Case Name: BUSINESS ELECTRONICS CORP. v. SHARP ELECTRONICS CORP.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1988-05-02
Citations: 485 U.S. 717
Docket Number: No. 85-1910
Parties: BUSINESS ELECTRONICS CORP. v. SHARP ELECTRONICS CORP.
Judges: Scalia, J., delivered the opinion of the Court,"in which Rehnquist, C. J., and Brennan, Marshall, Blackmun, and O’Connor, JJ., joined. Stevens, J., filed a dissenting opinion, in which White, J., joined, post, p. 736. Kennedy, J., took no part in the consideration or decision of the case.
Reporter: United States Reports
Volume: 485
Pages: 717–758

Head Matter:
BUSINESS ELECTRONICS CORP. v. SHARP ELECTRONICS CORP.
No. 85-1910.
Argued January 19, 1988
Decided May 2, 1988
Scalia, J., delivered the opinion of the Court,"in which Rehnquist, C. J., and Brennan, Marshall, Blackmun, and O’Connor, JJ., joined. Stevens, J., filed a dissenting opinion, in which White, J., joined, post, p. 736. Kennedy, J., took no part in the consideration or decision of the case.
Gary V. McGowan argued the cause and filed briefs for petitioner.
Harold R. Tyler, Jr. argued the cause for respondent. With him on the brief was Lance Gotthoffer.
Briefs of amici curiae urging reversal were filed for Forty-two States by J. Joseph Curran, Jr., Attorney General of Maryland, and Michael F. Brockmeyer and Craig J. Hornig, Assistant Attorneys General, by Anthony J. Celebrezze, Jr., Attorney General of Ohio, and Gregory E. Young and Matthew C. Lawry, Assistant Attorneys General, by Don Siegelman, Attorney General of Alabama, and James Prude, Assistant Attorney General, by Grace Berg Schaible, Attorney General of Alaska, and Richard D. Monkman, Assistant Attorney General, by Robert K. Corbin, Attorney General of Arizona, and Alison B. Swan, Assistant Attorney General, by John Steven Clark, Attorney General of Arkansas, and Jeffrey A. Bell, Deputy Attorney General, by Duane Woodard, Attorney General of Colorado, Thomas P. McMahon, First Assistant Attorney General, and David S. Harmon and James R. Lewis, Assistant Attorneys General, by Joseph Lieberman, Attorney General of Connecticut, and Robert M. Langer, Assistant Attorney General, by Robert A. Butterworth, Attorney General of Florida, by James T. Jones, Attorney General of Idaho, by Neil F. Hartigan, Attorney General of Illinois, and Robert E. Davy, Jr., Assistant Attorney General, by Linley E. Pearson, Attorney General of Indiana, and Frank A. Baldwin, Deputy Attorney General, by Thomas J. Miller, Attorney General of Iowa, and John R. Perkins, Deputy Attorney General, by Robert T. Stephan, Attorney General of Kansas, and Carl M. Anderson, Assistant Attorney General, by David L. Armstrong, Attorney General of Kentucky, by William J. Guste, Jr., Attorney General of Louisiana, by James M. Shannon, Attorney General of Massachusetts, and Barbara Anthony, Assistant Attorney General, by Frank J. Kelley, Attorney General of Michigan, Louis J. Caruso, Solicitor General, and Frederick H. Hoffecker and Robert C. Ward, Assistant Attorneys General, by Hubert H. Humphrey III, Attorney General of Minnesota, by Edwin L. Pittman, Attorney General of Mississippi, and Robert E. Sanders, Special Assistant Attorney General, by William L. Webster, Attorney General of Missouri, by Mike Greely, Attorney General of Montana, and Joe Roberts, Assistant Attorney General, by Robert M. Spire, Attorney General of Nebraska, and Dale A. Comer, Assistant Attorney General, by Brian McKay, Attorney General of Nevada, and P. Gregory Giordano, Deputy Attorney General, by Stephen E. Merrill, Attorney General of New Hampshire, and Amy L. Ignatius, Senior Assistant Attorney General, by W. Cary Edwards, Attorney General of New Jersey, and Laurel A. Price, Deputy Attorney General, by Robert Abrams, Attorney General of New York, O. Peter Sherwood, Solicitor General, and Lloyd E. Constantine, Assistant Attorney General, by Lacy H. Thornburg, Attorney General of North Carolina, and Richard Carlton, Assistant Attorney General, by Dave Frohnmayer, Attorney General of Oregon, by Leroy S. Zimmerman, Attorney General of Pennsylvania, and Eugene F. Waye, Deputy Attorney General, by James E. O’Neil, Attorney General of Rhode Island, by Roger A. Tellinghuisen, Attorney General of South Dakota, and Jeffrey P. Hallem, Assistant Attorney General, by W. J. Michael Cody, Attorney General of Tennessee, and Perry A. Craft, Deputy Attorney General, by Jim Mattox, Attorney General of Texas, Mary F. Keller, Executive Assistant Attorney General, and J. L. Covington and Aliene D. Evans, Assistant Attorneys General, by David L. Wilkinson, Attorney General of Utah, and Richard M. Hagstrom, Assistant Attorney General, by Jeffrey L. Amestoy, Attorney General of Vermont, and Glenn A. Jarrett, Assistant Attorney General, by Mary Sue Terry, Attorney General of Virginia, and Allen L. Jackson, Assistant Attorney General, by Kenneth O. Eikenberry, Attorney General of Washington, and John R. Ellis, Deputy Attorney General, by Charles G. Brown, Attorney General of West Virginia, C. William Ullrich, First Deputy Attorney General, and Mark D. Kindt, Deputy Attorney General, by Donald J. Hanaway, Attorney General of Wisconsin, and Kevin J. O’Connor, Assistant Attorney General, and by Joseph B. Meyer, Attorney General of Wyoming; for K mart Corporation by Robert W. Steele, Robert E. Hebda, and James C. Tuttle; and for the National Mass Retailing Institute by William D. Coston and Robert J. Verdisco.
Briefs of amici curiae urging affimance were filed for the Consumer Electronics Group of the Electronic Industries Association by Gary J. Shapiro; for the National Association of Manufacturers by Jan S. Amundson, Quentin Riegel, and Donald I. Baker; and for the National Office Machine Dealers Association by Samuel Schoenberg.

Opinion:
Justice Scalia
delivered the opinion of the Court.
Petitioner Business Electronics Corporation seeks review of a decision of the United States Court of Appeals for the Fifth Circuit holding that a vertical restraint is per se illegal under § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. § 1, only if there is an express or implied agreement to set resale prices at some level. 780 F. 2d 1212, 1215-1218 (1986). We granted certiorari, 482 U. S. 912 (1987), to resolve a conflict in the Courts of Appeals regarding the proper dividing line between the rule that vertical price restraints are illegal per se and the rule that vertical nonprice restraints are to be judged under the rule of reason.
I
In 1968, petitioner became the exclusive retailer in the Houston, Texas, area of electronic calculators manufactured by respondent Sharp Electronics Corporation. In 1972, respondent appointed Gilbert Hartwell as a second retailer in the Houston area. During the relevant period, electronic calculators were primarily sold to business customers for prices up to $1,000. While much of the evidence in this case was conflicting — in particular, concerning whether petitioner was "free riding" on Hartwell's provision of presale educational and promotional services by providing inadequate services itself — a few facts are undisputed. Respondent published a list of suggested minimum retail prices, but its written dealership agreements with petitioner and Hartwell did not obligate either to observe them, or to charge any other specific price. Petitioner's retail prices were often below respondent's suggested retail prices and generally below Hartwell's retail prices, even though Hartwell too sometimes priced below respondent's suggested retail prices. Hartwell complained to respondent on a number of occasions about petitioner's prices. In June 1973, Hartwell gave respondent the ultimatum that Hartwell would terminate his dealership unless respondent ended its relationship with petitioner within 30 days. Respondent terminated petitioner's dealership in July 1973.
Petitioner brought suit in the United States District Court for the Southern District of Texas, alleging that respondent and Hartwell had conspired to terminate petitioner and that such conspiracy was illegal per se under § 1 of the Sherman Act. The case was tried to a jury. The District Court submitted a liability interrogatory to the jury that asked whether "there was an agreement or understanding between Sharp Electronics Corporation and Hartwell to terminate Business Electronics as a Sharp dealer because of Business Electronics' price cutting." Record, Doc.. No. 241. The District Court instructed the jury at length about this question:
"The Sherman Act is violated when a seller enters into an agreement or understanding with one of its dealers to terminate another dealer because of the other dealer's price cutting. Plaintiff contends that Sharp terminated Business Electronics in furtherance of Hartwell's desire to eliminate Business Electronics as a price-cutting rival.
"If you find that there was an agreement between Sharp and Hartwell to terminate Business Electronics because of Business Electronics' price cutting, you should answer yes to Question Number 1.
"A combination, agreement or understanding to terminate a dealer because of his price cutting unreasonably restrains trade and cannot be justified for any reason. Therefore, even though the combination, agreement or understanding may have been formed or engaged in . . . to eliminate any alleged evils of price cutting, it is still unlawful. . . .
"If a dealer demands that a manufacturer terminate a price cutting dealer, and the manufacturer agrees to do so, the agreement is illegal if the manufacturer's purpose is to eliminate the price cutting." App. 18-19.
The jury answered Question 1 affirmatively and awarded $600,000 in damages. The. District Court rejected respondent's motion for judgment notwithstanding the verdict or a new trial, holding that the jury interrogatory and instructions had properly stated the law. It entered judgment for petitioner for treble damages plus attorney's fees.
The Fifth Circuit reversed, holding that the jury interrogatory and instructions were erroneous, and remanded for a new trial. It held that, to render illegal per se a vertical agreement between a manufacturer and a dealer to terminate a second dealer, the first dealer "must expressly or impliedly agree to set its prices at some level, though not a specific one. The distributor cannot retain complete freedom to set whatever price it chooses." 780 F. 2d, at 1218.
II
A
Section 1 of the Sherman Act provides that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U. S. C. § 1. Since the earliest decisions of this Court interpreting this provision, we have recognized that it was intended to prohibit only unreasonable restraints of trade. National Collegiate Athletic Assn. v. Board of Regents of University of Oklahoma, 468 U. S. 85, 98 (1984); see, e. g., Standard Oil Co. v. United States, 221 U. S. 1, 60 (1911). Ordinarily, whether particular concerted action violates § 1 of the Sherman Act is determined through case-by-case application of the so-called rule of reason — that is, "the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T. V., Inc. v. GTE Sylvania Inc., 433 U. S. 36, 49 (1977). Certain categories of agreements, however, have been held to be per se illegal, dispensing with the need for case-by-case evaluation. We have said that per se rules are appropriate only for "conduct that is manifestly anticompetitive," id., at 50, that is, conduct " 'that would always or almost always tend to restrict competition and decrease output,'" Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U. S. 284, 289-290 (1985), quoting Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U. S. 1, 19-20 (1979). See also FTC v. Indiana Federation of Dentists, 476 U. S. 447, 458-459 (1986) ("[W]e have been slow . to extend per se analysis to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious"); National Collegiate Athletic Assn. v. Board of Regents of University of Oklahoma, supra, at 103-104 ("Per se rules are invoked when surrounding circumstances make the likelihood of anti-competitive conduct so great as to render unjustified further examination of the challenged conduct"); National Society of Professional Engineers v. United States, 435 U. S. 679, 692 (1978) (agreements are per se illegal only if their "nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality").
Although vertical agreements on resale prices have been illegal per se since Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373 (1911), we have recognized that the scope of per se illegality should be narrow in the context of vertical restraints. In Continental T. V., Inc. v. GTE Sylvania Inc., supra, we refused to extend per se illegality to vertical nonprice restraints, specifically to a manufacturer's termination of one dealer pursuant to an exclusive territory agreement with another. We noted that especially in the vertical restraint context "departure from the rule-of-reason standard must be based on demonstrable economic effect rather than . . . upon formalistic line drawing." Id., at 58-59. We concluded that vertical nonprice restraints had not been shown to have such a " 'pernicious effect on competition' " and to be so " 'lacking] [in]. . . redeeming value' " as to justify per se illegality. Id., at 58, quoting Northern Pacific R. Co. v. United States, 356 U. S. 1, 5 (1958). Rather, we found, they had real potential to stimulate interbrand competition, "the primary concern of antitrust law," 433 U. S., at 52, n. 19:
"[N]ew 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 required 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. . . . 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." Id., at 55.
Moreover, we observed that a rule of per se illegality for vertical nonprice restraints was not needed or effective to protect mimbrand competition. First, so long as interbrand competition existed, that would provide a "significant check" on any attempt to exploit intrabrand market power. Id., at 52, n. 19; see also id., at 54. In fact, in order to meet that interbrand competition, a manufacturer's dominant incentive is to lower resale prices. Id., at 56, and n. 24. Second, the per se illegality of vertical restraints would create a perverse incentive for manufacturers to integrate vertically into distribution, an outcome hardly conducive to fostering the creation and maintenance of small businesses. Id., at 57, n. 26.
Finally, our opinion in GTE Sylvania noted a significant distinction between vertical nonprice and vertical price restraints. That is, there was support for the proposition that vertical price restraints reduce mterbrand price competition because they "'facilitate cartelizing.'" Id., at 51, n. 18, quoting Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions, 75 Colum. L. Rev. 282, 294 (1975). The authorities cited by the Court suggested how vertical price agreements might assist horizontal price fixing at the manufacturer level (by reducing the manufacturer's incentive to cheat on a cartel, since its retailers could not pass on lower prices to consumers) or might be used to organize cartels at the retailer level. See R. Posner, Antitrust: Cases, Economic Notes and Other Materials 134 (1974); E. Gellhorn, Antitrust Law and Economics 252, 256 (1976); Note, Vertical Territorial and Customer Restrictions in the Franchising Industry, 10 Colum. J. L. & Soc. Prob. 497, 498, n. 12 (1974). Similar support for the cartel-facilitating effect of vertical nonprice restraints was and remains lacking.
We have been solicitous to assure that the market-freeing effect of our decision in GTE Sylvania is not frustrated by related legal rules. In Monsanto Co. v. Spray-Rite Service Corp., 465 U. S. 752, 763 (1984), which addressed the evidentiary showing necessary to establish vertical concerted action, we expressed concern that "[i]f an inference of such an agreement may be drawn from highly ambiguous evidence, there is considerable danger that the doctrin[e] enunciated in Sylvania . . . will be seriously eroded." See also id., at 761, n. 6. We eschewed adoption of an evidentiary standard that "could deter or penalize perfectly legitimate conduct" or "would create an irrational dislocation in the market" by preventing legitimate communication between a manufacturer and its distributors. Id., at 763, 764.
Our approach to the question presented in the present case is guided by the premises of GTE Sylvania and Monsanto: that there is a presumption in favor of a rule-of-reason standard; that departure from that standard must be justified by demonstrable economic effect, such as the facilitation of cartelizing, rather than formalistic distinctions; that interbrand competition is the primary concern of the antitrust laws; and that rules in this area should be formulated with a view towards protecting the doctrine of GTE Sylvania. These premises lead us to conclude that the line drawn by the Fifth Circuit is the most appropriate one.
There has been no showing here that an agreement between a manufacturer and a dealer to terminate a "price cutter," without a further agreement on the price or price levels to be charged by the remaining dealer, almost always tends to restrict competition and reduce output. Any assistance to cartelizing that such an agreement might provide cannot be distinguished from the sort of minimal assistance that might be provided by vertical nonprice agreements like the exclusive territory agreement in GTE Sylvania, and is insufficient to justify a per se rule. Cartels are neither easy to form nor easy to maintain. Uncertainty over the terms of the cartel, particularly the prices to be charged in the future, obstructs both formation and adherence by making cheating easier. Cf. Maple Flooring Mfrs. Assn. v. United States, 268 U. S. 563 (1925); Cement Mfrs. Protective Assn. v. United States, 268 U. S. 588 (1925); see generally Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U. S. 574, 590 (1986). Without an agreement with the remaining dealer on price, the manufacturer both retains its incentive to cheat on any manufacturer-level cartel (since lower prices can still be passed on to consumers) and cannot as easily be used to organize and hold together a retailer-level cartel.
The District Court's rule on the scope of per se illegality for vertical restraints would threaten to dismantle the doctrine of GTE Sylvania. Any agreement between a manufacturer and a dealer to terminate another dealer who happens to have charged lower prices can be alleged to have been directed against the terminated dealer's "price cutting." In the vast majority of cases, it will be extremely difficult for the manufacturer to convince a jury that its motivation was to ensure adequate services, since price cutting and some measure of service cutting usually go hand in hand. Accordingly, a manufacturer that agrees to give one dealer an exclusive territory and terminates another dealer pursuant to that agreement, or even a manufacturer that agrees with one dealer to terminate another for failure to provide contractually obligated services, exposes itself to the highly plausible claim that its real motivation was to terminate a price cutter. Moreover, even vertical restraints that do not result in dealer termination, such as the initial granting of an exclusive territory or the requirement that certain services be provided, can be attacked as designed to allow existing dealers to charge higher prices. Manufacturers would be likely to forgo legitimate and competitively useful conduct rather than risk treble damages and perhaps even criminal penalties.
We cannot avoid this difficulty by invalidating as illegal per se only those agreements imposing vertical restraints that contain the word "price," or that affect the "prices" charged by dealers. Such formalism was explicitly rejected in GTE Sylvania. As the above discussion indicates, all vertical restraints, including the exclusive territory agreement held not to be per se illegal in GTE Sylvania, have the potential to allow dealers to increase "prices" and can be characterized as intended to achieve just that. In fact, vertical nonprice restraints only accomplish the benefits identified in GTE Sylvania because they reduce intrabrand price competition to the point where the dealer's profit margin permits provision of the desired services. As we described it in Monsanto: "The manufacturer often will want to ensure that its distributors earn sufficient profit to pay for programs such as hiring and training additional salesmen or demonstrating the technical features of the product, and will want to see that 'free-riders' do not interfere." 465 U. S., at 762-763. See also GTE Sylvania, 433 U. S., at 55.
The dissent erects a much more complex analytic structure, which ultimately rests, however, upon the same dis credited premise that the only function this nonprice vertical restriction can serve is restraint of dealer-level competition. Specifically, the dissent's reasoning hinges upon its perception that the agreement between Sharp and Hart-well was a "naked" restraint — that is, it was not "ancillary" to any other agreement between Sharp and Hartwell. Post, at 736-742, 744-745. But that is not true, unless one assumes, contrary to GTE Sylvania and Monsanto, and contrary to our earlier discussion, that it is not a quite plausible purpose of the restriction to enable Hartwell to provide better services under the sales franchise agreement. From its faulty conclusion that what we have before us is a "naked" restraint, the dissent proceeds, by reasoning we do not entirely follow, to the further conclusion that it is therefore a horizontal rather than a vertical restraint. We pause over this only to note that in addition to producing what we think the wrong result in the present case, it introduces needless confusion into antitrust terminology. Restraints imposed by agreement between competitors have traditionally been denominated as horizontal restraints, and those imposed by agreement between firms at different levels of distribution as vertical restraints.
Finally, we do not agree with petitioner's contention that an agreement on the remaining dealer's price or price levels will so often follow from terminating another dealer "because of [its] price cutting" that prophylaxis against resale price maintenance warrants the District Court's per se rule. Petitioner has provided no support for the proposition that vertical price agreements generally underlie agreements to terminate a price cutter. That proposition is simply incompatible with the conclusion of GTE Sylvania and Monsanto that manufacturers are often motivated by a legitimate desire to have dealers provide services, combined with the reality that price cutting is frequently made possible by "free riding" on the services provided by other dealers. The District Court's per se rule would therefore discourage conduct recognized by GTE Sylvania and Monsanto as beneficial to consumers.
B
In resting our decision upon the foregoing economic analysis, we do not ignore common-law precedent concerning what constituted "restraint of trade" at the time the Sherman Act was adopted. But neither do we give that pre-1890 precedent the dispositive effect some would. The term "restraint of trade" in the statute, like the term at common law, refers not to a particular list of agreements, but to a particular economic consequence, which may be produced by quite different sorts of agreements in varying times and circumstances. The changing content of the term "restraint of trade" was well recognized at the time the Sherman Act was enacted. See Gibbs v. Consolidated Gas Co., 130 U. S. 396, 409 (1889) (noting that English case laying down the common-law rule that contracts in restraint of trade are invalid "was made under a condition of things, and a state of society, different from those which now prevail, [and therefore] the rule laid down is not regarded as inflexible, and has been considerably modified"); see also Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S., at 406 ("With respect to contracts in restraint of trade, the earlier doctrine of the common law has been substantially modified in adaptation to modern conditions"); B. Cardozo, The Nature of the Judicial Process 94-96 (1921).
The Sherman Act adopted the term "restraint of trade" along with its dynamic potential. It invokes the common law itself, and not merely the static content that the common law had assigned to the term in 1890. See GTE Sylvania, 433 U. S., at 53, n. 21; Standard Oil Co. v. United States, 221 U. S., at 51-60; see also McNally v. United States, 483 U. S. 350, 372-373 (1987) (Stevens, J., joined by O'Connor, J., dissenting); Associated General Contractors of California, Inc. v. Carpenters, 459 U. S. 519, 533, n. 28, 539-540, and n. 43 (1983); Bork 37. If it were otherwise, not only would the line of per se illegality have to be drawn today precisely where it was in 1890, but also case-by-case evaluation of legality (conducted where per se rules do not apply) would have to be governed by 19th-century notions of reasonableness. It would make no sense to create out of the single term "restraint of trade" a chronologically schizoid statute, in which a "rule of reason" evolves with new circumstances and new wisdom, but a line of per se illegality remains forever fixed where it was.
Of course the common law, both in general and as embodied in the Sherman Act, does not lightly assume that the economic realities underlying earlier decisions have changed, or that earlier judicial perceptions of those realities were in error. It is relevant, therefore, whether the common law of restraint of trade ever prohibited as illegal per se an agreement of the sort made here, and whether our decisions under § 1 of the Sherman Act have ever expressed or necessarily-implied such a prohibition.
With respect to this Court's understanding of pre-Sherman Act common law, petitioner refers to our decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., supra. Though that was an early Sherman Act case, its holding that a resale price maintenance agreement was per se illegal was based largely on the perception that such an agreement was categorically impermissible at common law. Id., at 404-408. As the opinion made plain, however, the basis for that common-law judgment was that the resale restriction was an unlawful restraint on alienation. See ibid. As we explained in Boston Store of Chicago v. American Graphophone Co., 246 U. S. 8, 21-22 (1918), "Dr. Miles . . . decided that under the general law the owner of movables . . . could not sell the movables and lawfully by contract fix a price at which the product should afterwards be sold, because to do so would be at one and the same time to sell and retain, to part with and yet to hold, to project the will of the seller so as to cause it to control the movable parted with when it was not subject to his will because owned by another." In the present case, of course, no agreement on resale price or price level, and hence no restraint on alienation, was found by the jury, so the common-law rationale of Dr. Miles does not apply. Cf. United States v. General Electric Co., 272 U. S. 476, 486-488 (1926) (Dr. Miles does not apply to restrictions on price to be charged by one who is in reality an agent of, not a buyer from, the manufacturer).
Petitioner's principal contention has been that the District Court's rule on per se illegality is compelled not by the old common law, but by our more recent Sherman Act precedents. First, petitioner contends that since certain horizontal agreements have been held to constitute price fixing (and thus to be per se illegal) though they did not set prices or price levels, see, e. g., Catalano, Inc. v. Target Sales, Inc., 446 U. S. 643, 647-650 (1980) (per curiam), it is improper to require that a vertical agreement set prices or price levels before it can suffer the same fate. This notion of equivalence between the scope of horizontal per se illegality aud that of vertical per se illegality was explicitly rejected in GTE Sylvania, supra, at 57, n. 27 — as it had to be, since a horizontal agreement to divide territories is per se illegal, see United States v. Topco Associates, Inc., 405 U. S. 596, 608 (1972), while GTE Sylvania held that a vertical agreement to do so is not. See also United States v. Arnold, Schwinn & Co., 388 U. S. 365, 390-391 (1967) (Stewart, J., joined by Harlan, J., concurring in part and dissenting in part); White Motor Co. v. United States, 372 U. S. 253, 263 (1963).
Second, petitioner contends that per se illegality here follows from our two cases holding per se illegal a group boycott of a dealer because of its price cutting. See United States v. General Motors Corp., 384 U. S. 127 (1966); Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U. S. 207 (1959). This second contention is merely a restatement of the first, since both cases involved horizontal combinations — General Motors, supra, at 140, 143-145, at the dealer level, and Klor's, supra, at 213, at the manufacturer and wholesaler levels. Accord, GTE Sylvania, supra, at 58, n. 28, United States v. Arnold, Schwinn & Co., 388 U. S., at 373, 378; id., at 390 (Stewart, J., joined by Harlan, J., concurring in part and dissenting in part); White Motor Co. v. United States, supra, at 263.
Third, petitioner contends, relying on Albrecht v. Herald Co., 390 U. S. 145 (1968), and United States v. Parke, Davis & Co., 362 U. S. 29 (1960), that our vertical price-fixing cases have already rejected the proposition that per se illegality requires setting a price or a price level. We disagree. In Albrecht, the maker of the product formed a combination to force a retailer to charge the maker's advertised retail price. See 390 U. S., at 149. This combination had two aspects. Initially, the maker hired a third party to solicit customers away from the noncomplying retailer. This solicitor "was aware that the aim of the solicitation campaign was to force [the noncomplying retailer] to lower his price" to the suggested retail price. Id., at 150. Next, the maker engaged another retailer who "undertook to deliver [products] at the suggested price" to the noncomplying retailer's customers obtained by the solicitor. Ibid. This combination of maker, solicitor, and new retailer was held to be per se illegal. Id., at 150, 153. It is plain that the combination involved both an explicit agreement on resale price and an agreement to force another to adhere to the specified price.
In Parke, Davis, a manufacturer combined first with wholesalers and then with retailers in order to gain the "retailers' adherence to its suggested minimum retail prices." 362 U. S., at 45-46, and n. 6. The manufacturer also brokered an agreement among its retailers not to advertise prices below its suggested retail prices, which agreement was held to be part of the per se illegal combination. This holding also does not support a rule that an agreement on price or price level is not required for a vertical restraint to be per se illegal — first, because the agreement not to advertise prices was part and parcel of the combination that contained the price agreement, id., at 35-36, and second because the agreement among retailers that the manufacturer organized was a horizontal conspiracy among competitors. Id., at 46-47.
In sum, economic analysis supports the view, and no precedent opposes it, that a vertical restraint is not illegal per se unless it includes some agreement on price or price levels. Accordingly, the judgment of the Fifth Circuit is
Affirmed.
Justice Kennedy took no part in the consideration or decision of this case.
The Seventh, Eighth, and Tenth Circuits have agreed with the analysis of the Fifth. See Morrison v. Murray Biscuit Co., 797 F. 2d 1430, 1440 (CA7 1986); McCabe's Furniture, Inc. v. La-Z-Boy Chair Co., 798 F. 2d 323, 329 (CA8 1986), cert. pending, No. 86-1101; Westman Commission Co. v. Hobart Int'l, Inc., 796 F. 2d 1216, 1223-1224 (CA10 1986), cert. pending, No. 86-484. Decisions of the Third and Ninth Circuits have disagreed. See Cernuto, Inc. v. United Cabinet Corp., 595 F. 2d 164, 168— 170 (CA3 1979); Zidell Explorations, Inc. v. Conval Int'l, Ltd., 719 F. 2d 1465, 1469-1470 (CA9 1983).
The dissent's principal fear appears to be not cartelization at either level, but Hartwell's assertion of dominant retail power. This fear does not possibly justify adopting a rule of per se illegality. Retail market power is rare, because of the usual presence of interbrand competition and other dealers, see Continental T. V., Inc. v. GTE Sylvania Inc., 433 U. S. 36, 54 (1977), and it should therefore not be assumed but rather must be proved. Cf. Baxter, The Viability of Vertical Restraints Doctrine, 75 Calif. L. Rev. 933, 948-949 (1987). Of course this case was not prosecuted on the theory, and therefore the jury was not asked to find, that Hartwell possessed such market power.
The conclusion of "naked" restraint could also be sustained on another assumption, namely, that an agreement is not "ancillary" unless it is designed to enforce a contractual obligation of one of the parties to the contract. The dissent appears to accept this assumption. See post, at 739-741, and n. 3, 744-746. It is plainly wrong. The classic "ancillary" restraint is an agreement by the seller of a business not to compete within the market. See Mitchel v. Reynolds, 1 P. Wms. 181, 24 Eng. Rep. 347 (1711); Restatement (Second) of Contracts § 188(2)(a) (1981). That is not ancillary to any other contractual obligation, but, like the restraint here, merely enhances the value of the contract, or permits the "enjoyment of [its] fruits." United States v. Addyston Pipe & Steel Co., 85 F. 271, 282 (CA6 1898), aff'd, 175 U. S. 211 (1899); cf. Restatement (Second) of Contracts § 187, 188 (1981) (restraint may be ancillary to a "transaction or relationship") (emphasis added); R. Bork, The Antitrust Paradox 29 (1978) (hereinafter Bork) (vertical arrangements are ancillary to the "transaction of supplying and purchasing").
More important than the erroneousness of the dissent's common-law analysis of "naked" and "ancillary" restraints are the perverse economic consequences of permitting nonprice vertical restraints to avoid per se invalidity only through attachment to an express contractual obligation. Such an approach is contrary to the express views of the principal scholar on whom the dissent relies. See 7 P. Areeda, Antitrust Law § 1457c, p. 170 (1986) (hereinafter Areeda) (legality of terminating price cutter should not depend upon formal adoption of service obligations that termination is assertedly designed to protect). In the precise case of a vertical agreement to terminate other dealers, for example, there is no conceivable reason why the existence of an exclusivity commitment by the manufacturer to the one remaining dealer would render anticompetitive effects less likely, or the procompetitive effects on services more likely — so that the dissent's line for per se illegality fails to meet the requirement of Continental T. V., Inc. v. GTE Sylvania Inc., 433 U. S., at 59, that it be based on "demonstrable economic effect." If anything, the economic effect of the dissent's approach is perverse, encouraging manufacturers to agree to otherwise inefficient contractual provisions for the sole purpose of attaching to them efficient nonprice vertical restraints which, only by reason of such attachment, can avoid per se invalidity as "naked" restraints. The dissent's approach would therefore create precisely the kind of "irrational dislocation in the market" that legal rules in this area should be designed to avoid. Monsanto Co. v. Spray-Rite Service Corp., 465 U. S. 752, 764 (1984).
The dissent apparently believes that whether a restraint is horizontal depends upon whether its anticompetitive effects are horizontal, and not upon whether it is the product of a horizontal agreement. Post, at 745-747, and n. 10. That is of course a conceivable way of talking, but if it were the language of antitrust analysis there would be no such thing as an unlawful vertical restraint, since all anticompetitive effects are by definition horizontal effects. The dissent quotes a statement of Professor Areeda as supposed adoption of its definition of horizontal restraint. Post, at 745-746, n. 10, quoting Areeda § 1457d, p. 174. That statement seems to us to be, to the contrary, Professor Areeda's attempt to explain a peculiar usage of the term "horizontal" in Cernuto, Inc. v. United Cabinet Corp., 595 F. 2d, at 168, noting that (even though Cernuto did not involve a horizontal restraint) the use of the term "horizontal" was "appropriate to capture the fact that dealer interests opposed to those of the manufacturer were being served." Areeda § 1457d, p. 174. The dissent also seeks to associate Judge Bork with its terminological confusion. See post, at 746, n. 10, quoting Bork 288. What the quoted passage says, how ever, is that a facially vertical restraint imposed by a manufacturer only because it has been coerced by a "horizontal carte[l]" agreement among his distributors is in reality a horizontal restraint. That says precisely what we say: that a restraint is horizontal not because it has horizontal effects, but because it is the product of a horizontal agreement.
Contrary to the dissent, post, at 742-743, 747, General Motors does not differ from the present case merely in that it involved a three-party rather than a two-party agreement. The agreement was among competitors in General Motors; it was between noncompetitors here. Cf. Bork 330 (defining "boycotts" as "agreements among competitors to refuse-to deal").