Making sense of State Oil Co. v. Khan: Vertical maximum price fixing under a rule of reason

Antitrust Law Journal

Volumn 66, Issue 3, 1998, Pages 567-611

  Grimes, Warren S ^a  

^a SOUTHWESTERN UNIVERSITY   (United States)

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EID: 0032343346     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (137)

1. 118 S. Ct. 275 (1997).
2. Id. at 282 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)). 3 390 U.S. 145 (1968.)
3. Id. at 153.
4. Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
5. Warren S. Grimes, The Seven Myths of Vertical Price Fixing: The Politics and Economics of a Century-Long Debate, 21 SW. U. L. REV. 1285, 1287-93 (1992).
6. 340 U.S. 211 (1951).
7. This aspect of the Kiefer-Stewart holding presumably would not suvive after Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (holding that a conspiracy under § 1 of the Sherman Act cannot be found between a corporation and its wholly owned subsidiary).
8. The background underlying Kiefer-Stewart is described in James A. Rahl, Comment, The Per Se Illegality of Price-Fixing - Sans Power, Purpose, or Effect, 19 U. CHI. L. REV. 837, 838-39 (1952). See also Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, 182 F.2d 228, 230-32 (7th Cir. 1950).
9. Kiefer-Stewart, 340 U.S. at 213.
10. In his dissent in Albrecht, Justice Harlan read Kiefer-Stewart as a decision premised on a horizontal conspiracy between two liquor producers, ignoring the circumstance that they were commonly owned. Albrecht, 390 U.S. at 156, 164-65. Although correct on its face, this reading does not provide a basis for a credible economic analysis of the maximum resale prices imposed in Kiefer-Stewart. Because the facts demonstrate no horizontally generated market power at the producer or distributor level, a genuine economic analysis must assume the vertical nature of the price restraints.
11. Kiefer-Stewart, 340 U.S. at 214. According to one source, the minimum prices were also likely to operate as maximum prices because wholesalers could not distinguish their offerings from rivals' offerings, with the result that retailers would quickly switch to another supplier if a particular wholesaler's prices were out of line. Rahl, supra note 9, at 838-39.
12. 388 U.S. 365 (1967).
13. Albrecht, 390 U.S. at 152-53.
14. Id. at 153.
15. Id. at 159.
16. Justice Stewart's dissent in Albrecht described the plaintiff distributor as "the only person who could sell for home delivery the city's only daily morning newspaper," and hence as "a monopolist widlin his own territory." Id. at 168.
17. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).
18. Among those who took this position were Roger Blair & Gordon Lang, Albrecht After ARCO, Maximum Resale Price Fixing Moves Toward the Rule of Reason, 44 VAND. L. REV. 1007 (1991); F.M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 17 (3d ed. 1990); 7 PHILLIP AREEDA, ANTITRUST LAW, ¶ 1635 at 295 (1989); Frank Easterbrook, Maximum Price Fixing, 48 U. CHI. L. REV. 886, 887-90 (1980); ROBERT BORK, THE ANTITRUST PARADOX 281-82 (1978).
19. Among those who took this position were Roger Blair & Gordon Lang, Albrecht After ARCO, Maximum Resale Price Fixing Moves Toward the Rule of Reason, 44 VAND. L. REV. 1007 (1991); F.M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 17 (3d ed. 1990); 7 PHILLIP AREEDA, ANTITRUST LAW, ¶ 1635 at 295 (1989); Frank Easterbrook, Maximum Price Fixing, 48 U. CHI. L. REV. 886, 887-90 (1980); ROBERT BORK, THE ANTITRUST PARADOX 281-82 (1978).
20. Among those who took this position were Roger Blair & Gordon Lang, Albrecht After ARCO, Maximum Resale Price Fixing Moves Toward the Rule of Reason, 44 VAND. L. REV. 1007 (1991); F.M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 17 (3d ed. 1990); 7 PHILLIP AREEDA, ANTITRUST LAW, ¶ 1635 at 295 (1989); Frank Easterbrook, Maximum Price Fixing, 48 U. CHI. L. REV. 886, 887-90 (1980); ROBERT BORK, THE ANTITRUST PARADOX 281-82 (1978).
21. Among those who took this position were Roger Blair & Gordon Lang, Albrecht After ARCO, Maximum Resale Price Fixing Moves Toward the Rule of Reason, 44 VAND. L. REV. 1007 (1991); F.M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 17 (3d ed. 1990); 7 PHILLIP AREEDA, ANTITRUST LAW, ¶ 1635 at 295 (1989); Frank Easterbrook, Maximum Price Fixing, 48 U. CHI. L. REV. 886, 887-90 (1980); ROBERT BORK, THE ANTITRUST PARADOX 281-82 (1978).
22. LAWRENCE SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 391 (1977). Other defenders of Albrecht include Mark Roszkowski, Vertical Maximum Price Fixing: In Defense of Albrecht, 23 LOY. U. CHI. L.J. 209 (1992); Recent Case: Khan v. State Oil Co., 110 HARV. L. REV. 523 (1996).
23. LAWRENCE SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 391 (1977). Other defenders of Albrecht include Mark Roszkowski, Vertical Maximum Price Fixing: In Defense of Albrecht, 23 LOY. U. CHI. L.J. 209 (1992); Recent Case: Khan v. State Oil Co., 110 HARV. L. REV. 523 (1996).
24. LAWRENCE SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 391 (1977). Other defenders of Albrecht include Mark Roszkowski, Vertical Maximum Price Fixing: In Defense of Albrecht, 23 LOY. U. CHI. L.J. 209 (1992); Recent Case: Khan v. State Oil Co., 110 HARV. L. REV. 523 (1996).
25. 495 U.S. 328 (1990).
26. Id. at 335 n.5.
27. 118 S. Ct. at 278.
28. 93 F.3d 1358 (7th Cir. 1996).
29. Id. at 136.
30. Roundtable Conference with Enforcement Officials, 65 ANTITRUST L.J. 929, 952 (1997).
31. Amicus Brief for the United States and the Federal Trade Commission 25 (1997) ("Since Albrecht, we are aware of no case in which either the Commission or the United States has committed enforcement resources to proceeding against a party on the ground of purely vertical maximum price fixing.").
32. The Court refers to the per se rule against vertical maximum price fixing as "Albrecht's per se rule." 118 S. Ct. at 283.
33. The government brief cites without discussion two economic studies said to explore circumstances in-which vertical maximum price fixing might be anticompetitive, but offers no explanation or support for these studies. Amicus Brief at 25 n.13 (citing Daniel P. O'Brien & Greg Shaffer, Vertical Control with Bilateral Contracts, 23 RAND J. ECON. 299 (1992); Martin K. Perry & David Besanko, Resale Price Maintenance and Manufacturer Competition for Exclusive Dealerships, 39 J. INDUS. ECON. 517 (1991)).
34. The government brief cites without discussion two economic studies said to explore circumstances in-which vertical maximum price fixing might be anticompetitive, but offers no explanation or support for these studies. Amicus Brief at 25 n.13 (citing Daniel P. O'Brien & Greg Shaffer, Vertical Control with Bilateral Contracts, 23 RAND J. ECON. 299 (1992); Martin K. Perry & David Besanko, Resale Price Maintenance and Manufacturer Competition for Exclusive Dealerships, 39 J. INDUS. ECON. 517 (1991)).
35. 118 S. Ct. at 283. The Court goes on to state: "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." Id. Presumably, the reference to "enforcement efforts" was meant to exclude private claims, of which there have been a substantial number. See infra note 31.
36. In addition to vertical maximum price-fixing cases reaching the Supreme Court (Khan and ARCO), a number of post-Albrecht private claims were decided by courts of appeal. See, e.g., Acquaire v. Canada Dry Bottling Co., 24 F.3d 401 (2d Cir. 1994); Caribe BMW, Inc. v. Bayerische Motoren Werke, Aktiengesellschaft, 19 F.3d 745 (1st Cir. 1994); Nordwest Publications, Inc. v. Crumb, 752 F.2d 473 (9th Cir. 1985); Jack Walters & Sons Corp. v. Morton Bldg., Inc., 737 F.2d 698 (7th Cir. 1984); Blanton v. Mobil Oil Corp., 721 F.2d 1207 (9th Cir. 1983); Auburn News Co. v. Providence Journal Co., 659 F.2d 273 (1st Cir. 1981); Yentsch v. Texaco, Inc., 630 F.2d 46 (2d Cir. 1980); Arnott v. American Oil Co., 609 F.2d 873 (8th Cir. 1979); Knutson v. Daily Review, Inc., 548 F.2d 795 (9th Cir. 1976); Bowen v. New York News, Inc., 522 F.2d 1242 (2d Cir. 1975); Blankenship v. Hearst Corp., 519 F.2d 418 (9th Cir. 1975); Greene v. General Foods Corp., 517 F.2d 635 (5th Cir. 1975); Milsen Co. v. Southland Corp., 454 F.2d 363 (7th Cir. 1971). There has already been at least one circuit court decision since the Supreme Court decided Khan. Mularkey v. Holsum Bakery, 1998-1 Trade Gas. (CCH) ¶ 72,183 (9th Cir. 1998).
37. 118 S. Ct. at 283.
38. Id. at 282 (citing John E. Lopatka, Stephen Breyer and Modern Antitrust: A Snug Fit, 40 ANTITRUST BULL. 1, 60 (1995)); Blair & Lang, supra note 19, at 1034.
39. The Supreme Court restated this argument in ARCO: "When a manufacturer provides a dealer an exclusive area within which to distribute a product, the manufacturer's decision to fix a maximum resale price may actually protect consumers against exploitation by the dealer acting as a local monopolist." 495 U.S. at 343 n.13.
40. Among those who made the argument were PHILUP AREEDA, ANTITRUST LAW ¶ 1636a, at 395 (1989).
41. 118 S. Ct. at 283.
42. In 1995 less than 10% of all branded gasoline stations in Illinois were Union stations. Amicus Brief of the Service Station Dealers of America 15 (noting that in 1995 only 380 of 4038 branded service stations in Illinois were Union stations). See Recent Case, supra note 20, at 528 (concluding that Khan "probably had interbrand if not intrabrand competition . . . [and] would not have been capable of price gouging.").
43. 118 S. Ct. at 282 (quoting Judge Posner's opinion, 93 F.3d at 1362).
44. 93 F.3d at 1362.
45. See the discussion of franchisor encroachment in Warren S. Grimes, When Do Franchisors Have Market Power? Antitrust Remedies for Franchisor Opportunism, 65 ANTITRUST L.J. 105, 136-41 (1996) [hereinafter Franchisor Market Power]. In response to franchisee protests of unfair exploitation, the Iowa Legislature in 1992 passed a statute that would provide franchisees specified territorial protection. Franchisors successfully challenged certain applications of that law as violating the retroactivity provisions of the federal and state constitutions. McDonald's Corp. v. Nelson, 822 F. Supp. 597 (S.D. Iowa 1993), aff'd sub nom. Holiday Inns Franchising, Inc. v. Branstad, 29 F.3d 383 (8th Cir. 1994). The territorial protections were modified in 1995 amendments, but remain in effect. The 1992 statute and the 1995 amendments are described in Dennis E. Wieczorek, The Iowa Franchise Law: 1995 Amendments and Some Proposals for 1996, 15 FRANCHISE L.J. 43 (1995).
46. See the discussion of franchisor encroachment in Warren S. Grimes, When Do Franchisors Have Market Power? Antitrust Remedies for Franchisor Opportunism, 65 ANTITRUST L.J. 105, 136-41 (1996) [hereinafter Franchisor Market Power]. In response to franchisee protests of unfair exploitation, the Iowa Legislature in 1992 passed a statute that would provide franchisees specified territorial protection. Franchisors successfully challenged certain applications of that law as violating the retroactivity provisions of the federal and state constitutions. McDonald's Corp. v. Nelson, 822 F. Supp. 597 (S.D. Iowa 1993), aff'd sub nom. Holiday Inns Franchising, Inc. v. Branstad, 29 F.3d 383 (8th Cir. 1994). The territorial protections were modified in 1995 amendments, but remain in effect. The 1992 statute and the 1995 amendments are described in Dennis E. Wieczorek, The Iowa Franchise Law: 1995 Amendments and Some Proposals for 1996, 15 FRANCHISE L.J. 43 (1995).
47. Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 344 (1982).
48. 372 U.S. 253 (1963).
49. Indeed, apparentiy concerned that it could not prevail under a rule of reason, the defendant in White Motor negotiated a setdement with the Department of Justice after the Supreme Court's decision.
50. Khan, 118 S. Ct. at 285. On remand, Mr. Khan apparently was discouraged by the Supreme Court's opinion and did not pursue his vertical maximum price-fixing claim, instead arguing that the defendant's actions constituted minimum price fixing. This argument also failed, and the court of appeals ordered the district court to dismiss. Khan v. State Oil Co., 143 F.3d 362 (7th Cir. 1998).
51. Id. at 283.
52. 1995 FRANCHISE ANNUAL H5 (Lewiston, N.Y., Info Press).
53. The one apparent exception is the soft drink holders, who, although often franchisees, filed an amicus brief in support of abrogating the per se rule. But the alignment of soft drink bottlers is not an anomaly. Soft drink bottiers have been accused of imposing maximum resale prices on soft drink dealers. See Acquaire v. Canada Dry Bottling Co. of N.Y., Inc., 24 F.3d 401 (2d Cir. 1994).
54. E.g., Blanton v. Mobil Oil Corp., 721 F.2d 1207 (9th Cir. 1983); Milsen Co. v. Southland Corp., 454 F.2d 363 (7th Cir. 1971).
55. William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 939 (1981).
56. In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599, 603 (7th Cir. 1997), cert. denied, 118 S. Ct. 1178 (1998) (market power or monopoly power is "the power to raise price above cost without losing so many sales as to make the price rise unsustainable"); Valley Liquors, Inc. v. Renfield Importers, Ltd., 678 F.2d 742, 745 (7th Cir. 1982) (market power is "the power to raise price significantly above the competitive level without losing all of one's business.")
57. Among the critics of an inelastic demand definition are Benjamin Klein, Market Power in Aftermarkets, 17 MANAGERIAL & DECISION ECON. 143 (1996); Thomas C. Arthur, The Costly Quest for Perfect Competition: Kodak and Nonstructural Market Power, 69 N.Y.U. L. REV. 1 (1994). I discuss the power-over-price definition of market power and the criticisms of that definition in Grimes, Franchisor Market Power, supra note 40, at 112-23.
58. Among the critics of an inelastic demand definition are Benjamin Klein, Market Power in Aftermarkets, 17 MANAGERIAL & DECISION ECON. 143 (1996); Thomas C. Arthur, The Costly Quest for Perfect Competition: Kodak and Nonstructural Market Power, 69 N.Y.U. L. REV. 1 (1994). I discuss the power-over-price definition of market power and the criticisms of that definition in Grimes, Franchisor Market Power, supra note 40, at 112-23.
59. Id. at 113 n.29 (listing various theorists who accept power-over-price as a definition of market power).
60. 504 U.S. 451 (1992).
61. U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines § 2.2 et seq. (1992), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.
62. 93 F.3d at 1361.
63. Id. at 1362.
64. Id.
65. 93 F.3d at 1361 (citing Mandeville Island Farms v. American Crystal Sugar Co., 334 U.S. 219, rehearing denied, 334 U.S. 835 (1948)). For a comprehensive discussion of monopsony power, see ROGER BLAIR & JEFFREY HARRISON, MONOPSONY: ANTITRUST LAW & ECONOMICS (1993).
66. This analysis is explained in HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND ITS PRACTICE § 1.2b (1994).
67. Quoting from Matsushita, Justice O'Connor wrote in Khan that "cutting prices in order to increase business often is the very essence of competition." 118 S. Ct at 282. But cutting prices to increase business may not be what the supplier is about when it imposes a resale price ceiling. Instead, the purpose of the supplier might be increasing its share of the consumer's dollar paid for gasoline without increasing the price paid by the consumer, an action that will distort competition because it squeezes the dealer's margin below a competitive level. See infra note 81 and accompanying text
68. In a landmark article, Spengler used economic theory to demonstrate that even if a monopolist supplier has extracted maximum profit in sales to a monopoly retailer, the retailer would still impose an additional monopoly markup. Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. POL. ECON. 347 (1950). Although Spengler's model can be questioned (for example, because it does not account for the vertical dimension of competition between a retailer and a supplier), his conclusions have implications for the efficiency inherent in some vertical integration and may justify a manufacturer's imposition of a maximum resale price if a price limit is a reasonable way of limiting the monopoly retailer's exploitation of market power. See discussion infra part V.D, suggesting that a supplier could rebut a presumption of illegality under certain conditions. Spengler's analysis, however, does not reach the important question of the nature of the supplier's market power over the dealer that allows imposition of the resale price restraint As explained in this section, depending on the nature of the supplier's market power, the supplier's imposition of the price restraint may be procompetitive, competitively benign, or anticompetitive.
69. If the monopolist manufacturer attempted to raise its price to the dealer above the optimal monopoly price, the dealer would maintain its margin, setting the resale price at a level that caused a fall-off in sales of the supplier's product. Or, the dealer might simply refuse to carry the product if it felt its retail margin were unduly squeezed. There might be an exception if the product is a necessity that the dealer must carry in order to bring business into the store. In that case, the dealer might be forced to carry the product at a loss.
70. If a product is distributed through multibrand retailers, the supplier of a strong brand is less likely to feel a need for vertical restraints as a means of obtaining a dealer network because consumer demand for the brand will make dealers anxious to carry it. Robert L. Steiner, How Manufacturers Deal with the Price-cutting Retailer: When Are Vertical Restraints Efficient?, 65 ANTITRUST L.J. 407, 412 (1997) (noting that "famous advertised brands are sold at very thin [retail] markups over factory price.").
71. Kiefer-Stewart, 182 F.2d at 230.
72. Although there is no rigid definition of franchising, a typical franchise arrangement involves a substantial franchisee investment in carrying and promoting the franchisor's line. Economists sometimes describe franchising as an intermediate stage in a vertical marketing continuum in which one extreme is common ownership of suppliers and retailers (vertical integration) and the other is short-term buying and selling transactions between independent suppliers and retailers. In franchising, the franchisee may commit to carrying the franchisor's line exclusively and agree to pay a royalty to the franchisor. The franchisor retains some control over the franchisee's operations but gives the franchisee license to use the franchisor's trademark, logos, and marketing strategies. The franchisor may also provide training for franchisees. See Grimes, Franchisor Market Power, supra note 40, at 107.
73. For a discussion of franchisee sunk costs, see Gillian Hadfield, Problematic Relations: Franchising and the Law of Incomplete Contracts, 42 STANFORD L. REV. 927, 951-52 (1990); Grimes, Franchisor Market Power, supra note 40, at 125.
74. 504 U.S. 451 (1992). Kodak has generated a great deal of analysis and comment. For commentary supportive of Kodak, see Robert H. Lande, Chicago Takes it on the Chin: Imperfect Information Could Play a Crucial Role in the Post-Kodak World, 62 ANTITRUST L.J. 193 (1993); Warren S. Grimes, Antitrust Tie-In Analysis After Kodak: A Reply to Larson's Comment, 63 ANTITRUST L.J. 267 (1994). For commentary critical of Kodak, see Herbert Hovenkamp, Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40 U.C.L.A. L. REV. 1447, 1452-53 (1993); Arthur, supra note 51.
75. 504 U.S. 451 (1992). Kodak has generated a great deal of analysis and comment. For commentary supportive of Kodak, see Robert H. Lande, Chicago Takes it on the Chin: Imperfect Information Could Play a Crucial Role in the Post-Kodak World, 62 ANTITRUST L.J. 193 (1993); Warren S. Grimes, Antitrust Tie-In Analysis After Kodak: A Reply to Larson's Comment, 63 ANTITRUST L.J. 267 (1994). For commentary critical of Kodak, see Herbert Hovenkamp, Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40 U.C.L.A. L. REV. 1447, 1452-53 (1993); Arthur, supra note 51.
76. 504 U.S. 451 (1992). Kodak has generated a great deal of analysis and comment. For commentary supportive of Kodak, see Robert H. Lande, Chicago Takes it on the Chin: Imperfect Information Could Play a Crucial Role in the Post-Kodak World, 62 ANTITRUST L.J. 193 (1993); Warren S. Grimes, Antitrust Tie-In Analysis After Kodak: A Reply to Larson's Comment, 63 ANTITRUST L.J. 267 (1994). For commentary critical of Kodak, see Herbert Hovenkamp, Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40 U.C.L.A. L. REV. 1447, 1452-53 (1993); Arthur, supra note 51.
77. 504 U.S. at 476.
78. Id. at 484.
79. Image Technical Servs. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), cert. denied, 118 S. Ct. 1560 (1998).
80. 54 F.2d 363 (7th Cir. 1971).
81. Id. at 368 (emphasis added).
82. 721 F.2d 1207 (9th Cir. 1983).
83. Id. at 1210-11. Other dealers testified that they were threatened with loss of their lease if they refused to buy tires or other Mobil products. Id.
84. Arnott v. American Oil Co., 609 F.2d 873, 877 (8th Cir. 1979) (service station lessee gave up a station in Minneapolis and relocated in South Dakota on the franchisor's promise of a more lucrative outlet); Greene v. General Foods Corp., 517 F.2d 635, 639 (5th Cir. 1975) (food distributor moved from South Carolina to Florida at the request of General Foods to run a different distributorship).
85. 19 F.3d 745 (1st Cir. 1994).
86. 737 F.2d 698, 706 (7th Cir. 1984). In Acquaire v. Canada Dry Bottling Co. of New York, Inc., 24 F.3d 401 (2d Cir. 1994), the court's recitation of the record reveals no sunk costs, but the soft drink dealers' vigorous challenge to the maximum resale prices is consistent with either or both of two factual settings: (1) margin-squeezing by the supplier that can be enforced because the dealer has substantial non-recoverable investments in carrying the supplier's line; (2) the supplier's unexercised product market power that was being exploited by the dealer. Unless one or both of these circumstances were present, a dealer would be unlikely to bear the substantial risks of litigation to contest the supplier's resale price limit.
87. 390 U.S. at 152.
88. In United States v. Arnold, Schwinn & Co. Justice Portas did draw a distinction between the non-risk bearing dealer acting as an agent in a consignment arrangement and the dealer who puchases and accepts title to the product. 388 U.S. 365, 378-79 (1967). Of course, many dealers who purchase inventory and accept title to that inventory still have no significant sunk costs invested in carrying a particular supplier's line.
89. This literature is surveyed in Grimes, Franchisor Market Power, supra note 40, at 107-11.
90. Food: Prices Tumble on Big Macs, But Fries Rise, WALL ST. J., Apr. 25, 1997, at B1, col. 6.
91. Although frequently overlooked, a major concern that underlay passage of the Sherman Act was the corrupting effects of monopoly power, both in sense of distorting competition and of corrupting firm management, civil servants, and legislators. See generally, William L. Letwin, Congress and the Sherman Antitrust Law: 1887-1890, 23 U. CHI. L. REV. 221 (1956).
92. Some of this competition-distorting behavior might constitute a crime (such as offering or accepting a bribe). But the coverage of the criminal law will reach only egregious instances of this competition distorting behavior. Even if the criminal law reaches a particular franchisor competition-distorting abuse, the franchisee may be unable to convince a public prosecutor that this matter deserves priority among the many demands on law enforcement resources, or the higher burden of proof in a criminal proceeding may prevent successful prosecution even when the anticompetitive effects are obvious.
93. Although the potentially corrupting nature of supplier payments to the franchisor often goes unrecognized, it is not difficult to find examples of such payments in reported cases. See, e.g., Valley Products Co v. Landmark, 128 F.3d 398, 401 (6th Cir. 1997) (two francisor-selected soap suppliers pay "access" fees to franchisor in return for exclusive right to sell to franchisees); Milsen v. Southland Corp., 54 F.2d 363, 368 (7th Cir. 1971) (franchisor-selected dairy products supplier pays 14% rebate to franchisor-described as a franchise fee - on all sales to franchisees); Wilson v. Mobil Oil Corp., 940 F. Supp. 944, 947 (E.D. La. 1996) (franchisor-selected petroleum products supplier pays franchisor $650,000, said to be designated for advertising for franchisees but allegedly misappropriated by the franchisor, in return for exclusive supplier status). Regardless of the label placed upon it, any supplier payment to the franchisor in return for exclusive supplier status is potentially corrupting because it can force the franchisee to purchase a competitively less desirable product and divert business from suppliers offering competitively more attractive products. Even if the franchisor chooses a reputable supplier offering competitive prices, the franchisee loses much of its leverage over that supplier should the supplier raise its price or occasionally provide defective goods or services.
94. Grimes, Franchisor Market Power, supra note 40, at 142-51. A few recent decisions suggest an unwillingness of some courts to recognize the competition-distorting injury often associated with franchisor-dictated supplier choices. Valley Prods. Co. v. Landmark, 128 F.3d 398 (6th Cir. 1997) (affirming dismissal of a franchisor-imposed tie-in despite claims that franchisees were forced to pay higher prices for a non-superior product); Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430 (3d Cir.), reh'g denied, 129 F.3d 724 (3d Cir. 1997) (same), cert. denied, 118 S. Ct. 1385 (1998). But see Wilson v. Mobil Oil Corp., 910 F. Supp. 944 (E.D. La. 1996); Collins v. International Dairy Queen, Inc., 939 F. Supp. 875 (M.D. Ga. 1996).
95. Traditional antitrust remedies afforded to franchisees include those based on claims of monopolization, tie-ins, exclusive dealing, and vertical maximum price fixing. Grimes, Franchisor Market Power, supra note 40, at 136-54.
96. Michael S. Jacobs, Market Power Through Imperfect Information: The Staggering Implications of Eastman Kodak Co. v. Image Technical Services and a Modest Proposal for Limiting Them, 52 MD. L. REV. 336 (1993); see also Arthur, supra note 51; Benjamin Klein, Market Power in Antitrust: Economic Analysis After Kodak, 3 S. CT. ECON. REV. 43 (1994).
97. Michael S. Jacobs, Market Power Through Imperfect Information: The Staggering Implications of Eastman Kodak Co. v. Image Technical Services and a Modest Proposal for Limiting Them, 52 MD. L. REV. 336 (1993); see also Arthur, supra note 51; Benjamin Klein, Market Power in Antitrust: Economic Analysis After Kodak, 3 S. CT. ECON. REV. 43 (1994).
98. Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962).
99. This would appear to be the interpretation favored by writers such as Arthur, supra note 51, and Klein, supra note 87, and has been followed in some lower court decisions. See, e.g, Valley Products Co. v. Landmark, 128 F.3d 398 (6th Cir. 1997) (assessing only interbrand market power and declining to recognize a Kodak lock-in theory); Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430 (3d Cir. 1997), reh'g denied, 129 F.3d 1997) (same).
100. In his discussion of the legislative history of the Sherman Act, Thorelli says there is "no doubt that the Congress felt that the ultimate beneficiary of this whole process [competition] was the consumer," but notes that a more immediate beneficiary Congress had in mind was "in all probability the small business proprietor or tradesman whose opportunities were to be safeguarded from the dangers emanating from [the trusts] HANS B. THORELLI, THE FEDERAL ANTITRUST POLICY 226-29 (1955). Writing seven years after the Sherman Act was enacted, Justice Peckham also saw harm to the small competitor and to the public as linked: a trust could "dictate the price at which the article shall be sold, the effect being to drive out of business all the small dealers in the commodity and to render the public subject to the decision of the combination as to what price shall be paid for the article." United States v. Trans-Missouri Freight Ass'n, 166 U.S. 290, 323 (1897).
101. 193 U.S. 38 (1904).
102. 359 U.S. 207 (1959).
103. 472 U.S. 585 (1985).
104. Among those making this point are George A. Hay, Is the Glass Half-Empty or Half-Full?: Reflections on the Kodak Case, 62 ANTITRUST L.J. 177, 185-88 (1993); Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & ECON. 345, 367-58 (1985).
105. Among those making this point are George A. Hay, Is the Glass Half-Empty or Half-Full?: Reflections on the Kodak Case, 62 ANTITRUST L.J. 177, 185-88 (1993); Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & ECON. 345, 367-58 (1985).
106. Grimes, Franchisor Market Power, supra note 40, at 125-3.
107. There would be an exception if the supplier is a monopolist selling a product that a dealer must carry in order to run a successful business.
108. Even if the wholesaler's survival depended on its ability to cany the Seagram's line, if the wholesaler's inventory and warehouse facilities could have been sold at or near cost, the wholesaler's sunk costs might have been insubstantial.
109. Gasoline retailing in the United States varies widely. Some service stations are owned by oil companies, some by distributors, others by operators. Among owner-operated stations, some are franchised while others are operated independently of franchise obligations. For a discussion of the various forms of gasoline retailing in Vancouver, Canada, see Margaret Slade, Strategic Motives for Vertical Separation: Evidence from Retail Gasoline, 14 J.L., ECON. & ORG. 84 (1998).
110. 472 U.S. 585 (1985).
111. One might construe the defendant's past cooperation as pivotal in determining that the defendant must continue to cooperate in issuing joint lift tickets. Another (and perhaps more sound) interpretation is that the past cooperation merely demonstrates that such cooperative behavior was efficient and would likely be abandoned only at the cost of efficient allocation beneficial to consumers.
112. 504 U.S. at 458.
113. Id. at 477 n.24.
114. Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 439 (3d Cir. 1997); PSI Repair Servs., Inc. v. Honeywell Inc., 104 F.3d 811 (6th Cir. 1997); Digital Equip. Corp. v. Uniq Digital Tech., Inc., 73 F.3d 756, 762 (7th Cir. 1996).
115. 504 U.S. at 473.
116. Kodak may have sought to exploit less-knowledgeable buyers by discriminating in making its spare parts available to large users of its original equipment who did their own maintenance but denying spare parts to all other users unless they used Kodak servicing. Id. at 475-76.
117. 392 U.S. 134 (1968).
118. Id. at 139.
119. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984).
120. 356 U.S. 1 (1958).
121. Id. at 454 (emphasis added).
122. A supplier might still advance an argument that the dealer's knowing acceptance of a clause imposing a resale price ceiling suggests procompetitive effects of the price ceiling, but the argued procompetitive effects would have to be consistent with other evidence.
123. According to Justice Douglas's separate opinion in Albrecht, the dealer in that case purchased its route for $11,000 and received: (1) a list of subscribers; (2) a used truck; and (3) a newspaper tying machine. 390 U.S. at 155. This outlay does not suggest major sunk costs.
124. An example of such forward vertical integration is described in Paschall v. Kansas City Star Co., 727 F.2d 692 (8th Cir. 1984).
125. In Khan the Supreme Court apparently assumed that forced vertical integration associated with a per se rule against vertical maximum price fixing would necessarily be undesirable. The Court said: "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." 118 S. Ct. at 282 (quoting 7 PHILLIP AREEDA, ANTITRUST LAW ¶ 1635, at 395 (1989)). A prohibition of certain applications of vertical maximum price fixing may encourage some forward vertical integration, but such encouragement is consistent with antitrust goals when the vertical integration is an efficient choice.
126. In Kiefer-Stewart the Court did not hesitate to label the defendants' conduct as involving maximum price fixing, but the opinion suggests that the prices that were fixed ended up being minimum prices as well. 340 U.S. 211 (1951).
127. 390 U.S. at 153.
128. 118 S. Ct. at 283. The Court cites discussion of this issue by Easterbrook, supra note 19 at 901-04, and Robert 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).
129. On remand, the plaintiff in Khan unsuccessfully argued that the price fixing constituted minimum price fixing. 143 F.3d 362 (7th Cir. 1998).
130. United States v. General Motors Corp., 384 U.S. 127 (1966) (distribution restraints imposed by General Motors at the behest of a dealers association held to involve a classic horizontal restraint of trade).
131. 457 U.S. 332 (1982).
132. 485 U.S. 717 (1988).
133. The Supreme Court may have more to say about distinguishing between vertical and horizontal conspiracies in its resolution of NYNEX Corp. v. Discon, Inc., cert. granted, 118 S. Ct. 1298 (1998).
134. California courts have interpreted langauge in the Cartwright Act, CAL. BUS. & PROF. CODE § 16700 et seq., to impose a per se ban on maximum as well as minimum vertically imposed prices. See, e.g., Mailand v. Burckle, 20 Cal. 3d 367 (1978); R.E. Spriggs Co. v. Adolph Coors Co., 94 Cal. App. 3d 419 (1979); Kolling v. Dow Jones & Co., 137 Cal. App. 3d 709, 720-21 (1982) (affirming judgment that a maximum resale price ceiling is a per se violation of the Cartwright Act).
135. In New Jersey, for example, the state antitrust law requires that state provisions be "construed in harmony with ruling judicial interpretations of comparable Federal antitrust statutes . . ." N.J. STAT. ANN. § 56: 9-18.
136. States have enacted a variety of franchise regulation legislation as well as more specific provisions governing automobile, petroleum, alcoholic beverage, and farm equipment dealers. ABA SECTION OF ANTITRUST LAW, MONOGRAPH 17, FRANCHISE PROTECTION: LAWS AGAINST TERMINATION AND THE ESTABLISHMENT OF ADDITIONAL FRANCHISES 16-19 (1990). Going beyond the franchisee protections provided by these statutes, a few courts have granted relief to franchisees based upon the franchisor's implied covenant of good faith linked to the franchise contract. Vylene Enterprizes, Inc. v. Naugles, Inc., 90 F.3d 1472 (9th Cir. 1996); Scheck v. Burger King Corp., 798 F. Supp. 692 (S.D. Fla. 1992); Cherick Distrib. Inc. v. Polar Corp., 41 Mass. App. Ct. 125 (1996).
137. The Roman Emperor Diocletian (284-305 A.D.) decreed price ceilings on goods and services, such as bread, beer, haircuts, and children's school tuition. Although the death penalty was decreed for violators, the effort apparently was abandoned by Diocletian's successors. For a description of Diocletian's maximum price ceilings, see R. ZIMMERMANN, THE LAW OF OBLIGATION, ROMAN FOUNDATIONS OF THE CIVILIAN TRADITION 260-61 & nn.162-65 (1990).