Court Opinion

ID: 9719060
Source: CourtListenerOpinion
Date Created: 2023-08-26 07:41:44.572415+00
Date Added: 2024-06-11T18:24:04.391582
License: Public Domain

CHRISTIAN, J.
I respectfully dissent.
The majority opinion sets out a clear and well ordered review of the pertinent authorities; but I cannot concur in the decision because, in my view, the opinion inappropriately applies “per se” antitrust doctrine in such a way as to punish as anticompetitive an act which according to the evidence had predominantly procompetitive purposes and effects.
At the times relevant to this appeal, there was no price competition between wholesale distributors of Guild products. Guild set the prices at which Guild sold to the wholesale distributors, the distributors sold to retail outlets, and retailers sold to consumers. (See Bus. & Prof. Code, §§ 24850-24881. Of later effect are Rice v. Alcoholic Bev. etc. Appeals Bd. (1978) 21 Cal.3d 431 [146 Cal.Rptr. 585, 579 P.2d 476] [statutory liquor price-fixing scheme violates Sherman Antitrust Act] and Midcal Aluminum, Inc. v. Rice (1979) 90 Cal.App.3d 979 [153 Cal.Rptr. 757], cert, granted sub. nom. Calif. Retail Liquor Assn. v. Midcal Aluminum *638(1979) 444 U.S. 824 [62 L.Ed.2d 31, 100 S.Ct. 45] [statutory wine price-fixing scheme violates Sherman Antitrust Act].)
Guild executives testified that the commercial success of a producer’s wine line depends heavily on the promotional presale services offered by wholesale distributors to retail outlets. The executives testified that to build consumer preference or demand for a particular wine brand, distributors had to engage in promotional activities with retail outlets to, e.g., set up floor displays for the brand, stock the brand at eye level rather than on bottom shelves, maintain well stocked refrigeration units of the chilled brand, promote white wines at Thanksgiving and red wines in winter, and so on. The spread between the price at which Guild sold its products to the distributors, and the higher price at which the distributors sold the products to the retailers, included an allowance to reimburse the distributors for performing these presale activities.
Each distributor had an area of primary responsibility. This was a geographical area adjacent to the distributor’s office and warehouse in which the distributor was expected to develop demand for Guild products by delivering presale services to retailers. Guild did not prohibit distributors from making sales outside of their own territories, although sales goals, promotional requirements, and practical geographical constraints generally ensured that each distributor concentrated its sales efforts in its own area. There was some problem with “highspotting” or “freeriders”: Typically, each distributor’s territory included some retail outlets that purchased a high volume of Guild products, and some outlets that purchased a low volume. A distributor in one territory would expend resources to promote Guild products to both large and low volume retailers. A second distributor from another territory then would “raid” the first territory, and sell the Guild products to the large-volume retailers without having incurred any promotional costs in connection with those retailers. The remaining low volume sales would be insufficient to compensate the first distributor for the costs that it had incurred in delivering the presale services to all retailers in the territory. Even though the revenue from the sales to the low-volume outlets was not sufficient to cover distribution costs to those outlets, Guild considered it necessary to keep the outlets stocked: If Guild products were not readily available to the ultimate consumer even in small retail outlets, *639consumers would lose or not develop a preference for the Guild brand. There was conflicting testimony as to whether Guild ever intervened to prevent this freeriding.
In January of 1975, Guild hired Jack Dadum as senior vice-president in charge of marketing and sales. Dadum found Guild’s low market share and promotional practices “horrible.” In consultation with other Guild executives, he took several steps to increase Guild’s market share, including three that are relevant here. First, Guild was dissatisfied with the promotional efforts and sales of DiNubilo and Company, the independent distributor in the San Joaquin Valley where most of the growermembers of the Guild cooperative were concentrated. Second, Guild management decided to integrate vertically by establishing Guild’s own unincorporated wholesale distribution division, Valley Distributors, to replace DiNubilo. On March 1, 1975, Guild established Valley Distributors and terminated DiNubilo. The San Joaquin Valley became Valley Distributor’s area of primary responsibility. Valley handled Guild products exclusively.
DiNubilo’s major customer for Guild products had been Lucky Stores. Lucky was also one of the major retail outlet purchasers of Guild products in Northern California. When Valley Distributors took over DiNubilo’s territory, Guild management expected the Lucky account to go to Valley. The revenue from the large volume sales to Lucky was necessary to offset the expenses of operating Valley Distributors. However, while DiNubilo had been supplying Guild products to Lucky, Sosnick had been supplying a line of Kosher foods to Lucky. When Guild terminated DiNubilo, Lucky began purchasing Guild products (in addition to Kosher foods) from Sosnick instead of from Valley.
On April 3, Guild took the third marketing step relevant here. Guild terminated Sosnick as an independent distributor. Guild contends that it terminated Sosnick because Sosnick had consistently refused to deliver promotional presale services to retail outlets, and thereby hampered Guild’s efforts to increase its market share by developing consumer preference for Guild wines. Guild claims that it decided to terminate Sosnick before Sosnick started selling to Lucky. Sosnick contends that it was terminated because it captured the Lucky Stores account, which Guild sought to reserve for Valley Distributors.
The crucial issue is whether Guild’s conduct is to be examined under the rule of reason, or whether the conduct was illegal per se. Sosnick [Jan. 1980] *640concedes that if Guild’s conduct is examined under the rule of reason, then Guild’s conduct was not illegal and the judgment must be affirmed. In my view the rule of reason is applicable and the judgment should be affirmed.
The legality of nonprice distribution restraints1 was at issue in U. S. v. Arnold, Schwinn & Co. (1967) 388 U.S. 365 [18 L.Ed.2d 1249, 87 S.Ct. 1856]. Bicycle manufacturer Schwinn marketed its products through three principal methods: (1) sales to wholesale distributors; (2) sales to retailers by means of consignment or agency arrangements with distributors; and (3) sales to retailers under the so-called Schwinn Plan, which involved direct shipment by Schwinn to the retailer with Schwinn invoicing the dealers, extending credit, and paying a commission to the distributor taking the order. Schwinn assigned specific territories to each distributor, and each distributor could sell only to franchised retail outlets within its assigned territory. Each franchised retailer could purchase Schwinn products only from or through the distributor authorized to serve the retailer’s area, and the retailer could sell only to consumers, not to unfranchised retailers. The Supreme Court held that section 1 of the Sherman Act required differentiation between the situation where the manufacturer parts with title, dominion, or risk with respect to its products, and where the manufacturer completely retains ownership and risk of loss. The court held nonprice distribution restrictions to be illegal per se if the manufacturer sold its products to distributors or retailers. The court found that such restrictions violated “the ancient rule against restraints on alienation.” (388 U.S. at p. 380 [18 L.Ed.2d at p. 1261].) However, nonprice restrictions were to be examined under the rule of reason if the manufacturer retained title, dominion, and risk with respect to the product, and the position and function of the distributor or retailer were indistinguishable from those of an agent or salesman of the manufacturer. The great weight of scholarly opinion was critical of the Schwinn decision. (See, e.g., Continental T. V., Inc. v. GTE Sylvania Inc. (1977) 433 U.S. 36, 48 fn. 13 [53 L.Ed.2d 568, 579, 97 S.Ct. 2549], and authorities cited.)
*641The legality of nonprice distribution restraints and the continuing vitality of the Schwinn rule were at issue in Continental T. V., Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36. GTE Sylvania Inc. manufactured television sets. It originally marketed its product through independent or company-owned wholesalers, who in turn resold to a large and diverse group of retailers for sale to the ultimate consumer. Prompted by a decline in its market share to a relatively insignificant 1 to 2 percent of national television sales in an industry with more than 100 manufacturers, Sylvania in 1962 phased out its wholesale distributors and began to sell to a smaller and more select group of franchised retailers. An acknowledged purpose of the new franchise plan was to decrease the number of competing Sylvania retailers in the hope of attracting the more aggressive and competent retailers thought necessary to improve the manufacturer’s market position. Sylvania imposed location restrictions2 on its retailers. By 1965 Sylvania ranked eighth in national television sales with 5 percent of the market. In 1965 Sylvania, dissatisfied with its sales in San Francisco, added another retail outlet in the city. The existing San Francisco retailer, Continental T. V., protested the addition. Continental also requested a franchise in Sacramento. Sylvania refused the request because it felt that the existing Sacramento retailers adequately serviced the Sacramento area. Relations between Continental and Sylvania deteriorated. Sylvania terminated the Continental franchise, and Continental brought suit for antitrust violations. The district court, applying the Schwinn rule, instructed the jury that if Sylvania imposed postsale territorial restrictions on its retailers, the conduct was illegal per se. The district court entered judgment on the jury verdict finding Sylvania liable for treble damages for violating section 1 of the Sherman Act. The United States Supreme Court disapproved the per se rule stated in Schwinn (433 U.S. 36, 58 [53 L.Ed.2d 568, 585]), and affirmed the decision of the Ninth Circuit reversing the district court judgment (id., at p. 59 [53 L.Ed.2d at pp. 585-586]).
The “rule of reason” is the prevailing standard of analysis to be used in evaluating combinations in restraint of trade or commerce. Under this rule, the factfinder weighs all of the circumstances of a case in de*642tiding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.3 (Continental T. V., Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36, 49 [53 L.Ed.2d 568, 580].)
Per se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive. (Continental T. V., Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36, 49-50 [53 L.Ed.2d 568, 580].) “[T]here 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 Pac. R. Co. v. United States (1958) 356 U.S. 1, 5 [2 L.Ed.2d 545, 549, 78 S.Ct. 514].) Per se rules require a court to make broad generalizations about the social utility of particular commercial practices. The probability that anticompetitive consequences will result from a practice, and the severity of those consequences, must be balanced against its procompetitive consequences. A per se rule reflects the judgment that exceptions to the generalization may arise, but such exceptions are not sufficiently common or important to justify the time and expense necessary to identify them. (Continental T. V., Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36, 50 fn. 16 [53 L.Ed.2d 568, 580].) Per se rules must be based on demonstrable economic effects (id., at pp. 58-59 [53 L.Ed.2d at p. 585]). (See also Sullivan, Antitrust (1977) pp. 165-194.)
The Sylvania court recognized that nonprice distribution restrictions reduce intrabrand competition but promote interbrand competition. Nonprice restraints reduce intrabrand competition, the competition between wholesale or retail distributors of the product of a particular manufacturer, by limiting the number of sellers of the product competing for the business of a given group of buyers. However, the Sylvania *643court held that nonprice restrictions do not have such a pernicious effect on competition and are not so lacking of any redeeming virtue as to be illegal per se. (433 U.S. 36, 52 fn. 19, 54, 58-59 [53 L.Ed.2d 568, 581, 583, 585].)
The Sylvania court identified the “‘redeeming virtues’” of nonprice distribution restrictions. (433 U.S. 36, 54 [53 L.Ed.2d 568, 583].) Interbrand competition, the competition among the manufacturers of the same generic product, “is the primary concern of antitrust law.” (Id., at p. 52 fn. 19 [53 L.Ed.2d at p. 581].) Nonprice restrictions may allow a manufacturer to achieve certain efficiencies in the distribution of its products, and thus to compete more effectively against other manufacturers. For example, manufacturers can use nonprice distribution restrictions, such as the territorial restrictions at issue in the present case, to induce distributors to engage in the promotional presale services thought necessary to the efficient marketing of their product. The availability and quality of such services affect a manufacturer’s goodwill and the interbrand competitiveness of its product. In the absence of the distribution restriction, the “free rider” problem could arise: If one distributor offered promotional presale services, other unrestricted distributors could capture the first dealer’s customers without having provided any presale services to those customers, and thus take a “free ride” on the first distributor’s services. This could deter delivery of the optimal amount of presale services. (Id., at pp. 54-55 [53 L.Ed.2d at p. 583], citing Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions (1975) 75 Colum.L.Rev. 282; Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards (1965) 30 Law & Contemp. Prob. 506, 511; Samuelson, Economics (10th ed. 1976) pp. 506-507. See generally Posner, Antitrust Law: An Economic Perspective (1976) pp. 147-167; Posner, The Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision, supra, 45 U. Chi. L. Rev. 1; Telser, Why Should Manufacturers Want Fair Trade? (1960) 3 J. Law & Econ. 86. But see Comanor, Vertical Territorial and Customer Restrictions: White Motor and Its Aftermath (1968) 81 Harv.L.Rev. 1419. See also Sullivan, Antitrust, supra, pp. 399-421.)
The Sylvania court held that the adverse effects of nonprice distribution restrictions on intrabrand competition are outweighed by the potential for beneficial effects on interbrand competition. The restrictions therefore must be reviewed under the rule of reason, rather than *644under the per se doctrine. (433 U.S. 36, 57-59 [53 L.Ed.2d 568, 584-585]. See generally ABA Antitrust Section, Monograph No. 2, Vertical Restrictions Limiting Intrabrand Competition (1977) pp. 55-71; Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division (1965) 74 Yale L.J. 775, (1966) 75 Yale L.J.373; Posner, The Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision, supra, 45 U.Chi.L.Rev. 1, 13-20.)
The majority opinion holds that the reasoning of the Sylvania decision does not apply to the present case. Guild was both a producer and a distributor of wine. As a producer, Guild was a supplier of and stood in a vertical relation to Sosnick. As a distributor, Guild was a competitor and stood in a horizontal relation to Sosnick. The question is whether the territorial and customer restrictions imposed by Guild must be treated as horizontal restrictions that are illegal per se under United States v. Topeo Associates (1972) 405 U.S. 596 [31 L.Ed.2d 515, 92 S.Ct. 1126].
The language of the Sylvania decision is limited to vertical nonprice distribution restrictions. In a footnote the court stated that horizontal nonprice distribution restrictions originating in agreements among retailers would be illegal per se. (433 U.S. 36, 58, fn. 28 [53 L.Ed.2d 568, 585], citing United States v. Topeo Associates, supra, 405 U.S. 596, and United States v. General Motors Corp. (1966) 384 U.S. 127 [16 L.Ed.2d 415, 86 S.Ct. 1321].) The meaning of this dictum is unclear. Whether distribution restrictions are to be examined under the rule of reason or under the per se doctrine should not turn on whether the restrictions were imposed by the manufacturer or by downstream distributors. The Sylvania court acknowledged that the location restrictions at issue there “involved understandings or agreements with the retailers.” (433 U.S. 36, 40 fn. 8 [53 L.Ed.2d 568, 574].) As Professor Posner points out: “Dealers as well as the manufacturer are hurt by free-riding; it is a detail whether the initiative in seeking to prevent free-riding was taken by the dealers or the manufacturer. This point was missed in Justice Fortas’s opinion for the Court in [United States v. General Motors Corp., supra, 384 U.S. 127]. .. .The Court.. .ruled that because competing dealers had collaborated to enlist General Motors’ assistance in enforcing the location clause, the case involved an illegal per se horizontal conspiracy, regardless of the reasonableness of the clause. But if the clause was reasonable, the dealers should have been entitled to band together for the innocent purpose of persuading General Motors to carry out mutually beneficial contractual obliga*645tions.” (Posner, The Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision, supra, 45 U.Chi.L.Rev. 1, 19-20. See also Posner, Antitrust Law: An Economic Perspective, supra, pp. 165-166; Handler, Changing Trends in Antitrust Doctrines: An Unprecedented Supreme Court Term-1977 (1977) 77 Colum.L.Rev. 979, 986-989.)
Moreover, the Sylvania court recognized that problems would arise in differentiating vertical from horizontal distribution restrictions. (433 U.S. 36, 58, fn. 28 [53 L.Ed.2d 568, 585].) In the instant case, Guild was both a producer and a distributor of wine, and also used independent wholesale distributors. Whether nonprice distribution restrictions in such a dual distribution system4 are to be examined under the rule of reason or under the per se doctrine should not turn on whether the restrictions are pigeonholed as horizontal or vertical. This is the type of “formalistic line drawing” condemned in Sylvania. (433 U.S. 36, 59 [53 L.Ed.2d 568, 585]. See also Note, Antitrust Treatment of Intrabrand Territorial Restraints Within a Dual Distribution System, supra, 56 Texas L.Rev. 1486 and cases cited.)
The Supreme Court in Topeo stated that the courts should use per se rules as a substitute for examining “difficult economic problems” (405 U.S. 596, 609 [31 L.Ed.2d 515, 526]) because courts are “of limited utility” (ibid.) in balancing the effects of distribution restrictions on intrabrand versus interbrand competition. (Id., pp. 609-612 [31 L.Ed.2d 526-528].) This cannot be reconciled with the position taken by the Supreme Court in Sylvania. The Sylvania court, influenced by the economic literature (see, e.g., 433 U.S. 36, 54-57 [53 L.Ed.2d 568, 582-585] and authorities cited), concluded that courts must assess the intent, competitive impact, and demonstrable economic effect of a non-price distribution restriction before declaring the restraint to be prohibited by the antitrust laws. (Id., at pp. 46, 59 [53 L.Ed.2d at pp. 577, 585].) The Topeo court felt that without per se rules, the business community would be left with little guidance as to what courts will *646find to be legal and illegal under the Sherman Act (405 U.S. 596, 609, fn. 10 [31 L.Ed.2d 515, 527]). The Sylvania court acknowledged that per se rules provide guidance to the business community and minimized the burdens on the courts and litigants as compared to rule of reason trials. However, the Sylvania court held that those advantages are not sufficient in themselves to justify the creation of per se rules. The Topeo court referred to the antitrust laws as “the Magna Carta of free enterprise” (405 U.S. 596, 610 [31 L.Ed.2d 515, 527]) which guaranteed every business the freedom to compete in every section of the economy, whether intrabrand or interbrand (id., at pp. 610-612 [31 L.Ed.2d at pp. 527-528]). This is contrary to the Sylvania court’s explicit sanctioning of limits on wholesale and retail dealer autonomy.
It appears that the per se rule of Topco should be limited to situations where “it is clear that the restraint.. .is a horizontal one” (United States v. Topco Associates, supra, 405 U.S. 596, 608 [31 L.Ed.2d 515, 526]) “originating in agreements among... retailers” (Continental T. V., Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36, 58, fn. 28 [53 L.Ed.2d 568, 585]; see also id., at p. 48, fn. 14 [53 L.Ed.2d at p. 579]; cf. Fuchs Sugars and Syrups, Inc. v. Amstar Corp. (2d Cir. 1979) 602 F.2d 1025, 1030, cert. den. (Oct. 16, 1979) 444 U.S. 917 [62 L.Ed.2d 172, 100 S.Ct. 232]; Magnus Petroleum Co., Inc. v. Skelly Oil Co. (7th Cir. 1979) 599 F.2d 196, 204, cert. den. (Oct. 16, 1979) 444 U.S. 916 [62 L.Ed.2d 171, 100 S.Ct. 231]). The challenged restrictions in the present case are not exclusively horizontal, and there is no evidence that the restrictions originated in agreements among retailers. There was substantial evidence that Guild adopted the restrictions in order to promote interbrand competition and to guard against freeriders. Sosnick did not establish that Guild’s conduct had such a pernicious effect on competition and was so lacking in any redeeming virtue as to be illegal per se. I would hold that the restrictions should be reviewed under the Sylvania rule of reason approach. Sosnick does not argue that the Guild restrictions are illegal under the rule of reason.
I would affirm the judgment.
A petition for a rehearing was denied February 25, 1980. Christian, J., was of the opinion that the petition should be granted. Respondent’s petition for a hearing by the Supreme Court was denied March 27, 1980. Clark, J., was of the opinion that the petition should be granted.

A nonprice distribution restraint restricts competition among wholesale or retail distributors by, e.g., forbidding distributors from selling from any but a designated location, assigning exclusive territories to distributors, reserving certain customers to the manufacturer, forbidding wholesale distributors from selling to other than authorized retail outlets, or forbidding distributors from selling to other distributors. (See Posner, The Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision (1977) 45 U.Chi.L.Rev. 1.)

A location restriction limits a distributor’s sales of a manufacturer’s product to certain authorized outlets. The manufacturer does not assign specific territories, but as a practical matter the size of each distributor’s market will be controlled and limited by the number of authorized outlets. (Note, Antitrust Treatment of Intrabrand Territorial Restraints Within a Dual Distribution System (1978) 56 Texas L.Rev. 1486, 1487 fn. 8.)

The classic statement of the rule of reason is that of Mr. Justice Brandéis in Chicago Board of Trade v. United States (1918) 246 U.S. 231, 238 [62 L.Ed. 683, 687, 38 S.Ct. 242]: “The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.”

“A manufacturer employing a dual distribution system markets a product through two separate and competitive channels. The manufacturer supplies independent retailers either directly or through its wholly-owned branch distributors. It also supplies the product to independent distributors who resell to retailers. Consequently, the manufacturer, whether or not vertically integrated, faces competition on two market levels. On the production level, it competes interbrand with other manufacturers of the same generic product; on the distribution level, it competes intrabrand with the independent distributors of its own brand.” (Note, Antitrust Treatment of Intrabrand Territorial Restraints Within a Dual Distribution System, supra, 56 Texas L.Rev. 1486, 1489.)