Court Allows Exception To Illegal Price-Fixing Wholesalers Can Limit Retailers’ Charges

The Supreme Court, making the first-ever exception to the notion that all price-fixing is illegal, said Tuesday that wholesalers don’t always break the law by limiting what retailers charge consumers.

The unanimous antitrust ruling could be a boon for consumers - potentially resulting in lower prices for products ranging from cars to gasoline to groceries.

But 33 states and coalitions of retailers had urged the court to rule the other way, contending that granting wholesalers such freedom might actually hurt consumers.

The decision was a victory for State Oil Co., still locked in a legal fight with Barkat Khan, who operates a State Oil service station in DuPage County, Ill.

A contract between State Oil and Khan bars him from pricing gasoline, sold under the name Union ‘76, at more than a suggested retail price that changes from time to time.

State Oil sells the gasoline to Khan at 3.25 cents a gallon under the suggested retail price, and their contract requires him to rebate all profits he makes from raising that price without State Oil’s permission.

Khan sued, contending the arrangement amounted to illegal price-fixing - a violation of a key federal antitrust law, the Sherman Act.

A federal appeals court kept Khan’s case alive by relying on a 1968 Supreme Court decision that said all such price-fixing is illegal automatically.

But Justice Sandra Day O’Connor wrote Tuesday that the court now is abandoning that 29-year-old ruling and wants judges to decide the legality of such arrangements on a case-by-case basis.

“Vertical maximum price-fixing, like the majority of commercial arrangements subject to antitrust laws, should be evaluated under the rule of reason,” O’Connor said. In other words, some could be found to be legal.

Under antitrust law, wholesaler-to-retailer relationships are said to be vertical, while relationships between competing wholesalers or competing retailers are horizontal.

Here’s how a typical “vertical maximum price-fixing” arrangement might work:

General Motors, intent on selling as many of a new model car as possible, imposes a maximum price dealers around the country can charge. In one region, owning the new car becomes a fad and dealers there could charge considerably more for it. But GM’s contract with the dealers, if deemed legal, would block any markup.

The same rule of law would apply if Kellogg Co. imposed a maximum price a grocery chain could charge for Corn Flakes, complicating the chain’s desire to ensure that its brand name cereal always is less expensive.

If Kellogg’s demand were ruled illegal, the grocery chain could make its brand more marketable simply by raising Corn Flakes prices beyond what Kellogg wanted.

In the Illinois case, State Oil’s appeal was supported in friend-ofthe-court briefs filed by automakers, beer distributors, newspaper publishers and the National Association of Manufacturers.

Newspaper publishers, for example, said they could suffer losses in circulation, and eventually in advertising, if their distributors charge excessive retail prices. It should not be illegal for them to impose maximum prices, they said.

But 33 states, in a brief by the New York attorney general’s staff, said allowing such price arrangements “displaces the free play of market forces in determining the prices consumers pay for goods and services.”

They added: “This court should continue to reject any rule that supplants normal market processes and accords suppliers the ultimate power to fix prices.”

Tuesday’s decision sends the Illinois case back to the 7th U.S. Circuit Court of Appeals for further study.