State Oil Company v. Khan – Oral Argument – October 07, 1997

Media for State Oil Company v. Khan

Audio Transcription for Opinion Announcement – November 04, 1997 in State Oil Company v. Khan

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William H. Rehnquist:

We’ll hear argument first this morning in No. 96-871, State Oil Company v. Barkat U. Khan and Khan & Associates.

Mr. Baumgartner.

John Baumgartner:

Mr. Chief Justice, and may it please the Court:

The Petitioner in this cause would like to accent three questions in this case this morning, if possible.

First, that manufacturers and suppliers have a legitimate and competitive interest in the maximum prices which are charged by the people who carry their products.

Second, that the rule in Albrecht actually hinders, rather than enhances, economic efficiency and competition.

And, third, that the foundations of Albrecht were destroyed by the decisions in Sylvania and Arco.

Unless a manufacturer or a supplier operates his own retail outlets, the only means he has for reaching consumers is through retailers.

And the activities of those retailers vitally affect the degree to which his products are sold.

For instance, in this particular case, Khan sales were also State Oil sales.

And State Oil had a legitimate business interest in seeing to it that those sales were handled in the most effective manner possible.

Any action by Mr. Khan which reduced those sales also reduced State Oil’s sales, income and profits.

We believe that this is the incentive which a manufacturer or a wholesaler has when he attempts to introduce a maximum retail price.

We also believe that the rule in Albrecht hinders, rather than supports, competition, and maximum economic efficiency, because it prevents manufacturers from ensuring that economic incentives offered at the wholesale level are passed on to the targeted consumers, who actually determine the competitive outcome.

For example, a dealer who wishes a price reduction, or a manufacturer who wishes to establish a price reduction, are unable to agree, at least to the degree of an enforceable arrangement, that this price reduction will be passed on to the consumer.

And the supplier or the manufacturer is therefore discouraged from utilizing price reductions as a man… as a means of enhancing sales of his products.

A dealer who wishes an exclusive territory, or a manufacturer who wishes to establish exclusive territories, are again discouraged from utilizing that means, because the manufacturer and the supplier are unable to obtain enforceable assurances that the dealer, or that some dealers, will not ultimately use that exclusive territory to be able to increase the price of the product which they’re selling.

In this case, when the price ceiling was ignored, the consumer who purchased premium gasoline paid a higher price for that gasoline, and the additional effect of an inability of the manufacturer, or the wholesaler, to limit the maximum price is that an increased price can be passed on to the consumer.

The only thing which the rule in Albrecht really encourages is vertical integration on the part of manufacturers and suppliers.

We further believe that the foundations of Albrecht were destroyed by the decisions in Sylvania and Arco.

The… Arco… Albrecht appears to be based on four concepts.

Number one, an objection to restraints on alienation; a concern about the freedom of dealers; an objection to vertical restraints; and an objection to price restraints in any form.

Sylvania rejected the distinction between sales and non-sales transactions and, therefore, also rejected the concept of restraints on alienation.

In determining that some forms of vertical restraints were permissible and were not anti-competitive, Sylvania also rejected the concept of freedom of dealers as an antitrust concept.

This leaves as the only real foundation for Albrecht an objection to price restraints as such.

Anthony M. Kennedy:

Are there some markets where freedom for the dealers is… is important?

Are there some circumstances in which it’s advantageous… and I won’t say whether it’s pro-competitive, but advantageous… to have dealers with substantial strength and substantial freedom?

John Baumgartner:

Oh, yes, there are, Your Honor.

Anthony M. Kennedy:

Is… is one of those instances so that dealers have the ability to switch to different manufacturers, different suppliers?

John Baumgartner:

Well, the dealer, until he’s committed to a particular supplier or manufacturer, always has the ability to switch suppliers.

Anthony M. Kennedy:

And… and is that… is that ability helpful to competition, do you think?

John Baumgartner:

Oh, yes, I think it is.

It induces a competition between wholesalers or manufacturers.

Anthony M. Kennedy:

Do you suggest that that case, Sylvania, totally rejected any interest in the independence of the dealer, such as, for example, fixing minimum prices?

Do you think that’s at stake in this case?

John Baumgartner:

I don’t believe that minimum price fixing is at stake in this case, Your Honor.

As I understand Sylvania, Sylvania represents a switch from Albrecht in the sense of looking not at… in Albrecht the Court, I believe, looked at possible misuses of the activity in question.

And in Sylvania, the Court, rather than looking at possible misuses, looked to see whether the activity had potential pro-competitive effects.

My problem with the question of minimum price-fixing is that I’m not really in a… a position to express a worthwhile opinion on the pro-competitive aspects of minimum price-fixing.

And, therefore, I’m not really expressing any opinion on it at all.

Antonin Scalia:

It doesn’t really apply in this case?

John Baumgartner:

It does not apply.

Our argument is limited strictly to vertical maximum price-fixing.

If the primary concern that remains from Albrecht is the question of price agreements as such, it’s a recognized fact today that price agreements cannot be realistically lumped into one sole category.

There’s an excepted difference between vertical price arrangements and horizontal price arrangements.

There’s a recognized difference between maximum prices and minimum prices.

And we believe that the–

Antonin Scalia:

But recognized by whom?

Not by our current antitrust jurisprudence.

John Baumgartner:

–Even in the decision in Albrecht, Your Honor, the Court appears to recognize that there is a difference between maximum prices and minimum prices.

And that’s really all I was expressing as an opinion.

Antonin Scalia:

I think we can all stipulate that there’s a difference between maximum prices and minimum prices.

But I thought you were saying that there was a legal difference that’s… that’s been established in… in some of our cases.

John Baumgartner:

I know of no legal–

Antonin Scalia:

That’s not what you’re saying, though?

John Baumgartner:

–No.

I know of no legal difference between the effect of maximum prices and the effect of minimum prices.

I’m just saying there’s a realistic economic difference between the two.

And maximum prices established in a vertical sense, as I indicated before, can be used in a pro-competitive manner and should, therefore, not be found to be, per se, as a matter of law, unreasonable and forbidden.

David H. Souter:

Pro… pro-competitive because it precludes exploitation of… of exclusive territories.

David H. Souter:

Is there any other particular reason that it’s pro-competitive?

John Baumgartner:

Yes.

I believe that the… the most significant position in which it’s pro-competitive is the situation… and we believe that situation existed in this case… in which a supplier, in this particular case, to assist the dealers’ competitive position, provides a reduced wholesale price… not in one specific instance, such as a… a price war or anything like that, but, generally speaking… prices the dealer below what the dealer would normally be charged as a wholesale price.

And we believe that the supplier is discouraged from doing that because he’s unable to obtain any sort of binding assurance that the dealer won’t pass that reduction… or will pass that reduction on and won’t simply regard it as money on the table which he can then use.

And I think that’s probably a more important and more significant instance than the situation in which the dealer has a monopoly position.

Antonin Scalia:

That’s really your burden.

I mean, it’s surely not enough for you to say that there’s… you can conceive of circumstances in which vertical maximum price restraints are… are healthy.

I… I suppose I could conceive of instances in which… in which vertical minimum prices are… are healthy as well.

I… I think our per se rule is directed at situations in which it is most unlikely to be helpful.

It might be helpful in some circumstances, but the chances are… are so small that it’s not worth… it’s not worth taking the risk.

And you should put the burden on the other side, to show that there’s some exceptional situation.

John Baumgartner:

I–

Antonin Scalia:

So you… can you persuade us that that’s the case, that it’s more… it’s more likely to be good than bad?

John Baumgartner:

–I believe I can, Your Honor.

I’ve given two instances, counting the… the one that was given, three instances, in which it’s a good situation.

On the other hand, I personally… and it may be a defect in my imagination… but I personally am unable to come up with any situation in which a vertical maximum price arrangement can be used in a manner which will reduce competition.

Antonin Scalia:

Well, your opponent here… your opponent here claims that one situation is where… where the… the maximum price on… on one line, high octane gas, prevents him from charging a lower price on another line.

Why isn’t that a situation?

I mean, as… as I gather it, what… what Khan wanted to do was to use… use the low octane as a… as a loss leader, and make up for the difference by charging a lot on high octane.

Why… conceivably, that could benefit consumers.

I guess there are more consumers that buy low octane than high octane.

John Baumgartner:

Well, it benefits the consumers who buy low octane and hurts the consumers who buy high octane.

Actually, there was no evidence of that ever introduced in this case.

It’s simply a claim at this point.

But I would alter that situation, if I could, Your Honor, to the situation in which we are merely selling high octane gasoline, and he wishes to use our product to subsidize a loss leader of some other type.

In Mr. Khan’s operation, he carried a lot of different products… bread, milk… a number of things.

And I think we would have a very legitimate objection, and should have a right to protect ourselves, if Mr. Khan had increased the price of all gasoline, for instance, to subsidize a price reduction for beer.

Ruth Bader Ginsburg:

Mr. Baumgartner, are you right when you say there’s no evidence?

At least it was alleged that that was what the receiver did, wasn’t it?

John Baumgartner:

It was alleged that the receiver increased the price of premium gasoline and reduced the price of regular gasoline, yes.

John Baumgartner:

There was no allegation that Mr. Khan ever attempted or wished to do that.

And there was no allegation or evidence that the increase in premium gasoline actually in fact subsidized the reduction of price in regular gasoline.

It may very well have been that the reduction of price in regular gasoline increased sales by enough to more than make up the difference of the lost margin.

There’s not really any evidence, one way or the other, at this point in the case.

Anthony M. Kennedy:

Although you said you can’t think of any example in which a… a supplier’s control over the maximum price the… the retailer could sell would ever be anti-competitive, you don’t really have to go that far to win.

Because you can surely conceive of a case in which the… a… a seller with monopoly power, who wanted to drive out competitors from the market, and, in order to do it, had to control the prices of his customers as well as his own price.

I mean, it’s at least theoretically possible.

John Baumgartner:

I agree.

And I should have accepted the situation in… that predatory pricing was–

Anthony M. Kennedy:

But… but your view is that it happens so rarely that you shouldn’t have a per se rule… you should have a rule of reasoned approached, rather than per se?

John Baumgartner:

–There are other situations, but they are illegal under other rules.

And I’m just simply saying that the rule of reason will cover any situation that could come up in vertical maximum price-fixing.

If the Court has no other questions, I’d like to reserve any time I have remaining.

William H. Rehnquist:

Very well, Mr. Baumgartner.

John Baumgartner:

Thank you.

William H. Rehnquist:

Mr. Klein, we’ll hear from you.

Joel I. Klein:

Thank you, Mr. Chief Justice, and may it please the Court:

Albrecht should be overruled because its doctrinal underpinnings have been eroded, and also because its perpetuation is likely to do considerably more competitive harm than good.

Per se rules are reserved for business practices that are manifestly, self-evidently, if not always, at least almost always, anti-competitive, whereas maximum resale price agreements are rarely in that category.

If anything, we submit, they are more likely to be pro-competitive.

For example, as the Court express… expressly recognized in Arco, a maximum can constrain dealer market power, which is something that, in varying degrees, can exist from time to time.

These maximums also serve other important purposes relating to price, advertising and discounting, which is undermined by a per se rule.

I should add, as precedent, Albrecht has had an especially difficult time of it.

Its dealer autonomy and dealer multiplicity rationales were undermined in Sylvania.

And I do think that that doesn’t mean that a minimum falls.

The difference is that minimum resale price-fixing has entirely different effects and… both pro-competitive and anti-competitive.

But it’s not the abstract notion of dealer autonomy, Justice Stevens, that’s critical here.

And I would dare say that Albrecht got a remarkably chilly reception in the Arco case.

The lower Federal courts have whittled away at it.

The commentators have been extraordinarily critical of it.

Sandra Day O’Connor:

Mr. Klein, we have a brief here from 33 States and the Territory of Guam, saying don’t get rid of Albrecht.

That’s going to hurt our antitrust enforcement.

Now, would you like to comment on the position of the States?

Joel I. Klein:

I’d be… I’d be delighted to.

I… I think there are two things I’d like to say about it.

First of all, what’s significant is that the States themselves don’t cite a single instance, and we in the Federal Government could find no instances, where an enforcement agency brought a maximum case.

And that seems to me to be very, very telling.

That is, in the 30 years since Albrecht, none of them appear to have brought such a case.

Second, their concern… if you read their briefs… their concern is, somehow, if you breach the wall in this pricing area, that you won’t be able to stop at minimum.

Now, I think minimum presents very different effects.

And in fact, their key argument is that maximum could be a minimum.

But my answer to that is, if it is a minimum, it will be treated by a minimum.

And, frankly, I don’t see any problem in detection.

The notion that somehow you could disguise this… after all, the first person who is likely to object is going to be the dealer.

And if the dealer thinks that its price wants… he wants to drive his price down, he’s entirely free to do so.

And if he gets punished for that, then we know that it’s a minimum.

So this notion that it’s undetectable seems to me to be a very hard one to sustain.

Now, in addition, the only other arguments of maximum and minimum, which I think is the most telling thing about the States’ brief, Justice O’Connor, is they really are fighting for another day.

And if that day should come, entirely different competitive considerations will be at play.

But the other thing that’s very telling about it, the only other argument you see in the briefs is that a maximum price could affect dealer service.

Now, that… that… that’s a reasonable concern, but I would say several things about it.

One, there’s no reason to think that the manufacturer is not interested in dealer service that has a pro-competitive benefit.

This Court recognized, in GTE, it recognized in Sharp, that manufacturers have an interest in order to maximize their profit in an efficient distribution system.

Second, and it seems to me crucial, is that under the law now, after GTE/Sylvania, you can actually impose specific service limitations in your contract.

For example, McDonald’s can say to all of its dealers: You can’t have waiters.

It destroys the ambience.

William H. Rehnquist:

You can’t have what?

Joel I. Klein:

Waiters.

William H. Rehnquist:

Waiters?

Joel I. Klein:

In a fast-food restaurant.

Joel I. Klein:

They can condition a McDonald’s franchise on that limitation on service.

The… the… the manufacturer here, the gas State… gas company here could say: You can’t wash windows.

You can’t do tires.

They can put that in there.

Now, that may be anti-competitive ultimately, but it would be tested by a rule of reason.

So the notion that we would have a per se rule, basically because it might impact service… a price restriction might impact service, seems to me to have the cart way before the horse in terms of what would go on, on a direct restriction.

And, beyond that, those are the two generic circumstances: maximum/minimum and effect on service.

Beyond that, the only other notion that comes up is a possibility of predation.

And if there is predation, of course, that would be a violation.

But the Court, in Brook and many other cases, has realized that that’s quite rare.

So the key point here is that this is not the stuff of which per se rules are made.

Whether you could imagine a case is not the question.

If there is such a case and there’s competitive effects, the rule of reason is there, as it is for virtually all business practices.

What the per se rule is reserved for, what it has its real currency in is practices that one ought to look at and say, this is really bad stuff; you don’t need to do an in-depth examination.

Now, what’s on the other side of the equation?

First of all, you asked about exclusives.

But it’s not just exclusives.

Look at the facts in Albrecht.

You can have, if you will, de facto market power.

If you’re a newspaper dealer, it’s… it’s really the case that you’re going to have an area which you… you deliver these newspapers to.

And unlike the newspaper company, the dealer might well say, look, I have some market power; people in Washington, D.C. want to wake up on a Saturday morning and see their newspaper there.

I can charge more than a quarter for that, before they’re going to go out to a machine or downtown or something like that.

And then the dealer can extract real monopoly profits in that situation.

Anthony M. Kennedy:

Is… is one of the States’ concerns that if you change the per se rule, then price, for maximum prices, becomes a legitimate subject of a day-to-day discussion between the manufacturer and his dealers, and that this will create a climate in which minimum pricing and price-fixing of the anti-competitive sort might go on, and that it’s more difficult, then, for the States to enforce?

As it is now, it’s just… this is just beyond the subject of discussion, which is one reason why there have been so few cases on it.

People know that you don’t do this.

And if we say that you can, does this, then, cause a… a danger of… that price will be a subject of… of legitimate discussion in some instances and that this will lead to abuses?

Is that, do you think, the States’ concern?

Joel I. Klein:

I don’t… I… I don’t think it’s… it may be the States’ concern.

I don’t think it’s a realistic concern, Justice Kennedy, for sev… several reasons.

Joel I. Klein:

To begin with, there is a lot of discussion about price, as this Court has recognized, time and again.

You can have a suggested manufacturers’ retail price, as long as there’s no agreement.

But they discuss it all the time.

Second, it seems to me, this notion that somehow talking about this issue will lead to unlawful agreements, I think, if there is such an unlawful agreement that results, then we can address that problem in that particular case.

But I don’t see any reason to somehow say that we need to eliminate from the air discussions of price.

Manufacturers and their retailers discuss price all the time.

William H. Rehnquist:

Mr. Klein, what about the principle of stare decisis here?

We’re dealing with a statutory question, not a constitutional question.

And, customarily, it takes a fairly strong case to get us to overrule a previous decision.

Joel I. Klein:

I think that that’s right, Mr. Chief Justice.

I would say two things.

One, I think, as this Court has recognized, the standard under the antitrust law is a little different from many statutes, because it is a common law statute, in which this Court has revised and changed over the years.

GTE/Sylvania said that, and the Court did as well in Copperweld.

And I think it has recognized that principle.

But I think, whatever standard you apply, it can be met here.

I think if you look at GTE/Sylvania, you will see that the basic notions that animated the decision in… in Albrecht are no longer viable.

There was a view in the mid-eighties that actually animated Schwinn… in the mid-sixties, it animated Schwinn and animated Albrecht… that said there ought to be dealer autonomy; we ought to have lots and lots of dealers; that’s better than a few dealers.

The Court’s opinion, quite clearly, eroded that thinking.

Not only that, it created the very right to… to establish exclusives that Albrecht said was no good.

Albrecht said, well, if you have market power because you have an exclusive territorial arrangement, then, under Schwinn, the territory falls.

But now, post-GTE, the territory remains.

Then I think the next problem you have is the Court says in Arco… it… it… it’s really an interesting opinion… it starts out by saying: We assume, arguendo, that Albrecht is still good law.

It then has a footnote saying: Albrecht was the only case ever that dealt with a pure maximum.

And then it goes on, in footnote 13, and says: The pro-competitive benefits are now, quote, clearer than they were at the time of Albrecht.

And they cite a list of maybe 10 different academic articles, all of which are harshly critical of Albrecht for essentially mis-perceiving its competitive impact.

Then you look at what the lower courts have done.

They have constantly read the opinion narrowly, chipping away at it.

No antitrust injury, no injury in fact, no damages, no agreement.

Cases involving discounts get distinguished in some sort of ways.

So this is anything but robust.

Joel I. Klein:

This is, in… in Judge… Chief Judge Posner’s words, a rather moth eaten foundation.

And then the point which I would not discount… Justice Kennedy said there haven’t been many such cases in minimum resale price maintenance.

The States cite a lot of cases they have brought.

The Antitrust Division has brought such cases.

The Federal Trade Commission has brought such… such cases.

These are real enforcement actions.

In the maximum area, there are no such cases.

It’s not because the practice doesn’t occur; it’s because government agencies don’t find this to be a desirable enforcement vehicle.

And then I would just say the last point, to the extent congressional intent here is relevant.

Of course, in 1991, Congress actually attempted to pass… it ultimately failed, but a different statute passed both houses, trying to reverse this Court’s decisions in Sharp and Monsanto.

And while the ultimate statute never passed, Mr. Chief Justice, both statutes would have ensured… both… both bills… would have ensured that minimum resale price maintenance stayed a per se rule.

And they had exceptions for maximum.

So, to the extent one can glint… glim… take anything from that congressional reaction, Congress, too, realized that Albrecht was no good.

William H. Rehnquist:

Well, but of… of what use is congressional reaction if it doesn’t become a law?

Joel I. Klein:

It… it… it… I only point to it.

I… I put it last on the last.

I only point to it to say to the extent heard anything from them, we’ve heard that… what little guidance there is, is minimal, I agree.

But the key point is not what Congress did.

This is, in the end, a common law statute.

This Court, I believe, has the obligation to revise and change in this circumstance.

And the reason you should do it, most importantly, is I don’t think you should strip manufacturers of a mechanism that is pro-competitive.

If we leave it on the books, that is going to increase market injury.

And I think that is a bad result.

Thank you very much, Mr. Chief Justice.

William H. Rehnquist:

Thank you, Mr. Klein.

Mr. DiVincenzo.

Anthony S. DiVincenzo:

Mr. Chief Justice, may it please the Court:

Current antitrust jurisprudence relies upon interbrand competition to guarantee the fundamental purpose of the antitrust laws: the protection and preservation of competition.

What I find interesting in this case is that although cloaking themselves as champions of competition, their position… the Government and State Oil’s position… really expresses a deep-seated distrust of interbrand competition.

Look at what they tell you.

Anthony S. DiVincenzo:

They tell you that we need to have the manufacturers and suppliers, the upstream suppliers, have power to set prices, because interbrand competition, which affects and controls retailers’ actions as well, isn’t going to work.

We have to be afraid of the possibility of retailers having market power.

What happened to the concept of interbrand competition, which they espouse?

If interbrand competition exists in a marketplace, why not trust interbrand competition to keep the prices of the retailers at the level the competition would in fact dictate?

Stephen G. Breyer:

I guess their answer is that, basically, the only time that a manufacturer would want to do such a thing… not… not 100 percent, but the vast… would be in an instance where interbrand competition was not working perfectly.

Otherwise, there wouldn’t be power in the dealer to raise price above the competitive level.

That’s why he wants to keep it down.

There isn’t enough interbrand competition.

I think that’s basically the argument.

Anthony S. DiVincenzo:

In 30 years, since Albrecht was adopted, what I’m looking for and I don’t see in this record or in the literature is any breakdown of interbrand competition controlling retailers.

As this Court itself pointed out in the… the Sharp case, it is rare, indeed, that you’re going to find a retailer that has market power to be able to dictate price.

And, indeed, the concept of GTE/Sylvania was that you don’t have to really worry about exclusive territories, because they protect intrabrand competition, because you still have the specter of interbrand competition out there to control these retailers, even though they now have exclusive territories.

Under those circumstances, I think the best way to approach the potential problem of a market power in a retailer is under the current jur… jurisprudence.

And that has two very distinct elements.

The first is Albrecht, which is the per se application.

It says that a violation of Section 1 occurs when there is a vertical maximum resale price maintenance agreement… price-fixing at that level.

But there’s a second element.

And that is the Arco case.

And the Arco case says that in order for a private plaintiff to have an antitrust cause of action, that private plaintiff has to establish an antitrust injury.

And it is an injury which flows from the core of the antitrust laws.

And what is the core of the antitrust laws, as this Court has come to define it?

Interbrand competition.

So, thus, you have the per se rule in its maximum, strident position, indeed–

Stephen G. Breyer:

Sorry, I thought you were talking about intrabrand.

You mean interbrand?

Anthony S. DiVincenzo:

–Interbrand.

Stephen G. Breyer:

Oh, well, the reason that they worried is that they have some market power in there, in their product.

And since they have some market power, the price isn’t perfectly competitive, the dealer gets more market power because of his position; that’s why they want to keep the price down.

Anthony S. DiVincenzo:

Again–

Stephen G. Breyer:

And that’s the basic argument, which I guess you have to deal with in this.

Anthony S. DiVincenzo:

–No, I understand that, Your Honor.

Stephen G. Breyer:

I’m sorry I misunderstood inter for intra.

Anthony S. DiVincenzo:

No, what… what I’m saying is that in a situation… the best way of dealing with that market power is to use the… the per se rule, coupled with antitrust injury.

It would require a plaintiff to demonstrate that there was an injury flowing to itself from the interference within interbrand competition.

And that’s what occurred in this case.

Here, Mr. Khan ran his gas station… and he was constrained as to his pricing ability.

He had to deal with a margin restraint, which is a… a slightly different animal than a pure maximum price-fixing price.

It says: Mr. Khan, you cannot make more than 3 and a quarter cents per gallon of gasoline.

Now, we don’t care if you charge more than the suggested pump price.

And… except… and even to monopoly levels… but we get those monopoly profits.

And that’s State Oil’s position here.

It’s clear that State Oil wasn’t trying to restrain Mr. Khan’s ability to charge monopoly prices.

All they wanted to do was shift the profits from that monopoly pricing, if it could occur, from Mr. Khan, and put some–

William H. Rehnquist:

But surely… surely the effect was precisely the same.

If you tell a dealer that you can charge whatever you want, but everything over a certain amount that you take in goes to me, he’s not going to do that?

You don’t really think they thought Mr. Khan was that stupid?

Anthony S. DiVincenzo:

–No, I–

[Laughter]

No, I… I… I cert… I certainly agree.

But I think, Your Honors, what that puts an end to is the argument which State Oil makes, that what they were trying to do was constrain, in reality, Mr. Khan’s pricing.

I don’t think that that was what was involved in this case at all.

The intention here may have been to allocate the profit margins, but it certainly wasn’t any concern over Mr. Khan’s ability to manipulate or charge more for gasoline than interbrand competition, which existed in this marketplace, would allow him to charge.

Antonin Scalia:

What… what’s… what’s the antitrust injury?

What… how… how is the consumer harmed?

Anthony S. DiVincenzo:

The consumer was harmed here because the price which was in fact set, the mechanism… the restraining mechanism… the margin restraint, affected both a maximum price on some products as well as the minimum price on other products.

Indeed, what you ended up here is the manufacturer set a single price, and that became the market price.

Because it not only eliminated the ability of the supp… of the dealer, Mr. Khan, to increase price… he… well, it removed any incentive, as this Court has quite… pointed… has just pointed out to me… it also eliminated his incentive to decrease prices.

Because, at this point, a 3-and-a-quarter-cent margin, his margins were so close to cost that he had no incentive or ability to lower the price.

Antonin Scalia:

Why does he ever… why does he ever have an incentive to lower the price?

I mean, once again, this… does… doesn’t this posit a… a good deal of stupidity on his part?

Antonin Scalia:

That, oh, if I could only raise this price more, I would give all this money back to the consumers by lowering my price on the… on the regular gas.

Why, I mean, nobody behaves that way.

Anthony S. DiVincenzo:

Your Honor, with all due respect, the receiver behaved exactly that way after Mr. Khan was out.

When Mr. Khan left the station, the receiver did exactly what we say State Oil constrained them, or stopped them, from doing.

It lowered the price on regular grades of gasoline.

And, as the expert points out, that resulted in a shift of the volumes from premium to more sales of regular gasoline, thereby increasing the volume of sales.

And the same token, there was an–

Antonin Scalia:

Excuse me.

By that, do you mean that some people who used to buy premium bought regular or–

Anthony S. DiVincenzo:

–No.

I–

Antonin Scalia:

–or more regular were… more people came to buy regular?

Anthony S. DiVincenzo:

–Your Honor, with all… with… based on the record we have, all we know is that there was more regular gasoline sold.

Antonin Scalia:

Okay.

Well, that… that, in itself, is a justification for lowering the price of regular gas.

And as far as I can tell, it’s the only justification that someone who’s selling gas will ever use.

If I lower the price, I’ll sell more and I’ll make more money.

I can’t imagine anybody thinking, oh, you know, if I could raise the price on premium, I’ll be able to lower the price on regular, even though it won’t get me any more customers.

I mean, that’s silly.

Why does he want to do that?

This man is full of love for… for gasoline buyers?

Anthony S. DiVincenzo:

No, Your Honor.

What–

[Laughter]

–what this man is trying to do is run a business where he has margins constrained at 3 and a quarter cents per gallon, which is simply, as experience proved to him, not enough to sustain his business.

So what he attempts to do at that point is, by using his market ability to read the market, to get to a level which brings him more volume and therefore some additional gross revenue–

Antonin Scalia:

Right.

Anthony S. DiVincenzo:

–but, at the same token, add to his profit by charging a… what the market allows him to charge as a competitive price on another grade of gasoline.

Antonin Scalia:

But he ought to lower the price of his regular no matter what the price of his premium is if lowering the price of the regular will… will increase his profits.

He ought to do that whether or not he’s… he can fiddle with the… with the maximum on… on the premium.

Antonin Scalia:

I can’t understand why that gives him any more of an incentive to lower the price of his regular.

Anthony S. DiVincenzo:

The incentive that any dealer has is to stay in business, Your Honor.

Antonin Scalia:

No; it’s to make as much money as he can.

Anthony S. DiVincenzo:

And if he… if, by lowering price, he cannot make enough money to stay in business–

Antonin Scalia:

No.

If by lowering price he can’t make more money than by keeping the price higher, he’s not going to lower it.

He’s not going to say, I’m going to lower it; I’ll lose a little more… you know, I’ll make it up… I’ll make it up by… by increasing my premium price.

That is… that is senseless behavior.

Anthony S. DiVincenzo:

–Your Honor, no, I don’t believe it is.

And… and for this reason.

As a businessman sitting there, he must decide whether in fact the lowering of the price in the competitive conditions that he faces will… will result in an increase in volume to him, and bring in sufficient additional revenue to offset the decrease in price that he has in fact imposed.

Antonin Scalia:

This is intelligent behavior only for somebody whose whole objective in running a gas station is barely to stay in business.

Then… then it makes sense.

If… if I’m going… opening this gas station in order barely to stay in business, then I… I might want to raise my premium price so that I could give away money by lowering my… my… my regular price, even though it’s not going to increase sales.

Anthony S. DiVincenzo:

And it is also the–

Antonin Scalia:

But I don’t know anybody who has that objective.

He wants to make money.

Anthony S. DiVincenzo:

–Your Honor, he must make money.

But it would also be the case of someone who is in trouble of going out of business to adopt that marketing strategy and that pricing strategy.

Because if that person is then faced with a business where he is about to lose his $100,000 investment in his gas station, he has got to do something to increase his profitability.

He’s got to make more money.

So at that point he says, I can get more volume and thereby increase my ancillary sales, drawing in additional revenue.

But, at the same token, that is a tremendous gamble, and one which he may say, given the current market conditions, he could not achieve.

If he lowers the price and doesn’t increase volume, what he’s done is signed his own death warrant.

But in the circumstances that existed here because of the pricing decisions imposed upon him by State Oil, the market for premium gasoline, the interbrand competition on premium gasoline, would allow him to make more money.

And so, as a result, he was able… would be able to shift his pricing, to lower the price in one place, to increase his overall volumes and, the same token, to increase the price on premium gasolines, overall increasing his margins.

And–

William H. Rehnquist:

The 3.25 limit did not apply to premium?

Anthony S. DiVincenzo:

–The 3.25 limit applied to all grades of gasoline.

William H. Rehnquist:

All grades… all grades of gas?

Anthony S. DiVincenzo:

All grades of gasoline.

William H. Rehnquist:

I see.

Anthony S. DiVincenzo:

He was restricted with that margin.

He could not charge another price.

If he did, it went to State Oil.

If he dropped below, he lost money.

Stephen G. Breyer:

If… if I understand your response to Justice Scalia, it would be that lowering the price of the cheap grade will make him more money, but not for a year or two.

So we have to stay in business until it pays off.

And so, what we’ll do is raise the high price even more, and that gives us the money necessary to stay in business until the low price pays off.

Anthony S. DiVincenzo:

That would certainly be rational thinking on their part.

Stephen G. Breyer:

Is that your argument?

Anthony S. DiVincenzo:

Yes.

That would be rational thinking on his part.

Stephen G. Breyer:

All right.

And the problem with that argument, I guess, John D. Rockefeller could make it, too: Let me… any monopolist… let me charge the earth, because, you see, what I do when I charge the earth, is I take all this money… John D. Rockefeller and others… and I give it back to the public.

I charge a lower price eventually for my heating oil or for some other product.

And the difficulty is not that that’s always wrong; I guess the difficulty is, if that argument were allowed as a response, it would always be made and we’d never know when it was wrong.

I mean, that’s… that’s what I think… you gave a sophisticated argument… and so I… I think it’s an interesting one, and I… I want to get you to respond to what I’d call is a… a real administrative objection to your sophisticated argument.

Anthony S. DiVincenzo:

The argument can always be made by a monopolist with market power that they’re… what they’re trying to do is shift pricing around so that, at one point, they in fact lower price.

I don’t think that makes a monopolist… you know, going back to United Shoe Machinery, this Court was faced with the benevolent monopolist.

You can always posit a benevolent monopolist, but that still was… was considered illegal.

What I think the administrative answer, Your Honor, is that the rest of the antitrust laws aren’t abrogated as to dealers.

The antitrust laws would apply to dealers who attempt to use or abuse monopoly power that they have acquired in a definable marketplace.

And that… that’s the other end of this scenario.

You have on one end, in trying to judge whether you should change the per se rule and allow vertical maximum price-fixing, the question is: Is it really necessary?

And I suggest that it’s not.

Because interbrand competition should do, in all cases where interbrand competition exists and is not distorted, it should keep the prices at competitive levels.

So you don’t need to have this artificial restraint or power given to manufacturers where interbrand competition can work.

Antonin Scalia:

But it apparently doesn’t work here.

Because you say your client feels free to kick the premium up as high as he likes… with… without being… why isn’t he constrained by… by other gas stations from charging this additional money for his premium?

Anthony S. DiVincenzo:

The answer, Your Honor, is that in the given conditions, the price that was prevailing in the marketplace must have allowed him to make additional margins.

Antonin Scalia:

That is to say there was no interbrand competition.

Anthony S. DiVincenzo:

No, I… I disagree with that, Your Honor, with all due respect.

Interbrand competition doesn’t always drive the price to the lowest possible level.

Otherwise, you’d have no profitability.

Competition sets a price… and I think this Court has recognized–

John Paul Stevens:

Well, is it your position that the market for the premium gas allow… generally allowed for a margin of more than 3.25 cents, where it’s just 3.25 on the regular?

Anthony S. DiVincenzo:

–Or… or–

John Paul Stevens:

And that… in other words, the difference in product was… should have dictated a difference in margin, and that’s what he was trying to take advantage of?

Anthony S. DiVincenzo:

–That is correct, Your Honor.

The… the difference in the products… there are… without using the… the term “market” in the technical sense… but the difference in the competitive market for premium gasoline would allow a higher margin.

And a… competition within that market would have allowed the dealers to make more than 3 and a quarter cents per gallon.

The receiver experience, at least 3 and 8/10ths cents a gallon over all his entire product margin.

On the other hand, because of the difference in the nature of competition, it may be that premium gasoline buyers don’t price shop as much as regular gasoline purchasers, but that the general circumstance concerning regular gasoline is that the margins… the competitive market allows less margin and requires lower prices.

And what State Oil did was it ignored the competitive circumstances, ignored these differences between these products, and set a single price.

And that put him–

John Paul Stevens:

Well, of course, the consequence of that normally would be that you would get a larger share of the premium sales, if your margin is less, and you… you’d be un… underpricing your competitors on… on premium.

Anthony S. DiVincenzo:

–You… you might receive some additional–

John Paul Stevens:

Unless, as you say, all premium buyers are stupid.

Anthony S. DiVincenzo:

–Well, not necessarily stupid; less price elastic.

John Paul Stevens:

They don’t… they don’t… yeah.

Anthony S. DiVincenzo:

Demand being, in that market, a little different, the elasticities of demand being different.

But under those circumstances, what you end up happening is… what ends up happening is that you have State Oil saying to this Court: Give us the power to give… put our judgment in place of free market forces.

And… and that is a very serious threat to competition, which is the purpose of the antitrust laws.

William H. Rehnquist:

Well, free market forces are ordinarily reflected in contracts, which your client signed with State Oil.

Anthony S. DiVincenzo:

There was a contract that was… was signed with State Oil, in which he agreed… that’s how we actually get in… under Section 1 here, Your Honor.

There was an agreement which constrained his ability to price, to 3 and a quarter cents.

There is… the flip side of that, however, is that what is not set is the pump price.

There is no contractual requirement that a particular pump price be set.

So State Oil had the right to set a pump price, and that pump price may or may not reflect conditions in competition in that particular marketplace.

Anthony S. DiVincenzo:

And if State Oil guessed wrong, then you have the threat of anti-competitive effects.

And if State Oil, as it did, guessed wrong as to the price that should prevail for regular grades of gasoline, you have the consumers being hurt.

And State Oil guessed wrong, on the high side on the… on the premium grades, in setting the maximum, then Mr. Khan was squeezed at that end as well.

This was a squeeze that came from both ends, and ultimately resulted in his failure to run the business.

Now, the receiver, which refused to agree with the restraints set forth in the contract and was free to do what it wanted, and adopted a marketing strategy which increased volume, which increased profitability and margin, and therefore benefitted some consumers, benefitted State Oil, as well as benefitting itself and the operation.

And that’s what competition is supposed to do.

Competition allows for the businessmen to make a reasonable profit so they can stay in business, so they can invest in their business, to recoup their investment, and that return of investment is… is–

Sandra Day O’Connor:

Well, I don’t see that any of that argument means you couldn’t reach the right result under the rule of reason.

I mean, I… I just don’t understand why it requires a per se rule.

Anthony S. DiVincenzo:

–The rule of reason analysis requires proofs of market power, quite honestly, which would exclude almost every single petroleum market case that you’re faced with, as well as others.

Absent proof of market power and impacts on competition in a definable market, you would have situations like Mr. Khan not being able… you could not address his situation, where he suffers an antitrust injury.

But, moreover, when the–

Antonin Scalia:

Excuse me.

He suffers and antitrust injury?

I mean, I… I thought it’s the consumer that suffers the antitrust injury?

Anthony S. DiVincenzo:

–No.

In this case, he suffers an antitrust injury in the sense that he cannot price and increase his volumes on the low end and make a competitive price on the high end.

Antonin Scalia:

Well, that’s a… that’s a com… I… I think we’ve said that… that the antitrust law is not there to protect merchants; it’s there to protect consumers.

Anthony S. DiVincenzo:

In every ca–

Antonin Scalia:

And that’s why I keep looking for some consumer who has been hurt by this.

Now, you… you… you say that… that… that when… when the… the trustee took over, he lowered the price of… of regular.

Is it clear that it would not have paid him to lower the price of regular unless he had… unless he had increased the price of premium?

Did… did he not make more money, in volume, by lowering the price of regular?

Anthony S. DiVincenzo:

–He made some additional volume… he made volume.

There’s nothing in the record which indicates he made enough from that to be able to sustain or improve the profitability.

Antonin Scalia:

Is there any… anything in the record to the contrary, that… that he did not increase his profitability by selling more of the regular at a lower price?

Anthony S. DiVincenzo:

The–

Antonin Scalia:

Do… do we know that he… he lost money on it?

Anthony S. DiVincenzo:

–No.

The… the only… the only… in… the only evidence in the record is the expert’s report, which, as I pointed out, indicates an increase in overall volume, lumping both… all grades together.

William H. Rehnquist:

Thank you, Mr. DiVincenzo.

I think you’ve answered the question.

Ms. Harbour, we’ll hear from you.

Pamela J. Harbour:

Mr. Chief Justice, and may it please the Court:

For several decades, the 35 State attorneys general before this Court today have been the primary enforcers of the law in the area of vertical price-fixing.

Our experience, and the realities of the marketplace, have shown us that the labels placed on these agreements… that is to say, maximum vertical price-fixing, on one hand, and minimum vertical price-fixing on the other… are, in most cases, a meaningless distinction.

As the agencies most familiar with these cases, the States have considerable experience with price-raising schemes being characterized as price-lowering schemes.

And–

Antonin Scalia:

Ms. Harbour, how… how extensive is that experience?

Is it… is it correct that there’s not a single case that’s been brought?

Pamela J. Harbour:

–Your Honor, there are… there was a characterization game that was going on here.

The targets of our investigation came in and said to us, we are actually fixing price ceilings, intending to lower prices.

But, in fact, after we investigated, we found that those were not price ceilings.

In fact, they were intended to raise prices rather than lower them.

Antonin Scalia:

So were there prosecutions brought?

What I’m asking is, is it correct, as the… as the… as the United States Government has contended, that they’re… they’re unaware of a single case, where… where you or any other State has moved against maximum prices?

Pamela J. Harbour:

As I said, there are elements of maximum price-fixing in the cases that we brought.

The States claim that they’re price-fixing–

Antonin Scalia:

What cases are they?

Pamela J. Harbour:

–The Minolta case.

It was a $640,000 settlement that was returned to consumers.

Panasonic involved a $16 million settlement.

And in these two cases, as well as Mitsubishi, Your Honor, the defendants contended that they were actually trying to lower prices for consumers.

But, in fact, when we investigated, we found that they were in fact raising those prices.

There was a characterization they were appealing to our prosecutory–

Ruth Bader Ginsburg:

You found that they were minimum pricing cases, not maximum pricing cases.

And I suppose the question is, a genuine maximum… which is not in question in this case… no one is asserting that this was a minimum price in disguise… do you have any case where there was a maximum price, not a disguised minimum price, where the States have prosecuted?

Pamela J. Harbour:

–Understood, Your Honor.

No, Your Honor.

But retailer market power is very rare in these cases–

Stephen G. Breyer:

The… the reason that I think that’s awfully important is because what you’re basically doing is you’re taking the position that consumers should have to pay more money for gasoline.

Now, if you’re requiring consumers to pay more money for gasoline, there ought to be… which is what’s going on, if you don’t let them set a real high price… then I’d like to know why.

And your argument is, because, really, maybe it’s a minimum price.

All right, I understand that argument.

It’s logically sound.

But what is the evidence that you have to make consumers pay more money for gasoline in order to stop people from, you know, charging a minimum price?

And… and… and that’s why I think this evidentiary question, why you know that, why you’re saying this, the facts of the case, are pretty important.

So… so I’m urging you to… you know, why do you think that?

Pamela J. Harbour:

–Your Honor, basically, the argument being advanced today by the Petitioners is that manufacturers, like State Oil, should be free to restrain the exercise of monopoly power by their dealers who have been granted exclusive territories.

Well, first of all, Khan had no exclusive territory.

There is nothing in this record that points to that.

And, second of all, nothing in this record suggests that Khan had monopoly power whatsoever.

Stephen G. Breyer:

That’s quite a good point.

And… and do you think, then, it would be possible, under a rule of reason, for a firm to come and complain on the basis that they’re a failing dealer, and so a failing dealer couldn’t possibly be in a situation of trying to raise prices above the competitive level unless there was no need for this kind of thing to constrain his price?

I mean, that’s what I think would be quite interesting, whether there would be categories of things where it would be a good defense… or it would be a good… a good price-fixing claim.

Pamela J. Harbour:

The rule of reason is not the rule for a price-fixing case or any agreement on price.

In fact, as this Court has held in Maricopa, the anti-competitive potential inherent in all price-fixing cases justify their facial invalidation even when pro-competitive justifications are offered for some.

But, in this case, Your Honor, it is the States’ position that the argument posited by the Petitioners is illogical.

And allow me to illustrate.

The Petitioners have hypothesized a dealer with market power in an exclusive territory.

When a dealer has monopoly power, by definition, there is no effective interbrand competition; and, therefore, there is no justification for granting the exclusive territory.

Under the Sylvania decision, Sylvania held that restraints on intrabrand competition… namely, the exclusive territory… will only be tolerated when they stimulate interbrand competition.

But here, this… this dealer, this hypothetical monopoly power that this dealer has, there is no effective interbrand competition.

Therefore, there is no justification for granting the exclusive territory; and further, there is no justification for imposing the price ceiling to restrain the monopoly power that was unreasonably granted to the dealer in the first place.

Antonin Scalia:

Gee, is that our law?

I wasn’t aware it was.

That you… you cannot exclusive territories, even those exclusive territories, overall, will… will… will stimulate interbrand competition.

If in any single territory there is no interbrand competition, you cannot restrict that dealer to… to a territory?

Pamela J. Harbour:

As… as the holding–

Antonin Scalia:

Just one territory?

Pamela J. Harbour:

–Intrabrand competition… restraints on intrabrand competition will only be tolerated when they stimulated interbrand competition.

Antonin Scalia:

Within the particular territory or overall?

I mean, I’m… I’m… I’m a manufacturer, and nationwide, there’s plenty of interbrand competition.

But you’re saying if there is one… one territory in the country where there’s no effective interbrand competition, you cannot have an exclusive territory there?

Pamela J. Harbour:

When… I’m talking about a… a monopolist.

And when there is a monopolist there, that means there is no inter or intrabrand competition.

Antonin Scalia:

I wasn’t aware we… we had held that, but you think that’s the law?

Pamela J. Harbour:

Your Honor, if… if I have mischaracterized that, forgive me.

But I… I do know that, in Sylvania, this Court said that in order to… to restrain intrabrand competition, there must be effective interbrand competition.

And the States do not feel that that has been posited here.

But we do believe that a great deal is at stake in this case, Your Honor… more than the 29-year-old rule in the Albrecht decision.

The clear and straightforward per se rule against maximum price-fixing, which has served this Nation well for most of this century, is at risk.

Albrecht was merely a reaffirmation of Dr. Miles, Sucony-Vacuum Oil, Parke Davis and many other precedents in a consistent line of cases, which all stand for the same proposition… that price-fixing is price-fixing, whether it is vertical or horizontal–

Ruth Bader Ginsburg:

Then why was it… Dr. Miles was 1911 and Albrecht wasn’t until the sixties.

So if it was so evident that minimum and maximum are the same and they’re all equally bad, why did it take from 1911, till what, 1968 for that light to go on?

Pamela J. Harbour:

–Actually, it didn’t, Your Honor.

In 1911, Dr. Miles equated horizontal and… and vertical price-fixing.

And… and, basically, they said that it produced market effects that were functionally the same.

But, then, in the Sucony-Vacuum Oil decision, in 1940, this Court formulated the classic definition of a price-fixing agreement… any agreement that fixes, raises, lowers, maintains, or stabilizes prices.

In that agreement, maximum and minimum price-fixing was equated.

Stephen G. Breyer:

Well, that may be, but they’re arguing for a very basic distinction.

In the vertical context, the one, means the consumer pays low prices; in the other, high prices.

Where the consumer pays high prices, that’s likely to be bad.

Where it means the consumer pays lower prices, that’s likely to be good.

I mean, that’s a crude distinction, and it requires lots of… but, I mean, I think that’s the basic idea, isn’t it, for making the distinction between the high and the low, under the antitrust laws?

Pamela J. Harbour:

Yes.

In the States’ opinion, price ceilings almost always harm consumers.

And they almost always harm consumers because they can disguise a minimum price, as this Court pointed out in Albrecht and late in Maricopa, or they could be a de facto minimum.

And also they can fa… facilitate collusion.

And as this Court pointed out in–

Antonin Scalia:

Can’t you use suggested retail prices for that purpose just as effectively?

Pamela J. Harbour:

–I’m sorry, Your Honor?

Antonin Scalia:

Why can’t you use suggested retail prices for that purpose just as effectively?

Pamela J. Harbour:

Well, in fact, that is–

Antonin Scalia:

I mean, if… if you’re trying to get a de facto minimum.

Pamela J. Harbour:

–I believe that that suggestion by Your Honor is an alternative that can be used instead of the price ceiling.

Price ceilings are almost always anti-competitive.

And there are alternatives that are less pernicious to competition, such as suggested retail pricing.

William H. Rehnquist:

Thank you, Ms. Harbour.

Your time has expired.

Pamela J. Harbour:

You’re welcome.

William H. Rehnquist:

Mr. Baumgartner, you have 1 minute remaining.

John Baumgartner:

We have nothing further, Mr. Chief Justice.

William H. Rehnquist:

Very well, the case is submitted.