Opinion ID: 352316
Heading Depth: 1
Heading Rank: 1

Heading: The Instructions on Territorial Restrictions

Text: 37 About eight months after the conclusion of the jury trial, the Supreme Court handed down Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 holding that territorial restrictions are not illegal per se under the Sherman Act, thus overruling United States v. Arnold Schwinn & Company, 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249. We are of course required to decide this case on the basis of existing law rather than according to the law that existed at the time of the decision below. United States v. Schooner Peggy, 5 U.S. (1 Cranch.) 103, 109, 2 L.Ed. 49; Bradley v. Richmond School Board, 416 U.S. 696, 94 S.Ct. 2006, 40 L.Ed.2d 476; Hamling v. United States, 418 U.S. 87, 102, 94 S.Ct. 2887, 41 L.Ed.2d 590. 38 In the court below, the case was tried and the jury was instructed based on the law in Schwinn. Count II of the amended complaint asserted that defendant's territorial restrictions violated Section 1 of the Sherman Act, and during the trial plaintiff introduced substantial evidence to prove that defendant attempted to impose territorial restrictions and that the distributorship termination resulted from plaintiff's refusal to accede to such. During the course of the litigation, plaintiff's theory was that these territorial restrictions were unlawful per se under Schwinn. 39 One of the district judge's instructions to the jury was a Schwinn -type instruction that territorial limitations    are per se violations of the antitrust laws. Subsequently he charged the jurors in accord with Schwinn as follows: 40 In this regard, it is unlawful for a producer to terminate one of its distributors for the reason that the distributor objected to or departed from a plan by the producer to allocate or to restrict the territories in which its products could be sold. 41 Immediately thereafter, the district judge correctly told the jury it is unlawful for a producer to terminate a distributor because of its objections to or departures from the producer's plan to fix or maintain retail prices and incorrectly told the jury that it would also be unlawful for a producer to terminate a distributor for distributing the products of a competing producer. 6 Then came the following instruction: 42 Termination for any one or more of these (three) reasons is unlawful. (Emphasis supplied.) 43 Thus it is seen that the jury may have found defendant guilty of violating the Sherman Act because of territorial restrictions alone, now permissible under the Continental T.V. case unless they violate the long-time rule of reason. To avoid a retrial, plaintiff argues first that defendant cannot challenge the Schwinn instructions because no objection was made to them at trial and, second, that even if a proper objection had been made the instructions should be upheld because Continental T.V. is distinguishable from the facts of this case. 44 The argument that in order to receive the benefit of a change in the law on appeal a party must have objected to the old law at trial would give effect to the Supreme Court's now firm principle that an appellate court should apply the law in existence at the time of appeal only in those rare cases in which counsel had the foresight to predict the change. Cf. Carpenter v. Wabash Ry. Co., 309 U.S. 23, 29, 60 S.Ct. 416, 84 L.Ed. 558. Not only would plaintiff's argument thus undermine the clear intention of the Supreme Court but it would also exceed the purposes of requiring an objection at trial: objections are required so that the trial judge can correct any errors, but given the applicable law at the time he gave the instruction the district judge here committed no error and in fact would have been wrong to instruct that Schwinn was not the law. 7 Even if, as plaintiff suggests, the appropriate standard is whether defendant's counsel can be faulted for failing to predict the change in the laws, we decline to find fault on the facts of this case because of the infrequency with which recent Supreme Court decisions are overruled even when, as here, they have been criticized by some commentators and courts. 45 Plaintiff's more substantial contention is its attempt to distinguish Continental T.V. on two grounds. First, citing Pitchford Scientific Instruments Corp. v. Pepi, Inc., 435 F.Supp. 685 (W.D.Pa.1977), plaintiff argues that Continental T.V. is not controlling because it did not change the rule that vertical territorial restrictions are per se illegal when they are part of a price-fixing scheme. See United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 64 S.Ct. 805, 88 L.Ed. 1024. Although this argument may be a fair reading of Continental T.V., it is inapplicable here. Unlike Pitchford, in which the Third Circuit already had found that the evidence in the case supported a finding of price fixing 8 and the district judge found that defendant's territorial restrictions were part and parcel of a comprehensive price-fixing policy, 435 F.Supp. at 689, this case was not tried on a theory that the restraints were ancillary to an illegal price fixing scheme (Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d 934, 948 (5th Cir. 1975)) and the record is insufficient to support our making such a finding. See Part III, infra. 46 Also based on Pitchford, plaintiff's second argument is that Continental T.V. is not controlling because it deals only with a  'location' clause a restriction barring a vendor from selling products from locations other than those specified in the agreements and not with an arguably more anti-competitive restriction (such as here) barring the vendor from selling to buyers in certain locations. Judge Dumbauld offered this distinction in Pitchford because Justice Powell, the author of the Continental T.V. opinion, spoke at the beginning only of the location clause and then went on to say that the Continental T.V. case 'presents important questions concerning . . . these restrictions' (Italics supplied). 435 F.Supp. at 688, quoting Continental T.V. Inc. v. GTE Sylvania, Inc., supra, 433 U.S. at 37, 97 S.Ct. at 2551. However, Justice Powell's own express limitation of the Court's holding later in the opinion was not so narrow but rather stated that we are concerned here only with nonprice vertical restrictions, Id. at 51 n.18, 97 S.Ct. at 2558 n.18 and the prohibition in Schwinn that was overruled by Continental T.V. was described as attempting to restrict a 'retailer's freedom as to where and to whom it will resell the products'  (emphasis added). Id. at 46, 97 S.Ct. at 2555. Still later in the opinion, Justice Powell expressly rejected the distinction that plaintiff asks us to draw: The fact that one restriction was addressed to territory and the other to customers is irrelevant to functional antitrust analysis     Ibid.; see also Id. at 58 n.29, 97 S.Ct. at 2562, n.29. That Continental T.V. intended to change the law relating to more than merely location clauses 9 is also clear from the conclusion of the opinion: 47 (W)e conclude that the per se rule stated in Schwinn must be overruled. In so holding we do not foreclose the possibility that particular applications of vertical restrictions might justify per se prohibition under Northern Pac. R. Co. But we do make clear that departure from the rule of reason standard must be based upon demonstrable economic effect rather than as in Schwinn upon formalistic line drawing. Id. at 58, 97 S.Ct. at 2562. 48 Applying this standard, on the record presented below Continental T.V. mandates that the rule of reason initially apply to the vertical restriction at issue here. The trial court's instruction therefore was erroneous and constitutes reversible (though unavoidable) error because a territorial restriction was one of the three grounds listed in the instructions as permitting a verdict for plaintiff under Counts II and III. Because this defect in the instructions affects the substantial rights of the defendant, it cannot be considered harmless error under Rule 61 of the Federal Rules of Civil Procedure. On remand, however, plaintiff should be afforded the opportunity to prove that this particular type of vertical restriction justifies per se prohibition based upon demonstrable economic effect. Id. at 59, 97 S.Ct. at 2562.