Opinion ID: 748172
Heading Depth: 2
Heading Rank: 2

Heading: Agreement in Restraint of Trade: Sherman Act Section 1

Text: 10 Section 1 of the Sherman Act prohibits [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. 15 U.S.C. § 1. A complaint pleading a violation of section 1 must allege a contract, combination or conspiracy that unreasonably restrains trade. See Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1059 (2d Cir.1996), petition for cert. filed, 65 U.S.L.W. 3694 (U.S. Apr. 3, 1997) (No. 96-1570), and petition for cert. filed, 65 U.S.L.W. 3767 (U.S. May 5, 1997) (No. 96-1785). ECC argues that the complaint properly alleges that the agreement between Audiovox and Toshiba, whereby Toshiba ceased efforts to distribute Toshiba cellular phones independently under its own brand name, violates section 1. We disagree. 11 ECC's complaint alleges that Audiovox sells Toshiba-manufactured cellular phones under the Audiovox name and that Audiovox applied pressure to prevent Toshiba from selling identical phones independently under the Toshiba name. These allegations, if true, establish nothing more than that Audiovox sought to preserve its role as an exclusive distributor of Toshiba phones, a role it played for many years before Toshiba tried to distribute Toshiba-brand phones through ECC. This is a so-called vertical restraint. 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. Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730, 108 S.Ct. 1515, 1522-23, 99 L.Ed.2d 808 (1988). Absent price-fixing between a supplier and distributor, vertical restraints are generally subject to rule of reason analysis. See id. at 726-27, 108 S.Ct. at 1520-21; Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 97 S.Ct. 2549, 2557, 53 L.Ed.2d 568 (1977); K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir.1995) (Walker, J.); Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 131 (2d Cir.1978) (in banc). This is so even if the distributor and manufacturer also compete at the distribution level, where, as here, the manufacturer distributes its products through a distributor and independently (so-called dual distribution arrangements). See Smalley & Co. v. Emerson & Cuming, Inc., 13 F.3d 366, 368 (10th Cir.1993) (treating such an agreement as a vertical agreement between a supplier and distributor, not a horizontal agreement between competitors, and applying rule of reason analysis); Illinois Corporate Travel, Inc. v. American Airlines, Inc., 889 F.2d 751, 753 (7th Cir.1989) (subjecting restrictions on travel price advertising to rule of reason analysis, where travel agents also competed against airline in selling fares); International Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 906 (6th Cir.1989) (characterizing restraints imposed in dual distribution arrangement as vertical, and applying rule of reason analysis, citing Vertical Restraints Guidelines, 50 Fed.Reg. 6263, 6265 (Dep't of Justice 1985) (notice)); Copy-Data Sys., Inc. v. Toshiba Am., Inc., 663 F.2d 405, 408-09 (2d Cir.1981) (applying rule of reason analysis to restraints imposed on supplier by manufacturer, where dual distributorship existed). 1 Under rule of reasons analysis, an agreement will not violate the antitrust laws unless it can be shown that it will have an actual adverse effect on competition in the relevant market. See Clorox Company v. Sterling Winthrop, Inc., 117 F.3d 50, 56 (2d Cir.1997); K.M.B., 61 F.3d at 127. 12 To state a claim under section 1, it is not enough merely to allege that, as a result of the agreement between Toshiba and Audiovox, Toshiba-brand cellular phones no longer compete against Audiovox-brand cellular phones. The fact remains that the dispute involves one manufacturer's product, Toshiba cellular phones. Although two brand names are involved, this is essentially a dispute about the way one product is distributed, a question of intrabrand competition. We considered a similar antitrust challenge in Oreck. There, a manufacturer terminated a dealer that sold vacuum cleaners under the manufacturer's label, granting Sears exclusive rights to distribute the manufacturer's vacuum cleaners under a different label. See 579 F.2d at 128. Despite the fact that the case involved two competing brands of vacuum cleaners, because one manufacturer's product was involved we held that the agreement was not per se illegal and rule of reason analysis applied. See 579 F.2d at 131 n. 6 (While it is true that, because of its unique facts [different brand-name products are at issue], this case does not fit exactly into the dealer substitution line of cases, appellee's argument does not persuade us that it therefore comes within the rule of per se illegality.). We noted that the plaintiff did not allege or prove that the manufacturer or Sears conspired to maintain high resale prices. See id. at 130-31. Here, as in Oreck, an actual adverse effect on interbrand competition is not established merely because an agreement removes from the marketplace one brand name under which a manufacturer's products are sold. See id. at 131; cf. Clorox, 117 F.3d 50 (affirming summary judgment dismissing antitrust claim where challenged trademark agreement limited only the way one brand name could be used). 13 Nor is it a violation of the antitrust laws, without a showing of an actual adverse effect on competition market-wide, for a manufacturer to terminate a distributor like ECC and to appoint an exclusive distributor. See Oreck, 579 F.2d at 131; see also Burdett Sound, Inc. v. Altec Corp., 515 F.2d 1245, 1249 (5th Cir.1975) (Lest any other former distributors succumb to the temptation of treble damages, we reiterate that it is simply not an antitrust violation for a manufacturer to contract with a new distributor, and as a consequence, to terminate his relationship with a former distributor, even if the effect of the new contract is to seriously damage the former distributor's business.). True, we recently held that an agreement between a supplier and its purchaser that disadvantaged the supplier's competitor could constitute a violation of the antitrust laws, even a per se violation. See Discon, 93 F.3d at 1061. In Discon, however, the alleged agreement between the purchaser and supplier involved a fraudulent scheme to defraud ratepaying telephone customers whereby the telephone company's purchasing agent bought services from the conspiring supplier at inflated prices, charged these to customers, and then received a partial rebate from the supplier. See id. at 1057-58. The Court distinguished the case from one involving a typical exclusive distributorship arrangement because the conduct alleged was manifestly anticompetitive and no procompetitive rationale appeared on the face of the complaint. See id. at 1061. That is not the case here, as the allegations in ECC's complaint establish nothing more than a run-of-the-mill exclusive distributorship controversy, where a former exclusive distributor is attempting to protect its competitive position vis a vis its supplier. Such exclusive distributorship arrangements are presumptively legal. See id. (citing Oreck, 579 F.2d at 131). 14 The allegations in ECC's complaint, if true, do not establish that the agreement between Audiovox and Toshiba adversely affects market-wide competition. ECC rests its entire case on the fact that the Toshiba name will no longer be available in the cellular telephone market, calling this a reduction in output of Toshiba phones that benefits only Audiovox. Toshiba phones, however, will still be available, presumably in whatever number is demanded by consumers. The complaint does not allege how Audiovox could sensibly reduce its sales of the phones and increase its prices. The allegations show, at most, a slight reduction in competition between Audiovox and Toshiba regarding the distribution of Toshiba-manufactured phones. It is settled, however, that to sustain a section 1 claim, a plaintiff must ... show more than just an adverse effect on competition among different sellers of the same product.... K.M.B., 61 F.3d at 127; see also Illinois Corporate Travel, 889 F.2d at 753 (An agreement between American and its travel agents does not reduce supply ... only an agreement among the air carriers could do that.). 15 Although competition from Toshiba could deter Audiovox from attempting to increase its margin on Toshiba phones by increasing price, the Toshiba-ECC endeavor was very limited in scope and would have had only a limited effect on Audiovox sales. In any event, ECC has not alleged how this slight reduction in intrabrand competition affects the market as a whole, given the continuing presence of Toshiba phones in the market--in whatever number consumers demand--and the lack of an allegedly anticompetitive agreement between Toshiba or Audiovox and their competitors. 16 Accordingly, although ECC's amended complaint makes a single, general allegation that Toshiba's decision to terminate ECC as a distributor would diminish competition, we do not see how this could be the case. Other allegations in the amended complaint, as well as common knowledge, make it clear that other large competitors (Motorola and Mitsubishi are mentioned in the complaint) compete in the cellular telephone market. Without any allegation as to how market-wide competition will be affected, the complaint fails to allege a claim on which relief may be granted. See Furlong, 710 F.2d at 928 (notice pleading does not permit conclusory statements to substitute for minimally sufficient factual allegations). 17 While Audiovox very well may have brought pressure to bear on Toshiba to preserve its role as an exclusive distributor of Toshiba products, that is not illegal without more. In the absence of price-fixing, agreements to terminate distributors, even at the behest of competing distributors who seek to maintain exclusive distribution rights, have repeatedly been sanctioned by the courts. See, e.g., Oreck, 579 F.2d at 133-34; Bailey's, Inc. v. Windsor Am., Inc., 948 F.2d 1018, 1030 (6th Cir.1991) (upholding under rule of reason analysis termination of dealer after several competing dealers told supplier that they would no longer carry supplier's goods if first dealer continued to carry supplier's line); Valley Liquors, Inc. v. Renfield Importers, Ltd., 822 F.2d 656, 658 (7th Cir.1987) (upholding supplier's termination of dealer even though supplier met with other dealers to discuss plans to reorganize supplier's distribution system beforehand); cf. Sharp, 485 U.S. at 726-27, 108 S.Ct. at 1520-21 (subjecting alleged agreement between supplier and dealer to terminate price-cutting second dealer to rule of reason analysis, requiring a showing of adverse competitive effects absent evidence of price fixing). Manufacturers must enjoy some freedom to determine how to distribute their products without subjecting themselves to attack under the antitrust laws by disappointed distributors, absent activity that is manifestly anticompetitive. The fact that a distributor applies pressure to preserve its exclusive role does not alone raise special antitrust concerns. 18 As we reasoned in Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 543 (2d Cir.1993), [i]nsisting on proof of harm to the whole market fulfills the broad purpose of the antitrust law that was enacted to ensure competition in general, not narrowly focused to protect individual competitors. While ECC's allegations suggest that it was harmed by Toshiba's decision to terminate it as a distributor, they do not show that the agreement threatens to harm overall competition in the cellular telephone market. Accordingly, its section 1 claim was properly dismissed.