Opinion ID: 385888
Heading Depth: 2
Heading Rank: 2

Heading: group boycott or concerted refusal to deal.

Text: 27 Section 1 of the Sherman Act proscribes Every contract, combination ... or conspiracy, in restraint of trade. 15 U.S.C. § 1. In order for a restraint to run afoul of the antitrust laws, however, it must be unreasonable. Certain conduct has been held to be unreasonable per se, i. e., once a court has identified such conduct it is foreclosed from undertaking an inquiry into its reasonableness. Per se treatment is warranted, in certain areas because 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. Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). The Court has emphasized that any departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than ... upon formalistic line drawing. Continental T. V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 58-9, 97 S.Ct. 2549, 2561-62, 53 L.Ed.2d 568 (1977). 28 One type of activity that is commonly cited as being per se illegal is the group boycott or concerted refusal to deal. Appellant relies on Klor's v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959), and its progeny for the proposition that the instant case fits within the group boycott rationale. In Klor's, Broadway-Hale, a chain of department stores, operated one of its stores next door to Klor's retail store. The two stores competed in the sale of radios, televisions, refrigerators and other household appliances. Broadway-Hale, apparently disturbed by Klor's price-cutting tactics, approached ten national manufacturers and their distributors and prevailed upon them to either not sell to Klor's or sell to it only at discriminatory prices and on highly unfavorable terms. Klor's brought an action claiming that this concerted refusal to deal constituted an illegal group boycott. The defendants moved for summary judgment, arguing that there was no public injury because there were hundreds of other appliance retailers, some within blocks of Klor's who sold competing brands of appliances, including those the defendants refused to sell to Klor's. The Supreme Court concluded that a group boycott of this nature would always be condemned, regardless of any adverse effect on competition. 29 Group boycotts, or concerted refusals by traders to deal with other traders, have long been held to be in the forbidden category. They have not been saved by allegations that they were reasonable in the specific circumstances.... Even when they operated to lower prices or temporarily to stimulate competition they were banned. Id. at 212, 79 S.Ct. at 709. (Footnote omitted). 30 The Court noted that it was not faced with a case of a single trader refusing to deal with another, nor even of a manufacturer and a dealer agreeing to an exclusive distributorship. Alleged in (the Klor's) complaint is a wide combination consisting of manufacturers, distributors and a retailer. Id. at 212-3, 79 S.Ct. at 709-710. (Footnote omitted, emphasis added). 5 31 Klor's has often been criticized, not so much because of the result reached, but because the Court failed to articulate with any degree of precision a definition of group boycott or to offer an explanation for why all concerted refusals to deal warranted per se treatment. See, e. g., Bauer, Per Se Illegality of Concerted Refusals to Deal: A Rule Ripe for Reexamination, 79 Colum.L.Rev. 685 (1979); Rahl, Per Se Rules and Boycotts Under the Sherman Act: Some Reflections on the Klor's Case, 45 Va.L.Rev. 1165 (1959). In fact, one commentator, after examining the Supreme Court's discussion in Klor's and considering the feasibility of articulating a workable definition of group boycotts, concluded that It seems even more clear that any comprehensible per se rule for boycotts is ... out of the question. Rahl, supra, at 1173. Indeed, there is more confusion about the scope and operation of the per se rule against group boycotts than in reference to any other aspect of the per se doctrine. Sullivan, Handbook of the Law of Antitrust, § 83 at 229-30 (1977). 32 The term group boycott can be applied to divergent types of concerted activity, not all of which necessarily have a pernicious effect on competition or lack any redeeming virtue. The simple use of labels cannot suffice, because this would create the possibility that reasonable concerted activity would be proscribed. See Worthen Bank & Trust Co. v. National Bankamericard Inc., 485 F.2d 119, 125 (CA8 1973), cert. denied, 415 U.S. 918, 94 S.Ct. 1417, 39 L.Ed.2d 473 (1974). The broad language of Klor's and General Motors is not helpful in resolving this case. 33 Two recent Second Circuit decisions are instructive. In Oreck Corporation v. Whirlpool Corporation, 579 F.2d 126 (CA2 1978) (en banc), cert. denied, 439 U.S. 946, 99 S.Ct. 340, 58 L.Ed.2d 338, rehearing denied, 439 U.S. 1104, 99 S.Ct. 883, 59 L.Ed.2d 65 (1979), Oreck charged Whirlpool and Sears with engaging in a conspiracy in unreasonable restraint of trade to exclude Oreck from the vacuum cleaner market. Oreck had been the exclusive distributor of vacuum cleaners under the Whirlpool name. Whirlpool also had manufactured vacuum cleaners for resale by Sears under the Kenmore label. The conspiracy was based on Oreck's allegation that Whirlpool did not extend Oreck's exclusive distributorship at the behest and insistence of Sears, a much larger purchaser of Whirlpool products. Under the jury instruction given, the jury could simply have found an agreement by Sears and Whirlpool to exclude Oreck from the sale of Whirlpool vacuum cleaners and, on that basis, have found them guilty (as it in fact did) of a per se violation of § 1 of the Sherman Act. Id. at 129. The jury was not required to find the existence of an anticompetitive purpose or effect. 34 The Second Circuit found that an instruction on a per se theory was inappropriate. The court stated 35 It is important to distinguish between 'horizontal' restraints, i. e. agreements between competitors at the same level of market structure, and 'vertical' restraints, i. e. combinations of persons at different levels of the market structure, such as manufacturers and distributors.... Horizontal restraints alone have been characterized as 'naked restraints of trade with no purpose except stifling competition,' ... and, therefore, per se violations of the Sherman Act. On the other hand, while vertical restrictions may reduce intrabrand competition by limiting the number of sellers of a particular product, competing for a given group of buyers, they also promote interbrand competition by allowing a manufacturer to achieve certain efficiencies in the distribution of its products.... They are, therefore, to be examined under the rule of reason standard. Id. at 131 (Citations omitted). 6 36 Because the restraint involved was characterized as vertical, the court expressed a reluctance to use the per se rule because to do so would interfere with the business decisions of a manufacturer without any assurance that the purposes of the Sherman Act would be served thereby. 37 It has always been the prerogative of a manufacturer to decide with whom it will deal. See United States v. Colgate & Co., 250 U.S. 300, 39 S.Ct. 465 (63 L.Ed. 992) (1919). Any alleged inducements by Sears to Whirlpool to allow the contract with Oreck to expire may have amounted to tortious interference; but, without some further showing that from this course of conduct there was an anticompetitive effect in the vacuum cleaner industry as a whole, it is inconsistent with the sanctity of contractual arrangements to allow the antitrust laws to inject a provision into the agreement which would require Whirlpool to renew Oreck's distributorship for as long as it is able to compete successfully with Sears. In this case, therefore, something more than an agreement between Whirlpool and Sears to eliminate Oreck must be shown. The agreement becomes violative of § 1 of the Sherman Act only if it is anticompetitive in purpose or effect in sum, it must be tested by the rule of reason. Without any consideration of the anticompetitive purpose or effect, arbitrarily seeking to protect Oreck simply because Whirlpool refused to renew a contract with Oreck which had terminated by its own terms, even though this refusal was in whole or in part, due to persuasion by Sears, disregards the well established rule that 'the antitrust laws ... were enacted for the protection of competition, not competitors.... '  Id. at 133-4. 38 In Borger v. Yamaha International Corporation, 625 F.2d 390 (CA2 1980), a case with facts much like those in the instant case, the Second Circuit again refused to apply the per se rule to activity which could conceivably be labeled as a concerted refusal to deal. Yamaha, a United States importer of various consumer products, including high fidelity audio equipment, distributes its audio products through franchised dealers in a limited distribution system. After some preliminary negotiations, it appeared that Borger would become a franchised dealer in Manhattan. Prior to consummation of the franchise agreement, Yamaha contacted two existing Yamaha dealers in Manhattan and discussed Borger's appointment as a dealer. The two dealers expressed a negative reaction to the appointment and Yamaha subsequently decided not to grant Borger the dealership. 39 Borger brought an action against Yamaha and its dealers alleging two violations of Section 1 of the Sherman Act, a group boycott and a conspiracy to fix prices. Borger also alleged breach of contract and promissory estoppel, but the district judge refused to submit these counts to the jury. The jury returned a verdict in favor of Borger. The Second Circuit reversed and remanded because of errors in the instructions similar to those which existed in Oreck. 40 The district court judge had instructed the jury that because there was no evidence to support a finding of horizontal combination or contract, the question for the jury was whether Yamaha had entered into a vertical combination with one or both of the dealers with whom it consulted prior to rejecting Borger's application. Id. at 394 (emphasis added). The jury was instructed on a rule of reason theory. The instructions, however, stated that a finding of illegality would be justified if Yamaha had the sole purpose of protecting either or both of the existing dealers from competition. The Second Circuit, relying on Oreck, stated In the instant case, the jury was instructed to find Yamaha liable solely on the basis of a purpose to restrict intrabrand competition, without any finding of either a purpose or effect related to interbrand competition. This was reversible error. Id. at 397. We find that the logic used by the Second Circuit is sound. 41 In both Oreck and Borger the vertical-horizontal distinction was crucial to the determination of whether to apply a per se or a rule of reason analysis. The importance of this distinction has been recognized in this circuit as well. We said, in Gough v. Rossmoor Corporation, 585 F.2d 381 (CA 9 1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed.2d 494 (1979), that 42 In all cases so far holding such restraints to be per se unreasonable, there has been some horizontal concert of action taken against the victims of the restraint. In Mutual Fund Investors v. Putnam Management Co., supra, this court rejected the contention that the refusal to deal there under fire constituted a per se illegal group boycott, stating 'At issue is an alleged conspiracy among vertically integrated organizations, and agreements among them are not per se illegal.' 553 F.2d at 626. Id. at 387. (Footnote omitted). 43 The vertical-horizontal distinction is not always dispositive. In Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164 (CA3 1979), the court was faced with the termination, by a manufacturer of kitchen cabinets, of one of its customers, a discount house, at the behest of another customer, a retailer, allegedly because of price considerations. On appeal from a grant of summary judgment for the defendants, the court considered whether a per se rule could have been applied to the challenged conduct. 7 The court asserted that Sylvania did not necessarily mean that any restraint which could be characterized as vertical could not be analyzed under a per se approach. 44 When a manufacturer acts on its own, in pursuing its own market strategy, it is seeking to compete with other manufacturers by imposing what may be defended as reasonable vertical restraints. This would appear to be the rationale of the GTE Sylvania decision. However, if the action of the manufacturer or other supplier is taken at the direction of its customer, the restraint becomes primarily horizontal in nature in that one customer is seeking to suppress its competition by utilizing the power of a common supplier. Therefore, although the termination in such a situation is, itself, a vertical restraint, the desired impact is horizontal and on the dealer, not the manufacturer, level. Id. at 168. 45 The court emphasized that the motivating factor in the alleged conspiracy was price, i. e. the conspiracy sought to protect the existing retailer from the price competition of a discounter. Oreck was distinguished because, in addition to a lack of proof that price control was the likely purpose of the Whirlpool-Sears agreement, Whirlpool had done no more than refuse to renew a contract while the manufacturer in this case had breached a two year agreement after only three months. In Cernuto, therefore, there was clearly less of a likelihood that the manufacturer's decision could be considered an element of its own marketing strategy. In conclusion, the court stated that 46 If Cernuto can prove at trial that United, Lappin and Famous conspired to protect Famous from price competition by Cernuto, and that United and Lappin terminated Cernuto at Famous' request and in pursuit of a price related end, then it can prevail on a price-fixing theory notwithstanding its failure to show any impact on competition involving kitchen cabinet sales in Western Pennsylvania. Id. at 170. 47 While allowing the possibility that plaintiff's theory could be disproved, the court, because of the procedural posture (appeal from a grant of a motion for summary judgment), assumed the facts were as plaintiff had stated. 48 It seems, therefore, that a characterization of a restraint as vertical or horizontal is not necessarily determinative of the analysis either per se or rule of reason to be applied. In fact, it has been noted by one commentator that 49 A number of decisions involving concerted refusals to deal have turned upon the relationship between the boycotting parties; that is, whether the agreement could be characterized as at least partially horizontal or as solely vertical. This distinction has only limited utility. When considered apart from the purpose and the effect of the agreement, it can lead to undesirable results. Bauer, supra, at 712. 50 We have recognized, in Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71 (CA 9 1969), cert. denied, 396 U.S. 1062, 90 S.Ct. 752, 24 L.Ed.2d 755, rehearing denied, 397 U.S. 1003, 90 S.Ct. 1113, 25 L.Ed.2d 415 (1970), that the presence of a horizontal element does not require the use of a per se rule. Hawaiian Oke indicates that an inquiry must be made to determine whether there exists an anticompetitive purpose or effect. 8 And it must be emphasized that it is interbrand competition which is the primary concern of the antitrust laws. Sylvania, supra, at 52, n. 19, 97 S.Ct. at 2558 n. 19. 51 Although FDI contends that its actions were solely unilateral, we assume, because on review of a grant of a motion for summary judgment we draw all reasonable inferences in favor of the nonmoving party, that FDI and Wakehouse acted jointly. 9 This concert of action does not, however, mean that appellant's version of the facts justify the application of a per se rule. The use of a per se rule could only be justified if, drawing all reasonable inferences in favor of appellant, the challenged conduct clearly had, or was likely to have, a pernicious effect on competition and lacked any redeeming virtue. We cannot say that this is the case and, consequently, find that the rule of per se illegality has no role in our disposition of the case. 52 Appellant seems to argue that the per se rule should be applied because the challenged conduct was undertaken with the purpose of allowing Wakehouse to continue to extract monopoly profits. This theory is based on appellant's view that Fiat cars constitute the relevant product market. The magistrate concluded that the relevant product market was cars in general. The lower court concluded that appellant should not be allowed to go to trial on its unsupported allegation that, for 'a sizeable number of customers ... (o)nly a Fiat, ..., will do.'  We agree with this assessment. Appellant has not presented significant probative evidence which contradicts the assertion that the product market involved is characterized by vigorous interbrand competition. 10 There has been no suggestion that the failure to increase intrabrand competition for a product with a very small share of the market had any effect whatsoever on interbrand competition. 53 Fiat's insignificant market power in a market characterized by vigorous interbrand competition is important to our analysis. We note, at the outset, that the antitrust laws are primarily concerned with interbrand competition. This is true because the existence of interbrand competition 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. Sylvania, supra, 433 U.S. at 52, n. 19, 97 S.Ct. at 2558, n. 19. The market conditions make it evident that appellant's contention that the challenged conduct was undertaken solely to allow Wakehouse to continue to reap monopoly profits is simply unfounded. There is no significant probative evidence which supports that proposition. In fact, appellant seems to recognize that an important factor in FDI's decision to postpone its decision to appoint an additional dealer was its desire to stimulate Wakehouse's sales, i. e., its desire to promote interbrand competition. The desired increase in Wakehouse's sales convinced FDI that it was not in its economic interests to appoint appellant as an additional dealer. It is clear, therefore, that the failure to increase intrabrand competition was not necessarily pernicious. The courts have recognized the benefit to encouraging the promotion of interbrand competition which occurs by allowing a business to distribute its products in a particular fashion. Sylvania, supra, 433 U.S. at 54, 97 S.Ct. at 2559. 54 Businessmen may, within certain limits, decide to deal with whom they wish. Our conclusion, or a plaintiff's, that a defendant exercised poor business judgment, that a defendant treated someone unfairly, or that a potential competitor has been injured does not mean that the antitrust laws have been violated. The cases discussed above indicate that the courts are reluctant to interfere with a company's business decision to distribute its products in a particular fashion. We do not expect businesses to be run in an altruistic fashion, but, particularly when there is vigorous interbrand competition, the interests of the manufacturer and the consumer with regard to product distribution coincide. 92 Harv.L.Rev. 1160, 1164 (1979). It is in the interests of FDI to see to it that its product is distributed in an efficient fashion. The economic interests of FDI dictate that it seek to improve sales. It is clear that the desire to stimulate sales was a factor in FDI's decision not to appoint an additional dealer. 11 Appellant seems to recognize this, but it continues to attach talismanic significance to the existence of an additional competitor. The antitrust laws are concerned with competition and we must recognize that FDI's decision not to appoint an additional dealer in an effort to expand its small share of the market had the potential to benefit competition. 12 Accordingly, we cannot say that the use of a per se rule would be justified. There is assuredly no significant probative evidence which would indicate that the challenged conduct had, or was likely to have, a pernicious effect on competition or lacked any redeeming virtue. Therefore, the rule of reason is the appropriate analysis. This analytical framework provides a more discriminating tool by which to evaluate the competitive significance of the challenged conduct. 55 There is a greater reluctance to uphold a grant of summary judgment when the rule of reason is the appropriate standard. Harold Friedman Inc. v. Thorofare Markets, Inc., 587 F.2d 127, 141, n. 51 (CA3 1978); 92 Harv.L.Rev. 1160, 1167-9 (1979). This court once commented, however, that because there was no tenable per se boycott theory appellants must evince a substantially adverse effect on competition in the relevant market to support a viable legal theory. Appellants point to the alleged injury to their businesses, but fail to provide any evidence that the 'effect upon competition in the marketplace is substantially adverse.'  Mutual Fund, supra, at 627. Appellant's case suffers from the same deficiencies noted in Mutual Fund. 56 We hold that the grant of the motion for summary judgment was proper. Primarily because of the market structure and Fiat's small percentage of that market, the decision not to appoint an additional dealer cannot be said to be so plainly anticompetitive as to justify resort to a per se rule. The rule of reason is, therefore, the appropriate standard. And even under that standard appellant cannot withstand a motion for summary judgment. Appellant has simply failed to evince significant probative evidence of a substantially adverse effect on competition. 57