The Standard for Determining the Legality of Vertical Price Restraints
Journal of Business and Behavioral Sciences, Vol. 22, No. 1, Fall 2010
12 Pages Posted: 30 Jun 2016
Date Written: 2010
Section I of the Sherman Act condemns and declares illegal "every restraint, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." Under the Sherman Act, agreements to fix prices between natural competitors, e.g., retailers or manufacturers, are illegal per se. So-called horizontal price-fixing agreements of this nature do not require analysis by courts to determine whether or not they damage competition because they have been declared illegal by their very nature, i.e., per se. Vertical price-fixing and vertical price restraints, e.g., agreements between manufacturers and distributors which set a minimum price at which a product can be sold, were similarly declared illegal per se in 1911 by the United States Supreme Court in the famous Dr. Miles case. Generally, most other agreements or actions which are not illegal per se but are alleged to be in violation of the Sherman Act are judged by what is known as the rule of reason. Basically, the rule of reason doctrine requires analysis of an alleged violation and the weighing of all circumstances and factors to determine whether a restriction on trade or competition unreasonably restrains competition. Those that do not unreasonably restrain competition are permitted. In 2007, ninety-six years after they established the Dr. Miles rule for vertical restraints, the Supreme Court considered again the question of how agreements between manufacturers and distributors setting minimum prices should be viewed, i.e., under the rule of reason or per se illegal. The following article analyzes the landmark decision.
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