Court Opinion

ID: 9423491
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:07:54.909026+00
Date Added: 2024-06-11T17:22:40.295561
License: Public Domain

Mr. Justice Stewart,
whom Mr. Justice Harlan joins,
concurring in part and dissenting in part.
I agree with the Court’s basic determination that Schwinn’s marketing system is, under the rule of reason, entirely consonant with the antitrust laws. But I cannot understand how that marketing system becomes per se unreasonable and illegal in those instances where it is effectuated through sales to wholesalers and dealers.
*383Schwinn’s present marketing policies were developed in the late 1940’s and early 1950’s. Studies undertaken at that time revealed that Schwinn’s existing distribution activities were haphazard and inefficient, involving a large number of wholesalers and over 15,000 retailers of every size and variety. Many of the retailers were largely or completely inactive, resulting in unprofitable overhead costs and wasted advertising and promotional expenditures for Schwinn. Moreover, the sales methods and service resources of many of these outlets did not comport with Schwinn’s traditional policy of manufacturing and selling quality bicycles. Schwinn believed that proper promotion of its products required an active and stable dealer organization, composed of experienced people who could properly promote, assemble and service bicycles. Such dealers were to be found primarily in small independent bicycle sales and repair shops, rather than hardware stores or mass merchandisers that sold bicycles unassembled in the carton and provided no service and repair facilities.1 As the District Court found, “Schwinn determined that it did not want Tom, Dick and Harry to be selling its product in a carton, collecting the price paid, ‘kissing the customer goodbye,’ depositing his profit and forgetting the customer, Schwinn, and the public generally.” 2
Schwinn accordingly developed a franchising policy that would assure quality and efficiency in its distribution system. After consulting with marketing experts in government and industry and clearing its program with the Federal Trade Commission, it franchised about 5,500 *384selected retailers to market its products. “Schwinn chose those who by their record were best credit risks, made the most sales, and provided the best service for Schwinn bicycles.” 3 These retailers were predominantly the small independent bicycle sales and repair dealers mentioned above, who now represent nearly all of Schwinn’s outlets.
By forming this relationship with independent dealers, Schwinn hoped to meet the competition of the giant chain distributors. These distributors account for 60% of retail bicycle sales. Although the past decade and a half has been one of unprecedented vigorous competition in the industry, spurred by a flood of imported bicycles, Schwinn’s policy has in large part succeeded. While profits and margins have been squeezed,4 Schwinn’s sales have increased substantially, it has pared the number of inactive retailers and increased the number of high-volume dealers, and it has reaped a greater return from its advertising and promotional expenditures. As the District Court concluded:5
“The evidence is abundantly clear that Schwinn’s practice of eliminating dead timber, useless and inactive or relatively inactive accounts, and persons and firms unable or unwilling to provide service and part replacements, and adopting and adhering to a franchise program instead of restraining trade in Schwinn bicycles, has greatly enhanced trade in Schwinn bicycles and has in fact been the salvation of Schwinn . . . and has actually made for genuine competition in the bicycle manufacturing industry.”
Of course, the whole premise of Schwinn’s marketing program was that its product would be sold to the public *385only by the qualified retailers whom it had franchised.6 Accordingly, Schwinn unilaterally instituted a policy of ensuring that only franchised retailers would be supplied with its products. This policy was the same, whether distribution took the form of the so-called Schwinn Plan deliveries to retailers, or agency and consignment arrangements, or whether it took the form of sales by Schwinn to wholesalers and resale by them to retailers. The record shows that this policy was implemented largely through request and persuasion by Schwinn.
Schwinn’s selective distribution policy may be said to embody restraints on trade. As such, it is subject to antitrust scrutiny, but the scrutiny does not stop with the label “restraint.” The words written by Mr. Justice Brandéis for a unanimous Court in Chicago Board of Trade v. United States, 246 U. S. 231, 238, bear repeating:
“Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. 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.”
In White Motor Co. v. United States, 372 U. S. 253, we reaffirmed this formulation of the rule of reason and *386refused to adopt per se rules to invalidate vertical restraints on distribution analogous to but more restrictive than those involved here. The District Court in this case explicitly followed the directive of White Motor and examined in detail the historical and economic context in which Schwinn’s distribution policies were developed and applied. The evidence fully supports the District Court’s findings that the ultimate effect of these policies was to enhance rather than undermine or destroy competition, and I fully join the Court’s approval of those findings today.
It is worth emphasizing that the justifications for Schwinn’s franchising policy rest not only on the facts of this particular record, but on larger issues of social and economic policy. This Court has recognized Congress’ concern with the disappearance of the small independent merchant in the face of competition from vertically integrated giants. See Brown Shoe Co. v. United States, 370 U. S. 294, 333, 346. This trend in many cases reflects the inexorable economic realities of modern marketing. But franchising promises to provide the independent merchant with the means to become an efficient and effective competitor of large integrated firms. Through various forms of franchising, the manufacturer is assured qualified and effective outlets for his products, and the franchisee enjoys backing in the form of know-how and financial assistance.7 These franchise arrangements also make significant social and economic contributions of importance to the whole society, as at least one federal court has noted:
“The franchise method of operation has the advantage, from the standpoint of our American sys*387tem of competitive economy, of enabling numerous groups of individuals with small capital to become entrepreneurs. ... If our economy had not developed that system of operation these individuals would have turned out to have been merely employees. The franchise system creates a class of independent businessmen; it provides the public with an opportunity to get a uniform product at numerous points of sale from small independent contractors, rather than from employees of a vast chain.”8
Indiscriminate invalidation of franchising arrangements would eliminate their creative contributions to competition and force “suppliers to abandon franchising and integrate forward to the detriment of small business. In other words, we may inadvertently compel concentration” by misguided zealousness.9 As a result, “[t]here [would be] less and less place for the independent.” Standard Oil Co. v. United States, 337 U. S. 293, 315 (separate opinion of Mb. Justice Douglas). “The small, independent business man [would] be supplanted by clerks.” Id., at 321.
For these reasons I completely agree with the Court’s basic approach to this case. The Court fully recognizes *388that outlawry of franchising “might severely hamper smaller enterprises resorting to reasonable methods of meeting the competition of giants and of merchandising through independent dealers, and it might sharply accelerate the trend towards vertical integration of the distribution process.” It acknowledges that Schwinn’s marketing program has operated “to preserve and not to damage competition,” and concludes that “the rule of reason” is satisfied. It upholds the legality of the Schwinn Plan, which is the heart of Schwinn’s marketing system, now accounting for 75% of the distribution of Schwinn’s products. It also upholds the legality of Schwinn’s agency and consignment arrangements.
But the Court inexplicably turns its back on the values of competition by independent merchants and the flexible wisdom of the rule of reason when dealing with distribution effected through sales to wholesalers. In Schwinn’s particular marketing system, this mode of distribution plays a subsidiary role, serving to meet “fill-in” orders by dealers, whose basic stock is obtained through the Schwinn Plan. Without considering its function, purpose or effect, the Court declares this aspect of Schwinn’s program to be per se invalid. It likewise applies the same automatic rule of illegality to strike down Schwinn’s policy of ensuring that franchised dealers do not resell to unfranchised retailers and thus subvert the whole distributional scheme.
Despite the Government’s concession that the rule of reason applies to all aspects of Schwinn’s distribution system, the Court nevertheless reaches out to adopt a potent per se rule. No previous antitrust decision of this Court justifies its action.10 Instead, it completely *389repudiates the only ease in point, White Motor. There the manufacturer sold its products to retailers and wholesalers and imposed territorial and customer restrictions on their resale, restrictions much more stringent- than those involved here. But the Court in White Motor refused to apply a per se rule to invalidate these restrictions, and declared that their legality must be tested under the rule of reason by examining their actual impact in a particular competitive context. The Court today is unable to give any reasons why, only four years later, this precedent should be overruled. Surely, we have not in this short interim accumulated sufficient new experience or insight to justify embracing a rule automatically invalidating any vertical restraints in a distribution system based on sales to wholesalers and retailers. See 372 U. S., at 264-266 (concurring opinion of Me. Justice Brennan). Indeed, the Court does not cite or discuss any new data that might support such a radical change in the law. And I am completely at a loss to fathom how the Court can adopt its per se rule concerning distributional sales and yet uphold identical restrictions in Schwinn’s marketing scheme when distribution takes the form of consignment or Schwinn Plan deliveries. It does not demonstrate that these restrictions are in their actual operation somehow more anticompetitive or less justifiable merely because the contractual relations between Schwinn and its jobbers and dealers bear the label “sale” rather than “agency” or “consignment.” Such irrelevant formulae are false guides to sound adjudication in the antitrust field: “Our choice must be made on the basis not of abstractions but of the realities of modern industrial life.” Standard Oil Co. v. United States, 337 U. S. 293, 320 (separate opinion of Mr. Justice Douglas).
The Court advances two justifications for its new per se rule. I do not find either persuasive. First, the *390Court correctly observes that *the District Court invalidated territorial limitations on the resale activities of Schwinn’s wholesalers. The Court then states that it would be “illogical and inconsistent” not to strike down all the other restrictions in Schwinn’s marketing program insofar as sales are involved. But the Court completely overlooks the fact that the territorial limitations invalidated by the District Court were the product of a horizontal conspiracy between the wholesalers. The District Court found a “division of territory by agreement between the distributors . . . horizontal in nature.” 11 Schwinn played a part in this conspiracy, but just as in United States v. General Motors Corp., 384 U. S. 127, 140, that did not alter its fundamentally horizontal nature as a “classic conspiracy in restraint of trade.” In striking down this horizontal division of markets between competing distributors, the District Court was simply following familiar precedent. Timken Roller Bearing Co. v. United States, 341 U. S. 593. By contrast, the restrictions involved in the franchising methods now before us are quite different in nature, as the Court points out elsewhere in its opinion:
“[W]e are dealing here with a vertical restraint embodying the unilateral program of a single manufacturer. We are not dealing with a combination ... of distributors, as in General Motors. We are not dealing with a ‘division’ of territory in the sense of an allocation by and among the distributors ... or an agreement among distributors to restrict their competition, see General Motors, supra. We are here concerned with a truly vertical arrangement.” Ante, at 378.
As the Court also emphasizes, the legal principles applicable to horizontal and vertical restrictions are quite *391different.12 Thus, applying the rule of reason to the vertical restraints now in issue is not at all “illogical and inconsistent” with per se invalidation of the wholesalers’ horizontal division of markets.
The Court’s second justification for its new per se doctrine is the “ancient rule against restraints on alienation.” This rule of property law is certainly ancient — it traces its lineage to Coke on Littleton.13 But it is hardly the practice of this Court to embrace a rule of law merely on grounds of its antiquity. Moreover, the common-law doctrine of restraints on alienation is not nearly so rigid as the Court implies. The original rule concerned itself with arbitrary and severe restrictions on alienation, such as total prohibition of resale.14 As early as 1711 it was recognized that only unreasonable restraints should be proscribed, and that partial restrictions could be justified when ancillary to a legitimate business purpose and not *392unduly anticompetitive in effect. Mitchel v. Reynolds, 1 P. Wms. 181, 24 Eng. Rep. 347. Cf. Tulk v. Moxhay, 2 Ph. 774, 41 Eng. Rep. 1143. This doctrine of ancillary restraints was assimilated into the jurisprudence of this country in the nineteenth century. See Oregon Steam Navigation Co. v. Winsor, 20 Wall. 64; United States v. Addyston Pipe & Steel Co., 85 F. 271.
Centuries ago, it could perhaps be assumed that a manufacturer had no legitimate interest in what happened to his products once he had sold them to a middleman and they had started their way down the channel of distribution. But this assumption no longer holds true in a day of sophisticated marketing policies, mass advertising, and vertically integrated manufacturer-distributors.15 Restrictions like those involved in a franchising program should accordingly be able to claim justification under the ancillary restraints doctrine.
In any event, the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today. The problems involved are difficult and complex,16 and our response should be more reasoned and sensitive than the simple acceptance of a hoary formula. “It does seem possible that the nineteenth and twentieth centuries have contributed legal conceptions growing out of new types of *393business which make it inappropriate” for the Court to base its “overthrow of contemporary commercial policies on judicial views of the reign of Queen Elizabeth.” 17 Moreover, the. Court’s answer makes everything turn on whether the arrangement between a manufacturer and his distributor is denominated a “sale” or “agency.” Such a rule ignores and conceals the “economic and business stuff out of which” a sound answer should be fashioned. White Motor Co. v. United States, supra, at 263. The Court has emphasized in the past that these differences in form often do not represent “differences in substance.” Simpson v. Union Oil Co., 377 U. S. 13, 22. Draftsmen may cast business arrangements in different legal molds for purposes of commercial law, but these arrangements may operate identically in terms of economic function and competitive effect. It is the latter factors which are the concern of the antitrust laws. The record does not show that the purposes of Schwinn’s franchising program and the competitive consequences of its implementation differed, depending on whether Schwinn sold its products to wholesalers or resorted to the agency, consignment, or Schwinn Plan methods of distribution. And there is no reason generally to suppose that variations in the formal legal packaging of franchising programs produce differences in their actual impact in the marketplace. Our experience is to the contrary. As stated in United States v. Masonite Corp., 316 U. S. 265, 278, 280:
“[T]his Court has quite consistently refused to allow the form into which the parties chose to cast the transaction to govern.
“So far as the Sherman Act is concerned, the result must turn not on the skill with which counsel has *394manipulated the concepts of ‘sale’ and 'agency’ but on the significance of the business practices in terms of restraint of trade.”
The impact of today’s decision on Schwinn may be slight, because over 75% of its distribution is done through the Schwinn Plan, which the Court upholds. Perhaps Schwinn can rearrange the legal terminology of its other distributional arrangements to avoid “the ancient rule against restraints on alienation” which the Court adopts. Perhaps other manufacturers who use sales as a means of distribution in a franchise or analogous marketing system can do likewise. If they can, the Court has created considerable business for legal draftsmen. If they cannot, vertical integration and the elimination of small independent competitors are likely to follow. Meanwhile, the Court has, sua sponte, created a bluntly indiscriminate and destructive weapon which can be used to dismantle a vast variety of distributional systems — competitive and anticompetitive, reasonable and unreasonable.
In view of the commendably careful and realistic approach the Court has taken in analyzing the basic structure of Schwinn’s marketing program, it is particularly disappointing to see the Court balk at the label “sale,” and turn from reasoned response to a wooden and irrelevant formula.

 The District Court found that: “Bicycles are in constant need of service. Hardware stores, department stores, and most other sales outlets do not furnish these services. Retail cycle outlets do. That is the type of business establishment that Schwinn has turned to as their local sales representatives.” 237 F. Supp. 323, 335.

 237 F. Supp., at 338.

 Ibid.

 In the 1951-1961 period, Schwinn’s prices fell between 9% and 12%, and its profits also declined. The margins of its wholesalers and retailers were reduced about 10% during the same period.

 237 F. Supp., at 338.

 This premise is common to all forms of franchising. See Lewis & Hancock, The Franchise System of Distribution 4, 9 (1963).

 See Lewis & Hancock, The Franchise System of Distribution (1963); Small Business Administration, Management Aids for Small Manufacturers, No. 182, “Expanding Sales Through Franchising” (1966).

 Susser v. Carvel Corp., 206 F. Supp. 636, 640, aff’d, 332 F. 2d 505, cert. granted, 379 U. S. 885, cert. dismissed, 381 U. S. 125. See also Distribution Problems Affecting Small Business, Hearings before the Subcommittee on Antitrust and Monopoly, Senate Committee on the Judiciary, 89th Cong., 1st Sess., 7-9, 12-13 (statement of Small Business Administration Administrator Eugene P. Foley), 90 (statement of Federal Trade Commission Chairman Paul Rand Dixon) (March 1965); Lewis & Hancock, The Franchise System of Distribution 91-92 (1963); Handler, Statement Before the Small Business Administration, 11 Antitrust Bull. 417, 419.

 Wilson, Some Problems Relative to Franchise Arrangements, 11 Antitrust Bull. 473, 488. It should be noted that since the start of this litigation, Schwinn has taken over 30% of the wholesaling of its products by vertical integration.

 The Court cites Dr. Miles Medical Co. v. Park & Sons Co., 220 U. S. 373, but that case was decided on common-law principles and involved price-fixing, long recognized by this Court as per se invalid.

 237 F. Supp., at 342.

 One difference between a horizontal conspiracy and vertical restraints imposed by the manufacturer is that there is often serious question whether the latter conduct involves the “contract, combination ... or conspiracy” required by § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. § 1. The District Judge in this case refused to find that the relevant conduct of Schwinn and its distributors amounted to a “contract,” “combination” or “conspiracy.” Instead, he stated that “the Schwinn franchising program was conceived, hatched and born into life ... in the minds of the Schwinn officials,” and agreed that “the action was unilateral in nature.” Although essential to its case, the Government failed specifically to raise this issue in its Jurisdictional Statement, and I must register my disagreement with the Court’s cursory treatment of the matter. The Court merely notes that “Schwinn has been ‘firm and resolute’ in insisting upon observance” of the restrictions involved in its franchising program and that there was a “communicated danger of termination” for violations of its policies. This alone does not amount to a “contract,” “combination” or “conspiracy” under established precedent. United States v. Colgate & Co., 250 U. S. 300; United States v. Parke, Davis & Co., 362 U. S. 29.

 2 Coke, Institutes of the Laws of England § 360 (Day ed. 1812).

 Ibid.

 See Elman, “Petrified Opinions” and Competitive Realities, 66 Col. L. Rev. 625.

 See Jordan, Exclusive and Restricted Sales Areas Under the Antitrust Laws, 9 U. C. L. A. L. Rev. Ill; McLaren, Territorial Restrictions, Exclusive Dealing, and Related Sales Distribution Problems Under the Antitrust Laws, 11 Prac. Law. No. 4, 79; Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law & Contemp. Prob. 506; Robinson, Restraints on Trade and the Orderly Marketing of Goods, 45 Cornell L. Q. 254; Note, Restricted Channels of Distribution Under the Sherman Act, 75 Harv. L. Rev. 795.

 Chafee, Equitable Servitudes on Chattels, 41 Harv. L. Rev. 945, 983.