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Justia › US Law › US Case Law › US Supreme Court › Volume 433 › Continental T.V., Inc. v. GTE Sylvania, Inc.
In an attempt to improve its market position by attracting more aggressive and competent retailers, respondent manufacturer of television sets limited the number of retail franchises granted for any given area and required each franchisee to sell respondent's products only from the location or locations at which it was franchised. Petitioner Continental, one of respondent's franchised retailers, claimed that respondent had violated § 1 of the Sherman Act by entering into and enforcing franchise agreements that prohibited the sale of respondent's products other than from specified locations. The District Court rejected respondent's requested jury instruction that the location restriction was illegal only if it unreasonably restrained or suppressed competition. Instead, relying on United States v. Arnold, Schwinn & Co., 388 U. S. 365, the District Court instructed the jury that it was a per se violation of § 1 if respondent entered into a contract, combination, or conspiracy with one or more of its retailers, pursuant to which it attempted to restrict the locations from which the retailers resold the merchandise they had purchased from respondent. The jury found that the location restriction violated § 1, and treble damages were assessed against respondent. Concluding that Schwinn was distinguishable, the Court of Appeals reversed, holding that respondent's location restriction had less potential for competitive harm than the restrictions invalidated in Schwinn, and thus should be judged under the "rule of reason."
1. The statement of the per se rule in Schwinn is broad enough to cover the location restriction used by respondent. And the retail customer restriction in Schwinn is functionally indistinguishable from the location restriction here, the restrictions in both cases limiting the retailer's freedom to dispose of the purchased products and reducing, but not eliminating, intrabrand competition. Pp. 433 U. S. 42-47.
presumed to be unreasonable, and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use."
Under this standard, there is no justification for the distinction drawn in Schwinn between restrictions imposed in sale and nonsale transactions. Similarly, the facts of this case do not present a situation justifying a per se rule. Accordingly, the per se rule stated in Schwinn is overruled, and the location restriction used by respondent should be judged under the traditional rule of reason standard. Pp. 433 U. S. 47-59.
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, BLACKMUN, and STEVENS, JJ., joined. WHITE, J., filed an opinion concurring in the judgment, post, p. 433 U. S. 59. BRENNAN, J., filed a dissenting statement, in which MARSHALL, J., joined, post, p. 433 U. S. 71. REHNQUIST, J., took no part in the consideration or decision of the case.
Franchise agreements between manufacturers and retailers frequently include provisions barring the retailers from selling franchised products from locations other than those specified in the agreements. This case presents important questions concerning the appropriate antitrust analysis of these restrictions under § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1, and the Court's decision in United States v. Arnold, Schwinn & Co., 388 U. S. 365 (1967).
This suit is the result of the rupture of a franchiser-franchisee relationship that had previously prospered under the revised Sylvania plan. Dissatisfied with its sales in the city of San Francisco, [Footnote 4] Sylvania decided in the spring of 1965 to franchise Young Brothers, an established San Francisco retailer of televisions, as an additional San Francisco retailer. The proposed location of the new franchise was approximately a mile from a retail outlet operated by petitioner Continental T.V., Inc. (Continental), one of the most successful Sylvania franchisees. [Footnote 5] Continental protested that the location of the new franchise violated Sylvania's marketing policy, but Sylvania persisted in its plans. Continental then canceled a large Sylvania order and placed a large order with Phillips, one of Sylvania's competitors.
credit line from $300,000 to $50,000. [Footnote 7] In response to the reduction in credit and the generally deteriorating relations with Sylvania, Continental withheld all payments owed to John P. Maguire & Co., Inc. (Maguire), the finance company that handled the credit arrangements between Sylvania and its retailers. Shortly thereafter, Sylvania terminated Continental's franchises, and Maguire filed this diversity action in the United States District Court for the Northern District of California seeking recovery of money owed and of secured merchandise held by Continental.
products sold to the dealer, after having parted with title and risk to the products, you must find any effort thereafter to restrict outlets or store locations from which its dealers resold the merchandise which they had purchased from Sylvania to be a violation of Section 1 of the Sherman Act, regardless of the reasonableness of the location restrictions."
its bicycles in any given area according to its view of the needs of that market.
As of 1967 approximately 75% of Schwinn's total sales were made under the "Schwinn Plan." Acting essentially as a manufacturer's representative or sales agent, a distributor participating in this plan forwarded orders from retailers to the factory. Schwinn then shipped the ordered bicycles directly to the retailer, billed the retailer, bore the credit risk, and paid the distributor a commission on the sale. Under the Schwinn Plan, the distributor never had title to or possession of the bicycles. The remainder of the bicycles moved to the retailers through the hands of the distributors. For the most part, the distributors functioned as traditional wholesalers with respect to these sales, stocking an inventory of bicycles owned by them to supply retailers with emergency and "fill-in" requirements. A smaller part of the bicycles that were physically distributed by the distributors were covered by consignment and agency arrangements that had been developed to deal with particular problems of certain distributors. Distributors acquired title only to those bicycles that they purchased as wholesalers; retailers, of course, acquired title to all of the bicycles ordered by them.
cycle distributors." 237 F.Supp. 323, 342 (ND Ill.1965). The court described the violation as a "division of territory by agreement between the distributors . . . horizontal in nature," and held that Schwinn's participation did not change that basic characteristic. Ibid. The District Court limited its injunction to apply only to the territorial restrictions on the resale of bicycles purchased by the distributors in their roles as wholesalers. Ibid.
Schwinn came to this Court on appeal by the United States from the District Court's decision. Abandoning its per se theories, the Government argued that Schwinn's prohibition against distributors' and retailers' selling Schwinn bicycles to nonfranchised retailers was unreasonable under § 1, and that the District Court's injunction against exclusive distributor territories should extend to all such restrictions regardless of the form of the transaction. The Government did not challenge the District Court's decision on price-fixing, and Schwinn did not challenge the decision on exclusive distributor territories.
"the specifics of the challenged practices and their impact upon the marketplace in order to make a judgment as to whether the restraint is or is not 'reasonable' in the special sense in which § 1 of the Sherman Act must be read for purposes of this type of inquiry."
"Under the Sherman Act, it is unreasonable without more for a manufacturer to seek to restrict and confine areas or persons with whom an article may be traded after the manufacturer has parted with dominion over it."
respect to the product and the position and function of the dealer in question are, in fact, indistinguishable from those of an agent or salesman of the manufacturer."
Id. at 388 U. S. 380.
"The principle is, of course, equally applicable to sales to retailers, and the decree should similarly enjoin the making of any sales to retailers upon any condition, agreement or understanding limiting the retailer's freedom as to where and to whom it will resell the products."
Id. at 388 U. S. 378. Applying the rule of reason to the restrictions that were not imposed in conjunction with the sale of bicycles, the Court had little difficulty finding them all reasonable in light of the competitive situation in "the product market as a whole." Id. at 388 U. S. 382.
locations falls outside Schwinn's prohibition against a manufacturer's attempting to restrict a "retailer's freedom as to where and to whom it will resell the products" Id. at 388 U. S. 378. As the Court of Appeals conceded, the language of Schwinn is clearly broad enough to apply to the present case. Unlike the Court of Appeals, however, we are unable to find a principled basis for distinguishing Schwinn from the case now before us.
Appalachian Coals, Inc. v. United States, 288 U. S. 344, 288 U. S. 360, 377 (1933): "Realities must dominate the judgment. . . . The Anti-Trust Act aims at substance."
past 10 years should be brought to bear on this subject of considerable commercial importance.
"there are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. [Footnote 16]"
be classified as per se violations of the Sherman Act."
372 U.S. at 372 U. S. 263. Only four years later, the Court, in Schwinn, announced its sweeping per se rule without even a reference to Northern Pac. R. Co. and with no explanation of its sudden change in position. [Footnote 17] We turn now to consider Schwinn in light of Northern Pac. R. Co.
Significantly, the Court in Schwinn did not distinguish among the challenged restrictions on the basis of their individual potential for intrabrand harm or interbrand benefit. Restrictions that completely eliminated intrabrand competition among Schwinn distributors were analyzed no differently from those that merely moderated intrabrand competition among retailers. The pivotal factor was the passage of title: all restrictions were held to be per se illegal where title had passed, and all were evaluated and sustained under the rule of reason where it had not. The location restriction at issue here would be subject to the same pattern of analysis under Schwinn.
The Court's opinion provides no analytical support for these contrasting positions. Nor is there even an assertion in the opinion that the competitive impact of vertical restrictions is significantly affected by the form of the transaction. Nonsale transactions appear to be excluded from the per se rule, not because of a greater danger of intrabrand harm or a greater promise of interbrand benefit, but rather because of the Court's unexplained belief that a complete per se prohibition would be too "inflexibl[e]." Id. at 388 U. S. 379.
Vertical restrictions reduce intrabrand competition by limiting the number of sellers of a particular product competing for the business of a given group of buyers. Location restrictions have this effect because of practical constraints on the effective marketing area of retail outlets. Although intrabrand competition may be reduced, the ability of retailers to exploit the resulting market may be limited both by the ability of consumers to travel to other franchised locations and, perhaps more importantly, to purchase the competing products of other manufacturers. None of these key variables, however, is affected by the form of the transaction by which a manufacturer conveys his products to the retailers.
of ways in which manufacturers can use such restrictions to compete more effectively against other manufacturers. See, e.g., Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law & Contemp.Prob. 506, 511 (1965). [Footnote 23] For example, new manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often require in the distribution of products unknown to the consumer. Established manufacturers can use them to induce retailers to engage in promotional activities or to provide service and repair facilities necessary to the efficient marketing of their products. Service and repair are vital for many products, such as automobiles and major household appliances. The availability and quality of such services affect a manufacturer's goodwill and the competitiveness of his product. Because of market imperfections such as the so-called "free rider" effect, these services might not be provided by retailers in a purely competitive situation, despite the fact that each retailer's benefit would be greater if all provided the services than if none did. Posner, supra, n 13, at 285; cf. P. Samuelson, Economics 506-507 (10th ed.1976).
We conclude that the distinction drawn in Schwinn between sale and nonsale transactions is not sufficient to justify the application of a per se rule in one situation and a rule of reason in the other. The question remains whether the per se rule stated in Schwinn should be expanded to include nonsale transactions or abandoned in favor of a return to the rule of reason. We have found no persuasive support for expanding the per se rule. As noted above, the Schwinn Court recognized the undesirability of "prohibit[ing] all vertical restrictions of territory and all franchising. . . ." 388 U.S. at 388 U. S. 379-380. [Footnote 27] And even Continental does not urge us to hold that all such restrictions are per se illegal.
"conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use."
must be based upon demonstrable economic effect, rather than -- as in Schwinn -- upon formalistic line drawing.
RCA at that time was the dominant firm, with as much as 60% to 70% of national television sales in an industry with more than 100 manufacturers.
The number of retailers selling Sylvania products declined significantly as a result of the change, but, in 1965, there were at least two franchised Sylvania retailers in each metropolitan center of more than 100,000 population.
Sylvania imposed no restrictions on the right of the franchisee to sell the products of competing manufacturers.
Sylvania's market share in San Francisco was approximately 2.5% -- half its national and northern California average.
There are, in fact, four corporate petitioners: Continental T.V., Inc., A & G Sales, Sylpac, Inc., and S. A. M. Industries, Inc. All are owned in large part by the same individual, and all conducted business under the trade style of "Continental T.V." We adopt the convention used by the court below of referring to petitioners collectively as "Continental."
Sylvania had achieved exceptional results in Sacramento, where its market share exceeded 15% in 1965.
In its findings of fact made in conjunction with Continental's plea for injunctive relief, the District Court rejected Sylvania's claim that its actions were prompted by independent concerns over Continental's credit. The jury's verdict is ambiguous on this point. In any event, we do not consider it relevant to the issue before us.
Although Sylvania contended in the District Court that its policy was unilaterally enforced, it now concedes that its location restriction involved understandings or agreements with the retailers.
The jury also found that Maguire had not conspired with Sylvania with respect to this violation. Other claims made by Continental were either rejected by the jury or withdrawn by Continental. Most important was the jury's rejection of the allegation that the location restriction was part of a larger scheme to fix prices. A pendent claim that Sylvania and Maguire had willfully and maliciously caused injury to Continental's business in violation of California law also was rejected by the jury, and a pendent breach of contract claim was withdrawn by Continental during the course of the proceedings. The parties eventually stipulated to a judgment for Maguire on its claim against Continental.
There were two major dissenting opinions. Judge Kilkenny argued that the present case is indistinguishable from Schwinn, and that the jury had been correctly instructed. Agreeing with Judge Kilkenny's interpretation of Schwinn, Judge Browning stated that he found the interpretation responsive to and justified by the need to protect "individual traders from unnecessary restrictions upon their freedom of action.'" 537 F.2d at 1021. See n 21, infra.
This Court has never given plenary consideration to the question of the proper antitrust analysis of location restrictions. Before Schwinn, such restrictions had been sustained in Boro Hall Corp. v. General Motors Corp., 124 F.2d 822 (CA2 1942). Since the decision in Schwinn, location restrictions have been sustained by three Courts of Appeals, including the decision below. Salco Corp. v. General Motors Corp., 517 F.2d 567 (CA10 1975); Kaiser v. General Motors Corp., 396 F.Supp. 33 (ED Pa.1975), affirmance order, 530 F.2d 964 (CA3 1976).
"no showing that [competitive bicycles were] not in all respects reasonably interchangeable as articles of competitive commerce with the Schwinn product,"
and that it did "not regard Schwinn's claim of product excellence as establishing the contrary." 388 U.S. at 388 U. S. 381, and n. 7. Although Schwinn did hint at preferential treatment for new entrants and failing firms, the District Court below did not even submit Sylvania's claim that it was failing to the jury. Accordingly, MR. JUSTICE WHITE's position appears to reflect an extension of Schwinn in this regard. Having crossed the "failing firm" line, MR. JUSTICE WHITE attempts neither to draw a new one nor to explain why one should be drawn at all.
A former Assistant Attorney General in charge of the Antitrust Division has described Schwinn as "an exercise in barren formalism" that is "artificial and unresponsive to the competitive needs of the real world." Baker, Vertical Restraints in Times of Change: From White to Schwinn to Where?, 44 Antitrust L.J. 537 (1975). See, e.g., Handler, The Twentieth Annual Antitrust Review -- 1967, 53 Va.L.Rev. 1667 (1967); McLaren, Territorial and Customer Restrictions, Consignments, Suggested Retail Prices and Refusals to Deal, 37 Antitrust L.J. 137 (1968); Pollock, Alternative Distribution Methods After Schwinn, 63 Nw.U.L.Rev. 595 (1968); Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions, 75 Colum.L.Rev. 282 (1975); Robinson, Recent Antitrust Developments: 1974, 75 Colum.L.Rev. 243 (1975); Note, Vertical Territorial and Customer Restrictions in the Franchising Industry, 10 Colum.J.L. & Soc.Prob. 497 (1974); Note, Territorial and Customer Restrictions: A Trend Toward a Broader Rule of Reason?, 40 Geo.Wash.L.Rev. 123 (1971); Note, Territorial Restrictions and Per Se Rules -- A Re-evaluation of the Schwinn and Sealy Doctrines, 70 Mich.L.Rev. 616 (1972). But see Louis, Vertical Distributional Restraints Under Schwinn and Sylvania: An Argument for the Continuing Use of a Partial Per Se Approach, 75 Mich.L.Rev. 275 (1976); Zimmerman, Distribution Restrictions After Sealy and Schwinn, 12 Antitrust Bull. 1181 (1967). For a more inclusive list of articles and comments, see 537 F.2d at 988 n. 13.
Indeed, as one commentator has observed, many courts "have struggled to distinguish or limit Schwinn in ways that are a tribute to judicial ingenuity." Robinson, supra, n 13, at 272. Thus, the statement in Schwinn that post-sale vertical restrictions as to customers or territories are "unreasonable without more," 388 U.S. at 388 U. S. 379, has been interpreted to allow an exception to the per se rule where the manufacturer proves "more" by showing that the restraints will protect consumers against injury and the manufacturer against product liability claims. See, e.g., Tripoli Co. v. Wella Corp., 425 F.2d 932, 936-938 (CA3 1970) (en banc). Similarly, the statement that Schwinn's enforcement of its restrictions had been "firm and resolute,'" 388 U.S. at 388 U. S. 372, has been relied upon to distinguish cases lacking that element. See, e.g., Janel Sales Corp. v. Lanvin Parfums, Inc., 396 F.2d 398, 406 (CA2 1968). Other factual distinctions have been drawn to justify upholding territorial restrictions that would seem to fall within the scope of the Schwinn per se rule. See, e.g., Carter-Wallace, Inc. v. United States, 196 Ct.Cl. 35, 44-46, 449 F.2d 1374, 1379-1380 (1971) (per se rule inapplicable when purchaser can avoid restraints by electing to buy product at higher price); Colorado Pump & Supply Co. v. Febco, Inc., 472 F.2d 637 (CA10 1973) (apparent territorial restriction characterized as primary responsibility clause). One Court of Appeals has expressly urged us to consider the need in this area for greater flexibility. Adolph Coors Co. v. FTC, 497 F.2d 1178, 1187 (CA10 1974). The decision in Schwinn and the developments in the lower courts have been exhaustively surveyed in ABA Antitrust Section, Monograph No. 2, Vertical Restrictions Limiting Intrabrand Competition (1977) (ABA Monograph No. 2).
"The true test of legality is whether the restraint imposed is such as merely regulates, and perhaps thereby promotes, competition, or whether it is such as may suppress or even destroy competition. To determine that question, the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse, but because knowledge of intent may help the court to interpret facts and to predict consequences."
Per se rules thus require the Court to make broad generalizations about the social utility of particular commercial practices. The probability that anticompetitive consequences will result from a practice and the severity of those consequences must be balanced against its procompetitive consequences. Cases that do not fit the generalization may arise, but a per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them. Once established, per se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system of the more complex rule of reason trials, see Northern Pac. R. Co. v. United States, 356 U.S. at 356 U. S. 5; United States v. Topco Associates, Inc., 405 U. S. 596, 405 U. S. 609-610 (197), but those advantages are not sufficient, in themselves, to justify the creation of per se rules. If it were otherwise, all of antitrust law would be reduced to per se rules, thus introducing an unintended and undesirable rigidity in the law.
After White Motor Co., the Courts of Appeals continued to evaluate territorial restrictions according to the rule of reason. Sandura Co. v. FTC, 339 F.2d 847 (CA6 1964); Snap-On Tools Corp. v. FTC, 321 F.2d 825 (CA7 1963). For an exposition of the history of the antitrust analysis of vertical restrictions before Schwinn, see ABA Monograph No. 2, pp. 6-8.
"[r]esale price maintenance is not only designed to, but almost invariably does in fact, reduce price competition not only among sellers of the affected product, but quite as much between that product and competing brands."
372 U.S. at 372 U. S. 268. Professor Posner also recognized that "industry-wide resale price maintenance might facilitate cartelizing." Posner, supra, n 13, at 294 (footnote omitted); see R. Posner, Antitrust: Cases, Economic Notes and Other Materials 134 (1974); E. Gellhorn, Antitrust Law and Economics 252 (1976); Note, 10 Colum.J.L. & Soc.Prob., supra, n 13, at 498 n. 12. Furthermore, Congress recently has expressed its approval of a per se analysis of vertical price restrictions by repealing those provisions of the Miller-Tydings and McGuire Acts allowing fair trade pricing at the option of the individual States. Consumer Goods Pricing Act of 1975, 89 Stat. 801, amending 15 U.S.C. §§ 1, 45(a). No similar expression of congressional intent exists for nonprice restrictions.
Interbrand competition is the competition among the manufacturers of the same generic product -- television sets in this case -- and is the primary concern of antitrust law. The extreme example of a deficiency of interbrand competition is monopoly, where there is only one manufacturer. In contrast, intrabrand competition is the competition between the distributors -- wholesale or retail -- of the product of a particular manufacturer.
The degree of intrabrand competition is wholly independent of the level of interbrand competition confronting the manufacturer. Thus, there may be fierce intrabrand competition among the distributors of a product produced by a monopolist and no intrabrand competition among the distributors of a product produced by a firm in a highly competitive industry. But when interbrand competition exists, as it does among television manufacturers, it provides a significant check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different brand of the same product.
The Court did not specifically refer to intrabrand competition, but this meaning is clear from the context.
"the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today."
388 U.S. at 388 U. S. 392.
We are similarly unable to accept Judge Browning's interpretation of Schwinn. In his dissent below, he argued that the decision reflects the view that the Sherman Act was intended to prohibit restrictions on the autonomy of independent businessmen even though they have no impact on "price, quality, and quantity of goods and services," 537 F.2d at 1019. This view is certainly not explicit in Schwinn, which purports to be based on an examination of the "impact [of the restrictions] upon the marketplace." 388 U.S. at 388 U. S. 374. Competitive economies have social and political, as well as economic ,advantages, see e.g., Northern Pac. R. Co. v. United States, 356 U.S. at 356 U. S. 4, but an antitrust policy divorced from market considerations would lack any objective benchmarks. As Mr. Justice Brandeis reminded us: "Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence." Chicago Bd. of Trade v. United States, 246 U.S. at 246 U. S. 238. Although MR. JUSTICE WHITE's opinion endorses Judge Browning's interpretation, post at 433 U. S. 66-68, it purports to distinguish Schwinn on grounds inconsistent with that interpretation, post at 433 U. S. 71.
"might severely hamper smaller enterprises resorting to reasonable methods of meeting the competition of giants and of merchandising through independent dealers."
388 U.S. at 388 U. S. 380. The Court also broadly hinted that it would recognize additional exceptions to the per se rule for new entrants in an industry and for failing firms, both of which were mentioned in White Motor as candidates for such exceptions. 388 U.S. at 388 U. S. 374. The Court might have limited the exceptions to the per se rule to these situations, which present the strongest arguments for the sacrifice of intrabrand competition for interbrand competition. Significantly, it chose instead to create the more extensive exception for nonsale transactions which is available to all businesses, regardless of their size, financial health, or market share. This broader exception demonstrates even more clearly the Court's awareness of the "redeeming virtues" of vertical restrictions.
Marketing efficiency is not the only legitimate reason for a manufacturer's desire to exert control over the manner in which his products are sold and serviced. As a result of statutory and common law developments, society increasingly demands that manufacturers assume direct responsibility for the safety and quality of their products. For example, at the federal level, apart from more specialized requirements, manufacturers of consumer products have safety responsibilities under the Consumer Product Safety Act, 15 U.S.C. § 2051 et seq. (1970 ed., Supp. V), and obligations for warranties under the Consumer Product Warranties Act, 15 U.S.C. § 2301 et seq. (1970 ed., Supp. V). Similar obligations are imposed by state law. See, e.g., Cal.Civ.Code Ann. 1790 et seq. (West 1973). The legitimacy of these concerns has been recognized in cases involving vertical restrictions. See, e.g., Tripoli Co. v. Wella Corp., 425 F.2d 932 (CA3 1970).
"Generally, a manufacturer would prefer the lowest retail price possible, once its price to dealers has been set, because a lower retail price means increased sales and higher manufacturer revenues."
Note, 88 Harv.L.Rev. 636, 641 (1975). In this context, a manufacturer is likely to view the difference between the price at which it sells to its retailers and their price to the consumer as its "cost of distribution," which it would prefer to minimize. Posner, supra, n 13, at 283.
Professor Comanor argues that the promotional activities encouraged by vertical restrictions result in product differentiation, and therefore a decrease in interbrand competition. This argument is flawed by its necessary assumption that a large part of the promotional efforts resulting from vertical restrictions will not convey socially desirable information about product availability, price, quality, and services. Nor is it clear that a per se rule would result in anything more than a shift to less efficient methods of obtaining the same promotional effects.
We also note that per se rules in this area may work to the ultimate detriment of the small businessmen who operate as franchisees. To the extent that a per se rule prevents a firm from using the franchise system to achieve efficiencies that it perceives as important to its successful operation, the rule creates an incentive for vertical integration into the distribution system, thereby eliminating to that extent the role of independent businessmen. See, e.g., Keck, The Schwinn Case, 23 Bus.Law. 669 (1968); Pollock, supra, n 13, at 608-610.
Continental's contention that balancing intrabrand and interbrand competitive effects of vertical restrictions is not a "proper part of the judicial function," Brief for Petitioners 52, is refuted by Schwinn itself. United States v. Topco Associates, Inc., 405 U.S. at 405 U. S. 608, is not to the contrary, for it involved a horizontal restriction among ostensible competitors.
There may be occasional problems in differentiating vertical restrictions from horizontal restrictions originating in agreements among the retailers. There is no doubt that restrictions in the latter category would be illegal per se, see, e.g., United States v. General Motors Corp., 384 U. S. 127 (1966); United States v. Topco Associates, Inc., supra, but we do not regard the problems of proof as sufficiently great to justify a per se rule.
The location restriction used by Sylvania was neither the least nor the most restrictive provision that it could have used. See ABA Monograph No. 2, pp. 20-25. But we agree with the implicit judgment in Schwinn that a per se rule based on the nature of the restriction is, in general, undesirable. Although distinctions can be drawn among the frequently used restrictions, we are inclined to view them as differences of degree and form. See Robinson, supra, n 13, at 279-280; Averill, Sealy, Schwinn and Sherman One: An Analysis and Prognosis, 15 N.Y.L.F. 39, 65 (1969). We are unable to perceive significant social gain from channeling transactions into one form or another. Finally, we agree with the Court in Schwinn that the advantages of vertical restrictions should not be limited to the categories of new entrants and failing firms. Sylvania was faltering, if not failing, and we think it would be unduly artificial to deny it the use of valuable competitive tools.
"stare decisis is a principle of policy, and not a mechanical formula of adherence to the latest decision, however recent and questionable, when such adherence involves collision with a prior doctrine more embracing in its scope, intrinsically sounder, and verified by experience."
the per se rule established in that case does not apply to location clauses such as Sylvania's. To reach out to overrule one of this Court's recent interpretations of the Sherman Act, after such a cursory examination of the necessity for doing so, is surely an affront to the principle that considerations of stare decisis are to be given particularly strong weight in the area of statutory construction. Illinois Brick Co. v. Illinois, 431 U. S. 720, 431 U. S. 736-737 (1977); Runyon v. McCrary, 427 U. S. 160, 427 U. S. 175 (1976); Edelman v. Jordan, 415 U. S. 651, 415 U. S. 671 (1974).
"[e]ach one of [Schwinn's franchised retailers] knows also that he is not a wholesaler, and that he cannot sell as a wholesaler or act as an agent for some other unfranchised dealer, such as a discount house retailer who has not been franchised as a dealer by Schwinn."
District Court, on remand in Schwinn, evidently thought so as well, for, after enjoining Schwinn's customer restrictions as directed by this Court, it expressly sanctioned location clauses, permitting Schwinn to "designat[e] in its retailer franchise agreements the location of the place or places of business for which the franchise is issued." 291 F.Supp. 564, 565-566 (ND Ill.1968).
"[Schwinn] had created exclusive geographical sales territories for each of its 22 wholesaler bicycle distributors, and had made each distributor the sole Schwinn outlet for the distributor's designated area. Each distributor was prohibited from selling to any retailers located outside its territory. . . ."
". . . Schwinn's territorial restrictions requiring dealers to confine their sales to exclusive territories prescribed by Schwinn prevented a dealer from competing for customers outside his territory. . . . Schwinn's restrictions guaranteed each wholesale distributor that it would be absolutely isolated from all competition from other Schwinn wholesalers."
537 F.2d 980, 989-990 (1976). Moreover, like its franchised retailers, Schwinn's distributors were absolutely barred from selling to nonfranchised retailers, further limiting the possibilities of intrabrand price competition.
decisions of the Third and Tenth Circuits upholding the validity of location clauses similar to Sylvania's here. Salco Corp. v. General Motors Corp., 517 F.2d 567 (CA10 1975); Kaiser v. General Motors Corp., 530 F.2d 964 (CA3 1976), aff'g 396 F.Supp. 33 (ED Pa.1975). Finally, many of the scholarly authorities the majority cites in support of its overruling of Schwinn have not had to strain to distinguish location clauses from the restrictions invalidated there. E.g., Robinson, Recent Antitrust Developments: 1974, 75 Colum.L.Rev. 243, 278 (1975) (outcome in Sylvania not preordained by Schwinn, because of marked differences in the vertical restraints in the two cases); McLaren, Territorial and Customer Restrictions, Consignments, Suggested Retail Prices and Refusals to Deal, 37 Antitrust L.J. 137, 144-145 (1968) (by implication, Schwinn exempts location clauses from its per se rule); Pollock, Alternative Distribution Methods After Schwinn, 63 Nw.U.L.Rev. 595, 603 (1968) ("Nor does the Schwinn doctrine outlaw the use of a so-called 'location clause' . . .").
protection from interbrand competition and created the possibilities for price-cutting by discounters that the Government argued were forestalled by Schwinn's customer restrictions. [Footnote 2/3] Thus, judged by the criteria economists use to measure market power -- product differentiation and market share [Footnote 2/4] -- Schwinn enjoyed a substantially stronger position in the bicycle market than did Sylvania in the television market. This Court relied on Schwinn's market position as one reason not to apply the rule of reason to the vertical restraints challenged there.
"Schwinn was not a newcomer, seeking to break into or stay in the bicycle business. It was not a 'failing company.' On the contrary, at the initiation of these practices, it was the leading bicycle producer in the Nation."
"when interbrand competition exists, as it does among television manufacturers, it provides a significant check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different brand of the same product."
Ante at 433 U. S. 52 n.19. See also ante at 433 U. S. 54. [Footnote 2/6] Second is the view, argued forcefully in the economic literature cited by the majority, that the potential benefits of vertical restraints in promoting interbrand competition are particularly strong where the manufacturer imposing the restraints is seeking to enter a new market or to expand a small market share. Ibid. [Footnote 2/7] The majority even recognizes that Schwinn "hinted" at an exception for new entrants and failing firms from its per se rule. Ante at 433 U. S. 53-54, n. 22.
"restraints upon alienation . . . are beyond the power of the manufacturer to impose upon its vendees, and . . . are violations of § 1 of the Sherman Act,"
"If [the manufacturer] should make the retail dealers also agents in law, as well as in name, and retain the title until the goods left their hands, I cannot conceive that even the present enthusiasm for regulating the prices to be charged by other people would deny that the owner was acting within his rights."
Id. at 220 U. S. 411.
"restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal."
"an attempt by the Miles Medical Company . . . to hold its purchasers, after the purchase at full price, to an obligation to maintain prices on a resale by them."
"[fix] the price by which his agents transfer the title from him directly to [the] consumer . . . however comprehensive as a mass or whole in [the] effect [of these contracts]."
"such agreements, no less than those to fix minimum prices, cripple the freedom of traders, and thereby restrain their ability to sell in accordance with their own judgment."
Accord, Albrecht v. Herald Co., 390 U. S. 145, 390 U. S. 152 (1968). See generally Judge Browning's dissent below, 537 F.2d at 1018-1022; ABA Antitrust Section, Monograph No. 2, Vertical Restrictions Limiting Intrabrand Competition 29-31, 82-83, 87-91, 96-97 (1977); Blake & Jones, Toward a Three-Dimensional Antitrust Policy, 65 Colum.L.Rev. 422, 427-436 (1965).
interest in controlling the terms on which he trades in his own goods may be anathema to those who view the Sherman Act as directed solely to economic efficiency, [Footnote 2/9] this principle is without question more deeply embedded in our cases than the notions of "free rider" effects and distributional efficiencies borrowed by the majority from the "new economics of vertical relationships." Ante at 433 U. S. 557. Perhaps the Court is right in partially abandoning this principle and in judging the instant nonprice vertical restraints solely by their "relevant economic impact"; but the precedents which reflect this principle should not be so lightly rejected by the Court. The rationale of Schwinn is no doubt difficult to discern from the opinion, and it may be wrong; it is not, however, the aberration the majority makes it out to be here.
"I believe that the law should treat price and nonprice restrictions the same, and that it should make no distinction between the imposition of restrictions in a sale contract and their imposition in an agency contract."
Posner, supra, n. 7, at 298. Indeed, the Court has already recognized that resale price maintenance may increase output by inducing "demand-creating activity" by dealers (such as additional retail outlets, advertising and promotion, and product servicing) that outweighs the additional sales that would result from lower prices brought about by dealer price competition. Albrecht v. Herald Co., supra at 390 U. S. 151 n. 7. These same output-enhancing possibilities of nonprice vertical restraints are relied upon by the majority as evidence of their social utility and economic soundness, ante at 433 U. S. 55, and as a justification for judging them under the rule of reason. The effect, if not the intention, of the Court's opinion is necessarily to call into question the firmly established per se rule against price restraints.
Maple Flooring Mfrs. Assn. v. United States, 268 U. S. 563, 268 U. S. 579 (1925).
In order to decide this case, the Court need only hold that a location clause imposed by a manufacturer with negligible economic power in the product market has a competitive impact sufficiently less restrictive than the Schwinn restraints to justify a rule of reason standard, even if the same weight is given here as in Schwinn to dealer autonomy. I therefore concur in the judgment.
The franchised retailers would be prevented from engaging in discounting themselves if, under the Colgate doctrine, see infra at 433 U. S. 67, the manufacturer could lawfully terminate dealers who did not adhere to his suggested retail price.
Given the Government's emphasis on the inhibiting effect of the Schwinn restrictions on discounting activities, the Court may well have been referring to this effect when it condemned the restrictions as "obviously destructive of competition." 388 U.S. at 388 U. S. 379. But the Court was also heavily influenced by its concern for the freedom of dealers to control the disposition of products they purchased from Schwinn. See infra at 433 U. S. 66-69. In any event, the record in Schwinn illustrates the potentially greater threat to intrabrand competition posed by customer, as opposed to location, restrictions.
"[T]he declared purpose of the Schwinn franchising system [was] to establish and exploit a distinctive identity and superior consumer acceptance for the Schwinn brand name as the Cadillac of bicycles, thereby enabling the charging of a premium price. . . . This scheme could not possibly succeed, and doubtless would long ago have been abandoned, if in the consumer's mind other bicycles were just as good as Schwinn's."
Brief for United States, O.T. 1966, No. 25, p. 36.
See, e.g., F. Scherer, Industrial Market Structure and Economics Performance 10-11 (1970); P. Samuelson, Economics 485-491 (10th ed.1976).
Schwinn's national market share declined to 12.8% in the 10 years following the institution of its distribution program, at which time it ranked second behind a firm with a 22.8% share. 388 U.S. at 388 U. S. 368-369. In the three years following the adoption of its locations practice, Sylvania's national market share increased to 5%, placing it eighth among manufacturers of color television sets. Ante at 433 U. S. 38-39. At this time, Sylvania's shares of the San Francisco, Sacramento, and northern California markets were respectively 2.5%, 15%, and 5%. Ante at 433 U. S. 39 nn. 4, 6. The District Court made no findings as to Schwinn's share of local bicycle markets.
For an extensive discussion of this effect of interbrand competition, see ABA Antitrust Section, Monograph No. 2, Vertical Restrictions Limiting Intrabrand Competition 60-67 (1977).
Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law & Contemp.Prob. 506, 511 (1965); Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions, 75 Colum.L.Rev. 282, 293 (1975); Scherer, supra, n. 4, at 510.
Cf. Sandura Co. v. FTC, 339 F.2d 847, 850 (CA6 1964) (territorial restrictions on distributors imposed by small manufacturer "competing with and losing ground to the giants' of the floor-covering industry" is not per se illegal); Baker, Vertical Restraints in Times of Change: From White to Schwinn to Where?, 44 Antitrust L.J. 537, 545-547 (1975) (presumptive illegality of territorial restrictions imposed by manufacturer with "any degree of market power"). The majority's failure to use the market share of Schwinn and Sylvania as a basis for distinguishing these cases is the more anomalous for its reliance, see infra at 433 U. S. 68-70, on the economic analysis of those who distinguish the anticompetitive effects of distribution restraints on the basis of the market shares of the distributors. See Posner, supra at 299; Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division [II], 75 Yale L.J. 373, 391-429 (1966).
E.g., Bork, Legislative Intent and the Policy of the Sherman Act, 9 J. Law & Econ. 7 (1966); Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division [I] 74 Yale L.J. 775 (1965).
"There is no basis for choosing between [price-fixing and market division] on social grounds. If resale price maintenance is like dealer price-fixing, and therefore bad, a manufacturer's assignment of exclusive sales territories is like market division, and therefore bad too. . . ."
"[If helping new entrants break into a market] is a good justification for exclusive territories, it is an equally good justification for resale price maintenance, which, as we have seen, is simply another method of dealing with the free-rider problem. . . . In fact, any argument that can be made on behalf of exclusive territories can also be made on behalf of resale price maintenance."
Posner, supra, n. 7, at 292-293. (Footnote omitted.) See Bork, supra, n. 8, at 391-464.
I would not overrule the per se rule stated in United States v. Arnold, Schwinn & Co., 388 U. S. 365 (1967), and would therefore reverse the decision of the Court of Appeals for the Ninth Circuit.
Continental T. V., Inc., et al.

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