Legal Document

433 U.S. 36 97 Supreme Court Reporter 2549 53 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 568 CONTINENTAL T. V., INC., et al., Petitioners,v.GTE SYLVANIA INCORPORATED. Number 76-15. Argued Feb. 28, 1977. Decided June 23, Syllabus In an attempt to improve its market position by attracting more aggressive and competent retailers, respondent manufacturer of television sets limited the number retail franchises granted for any given area required each franchisee sell respondent's products only from location or locations at which it was franchised. Petitioner Continental, one franchised claimed that had violated § 1 Sherman Act entering into enforcing franchise agreements prohibited sale other than specified locations. The District rejected requested jury instruction restriction illegal if unreasonably restrained suppressed competition. Instead, relying on versus Arnold, Schwinn & Co., 388 365, 87 1856, 18 1249, instructed a per se violation entered contract, combination, conspiracy with pursuant attempted restrict retailers resold merchandise they purchased respondent. found 1, treble damages were assessed against Concluding distinguishable, Appeals reversed, holding less potential competitive harm restrictions invalidated in thus should be judged under "rule reason." Held: 1. statement rule is broad enough cover used And retail-customer functionally indistinguishable here, both cases limiting retailer's freedom dispose reducing, but not eliminating, intrabrand Pp. 42-47. 2. justification standard creation rules stated Northern Pac. R. company States, 356 5, 78 514, 518, 2 545: "There are certain practices because their pernicious effect competition lack redeeming virtue conclusively presumed unreasonable therefore without elaborate inquiry as precise have caused business excuse use." Under this standard, there no distinction drawn between imposed nonsale transactions. Similarly, facts case do present situation justifying rule. Accordingly, overruled, traditional rule-of-reason standard. 47-59. 537 Federal Reporter, 2nd 980, affirmed. Glenn E. Miller, San Jose, Cal., petitioners. M. Laurence Popofsky, Francisco, Mr. Justice POWELL delivered opinion Court. Franchise manufacturers frequently include provisions barring selling those agreements. This presents important questions concerning appropriate antitrust analysis these Act, 26 Statutes-at-Large 209, amended, 15 Code KF62 Court's decision 1249 (1967). * Respondent GTE Sylvania Incorporated (Sylvania) manufactures sells through Home Entertainment Products Division. Prior 1962, like most manufacturers, sold televisions independent company-owned distributors who turn large diverse group retailers. Prompted decline share relatively insignificant 1% 2% national sales,1 conducted intensive reassessment marketing strategy, 1962 adopted plan challenged here. phased out wholesale began directly smaller select An acknowledged purpose change decrease competing hope thought necessary improvement company's position.2 To end, his he franchised.3 A did constitute exclusive territory, retained sole discretion increase light success failure existing developing market. revised strategy appears been successful during period issue 1965 Sylvania's sales increased approximately 5%, ranked Nation's eighth largest color sets. 3 suit result rupture franchiser-franchisee relationship previously prospered plan. Dissatisfied city Francisco,4 decided spring Young Brothers, established Francisco retailer televisions, additional retailer. proposed new mile outlet operated petitioner Continental (Continental), franchisees.5 protested policy, persisted plans. then canceled order placed Phillips, competitors. 4 During same period, expressed desire open store Sacramento, attributed least part Continental's displeasure over Brothers decision. believed Sacramento adequately served denied request.6 face denial, advised early September 1965, process moving warehouse leased Sacramento. Two weeks later, allegedly unrelated reasons, credit department reduced Continental' s line $300,000 $50,000.7 response reduction generally deteriorating relations Sylvania, withheld all payments owed John Pacific KF135 P2 Maguire (Maguire), finance handled arrangements Shortly thereafter, terminated franchises, filed diversity action California seeking recovery money secured held Continental. 5 issues before us originated cross-claims brought Maguire. Most our purposes claim locations.8 At close evidence trial claims, instruct App. 5-6, 9-15. Relying supra, proffered favor following one: 6 "Therefore, you find preponderance combination dealers exercised dominion control dealer, after having parted title risk products, must effort thereafter outlets Section regardless reasonableness restrictions." 492. 7 answers special interrogatories, engaged "in restraint trade laws respect alone," $591,505, trebled produce award of.$1,774,515. 498, 501.9 8 On appeal, Ninth Circuit, sitting en banc, reversed divided vote. 980 (1976). court language could read support concluded distinguishable several grounds. Contrasting nature restrictions, impact, shares franchisers two cases, reason" rather Schwinn. policies decisions federal courts involving nonprice vertical restrictions.10 9 We petition certiorari resolve question law. 429 893, 252, 50 176 (1976).11 II Atlantic 10 first contention interpreted three-tier distribution system comprising, addition (Schwinn), 22 intermediate network Each distributor defined geographic right supply Sales public made authorized bicycles limitation, nonfranchised level, therefore, able according view needs 11 As 1967 75% Schwinn's total "Schwinn Plan." Acting essentially manufacturer's representative agent, participating forwarded orders factory. shipped ordered retailer, billed bore risk, paid commission sale. Plan, never possession bicycles. remainder moved hands distributors. For part, functioned wholesalers sales, stocking inventory owned them emergency "fill-in" requirements. physically distributed covered consignment agency developed deal particular problems Distributors acquired wholesalers; course, them. 12 Court, charged continuing alleged co-conspirators fix prices, allocate territories distributors, confine Bausch Lomb 321 707, 64 805, 88 L.Ed. 1024 (1944), Government argued scheme fixing prices price-fixing allegation proof limitation bicycle permissible violation, however, "a divide borderline overlapping counties four Midwestern cycle distributors." 237 F.Supp. 323, 342 (ND Ill.1965). described "division territory agreement . horizontal nature," participation basic characteristic. Ibid. injunction apply territorial resale roles wholesalers. 13 came appeal Abandoning theories, prohibition distributors' retailers' extend such form transaction. challenge price fixing, territories. 14 Government's abandonment theories resolution would require examination "the specifics impact upon marketplace make judgment whether 'reasonable' sense type inquiry." U.S., 374, S.Ct., 1863. Despite description task, proceeded articulate "bright line" illegality restrictions: "Under seek areas persons whom article may traded has it." Id., 379, 1865. But expressly reason governs when retains title, dominion, product function dealer are, fact, agent salesman manufacturer." 380, 1866. Application principles produced sharply contrasting results depending role played system. With portion acted ordinary wholesalers, buying reselling bicycles, customer illegal. But, larger Plan common arrangements, reason. prevented supplying 377, 1864. apparently perceived material held: 16 "The principle is, equally applicable decree similarly enjoin making condition, understanding where will resell products." 378, 17 Applying conjunction little difficulty finding reasonable whole." 382, 1867. B case, undisputed passed Thus, applies unless falls outside attempting "retailer's conceded, clearly case. Unlike Appeals, we unable principled basis distinguishing now us. 19 Both sought reduce eliminate among respective adoption Although addressed presented Government, included similar These allowed regulate amount preventing agreement. exactly companion restriction, plan, impermissible there. intent n desired. fact customers irrelevant functional anti-trust analysis, indeed, thrust Schwinn.12 Chief Hughes Appalachian Coals, 288 344, 360, 471, 474, 480, 77 825 (1933): "Realities dominate judgment. Anti-Trust aims substance." III 20 argues cannot distinguished, reconsidered. supported stare decisis, Illinois Brick Illinois, 431 720, 736, 2061, 2070, 52 707 (1977), convinced need clarification law justifies reconsideration. itself abrupt largely unexplained departure White Motor 372 253, 83 696, 738 (1963), years earlier refused endorse restrictions. Since announcement, subject controversy confusion, scholarly journals courts. great weight critical decision,13 confronted analogous limit reach.14 view, experience past bear considerable commercial importance. 21 (1-3) framework familiar does extended discussion. prohibits "(e) very ., conspiracy, commerce." century judicial gloss statutory prevailing analysis. Standard Oil 221 31 502, 55 619 (1911). rule, factfinder weighs circumstances deciding restrictive practice imposing competition.15 Per relate conduct manifestly anticompetitive. explained 545 (1958), "there use."16 essence, can justified demanding standards refusal based uncertainty satisfied standards. Addressing time, stated: 23 "We know about actual decide 'pernicious virtue' (Northern Page 514) classified violations Act." 263, 702. 24 Only later announced sweeping even reference explanation sudden position.17 consider 25 restrictions18 complex simultaneous stimulation interbrand Significantly, distinguish individual benefit. Restrictions completely eliminated analyzed differently merely moderated pivotal factor passage title: All passed, evaluated sustained not. here pattern It transactions resulted accommodate benefit reflected "so obviously destructive" competition20 use "open door exclusivity further prudence permits." 379-380, 1865-1866.21 Conversely, continued adherence too promotion justify complete prohibition.22 provides analytical positions. Nor assertion significantly affected Non-sale appear excluded greater danger promise benefit, belief "inflexibl(e)." 27 Vertical sellers buyers. Location practical constraints effective outlets. reduced, ability exploit resulting consumers travel and, perhaps importantly, purchase manufacturers. None key variables, transaction conveys 28 promote allowing achieve efficiencies products. "redeeming virtues" implicit every sustaining Economists identified ways compete effectively See, e. g., Preston, Restrictive Distribution Arrangements: Economic Analysis Public Policy Standards, 30 Law Contemp.Prob. 506, 511 (1965).23 example, markets induce kind investment capital labor often unknown consumer. Established engage promotional activities provide service repair facilities efficient Service vital many automobiles major household appliances. availability quality services affect goodwill competitiveness product. Because imperfections so-called "free rider" effect, might provided purely situation, despite none did. Posner, n. 13, 285; cf. Samuelson, Economics 506-507 (10th ed. 1976). 29 also economic interest maintaining much consistent Bork, Rule Reason Se Concept: Price Fixing Market Division (II), 75 Yale L.J. 373, 403 (1966); 283, 287-288.24 necessarily corresponds universally shared, leading critic concedes relevant impact. Comanor, Territorial Customer Restrictions: Its Aftermath, 81 Harv.L.Rev. 1419, 1422 (1968).25 Indeed, extent related benefits, inconsistent articulated concern firms ones. Capital requirements administrative expenses prevent using exception Baker, 538; Rules "New Economics" Relation, 44 Antitrust 573, 576 (1975); Pollock, 610.26 (4) conclude sufficient application other. remains expanded non-sale abandoned return persuasive expanding noted above, recognized undesirability "prohibit(ing) franchising .." 1866.27 urge hold (5, 6) revert reiterated Motor, determining "conclusively 518. Such varying forms, widely free economy. indicated substantial authority supporting utility. There contrary.28 Certainly, showing either agreements, likely "pernicious competition" "lack virtue." Ibid.29 overruled.30 so foreclose possibility applications clear demonstrable formalistic drawing. 32 (7) sum, governed prior When anticompetitive effects shown policed reason, traditionally applied majority Act. 33 Affirmed. 34 REHNQUIST took consideration 35 WHITE, concurring N Dec. Immigration Nationality Decisions agree clause requires overruling my stimulating competition, unlike Schwinn, purchasers sell. time enjoyed consumer preference allow charge premium brands. short paragraphs, disposes careful Circuit banc below, differences "principled Schwinn," ante, 46, holdings three Courts remand clauses Sylvania's. reach overrule recent interpretations cursory necessity doing so, surely affront considerations decisis particularly strong construction. 736-737, (1977); Runyon McCrary, 427 160, 175, 96 2586, 2596, 49 415 (1976); Edelman Jordan, 651, 671, 94 1347, 1359, 39 662 (1974). 37 One element interrelated restraints prohibiting rests inability entirely "(i)n case," desired." Ante, 46. well have, different "intent impact" restriction: prevents discount stores getting Suppose, sufficiently weak substantially above wholesale. below level. tempted lower act wholesaler house profits lowering volume.1 38 hand, discounters, cut off altogether opportunity precisely theory successfully "(e)ach (Schwinn's retailers) knows some unfranchised Schwinn." 333 extensive citations record, "to keep houses cutters discourage retailing Brief O.T. 1966, 25, 26. See id., 29-37.2 true that, states, inhibited degree products" requiring place business. still including discounters area. think implies significant difference evidently well, enjoining directed sanctioned clauses, permitting "designat(e) places issued." 291 564, 565-566 Ill.1968). 40 emphasized involved Judge Ely wrote six-member below: 41 "(Schwinn) created geographical distributor's designated located territory. 42 ". prescribed guaranteed absolutely isolated wholesalers." 989-990 43 Moreover, barred possibilities gives Appeals' reliance interlocking "system affecting distribution." 989. ignores post-Schwinn Third Tenth Circuits upholding validity Salco Corporation General Motors Corp., 517 567 (CA10 1975); Kaiser 530 964 (CA3 1976), aff'g 396 (ED Pa.1975). Finally, authorities cites strain E.g., Robinson, Recent Developments: 1974, Colum.L.Rev. 243, 278 (1975) (outcome preordained marked cases); McLaren, Restrictions, Consignments, Suggested Retail Prices Refusals Deal, 137, 144-145 (1968) (by implication exempts rule); Alternative Methods After 63 Nw.U.L.Rev. 595, 603 ("Nor doctrine outlaw 'location clause' ."). 45 Just power generic instituted policies, producer Nation," 22.5%, 368, 1860, 1863, whereas "faltering, failing" sets, 2%" dominant 60% 70% share. 38, 58 29. brand name superior acceptance commanded as, words, Cadillac industry." F.Supp., 335. gave margin protection cutting forestalled restrictions.3 criteria economists measure differentiation share4 stronger relied newcomer, break stay 'failing company.' contrary, initiation practices, Nation." "another " "precarious share," "was small threatened expulsion market." F.2d, 991.5 46 considerations, basis" instead refusing "faltering" "precarious" dominated another firm. puts it, "when exists, check exploitation substitute product." 19. 54.6 Second forcefully literature cited majority, benefits promoting enter expand Ibid.7 recognizes "hinted" entrants failing 53-54, 22. 47 law, hesitated base defendant's power. draws rules, tie-ins extending defendants "sufficient tying appreciably restrain tied ." 6, subsequently approved "infant industries" Jerrold Electronics 187 Pa.1960), aff'd curiam, 365 567, 755, 806 (1961). Philadelphia National Bank, 374 321, 363, 1715, 1741, 915 presumptively merger "which produces firm controlling undue percentage see doctrinal obstacle excluding minimal rule.8 48 moreover, misgivings approach takes not, restrictions," 52; rather, Browning dissent notion businessmen goods own fit. Thus proposition "restraints alienation beyond impose vendees Act," 1865, seminal holding, series resale-price-maintenance Dr. Miles Medical D. Park Sons 220 376, 502 general ordinarily invalid," citing Coke Littleton, "agreements restricting what sell." 404, 407-408, 383, 384. Holmes dissent: "If (the manufacturer) agents retain until left conceive enthusiasm regulating people deny owner acting within rights." 411, 386. businessman sees fit probably subsequent Colgate 250 300, 465, 992 (1919), policy failed suggested terminating adhere price. "restrict long trader private business, freely exercise parties deal." 307, 468. Electric 272 476, 192, 71 362 (1926), upheld patentee obtained basis. distinguished ground "contracts agency" "an Company purchasers, full price, obligation maintain them." 487, 196. By contrast, contract "(fix) transfer him (the) however comprehensive mass whole (of contracts)." 488, called decisions, Parke, Davis 29, 80 503, 505 (1960), Simpson Union 377 84 1051, 98 (1964), rationale runs distributional restraints. Kiefer-Stewart Joseph Seagram Sons, 340 211, 213, 259, 260, 95 219 (1951), "such minimum cripple traders thereby accordance judgment." Accord, Albrecht Herald 390 145, 152, 869, 872, 998 (1968). Browning's 1018-1022; American Bar Association Section, Monograph 2, Limiting Intrabrand Competition 29-31, 82-83, 87-91, 96-97 Blake Jones, Toward Three-Dimensional Policy, 65 422, 427-436 (1965). summarily rejecting concern, autonomy businessmen," 21, surprisingly finds "no justification" "essentially impact." 56. while businessman' terms trades anathema solely efficiency,9 deeply embedded notions borrowed "new economics relationships." 54-57. Perhaps partially abandoning judging instant "relevant impact"; precedents reflect lightly doubt difficult discern opinion, wrong; aberration makes 51 reservation majority's test retaining regarding advocates arguments well.10 asserts involves policy," 18, suspect purported Professor five times concludes: "I believe treat imposition contract." 7, 298. already maintenance output inducing "demand-creating activity" (such outlets, advertising promotion, servicing) outweighs 151 872 7. output-enhancing social utility soundness, 55, intention, call firmly satisfactory, proceed deliberately it. ample reasons absence contrary congressional action, "each arising determined disclosed opinions recognition essential applied." Maple Flooring Manufacturers 268 563, 579, 578, 583, 69 1093 (1925). 54 negligible autonomy. concur BRENNAN MARSHALL joins, dissenting. 56 (1967), reverse Circuit. RCA industry 100 declined change, metropolitan center 100,000 population. 2.5% half northern average. corporate petitioners: Inc., G Sales, Sylpac, S. Industries, individual, style "Continental V." adopt convention referring petitioners collectively "Continental." achieved exceptional exceeded 15% 1965. findings plea injunctive relief, actions prompted concerns credit. jury's verdict ambiguous point. event, contended unilaterally enforced, understandings conspired violation. Other claims withdrawn rejection prices. pendent willfully maliciously injury jury, breach-of-contract course proceedings. eventually stipulated dissenting opinions. Kilkenny correctly instructed. Agreeing Kilkenny's interpretation responsive protect 'individual unnecessary action.' 1021. infra. plenary proper Before Boro Hall 124 822 (CA2 1942). below. Pa.1975), affirmance order, distinctions endorsed White's separate ranged elimination mere reduction; yet, hint ground. suggestion prominent industry. That consigned, quite different. emphasis "superior acceptance" name, post, 63, note premise transactions, stressed (competitive were) respects reasonably interchangeable articles commerce product" "not regard excellence establishing contrary." 381, preferential treatment firms, submit jury. extension regard. Having crossed "failing firm" line, attempts neither draw nor explain why all. former Assistant Attorney barren formalism" "artificial unresponsive real world." Restraints Times Change: From Where?, (1975). Handler, Twentieth Annual Review 1967, Va.L.Rev. 1667 (1967); 137 (1968); 595 Court: Restricted Distribution, Horizontal Merger Potential Decisions, 282 243 Note, Franchising Industry, Colum.J.L. Soc.Prob. 497 (1974); Trend Broader Reason?, Geo.Wash.L.Rev. 123 (1971); Re-evaluation Sealy Doctrines, 70 Mich.L.Rev. 616 (1972). Louis, Distributional : Argument Continuing Use Partial Approach, 275 Zimmerman, Bull. 1181 inclusive list comments, 988 13. commentator observed, "have struggled tribute ingenuity." 272. post-sale "unreasonable more," proves "more" liability claims. Tripoli Wella 425 932, 936-938 1970) (en banc). enforcement 'firm resolute,' 372, 1862, lacking element. Janel Lanvin Parfums, 398, 406 1968). factual seem fall scope Carter-Wallace, 449 1374, 1379-1380, 196 Ct.Cl. 35, 44-46 (1971) (per inapplicable purchaser avoid electing buy higher price); Colorado Pump Supply Febco, 472 637 1973) (apparent characterized primary responsibility clause). urged flexibility. Adolph Coors FTC, 1178, 1187 1974). developments exhaustively surveyed (1977) (ABA 2). statements Brandeis Chicago Board Trade 246 231, 238, 242, 244, 62 683 (1918): legality regulates promotes suppress destroy determine peculiar applied; condition imposed; probable. history restraint, evil exist, adopting remedy, end attained, facts. good intention save otherwise objectionable regulation reverse; knowledge help interpret predict consequences." generalizations practices. probability consequences severity balanced pro-competitive consequences. Cases generalization arise, reflects expense identify Once established, tend guidance community minimize burdens litigants trials, 518; Topco Associates, 405 596, 609-610, 92 1126, 1134, 515 (1972), advantages themselves rules. If otherwise, introducing unintended undesirable rigidity evaluate Sandura 339 847 (CA6 1964); Snap-On Tools (CA7 1963). exposition Pages 6-8. concerned policy. notes, 69-70, commentators motivation easily treatment. Brennan "(r)esale designed to, almost invariably product, brands." 268, 704. Posner "industry-wide facilitate cartelizing." 294 (footnote omitted); Antitrust: Cases, Notes Materials 134 Gellhorn, 252 Soc.Prob., 498 12. Furthermore, Congress recently approval repealing Miller-Tydings McGuire Acts fair pricing option States. Consumer Goods Pricing 1975, 89 801, amending §§ 45(a). No expression exists Interbrand extreme example deficiency monopoly, manufacturer. wholly level confronting fierce monopolist highly specifically refer meaning context. "violate ancient alienation." provoked sharp criticism virtually decision, regarded apparent "ancient rule" misreading legal perversion 1684-1686; 295-296; 270-271; 276 6. Stewart's comment state 400 ago us: economy today." 392, 1872. accept intended prohibit though "price, quality, quantity services," 1019. certainly explicit purports "impact restrictions) marketplace." Competitive economies political advantages, 4, 517, divorced objective benchmarks. reminded "Every trade, restrains. bind, restrain, essence." 244. endorses interpretation, 66-68, grounds 71. regard, "might severely hamper enterprises resorting methods meeting giants merchandising dealers." broadly hinted recognize exceptions mentioned candidates exceptions. situations, strongest sacrifice chose create available businesses, size, financial health, broader demonstrates awareness Marketing efficiency legitimate exert manner serviced. common-law developments, society increasingly demands assume direct safety apart specialized requirements, responsibilities Product Safety 2051 seq. (1970 ed., Supp. V), obligations warranties Warranties 2301 V). Similar Cal.Civ.Code Ann. 1790 (West 1973). legitimacy 932 1970). "Generally prefer lowest possible, once set, means revenues." 636, 641 context, "cost distribution," minimize. 283. Comanor encouraged argument flawed assumption efforts convey socially desirable information availability, services. anything shift obtaining effects. work ultimate detriment operate franchisees. perceives operation, creates incentive integration system, eliminating businessmen. Keck, Case, Bus.Law. 669 608-610. balancing "proper function," Petitioners 52, refuted itself. 608, ostensible occasional differentiating originating latter category se, see, 384 127, 86 1321, provision used. 20-25. general, undesirable. inclined form. 279-280; Averill, Sealy, One: Prognosis, N.Y.L.F. 39, (1969). perceive gain channeling another. categories firms. faltering, failing, unduly artificial valuable tools. importance unquestioned, Frankfurter Helvering Hallock, 309 106, 119, 60 444, 451, 604 (1940), "stare mechanical formula latest questionable, collision embracing scope, intrinsically sounder, verified experience." engaging discounting if, doctrine, infra, 67, lawfully terminate Given inhibiting activities, condemned "obviously destructive competition." heavily influenced disposition 66-69. record illustrates potentially threat posed opposed argued: "(T)he declared (was) establish distinctive identity enabling charging .. possibly succeed, doubtless abandoned, consumer's mind just Schwinn's." 36. e.g., KF105 F3 Scherer, Industrial Structure Performance 10-11 (1970); 485-491 12.8% institution program, second behind 22.8% 368-369, 1859-60. practice, placing 38-39. respectively 2.5%, 15%, 5%. nn. local markets. discussion 60-67 (1977). (1965); 282, 293 510. Cf. 847, 850 1964) (territorial "competing losing 'giants' floor-covering industry" illegal); 537, 545-547 (presumptive "any power"). anomalous reliance, 68-70, 299; 391-429 (1966). Legislative Intent J.Law Econ. (I), 74 775 writes, example: choosing (price division) bad, assignment division, bad "(If helping market) territories, maintenance, seen simply method dealing free-rider problem. behalf maintenance." 292-293. (Footnote omitted.) 8, 391-464.

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