They'd surely been misled;
No rule of law had he defied.
But then their lawyer said:
"The rule of law, in complex times,
Has proved itself deficient.
We much prefer the rule of men!
It's vastly more efficient."

From "Tom Smith and His Incredible Bread Machine," by R.W. Grant (1966)

My last column was on Netscape's antitrust suit against Microsoft and the "rule of reason" on monopolization developed by E.D. White in the early part of this century. While one section of the Sherman Antitrust Act prohibits monopolization, the other section prohibits price fixing. The courts have long ruled that price fixing agreements are illegal per se. The per se rule means that there are no excuses, no "ifs" or "buts" to consider. If a price-fixing as in the baby formula case is proven, no defense is allowed--that is, until now.

On November 4^th, the court charted a new course in the law on price fixing, and few seem to have noticed. The new course gives wholesalers or manufacturers the right, in many cases, to contract with retailers to set retail prices, which has ramifications for relationships between retailers and their wholesaler or manufacturer vendors.

Most of the price-fixing cases we hear about, such as the baby formula case, are among direct competitors are called horizontal cases because the agreement is between those at the same level. But a number of cases have involved pricing agreements between manufacturers or wholesalers on one hand and retailers on the other. These are termed vertical price-fixing cases. Both horizontal and vertical price-fixing have been ruled illegal per se. Under the law, for instance, a manufacturer of personal computers cannot set a minimum retail price for its computers to keep its retailers from trying to undercut one another.

Since 1951 when the Supreme Court decided a case involving Seagrams and an Indiana drug and liquor chain, the law also stated that contracts between suppliers and re-sellers setting maximum prices were also illegal per se, no excuses accepted. That is, until now, a manufacturer could do nothing to ensure low prices for consumers other than to operate its own retail establishments.

In this recent case, State Oil, which distributes gasoline under the Union '76 brand name in Illinois, set the maximum price for gasoline at the pumps for stations it sold to. State Oil's contract with Barkat Khan, who has a Union '76 gas station, requires that Mr. Khan rebate any profits Mr. Khan makes for selling gasoline at prices higher than those approved by State Oil.

Mr. Khan claimed that the rebate provision is vertical price fixing. While the court agreed that the contract is vertical price fixing, it reversed itself from its1951 Seagrams case. "Vertical maximum price-fixing, like the majority of commercial arrangements subject to antitrust laws, should be evaluated under the rule of reason," wrote Justice O'Conner.

Those who sell to retailers, wholesalers and retailers, will now have more power in dealing with retailers. This is not all bad. What the new ruling means is that if a manufacturer insists on maximum vertical price ceilings, consumers win. Of course, the retailer can choose to carry other manufacturers' products, instead. The cases where the retailer has few alternatives to a particular manufacturer's wares are exactly the situations where the rule of reason kicks in to prevent vertical price fixing.

While I welcome the relaxation of antitrust laws in these vertical price fixing cases, there is one thing that I dread about it: the rule of reason is the rule of men's reason, in other words, it boils down to the rule of men, instead of the rule of law, the rule of rule makers instead of the rule of rules. You can never be quite sure if your actions violate the rule of men, where you can be certain if your actions violate the rule of law, which is what the per se illegality is about. Instead, people in business must live afraid that some judge will decide that they have violated antitrust laws.

Why does so much of our antitrust law have to be about making legitimate business agreements, agreements that increase innovation and lower prices to consumers, criminal offenses?