## Facts

- State Oil Company, a gasoline wholesaler, leased a Chicago-area service station and convenience store to Barkat U. Khan and Khan & Associates, Inc.
- The lease/supply agreement required Khan to buy gasoline from State Oil at a price equal to State Oil’s suggested retail price minus a fixed 3.25¢-per-gallon margin.
- Khan could set any retail price, but any amount charged above the suggested retail price had to be rebated to State Oil; charging below the suggested price reduced Khan’s margin.
- The arrangement effectively capped Khan’s per-gallon retail margin at 3.25¢.
- After Khan fell behind on lease payments, State Oil pursued eviction proceedings and a receiver was appointed to run the station.
- Khan alleged the receiver, not bound by the maximum-margin term, improved profits by adjusting pricing across grades of gasoline, supporting Khan’s claim that the contractual restraint limited his pricing choices.
- Khan sued under § 1 of the Sherman Act, alleging unlawful price fixing via a vertical maximum price restraint.

## Issues

1. Whether vertical maximum resale price restraints must be treated as per se unlawful under § 1 of the Sherman Act.
2. Whether the Court should overrule Albrecht v. Herald Co., which had applied per se condemnation to vertical maximum price fixing.
3. If per se treatment is rejected, what standard should govern vertical maximum price restraints.

## Decision

- The Supreme Court unanimously overruled Albrecht v. Herald Co.
- The Court held that vertical maximum resale price restraints are not per se unlawful and must be evaluated under the rule of reason.
- The Court vacated the Seventh Circuit’s judgment and remanded for further proceedings applying rule-of-reason analysis.
- The Court emphasized that only the Supreme Court may overrule its precedents, and lower courts must follow controlling decisions until the Court changes them.

## Legal Principles

- Most restraints challenged under § 1 are assessed under the rule of reason, which considers market context and the restraint’s actual competitive effects.
- Per se rules are reserved for practices that predictably and almost always reduce competition and lack plausible competitive benefits.
- Vertical maximum price restraints can have plausible competitive benefits (including limiting dealer overcharges and reducing double marginalization) and therefore are not suitable for per se condemnation.
- Overruling a prior antitrust per se rule shifts the mode of analysis; it does not render the challenged practice automatically lawful, because the restraint remains subject to § 1 scrutiny under the rule of reason.

## Conclusion

The Court rejected per se invalidation of vertical maximum resale price restraints, overruled Albrecht, and required courts to evaluate such restraints under the rule of reason to determine whether, in context, they unreasonably restrain trade.


State Oil Co. v. Khan, 522 U.S. 3 (1997)