Source: https://www.law.cornell.edu/supremecourt/text/388/365/
Timestamp: 2019-04-24 14:30:15+00:00

Document:
Appellee Schwinn is a family-owned business which for many years has been engaged in the manufacture and sale of bicycles and some limited bicycle parts and accessories. 2 Appellee SCDA is an association of distributors handling Schwinn bicycles and other products. The challenged marketing program was instituted in 1952. In 1951 Schwinn had the largest single share of the United States bicycle market22.5%. In 1961 Schwinn's share of market had fallen to 12.8% although its dollar and unit sales had risen substantially. In the same period, a competitor, Murray Ohio Manufacturing Company, which is now the leading United States bicycle producer, increased its market share from 11.6% in 1951 to 22.8% in 1961. Murray sells primarily to Sears, Roebuck & Company and other mass merchandisers. By 1962 there were nine bicycle producers in the Nation, operating 11 plants. Imor ts of bicycles amounted to 29.7% of sales in 1961.
We come, then, to the legal issues in this case. We are here confronted with challenged vertical restrictions as to territory and dealers. The source of the restrictions is the manufacturer. These are not horizontal restraints, in which the actors are distributors with or without the manufacturer's participation. We have held in such a case, where the purpose was to prevent the distribution of automobiles to or by 'discounters,' that a 'classic conspiracy in restraint of trade' results. United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966); see also Klor's, Inc. v. Broadway-al e Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959); Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951). Nor is this a case of territorial or dealer restrictions accompanied by price fixing, for here the issue of unlawful price fixing was tendered, litigated, decided against the appellant, and appellant has not appealed. If it were otherwiseif there were here a finding that the restrictions were part of a scheme involving unlawful price fixing, the result would be a per se violation of the Sherman Act. United States v. Sealy, Inc., 388 U.S. 350, 87 S.Ct. 1847, 18 L.Ed.2d 1238; United States v. Bausch & Lomb Co., 321 U.S. 707, 724, 64 S.Ct. 805, 814, 88 L.Ed. 1024 (1944). Because of the posture of the case and the failure of the Government to urge the point, we do not here pause to consider whether a case might be presented, short of unlawful price fixing, in which the activities of the manufacturer to affect resale priceswhether styled price 'maintenance' or 'stabilization' or otherwisewould fatally infect vertical customer restrictions so as to require a conclusion of per se violation. The Government does not contend that a per se violation of the Sherman Act is presented by the practices which are involved in this appeal (that is, without reference to the practice which the lower court enjoined and which is not before us). Accordingly, we are remitted to an appraisal of the market impact of these practices.
On this basis, restraints as to territory or customers, vertical or horizontal, are unlawful if they are 'ancillary to the price-fixing' (White Motor Co. v. United States, supra, 372 U.s., at 260, 83 S.Ct. at 700) or if the price fixing is 'an integral part of the whole distribution system.' (Bausch & Lomb, supra, 321 U.S., at 720, 64 S.Ct., at 812). In those situations, it is needless to inquire further into competitive effect because it is established doctrine that, unless permitted by statute, the fixing of prices at which others may sell is anticompetitive, and the unlawfulness of the price fixing infects the distribution restrictions. Cf. Sealy, supra, and Bausch & Lomb, supra. At the other extreme, a manufacturer of a product other and equivalent brands of which are readily available in the market may select his customers, and for this purpose he may 'franchise' certain dealers to whom, alone, he will sell his goods. Cf. United States v. Colgate & Co., 250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992 (1919). If the restraint stops at that pointif nothing more is involved than vertical 'confinement' of the manufacturer's own sales of the merchandise to selected dealers, and if competitive products are readily available to others, the restriction, on these facts alone, would not violate the Sherman Act. It is within these boundary lines that we must analyze the present case.
The appellant vigorously argues that, since this remedy is confined to situations where the distributor and retailer acquire title to the bicycles, it will provide only partial relief; that to prevent the allocation of territories and confinement to franchised retail dealers, the decree can and should be enlarged to forbid these practices, however effectedwhether by sale and resale or by agency, consignment, or the Schwinn Plan. But we are dealing here with a vertical restraint embodying the unilateral program of a single manufacturer. We are not dealing with a combination of manufacturers, as in Klor's or of distributors, as in General Motors. We are not dealing with a 'division' of territory in the sense of all allocation by and among the distributors, see Sealy, supra, or an agreement among distributors to restrict their competition, see General Motors, supra. We are here concerned with a truly vertical arrangement, raising the fundamental question of the degree to which a manufacturer may not only select the customers to whom he will seel, but also allocate territories for resale and confine access to his product to selected, or franchised, retailers. We conlu de that the proper application of § 1 of the Sherman Act to this problem requires differentiation between the situation where the manufacturer parts with title, dominion, or risk with respect to the article, and where he completely retains ownership and risk of loss.
As the District Court held, where a manufacturer sells products to his distributor subject to territorial restrictions upon resale, a per se violation of the Sherman Act results. And, as we have held, the same principle applies to restrictions of outlets with which the distributors may deal and to restraints upon retailers to whom the goods are sold. 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. White Motor, supra; Dr. Miles, supra. Such restraints are so obviously destructive of competition that their mere existence is enough. If the manufacturer parts with dominion over his product or transfers risk of loss to another, he may not reserve control over its destiny or the conditions of its resale. 6 To permit this would sanction franchising and confinement of distribution as the ordinary instead of the unusual method which may be permissible in an appropriate and impelling competitive setting, since most merchandise is distributed by means of purchase and sale. On the other hand, as indicated in White Motor, we are not prepared to introduce the inflexibility which a per se rule might bring if it were applied to prohibit all vertical restrictions of territory and all franchising, in the sense of designating specified distributors and retailers as the chosen instruments through which the manufacturer, retaining ownership of the goods, will distribute them to the public. Such a rule might severely hamper smaller enterprises resorting to reasonable methods of meeting the competition of giants and of merchandising through independen dealers, and it might sharply accelerate the trend towards vertical integration of the distribution process. But to allow this freedom where the manufacturer has parted with dominion over the goodsthe usual marketing situationwould violate the ancient rule against restraints on alienation and open the door to exclusivity of outlets and limitation of territory further than prudence permits.
The Government does not here contend for a per se rule as to agency, consignment, or Schwinn-Plan transactions even though these may be usedas they are hereto implement a scheme of confining distribution outlets as in this case. Where the manufacturer retains title, dominion, and risk with 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, it is only if the impact of the confinement is 'unreasonably' restrictive of competition that a violation of § 1 results from such confinement, unencumbered by culpable price fixing. Simpson v. Union Oil Co., 377 U.S. 13, 84 S.Ct. 1051, 12 L.Ed.2d 98 (1964). As the District Court found, Schwinn adopted the challenged distribution programs in a competitive situation dominated by mass merchandisers which command access to large-scale advertising and promotion, choice of retail outlets, both owned and franchised, and adequate sources of supply. It is not claimed that Schwinn's practices or other circumstances resulted in an inadequate competitive situation with respect to the bicycle market; and ter e is nothing in this recordafter elimination of the price-fixing issueto lead us to conclude that Schwinn's program exceeded the limits reasonably necessary to meet the competitive problems posed by its more powerful competitors. In these circumstances, the rule of reason is satisfied.
We do not suggest that the unilateral adoption by a single manufacturer of an agency or consignment pattern and the Schwinn type of restrictive distribution system would be justified in any and all circumstances by the presence of the competition of mass merchandisers and by the demonstrated need of the franchise system to meet that competition. But certainly, in such circumstances, the vertically imposed distribution restraintsabsent price fixing and in the presence of adequate sources of alternative products to meet the needs of the unfranchisedmay not be held to be per se violations of the Sherman Act. The Government, in this Court, so concedes in this case.
On this record, we cannot brand the District Court's finding as clearly erroneous and cannot ourselves conclude that Schwinn's franchising of retailers and its confinement of retail sales to themso long as it retains all indicia of ownership, including title, dominion, and risk, and so long as the dealers in question are indistinguishable in function from agents or salesmen constitute an 'unreasonable' restraint of trade. Critical in this respect are the facts: (1) that other competitive bicycles are available to distributors and retailers in the marketplace, and there is no showing that they are not in all respects reasonably interchangeable as articles of competitive commerce with the Schwinn product; 7 (2) that Schwinn distributors and retailers handle other brands of bicycles as well as Schwinn's; (3) in the present posture of the case we cannot rule that the vertical restraints are unreasonable because of their intermixture with price fixing; and (4) we cannot disagree with the findings of the trial court that competition made necessary the challenged program; that it was justified by, and went no further than required by, competitive pressures; and that its net effect is to preserve and not to damage competition in the bicycle market. Application of the rule of reason here cannot be confined to intrabrand competition. When we look to the product market as a whole, we cannot conclude that Schwinn's franchise system with respect to products as to which it retains ownership and risk constitutes an unreasonable restraint of trade. This does not, of course, excuse or condone the per se violations which, in substance, consist of the control over the resale of Schwinn's products after Schwinn has parted with ownership thereof. Once the manufacturer has parted with title and risk, he has parted with dominion over the product, and his effort thereafter to restrict territory or persons to whom the product may be transferred whether by explicit agreement or by silent combination or understanding with his vendeeis a per se violation of § 1 of the Sherman Act.
Schwinn accordingly developed a franchising policy that would assure quality and efficiency in its distribution system. After consulting with marketing experts in government and industry and clearing its program with the Federal Trade Commission, it franchised about 5,500 selected retailers to market its products. 'Schwinn chose those who by their record were best credit risks, made the most sales, and provided the best service for Schwinn bicycles.' 3 These retailers were predominantly the small independent bicycle sales and repair dealers mentioned above who now represent nearly all of Schwinn's outlets.
Of course, the whole premise of Schwinn's marketing program was that its product would be sold to the public only by the qualified retailers whom it had franchised. 6 Accordingly, Schwinn unilaterally instituted a policy of ensuring that only franchised retailers would be supplied with its products. This policy was the same, whether distribution took the form of the so-called ch winn Plan deliveries to retailers, or agency and consignment arrangements, or whether it took the form of sales by Schwinn to wholesalers and resale by them to retailers. The record shows that this policy was implemented largely through request and persuasion by Schwinn.
Indiscriminate invalidation of franchising arrangements would eliminate their creative contributions to competition and force 'suppliers to abandon franchising and integrate forward to the detriment of small business. In other words, we may inadvertently compel concentration' by misguided zealousness. 9 As a result, '(t)here (would be) less and less place for the independent.' Standard Oil Co. of Cal. and Standard Stations v. United States, 337 U.S. 293, 315, 69 S.Ct. 1051, 1064, 93 L.Ed. 1371 (separate opinion of Mr. Justice Douglas). 'The small, independent business man (would) be supplanted by clerks.' Id., at 321, 69 S.Ct., at 1067.
Despite the Government's concession that the rule of reason applies to all aspects of Schwinn's distribution system, the Court nevertheless reaches out to adopt a potent per se rule. No previous antitrust decision of this Court justifies its action. 10 Instead, it completely repudiates the only case in point, White Motor. There the manufacturer sold its products to retailers and wholesalers and imposed territorial and customer restrictions on their resale, restrictions much more stringent than those involved here. But the Court in White Motor refused to apply a per se rule to invalidate these restrictions, and declared that their legality must be tested under the rule of reason by examining their actual impact in a particular competitive context. The Court today is unable to give any reasons why, only four years later, this preceen t should be overruled. Surely, we have not in this short interim accumulated sufficient new experience or insight to justify embracing a rule automatically invalidating any vertical restraints in a distribution system based on sales to wholesalers and retailers. See 372 U.S., at 264266, 83 S.8ct., at 702 (concurring opinion of Mr. Justice Brennan). Indeed, the Court does not cite or discuss any new data that might support such a radical change in the law. And I am completely at a loss to fathom how the Court can adopt its per se rule concerning distributional sales and yet uphold identical restrictions in Schwinn's marketing scheme when distribution takes the form of consignment or Schwinn Plan deliveries. It does not demonstrate that these restrictions are in their actual operation somehow more anticompetitive or less justifiable merely because the contractual relations between Schwinn and its jobbers and dealers bear the label 'sale' rather than 'agency' or 'consignment.' Such irrelevant formulae are false guides to sound adjudication in the antitrust field: 'Our choice must be made on the basis not of abstractions but of the realities of modern industrial life.' Standard Oil Co. v. California and Standard Stations v. United States, 337 U.S. 293, 320, 69 S.Ct. 1051, 1067 (separate opinion of Mr. Justice Douglas).
As the Court also emphasizes, the legal principles applicable to horizontal and vertical restrictions are quite different. 12 Thus, applying the rule of reason to the vertical restraints now in issue is not at all 'illogical and inconsistent' with per se invalidation of the wholesalers' horizontal division of markets.
The Court's second justification for its new per se doctrine is the 'ancient rule against restraints on alienation.' This rule of property law is certainly ancientit traces its lineage to Coke on Littleton. 13 But it is hardly the practice of this Court to embrace a rule of law merely on grounds of its antiquity. Moreover, the common-law doctrine of restraints on alienation is not nearly so rigid as the Court implies. The original rule concerned itself with arbitrary and severe restrictions on alienation, such as total prohibition of resale. 14 As early as 1711 it was recognized that only unreasonable restraints should be proscribed, and that partial restrictions could be justified when ancillary to a legitimate business purpose and not unduly anticompetitive in effect. Mitchel v. Reynolds, 1 P.Wms. 181, 24 Eng.Rep. 347. Cf. Tulk v. Moxhay, 2 Ph. 774, 41 Eng.Rep. 1143. This doctrine of ancillary restraints was assimilated into the jurisprudence of this country in the nineteenth century. See Oregon Steam Navigation Co. v. Winsor, 20 Wall. 64, 22 L.Ed. 315; United States v. Addyston Pipe & Steel Co., 6 Cir., 85 F. 271.
In any event, 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. The problems involved are difficult and complex, 16 and our response should be more reasoned and sensitive than the simple acceptance of a hoary formula. 'It does seem possible that the nineteenth and twentieth centuries have contributed legal conceptions growing out of new types of business which make it inappropriate' for the Court to base its 'overthrow of contemporary commercial policies on judicial views of the reign of Queen Elizabeth.' 17 Moreover, the Court's answer makes everything turn on whether the arrangement between a manufacturer and his distributor is denominated a 'sale' or 'agency.' Such a rule ignores and conceals the 'economic and business stuff out of which' a sound answer should be fashioned. White Motor Co. v. United States, supra, 372 U.S., at 263, 83 S.Ct., at 702. The Court has emphasized in the past that these differencs in form often do not represent 'differences in substance.' Simpson v. Union Oil Co., 377 U.S. 13, 22, 84 S.Ct. 1051, 1057. Draftsmen may cast business arrangements in different legal molds for purposes of commercial law, but these arrangements may operate identifically in terms of economic function and competitive effect. It is the latter factors which are the concern of the antitrust laws. The record does not show that the purposes of Schwinn's franchising program and the competitive consequences of its implementation differed, depending on whether Schwinn sold its products to wholesalers or resorted to the agency, consignment, or Schwinn Plan methods of distribution. And there is no reason generally to suppose that variations in the formal legal packaging of franchising programs produce differences in their actual impact in the marketplace. Our experience is to the contrary. As stated in United States v. Masonite Corp., 316 U.S. 265, 278, 280, 62 S.Ct. 1070, 1077.
The impact of today's decision on Schwinn may be slight, because over 75% of its distribution is done through the Perhaps Schwinn can rearrange the legal terminology of its other distributional arrangements to avoid 'the ancient rule against restraints on alienation' which the Court adopts. Perhaps other manufacturers who use sales as a means of distribution in a franchise or analogous marketing system can do likewise. If they can, the Court has created considerable business for legal draftsmen. If they cannot, vertical integration and the elimination of small independent competitors are likely to follow. Meanwhile, the Court has, sua sponte, created a bluntly indiscriminate and destructive weapon which can be used to dismantle a vast variety of distributional systemscompetitive and anticompetitive, reasonable and unreasonable.
The United States did not perfect this point below, and its Jurisdictional Statement in this Court did not expressly request revision of the decree. Appellees strenuously urge that we should for these reasons refuse to consider the United States' present argument that the decree should be enlarged as stated. See Supreme Court Rules 15(1)(c)(1) and 40(1)(d)(2); General Talking Pictures Co. v. Western Electric Co., 304 U.S. 175, 177179, 58 S.Ct. 849, 850751, 82 L.Ed. 1548 (1938). While we regard with disfavor the Government's practice in this case, both with respect to the point here at issue and its change of theory, in view of the nature and importance of the case, we shall not reject the tendered issues because the request for the substance of the relief was embraced in the question presented in the Jurisdictional Statement and because appellees have not been adversely affected.
The United States, having abandoned its contention that the restraints in the present case are per se violations of the Sherman Act, now urges 'a standard of presumptive illegality,' presumably on the basis of a showing that a product has been distributed by means of arrangements for territorial exclusivity and restricted retail and wholesale customers. We do not consider this additional subtlety which was not advanced in the trial court. The burden of proof in antitrust cases remains with the plaintiff, deriving such help as may be available in the circumstances from particularized rules articulated by lawsuch as the per se doctrine. Cf. Standard Oil Co. (Indiana) v. United States, 283 U.S. 163, 179, 51 S.Ct. 421, 427, 75 L.Ed. 926 (1931).
In the 19511961 period, Schwinn's prices fell between 9% and 12%, and its profits also declined. The margins of its wholesalers and retailers were reduced about 10% during the same period.
Susser v. Carvel Corp., D.C., 206 F.Supp. 636, 640, aff'd, 2 Cir., 332 F.2d 505, cert. granted, 379 U.S. 885, 85 S.Ct. 158, 13 L.Ed.2d 91, cert. dismissed, 381 U.S. 125, 85 S.Ct. 1364, 14 L.Ed.2d 284. See also Distribution Problems Affecting Small Business, Hearings before the Subcommittee on Antitrust and Monopoly, Senate Committee on the Judiciary, 89th Cong., 1st Sess., 79, 1213 (statement of Small Business Administration Administrator Eugene P. Foley), 90 (statement of Federal Trade Commission Chairman Paul Rand Dixon) (March 1965); Lewis & Hancock, The Franchise System of Distribution 9192 (1963); Handler, Statement Before the Small Business Administration, 11 Antitrust Bull. 417, 419.
One difference between a horizontal conspiracy and vertical restraints imposed by the manufacturer is that there is often serious question whether the latter conduct involves the 'contract, combination * * * or conspiracy' required by § 1 of the Sherman Act, 2 § tat. 209, as amended, 15 U.S.C. 1. The District Judge in this case refused to find that the relevant conduct of Schwinn and its distributors amounted to a 'contract,' 'combination' or 'conspiracy.' Instead, he stated that 'the Schwinn franchising program was conceived, hatched and born into life * * * in the minds of the Schwinn officials,' and agreed that 'the action was unilateral in nature.' Although essential to its case, the Government failed specifically to raise this issue in its Jurisdictional Statement, and I must register my disagreement with the Court's cursory treatment of the matter. The Court merely notes that 'Schwinn has been 'firm and resolute' in insisting upon observance' of the restrictions involved in its franchising program and that there was a 'communicated danger of termination' for violations of its policies. This alone does not amount to a 'contract,' 'combination' or 'conspiracy' under established precedent. United States v. Colgate & Co., 250 U.S. 300, 39 S.Ct. 465; United States v. Parke, Davis & Co., 262 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505.

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