did not allege a violation of antitrust laws by their claim that petitioner’s SRP 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 petitioner’s conduct. Subsequently, in ruling on cross-motions for summary judgment, the district court concluded that respondents failed to demonstrate antitrust injury or harm to competition. Accordingly, the district court entered summary judgment for petitioner on respondents' Sherman Act claim. However, the court of appeals reversed finding that it was bound to follow Supreme Court precedent. The appellate court then ruled that petitioner's vertical maximum price fixing scheme was a per se antitrust violation and that respondents could have suffered injury from not being able to adjust gasoline prices. Petitioner sought review.

Issue:

Did the appellate court correctly hold that petitioner’s vertical maximum price fixing scheme was a per se antitrust violation?

Answer:

No.

Conclusion:

The court vacated said judgment. The court held that vertical maximum price fixing was not a per se violation of the Act, and that such price fixing arrangements should be evaluated under the rule of reason. Moreover, the court determined that there was insufficient economic justification for per se invalidation of vertical maximum price fixing. Hence, the court overruled the precedent relied upon by the appellate court which held that vertical maximum price fixing was per se unlawful. The court concluded that despite the doctrine of stare decisis, said Supreme Court precedent relied to by the court of appeals was overruled because its theoretical underpinnings had been called into serious question. Accordingly, the court remanded the case for further proceedings.