IX Vertical and Horizontal Restraints:
A Multiple Parties: Timken Roller Bearing Co. v. US 341 US 598, 71 S Ct 971, 95 L Ed 1199 89 U.S.P.Q. 462, 1951 Trade Cas. ¶ 62,837 (1951)
B Single "Person" Copperweld Corp. v. Independence Tube Corp. 467 U.S. 752, 104 S. Ct. 2731, 81 L. Ed. 2d 628, 52 U.S.L.W. 4821, 1984-2 Trade Cas. ¶ 66,065
C. Combination: US v. E I DuPont de Nemours 118 F Supp 41 (aff'd 351 US 377 (1956)
D. Settlement and Cartelization: US v. Singer Mfg. Co. 374 U.S. 174, 83 S.Ct. 1773, 10 L.Ed.2d 823, 137 USPQ 808, 1963 Trade Cas. ¶ 70,813 (1963)
E. Vertical Restraints: Continental T.V., Inc. v. GTE Sylvania, Inc. 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed. 2d 568433 U.S. 36, 97 S. Ct. 2549, 1977-1 Trade Cas. ¶ 61,488 (1977)
F. Coownership as Horizontal, Not Vertical: U.S. v. Sealy, Inc. 388 U.S. 350, 87 S. Ct. 1847, 18 L. Ed. 2d 1238, 153 U.S.P.Q. 763, 1967 Trade Cas. ¶ 72,125 (1967)
G. Veto Power as Per Se Violation: U.S. v. Topco Associates, Inc. 405 U.S. 596, 92 S. Ct. 1126, 31 L. Ed. 2d 515, 173 U.S.P.Q. 193, 1972 Trade Cas. ¶ 73,904 (1972)
H. Dual Distribution Norman E. Krehl v. Baskin-Robbins Ice Cream Company664 F.2d 1348, 1982-1 Trade Cas. ¶ 64,449 (9th Cir 1982)
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Timken Roller Bearing Co. v. United States
341 U.S. 593, 71 S. Ct. 971,
95 L. Ed. 1199, 89 U.S.P.Q. 462,
1951 Trade Cas. ¶ 62,837 (1951)
Black, J.: United States brought this civil action to prevent and restrain violations of the Sherman Act by appellant, Timken Roller Bearing Co., an Ohio corporation. The complaint charged that appellant, in violation of §§ 1 and 3 of the Act, combined, conspired and acted with British Timken, Ltd. (British Timken), and Societe Anonyme Francaise Timken (French Timken) to restrain interstate and foreign commerce by eliminating competition in the manufacture and sale of antifriction bearings in the markets of the world. After a trial of more than a month the District Court made detailed findings of fact which may be summarized as follows:
As early as 1909 appellant and British Timken's predecessor had made comprehensive agreements providing for a territorial
division of the world markets for antifriction bearings. These arrangements were somewhat modified and extended in 1920,
1924 and 1925. Again in 1927 the agreements were substantially renewed in connection with a transaction by which
appellant and one Dewar, an English businessman, cooperated in purchasing all the stock of British Timken. Later some
British Timken stock was sold to the public with the result that appellant now holds about 30% of the outstanding shares
while Dewar owns about 24%.
As early as 1909 appellant and British Timken's predecessor had made comprehensive agreements providing for a territorial division of the world markets for antifriction bearings. These arrangements were somewhat modified and extended in 1920, 1924 and 1925. Again in 1927 the agreements were substantially renewed in connection with a transaction by which appellant and one Dewar, an English businessman, cooperated in purchasing all the stock of British Timken. Later some British Timken stock was sold to the public with the result that appellant now holds about 30% of the outstanding shares while Dewar owns about 24%. In 1928 appellant and Dewar organized French Timken and since that date have together owned all the stock in the French company. Beginning in that year, appellant, British Timken and French Timken have continuously kept operative "business agreements" regulating the manufacture and sale of antifriction bearings by the three companies and providing for the use by the British and French corporations of the trademark "Timken." Under these agreements the contracting parties have (1) allocated trade territories among themselves; (2) fixed prices on products of one sold in the territory of the others; (3) cooperated to protect each other's markets and to eliminate outside competition; and (4) participated in cartels to restrict imports to, and exports from, the United States.
On these findings, the District Court concluded that appellant had violated the Sherman Act as charged, and entered a comprehensive decree designed to bar future violations. 83 F.Supp. 284. The case is before us on appellant's direct appeal under 15 U. S. C. § 29.
Although appellant has indiscriminately challenged the District Court's judgment and decree in over 200 separate assignments of error, the real grounds relied on for reversal are only a few in number. In the first place, appellant contends that most of the District Court's material findings of fact are without evidential support, that they "ignore or fail properly to evaluate" evidence supporting appellant's position, and that it was error for the court to refuse to make additional findings. For the most part, this shotgun approach is actually only a dispute as to the proper inferences to be drawn from the evidence in the record; in effect, it is an invitation for us to try the case de novo. This Court must decline such an invitation just as it does when the Government makes the same request. United States v. Yellow Cab Co., 338 U.S. 338. In the present case, the trial judge after a patient hearing carefully analyzed the evidence in an opinion prepared with obvious care. Appellant's lengthy brief has failed to establish that there was error in making any crucial, or even important, ultimate or subsidiary finding. Since we cannot say the findings are "clearly erroneous," we accept them. Fed. Rules Civ. Proc., 52 (a).
Appellant next contends that the restraints of trade so clearly revealed by the District Court's findings can be justified as "reasonable," and therefore not in violation of the Sherman Act, because they are "ancillary" to allegedly "legal main transactions," namely, (1) a "joint venture" between appellant and Dewar, and (2) an exercise of appellant's right to license the trademark "Timken."
We cannot accept the "joint venture" contention. That the trade restraints were merely incidental to an otherwise legitimate "joint venture" is, to say the least, doubtful. The District Court found that the dominant purpose of the restrictive agreements into which appellant, British Timken and French Timken entered was to avoid all competition either among themselves or with others. Regardless of this, however, appellant's argument must be rejected. Our prior decisions plainly establish that agreements providing for an aggregation of trade restraints such as those existing in this case are illegal under the Act. Kiefer-Stewart Co. v. Seagram & Sons, 340 U.S. 211, 213; United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223-224 and note 59, United States v. National Lead Co., 63 F.Supp. 513, affirmed, 332 U.S. 319, United States v. American Tobacco Co., 221 U.S. 106, 180-184, Associated Press v. United States, 326 U.S. 1, 15. See also United States v. Aluminum Co. of America, 148 F.2d 416, 439-445. The fact that there is common ownership or control of the contracting corporations does not liberate them from the impact of the antitrust laws. E. g., Keifer-Stewart Co. v. Seagram & Sons, supra at 215. Nor do we find any support in reason or authority for the proposition that agreements between legally separate persons and companies to suppress competition among themselves and others can be justified by labeling the project a "joint venture." Perhaps every agreement and combination to restrain trade could be so labeled.
Nor can the restraints of trade be justified as reasonable steps taken to implement a valid trademark licensing system, even if we assume with appellant that it is the owner of the trademark "Timken" in the trade areas allocated to the British and French corporations. Appellant's premise that the trade restraints are only incidental to the trademark contracts is refuted by the District Court's finding that the "trade mark provisions [in the agreements] were subsidiary and secondary to the central purpose of allocating trade territories." Furthermore, while a trademark merely affords protection to a name, the agreements in the present case went far beyond protection of the name "Timken" and provided for control of the manufacture and sale of antifriction bearings whether carrying the mark or not. A trademark cannot be legally used as a device for Sherman Act violation. Indeed, the Trade Mark Act of 1946 itself penalizes use of a mark "to violate the antitrust laws of the United States."
We also reject the suggestion that the Sherman Act should not be enforced in this case because what appellant has done is reasonable in view of current foreign trade conditions. The argument in this regard seems to be that tariffs, quota restrictions and the like are now such that the export and import of antifriction bearings can no longer be expected as a practical matter; that appellant cannot successfully sell its American-made goods abroad; and that the only way it can profit from business in England, France and other countries is through the ownership of stock in companies organized and manufacturing there. This position ignores the fact that the provisions in the Sherman Act against restraints of foreign trade are based on the assumption, and reflect the policy, that export and import trade in commodities is both possible and desirable. Those provisions of the Act are wholly inconsistent with appellant's argument that American business must be left free to participate in international cartels, that free foreign commerce in goods must be sacrificed in order to foster export of American dollars for investment in foreign factories which sell abroad. Acceptance of appellant's view would make the Sherman Act a dead letter insofar as it prohibits contracts and conspiracies in restraint of foreign trade. If such a drastic change is to be made in the statute, Congress is the one to do it.
Finally, appellant attacks the District Court's decree as being too broad in scope. The decree enjoins continuation or repetition of the conduct found illegal. This is clearly correct. Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 461. It also contains certain other restraining provisions which were within the court's discretion because "relief, to be effective, must go beyond the narrow limits of the proven violation." United States v. United States Gypsum Co., 340 U.S. 76, 90. The most vigorous objection, however, is made to those portions of the decree relating to divestiture of appellant's stockholdings and other financial interests in British and French Timken.
Mr. Justice Douglas, Mr. Justice Minton and I believe that the decree properly ordered divestiture. Our views on this point are as follows: Appellant's interests in the British and French companies were obtained as part of a plan to promote the illegal trade restraints. If not severed, the intercompany relationships will provide in the future, as they have in the past, the temptation and means to engage in the prohibited conduct. These considerations alone should be enough to support the divestiture order. United States v. Paramount Pictures, Inc., 334 U.S. 131, 152-153; United States v. National Lead Co., 332 U.S. 319, 363. But there are other considerations as well. The decree should not be overturned unless we can say that the District Court abused its discretion. Absent divestiture, it is difficult to see where other parts of the decree forbidding trade restraints would add much to what the Sherman Act by itself already prohibits. And obviously the most effective way to suppress further Sherman Act violations is to end the intercorporate relationship which has been the core of the conspiracy. For these reasons, Mr. Justice Douglas, Mr. Justice Minton and I cannot say that the District Court abused its discretion in ordering divestiture.
Nevertheless, a majority of this Court, for reasons set forth in other opinions filed in this case, believe that divestiture should not have been ordered by the District Court. Therefore, it becomes necessary to strike from the decree §§ VIII, IVB, and the phrase "or B" in § IVC. As so modified, the judgment of the District Court is affirmed.
It is so ordered.
Reed, J. Concurring: It seems to me there can be no valid objection to that part of the opinion which approves the finding of the District Court that the Timken Roller Bearing Company has violated §§ 1 and 3 of the Sherman Act. It may seem strange to have a conspiracy for the division of territory for marketing between one corporation and another in which it has a large or even a major interest, but any other conclusion would open wide the doors for violation of the Sherman Act at home and in foreign fields. My disagreement with the opinion is based on the suggested requirement that American Timken divest itself of all interest in British Timken and French Timken as required by paragraph VIII of the decree set out below. My reasons for this disagreement follow.
There are no specific statutory provisions authorizing courts to employ the harsh remedy of divestiture in civil proceedings to restrain violations of the Sherman Act. Fines and imprisonment may follow criminal convictions, 15 U. S. C. § 1, and divestiture of property has been used in decrees, not as punishment, but to assure effective enforcement of the laws against restraint of trade.
Since divestiture is a remedy to restore competition and not to punish those who restrain trade, it is not to be used indiscriminately, without regard to the type of violation or whether other effective methods, less harsh, are available. That judicial restraint should follow such lines is exemplified by our recent rulings in United States v. National Lead Co., 332 U.S. 319, where we approved divestiture of some properties belonging to the conspirators and denied it as to others, pp. 348-353. While the decree here does not call for confiscation, it does call for divestiture. I think that requirement is unnecessary.
In this case the prohibited plan grew out of the effort to implement a patent monopoly. The difficulties of cultivating a foreign market for our manufactured goods obviously entered into creation of the British and French companies so as to enjoy a right of distribution into areas where otherwise restrictions, because of tariffs, quotas and exchange, might be expected. We fail to see such propensity toward restraint of trade as is evidenced in the Crescent case.
What we have is an American corporation, dominant in the field of tapered roller bearings, producing between 70 and 80 percent of the American output. In 1947 its gross sales were over $ 77,000,000. This is a distinctive type of bearing, competing successfully for adoption by industry with other antifriction bearings. Timken produces about 25% of all United States antifriction bearings. As there were no findings of facts tending to show violation of the Sherman Act otherwise than through formal agreements for partition of territory, we assume appellant's conduct was otherwise lawful.
In such circumstances, there was, of course, no occasion for the lower court to order any splitting up of a consolidated entity. Cf. Standard Oil Co. v. United States, 221 U.S. 1; United States v. American Tobacco Co., 221 U.S. 106. There has been no effort to create numerous smaller companies out of Timken so that there will be no dominant individual in the tapered roller bearing field. The American company had had a normal growth and development. Its relations with English and French Timken were close and American Timken had stock and contracts for further stock in both foreign companies of value in the development of its foreign business. Such business arrangements should not be destroyed unless necessary to do away with the prohibited evil.
An injunction was entered by the District Court to prohibit the continuation of the objectionable contracts. Violation of that injunction would threaten the appellant and its officers with civil and criminal contempt. United States v. Goldman, 277 U.S. 229, and Hill v. Weiner, 300 U.S. 105. The paucity of cases dealing with contempt of Sherman Act injunctions is, I think, an indication of how carefully the decrees are obeyed. The injunction is a far stronger sanction against further violation than the Sherman Act alone. Once in possession of facts showing violation, the Government would obtain a quick and summary punishment of the violator. Furthermore this case remains on the docket for the purpose of "enforcement of compliance" and "punishment of violations." This provision should leave power in the court to enforce divestiture, if the injunction alone fails. Prompt and full compliance with the decree should be anticipated.
This Court is hesitant, always, to interfere with the scope of the trial court's decree. However, in this case it seems appropriate to indicate my disapproval of the requirement of divestiture and to suggest a direction to the District Court that provisions leading to that result be eliminated from the decree. Such remand would also give opportunity for reconsideration of the changes necessary in the decree because of the remand and the death of Mr. Dewar.
In my view such an order should be entered.
Frankfurter, J., dissenting: The force of the reasoning against divestiture in this case fortifies the doubts which I felt about the Government's position at the close of argument and persuades me to associate myself, in substance, with the dissenting views expressed by Mr. Justice Jackson. Even "cartel" is not a talismanic word, so as to displace the rule of reason by which breaches of the Sherman Law are determined. Nor is "division of territory" so self-operating a category of Sherman Law violations as to dispense with analysis of the practical consequences of what on paper is a geographic division of territory.
While American Banana Co. v. United Fruit Co., 213 U.S. 347, presented a wholly different set of facts from those before us, the decision in that case does point to the fact that the circumstances of foreign trade may alter the incidence of what in the setting of domestic commerce would be a clear case of unreasonable restraint of trade.
Of course, it is not for this Court to formulate economic policy as to foreign commerce. But the conditions controlling foreign commerce may be relevant here. When as a matter of cold fact the legal, financial, and governmental policies deny opportunities for exportation from this country and importation into it, arrangements that afford such opportunities to American enterprise may not fall under the ban of a fair construction of the Sherman Law because comparable arrangements regarding domestic commerce come within its condemnation.
Mr. Justice Jackson, dissenting.
I doubt that it should be regarded as an unreasonable restraint of trade for an American industrial concern to organize
foreign subsidiaries, each limited to serving a particular market area. If so, it seems to preclude the only practical means of
reaching foreign markets by many American industries.
The fundamental issue here concerns a severely technical application to foreign commerce of the concept of conspiracy. It is admitted that if Timken had, within its own corporate organization, set up separate departments to operate plants in France and Great Britain, as well as in the United States, "that would not be a conspiracy. You must have two entities to have a conspiracy." Thus, although a single American producer, of course, would not compete with itself, either abroad or at home, and could determine prices and allot territories with the same effect as here, that would not be a violation of the Act, because a corporation cannot conspire with itself. Government counsel answered affirmatively the question of the Chief Justice: "Your theory is that if you have a separate corporation, that makes the difference?" Thus, the Court applies the well-established conspiracy doctrine that what it would not be illegal for Timken to do alone may be illegal as a conspiracy when done by two legally separate persons. The doctrine now applied to foreign commerce is that foreign subsidiaries organized by an American corporation are "separate persons," and any arrangement between them and the parent corporation to do that which is legal for the parent alone is an unlawful conspiracy. I think that result places too much weight on labels.
But if we apply the most strict conspiracy doctrine, we still have the question whether the arrangement is an unreasonable restraint of trade or a method and means of carrying on competition in trade. Timken did not sit down with competitors and divide an existing market between them. It has at all times, in all places, had powerful rivals. It was not effectively meeting their competition in foreign markets, and so it joined others in creating a British subsidiary to go after business best reachable through such a concern and a French one to exploit French markets. Of course, in doing so, it allotted appropriate territory to each and none was to enter into competition with the other or with the parent. Since many foreign governments prohibit or handicap American corporations from owning plants, entering into contracts, or engaging in business directly, this seems the only practical way of waging competition in those areas.
The philosophy of the Government, adopted by the Court, is that Timken's conduct is conspiracy to restrain trade solely because the venture made use of subsidiaries. It is forbidden thus to deal with and utilize subsidiaries to exploit foreign territories, because "parent and subsidiary corporations must accept the consequences of maintaining separate corporate entities," and that consequence is conspiracy to restrain trade. But not all agreements are conspiracies and not all restraints of trade are unlawful. In a world of tariffs, trade barriers, empire or domestic preferences, and various forms of parochialism from which we are by no means free, I think a rule that it is restraint of trade to enter a foreign market through a separate subsidiary of limited scope is virtually to foreclose foreign commerce of many kinds. It is one thing for competitors or a parent and its subsidiaries to divide the United States domestic market which is an economic and legal unit; it is another for an industry to recognize that foreign markets consist of many legal and economic units and to go after each through separate means. I think this decision will restrain more trade than it will make free.
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Copperweld Corp. v. Independence Tube Corp.
467 U.S. 752, 104 S. Ct. 2731, 1984 U.S. LEXIS 115, 81 L. Ed. 2d 628,
52 U.S.L.W. 4821, 1984-2 Trade Cas. ¶ 66,065 (1984)
Burger, C. J.
We granted certiorari to determine whether a parent corporation and its wholly owned subsidiary are legally capable of conspiring with each other under § 1 of the Sherman Act.
The predecessor to petitioner Regal Tube Co. was established in Chicago in 1955 to manufacture structural steel tubing used in heavy equipment, cargo vehicles, and construction. From 1955 to 1968 it remained a wholly owned subsidiary of C. E. Robinson Co. In 1968 Lear Siegler, Inc., purchased Regal Tube Co. and operated it as an unincorporated division. David Grohne, who had previously served as vice president and general manager of Regal, became president of the division after the acquisition.
In 1972 petitioner Copperweld Corp. purchased the Regal division from Lear Siegler; the sale agreement bound Lear Siegler and its subsidiaries not to compete with Regal in the United States for five years. Copperweld then transferred Regal's assets to a newly formed, wholly owned Pennsylvania corporation, petitioner Regal Tube Co. The new subsidiary continued to conduct its manufacturing operations in Chicago but shared Copperweld's corporate headquarters in Pittsburgh.
Shortly before Copperweld acquired Regal, David Grohne accepted a job as a corporate officer of Lear Siegler. After the acquisition, while continuing to work for Lear Siegler, Grohne set out to establish his own steel tubing business to compete in the same market as Regal. In May 1972 he formed respondent Independence Tube Corp., which soon secured an offer from the Yoder Co. to supply a tubing mill. In December 1972 respondent gave Yoder a purchase order to have a mill ready by the end of December 1973.
When executives at Regal and Copperweld learned of Grohne's plans, they initially hoped that Lear Siegler's non-competition agreement would thwart the new competitor. Although their lawyer advised them that Grohne was not bound by the agreement, he did suggest that petitioners might obtain an injunction against Grohne's activities if he made use of any technical information or trade secrets belonging to Regal. The legal opinion was given to Regal and Copperweld along with a letter to be sent to anyone with whom Grohne attempted to deal. The letter warned that Copperweld would be "greatly concerned if [Grohne] contemplates entering the structural tube market . . . in competition with Regal Tube" and promised to take "any and all steps which are necessary to protect our rights under the terms of our purchase agreement and to protect the know-how, trade secrets, etc., which we purchased from Lear Siegler." Petitioners later asserted that the letter was intended only to prevent third parties from developing reliance interests that might later make a court reluctant to enjoin Grohne's operations.
When Yoder accepted respondent's order for a tubing mill on February 19, 1973, Copperweld sent Yoder one of these letters; two days later Yoder voided its acceptance. After respondent's efforts to resurrect the deal failed, respondent arranged to have a mill supplied by another company, which performed its agreement even though it too received a warning letter from Copperweld. Respondent began operations on September 13, 1974, nine months later than it could have if Yoder had supplied the mill when originally agreed.
Although the letter to Yoder was petitioners' most successful effort to discourage those contemplating doing business with respondent, it was not their only one. Copperweld repeatedly contacted banks that were considering financing respondent's operations. One or both petitioners also approached real estate firms that were considering providing plant space to respondent and contacted prospective suppliers and customers of the new company.
In 1976 respondent filed this action in the District Court against petitioners and Yoder. The jury found that Copperweld and Regal had conspired to violate § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. § 1, but that Yoder was not part of the conspiracy. It also found that Copperweld, but not Regal, had interfered with respondent's contractual relationship with Yoder; that Regal, but not Copperweld, had interfered with respondent's contractual relationship with a potential customer of respondent, Deere Plow & Planter Works, and had slandered respondent to Deere; and that Yoder had breached its contract to supply a tubing mill.
[Petitioners counterclaimed on the ground that respondent and Grohne had used proprietary information belonging to Regal, had competed unfairly by hiring away key Regal personnel, and had interfered with prospective business relationships by filing the lawsuit on the eve of a large Copperweld debenture offering. At the close of the evidence, the court directed a verdict against petitioners on their counterclaims.]
At a separate damages phase, the judge instructed the jury that the damages for the antitrust violation and for the inducement of the Yoder contract breach should be identical and not double counted. The jury then awarded $ 2,499,009 against petitioners on the antitrust claim, which was trebled to $ 7,497,027. It awarded $ 15,000 against Regal alone on the contractual interference and slander counts pertaining to Deere. The court also awarded attorney's fees and costs after denying petitioners' motions for judgment n.o.v. and for a new trial.
The United States Court of Appeals for the Seventh Circuit affirmed. 691 F.2d 310 (1982). It noted that the exoneration of Yoder from antitrust liability left a parent corporation and its wholly owned subsidiary as the only parties to the § 1 conspiracy. The court questioned the wisdom of subjecting an "intra-enterprise" conspiracy to antitrust liability, when the same conduct by a corporation and an unincorporated division would escape liability for lack of the requisite two legal persons. However, relying on its decision in Photovest Corp. v. Fotomat Corp., 606 F.2d 704 (1979), cert. denied, 445 U.S. 917 (1980), the Court of Appeals held that liability was appropriate "when there is enough separation between the two entities to make treating them as two independent actors sensible." 691 F.2d, at 318. It held that the jury instructions took account of the proper factors for determining how much separation Copperweld and Regal in fact maintained in the conduct of their businesses. It also held that there was sufficient evidence for the jury to conclude that Regal was more like a separate corporate entity than a mere service arm of the parent.
We granted certiorari to reexamine the intra-enterprise conspiracy doctrine, 462 U.S. 1131 (1983), and we reverse.
Review of this case calls directly into question whether the coordinated acts of a parent and its wholly owned subsidiary can, in the legal sense contemplated by § 1 of the Sherman Act, constitute a combination or conspiracy. The so-called "intra-enterprise conspiracy" doctrine provides that § 1 liability is not foreclosed merely because a parent and its subsidiary are subject to common ownership. The doctrine derives from declarations in several of this Court's opinions.
In no case has the Court considered the merits of the intra-enterprise conspiracy doctrine in depth. Indeed, the concept arose from a far narrower rule. Although the Court has expressed approval of the doctrine on a number of occasions, a finding of intra-enterprise conspiracy was in all but perhaps one instance unnecessary to the result.
The problem began with United States v. Yellow Cab Co., 332 U.S. 218 (1947). The controlling shareholder of the Checker Cab Manufacturing Corp., Morris Markin, also controlled numerous companies operating taxicabs in four cities. With few exceptions, the operating companies had once been independent and had come under Markin's control by acquisition or merger. The complaint alleged conspiracies under §§ 1 and 2 of the Sherman Act among Markin, Checker, and five corporations in the operating system. The Court stated that even restraints in a vertically integrated enterprise were not "necessarily" outside of the Sherman Act, observing that an unreasonable restraint
"may result as readily from a conspiracy among those who are affiliated or integrated under common ownership as from a conspiracy among those who are otherwise independent. Similarly, any affiliation or integration flowing from an illegal conspiracy cannot insulate the conspirators from the sanctions which Congress has imposed. The corporate interrelationships of the conspirators, in other words, are not determinative of the applicability of the Sherman Act. That statute is aimed at substance rather than form. See Appalachian Coals, Inc. v. United States, 288 U.S. 344, 360-361, 376-377.
"And so in this case, the common ownership and control of the various corporate appellees are impotent to liberate the alleged combination and conspiracy from the impact of the Act. The complaint charges that the restraint of interstate trade was not only effected by the combination of the appellees but was the primary object of the combination. The theory of the complaint . . . is that 'dominating power' over the cab operating companies 'was not obtained by normal expansion . . . but by deliberate, calculated purchase for control.'"
Id., at 227-228 (emphasis added) (quoting United States v. Reading Co., 253 U.S. 26, 57 (1920)).  It is the underscored language that later breathed life into the intra-enterprise conspiracy doctrine. The passage as a whole, however, more accurately stands for a quite different proposition. It has long been clear that a pattern of acquisitions may itself create a combination illegal under § 1, especially when an original anticompetitive purpose is evident from the affiliated corporations' subsequent conduct. The Yellow Cab passage is most fairly read in light of this settled rule. In Yellow Cab, the affiliation of the defendants was irrelevant because the original acquisitions were themselves illegal. An affiliation "flowing from an illegal conspiracy" would not avert sanctions. Common ownership and control were irrelevant because restraint of trade was "the primary object of the combination," which was created in a "'deliberate, calculated'" manner. Other language in the opinion is to the same effect.
The Court's opinion relies on Appalachian Coals, Inc. v. United States, 288 U.S. 344 (1933), however, examination of that case reveals that it gives very little support for the broad doctrine Yellow Cab has been thought to announce. On the contrary, the language of Chief Justice Hughes speaking for the Court in Appalachian Coals supports a contrary conclusion. After observing that "[the] restrictions the Act imposes are not mechanical or artificial," 288 U.S., at 360, he went on to state:
"The argument that integration may be considered a normal expansion of business, while a combination of independent producers in a common selling agency should be treated as abnormal -- that one is a legitimate enterprise and the other is not -- makes but an artificial distinction. The Anti-Trust Act aims at substance." Id., at 377. As we shall see, infra, at 771-774, it is the intra-enterprise conspiracy doctrine itself that "makes but an artificial distinction" at the expense of substance.
The ambiguity of the Yellow Cab holding yielded the one case giving support to the intra-enterprise conspiracy doctrine. In Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211 (1951), the Court held that two wholly owned subsidiaries of a liquor distiller were guilty under § 1 of the Sherman Act for jointly refusing to supply a wholesaler who declined to abide by a maximum resale pricing scheme. The Court offhandedly dismissed the defendants' argument that "their status as 'mere instrumentalities of a single manufacturing- merchandising unit' makes it impossible for them to have conspired in a manner forbidden by the Sherman Act." Id., at 215. With only a citation to Yellow Cab and no further analysis, the Court stated that the
"suggestion runs counter to our past decisions that common ownership and control does not liberate corporations from the impact of the antitrust laws" and stated that this rule was "especially applicable" when defendants "hold themselves out as competitors."
340 U.S., at 215.
Unlike the Yellow Cab passage, this language does not pertain to corporations whose initial affiliation was itself unlawful. In straying beyond Yellow Cab, the Kiefer-Stewart Court failed to confront the anomalies an intra-enterprise doctrine entails. It is relevant nonetheless that, were the case decided today, the same result probably could be justified on the ground that the subsidiaries conspired with wholesalers other than the plaintiff. An intra-enterprise conspiracy doctrine thus would no longer be necessary to a finding of liability on the facts of Kiefer-Stewart.
Later cases invoking the intra-enterprise conspiracy doctrine do little more than cite Yellow Cab or Kiefer-Stewart, and in none of the cases was the doctrine necessary to the result reached. Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951), involved restrictive horizontal agreements between an American corporation and two foreign corporations in which it owned 30 and 50 percent interests respectively. The Timken Court cited Kiefer-Stewart to show that "[the] fact that there is common ownership or control of the contracting corporations does not liberate them from the impact of the antitrust laws." 341 U.S., at 598. But the relevance of this statement is unclear. The American defendant in Timken did not own a majority interest in either of the foreign corporate conspirators and, as the District Court found, it did not control them. [See United States v. Timken Roller Bearing Co., 83 F.Supp. 284, 311-312 (ND Ohio 1949), aff'd as modified, 341 U.S. 593 (1951). The agreement of an individual named Dewar, who owned 24 and 50 percent of the foreign corporations respectively, was apparently required for the American defendant to have its way.] Moreover, as in Yellow Cab, there was evidence that the stock acquisitions were themselves designed to effectuate restrictive practices. [For almost 20 years before they became affiliated by stock ownership, two of the corporations had been party to the sort of restrictive agreements the Timken Court condemned. Three Justices upholding antitrust liability were of the view that Timken's "interests in the [foreign] companies were obtained as part of a plan to promote the illegal trade restraints" and that the "intercorporate relationship" was "the core of the conspiracy." Id., at 600-601. Because two Justices found no antitrust violation at all, see id., at 605 (Frankfurter, J., dissenting), id., at 606 (Jackson, J., dissenting), and two Justices did not take part, apparently only Chief Justice Vinson and Justice Reed were prepared to hold that there was a violation even if the initial acquisition itself was not illegal. See id., at 601-602 (Reed, J., joined by Vinson, C. J., concurring). ] The Court's reliance on the intra-enterprise conspiracy doctrine was in no way necessary to the result.
The same is true of Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134 (1968), which involved a conspiracy among a parent corporation and three subsidiaries to impose various illegal restrictions on plaintiff franchisees. The Court did suggest that, because the defendants
"availed themselves of the privilege of doing business through separate corporations, the fact of common ownership could not save them from any of the obligations that the law imposes on separate entities [citing Yellow Cab and Timken]."
Id., at 141-142. But the Court noted immediately thereafter that "[in] any event" each plaintiff could "clearly" charge a combination between itself and the defendants or between the defendants and other franchise dealers. Ibid. Thus, for the same reason that a finding of liability in Kiefer-Stewart could today be justified without reference to the intra-enterprise conspiracy doctrine, see n. 9, supra, the doctrine was at most only an alternative holding in Perma Life Mufflers.
In short, while this Court has previously seemed to acquiesce in the intra-enterprise conspiracy doctrine, it has never explored or analyzed in detail the justifications for such a rule; the doctrine has played only a relatively minor role in the Court's Sherman Act holdings.
Petitioners, joined by the United States as amicus curiae, urge us to repudiate the intra-enterprise conspiracy doctrine. The central criticism is that the doctrine gives undue significance to the fact that a subsidiary is separately incorporated and thereby treats as the concerted activity of two entities what is really unilateral behavior flowing from decisions of a single enterprise.
We limit our inquiry to the narrow issue squarely presented: whether a parent and its wholly owned subsidiary are capable of conspiring in violation of § 1 of the Sherman Act. We do not consider under what circumstances, if any, a parent may be liable for conspiring with an affiliated corporation it does not completely own.
The Sherman Act contains a "basic distinction between concerted and independent action." Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 761 (1984). The conduct of a single firm is governed by § 2 alone and is unlawful only when it threatens actual monopolization. [ * * * By making a conspiracy to monopolize unlawful, § 2 does reach both concerted and unilateral behavior. The point remains, however, that purely unilateral conduct is illegal only under § 2 and not under § 1. Monopolization without conspiracy is unlawful under § 2, but restraint of trade without a conspiracy or combination is not unlawful under § 1.] It is not enough that a single firm appears to "restrain trade" unreasonably, for even a vigorous competitor may leave that impression. For instance, an efficient firm may capture unsatisfied customers from an inefficient rival, whose own ability to compete may suffer as a result. This is the rule of the marketplace and is precisely the sort of competition that promotes the consumer interests that the Sherman Act aims to foster. [For example, the Court has declared that § 2 does not forbid market power to be acquired "as a consequence of a superior product, [or] business acumen." United States v. Grinnell Corp., 384 U.S. 563, 571 (1966). We have also made clear that the "antitrust laws . . . were enacted for 'the protection of competition, not competitors.'" Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (damages for violation of Clayton Act § 7) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)). ] In part because it is sometimes difficult to distinguish robust competition from conduct with long-run anticompetitive effects, Congress authorized Sherman Act scrutiny of single firms only when they pose a danger of monopolization. Judging unilateral conduct in this manner reduces the risk that the antitrust laws will dampen the competitive zeal of a single aggressive entrepreneur.
Section 1 of the Sherman Act, in contrast, reaches unreasonable restraints of trade effected by a "contract, combination . . . or conspiracy" between separate entities. It does not reach conduct that is "wholly unilateral." Albrecht v. Herald Co., 390 U.S. 145, 149 (1968), accord, Monsanto Co. v. Spray-Rite Corp., supra, at 761. Concerted activity subject to § 1 is judged more sternly than unilateral activity under § 2. Certain agreements, such as horizontal price fixing and market allocation, are thought so inherently anticompetitive that each is illegal per se without inquiry into the harm it has actually caused. See generally Northern Pacific R. Co. v. United States, 356 U.S. 1, 5 (1958). Other combinations, such as mergers, joint ventures, and various vertical agreements, hold the promise of increasing a firm's efficiency and enabling it to compete more effectively. Accordingly, such combinations are judged under a rule of reason, an inquiry into market power and market structure designed to assess the combination's actual effect. See, e. g., Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977), Chicago Board of Trade v. United States, 246 U.S. 231 (1918). Whatever form the inquiry takes, however, it is not necessary to prove that concerted activity threatens monopolization.
The reason Congress treated concerted behavior more strictly than unilateral behavior is readily appreciated. Concerted activity inherently is fraught with anticompetitive risk. It deprives the marketplace of the independent centers of decisionmaking that competition assumes and demands. In any conspiracy, two or more entities that previously pursued their own interests separately are combining to act as one for their common benefit. This not only reduces the diverse directions in which economic power is aimed but suddenly increases the economic power moving in one particular direction. Of course, such mergings of resources may well lead to efficiencies that benefit consumers, but their anticompetitive potential is sufficient to warrant scrutiny even in the absence of incipient monopoly.
The distinction between unilateral and concerted conduct is necessary for a proper understanding of the terms "contract, combination . . . or conspiracy" in § 1. Nothing in the literal meaning of those terms excludes coordinated conduct among officers or employees of the same company. But it is perfectly plain that an internal "agreement" to implement a single, unitary firm's policies does not raise the antitrust dangers that § 1 was designed to police. The officers of a single firm are not separate economic actors pursuing separate economic interests, so agreements among them do not suddenly bring together economic power that was previously pursuing divergent goals. Coordination within a firm is as likely to result from an effort to compete as from an effort to stifle competition. In the marketplace, such coordination may be necessary if a business enterprise is to compete effectively. For these reasons, officers or employees of the same firm do not provide the plurality of actors imperative for a § 1 conspiracy.
There is also general agreement that § 1 is not violated by the internally coordinated conduct of a corporation and one of its unincorporated divisions. Although this Court has not previously addressed the question, there can be little doubt that the operations of a corporate enterprise organized into divisions must be judged as the conduct of a single actor. The existence of an unincorporated division reflects no more than a firm's decision to adopt an organizational division of labor. A division within a corporate structure pursues the common interests of the whole rather than interests separate from those of the corporation itself; a business enterprise establishes divisions to further its own interests in the most efficient manner. Because coordination between a corporation and its division does not represent a sudden joining of two independent sources of economic power previously pursuing separate interests, it is not an activity that warrants § 1 scrutiny.
Indeed, a rule that punished coordinated conduct simply because a corporation delegated certain responsibilities to autonomous units might well discourage corporations from creating divisions with their presumed benefits. This would serve no useful antitrust purpose but could well deprive consumers of the efficiencies that decentralized management may bring.
For similar reasons, the coordinated activity of a parent and its wholly owned subsidiary must be viewed as that of a single enterprise for purposes of § 1 of the Sherman Act. A parent and its wholly owned subsidiary have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousnesses, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver. With or without a formal "agreement," the subsidiary acts for the benefit of the parent, its sole shareholder. If a parent and a wholly owned subsidiary do "agree" to a course of action, there is no sudden joining of economic resources that had previously served different interests, and there is no justification for § 1 scrutiny. Indeed, the very notion of an "agreement" in Sherman Act terms between a parent and a wholly owned subsidiary lacks meaning. A § 1 agreement may be found when "the conspirators had a unity of purpose or a common design and understanding, or a meeting of minds in an unlawful arrangement." American Tobacco Co. v. United States, 328 U.S. 781, 810 (1946). But in reality a parent and a wholly owned subsidiary always have a "unity of purpose or a common design." They share a common purpose whether or not the parent keeps a tight rein over the subsidiary, the parent may assert full control at any moment if the subsidiary fails to act in the parent's best interests.
The intra-enterprise conspiracy doctrine looks to the form of an enterprise's structure and ignores the reality. Antitrust liability should not depend on whether a corporate subunit is organized as an unincorporated division or a wholly owned subsidiary. A corporation has complete power to maintain a wholly owned subsidiary in either form. The economic, legal, or other considerations that lead corporate management to choose one structure over the other are not relevant to whether the enterprise's conduct seriously threatens competition. Rather, a corporation may adopt the subsidiary form of organization for valid management and related purposes. Separate incorporation may improve management, avoid special tax problems arising from multistate operations, or serve other legitimate interests. Especially in view of the increasing complexity of corporate operations, a business enterprise should be free to structure itself in ways that serve efficiency of control, economy of operations, and other factors dictated by business judgment without increasing its exposure to antitrust liability. Because there is nothing inherently anticompetitive about a corporation's decision to create a subsidiary, the intra-enterprise conspiracy doctrine "[imposes] grave legal consequences upon organizational distinctions that are of de minimis meaning and effect." Sunkist Growers, Inc. v. Winckler & Smith Citrus Products Co., 370 U.S. 19, 29 (1962).
If antitrust liability turned on the garb in which a corporate subunit was clothed, parent corporations would be encouraged to convert subsidiaries into unincorporated divisions. Indeed, this is precisely what the Seagram company did after this Court's decision in Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211 (1951). [See Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71 (CA9 1969), cert. denied, 396 U.S. 1062 (1970).] Such an incentive serves no valid antitrust goals but merely deprives consumers and producers of the benefits that the subsidiary form may yield.
The error of treating a corporate division differently from a wholly owned subsidiary is readily seen from the facts of this case. Regal was operated as an unincorporated division of Lear Siegler for four years before it became a wholly owned subsidiary of Copperweld. Nothing in this record indicates any meaningful difference between Regal's operations as a division and its later operations as a separate corporation. Certainly nothing suggests that Regal was a greater threat to competition as a subsidiary of Copperweld than as a division of Lear Siegler. Under either arrangement, Regal might have acted to bar a new competitor from entering the market. In one case it could have relied on economic power from other quarters of the Lear Siegler corporation, instead it drew on the strength of its separately incorporated parent, Copperweld. From the standpoint of the antitrust laws, there is no reason to treat one more harshly than the other. As Chief Justice Hughes cautioned, "[realities] must dominate the judgment." Appalachian Coals, Inc. v. United States, 288 U.S., at 360.
Any reading of the Sherman Act that remains true to the Act's distinction between unilateral and concerted conduct will necessarily disappoint those who find that distinction arbitrary. It cannot be denied that § 1's focus on concerted behavior leaves a "gap" in the Act's proscription against unreasonable restraints of trade. See post, at 789. An unreasonable restraint of trade may be effected not only by two independent firms acting in concert; a single firm may restrain trade to precisely the same extent if it alone possesses the combined market power of those same two firms. Because the Sherman Act does not prohibit unreasonable restraints of trade as such -- but only restraints effected by a contract, combination, or conspiracy -- it leaves untouched a single firm's anticompetitive conduct (short of threatened monopolization) that may be indistinguishable in economic effect from the conduct of two firms subject to § 1 liability.
We have already noted that Congress left this "gap" for eminently sound reasons. Subjecting a single firm's every action to judicial scrutiny for reasonableness would threaten to discourage the competitive enthusiasm that the antitrust laws seek to promote. See supra, at 767-769. Moreover, whatever the wisdom of the distinction, the Act's plain language leaves no doubt that Congress made a purposeful choice to accord different treatment to unilateral and concerted conduct. Had Congress intended to outlaw unreasonable restraints of trade as such, § 1's requirement of a contract, combination, or conspiracy would be superfluous, as would the entirety of § 2. Indeed, this Court has recognized that § 1 is limited to concerted conduct at least since the days of United States v. Colgate & Co., 250 U.S. 300 (1919). Accord, post, at 789.
The appropriate inquiry in this case, therefore, is not whether the coordinated conduct of a parent and its wholly owned subsidiary may ever have anticompetitive effects, as the dissent suggests. Nor is it whether the term "conspiracy" will bear a literal construction that includes parent corporations and their wholly owned subsidiaries. For if these were the proper inquiries, a single firm's conduct would be subject to § 1 scrutiny whenever the coordination of two employees was involved. Such a rule would obliterate the Act's distinction between unilateral and concerted conduct, contrary to the clear intent of Congress as interpreted by the weight of judicial authority. See n. 15, supra. Rather, the appropriate inquiry requires us to explain the logic underlying Congress' decision to exempt unilateral conduct from § 1 scrutiny, and to assess whether that logic similarly excludes the conduct of a parent and its wholly owned subsidiary. Unless we second-guess the judgment of Congress to limit § 1 to concerted conduct, we can only conclude that the coordinated behavior of a parent and its wholly owned subsidiary falls outside the reach of that provision.
Although we recognize that any "gap" the Sherman Act leaves is the sensible result of a purposeful policy decision by Congress, we also note that the size of any such gap is open to serious question. Any anticompetitive activities of corporations and their wholly owned subsidiaries meriting antitrust remedies may be policed adequately without resort to an intra-enterprise conspiracy doctrine. A corporation's initial acquisition of control will always be subject to scrutiny under § 1 of the Sherman Act and § 7 of the Clayton Act, 38 Stat. 731, 15 U. S. C. § 18. Thereafter, the enterprise is fully subject to § 2 of the Sherman Act and § 5 of the Federal Trade Commission Act, 38 Stat. 719, 15 U. S. C. § 45. That these statutes are adequate to control dangerous anticompetitive conduct is suggested by the fact that not a single holding of antitrust liability by this Court would today be different in the absence of an intra-enterprise conspiracy doctrine. It is further suggested by the fact that the Federal Government, in its administration of the antitrust laws, no longer accepts the concept that a corporation and its wholly owned subsidiaries can "combine" or "conspire" under § 1. Elimination of the intra-enterprise conspiracy doctrine with respect to corporations and their wholly owned subsidiaries will therefore not cripple antitrust enforcement. It will simply eliminate treble damages from private state tort suits masquerading as antitrust actions.
We hold that Copperweld and its wholly owned subsidiary Regal are incapable of conspiring with each other for purposes of § 1 of the Sherman Act. To the extent that prior decisions of this Court are to the contrary, they are disapproved and overruled. Accordingly, the judgment of the Court of Appeals is reversed.
It is so ordered.
Justice White took no part in the consideration or decision of this case.
Stevens, with whom Brennan and Marshall join, dissenting.
It is safe to assume that corporate affiliates do not vigorously compete with one another. A price-fixing or market-allocation agreement between two or more such corporate entities does not, therefore, eliminate any competition that would otherwise exist. It makes no difference whether such an agreement is labeled a "contract," a "conspiracy," or merely a policy decision, because it surely does not unreasonably restrain competition within the meaning of the Sherman Act. The Rule of Reason has always given the courts adequate latitude to examine the substance rather than the form of an arrangement when answering the question whether collective action has restrained competition within the meaning of § 1.
Today the Court announces a new per se rule: a wholly owned subsidiary is incapable of conspiring with its parent under § 1 of the Sherman Act. Instead of redefining the word "conspiracy," the Court would be better advised to continue to rely on the Rule of Reason. Precisely because they do not eliminate competition that would otherwise exist but rather enhance the ability to compete, restraints which enable effective integration between a corporate parent and its subsidiary -- the type of arrangement the Court is properly concerned with protecting -- are not prohibited by § 1. Thus, the Court's desire to shield such arrangements from antitrust liability provides no justification for the Court's new rule.
In contrast, the case before us today presents the type of restraint that has precious little to do with effective integration between parent and subsidiary corporations. Rather, the purpose of the challenged conduct was to exclude a potential competitor of the subsidiary from the market. The jury apparently concluded that the two defendant corporations -- Copperweld and its subsidiary Regal -- had successfully delayed Independence's entry into the steel tubing business by applying a form of economic coercion to potential suppliers of financing and capital equipment, as well as to potential customers. Everyone seems to agree that this conduct was tortious as a matter of state law. This type of exclusionary conduct is plainly distinguishable from vertical integration designed to achieve competitive efficiencies. If, as seems to be the case, the challenged conduct was manifestly anti-competitive, it should not be immunized from scrutiny under § 1 of the Sherman Act.
Repudiation of prior cases is not a step that should be taken lightly. As the Court wrote only days ago: "[Any] departure from the doctrine of stare decisis demands special justification." Arizona v. Rumsey, ante, at 212. It is therefore appropriate to begin with an examination of the precedents.
In United States v. Yellow Cab Co., 332 U.S. 218 (1947), the Court explicitly stated that a corporate subsidiary could conspire with its parent:
"The fact that these restraints occur in a setting described by the appellees as a vertically integrated enterprise does not necessarily remove the ban of the Sherman Act. The test of illegality under the Act is the presence or absence of an unreasonable restraint on interstate commerce. Such a restraint may result as readily from a conspiracy among those who are affiliated or integrated under common ownership as from a conspiracy among those who are otherwise independent."
Id., at 227.
The majority attempts to explain Yellow Cab by suggesting that it dealt only with unlawful acquisition of subsidiaries. Ante, at 761-762. But the Court mentioned acquisitions only as an additional consideration separate from the passage quoted above, and more important, the Court explicitly held that restraints imposed by the corporate parent on the affiliates that it already owned in themselves violated § 1.
At least three cases involving the motion picture industry also recognize that affiliated corporations may combine or conspire within the meaning of § 1. In United States v. Crescent Amusement Co., 323 U.S. 173 (1944), as the Court recognizes, ante, at 762, n. 6, the only conspirators were affiliated corporations. The majority's claim that the case involved only unlawful acquisitions because of the Court's comments concerning divestiture of the affiliates cannot be squared with the passage immediately following that cited by the majority, which states that there had been unlawful conduct going beyond the acquisition of subsidiaries:
"That principle is adequate here to justify divestiture of all interest in some of the affiliates since their acquisition was part of the fruits of the conspiracy. But the relief need not, and under these facts should not, be so restricted [to divestiture]. The fact that the companies were affiliated induced joint action and agreement. Common control was one of the instruments in bringing about unity of purpose and unity of action and in making the conspiracy effective. If that affiliation continues, there will be tempting opportunity for these exhibitors to continue to act in combination against the independents."
323 U.S., at 189-190 (emphasis supplied).
Similarly, in Schine Chain Theatres, Inc. v. United States, 334 U.S. 110 (1948), the Court held that concerted action by parents and subsidiaries constituted an unlawful conspiracy. That was also the holding in United States v. Griffith, 334 U.S. 100, 109 (1948). The majority's observation that in these cases there were alternative grounds that could have been used to reach the same result, ante, at 763, n. 8, disguises neither the fact that the holding that actually appears in these opinions rests on conspiracy between affiliated entities, nor that today's holding is inconsistent with what was actually held in these cases.
In Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211 (1951), the Court's holding was plain and unequivocal:
"Respondents next suggest that their status as 'mere instrumentalities of a single manufacturing-merchandizing unit' makes it impossible for them to have conspired in a manner forbidden by the Sherman Act. But this suggestion runs counter to our past decisions that common ownership and control does not liberate corporations from the impact of the antitrust laws. E. g. United States v. Yellow Cab Co., 332 U.S. 218. The rule is especially applicable where, as here, respondents hold themselves out as competitors."
Id., at 215. This holding is so clear that even the Court, which is not wanting for inventiveness in its reading of the prior cases, cannot explain it away. The Court suggests only that today Kiefer-Stewart might be decided on alternative grounds, ante, at 764, ignoring the fact that today's holding is inconsistent with the ground on which the case actually was decided.
A construction of the statute that reaches agreements between corporate parents and subsidiaries was again embraced by the Court in Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951), and Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134 (1968). The majority only notes that there might have been other grounds for decision available in these cases, ante, at 764-766, but again it cannot deny that its new rule is inconsistent with what the Court actually did write in these cases.
Thus, the rule announced today is inconsistent with what this Court has held on at least seven previous occasions. Perhaps most illuminating is the fact that until today, whether they favored the doctrine or not, it had been the universal conclusion of both the lower courts and the commentators that this Court's cases establish that a parent and a wholly owned subsidiary corporation are capable of conspiring in violation of § 1. In this very case the Court of Appeals observed:
"[The] salient factor is that the Supreme Court's decisions, while they need not be read with complete literalism, of course they cannot be ignored. It is no accident that every Court of Appeals to consider the question has concluded that a parent and its subsidiary have the same capacity to conspire, whether or not they can be found to have done so in a particular case." 691 F.2d 310, 317 (CA7 1982) (footnotes omitted).
Thus, we are not writing on a clean slate. "[We] must bear in mind that considerations of stare decisis weigh heavily in the area of statutory construction, where Congress is free to change this Court's interpretation of its legislation." Illinois Brick Co. v. Illinois, 431 U.S. 720, 736 (1977). See also Monsanto Co. v. Spray-Rite Service Co., 465 U.S. 752, 769 (1984) (Brennan, J., concurring). There can be no doubt that the Court today changes what has been taken to be the long-settled rule: a rule that Congress did not revise at any point in the last four decades. At a minimum there should be a strong presumption against the approach taken today by the Court. It is to the merits of that approach that I now turn.
The language of § 1 of the Sherman Act is sweeping in its breadth: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, . . . is declared to be illegal." 15 U. S. C. § 1. This Court has long recognized that Congress intended this language to have a broad sweep, reaching any form of combination:
"[In] view of the many new forms of contracts and combinations which were being evolved from existing economic conditions, it was deemed essential by an all-embracing enumeration to make sure that no form of contract or combination by which an undue restraint of interstate or foreign commerce was brought about could save such restraint from condemnation. The statute under this view evidenced the intent not to restrain the right to make and enforce contracts, whether resulting from combination or otherwise, which did not unduly restrain interstate or foreign commerce, but to protect that commerce from being restrained by methods, whether old or new, which would constitute an interference that is an undue restraint." Standard Oil Co. v. United States, 221 U.S. 1, 59-60 (1911). This broad construction is illustrated by the Court's refusal to limit the statute to actual agreements. Even mere acquiescence in an anticompetitive scheme has been held sufficient to satisfy the statutory language.
See Albrecht v. Herald Co., 390 U.S. 145, 149 (1968), United States v. Parke, Davis & Co., 362 U.S. 29, 44 (1960). See also Monsanto Co. v. Spray-Rite Service Co., 465 U.S., at 764, n. 9.
Since the statute was written against the background of the common law, reference to the common law is particularly enlightening in construing the statutory requirement of a "contract, combination in the form of trust or otherwise, or conspiracy." Under the common law, the question whether affiliated corporations constitute a plurality of actors within the meaning of the statute is easily answered. The well-settled rule is that a corporation is a separate legal entity; the separate corporate form cannot be disregarded. The Congress that passed the Sherman Act was well acquainted with this rule. See 21 Cong. Rec. 2571 (1890) (remarks of Sen. Teller) ("Each corporation is a creature by itself"). Thus it has long been the law of criminal conspiracy that the officers of even a single corporation are capable of conspiring with each other or the corporation. This Court has held that a corporation can conspire with its employee, and that a labor union can "combine" with its business agent within the meaning of § 1. This concept explains the Timken Court's statement that the affiliated corporations in that case made" agreements between legally separate persons," 341 U.S., at 598. Thus, today's holding that agreements between parent and subsidiary corporations involve merely unilateral conduct is at odds with the way that this Court has traditionally understood the concept of a combination or conspiracy, and also at odds with the way in which the Congress that enacted the Sherman Act surely understood it.
Holding that affiliated corporations cannot constitute a plurality of actors is also inconsistent with the objectives of the Sherman Act. Congress was particularly concerned with "trusts," hence it named them in § 1 as a specific form of "combination" at which the statute was directed. Yet "trusts" consisted of affiliated corporations. As Senator Sherman explained:
"Because these combinations are always in many States and, as the Senator from Missouri says, it will be very easy for them to make a corporation within a State. So they can, but that is only one corporation of the combination. The combination is always of two or more, and in one case of forty-odd corporations, all bound together by a link which holds them under the name of trustees, who are themselves incorporated under the laws of one of the States."
21 Cong. Rec. 2569 (1890). The activities of these "combinations" of affiliated corporations were of special concern:
"[Associated] enterprise and capital are not satisfied with partnerships and corporations competing with each other, and have invented a new form of combination commonly called trusts, that seeks to avoid competition by combining the controlling corporations, partnerships, and individuals engaged in the same business, and placing the power and property of the combination under the government of a few individuals, and often under the control of a single man called a trustee, a chairman, or a president.
"The sole object of such a combination is to make competition impossible. It can control the market, raise or lower prices, as will best promote its selfish interests, reduce prices in a particular locality and break down competition and advance prices at will where competition does not exist. Its governing motive is to increase the profits of the parties composing it. The law of selfishness, uncontrolled by competition, compels it to disregard the interest of the consumer. It dictates terms to transportation companies, it commands the price of labor without fear of strikes, for in its field it allows no competitors. . . . It is this kind of a combination we have to deal with now." Id., at 2457.
Thus, the corporate subsidiary, when used as a device to eliminate competition, was one of the chief evils to which the Sherman Act was addressed. The anomaly in today's holding is that the corporate devices most similar to the original "trusts" are now those which free an enterprise from antitrust scrutiny.
The Court's reason for rejecting the concept of a combination or conspiracy among a parent corporation and its wholly owned subsidiary is that it elevates form over substance -- while in form the two corporations are separate legal entities, in substance they are a single integrated enterprise and hence cannot comprise the plurality of actors necessary to satisfy § 1. Ante, at 771-774. In many situations the Court's reasoning is perfectly sensible, for the affiliation of corporate entities often is procompetitive precisely because, as the Court explains, it enhances efficiency. A challenge to conduct that is merely an incident of the desirable integration that accompanies such affiliation should fail. However, the protection of such conduct provides no justification for the Court's new rule, precisely because such conduct cannot be characterized as an unreasonable restraint of trade violative of § 1. Conversely, the problem with the Court's new rule is that it leaves a significant gap in the enforcement of § 1 with respect to anticompetitive conduct that is entirely unrelated to the efficiencies associated with integration.
Since at least United States v. Colgate & Co., 250 U.S. 300 (1919), § 1 has been construed to require a plurality of actors. This requirement, however, is a consequence of the plain statutory language, not of any economic principle. As an economic matter, what is critical is the presence of market power, rather than a plurality of actors. From a competitive standpoint, a decision of a single firm possessing power to reduce output and raise prices above competitive levels has the same consequence as a decision by two firms acting together who have acquired an equivalent amount of market power through an agreement not to compete. Unilateral conduct by a firm with market power has no less anticompetitive potential than conduct by a plurality of actors which generates or exploits the same power, and probably more, since the unilateral actor avoids the policing problems faced by cartels.
The rule of Yellow Cab thus has an economic justification. It addresses a gap in antitrust enforcement by reaching anticompetitive agreements between affiliated corporations which have sufficient market power to restrain marketwide competition, but not sufficient power to be considered monopolists within the ambit of § 2 of the Act. The doctrine is also useful when a third party declines to join a conspiracy to restrain trade among affiliated corporations, and is harmed as a result through a boycott or similar tactics designed to penalize the refusal. In such cases, since there has been no agreement with the third party, only an agreement between the affiliated corporations can be the basis for § 1 inquiry. Finally, it must be remembered that not all persons who restrain trade wear grey flannel suits. Businesses controlled by organized crime often attempt to gain control of an industry through violence or intimidation of competitors; in such cases § 1 can be applied to separately incorporated businesses which benefit from such tactics, but which may be ultimately controlled by a single criminal enterprise.
The rule of Yellow Cab and its progeny is not one that condemns every parent-subsidiary relationship. A single firm, no matter what its corporate structure may be, is not expected to compete with itself. Functional integration by its very nature requires unified action, hence in itself it has never been sufficient to establish the existence of an unreasonable restraint of trade: "In discussing the charge in the Yellow Cab case, we said that the fact that the conspirators were integrated did not insulate them from the act, not that corporate integration violated the act." United States v. Columbia Steel Co., 334 U.S. 495, 522 (1948). Restraints that act only on the parent or its subsidiary as a consequence of an otherwise lawful integration do not violate § 1 of the Sherman Act. But if the behavior at issue is unrelated to any functional integration between the affiliated corporations and imposes a restraint on third parties of sufficient magnitude to restrain marketwide competition, as a matter of economic substance, as well as form, it is appropriate to characterize the conduct as a "combination or conspiracy in restraint of trade."
For example, in Yellow Cab the Court read the complaint as alleging that integration had assisted the parent in excluding competing manufacturers from the marketplace, 332 U.S., at 226-227, leading the Court to conclude that "restraint of interstate trade was not only effected by the combination of the appellees but was the primary object of the combination." Id., at 227. Similarly, in Crescent Amusement the Court noted that corporate affiliation between exhibitors enhanced their buying power and "was one of the instruments in . . . making the conspiracy effective" in excluding independents from the market. 323 U.S., at 189-190. Thus, in both cases the Court found that the affiliation enhanced the ability of the parent corporation to exclude the competition of third parties, and hence raised entry barriers faced by actual and potential competitors. When conduct restrains trade not merely by integrating affiliated corporations but rather by restraining the ability of others to compete, that conduct has competitive significance drastically different from procompetitive integration. In these cases, the affiliation assisted exclusionary conduct; it was not the competitive equivalent of unilateral integration but instead generated power to restrain marketwide competition.
There are other ways in which corporate affiliation can operate to restrain competition. A wholly owned subsidiary might market a "fighting brand" or engage in other predatory behavior that would be more effective if its ownership were concealed than if it was known that only one firm was involved. A predator might be willing to accept the risk of bankrupting a subsidiary when it could not afford to let a division incur similar risks. Affiliated corporations might enhance their power over suppliers by agreeing to refuse to deal with those who deal with an actual or potential competitor of one of them; such a threat might be more potent coming from both corporations than from only one.
In this case, it may be that notices to potential suppliers of respondent emanating from Copperweld carried more weight than would notices coming only from Regal. There was evidence suggesting that Regal and Copperweld were not integrated, and that the challenged agreement had little to do with achieving procompetitive efficiencies and much to do with protecting Regal's market position. The Court does not even try to explain why their common ownership meant that Copperweld and Regal were merely obtaining benefits associated with the efficiencies of integration. Both the District Court and the Court of Appeals thought that their agreement had a very different result -- that it raised barriers to entry and imposed an appreciable marketwide restraint. The Court's discussion of the justifications for corporate affiliation is therefore entirely abstract -- while it dutifully lists the procompetitive justifications for corporate affiliation, ante, at 772-774, it fails to explain how any of them relate to the conduct at issue in this case. What is challenged here is not the fact of integration between Regal and Copperweld, but their specific agreement with respect to Independence. That agreement concerned the exclusion of Independence from the market, and not any efficiency resulting from integration. The facts of this very case belie the conclusion that affiliated corporations are incapable of engaging in the kind of conduct that threatens marketwide competition. The Court does not even attempt to assess the competitive significance of the conduct under challenge here -- it never tests its economic assumptions against the concrete facts before it. Use of economic theory without reference to the competitive impact of the particular economic arrangement at issue is properly criticized when it produces overly broad per se rules of antitrust liability, e. g., Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977). criticism is no less warranted when a per se rule of antitrust immunity is adopted in the same way.
In sum, the question that the Court should ask is not why a wholly owned subsidiary should be treated differently from a corporate division, since the immunity accorded that type of arrangement is a necessary consequence of Colgate. Rather the question should be why two corporations that engage in a predatory course of conduct which produces a marketwide restraint on competition and which, as separate legal entities, can be easily fit within the language of § 1, should be immunized from liability because they are controlled by the same godfather. That is a question the Court simply fails to confront. I respectfully dissent.
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United States v. E.I. du Pont de Nemours
118 F.Supp. 41, 99 U.S.P.Q. 462 (D.Del., 1953)
[Numerous factual and legal issues were raised by the government in the antitrust action against DuPont for monopolization of the cellophane market. The district court decision herein focusses on allegations that a territorially limited trade secret license was illegal, presumably as a contract, combination or conspiracy in restraint of trade under §1 of the Sherman Act. The only issue appealed by the government was the single firm monopolization claim under §2. The Supreme Court affirmed, finding no monopolization of the relevant market, setting the standards for market definition. US v. E.I. duPont de Nemours 351 US 377, 76 SCt 994, 100 LEd 1264 (1956)]
* * *
B. IS ORIGIN OF DUPONT'S
Plaintiff contends duPont acquired an illegal monopoly at the time it entered the business for the reason its basic contracts with the French were part of a plan to divide world markets and thus isolate duPont from import competition. DuPont's embarcation upon cellophane manufacture was lawful and had neither the purpose nor effects attributed to them.
The agreements made by duPont at the time it entered into the manufacture of cellophane in 1923 are the series of formal contracts between duPont and La Cellophane under which the duPont Cellophane Company was organized and rights obtained for it to manufacture under the French secret process.
Each of these undertakings was lawful in the circumstances under which it was made. From an antitrust point of view the form of the transaction is of no consequence. I must be concerned with substance and purpose. The record establishes basic contracts with La Cellophane arose from legitimate business considerations and were what they purported to be in form, namely organization of a partnership with La Cellophane for the manufacture of cellophane in the United States coupled with license agreements under which significant technology was made available exclusively to the partnership in return for stock in the venture. These facts are:
1. La Cellophane developed a successful proven process for the commercial manufacture of cellophane. This process was secret, novel and of commercial value. Plaintiff does not attempt to challenge this fact of importance.
2. When duPont learned of cellophane, it entered upon the manufacture of the product. It was not then engaged in any business which would cause it to fear the competition of cellophane. Rather, it desired to diversify its business and take the business risk of entering this new field. La Cellophane, in turn, had no reason to fear duPont's competition, for duPont had neither the necessary knowledge nor technical experience to compete in cellophane. No one else in the United States was making cellophane or seeking to get La Cellophane's process. It was not practicable to enter upon the manufacture of cellophane without having access to the French process. DuPont had had previous successful business ventures in partnership with the French interests who controlled La Cellophane. DuPont and La Cellophane negotiated in good faith the basic agreements and entered into them in good faith with advice of counsel. There were logical business reasons for the organization of the joint enterprise known as duPont Cellophane Company. DuPont contributed capital; duPont contributed trained management familiar with United States business conditions who had worked with the French in the manufacture of rayon; duPont could make available facilities at Buffalo which would help get the enterprise going. La Cellophane was in a position to contribute, in addition to capital, substantial technical assistance in the form of operating manuals and procedures, the designing and manufacture of secret equipment, the training of personnel, the imparting of all phases of production line know-how. DuPont and the French thus each had a legitimate stake in the venture, a participation in the management and profits of the enterprise, and neither party was motivated by anti-competitive considerations. It was a corollary to such a partnership La Cellophane would undertake not to enter into other manufacturing enterprises in the United States in competition with the enterprise that it was assisting to create. The company was thus jointly created to do business in North and Central America and the licenses granted by La Cellophane limited the new company's rights to this area although duPont sought wider rights. Under the license agreement La Cellophane made available designs, process information and trade secrets of a comprehensive character. The data was secret and novel. It had high commercial value and was precisely imparted. It was essential to the manufacture of the product. It was used in actual practice and in fact even today, almost thirty years later, is at the core of duPont's processes for the manufacture of cellophane.
Plaintiff's argument a territorially limited license under a secret process is per se illegal is not accepted.
Defendant's evidence has shown the French process was the only existing commercial process for the manufacture of cellophane, and it was a prov en process that worked. It was not known in the trade, nor disclosed in issued patents. It was guarded against public disclosure. Its value is clear not only from the price paid for it at the time but from the expert testimony received as to the amount of effort and money which would have been required to enter the business without it. It was made available in an explicit way, both by writing and plant disclosure. All steps of the process were covered, all aspects of machinery design revealed. Elaborate chemical controls requiring years to develop were explained. The process covered the entire manufacturing process from viscose through casting and drying machines to the plain cellophane itself.
It is not the purpose of the Sherman Act or the co mon law of restraints of trade to discourage establishment of a new business in a new territory. Trade secrets have always been considered in the nature of a property right. E. I. duPont de Nemours Powder Co. v. Masland, 244 U.S. 100, 37 S.Ct. 575, 61 L.Ed. 1016; and my views in International Industries, Inc. v. Warren Petroleum Co., D.C. Del., 99 F.Supp. 907. See, Restatement of Torts, § 516, relied on in United States v. Bausch & Lomb Optical Co., D.C., 45 F. Supp. 387, 398, affirmed on this point, 321 U.S. 707, 719, 64 S.Ct. 805, 88 L.Ed. 1024; United States v. Addyston Pipe & Steel Co., 6 Cir., 85 F.271. Among the ancillary restraints which are considered reasonable, both under common law and the Sherman Act, are those which limit territory in which the contracting parties may use the trade secret. Fowle v. Park, 131 U.S. 88, 9 S.Ct. 658, 33 L.Ed. 67; Central Transportation Co. v Pullman's Palace Car Co., 139 U.S. 24, 53, 11 S.Ct. 478, 35 L.Ed. 55; Dr. Miles Medical Co. v. John D. Oarke & Sons Co., 220 U.S. 373, 402, 31 S.Ct. 376, 55 L.Ed. 502; Thomas v. Sutherland, 3 Cir., 52 F.2d 592, 595.
Apart from secret process, it is not illegal per se for competitors to combine their resources in a manufacturing joint venture to exploit a particular product or a particular market. The Sherman Act forbids only unreasonable restraints of trade. Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 60, 31 S.Ct. 502, 55 L. Ed. 619; United States v. American Tobacco Co., 221 U.S. 106, 180, 31 S.Ct. 632, 55 L.Ed. 663. This rule of reason applies to horizontal combinations between competitors as well as to other restraints. Appalachian Coals, Inc. v. United States, 288 U.S. 344, 53 S.Ct. 471, 77 L.Ed. 825; United States v. International Harvester Co., 274 U.S. 693, 47 S.Ct. 748, 71 L.Ed. 1302; United States v. United States Steel Corp., 251 U.S. 417, 41 S.Ct. 293, 64 L.Ed. 343. Such combinations occur in American business, as the trade reports of new joint ventures to exploit specific products bear witness. A horizontal combination of two domestic American competitors in an American market was recently upheld in a case arising in this Court United States v. Columbia Steel Co., 334 U.S. 495, 68 S.Ct. 1107, 92 L.Ed. 1533.
It is lawful for an American and a French concern who are not competitors to combine their resources in a joint venture absent an overriding unlawful purpose. That was done here. The purpose of the agreement was the development and exploitation of a new business to function in American markets. The reasonableness of the ancillary restraints on competition -- here at the most potential competition since the participants were not in fact competitors -- is enforced by the inherent legality of imposing a territorial limitation on an assignment of a secret process. The result of the agreement, in the case at bar, was the creation of the American cellophane industry.
The license arrangements were entered into during early stages of duPont's cellophane business, when it was struggling to establish plain cellophane as a competing product in the flexible packaging market. La Cellophane was a larger and more established producer and owned the essential processes. Its preeminence in the field, however, did not continue for long. Under duPont management, as the opportunities of the bigger American market were realized, the business here rapidly grew. Within a short time La Cellophane was not able to make any further technical contribution, and the direction of the business had shifted from plain cellophane to duPont's own patented produced, moistureproof cellophane. With the development of this product, duPont's production rapidly mounted. Throughout the entire period under review in this case, the bulk of duPont production was in moistureproof cellophane. DuPont owned the product patent which gave it the right to exclude imports into the United States. In addition, it was protected by high tariffs. Evidence discloses duPont's technical superiority and contacts with the trade gave it further assurance against import competition. Foreign cellophane cost more; it was of poorer quality and the foreign manufacturers were not in a position to render the sales service required, nor did they have research facilities to serve the needs of the trade.
Factors that limited imports to the United States from abroad are plain. For a period during the 1930's, Japanese producers sold cellophane in the United States. Their sales were small and soon ceased. These producers had no agreements with anyone in the United States, and were not blocked by the tariff since their delivered prices were lower than price of domestic cellophane. Yet even their sales stopped. They could make only plain, whereas moistureproof was the core of the business. They could not make rolls satisfactory to users, and overall quality was so poor customers would rarely try Japanese cellophane more than once. American standards of quality and service are confirmed, as the obstacles to invasion of the United States market by foreign producers, by the testimony of businessmen who had purchased or considered purchasing foreign cellophane. Their testimony was, due to deficiencies of quality and inability to obtain technical service, they did not buy.
Plaintiff looks at origins of duPont's cellophane business by claiming that, beyond the license agreements, duPont was carrying on a broad commercial understanding with foreign producers to allocate world territory and thus avoid competition. Failure to prove any effect from it, this cartel aspect of the case raises a straight issue of fact. DuPont did not make such an agreement. The evidence proves this.
Plaintiff's proof on this issue is a meeting at Paris in February 1930 among representatives of European producers, resulting in a master plan for price fixing and market divisions of the world's trade in cellophane. Plaintiff's contentions were denied by Yerkes and the testimony of Swint and Carpenter, and were supported by uncontroverted proof of basic facts; duPont did not sign the undertaking; its representatives attended as guests and observers, did not listen in on the second day of the two-day conference; facts show they were not authorized to make commitments for duPont and of more importance made none, and of equal importance the head of the Foreign Relations Department of duPont was unaware of the existence of the document until it was offered as evidence by plaintiff at the trial of this case.
Actual conduct of all producers implicated in this agreement is inconsistent with the existence of any cartel. La Cellophane wrote to duPont in 1932, two years after the meeting on which plaintiff places great reliance:
"Owing to the fact that you preferred not to join the Convention we could not keep Wolf and S.I.D.A.C. away from your markets, i.e., the United States, Canada, Etc., as they would not get anything in return, whereas ourselves would, of course, as in the past, refrain from selling in you territory.
"Cuba: being situated north of the Panama Canal, belonging thus to your territory, Wolf & Co. are quite free to fix their selling prices and enter into open competition with yourselves."
Evidence established Wolff sold in North America, though not in the United States. Wolff sought to manufacture in the United States to get behind the tariff wall. Wolff could not get over the tariff, and the tariff was the primary obstacle to Wolff.
SIDAC did not sell in North America after 1929. The Government recognizes SIDAC was free to do so. Intricate theories of a conspiratorial network is cast aside. SIDAC's agreement with the Sylvania Industrial Corporation ceded to the latter's exclusive rights to "use the said processes above mentioned in all the North American continent north of the Panama Canal * * * and the Republic of Cuba," much in the manner of the license granted duPont Cellophane Company by La Cellophane. There is no proof duPont was connected with the making of the Sylvania-SIDAC agreement.
Plaintiff has held out GX-1013 as the agreement between duPont and La Cellophane extending rights of duPont to South America. Witnesses and documents show GX-1013 was not ratified by defendant. It proposals for a price agreement and quota assignments for South America were, in fact, rejected. A new agreement was adopted by duPont and agreed to by the French, calling for equal rights in South America.
For a period duPont was prepared to respect the construction placed upon "equal rights" by La Cellophane, i.e., a 50-50 division with La Cellophane of South American business. It became clear La Cellophane was not prepared to devote effort to South American business, nor did La Cellophane provide duPont with any information as to how division was to be computed. Thus, Yerkes' advice to La Cellophane less than two years later:
"Considering all of the circumstances we must consider ourselves free to pursue our own policy of sales in South America, Japan and China".
The reasons for this action, and duPont's relationship with other Europeans as to South America business are summed up by May (GX-1036, p. 1068):
"The attempt at reparations took the form of extending our territory beyond North and Central America, but that extension was based upon some fancy European 'consortium' that apparently never worked out * * * the whole thing was based upon an impracticable premise and I though so at the time * * *
"When we talk about 'equal rights' with La Cellophane, it is, among other things, assumed that their rights with others can be maintained -- otherwise what rights have we except to assert our own to solicit business in South America and to derive the benefits that come from a real sales efforts free from a lot of impracticable European business politics? While they were 'negotiating' and talking about 'quotas' and doing other 'easy chair' things, we attempted to develop a market by real work, consisting of sending qualified salesman using the very methods that were successful in this country. The result has been that our business is expanding because we did something about it and the reward is a claim upon us to divide."
The basic fact is duPont refused to divide; it competed vigorously.
Price quotations of every producer in South America were different. Proof shows a pattern of price cutting by British, French, Belgian and German producers and efforts of all of them and of duPont to get business wherever it could be found. One trade report develops a case history of price competition between duPont and SIDAC over a single order, and exemplified the type of furtive warfare that characterized the South American trade. This was the norm for that market as is emphasized by a witness who saw it first-hand (Swint, Tr. 6212).
Evidence disproving any theory of quota assignments in South America has been shown. Quantities sold to South America from different nations demonstrate ratios between American, British, French and Belgian producers were not the product of anything but ability of each producer to make a sale. At outset, duPont sold in excess of what plaintiff contends it was limited to. This fact brought requests from La Cellophane that duPont permit the French to even the sales, or duPont make offsetting payments, requests which duPont declined. Thus, in every market where duPont sold, it fought the cartel group.
C. WAS DUPONTS POSITION MAINTAINED
BY PREDATORY ASSERTION OF
1. TESTS TO BE APPLIED.
Plaintiff contends duPont acquired its position unlawfully and has maintained that position by various predatory practices. Thus, plaintiff rests its case upon so-called predatory practices. These are said to be responsible for duPont's start in the business, to be responsible for its success, and to have been the motif of its entire conduct.
Exercise of monopoly power can be shown only where the act can be directly related to the company's aggressive use of a monopoly position to accomplish an exclusionary result. For example, the concerted acts of the tobacco companies in raising and lowering prices to eliminate specific types of competition, without regard for manufacturing cost or other competitive considerations, was found to be an exercise of monopoly power. American Tobacco Co. v. United States, 328 U.S. 781, 804-807, 66 S.Ct. 1125, 90 L.Ed. 1575. This conduct had an exclusionary intent and an exclusionary result. Plaintiff, on the other hand, has only suggested a series of transactions which it seeks to claim were restraints of trade and asks the court to infer these restraints could only have taken place in the area of monopoly power.
It is necessary for plaintiff to show restraints not only existed but they contributed to the achieving or maintenance of duPont's power. For example, considerable proof was offered as to whether or not prices of plain cellophane were fixed in Brazil for a period of several years in the 1930's. While evidence shows they were not, there could be no connection between such price activity and duPont's position in the manufacture of cellophane in the United States. Similarly, evidence was offered at one time an employee of duPont referred to a cancellation provision of a use patent license as being a provision by which the licensee could be forced to purchase cellophane from duPont, but there is no proof any tying took place, that any licensee under a use patent was forced to buy from duPont, or any contract was cancelled for failure so to buy. The claim is made duPont's pricing methods were at some points inconsistent with interpretations of the Robinson-Patman Act. But, evidence shows Sylvania followed identical pricing methods; and there is no proof any particular purchaser had its purchases channeled to duPont because of the discounts allowed or Sylvania was injured thereby. Testimony is to the contrary both on the part of purchasers and of Sylvania. It is charged duPont restrained trade by acquiring patents from others which it did not use. While the reasons for this non-use are clear, the use or non-use of the patents had nothing to do with duPont's position as a manufacturer of cellophane, for there is no showing patents were acquired from others who intended to use them in the manufacture of cellophane. Moreover, patents could not have been practiced by others without a license under the basic moistureproof patent.
This is not a case brought under § 1 of the Sherman Act, or § 3 of the Clayton Act or the Robinson-Patman Act. I have no reason to determine whether a particular practice does or does not restrain trade in a manner that violates these laws until it has first been shown one of two conditions has been satisfied. Unless evidence shows the particular practice was an assertion of power to fix arbitrary prices or to exclude competitors or, in the alternative, practice is shown to have been reasonably related to the maintenance or acquisition of duPont's position, it has no relevance to this case. Plaintiff has not by its attack been able to uncover any conduct to demonstrate duPont's position has been either acquired or maintained by predatory acts. Plaintiff has burden of proof in this regard, and it has failed to sustain that burden. Cf. United States v. Aluminum Co. of America, 2 Cir., 148 F.2d 416, 423, 426, 434, 435.
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United States v. Singer Mfg. Co.
374 U.S. 174, 83 S. Ct. 1773, 10 L. Ed. 2d 823;
137 USPQ 808, 1963 Trade Cas. ¶ 70,813 (1963)
This is a direct appeal from the judgment of the United States District Court for the Southern District of New York, 205 F.Supp. 394, dismissing a civil antitrust action brought by the United States against the Singer Manufacturing Company to prevent and restrain alleged violations of §§ 1 and 2 of the Sherman Act, 15 U. S. C. §§ 1 and 2. The complaint alleged that Singer combined and conspired with two competitors, Gegauf of Switzerland and Vigorelli of Italy, to restrain and monopolize and that Singer unilaterally attempted to monopolize interstate and foreign trade in the importation, sale and distribution of household zigzag sewing machines. The District Court dismissed after an extended trial, concluding that the charges were without merit. The United States appealed under § 2 of the Expediting Act, 15 U. S. C. § 29, but has abandoned its claim as to attempted monopolization. We noted probable jurisdiction in light of the fact that unless we did so the parties would be deprived of any appellate review in the case. 371 U.S. 918. We have examined the record (1,723 pages) in detail, as is necessary in these direct appeals, and upon consideration of it, as well as the briefs and argument of counsel, have concluded that there was a conspiracy to exclude Japanese competitors in household zigzag sewing machines and that the judgment must be reversed.
The details of the facts are long and complicated. The amended and corrected opinion of the District Court includes not only a description of the sewing machines involved and their operation but also an analysis of the patents covering them. We shall, therefore, not relate the facts in detail but satisfy ourselves with the overriding ones.
A. As the District Court stated, this action
"concerns only the United States trade and commerce arising from the importation into the United States of a particular type of household sewing machine known as the 'machine-carried multicam zigzag machine.'"
205 F.Supp., at 396. The zigzag stitch machine produces various ornamental and functional zigzag stitches as well asstraight ones. The automatic multicam zigzag machine, unlike the manually operated zigzag and the replaceable cam machine, each of which requires hand manipulation or insertion, operates in response to the turning of a knob or dial on the exterior of the machine. While the multicam machines involved here function in slightly different ways, all are a variant of the same basic principle.
B. Singer is the sole United States manufacturer of household zigzag sewing machines. In addition to the multicam variety at issue here, it produces replaceable cam machines but not the manually operated zigzag. Singer sells these machines in this country through a wholly owned subsidiary and in various foreign countries through independent distributors. Singer's sales comprised approximately 61.4% of all domestic sales in multicam zigzag machines in the United States in 1959. During the same year some 22.6% were imported from Japan and about 16% from Europe. In 1958 Singer's percentage was 69.6%, Japanese imports 20.7% and European imports 9.7%. Further, Singer's 1959 and 1960 domestic sales of multicam machines amounted to approximately $ 46 million per year, in each of which years such sales accounted for about 45% of all its domestic sewing machine sales.
C. It appears that Singer by April 29, 1953, through its experimental department, had completed a design of a multiple cam zigzag mechanism in what it calls the Singer "401" machine. It is disclosed in Singer's Johnson Patent. In 1953 Singer was also developing its Perla Patent as used in its "306" replaceable cam machine and in 1954 its "319" machine-carried multiple cam machine. In September of 1953 Vigorelli, an Italian corporation, introduced in the United States a sewing machine incorporating a stack of cams with a single follower. Singer concluded that Vigorelli had on file applications covering its machine in the various patent offices in the world and that the Singer design would infringe. On June 10, 1955, Singer bought for $ 8,000 a patent disclosing a plurality of cams with a single cam follower from Carl Harris, a Canadian. It was believed that this patent, filed June 9, 1952, might be reissued with claims covering the Singer 401 as well as its 319 machine, and that the reissued patent would dominate the Vigorelli machine as well as a Japanese one introduced into the United States in September 1954 by Brother International Corporation. Thereafter Singer concluded that litigation would result between it and Vigorelli unless a cross-licensing agreement could be made, and this was effected on November 17, 1955. The license was nonexclusive, world-wide and royalty free. The trial court found that Singer's only purpose was to effect a cross-licensing, but certain correspondence does cast some shadow upon these negotiations. The agreement also contained provisions by which each of the parties agreed not to bring any infringement action against the other "in any country" or institute against the other any opposition, nullity or invalidation proceedings in any country. In accordance with this agreement Singer withdrew its opposition to Vigorelli's patent application in Brazil and Vigorelli later (1958) abandoned a United States interference to the Johnson application which cleared the way for the Johnson Patent to issue on December 2 of that year.
D. While Singer was negotiating the cross-license agreement with Vigorelli it learned that Gegauf, a Swiss corporation, had a patent covering a multiple cam mechanism. This placed an additional cloud over Singer's Harris reissue plan because the Gegauf patent enjoyed an effective priority date in Italy of May 31, 1952. This was nine days earlier than Singer's Harris patent filing date in the United States. In December 1955 Singer learned that Gegauf and Vigorelli had entered a cross-licensing agreement covering their multiple cam patents similar to the Vigorelli-Singer agreement. In January 1956 Singer found that Gegauf had pending an application in the United States Patent Office and assumed that it was based on the same priority date, i. e., May 31, 1952. If this was true Singer could use its Harris reissue patent only to oppose through interference the allowance of broad claims to Gegauf. It therefore made preparation to negotiate with Gegauf, first approaching Vigorelli in order to ascertain how the latter had induced Gegauf to grant him a royalty-free license and drop any claim of infringement. Singer made direct arrangements for a conference wth Gegauf for April 12, 1956, and the license agreement was made April 14, 1956.
The setting for this meeting was that Gegauf had a dominant Swiss patent with applications in Germany, Italy, and the United States all prior to Singer. In addition, Singer's counsel had examined Gegauf's Swiss patent and advised that it was valid. Singer opened conversation with indications of coming litigation on the Harris patent, concealing the Johnson and Perla applications. Gegauf felt secure in his patent claims but insecure with reference to the inroads the Japanese machines were making on the United States market. It was this "lever" which Singer used to secure the license, pointing out that without an agreement Gegauf and Singer might litigate for a protracted period; that they should not be fighting each other as that would only delay the issue of their respective patents; and, finally, that they should license each other and get their respective patents "so they could be enforced by whoever would own the particular patent." Singer in the discussions worked upon these Gegauf fears of Japanese competition "because one of the strong points" of its argument was that an agreement should be made "in order to fight against this Japanese competition in their building a machine that in any way reads on the patents of ourselves and of Bernina [Gegauf] which are in conflict." The trial judge found that the only purpose "disclosed to Gegauf, and in fact the very one used to convince Gegauf of the advisability of entering into an agreement" was to "obtain protection against the Japanese machines which might be made under the Gegauf patent; this sprang from a fear which Singer had good reason to believe to be well founded." 205 F. Supp., at 413. While he found Singer's "underlying, dominant and sole purpose ... was to settle the conflict in priority between the Gegauf and Harris patents and to secure for Singer a license right under the earlier patent," ibid., it is significant that no such overriding purpose was found to have been disclosed to Gegauf.
The license agreement covered (1) the Singer-Harris patent and its reissue application in the United States and nine corresponding foreign ones, and (2) the Gegauf Swiss, Italian and German patents, as well as the United States and German applications covering the same. The parties agre ed in the first paragraph of the agreement "not to do anything, either directly or indirectly and in any country, the result of which might restrict the scope of the claims of the other party relating to the subject matter of the above mentioned patents and patent applications." In addition "each undertakes, in accordance with the laws and regulations of the Patent Office concerned, to facilitate the allowance in any country of claims as broad as possible, as regards the subject matter of the patents and patent applications referred to above." The parties also agreed not to sue one another on the basis of any of the patents or applications. Singer agreed not to make a "slavish" copy of Gegauf's machine and to give Gegauf "the amical assistance of its patent attorneys for the defense of any of the above mentioned Gegauf patents or patent applications against an action in cancellation." The agreement made no mention of Singer's Perla or Johnson applications, the existence of which Singer did not wish Gegauf to know.
E. Approximately one week after the Gegauf cross-licen se agreement Singer met with Vigorelli at Milan, Italy, at the latter's request. Vigorelli at this meeting suggested that Singer, Gegauf and Vigorelli, having arrived at their respective agreements, should act in concert in prosecuting their patents against all others in the field. This was out of the question, Singer immediately replied, advising that "what appeared to us to be proper action was for each one to prosecute his own patents and take care of any cases of infringement that might appear." The subsequent conversations at the meeting are reported from the same source as follows:
"Upon learning that there could be no joint action by the three companies who have been mentioned in prosecuting patents against all others in the field, that subject was dropped . . .. "
At this point, it should perhaps be mentioned that Mr. Stanford and I have discussed between ourselves whether we should say anything to Mr. Gegauf about our feeling that we could prosecute his patents that will be issued sometime within the next few months in the United States better than perhaps he could if we owned them, but we had decided not to say anything to Mr. Gegauf about this at this time.
"In talking with Mr. Vigorelli's lawyer, Mr. Stanford dropped this view to him. The point was immediately understood, and the question was raised if we would have any objection if they were to pass the word on to Mr. Gegauf that they were raising this point. We said that, of course, we would have no objection but that we ourselves did not wish to do this, and we would not want the suggestion coming to Mr. Gegauf at this time as from us. If they wanted to suggest it, it was all right. We would, of course, under such an arrangement have to give a license to Gegauf under the patent that he would turn over to us. Mr. Stanford believes that he would be able before the patent is issued to rewrite the claims and make it stronger than it now is and that it is a fact that, being in the United States, we would be better able to prosecute any claims against this patent than would Mr. Gegauf."
While the testimony of Mr. Stanford, Singer's patent attorney, varies somewhat from this memorandum of Mr. Waterman, it is substantially the same. That the approach to Gegauf was not casually laid is shown by a May 7, 1956, letter from Mr. Stanford to Patent Department employees of Singer in which he said,
"When in Italy we laid careful plans for Gegauf to be advised by a third party that Singer could best handle the patent situation if we owned the Gegauf U.S. Patent. Think it will bear fruit. This suggestion, with the U.S. attorney situation is pressure in the right direction."
Mr. Majnoni reported in June 1956 that he had the "opportunity of talking to the Patent Attorneys of Mr. F. Gegauf on a number of occasions" concerning "the question of the advantage of the American Singer Company being in possession of the different patents which might be useful in defence of sewing machines with multiple cams . . . ." He stated that "the particular character of the question," i. e., "the possibility and advantage that the Gegauf patent application in the States be assigned to Singer," required that the approach be in "such a way as to prompt an initiative to this end by Gegauf." He was hopeful that this had been accomplished. Thereafter on September 19 Dr. S. Lando, Singer representative in Milan, reported that Majnoni advised that Gegauf
"is today effectively willing to transfer his patent application in the U.S. to the Singer, without regard or with little regard to the financial side of the matter."
This was brought about, he said, by discussions between Vigorelli and Gegauf concerning a United States Van Tuyl patent and its effect upon the validity of the Gegauf German patent; that Gegauf had
"made informally known to Mr. Vigorelli that the withdrawing of the Vigorelli application in the U.S. would be greatly appreciated, to prevent the issuance of a printed patent wherein the fact that the Van Tuyl patent exists will be made known to third parties";
that Vigorelli had agreed to withdraw his application and that as a consequence Vigorelli would
"drop any direct means adapted to protect his machines in the U.S., but he is quite sure that Singer will take care of the protection of the machines of the general type of interest, by making use of the owned Harris and Gegauf patents."
In the summer of 1956 Mr. F. Gegauf, Jr., and his sister attended a sewing machine convention at Kansas City. On returning home they met with Singer (Messrs. Waterman & Stanford) in Singer's office in New York City. Gegauf expressed concern over the number of Japanese machines that he had seen at the convention. Singer again found opportunity to employ the Japanese problem and stressed to Gegauf, Jr., the difficulties of enforcing a patent in the United States -- namely, large number of importers, size of the country, number of judicial circuits, etc. Singer emphasized that these all presented problems to the owner of a United States patent. Singer being in the United States could, they said, enforce the patent better than Gegauf could. They asked Gegauf, Jr., whether he thought his father would be interested in selling the patent to Singer. Thereafter, on September 3, Gegauf, Jr. wrote Mr. Waterman that Singer's suggestion had been taken up with Gegauf, Sr., and "we might be interested in such an agreement." The closing paragraph says: "We agree that something should be done against Japanese competition in your country and maybe South America and are therefore looking forward to your early reply." Waterman replied on September 7 that he and Mr. Stanford would be in Germany on September 18 through 25; he asked that Gegauf's United States patent attorney be directed to meet with Stanford in New York City with authorization to disclose the content of the Gegauf patent application so that time might be saved in Europe. Mr. Waterman closed with the belief "that it may be possible that we can both strengthen our positions with respect to the Japanese competition which you mention . . . ." The conference was set for September 23 at which time Gegauf demanded $ 250,000 for the patent and negotiations broke off. Singer wrote Dr. Lando, its Milan agent, on October 9, informing him. The letter closed with this paragraph: "I thought you would like to have this information if the subject should come up in talking with Mr. Vigorelli or his attorney." An on October 24 Singer wrote Mr. Gegauf advising that the United States Patent Office had declared an interference between their patent applications; that their cross-license agreement provided that this interference be settled in accordance with the patent laws of the United States; that
"since . . . interference proceedings are usually time consuming and costly to the parties involved, it would appear that it would be advantageous for us to settle the interference between ourselves rather than to continue the proceeding and rely on the United States Patent Office finally to award a priority";
and finally Singer suggested that the attorneys for the parties in the United States get together with a view to settling the interference. Singer abandoned its interference on March 15, 1957, and the Gegauf claim was taken verbatim from the Singer Harris reissue claim.
Nothing more was done by Singer toward securing the Gegauf application until September 12, 1957, when Singer wrote Gegauf that its Harris application was about to be issued as a patent. It also anticipated that several other patents relating to ornamental stitch machines would soon be issued to it and presumed Gegauf's application would soon be granted. Then followed this paragraph:
"When I had the pleasure of meeting you last fall we had some discussion relative to the procedures that might be followed to enforce the patents . . . , when issued, against infringing manufacturers who primarily are manufacturers in other countries seeking markets in the United States, and more and more throughout the entire world. These manufacturers are bringing out a large variety of ornamental stitch machines which would appear to come within the terms of claims which may be awarded in the United States with respect of the aforementioned Singer and Gegauf patents. A proper enforcement of these patents may make it necessary to instigate patent suits against each of the importers in the United States, of whom there will perhaps be many. I think you will agree with me that neither one of us alone can protect himself most effectively."
This letter brought on a meeting of the parties in Zurich on October 16, 1957. Gegauf's position was that, as the trial court found, "while it had no objection 'to making an agreement with Singer, in order to stop as far as possible Japanese competitors in the United States market,' it was willing to do so only under certain conditions." 205 F.Supp., at 416. Finally, as the trial court found, Gegauf demanded $ 125,000 plus certain conditions declaring that it
"was cheap and that it could not go lower since it could get more money if it licensed the invention. Kirker [of Singer] replied that there was no comparison since a sale to Singer was insurance against common competitors and that was why Singer was willing to pay."
Ibid. In another exchange Gegauf
"advanced the argument that, if stopped by Singer in the United States, the Japanese manufacturers would run to Europe; to this Singer answered that a greater risk was run in Europe if Singer were not permitted to first stop infringements in the United States. . . . Singer continued 'to drive home the point' that Gegauf stood to benefit more by enforcement of the patents in the United States because the 'Brother Pacesetter' machine, a big selling and patent infringing Japanese-made machine, was in direct competition with the Gegauf machine, for both machines were of the free arm type." 205 F. Supp., at 417.
This letter is substantially the same as the proposed letter which Mr. Stanford sent Mr. Waterman for transmittal to Gegauf, except that the quoted paragraph was phrased more directly in the proposed letter:
"You are no doubt aware that recently the many Japanese sewing machine manufacturers have brought out a large variety of ornamental stitch machines which would appear to come within the terms of claims which may be awarded in the United States with respect of the above Gegauf and Singer patents. We have reason to believe that all of the very many United States sewing machine importers will wish to deal in such Japanese ornamental stitch machines, and that patent suits against each of these importers may be necessary if our respective patents are to be enforced.
"Your [sic] may agree with us that under the terms of our present agreement neither party is in a position effectively to protect itself through patents in the United States with respect to this threatened competition, particularly when the competing machines are copies after both Bernina and Singer models."
Finally Gegauf assigned to Singer its application and all rights in the invention claimed and to all United States patents which might be granted under it for $ 90,000. The accompanying agreement provided that (1) Singer would grant Gegauf a nonexclusive royalty-free license to sell in the United States sewing machines made in Gegauf's factory in Switzerland; (2) Singer would not institute, without the consent of Gegauf, legal proceedings asserting the patents when issued against Pfaff in Germany or Vigorelli in Italy with respect to machines manufactured in their home factories; and (3) Singer would not make a "slavish" copy of Gegauf's Bernina machine.
F. The Gegauf patent issued on April 29, 1958, and Singer filed two infringement suits against Brother, the largest domestic importer of Japanese machines. It also sued two other distributors of multicam machines, those actions terminating in consent decrees. Finally, in January 1959, eight months after the patent was issued, Singer brought a proceeding before the United States Tariff Commission under § 337 of the Tariff Act of 1930, 19 U.S.C. 188 § 1337. It sought an order of the President of the United States excluding all imported machines coming within the claims of the Gegauf patent for the term of the patent, naming European as well as Japanese infringers. Singer alleged that the tremendous volume of imports from Japan of household sewing machines, other than automatic zigzag, had eliminated all domestic manufacturers save itself and one small straight stitch part-time concern. It further alleged that the increasing volume of infringing imports similarly threatened to result in the curtailment and ultimate cessation of manufacturing operations in the United States in automatic zigzags, with heavy loss of highly paid and skilled labor and large capital investment. At the time of the filing, Singer alleged, foreign-made machines, "primarily from Japan," were being imported to the extent of 50% of the entire Singer sales of automatic zigzag machines in this country; it represented that the automatic zigzag machine is its most important product and that it sells for a minimum price of $ 300; that infringers from Japan sell at no firm price, the average being $ 100 less than Singer's price but often far below that figure; and that the minimum price in Japan for export is $ 40 to $ 54.
During the hearing on its complaint Singer was asked whether Pfaff was licensed under the Gegauf patent. Singer replied in the negative but became skeptical and, believing that it might "have a better chance of prevailing before the Tariff Commission," decided to ask Gegauf to revise the agreement, which originally excepted Pfaff and Vigorelli from enforcement proceedings, except on consent of Gegauf. The latter agreed on condition that Phoenix, a German manufacturer which was a party-defendant in the proceedings, be substituted.
Upon commencement of this action by the United States, the Commission stayed the proceedings, and they are now in abeyance pending our disposition of this case.
First it may be helpful to set out what is not involved in this case. There is no claim by the Government that it is illegal for one merely to acquire a patent in order to exclude his competitors; or that the owner of a lawfully acquired patent cannot use the patent laws to exclude all infringers of the patent; or that a licensee cannot lawfully acquire the covering patent in order better to enforce it on his own account, even when the patent dominates an industry in which the licensee is the dominant firm. Therefore, we put all these matters aside without discussion.
What is claimed here is that Singer engaged in a series of transactions with Gegauf and Vigorelli for an illegal purpose, i. e., to rid itself and Gegauf, together, perhaps, with Vigorelli, of infringements by their common competitors, the Japanese manufacturers. The Government claims that in this respect there were an identity of purpose among the parties and actions pursuant thereto that in law amount to a combination or conspiracy violative of the Sherman Act. It claims that this can be established under the findings of the District Court.
We note from the findings that the importation of Japanese household multicam zigzag sewing machines first came to notice in the United States in 1954 with the introduction of such a machine by the Brother International Corporation. It incorporated the mechanism of the Vigorelli zigzag and the Singer 401 machines. By 1959 importations of all Japanese household sewing machines reached 1,100,000, while importations of European machines reached only 100,000. Moreover, it appears that all but two domestic manufacturers were put out of business in three to four years after the Japanese machines first appeared. The two remaining domestic manufacturers were Singer and a company not specializing in sewing machines, which manufactured only straight stitch machines on order for a single domestic customer.
The trial court found that no mention was made of the Japanese machines during the negotiations covering the Vigorelli cross-licensing agreement with Singer. It first appeared during the Gegauf licensing negotiations where at those meetings Singer used "protection against the Japanese" as "one of the strong points" on the cross-licensing of the Gegauf and Harris patents and applications. Here, though the trial court stated that the "dominant and sole purpose of the license agreement was to settle the conflict in priority," it specifically, in the next paragraph of its opinion, found a "secondary" purpose, i. e., protection against the Japanese machines which were infringing the Gegauf patent. In this connection it is most important to note another finding of the trial court, namely, that this purpose to exclude the Japanese "was the only one disclosed to Gegauf, and in fact the very one used to convince Gegauf of the advisability of entering into an agreement." 205 F Supp, at 413. Under these findings it cannot be said that settlement of the conflict in priority was the "dominant and sole purpose" of Singer. Indeed, the two findings are in direct conflict. Furthermore the fact that the cross-license agreement provided that Singer and Gegauf would facilitate the allowance to each other of claims "as broad as possible" indicates a desire to secure as broad coverage for the patent as possible, the more effectively to stifle competition, the overwhelming percentage of which was Japanese. This effect was accomplished, for when the Patent Office placed the Harris (Singer) and Gegauf patents in interference, Singer abandoned the proceeding, thus facilitating the issuance of broad claims to Gegauf.
We now come to the assignment of the Gegauf patent to Singer. The trial court found: (1) that six days after the license agreement was made with Gegauf, Singer proceeded to Italy where a conference was held with Vigorelli. At this meeting two events took place that led to the later acquisition of the patent by Singer. The first was Vigorelli's proposal that Singer, Gegauf and himself act "in concert against others" in enforcing the patent. This was rejected by Singer's representatives, who said it was best for each "to prosecute his own patents." At the same meeting, however, Singer proposed to Vigorelli that it could prosecute the Gegauf patent in the United States better than Gegauf and, after Vigorelli agreed, solicited his help in getting Gegauf to agree to assign the patent. (2) Vigorelli went to Gegauf "acting as Singer's agent," 205 F.Supp., at 414, and convinced the latter sufficiently for him to write Singer that he favored the idea of doing something "against Japanese competition." (3) Singer replied to Gegauf by letter that an arrangement could be reached "equally advantageous to both." (4) Singer went to Europe but was not able to agree on Gegauf's terms and thereafter, in September 1957, wrote the latter that "their mutual interests required that something be done to protect themselves from the Japanese infringing machines." (5) Gegauf replied that he would be happy to meet Singer to discuss "mutual enforcement" of its United States application and the Harris reissue. Then, (6) in the final conferences in Europe Gegauf told Singer that he had no objection "to making an agreement with Singer, in order to stop as far as possible Japanese competitors in the United States market." Further, the trial court found that Singer assured Gegauf that "Singer was insurance against common competitors" and Gegauf's fears that if Singer stopped the Japanese infringements in the United States they (the Japanese) would go to Europe, where Gegauf was not in as good a position to stop them, were unfounded because a greater risk was run in Europe if Singer were not permitted to first stop infringements in the United States. Finally, the court found that (7) Singer was determined "to drive home the point" that Gegauf stood to benefit more by enforcement of the patents in the United States because the "Brother Pacesetter" machine, a big selling and patent infringing Japanese-made machine, was in direct competition with the Gegauf machine in the United States. As the trial court put it, "the point apparently reached home" -- Gegauf ultimately assigned the patent for only $ 90,000, much less than its original asking price and much less than Gegauf believed it would realize annually from a license grant. Gegauf's beliefs as to the inadequacy of the monetary consideration were well founded, since Singer received more than twice that amount in a two-year period from the one license it granted under the Gegauf patent. That license, incidentally, was to Sears, Roebuck & Company, which imported machines from Europe.
As we have noted with reference to the cross-license agreement, the trial court decided that "the undisputed facts support no conclusion other than that the underlying, dominant and sole purpose of the license agreement was to settle the conflict in priority between the Gegauf and Harris patents ... ." We have rejected this conclusion on the trial court's own finding in the next paragraph of the opinion that Singer's "secondary" purpose, the only one disclosed to Gegauf, was its "desire to obtain protection against the Japanese machines which might be made under the Gegauf patent." Likewise we reject, as a question of law, the court's inference that the attitude of suspicion, wariness and self-preservation of the parties negated a conspiracy. See United States v. Line Material Co. 333 U.S. 287, 297 (1948, )United States v. Masonite Corp., 316 U.S. 265, 280-281 (1942); United States v. General Electric Co., 80 F.Supp. 989, 997-998 (S. D. N. Y. 1948).
The trial court held that the fact that Singer had a purpose, which "Gegauf well knew," of enforcing the patent upon its acquisition, that the enforcement "would most certainly include Japanese manufacturers who were the principal infringers," and "that Gegauf shared with Singer a common concern over Japanese competition" did not establish a conspiracy. 205 F.Supp., at 419. Given the court's own findings and the clear import of the record, it is apparent that its conclusions were predicated upon "an erroneous interpretation of the standard to be applied. . . ." Thus, "because of the nature of the District Court's error we are reviewing a question of law, namely, whether the District Court applied the proper standard to essentially undisputed facts." United States v. Parke, Davis & Co., 362 U.S. 29, 44 (1960). There in a discussion of a like problem we held that "the inference of an agreement in violation of the Sherman Act" is not "merely limited to particular fact complexes," ibid., citing United States v. Bausch & Lomb Optical Co., 321 U.S. 707 (1944) and Federal Trade Comm'n v. Beech-Nut Packing Co., 257 U.S. 441 (1922). "Both cases," the Court continued, "teach that judicial inquiry is not to stop with a search of the record for evidence of purely contractual arrangements. . . ." Id.
Whether the conspiracy was achieved by agreement, by tacit understanding, or by "acquiescence . . . coupled with assistance in effectuating its purpose is immaterial." United States v. Bausch & Lomb, supra, at 723. Here the patent was put in Singer's hands to achieve the common purpose of enforcement "equally advantageous to both" Singer and Gegauf and to Vigorelli as well. What Singer had refused Vigorelli, i. e., acting "in concert against others," was thus achieved by the simple expedient of transferring the patent to Singer.
Thus by entwining itself with Gegauf and Vigorelli in such a program Singer went far beyond its claimed purpose of merely protecting its own 401 machine -- it was protecting Gegauf and Vigorelli, the sole licensees under the patent at the time, under the same umbrella. This the Sherman Act will not permit. As the Court held in Frey & Son, Inc., v. Cudahy Packing Co., 256 U.S. 208, 210 (1921), the conspiracy arises implicitly from the course of dealing of the parties, here resulting in Singer's obligation to enforce the patent to the benefit of all three parties. While there was no contract so stipulating, the facts as found by the trial court indicate a common purpose to suppress the Japanese machine competition in the United States through the use of the patent, which was secured by Singer on the assurances to Gegauf and its colicensee, Vigorelli, that such would certainly be the result. See Federal Trade Comm'n v. Beech-Nut Packing Co., supra. Singer cannot, of course, contend that it sought the assignment of the patent merely to assure that it could produce and sell its machines, since the preceding cross-license agreement had assured that right. The fact that the enforcement plan likewise served Singer is of no consequence, the controlling factor being the overall common design, i. e., to destroy the Japanese sale of infringing machines in the United States by placing the patent in Singer's hands the better to achieve this result. It is this concerted action to restrain trade, clearly established by the course of dealings, that condemns the transactions under the Sherman Act. As we said in United States v. Parke, Davis & Co., supra, at 44, "whether an unlawful combination or conspiracy is proved is to be judged by what the parties actually did rather than by the words they used."
Moreover this overriding common design to exclude the Japanese machines in the United States is clearly illustrated by Singer's action before the United States Tariff Commission. Less than eight months after the patent was issued it started this effort to bar infringers in one sweep. As an American corporation, it was the sole company of the three that was able to bring such an action. When it appeared that the references to Pfaff in the assignment agreement threatened the success of the Tariff Commission proceeding, Gegauf consented to the deletion of Pfaff from the agreement. This maneuver was for the purpose, as the trial court found, of giving Singer "'a better chance of prevailing before the Tariff Commission' in its efforts to exclude" infringing machines. 205 F.Supp., at 427. While the tariff application was leveled against nine European as well as the Japanese competitors, the allegations were clearly beamed at the infringing Japanese machines to which Singer attributed the destruction of all American domestic household sewing machine companies save itself. As the parties to the agreements and assignment well knew, and as the trial court itself stated, "by far the largest number of infringers of the Gegauf patent and invention were the Japanese." 205 F.Supp., at 418.
It is strongly urged upon us that application of the antitrust laws in this case will have a significantly deleterious effect on Singer's position as the sole remaining domestic producer of zigzag sewing machines for household use, the market for which has been increasingly preempted by foreign manufacturers. Whether economic consequences of this character warrant relaxation of the scope of enforcement of the antitrust laws, however, is a policy matter committed to congressional or executive resolution. It is not within the province of the courts, whose function is to apply the existing law. It is well settled that "beyond the limited monopoly which is granted, the arrangements by which the patent is utilized are subject to the general law," United States v. Masonite Corp., supra, at 277, and it
"is equally well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly. By aggregating patents in one control, the holder of the patents cannot escape the prohibitions of the Sherman Act."
United States v. Line Material Co., supra, at 308. That Act imposes strict limitations on the concerted activities in which patent owners may lawfully engage, see United States v. United States Gypsum Co., 333 U.S. 364 (1948); United States v. Line Material Co., supra; United States v. National Lead Co., 63 F.Supp. 513, aff'd, 332 U.S. 319 (1947), and those limitations have been exceeded in this case.
Justice White, concurring.
There are two phases to the Government's case here: one, the conspiracy to exclude the Japanese from the market, and the other, the collusive termination of a Patent Office interference proceeding pursuant to an agreement between Singer and Gegauf to help one another to secure as broad a patent monopoly as possible, invalidity considerations notwithstanding. The Court finds a violation of § 1 of the Sherman Act in the totality of Singer's conduct, and intimates no views as to either phase of the Government's case standing alone. Since, in my view, either branch of the case is sufficient to warrant relief, I join the Court's opinion, except for footnote 1, with which I disagree.
As to the conspiracy to exclude the Japanese, there is involved, as the Court points out, more than the transfer of the patent from one competitor to another; implicit in the arrangement is Singer's undertaking to enforce the patent on behalf of both itself and Gegauf.
* * *
More must be said about the interference settlement. In 1956, Singer's "Harris" multicam zigzag reissue-patent application was pending in the United States Patent Office; Gegauf had an application pending at the same time covering substantially the same subject matter, but enjoying a nine-day earlier priority date. See 35 U.S.C. § 119. In the circumstances, it appeared to Singer that, between Singer and Gegauf, Gegauf would have a better claim to a patent on the multicam zigzag, at least on the broad and thus more valuable claims. But it was by no means certain that either of them would get the patent. In cases where several applicants claim the same subject matter, the Patent Office declares an "interference." This is an adversary proceeding between the rival applicants, primarily for the purpose of determining relative priority. But a party to an interference also can, by drawing additional prior art to the attention of the Patent Office which will require the Office to issue no patent at all to anyone, see 37 CFR §§ 1.232, 1.237 (a); cf. 35 U.S.C. §§ 101-102, prevent his rival from securing a patent which if granted might exclude him from the manufacture of the subject matter. 35 U.S.C. § 154. Gegauf, after Singer approached it to negotiate an agreement before the Office declared an interference, feared that Singer might in self-defense draw to the attention of the Patent Office certain earlier patents the Office was unaware of, and which might cause the Gegauf claims to be limited or invalidated; Singer "let them know that we thought we could knock out their claims but that in so doing we were probably going to hurt both of us."
The result was that in April 1956 Singer and Gegauf entered a general cross-licensing agreement providing that the parties were not to attack one another's patent applications "directly or indirectly," not to do anything to restrict one another's claims in patents or applications, and to facilitate the allowance to one another of "claims as broad as possible." In August 1956 the Patent Office declared the anticipated interference. Singer and Gegauf settled the interference pursuant to their prior agreement: Singer withdrew its interfering claims and in April 1957 the Patent Office dissolved the interference proceeding before it had ever reached the litigation stage. 37 CFR § 1.262. Eventually the Gegauf patent issued and was sold to Singer as part of the concerted action to exclude the Japanese which is involved in the first branch of the case, supra, p. 197.
In itself the desire to secure broad claims in a patent may well be unexceptionable -- when purely unilateral action is involved. And the settlement of an interference in which the only interests at stake are those of the adversaries, as in the case of a dispute over relative priority only and where possible invalidity, because of known prior art, is not involved, may well be consistent with the general policy favoring settlement of litigation. But the present case involves a less innocuous setting. Singer and Gegauf agreed to settle an interference, at least in part, to prevent an open fight over validity. There is a public interest here, see Mercoid Corp. v. Mid-Continent Co., 320 U.S. 661, 665; United States v. Masonite Corp., 316 U.S. 265, 278, which the parties have subordinated to their private ends -- the public interest in granting patent monopolies only when the progress of the useful arts and of science will be furthered because as the consideration for its grant the public is given a novel and useful invention. U.S. Const., Art. I, § 8; 35 U. S. C. § 101; Statute of Monopolies, 21 Jac. I, c. 3. When there is no novelty and the public parts with the monopoly grant for no return, the public has been imposed upon and the patent clause subverted. United States v. Bell Telephone Co., 128 U.S. 315, 357, 370; see Katzinger Co. v. Chicago Mfg. Co., 329 U.S. 394, 400-401; Cuno Corp. v. Automatic Devices Corp., 314 U.S. 84, 92; A. & P. Tea Co. v. Supermarket Corp., 340 U.S. 147, 154-155 (concurring opinion). Whatever may be the duty of a single party to draw the prior art to the Office's attention, see 35 U. S. C. § 115; 37 CFR § 1.65 (a); Bell Telephone, supra, at 356, clearly collusion among applicants to prevent prior art from coming to or being drawn to the Office's attention is an inequitable imposition on the Office and on the public. Precision Instrument Co. v. Automotive Co., 324 U.S. 806; see H. R. Rep. No. 1983, 87th Cong., 2d Sess. 1, 4 (Rep. on Act of October 15, 1962, Pub. L. 87-831, 76 Stat. 958). In my view, such collusion to secure a monopoly grant runs afoul of the Sherman Act's prohibitions against conspiracies in restraint of trade -- if not bad per se, then such agreements are at least presumptively bad.
* * *
The patent laws do not authorize, and the Sherman Act does not permit, such agreements between business rivals to encroach upon the public domain and usurp it to themselves.
Justice Harlan, dissenting.
Although the Court reverses this case on the ground that the District Court proceeded on erroneous legal premises, I do not believe its opinion can serve to obscure the fact that what the majority has really done is overturn the lower court's findings of fact.
* * *
The basic predicate for this Court's attributing to the District Court the following of an erroneous legal standard is the "direct conflict" which the majority sees between the lower court's finding that Singer's underlying, "dominant and sole purpose" in entering into the Gegauf license agreement "was to settle the conflict" between the Harris and the Gegauf patents and the finding that Singer's "secondary" purpose was its desire to obtain "protection against the Japanese machines" which might be made under the Gegauf patent (ante, p. 190). This is indeed a slender reed for the Court's position. For one is left at a loss to understand how the two findings can be deemed inconsistent. Obviously Singer wanted to settle the "priority" issue with Gegauf in order to have solid patent protection against all comers -- particularly of course the Japanese, whose ability to manufacture these popular machines in a cheap labor market put them in the forefront of possible infringers. Thus it seems to me that the findings as to Singer's "dominant" and "secondary" purposes are entirely consistent, and that their supposed inconsistency can be made to rest on nothing more substantial than a play on the word "sole" in the basic finding. The further circumstance that it was only Singer's "secondary" purpose that was disclosed to Gegauf goes not to the question of "consistency" but rather to the sufficiency of the lower court's ultimate finding that no illegal concert of action had been shown between Singer and Gegauf.
Nor does anything to which the Court points in the Gegauf patent assignment and Tariff Commission episodes (ante, pp. 191-196) lend support to this transparent effort to ground reversal on a question of law so as to escape the necessity of coming to grips with the only true issue in this case: are the District Court's findings of fact -- which if accepted would put an end to the Government's case -- "clearly erroneous"? Again the various bits and pieces which the Court has culled from this lengthy record go not to the consistency but to the sufficiency of the findings.
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Continental T. V., Inc. v. GTE Sylvania, Inc.
433 U.S. 36, 97 S. Ct. 2549,
53 L. Ed. 2d 568, 1977-1 Trade Cas. ¶ 61,488 (1977)
Powell, J. Franchise agreements between manufacturers and retailers frequently include provisions barring the retailers from selling franchised products from locations other than those specified in the agreements. This case presents important questions concerning the appropriate antitrust analysis of these restrictions under § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1, and the Court's decision in United States v. Arnold, Schwinn & Co., 388 U. S. 365 (1967).
Respondent GTE Sylvania Inc. (Sylvania) manufactures and sells television sets through its Home Entertainment Products Division. Prior to 1962, like most other television manufacturers, Sylvania sold its televisions to independent or company-owned distributors who in turn resold to a large and diverse group of retailers. Prompted by a decline in its market share to a relatively insignificant 1% to 2% of national television sales, Sylvania conducted an intensive reassessment of its marketing strategy, and in 1962 adopted the franchise plan challenged here. Sylvania phased out its wholesale distributors and began to sell its televisions directly to a smaller and more select group of franchised retailers. An acknowledged purpose of the change was to decrease the number of competing Sylvania retailers in the hope of attracting the more aggressive and competent retailers though necessary to the improvement of the company's market position. To this end, Sylvania limited the number of franchises granted for any given area and required each franchisee to sell his Sylvania products only from the location or locations at which he was franchised. A franchise did not constitute an exclusive territory, and Sylvania retained sole discretion to increase the number of retailers in an area in light of the success or failure of existing retailers in developing their market. The revised marketing strategy appears to have been successful during the period at issue here, for by 1965 Sylvania's share of national television sales had increased to approximately 5%, and the company ranked as the Nation's eighth largest manufacturer of color television sets.
This suit is the result of the rupture of a franchiser-franchisee relationship that had previously prospered under the revised Sylvania plan. Dissatisfied with its sales in the city of San Francisco, Sylvania decided in the spring of 1965 to franchise Young Brothers, an established San Francisco retailer of televisions, as an additional San Francisco retailer. The proposed location of the new franchise was approximately a mile from a retail outlet operated by petitioner Continental T. V., Inc. (Continental), one of the most successful Sylvania franchisees. Continental protested that the location of the new franchise violated Sylvania's marketing policy, but Sylvania persisted in its plans. Continental then canceled a large Sylvania order and placed a large order with Phillips, one of Sylvania's competitors.
During this same period, Continental expressed a desire to open a store in Sacramento, Cal., a desire Sylvania attributed at least in part to Continental's displeasure over the Young Brothers decision. Sylvania believed that the Sacramento market was adequately served by the existing Sylvania retailers and denied the request. In the face of this denial, Continental advised Sylvania in early September 1965, that it was in the process of moving Sylvania merchandise from its San Jose, Cal., warehouse to a new retail location that it had leased in Sacramento. Two weeks later, allegedly for unrelated reasons, Sylvania's credit department reduced Continental's credit line from $300,000 to $50,000. In response to the reduction in credit and the generally deteriorating relations with Sylvania, Continental withheld all payments owed to John P. Maguire & Co., Inc. (Maguire), the finance company that handled the credit arrangements between Sylvania and its retailers. Shortly thereafter, Sylvania terminated Continental's franchises, and Maguire filed this diversity action in the United States District Court for the Northern District of California seeking recovery of money owed and of secured merchandise held by Continental.
The antitrust issuds before us originated in cross-claims brought by Continental against Sylvania and Maguire. Most important for our purposes was the claim that Sylvania had violated § 1 of the Sherman Act by entering into and enforcing franchise agreements that prohibited the sale of Sylvania products other than from specified locations. At the close of evidence in the jury trial of Continental's claims, Sylvania requested the District Court to instruct the jury that its location restriction was illegal only if it unreasonably restrained or suppressed competition. App. 5-6, 9-15. Relying on this Court's decision in United States v. Arnold, Schwinn & Co., supra, the District Court rejected the proffered instruction in favor of the following one:
"Therefore, if you find by a preponderance of the evidence that Sylvania entered into a contract, combination or conspiracy with one or more of its dealers pursuant to which Sylvania exercised dominion or control over the products sold to the dealer, after having parted with title and risk to the products, you must find any effort thereafter to restrict outlets or store locations from which its dealers resold the merchandise which they had purchased from Sylvania to be a violation of Section 1 of the Sherman Act, regardless of the reasonableness of the location restrictions."
In answers to special interrogatories, the jury found that Sylvania had engaged
"in a contract, combination or conspiracy in restraint of trade in violation of the antitrust laws with respect to location restrictions alone,"
and assessed Continental's damages at $591,505, which was trebled pursuant to 15 U.S.C. § 15 to produce an award of $1,774,515. App. 498, 501.
On appeal, the Court of Appeals for the Ninth Circuit, sitting en banc, reversed by a divided vote. 537 F.2d 980 (1976). The court acknowledged that there is language in Schwinn that could be read to support the District Court's instruction but concluded that Schwinn was distinguishable on several grounds. Contrasting the nature of the restrictions, their competitive impact, and the market shares of the franchisers in the two cases, the court concluded that Sylvania's location restriction had less potential for competitive harm than the restrictions invalidated in Schwinn and thus should be judged under the "rule of reason" rather than the per se rule stated in Schwinn. The court found support for its position in the policies of the Sherman Act and in the decisions of other federal courts involving nonprice vertical restrictions.
We granted Continental's petition for certiorari to resolve this important question of antitrust law. 429 U. S. 893 (1976).
We turn first to Continental's contention that Sylvania's restriction on retail locations is a per se violation of § 1 of the Sherman Act as interpreted in Schwinn. The restrictions at issue in Schwinn were part of a three-tier distribution system comprising, in addition to Arnold, Schwinn & Co. (Schwinn), 22 intermediate distributors and a network of franchised retailers. Each distributor had a defined geographic area in which it had the exclusive right to supply franchised retailers. Sales to the public were made only through franchised retailers, who were authorized to sell Schwinn bicycles only from specified locations. In support of this limitation, Schwinn prohibited both distributors and retailers from selling Schwinn bicycles to nonfranchised retailers.
At the retail level, therefore, Schwinn was able to control the number of retailers of its bicycles in any given area according to its view of the needs of that market.
As of 1967 approximately 75% of Schwinn's total sales were made under the "Schwinn Plan." Acting essentially as a manufacturer's representative or sales agent, a distributor participating in this plan forwarded orders from retailers to the factory. Schwinn then shipped the ordered bicycles directly to the retailer, billed the retailer, bore the credit risk, and paid the distributor a commission on the sale. Under the Schwinn Plan, the distributor never had title to or possession of the bicycles. The remainder of the bicycles moved to the retailers through the hands of the distributors. For the most part, the distributors functioned as traditional wholesalers with respect to these sales, stocking an inventory of bicycles owned by them to supply retailers with emergency and "fill-in" requirements. A smaller part of the bicycles that were physically distributed by the distributors were covered by consignment and agency arrangements that had been developed to deal with particular problems of certain distributors. Distributors acquired title only to those bicycles that they purchased as wholesalers; retailers, of course, acquired title to all of the bicycles ordered by them.
In the District Court, the United States charged a continuing conspiracy by Schwinn and other alleged co-conspirators to fix prices, allocate exclusive territories to distributors, and confine Schwinn bicycles to franchised retailers. Relying on United States v. Bausch & Lomb Co., 321 U.S. 707 (1944), the Government argued that the nonprice restrictions were per se illegal as part of a scheme for fixing the retail prices of Schwinn bicycles. The District Court rejected the price-fixing allegation because of a failure of proof and held that Schwinn's limitation of retail bicycle sales to franchised retailers was permissible under § 1. The court found a § 1 violation, however, in "a conspiracy to divide certain borderline or overlapping counties in the territories served by four Midwestern cycle distributors." 237 F. Supp. 323, 342 (ND Ill. 1965). The court described the violation as a "division of territory by agreement between the distributors... horizontal in nature," and held that Schwinn's participation did not change that basic characteristic. Ibid. The District Court limited its injunction to apply only to the territorial restrictions on the resale of bicycles purchased by the distributors in their roles as wholesalers. Ibid.
Schwinn came to this Court on appeal by the United States from the District Court's decision. Abandoning its per se theories, the Government argued that Schwinn's prohibition against distributors' and retailers' selling Schwinn bicycles to nonfranchised retailers was unreasonable under § 1 and that the District Court's injunction against exclusive distributor territories should extend to all such restrictions regardless of the form of the transaction. The Government did not challenge the District Court's decision on price fixing, and Schwinn did not challenge the decision on exclusive distributor territories.
The Court acknowledged the Government's abandonment of its per se theories and stated that the resolution of the case would require an examination of "the specifics of the challenged practices and their impact upon the marketplace in order to make a judgment as to whether the restraint is or is not 'reasonable' in the special sense in which § 1 of the Sherman Act must be read for purposes of this type of inquiry." 388 U.S., at 374. Despite this description of its task, the Court proceeded to articulate the following "bright line" per se rule of illegality for vertical restrictions:
"Under the Sherman Act, it is unreasonable without more for a manufacturer to seek to restrict and confine areas or persons with whom an article may be traded after the manufacturer has parted with dominion over it."
Id., at 379. But the Court expressly stated that the rule of reason governs when
"the manufacturer retains title, dominion, and risk with respect to the product and the position and function of the dealer in question are, in fact, indistinguishable from those of an agent or salesman of the manufacturer."
Id., at 380.
Application of these principles to the facts of Schwinn produced sharply contrasting results depending upon the role played by the distributor in the distribution system. With respect to that portion of Schwinn's sales for which the distributors acted as ordinary wholesalers, buying and reselling Schwinn bicycles, the Court held that the territorial and customer restrictions challenged by the Government were per se illegal. But, with respect to that larger portion of Schwinn's sales in which the distributors functioned under the Schwinn Plan and under the less common consignment and agency arrangements, the Court held that the same restrictions should be judged under the rule of reason. The only retail restriction challenged by the Government prevented franchised retailers from supplying nonfranchised retailers. Id., at 377. The Court apparently perceived no material distinction between the restrictions on distributors and retailers, for it held:
"The principle is, of course, equally applicable to sales to retailers, and the decree should similarly enjoin the making of any sales to retailers upon any condition, agreement or understanding limiting the retailer's freedom as to where and to whom it will resell the products."
Id., at 378.
Applying the rule of reason to the restrictions that were not imposed in conjunction with the sale of bicycles, the Court had little difficulty finding them all reasonable in light of the competitive situation in "the product market as a whole." Id., at 382.
In the present case, it is undisputed that title to the television sets passed from Sylvania to Continental. Thus, the Schwinn per se rule applies unless Sylvania's restriction on locations falls outside Schwinn's prohibition against a manufacturer's attempting to restrict a "retailer's freedom as to where and to whom it will resell the products." Id., at 378. As the Court of Appeals conceded, the language of Schwinn is clearly broad enough to apply to the present case. Unlike the Court of Appeals, however, we are unable to find a principled basis for distinguishing Schwinn from the case now before us.
Both Schwinn and Sylvania sought to reduce but not to eliminate competition among their respective retailers through the adoption of a franchise system. Although it was not one of the issues addressed by the District Court or presented on appeal by the Government, the Schwinn franchise plan included a location restriction similar to the one challenged here. These restrictions allowed Schwinn and Sylvania to regulate the amount of competition among their retailers by preventing a franchisee from selling franchised products from outlets other than the one covered by the franchise agreement. To exactly the same end, the Schwinn franchise plan included a companion restriction, apparently not found in the Sylvania plan, that prohibited franchised retailers from selling Schwinn products to nonfranchised retailers. In Schwinn the Court expressly held that this restriction was impermissible under the broad principle stated there. In intent and competitive impact, the retail-customer restriction in Schwinn is indistinguishable from the location restriction in the present case. In both cases the restrictions limited the freedom of the retailer to dispose of the purchased products as he desired. The fact that one restriction was addressed to territory and the other to customers is irrelevant to functional antitrust analysis and, indeed, to the language and broad thrust of the opinion in Schwinn. As Mr. Chief Justice Hughes stated in Appalachian Coals, Inc. v. United States, 288 U. S. 344, 360, 377 (1933): "Realities must dominate the judgment.... The Anti-Trust Act aims at substance."
Sylvania argues that if Schwinn cannot be distinguished, it should be reconsidered. Although Schwinn is supported by the principle of stare decisis, Illinois Brick Co. v. Illinois, 431 U. S. 720, 736 (1977), we are convinced that the need for clarification of the law in this area justifies reconsideration. Schwinn itself was an abrupt and largely unexplained departure from White Motor Co. v. United States, 372 U. S. 253 (1963), where only four years earlier the Court had refused to endorse a per se rule for vertical restrictions. Since its announcement, Schwinn has been the subject of continuing controversy and confusion, both in the scholarly journals and in the federal courts. The great weight of scholarly opinion has been critical of the decision, and a number of the federal courts confronted with analogous vertical restrictions have sought to limit its reach. In our view, the experience of the past 10 years should be brought to bear on this subject of considerable commercial importance.
The traditional framework of analysis under § 1 of the Sherman Act is familiar and does not require extended discussion. Section 1 prohibits "[e]very contract, combination..., or conspiracy, in restraint of trade or commerce." Since the early years of this century a judicial gloss on this statutory language has established the "rule of reason" as the prevailing standard of analysis. Standard Oil Co. v. United States, 221 U. S. 1 (1911). Under this rule, the fact-finding weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. Per se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive. As the Court explained in Northern Pac. R. Co. v. United States, 356 U. S. 1, 5 (1958),
"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."
[By comparison, the court discussed the rule of reason in a footnote: One of the most frequently cited statements of the rule of reason is that of Mr. Justice Brandeis in Chicago Bd. of Trade v. United States, 246 U.S. 231, 238 (1918):
"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."]
In essence, the issue before us is whether Schwinn's per se rule can be justified under the demanding standards of Northern Pac. R. Co. The Court's refusal to endorse a per se rule in White Motor Co. was based on its uncertainty as to whether vertical restrictions satisfied those standards. Addressing this question for the first time, the Court stated:
"We need to know more than we do about the actual impact of these arrangements on competition to decide whether they have such a 'pernicious effect on competition and lack... any redeeming virtue' (Northern Pac. R. Co. v. United States, supra, p. 5) and therefore should be classified as per se violations of the Sherman Act."
372 U. S., at 263.
Only four years later the Court in Schwinn announced its sweeping per se rule without even a reference to Northern Pac. R. Co. and with no explanation of its sudden change in position. We turn now to consider Schwinn in light of Northern Pacific.
The market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition. Significantly, the Court in Schwinn did not distinguish among the challenged restrictions on the basis of their individual potential for intrabrand harm or interbrand benefit. Restrictions that completely eliminated intrabrand competition among Schwinn distributors were analyzed no differently from those that merely moderated intrabrand competition among retailers. The pivotal factor was the passage of title: All restrictions were held to be per se illegal where title had passed, and all were evaluated and sustained under the rule of reason where it had not. The location restriction at issue here would be subject to the same pattern of analysis under Schwinn.
It appears that this distinction between sale and nonsale transactions resulted from the Court's effort to accommodate the perceived intrabrand harm and interbrand benefit of vertical restrictions. The per se rule for sale transactions reflected the view that vertical restrictions are "so obviously destructive" of intrabrand competition that their use would "open the door to exclusivity of outlets and limitation of territory further than prudence permits." 388 U. S., at 379-380. Conversely, the continued adherence to the traditional rule of reason for nonsale transactions reflected the view that the restrictions have too great a potential for the promotion of interbrand competition to justify complete prohibition. The Court's opinion provides no analytical support for these contrasting positions. Nor is there even an assertion in the opinion that the competitive impact of vertical restrictions is significantly affected by the form of the transaction. Nonsale transactions appear to be excluded from the per se rule, not because of a greater danger of intrabrand harm or a greater promise of interbrand benefit, but rather because of the Court's unexplained belief that a complete per se prohibition would be too "inflexibl[e]." Id., at 379.
Vertical restrictions reduce intrabrand competition by limiting the number of sellers of a particular product competing for the business of a given group of buyers. Location restrictions have this effect because of practical constraints on the effective marketing area of retail outlets. Although intrabrand competition may be reduced, the ability of retailers to exploit the resulting market may be limited both by the ability of consumers to travel to other franchised locations and, perhaps more importantly, to purchase the competing products of other manufacturers. None of these key variables, however, is affected by the form of the transaction by which a manufacturer conveys his products to the retailers.
Vertical restrictions promote interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products. These "redeeming virtues" are implicit in every decision sustaining vertical restrictions under the rule of reason. Economists have identified a number of ways in which manufacturers can use such restrictions to compete more effectively against other manufacturers. See, e.g., Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law & Contemp. Prob. 506, 511 (1965). For example, new manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer. Established manufacturers can use them to induce retailers to engage in promotional activities or to provide service and repair facilities necessary to the efficient marketing of their products. Service and repair are vital for many products, such as automobiles and major household appliances. The availability and quality of such services affect a manufacturer's goodwill and the competitiveness of his product. Because of market imperfections such as the so-called "free rider" effect, these services might not be provided by retailers in a purely competitive situation, despite the fact that each retailer's benefit would be greater if all provided the services than if none did. Posner, supra, n. 13, at 285, cf. P. Samuelson, Economics 506-507 (10th ed. 1976).
Economists also have argued that manufacturers have an economic interest in maintaining as much intrabrand competition as is consistent with the efficient distribution of their products. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division [II], 75 Yale L. J. 373, 403 (1966), Posner, supra, n. 13, at 283, 287-288. Although the view that the manufacturer's interest necessarily corresponds with that of the public is not universally shared, even the leading critic of vertical restrictions concedes that Schwinn's distinction between sale and nonsale transactions is essentially unrelated to any relevant economic impact. Comanor, Vertical Territorial and Customer Restrictions: White Motor and Its Aftermath, 81 Harv. L. Rev. 1419, 1422 (1968). Indeed, to the extent that the form of the transaction is related to interbrand benefits, the Court's distinction is inconsistent with its articulated concern for the ability of smaller firms to compete effectively with larger ones. Capital requirements and administrative expenses may prevent smaller firms from using the exception for nonsale transactions. See, e.g., Baker, supra, n. 13, at 538, Phillips, Schwinn Rules and the "New Economics" of Vertical Relation, 44 Antitrust L. J. 573, 576 (1975), Pollock, supra, n. 13, at 610.
We conclude that the distinction drawn in Schwinn between sale and nonsale transactions is not sufficient to justify the application of a per se rule in one situation and a rule of reason in the other. The question remains whether the per se rule stated in Schwinn should be expanded to include nonsale transactions or abandoned in favor of a return to the rule of reason. We have found no persuasive support for expanding the per se rule. As noted above, the Schwinn Court recognized the undesirability of "prohibit[ing] all vertical restrictions of territory and all franchising...." 388 U. S., at 379-380. And even Continental does not urge us to hold that all such restrictions are per se illegal.
We revert to the standard articulated in Northern Pac. R. Co., and reiterated in White Motor, for determining whether vertical restrictions must be
"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."
356 U. S., at 5. Such restrictions, in varying forms, are widely used in our free market economy. As indicated above, there is substantial scholarly and judicial authority supporting their economic utility. There is relatively little authority to the contrary. Certainly, there has been no showing in this case, either generally or with respect to Sylvania's agreements, that vertical restrictions have or are likely to have a "pernicious effect on competition" or that they "lack... any redeeming virtue." Ibid. Accordingly, we conclude that the per se rule stated in Schwinn must be overruled. In so holding we do not foreclose the possibility that particular applications of vertical restrictions might justify per se prohibition under Northern Pac. R. Co. But we do make clear that departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than - as in Schwinn - upon formalistic line drawing.
In sum, we conclude that the appropriate decision is to return to the rule of reason that governed vertical restrictions prior to Schwinn. When anticompetitive effects are shown to result from particular vertical restrictions they can be adequately policed under the rule of reason, the standard traditionally applied for the majority of anticompetitive practices challenged under § 1 of the Act. Accordingly, the decision of the Court of Appeals is Affirmed.
White, J. Concurring: Although I agree with the majority that the location clause at issue in this case is not a per se violation of the Sherman Act and should be judged under the rule of reason, I cannot agree that this result requires the overruling of United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967). In my view this case is distinguishable from Schwinn because there is less potential for restraint of intrabrand competition and more potential for stimulating interbrand competition. As to intrabrand competition, Sylvania, unlike Schwinn, did not restrict the customers to whom or the territories where its purchasers could sell. As to interbrand competition, Sylvania, unlike Schwinn, had an insignificant market share at the time it adopted its challenged distribution practice and enjoyed no consumer preference that would allow its retailers to charge a premium over other brands. In two short paragraphs, the majority disposes of the view, adopted after careful analysis by the Ninth Circuit en banc below, that these differences provide a "principled basis for distinguishing Schwinn," ante, at 46, despite holdings by three Courts of Appeals and the District Court on remand in Schwinn that the per se rule established in that case does not apply to location clauses such as Sylvania's. To reach out to overrule one of this Court's recent interpretations of the Sherman Act, after such a cursory examination of the necessity for doing so, is surely an affront to the principle that considerations of stare decisis are to be given particularly strong weight in the area of statutory construction. Illinois Brick Co. v. Illinois, 431 U.S. 720, 736-737 (1977), Runyon v. McCrary, 427 U.S. 160, 175 (1976), Edelman v. Jordan, 415 U.S. 651, 671 (1974).
* * *
It is true that, as the majority states, Sylvania's location restriction inhibited to some degree "the freedom of the retailer to dispose of the purchased products" by requiring the retailer to sell from one particular place of business. But the retailer is still free to sell to any type of customer - including discounters and other unfranchised dealers - from any area. I think this freedom implies a significant difference for the effect of a location clause on intrabrand competition. The District Court on remand in Schwinn evidently thought so as well, for after enjoining Schwinn's customer restrictions as directed by this Court it expressly sanctioned location clauses, permitting Schwinn to "designat[e] in its retailer franchise agreements the location of the place or places of business for which the franchise is issued." 291 F.Supp. 564, 565-566 (ND Ill. 1968).
* * *
Just as there are significant differences between Schwinn and this case with respect to intrabrand competition, there are also significant differences with respect to interbrand competition. Unlike Schwinn, Sylvania clearly had no economic power in the generic product market. At the time they instituted their respective distribution policies, Schwinn was "the leading bicycle producer in the Nation," with a national market share of 22.5%, 388 U. S., at 368, 374, whereas Sylvania was a "faltering, if not failing" producer of television sets, with "a relatively insignificant 1% to 2%" share of the national market in which the dominant manufacturer had a 60% to 70% share. Ante, at 38, 58 n. 29. Moreover, the Schwinn brand name enjoyed superior consumer acceptance and commanded a premium price as, in the District Court's words, "the Cadillac of the bicycle industry." 237 F.Supp., at 335. This premium gave Schwinn dealers a margin of protection from interbrand competition and created the possibilities for price cutting by discounters that the Government argued were forestalled by Schwinn's customer restrictions. Thus, judged by the criteria economists use to measure market power - product differentiation and market share - Schwinn enjoyed a substantially stronger position in the bicycle market than did Sylvania in the television market. This Court relied on Schwinn's market position as one reason not to apply the rule of reason to the vertical restraints challenged there.
"Schwinn was not a newcomer, seeking to break into or stay in the bicycle business. It was not a 'failing company.' On the contrary, at the initiation of these practices, it was the leading bicycle producer in the Nation."
388 U. S., at 374. And the Court of Appeals below found "another significant distinction between our case and Schwinn" in Sylvania's "precarious market share," which
"was so small when it adopted its locations practice that it was threatened with expulsion from the television market."
537 F.2d, at 991.
In my view there are at least two considerations, both relied upon by the majority to justify overruling Schwinn, that would provide a "principled basis" for instead refusing to extend Schwinn to a vertical restraint that is imposed by a "faltering" manufacturer with a "precarious" position in a generic product market dominated by another firm. The first is that, as the majority puts it, "when interbrand competition exists, as it does among television manufacturers, it 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." Ante, at 52 n. 19. See also ante, at 54. Second is the view, argued forcefully in the economic literature cited by the majority, that the potential benefits of vertical restraints in promoting interbrand competition are particularly strong where the manufacturer imposing the restraints is seeking to enter a new market or to expand a small market share. Ibid. The majority even recognizes that Schwinn "hinted" at an exception for new entrants and failing firms from its per se rule. Ante, at 53-54, n. 22.
In other areas of antitrust law, this Court has not hesitated to base its rules of per se illegality in part on the defendant's market power. Indeed, in the very case from which the majority draws its standard for per se rules, Northern Pac. R. Co. v. United States, 356 U. S. 1, 5 (1958), the Court stated the reach of the per se rule against tie-ins under § 1 of the Sherman Act as extending to all defendants with "sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product...." 356 U. S., at 6. And the Court subsequently approved an exception to this per se rule for "infant industries" marketing a new product. United States v. Jerrold Electronics Corp., 187 F.Supp. 545 (ED Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961). See also United States v. Philadelphia Nat. Bank, 374 U.S. 321, 363 (1963), where the Court held presumptively illegal a merger "which produces a firm controlling an undue percentage share of the relevant market...." I see no doctrinal obstacle to excluding firms with such minimal market power as Sylvania's from the reach of the Schwinn rule.
* * *
I have a further reservation about the majority's reliance on "relevant economic impact" as the test for retaining per se rules regarding vertical restraints. It is common ground among the leading advocates of a purely economic approach to the question of distribution restraints that the economic arguments in favor of allowing vertical nonprice restraints generally apply to vertical price restraints as well. Although the majority asserts that "the per se illegality of price restrictions... involves significantly different questions of analysis and policy," ante, at 51 n. 18, I suspect this purported distinction may be as difficult to justify as that of Schwinn under the terms of the majority's analysis. Thus Professor Posner, in an article cited five times by the majority, concludes:
"I believe that the law should treat price and nonprice restrictions the same and that it should make no distinction between the imposition of restrictions in a sale contract and their imposition in an agency contract."
Posner, supra, n. 7, at 298. Indeed, the Court has already recognized that resale price maintenance may increase output by inducing "demand creating activity" by dealers (such as additional retail outlets, advertising and promotion, and product servicing) that outweighs the additional sales that would result from lower prices brought about by dealer price competition. Albrecht v. Herald Co., supra, at 151 n. 7. These same output-enhancing possibilities of nonprice vertical restraints are relied upon by the majority as evidence of their social utility and economic soundness, ante, at 55, 57-58, and as a justification for judging them under the rule of reason. The effect, if not the intention, of the Court's opinion is necessarily to call into question the firmly established per se rule against price restraints.
Although the case law in the area of distributional restraints has perhaps been less than satisfactory, the Court would do well to proceed more deliberately in attempting to improve it. In view of the ample reasons for distinguishing Schwinn from this case and in the absence of contrary congressional action, I would adhere to the principle that:
"each case arising under the Sherman Act must be determined upon the particular facts disclosed by the record, and... the opinions in those cases must be read in the light of their facts and of a clear recognition of the essential differences in the facts of those cases, and in the facts of any new case to which the rule of earlier decisions is to be applied."
Maple Flooring Mfrs. Assn. v. United States, 268 U.S. 563, 579 (1925).
In order to decide this case, the Court need only hold that a location clause imposed by a manufacturer with negligible economic power in the product market has a competitive impact sufficiently less restrictive than the Schwinn restraints to justify a rule-of-reason standard, even if the same weight is given here as in Schwinn to dealer autonomy. I therefore concur in the judgment.
Brennan, J., dissenting. I would not overrule the per se rule stated in United States v. Arnold, Schwinn & Co., 388 U. S. 365 (1967), and would therefore reverse the decision of the Court of Appeals for the Ninth Circuit.
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United States v. Sealy, Inc.
388 U.S. 350, 87 S. Ct. 1847;18 L. Ed. 2d 1238, 153 U.S.P.Q. 763, 1967 Trade Cas. ¶ 72,125 (1967)
Fortas, J: Appellee and its predecessors have, for more than 40 years, been engaged in the business of licensing manufacturers of mattresses and bedding products to make and sell such products under the Sealy name and trademarks. In this civil action the United States charged that appellee had violated § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. § 1, by conspiring with its licensees to fix the prices at which the retail customers of the licensees might resell bedding products bearing the Sealy name, and to allocate mutually exclusive territories among such manufacturer-licensees.
After trial, the District Court found that the appellee was engaged in a continuing conspiracy with its manufacturer-licensees to agree upon and fix minimum retail prices on Sealy products and to police the prices so fixed. It enjoined the appellee from such conduct, "Provided, however, that nothing herein contained shall be construed to prohibit the defendant from disseminating and using suggested retail prices for the purpose of national advertising of Sealy products." Appellee did not appeal the finding or order relating to price-fixing.
With respect to the charge that appellee conspired to allocate mutually exclusive territory among its manufacturers, the District Court held that the United States had not proved conduct "in unreasonable restraint of trade in violation of Section 1 of the Sherman Act." The United States appealed under § 2 of the Expediting Act, 32 Stat. 823, as amended, 15 U. S. C. § 29. We noted probable jurisdiction. 382 U.S. 806 (1965).
There is no dispute that exclusive territories were allotted to the manufacturer-licensees. Sealy agreed with each licensee
not to license any other person to manufacture or sell in the designated area; and the licensee agreed not to manufacture or
sell "Sealy products" outside the designated area. A manufacturer could make and sell his private label products anywhere
he might choose.
Because this Court has distinguished between horizontal and vertical territorial limitations for purposes of the impact of the Sherman Act, it is first necessary to determine whether the territorial arrangements here are to be treated as the creature of the licensor, Sealy, or as the product of a horizontal arrangement among the licensees. White Motor Co. v. United States, 372 U.S. 253 (1963).
If we look at substance rather than form, there is little room for debate. These must be classified as horizontal restraints. Compare United States v. General Motors, 384 U.S. 127, 141-148 (1966); id., at 148-149 (Harlan, J., concurring in the result); United States v. Parke, Davis & Co., 362 U.S. 29 (1960).
There are about 30 Sealy "licensees." They own substantially all of its stock. Sealy's bylaws provide that each director must
be a stockholder or a stockholder-licensee's nominee. Sealy's business is managed and controlled by its board of directors.
Between board meetings, the executive committee acts. It is composed of Sealy's president and five board members, all
licensee-stockholders. Control does not reside in the licensees only as a matter of form. It is exercised by them in the
day-to-day business of the company including the grant, assignment, reassignment, and termination of exclusive territorial
licenses. Action of this sort is taken either by the board of directors or the executive committee of Sealy, both of which, as
we have said, are manned, wholly or almost entirely, by licensee-stockholders.
Appellee argues that "there is no evidence that Sealy is a mere creature or instrumentality of its stockholders." In support of this proposition, it stoutly asserts that "the stockholders and directors wore a 'Sealy hat' when they were acting on behalf of Sealy." But the obvious and inescapable facts are that Sealy was a joint venture of, by, and for its stockholder-licensees; and the stockholder-licensees are themselves directly, without even the semblance of insulation, in charge of Sealy's operations.
For example, some of the crucial findings of the District Court describe actions as having been taken by "stockholder representatives" acting as the board or a committee.
It is true that the licensees had an interest in Sealy's effectiveness and efficiency, and, as stockholders, they welcomed its profitability -- at any rate within the limits set by their willingness as licensees to pay royalties to the joint venture. But that does not determine whether they as licensees are chargeable with action in the name of Sealy. We seek the central substance of the situation, not its periphery; and in this pursuit, we are moved by the identity of the persons who act, rather than the label of their hats. The arrangements for exclusive territories are necessarily chargeable to the licensees of appellee whose interests such arrangements were supposed to promote and who, through select members, guaranteed or withheld and had the power to terminate licenses for inadequate performance. The territorial arrangements must be regarded as the creature of horizontal action by the licensees. It would violate reality to treat them as equivalent to territorial limitations imposed by a manufacturer upon independent dealers as incident to the sale of a trademarked product. Sealy, Inc., is an instrumentality of the licensees for purposes of the horizontal territorial allocation. It is not the principal.
Accordingly, this case is to be distinguished from White Motor Co. v. United States, supra, which involved a vertical territorial limitation. In that case, this Court pointed out that vertical restraints were not embraced within the condemnation of horizontal territorial limitations in Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951), and, prior to trial on summary judgment proceedings, the Court declined to extend Timken "to a vertical arrangement by one manufacturer restricting the territory of his distributors or dealers." 372 U.S., at 261.
Timken involved agreements between United States, British, and French companies for territorial division among themselves of world markets for antifriction bearings. The agreements included fixing prices on the products of one company sold in the territory of the others; restricting imports to and exports from the United States; and excluding outside competition. This Court held that the "aggregation of trade restraints such as those existing in this case are illegal under the [Sherman] Act." 341 U.S., at 598.
In the present case, we are also faced with an "aggregation of trade restraints." Since the early days of the company in 1925 and continuously thereafter, the prices to be charged by retailers to whom the licensee-stockholders of Sealy sold their products have been fixed and policed by the licensee- stockholders directly, by Sealy itself, and by collaboration between them. As the District Court found:
"the stockholder-licensee representatives . . . as the board of directors, the Executive Committee, or other committees of Sealy, Inc. . . . discuss, agree upon and set
Appellee has not appealed the order of the District Court enjoining continuation of this price-fixing, but the existence and
impact of the practice cannot be ignored in our appraisal of the territorial limitations. In the first place, this flagrant and
pervasive price-fixing, in obvious violation of the law, was, as the trial court found, the activity of the "stockholder
representatives" acting through and in collaboration with Sealy mechanisms. This underlines the horizontal nature of the
enterprise, and the use of Sealy, not as a separate entity, but as an instrumentality of the individual manufacturers. In the
second place, this unlawful resale price-fixing activity refutes appellee's claim that the territorial restraints were mere
incidents of a lawful program of trademark licensing. Cf. Timken Roller Bearing Co. v. United States, supra. The territorial
restraints were a part of the unlawful price-fixing and policing. As specific findings of the District Court show, they gave to
each licensee an enclave in which it could and did zealously and effectively maintain resale prices, free from the danger of
outside incursions. It may be true, as appellee vigorously argues, that territorial exclusivity served many other purposes. But
its connection with the unlawful price-fixing is enough to require that it be condemned as an unlawful restraint and that
appellee be effectively prevented from its continued or further use.
It is urged upon us that we should condone this territorial limitation among manufacturers of Sealy products because of the absence of any showing that it is unreasonable. It is argued, for example, that a number of small grocers might allocate territory among themselves on an exclusive basis as incident to the use of a common name and common advertisements, and that this sort of venture should be welcomed in the interests of competition, and should not be condemned as per se unlawful. But condemnation of appellee's territorial arrangements certainly does not require us to go so far as to condemn that quite different situation, whatever might be the result if it were presented to us for decision. For here, the arrangements for territorial limitations are part of "an aggregation of trade restraints" including unlawful price-fixing and policing. Timken Roller Bearing Co. v. United States, supra, 341 U.S., at 598. Compare United States v. General Motors, 384 U.S. 127, 147-148 (1966). Within settled doctrine, they are unlawful under § 1 of the Sherman Act without the necessity for an inquiry in each particular case as to their business or economic justification, their impact in the marketplace, or their reasonableness.
Accordingly, the judgment of the District Court is reversed and the case remanded for the entry of an appropriate decree.
Harlan, J., dissenting. I cannot agree that on this record the restrictive territorial arrangements here challenged are properly to be classified as "horizontal," and hence illegal per se under established antitrust doctrine. I believe that they should be regarded as "vertical" and thus, as the Court recognizes, subject to different antitrust evaluation.
Sealy, Inc., is the owner of trademarks for Sealy branded bedding. Sealy licenses manufacturers in various parts of the country to produce and sell its products. In addition, Sealy provides technical and managerial services for them, conducts advertising and other promotional programs, and engages in technical research and quality control activities. The Government's theory of this case in the District Court was essentially that the allocation of territories by Sealy to its various licensees was unlawful per se because in spite of these other legitimate activities Sealy was actually a "front" created and used by the various manufacturers of Sealy products "to camouflage their own collusive activities . . . ." Plaintiff's Brief pp. 12, 15.
If such a characterization of Sealy had been proved at trial I would agree that the division of territories is illegal per se. Horizontal agreements among manufacturers to divide territories have long been held to violate the antitrust laws without regard to any asserted justification for them. See Addyston Pipe & Steel Co. v. United States, 175 U.S. 211; United States v. National Lead Co., 332 U.S. 319; Timken Roller Bearing Co. v. United States, 341 U.S. 593. The reason is that territorial divisions prevent open competition, and where they are effected horizontally by manufacturers or by sellers who in the normal course of things would be competing among themselves, such restraints are immediately suspect. As the Court noted in White Motor Co. v. United States, 372 U.S. 253, 263, they are "naked restraints of trade with no purpose except stifling of competition." On the other hand, vertical restraints -- that is, limitations imposed by a manufacturer on his own dealers, as in White Motor Co., supra, or by a licensor on his licensees -- may have independent and valid business justifications. The person imposing the restraint cannot necessarily be said to be acting for anticompetitive purposes. Quite to the contrary, he can be expected to be acting to enhance the competitive position of his product vis-a-vis other brands.
With respect to vertical restrictions, it has long been recognized that in order to engage in effective interbrand competition, some limitations on intrabrand competition may be necessary. Restraints of this type "may be allowable protections against aggressive competitors or the only practicable means a small company has for breaking into or staying in business (cf. Brown Shoe v. United States, 370 U.S. 294, 330; United States v. Jerrold Electronics Corp., 187 F.Supp. 545, 560-561, aff'd, 365 U.S. 567) and within the 'rule of reason,'" White Motor Co., supra, at 263; see also id., at 267-272 (concurring opinion of Brennan, J.). For these reasons territorial limitations imposed vertically should be tested by the rule of reason, namely, whether in the context of the particular industry, "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." Chicago Board of Trade v. United States, 246 U.S. 231, 238. Indeed the Court reaffirms these principles in the opinion which it announces today in United States v. Arnold, Schwinn & Co., post, p. 365.
The question in this case is whether Sealy is properly to be regarded as an independent licensor which, as a prima facie matter, can be deemed to have imposed these restraints on its licensees for its own business purposes, or as equivalent to a horizontal combination of licensees, that is as simply a vehicle for effectuating horizontal arrangements between its licensees. On the basis of the findings made by the District Court, I am unable to accept the Court's classification of these restraints as horizontally contrived.
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The Solicitor General in presenting the appeal to this Court stated explicitly that he did not contend "that Sealy, Inc. was no
more than a facade for a conspiracy to suppress competition," Brief, p. 12, since it admittedly did have genuine and lawful
purposes. For me these District Court findings, which the Government accepts for purposes of this appeal, take this case
out of the category of horizontal agreements, and thus out of the per se category as well. Sealy has wholly legitimate
interests and purposes of its own: it is engaged in vigorous interbrand competition with large integrated bedding
manufacturers and with retail chains selling their own products. Sealy's goal is to maximize sales of its products nationwide,
and thus to maximize its royalties. The test under such circumstances should be the same as that governing other vertical
relationships, namely, whether in the context of the market structure of this industry, these territorial restraints are
reasonable business practices, given the true purposes of the antitrust laws. See White Motor Co., supra; Sandura Co. v.
FTC, 339 F.2d 847. It is true that in this case the shareholders of Sealy are the licensees. Such a relationship no doubt
requires special scrutiny. But I cannot agree that this fact by itself automatically requires striking down Sealy's policy of
territorialization. The correct approach, in my view, is to consider Sealy's corporate structure and decision-making process
as one (but only one) relevant factor in determining whether the restraint is an unreasonable one. Compare United States v.
Penn-Olin Chem. Co., 378 U.S. 158, 170.
The Court in reaching its result relies heavily on the fact that these territorial limitations were part of "an 'aggregation of trade restraints,'" ante, p. 354, because the District Court has held that appellee did violate the Sherman Act by engaging in unlawful price fixing. "The territorial restraints," the Court says, "were a part of the unlawful price-fixing and policing," ante, p. 356. Nothing, however, in the findings of the District Court supports this conclusion. Indeed, the opposite conclusion is the more tenable one since the District Court that found Sealy guilty of price fixing found at the same time that it had not unlawfully conspired to allocate territories. The Government has not contended here that it is entitled to an injunction against territorial restrictions as a part of its relief in the price-fixing aspect of the case. The price-fixing issue was not appealed to this Court, and we can assume that the Government will obtain adequate and effective injunctive relief from the District Court. For these reasons the Court's "aggregation of trade restraints" theory seems to me ill-conceived.
I find nothing in the Court's opinion that persuades me to abandon the traditional "rule of reason" approach to this type of
business practice in the context of the facts found by the trial court. The District Court, however, made no findings in
respect to this theory for judging liability since the Government insisted on trying the case in per se terms, attempting to
prove only a horizontal conspiracy. Although Sealy did introduce some evidence concerning the bedding industry, the
territorialization issue was not tried in the terms of the reasonableness of the territorial restrictions. A motion to suppress
Sealy's subpoena seeking discovery with respect to one of its leading competitors was successfully supported by the
Government, and no evidence directly aimed at justifying territorial limitations as a reasonable method of competition in the
bedding industry was taken. Accordingly, the District Court made no findings as to such justification.
Although in the normal course of things I would have voted to remand the case for further proceedings and findings under the correct rules of law, I believe that since the Government deliberately chose to stand on its per se approach, and did not prevail, it should not be able to relitigate the case on an alternative theory, especially when it opposed appellee's efforts to present the case that way.
I would affirm the dismissal of this aspect of the case by the District Court.
Next Previous Top
United States v. Topco Associates, Inc.
405 U.S. 596, 92 S. Ct. 1126, 31 L. Ed. 2d 515,
173 U.S.P.Q. 193, 1972 Trade Cas. ¶ 73,904 (1972)
Marshall, J., The United States brought this action for injunctive relief against alleged violation by Topco Associates, Inc. (Topco), of § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. § 1. Jurisdiction was grounded in § 4 of the Act, 15 U. S. C. § 4. Following a trial on the merits, the United States District Court for the Northern District of Illinois entered judgment for Topco, 319 F.Supp. 1031, and the United States appealed directly to this Court pursuant to § 2 of the Expediting Act, 32 Stat. 823, as amended, 15 U. S. C. § 29. We noted probable jurisdiction, 402 U.S. 905 (1971), and we now reverse the judgment of the District Court.
Topco is a cooperative association of approximately 25 small and medium-sized regional supermarket chains that operate stores in some 33 States. Each of the member chains operates independently; there is no pooling of earnings, profits, capital, management, or advertising resources. No grocery business is conducted under the Topco name. Its basic function is to serve as a purchasing agent for its members. In this capacity, it procures and distributes to the members more than 1,000 different food and related nonfood items, most of which are distributed under brand names owned by Topco. The association does not itself own any manufacturing, processing, or warehousing facilities, and the items that it procures for members are usually shipped directly from the packer or manufacturer to the members. Payment is made either to Topco or directly to the manufacturer at a cost that is virtually the same for the members as for Topco itself.
All of the stock in Topco is owned by the members, with the common stock, the only stock having voting rights, being equally distributed. The board of directors, which controls the operation of the association, is drawn from the members and is normally composed of high-ranking executive officers of member chains. It is the board that elects the association's officers and appoints committee members, and it is from the board that the principal executive officers of Topco must be drawn. Restrictions on the alienation of stock and the procedure for selecting all important officials of the association from within the ranks of its members give the members complete and unfettered control over the operations of the association.
Topco was founded in the 1940's by a group of small, local grocery chains, independently owned and operated, that desired to cooperate to obtain high quality merchandise under private labels in order to compete more effectively with larger national and regional chains. With a line of canned, dairy, and other products, the association began. It added frozen foods in 1950, fresh produce in 1958, more general merchandise equipment and supplies in 1960, and a branded bacon and carcass beef selection program in 1966. By 1964, Topco's members had combined retail sales of more than $ 2 billion; by 1967, their sales totaled more than $ 2.3 billion, a figure exceeded by only three national grocery chains.
Members of the association vary in the degree of market share that they possess in their respective areas. The range is from 1.5% to 16%, with the average being approximately 6%. While it is difficult to compare these figures with the market shares of larger regional and national chains because of the absence in the record of accurate statistics for these chains, there is much evidence in the record that Topco members are frequently in as strong a competitive position in their respective areas as any other chain. The strength of this competitive position is due, in some measure, to the success of Topco-brand products. Although only 10% of the total goods sold by Topco members bear the association's brand names, the profit on these goods is substantial and their very existence has improved the competitive potential of Topco members with respect to other large and powerful chains.
It is apparent that from meager beginnings approximately a quarter of a century ago, Topco has developed into a purchasing association wholly owned and operated by member chains, which possess much economic muscle, individually as well as cooperatively.
Section 1 of the Sherman Act provides, in relevant part:
"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the
several States, or with foreign nations, is declared to be illegal. . . ."
The United States charged that, beginning at least as early as 1960 and continuing up to the time that the complaint was filed, Topco had combined and conspired with its members to violate § 1 in two respects. First, the Government alleged that there existed:
When applying for membership, a chain must designate the type of license that it desires. Membership must first be approved by the board of directors, and thereafter by an affirmative vote of 75% of the association's members. If, however, the member whose operations are closest to those of the applicant, or any member whose operations are located within 100 miles of the applicant, votes against approval, an affirmative vote of 85% of the members is required for approval. Bylaws, Art. I, § 5. Because, as indicated by the record, members cooperate in accommodating each other's wishes, the procedure for approval provides, in essence, that members have a veto of sorts over actual or potential competition in the territorial areas in which they are concerned.
Following approval, each new member signs an agreement with Topco designating the territory in which that member may sell Topco-brand products. No member may sell these products outside the territory in which it is licensed. Most licenses are exclusive, and even those denominated "coextensive" or "non-exclusive" prove to be de facto exclusive. Exclusive territorial areas are often allocated to members who do no actual business in those areas on the theory that they may wish to expand at some indefinite future time and that expansion would likely be in the direction of the allocated territory. When combined with each member's veto power over new members, provisions for exclusivity work effectively to insulate members from competition in Topco-brand goods. Should a member violate its license agreement and sell in areas other than those in which it is licensed, its membership can be terminated under Art. IV § 2(a) and 2(b) of the bylaws. Once a territory is classified as exclusive, either formally or de facto, it is extremely unlikely that the classification will ever be changed. Bylaws, Art. IX.
The Government maintains that this scheme of dividing markets violates the Sherman Act because it operates to prohibit competition in Topco-brand products among grocery chains engaged in retail operations. The Government also makes a subsidiary challenge to Topco's practices regarding licensing members to sell at wholesale. Under the bylaws, members are not permitted to sell any products supplied by the association at wholesale, whether trademarked or not, without first applying for and receiving special permission from the association to do so. Before permission is granted, other licensees (usually retailers), whose interests may potentially be affected by wholesale operations, are consulted as to their wishes in the matter. If permission is obtained, the member must agree to restrict the sale of Topco products to a specific geographic area and to sell under any conditions imposed by the association. Permission to wholesale has often been sought by members, only to be denied by the association. The Government contends that this amounts not only to a territorial restriction violative of the Sherman Act, but also to a restriction on customers that in itself is violative of the Act.
From the inception of this lawsuit, Topco accepted as true most of the Government's allegations regarding territorial divisions and restrictions on wholesaling, although it differed greatly with the Government on the conclusions, both factual and legal, to be drawn from these facts.
Topco's answer to the complaint is illustrative of its posture in the District Court and before this Court:
"Private label merchandising is a way of economic life in the food retailing industry, and exclusivity is the essence of a
private label program; without exclusivity, a private label would not be private. Each national and large regional chain has
its own exclusive private label products in addition to the nationally advertised brands which all chains sell. Each such chain
relies upon the exclusivity of its own private label line to differentiate its private label products from those of its competitors
and to attract and retain the repeat business and loyalty of consumers. Smaller retail grocery stores and chains are unable to
compete effectively with the national and large regional chains without also offering their own exclusive private label
products. . . . .
"The only feasible method by which Topco can procure private label products and assure the exclusivity thereof is through trademark licenses specifying the territory in which each member may sell such trademarked products."
The District Court, considering all these things relevant to its decision, agreed with Topco. It recognized that the panoply of restraints that Topco imposed on its members worked to prevent competition in Topco-brand products, but concluded that
The court held that Topco's practices were procompetitive and, therefore, consistent with the purposes of the antitrust laws. But we conclude that the District Court used an improper analysis in reaching its result.
On its face, § 1 of the Sherman Act appears to bar any combination of entrepreneurs so long as it is "in restraint of trade." Theoretically, all manufacturers, distributors, merchants, sellers, and buyers could be considered as potential competitors of each other. Were § 1 to be read in the narrowest possible way, any commercial contract could be deemed to violate it. Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918) (Brandeis, J.). The history underlying the formulation of the antitrust laws led this Court to conclude, however, that Congress did not intend to prohibit all contracts, nor even all contracts that might in some insignificant degree or attenuated sense restrain trade or competition. In lieu of the narrowest possible reading of § 1, the Court adopted a "rule of reason" analysis for determining whether most business combinations or contracts violate the prohibitions of the Sherman Act. Standard Oil Co. v. United States, 221 U.S. 1 (1911). An analysis of the reasonableness of particular restraints includes consideration of the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption. Chicago Board of Trade v. United States, supra, at 238.
While the Court has utilized the "rule of reason" in evaluating the legality of most restraints alleged to be violative of the Sherman Act, it has also developed the doctrine that certain business relationships are per se violations of the Act without regard to a consideration of their reasonableness. In Northern Pacific R. Co. v. United States, 356 U.S. 1, 5 (1958), Mr. Justice Black explained the appropriateness of, and the need for, per se rules:
It is only after considerable experience with certain business relationships that courts classify them as per se violations of the
Sherman Act. See generally Van Cise, The Future of Per Se in Antitrust Law, 50 Va. L. Rev. 1165 (1964). One of the
classic examples of a per se violation of § 1 is an agreement between competitors at the same level of the market structure to
allocate territories in order to minimize competition.
Such concerted action is usually termed a "horizontal" restraint, in contradistinction to combinations of persons at different levels of the market structure, e. g., manufacturers and distributors, which are termed "vertical" restraints. This Court has reiterated time and time again that "horizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling of competition." White Motor Co. v. United States, 372 U.S. 253, 263 (1963). Such limitations are per se violations of the Sherman Act. See Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899), aff'g 85 F. 271 (CA6 1898) (Taft, J.); United States v. National Lead Co., 332 U.S. 319 (1947); Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951); Northern Pacific R. Co. v. United States, supra; Citizen Publishing Co. v. United States, 394 U.S. 131 (1969); United States v. Sealy, Inc., 388 U.S. 350 (1967); United States v. Arnold, Schwinn & Co., 388 U.S. 365, 390 (1967) (Stewart, J., concurring in part and dissenting in part); Serta Associates, Inc. v. United States, 393 U.S. 534 (1969), aff'g 296 F.Supp. 1121, 1128 (ND Ill. 1968).
We think that it is clear that the restraint in this case is a horizontal one, and, therefore, a per se violation of § 1. The District Court failed to make any determination as to whether there were per se horizontal territorial restraints in this case and simply applied a rule of reason in reaching its conclusions that the restraints were not illegal. See, e. g., Comment, Horizontal Territorial Restraints and the Per Se Rule, 28 Wash. & Lee L. Rev. 457, 469 (1971). In so doing, the District Court erred.
United States v. Sealy, Inc., supra, is, in fact, on all fours with this case. Sealy licensed manufacturers of mattresses and bedding to make and sell products using the Sealy trademark. Like Topco, Sealy was a corporation owned almost entirely by its licensees, who elected the Board of Directors and controlled the business. Just as in this case, Sealy agreed with the licensees not to license other manufacturers or sellers to sell Sealy-brand products in a designated territory in exchange for the promise of the licensee who sold in that territory not to expand its sales beyond the area demarcated by Sealy. The Court held that this was a horizontal territorial restraint, which was per se violative of the Sherman Act.
Whether or not we would decide this case the same way under the rule of reason used by the District Court is irrelevant to the issue before us. The fact is that courts are of limited utility in examining difficult economic problems. Our inability to weigh, in any meaningful sense, destruction of competition in one sector of the economy against promotion of competition in another sector is one important reason we have formulated per se rules.
In applying these rigid rules, the Court has consistently rejected the notion that naked restraints of trade are to be tolerated because they are well intended or because they are allegedly developed to increase competition. E. g., United States v. General Motors Corp., 384 U.S. 127, 146-147 (1966); United States v. Masonite Corp., 316 U.S. 265 (1942); Fashion Originators' Guild v. FTC, 312 U.S. 457 (1941).
Antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete -- to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster. Implicit in such freedom is the notion that it cannot be foreclosed with respect to one sector of the economy because certain private citizens or groups believe that such foreclosure might promote greater competition in a more important sector of the economy. Cf. United States v. Philadelphia National Bank, 374 U.S. 321, 371 (1963).
The District Court determined that by limiting the freedom of its individual members to compete with each other, Topco was doing a greater good by fostering competition between members and other large supermarket chains. But, the fallacy in this is that Topco has no authority under the Sherman Act to determine the respective values of competition in various sectors of the economy. On the contrary, the Sherman Act gives to each Topco member and to each prospective member the right to ascertain for itself whether or not competition with other supermarket chains is more desirable than competition in the sale of Topco-brand products. Without territorial restrictions, Topco members may indeed "[cut] each other's throats." Cf. White Motor Co., supra, at 278 (Clark, J., dissenting). But, we have never found this possibility sufficient to warrant condoning horizontal restraints of trade.
The Court has previously noted with respect to price fixing, another per se violation of the Sherman Act, that:
A similar observation can be made with regard to territorial limitations. White Motor Co., supra, at 265 n.2 (Brennan, J., concurring).
There have been tremendous departures from the notion of a free-enterprise system as it was originally conceived in this country. These departures have been the product of congressional action and the will of the people. If a decision is to be made to sacrifice competition in one portion of the economy for greater competition in another portion, this too is a decision that must be made by Congress and not by private forces or by the courts. Private forces are too keenly aware of their own interests in making such decisions and courts are ill-equipped and ill-situated for such decisionmaking. To analyze, interpret, and evaluate the myriad of competing interests and the endless data that would surely be brought to bear on such decisions, and to make the delicate judgment on the relative values to society of competitive areas of the economy, the judgment of the elected representatives of the people is required.
Just as the territorial restrictions on retailing Topco-brand products must fall, so must the territorial restrictions on wholesaling. The considerations are the same, and the Sherman Act requires identical results.
We also strike down Topco's other restrictions on the right of its members to wholesale goods. These restrictions amount to regulation of the customers to whom members of Topco may sell Topco-brand goods. Like territorial restrictions, limitations on customers are intended to limit intra-brand competition and to promote inter-brand competition. For the reasons previously discussed, the arena in which Topco members compete must be left to their unfettered choice absent a contrary congressional determination. United States v. General Motors Corp., supra; cf. United States v. Arnold, Schwinn & Co., supra; United States v. Masonite Corp., supra; United States v. Trenton Potteries, supra. See also, White Motor Co., supra, at 281-283 (Clark, J., dissenting).
We reverse the judgment of the District Court and remand the case for entry of an appropriate decree.
It is so ordered.
Blackmun, J. Concurring: The conclusion the Court reaches has its anomalous aspects, for surely, as the District Court's findings make clear, today's decision in the Government's favor will tend to stultify Topco members' competition with the great and larger chains. The bigs, therefore, should find it easier to get bigger and, as a consequence, reality seems at odds with the public interest. The per se rule, however, now appears to be so firmly established by the Court that, at this late date, I could not oppose it. Relief, if any is to be forthcoming, apparently must be by way of legislation.
Burger, J. Dissenting: This case does not involve restraints on interbrand competition or an allocation of markets by an association with monopoly or near-monopoly control of the sources of supply of one or more varieties of staple goods. Rather, we have here an agreement among several small grocery chains to join in a cooperative endeavor that, in my view, has an unquestionably lawful principal purpose; in pursuit of that purpose they have mutually agreed to certain minimal ancillary restraints that are fully reasonable in view of the principal purpose and that have never before today been held by this Court to be per se violations of the Sherman Act.
In joining in this cooperative endeavor, these small chains did not agree to the restraints here at issue in order to make it possible for them to exploit an already established line of products through noncompetitive pricing. There was no such thing as a Topco line of products until this cooperative was formed. The restraints to which the cooperative's members have agreed deal only with the marketing of the products in the Topco line, and the only function of those restraints is to permit each member chain to establish, within its own geographical area and through its own local advertising and marketing efforts, a local consumer awareness of the trademarked family of products as that member's "private label" line. The goal sought was the enhancement of the individual members' abilities to compete, albeit to a modest degree, with the large national chains which had been successfully marketing private-label lines for several years. The sole reason for a cooperative endeavor was to make economically feasible such things as quality control, large quantity purchases at bulk prices, the development of attractively printed labels, and the ability to offer a number of different lines of trademarked products. All these things, of course, are feasible for the large national chains operating individually, but they are beyond the reach of the small operators proceeding alone.
After a careful review of the economic considerations bearing upon this case, the District Court determined that "the relief which the government here seeks would not increase competition in Topco private label brands"; on the contrary, such relief "would substantially diminish competition in the supermarket field." 319 F. Supp. 1031, 1043. This Court has not today determined, on the basis of an examination of the underlying economic realities, that the District Court's conclusions are incorrect. Rather, the majority holds that the District Court had no business examining Topco's practices under the "rule of reason"; it should not have sought to determine whether Topco's practices did in fact restrain trade or commerce within the meaning of § 1 of the Sherman Act; it should have found no more than that those practices involve a "horizontal division of markets" and are, by that very fact, per se violations of the Act.
I do not believe that our prior decisions justify the result reached by the majority. Nor do I believe that a new per se rule should be established in disposing of this case, for the judicial convenience and ready predictability that are made possible by per se rules are not such overriding considerations in antitrust law as to justify their promulgation without careful prior consideration of the relevant economic realities in the light of the basic policy and goals of the Sherman Act.
I deal first with the cases upon which the majority relies in stating that "this Court has reiterated time and time again that 'horizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling of competition.' White Motor Co. v. United States, 372 U.S. 253, 263 (1963)." White Motor, of course, laid down no per se rule; nor were any horizontal territorial limitations involved in that case. Indeed, it was in White Motor that this Court reversed the District Court's holding that vertically imposed territorial limitations were per se violations, explaining that "we need to know more than we do about the actual impact of these arrangements on competition to decide whether they . . . should be classified as per se violations of the Sherman Act." 372 U.S., at 263.
* * *
Northern Pacific R. Co. v. United States, 356 U.S. 1 (1958), dealt exclusively with a prohibited tying arrangement and is improperly cited as a case concerned with a division of markets. Of the remaining seven cases, four involved an aggregation of trade restraints that included price-fixing agreements. Timken Roller Bearing Co. v. United Statess, 341 U.S. 593 (1951); United States v. Sealy, Inc., 388 U.S. 350 (1967); Serta Associates, Inc. v. United States, 393 U.S. 534 (1969), aff'g 296 F.
Supp. 1121 (ND Ill. 1968). Price fixing is, of course, not a factor in the instant case.
Another of the cases relied upon by the Court, United States v. National Lead Co.., 332 U.S. 319 (1947), involved a world-wide arrangement for dividing territories, pooling patents, and exchanging technological information.
* * *
In still another case on which the majority relies, United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), the District Court had, indeed, held that the agreements between the manufacturer and certain of its distributors, providing the latter with exclusive territories, were horizontal in nature and that they were, as such, per se violations of the Act. 237 F. Supp. 323, 342-343. [Ed. Note: Schwinn was later reversed. See Continental T.V., Inc. v. GTE Sylvania, Inc., supra]
Finally, there remains the eighth of the cases relied upon by the Court -- actually, the first in its list of "authorities" for the purported per se rule. Circuit Judge (later Chief Justice) Taft's opinion for the court in United States v. Addyston Pipe & Steel Co., 85 F. 271 (CA6 1898), aff'd, 175 U.S. 211 (1899), has generally been recognized -- and properly so -- as a fully authoritative exposition of antitrust law. But neither he, nor this Court in affirming, made any pretense of establishing a per se rule against all agreements involving horizontal territorial limitations. The defendants in that case were manufacturers and vendors of cast-iron pipe who had "entered into a combination to raise the prices for pipe" throughout a number of States "constituting considerably more than three-quarters of the territory of the United States, and significantly called . . . 'pay territory.'" 85 F., at 291. The associated defendants in combination controlled two-thirds of the manufactured output of such pipe in this "pay territory"; certain cities ("reserved" cities) within the territory were assigned to particular individual defendants who sold pipe in those cities at prices fixed by the association, the other defendants submitting fictitious bids and the selling defendants paying a fixed "bonus" to the association for each sale. Outside the "reserved" cities, all sales by the defendants to customers in the "pay territory" were, again, at prices determined by the association and were allocated to the association member who offered, in a secret auction, to pay the largest "bonus" to the association itself. The effect was, of course, that the buying public lost all benefit of competitive pricing. Although the case has frequently -- and quite properly -- been cited as a horizontal allocation-of-markets case, the sole purpose of the secret customer allocations was to enable the members of the association to fix prices charged to the public at noncompetitive levels. Judge Taft rejected the defendants' argument that the prices actually charged were "reasonable"; he held that it was sufficient for a finding of a Sherman Act violation that the combination and agreement of the defendants gave them such monopoly power that they, rather than market forces, fixed the prices of all cast-iron pipe in three-fourths of the Nation's territory. The case unquestionably laid important groundwork for the subsequent establishment of the per se rule against price fixing. It did not, however, establish that a horizontal division of markets is, without more, a per se violation of the Sherman Act.
* * * With all respect, I believe that there are two basic fallacies in the Court's approach here. First, while I would not characterize our role under the Sherman Act as one of "rambl[ing] through the wilds," it is indeed one that requires our "examin[ation of] difficult economic problems." We can undoubtedly ease our task, but we should not abdicate that role by formulation of per se rules with no justification other than the enhancement of predictability and the reduction of judicial investigation. Second, from the general proposition that per se rules play a necessary role in antitrust law, it does not follow that the particular per se rule promulgated today is an appropriate one. Although it might well be desirable in a proper case for this Court to formulate a per se rule dealing with horizontal territorial limitations, it would not necessarily be appropriate for such a rule to amount to a blanket prohibition against all such limitations. More specifically, it is far from clear to me why such a rule should cover those division-of-market agreements that involve no price fixing and which are concerned only with trademarked products that are not in a monopoly or near-monopoly position with respect to competing brands. The instant case presents such an agreement; I would not decide it upon the basis of a per se rule.
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Norman E. Krehl v. Baskin-Robbins Ice Cream Company
664 F.2d 1348, 1982-1 Trade Cas. ¶ 64,449 (9th Cir 1982)
In this class action antitrust suit against Baskin-Robbins Ice Cream Company (BRICO) and its area franchisors, certain franchisees appeal from an order of involuntary dismissal entered against them by the District Court. Because franchisees stipulated that Baskin-Robbins would be entitled to judgment absent proof of a per se violation of the antitrust laws, we have no occasion to consider the lawfulness of the challenged business practices under the so-called "rule of reason." We affirm.
I. FACTUAL BACKGROUND
BRICO, the nation's largest chain of ice cream specialty stores, operates the quintessential franchise system. See generally ABA Antitrust Section, Monograph 2, Vertical Restrictions Limiting Intrabrand Competition, 1-6 (1977). Originally a small Southern California ice cream manufacturer, BRICO initially engaged in the direct franchising of retail outlets in California. In 1959, BRICO began a program of expansion through licensing independent manufacturers to produce Baskin-Robbins ice cream and establish Baskin-Robbins franchised stores. This mode of expansion was chosen because shortages of capital and personnel rendered any other method impracticable.
The distribution system employed by BRICO has essentially three tiers. At the top is BRICO itself. It manages the chain of franchised stores, selects the area franchisors, and, through a wholly owned subsidiary, acts as the prime lessor of all Baskin-Robbins store properties.
At the second level of the system are the eight independent manufacturers licensed by BRICO to operate as area franchisors. BRICO, again through a wholly owned subsidiary, also operates at this level, acting as an area franchisor in six exclusive territories. The independent area franchisors are contractually bound to BRICO by Area Franchise Agreements. These agreements provide each area franchisor with an exclusive territory in which to manufacture Baskin-Robbins ice cream products. They also authorize the area franchisors, in conjunction with BRICO, to establish and service Baskin-Robbins franchised stores within their respective territories. Under these agreements, the area franchisors are forbidden to disclose the secret formulae and processes by which Baskin -Robbins ice cream products are manufactured.
The third level of the Baskin-Robbins system is composed of the franchised store owners. These independent businessmen
are bound to both BRICO and the area franchisor by the standard form Store Franchise Agreement. Under these
agreements, the franchised store may sell only Baskin-Robbins ice cream products purchased from the area franchisor in
whose territory the store is located.
It is important to note that BRICO utilizes a "dual distribution" system. Under this system, BRICO operates on two distinct levels of the distributional chain. As the owner of the Baskin-Robbins trademarks and formulae, it licenses independent area franchisors to manufacture Baskin-Robbins ice cream and establish franchised stores. In this respect, BRICO's relationship to the area franchisors is vertical in nature. BRICO also operates as an area franchisor, thereby assuming a horizontal position relative to the other area franchisors.
BRICO provides extensive advertising and promotional support for both the area franchisors and the store franchisees. As part of its services to the area franchisors, BRICO sponsors quarterly Marketing, Organization, and Planning (MOAP) meetings. Attendance of these meetings is voluntary but, generally, a majority of the area franchisors are represented. At these meetings, topics of current interest are discussed, including marketing strategy, industry trends and costs. On occasion, informal discussions regarding wholesale and retail prices have taken place.
Certain franchisees of Baskin-Robbins bring this treble damage antitrust suit, alleging three separate per se violations of § 1
of the Sherman Act (15 U.S.C. § 1). First, they contend that Baskin-Robbins ice cream products are unlawfully tied to the
sale of the Baskin-Robbins trademark. Second, they challenge the Baskin-Robbins "dual distribution" system as an unlawful
horizontal market allocation. Finally, franchisees allege that BRICO and its area franchisors conspired to fix the wholesale
prices of Baskin- Robbins ice cream products.
At the close of franchisees' case in chief, Baskin-Robbins moved to dismiss the action, pursuant to Rule 41(b) of the Federal Rules of Civil Procedure. The District Court, sitting without a jury, granted the motion, holding, inter alia, that: 1) The tie-in claim failed because franchisees did not establish that the Baskin-Robbins trademark was a separate product from Baskin-Robbins ice cream, 2) the horizontal market allocation claim failed because franchisees did not establish the requisite concerted activity among competitors, and 3) the wholesale price fixing claim failed for lack of proof of a purpose or effect to fix prices. This appeal, premised on 28 U.S.C. § 1291, ensued.
A. Standard of Review
Our first step in resolving the important issues presented by this appeal is a determination of the applicable standard of
review. Rule 52(a) of the Federal Rules of Civil Procedure provides that the findings of fact made by the District Court,
sitting without a jury, are not to be disturbed on appeal unless "clearly erroneous."
* * *
Here, the facts were hotly disputed by the parties at trial and competing inferences were forcefully pressed upon the District
Court. Under these circumstances, we conclude that the "clearly erroneous" standard governs the findings of the District
Court in this case.
B. The Tie-in Claim
It is well settled that there can be no unlawful tying arrangement absent proof that there are, in fact, two separate products, the sale of one (i.e., the tying product) being conditioned upon the purchase of the other (i. e., the tied product). Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 613-14, 73 S. Ct. 872, 883, 97 L. Ed. 1277 (1953), Siegel v. Chicken Delight, Inc., 448 F.2d 43, 47 (9th Cir. 1971). Franchisees argue that Baskin-Robbins' policy of conditioning the grant of a franchise upon the purchase of ice cream exclusively from Baskin-Robbins constitutes an unlawful tying arrangement. According to franchisees, the tying product is the Baskin-Robbins trademark and the tied product is the ice cream they are compelled to purchase.
The critical issue here is whether the Baskin-Robbins trademark may be properly treated as an item separate from the ice
cream it purportedly represents. We conclude, as did the District Court, that it may not.
In support of their tie-in claim, franchisees rely heavily on Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971). They contend that Chicken Delight established, as a matter of law, that a trademark is invariably a separate item whenever the product it represents is distributed through a franchise system. A careful reading of Chicken Delight, however, precludes such an interpretation and discloses that it stands only for the unremarkable proposition that, under certain circumstances, a trademark may be sufficiently unrelated to the alleged tied product to warrant treatment as a separate item.
In Chicken Delight, we were confronted with a situation where the franchisor conditioned the grant of a franchise on the purchase of a catalogue of miscellaneous items used in the franchised business. These products were neither manufactured by the franchisor nor were they of a special design uniquely suited to the franchised business. Rather, they were commonplace paper products and packaging goods, readily available in the competitive market place. In evaluating this arrangement, we stated that, "in determining whether the (trademark) ... and the remaining ... items ... are to be regarded as distinct items ... consideration must be given to the function of trademarks." Chicken Delight, 448 F.2d at 48. Because the function of the trademark in Chicken Delight was merely to identify a distinctive business format, we found the nexus between the trademark and the tied products to be sufficiently remote to warrant treating them as separate products. Id. at 48-49.
A determination of whether a trademark may appropriately be regarded as a separate product requires an inquiry into the
relationship between the trademark and the products allegedly tied to its sale. See id. at 48. In evaluating this relationship,
consideration must be given to the type of franchising system involved. In Chicken Delight, we distinguished between two
kinds of franchising systems: 1) the business format system; and 2) the distribution system. See id. at 49. A business format
franchise system is usually created merely to conduct business under a common trade name. The franchise outlet itself is
generally responsible for the production and preparation of the system's end product. The franchisor merely provides the
trademark and, in some cases, supplies used in operating the franchised outlet and producing the system's products. Under
such a system, there is generally only a remote connection between the trademark and the products the franchisees are
compelled to purchase. This is true because consumers have no reason to associate with the trademark, those component
goods used either in the operation of the franchised store or in the manufacture of the end product.
"Under such a type of franchise, the trade-mark simply reflects the goodwill and quality standards of the enterprise it identifies. As long as ... franchisees (live) up to those quality standards ... neither the protection afforded the trade-mark by law nor the value of the trade-mark ... depends upon the source of the components."
Id. at 48-49.
Where, as in Chicken Delight , the tied products are commonplace articles, the franchisor can easily maintain its quality standards through other means less intrusive upon competition. Accordingly, the coerced purchase of these items amounts to little more than an effort to impede competition on the merits in the market for the tied products. See Northern Pacific Railway Co. v. United States, 356 U.S. 1, 6, 78 S. Ct. 514, 518, 2 L. Ed. 2d 545 (1958).
Where a distribution type system, such as that employed by Baskin-Robbins, is involved, significantly different considerations are presented. See McCarthy, Trademark Franchising and Antitrust: The Trouble with Tie-ins, 58 Cal.L. Rev. 1085, 1108 (1970). Under the distribution type system, the franchised outlets serve merely as conduits through which the trademarked goods of the franchisor flow to the ultimate consumer. These goods are generally manufactured by the franchisor or, as in the present case, by its licensees according to detailed specifications. In this context, the trademark serves a different function. Instead of identifying a business format, the trademark in a distribution franchise system serves merely as a representation of the end product marketed by the system.
"It is to the system and the end product that the public looks with the confidence that the established goodwill has created."
Chicken Delight, 448 F.2d at 49 Consequently, sale of substandard products under the mark would dissipate this goodwill and reduce the value of the trademark. The desirability of the trademark is therefore utterly dependent upon the perceived quality of the product it represents. Because the prohibition of tying arrangements is designed to strike solely at the use of a dominant desired product to compel the purchase of a second undesired commodity, id. at 47, the tie-in doctrine can have no application where the trademark serves only to identify the alleged tied product. The desirability of the trademark and the quality of the product it represents are so inextricably interrelated in the mind of the consumer as to preclude any finding that the trademark is a separate item for tie-in purposes.
In the case at bar, the District Court found that the Baskin-Robbins trademark merely served to identify the ice cream products distributed by the franchise system. Based on our review of the record, we cannot say that this finding is clearly erroneous. Accordingly, we conclude that the District Court did not err in ruling that the Baskin-Robbins trademark lacked sufficient independent existence apart from the ice cream products allegedly tied to its sale, to justify a finding of an unlawful tying arrangement.
C. The Horizontal Market Allocation Claim
Franchisees contend that the "dual distribution" system used by Baskin-Robbins constitutes an unlawful horizontal market allocation. This contention is premised on BRICO's dual role as both trademark licensor and area franchisor. According to franchisees, BRICO's practice of licensing exclusive territories to other area franchisors while retaining certain areas for itself constitutes a market allocation among competitors. Franchisees further argue that any "dual distribution" system is, in and of itself, a per se violation of the antitrust laws. We address the former contention first.
The hallmark of a horizontal market allocation is collusion among competitors to confer upon each a monopoly in a specific area. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S. Ct. 2549, 53 L. Ed. 2d 568 (1977); Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S. Ct. 971, 95 L. Ed. 1199 (1951).
The District Court found that franchisees had
failed to establish the concerted activity among competitors required to sustain a finding of a horizontal market allocation. In challenging this ruling, franchisees rely primarily on three cases: United States v. Topco Associates, Inc., 405 U.S. 596, 92 S. Ct. 1126, 31 L. Ed. 2d 515 (1972); United States v. Sealy, 388 U.S. 350, 87 S. Ct. 1847, 18 L. Ed. 2d 1238 (1967); and Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S. Ct. 971, 95 L. Ed. 1199 (1951). These cases, according to franchisees, are indistinguishable from the present case and therefore require reversal. We conclude, however, as did the District Court, that these cases are clearly distinguishable from the case at bar. Indeed, our examination discloses that the only factor common to these cases is the existence of a trademark licensing agreement.
In Timken, a domestic manufacturer conspired with its foreign competitors to allocate, among themselves, the world market for anti-friction bearings. In both Topco and Sealy, competing manufacturers created wholly owned trademark licensors. The licensors then granted each competitor an exclusive area in which to manufacture and distribute the trademarked products. In both cases, the Supreme Court recognized that the trademark licenses were merely facades to mask an allocation of markets by pre-existing competitors.
The present case is markedly different. BRICO is neither owned nor controlled by the area franchisors. Unlike the situations in Topco and Sealy, the area franchisors have no voice over BRICO's decisions regarding grants of additional territories. Indeed, the District Court found that at all times the allocation of territory was dictated unilaterally by BRICO. "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." Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164, 168 (3rd Cir. 1979) (cited with approval in Ron Tonkin Gran Turismo v. Fiat Distributors, Inc., 637 F.2d 1376, 1385 (9th Cir. 1981)). Accordingly, the District Court concluded that the territorial restrictions imposed by BRICO are vertical in nature and therefore not per se illegal.
Franchisees attack this conclusion by pointing to several instances where, they allege, territories were transferred by one area franchisor directly to another. BRICO, however, introduced evidence indicating that the transfers were not between area franchisors but rather were instances where BRICO transferred territory from one area franchisor to another better able to service the area. The District Court, after weighing the evidence, concluded that these transfers were not the result of concerted activity by the area franchisors. It is not the function of this court to substitute its interpretation of the evidence for that of the District Court. See, e. g., United States v. Mountain States Construction Co., 588 F.2d 259 (9th Cir. 1978). Because the findings on this issue are not clearly erroneous, we decline to overturn the District Court's determination that franchisees failed to establish their horizontal market allocation claim.
Franchisees also urge us to extend the rule of per se illegality to encompass dual distribution systems such as that practiced by Baskin-Robbins.
Neither the Supreme Court nor this court has yet squarely ruled whether dual distribution systems fall within the rule of per se illegality. Both times it has faced the issue, the Supreme Court has, sub silentio, treated dual distribution systems as imposing only vertical restraints. See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S. Ct. 1856, 18 L. Ed. 2d 1249 (1967); White Motor Co. v. United States, 372 U.S. 253, 83 S. Ct. 696, 9 L. Ed. 2d 738 (1963). Because, however, the Court's silence is an unsteady foundation upon which to base a decision, we undertake our own inquiry into the appropriate standard under which to measure the legality of dual distribution systems.
We take as our starting point the Supreme Court's admonition in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 58-59, 97 S. Ct. 2549, 2562, 53 L. Ed. 2d 568 (1977): "(Departure) from the rule-of-reason standard must be based upon demonstrable economic effect rather than-as in Schwinn -upon formalistic line drawing." Accordingly, our inquiry focuses not on whether the vertical or horizontal aspects of the system predominate, but rather, on the actual competitive impact of the dual distribution system employed by Baskin-Robbins.
The test for determining whether the rule of per se illegality should be extended to a business practice not heretofore afforded per se treatment is
"whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output ... or instead one designed to "increase economic efficiency and render markets more, rather than less, competitive.'"
Broadcast Music, Inc. v. CBS, 441 U.S. 1, 19-20, 99 S. Ct. 1551, 1562, 60 L. Ed. 2d 1 (1980) (citations omitted). Applying this test to the system at issue here, we conclude that application of the rule of per se illegality would be both inappropriate and anti-competitive.
It is evident that were BRICO to abandon its area franchisor responsibilities, the system here would be identical to that involved in GTE Sylvania. We do not believe that BRICO's decision to retain these responsibilities in certain areas has any significant effect on competition. Regardless of BRICO's decision, there would still be fourteen areas, each exclusively served by a single manufacturer-franchisor. Only the identity of the franchisor in a given area is affected by BRICO's decision to retain area franchisor responsibilities in certain territories. To invalidate a distribution system on such basis is to revert to the kind of "formalistic line drawing" eschewed by the Court in GTE Sylvania. See GTE Sylvania, 433 U.S. at 58-59, 97 S. Ct. at 2562.
Franchisees have failed to establish here any significant, adverse impact upon either interbrand or intrabrand competition. Regarding intrabrand competition, the District Court found that franchisees failed to show that any area franchisor is capable of servicing the area of another on a sustained basis. Nor did franchisees establish the feasibility of a more extensive licensing program for the manufacture of Baskin-Robbins ice cream products.
Franchisees similarly failed to establish any adverse effect upon interbrand competition. Indeed, it appears that the distribution system at issue here may have actually fostered interbrand competition. Through the exclusive licensing of independent manufacturers, BRICO was able to expand into new geographic markets and promote the wider availability of its products. This expansion allowed BRICO to grow from a small manufacturer serving only local markets into a vigorous competitor with outlets throughout the world. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 54-57, 97 S. Ct. 2549, 2559-2561, 53 L. Ed. 2d 568; GTE Sylvania, Inc. v. Continental T.V., Inc., 537 F.2d 980, 1000-04 (9th Cir. 1976) (en banc).
Moreover, modern economic thought indicates that the invalidation of a distribution system, absent a showing of anti-competitive effect, may actually retard competition.
"Competition is promoted when manufacturers are given wide latitude in establishing their method of distribution and in
choosing particular distributors. Judicial deference to the manufacturer's business judgment is grounded in large part on the
assumption that the manufacturer's interest in minimum distribution costs will benefit the consumer."
A. H. Cox & Co. v. Star Machinery Co., 653 F.2d 1302, 1306 (9th Cir. 1981) (citations omitted). See also, Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions, 75 Colum.L.Rev. 282, 283-99 (1975); Posner, The Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision, 45 U.Chi. L.Rev. 1 (1977).
Accordingly, we conclude that, in the absence of proof of anti-competitive purpose or effect, dual distribution systems must be evaluated under the traditional rule of reason standard.
D. The Wholesale Price Fixing Claim
Franchisees final contention is that BRICO and its area franchisors conspired to fix the wholesale prices of Baskin-Robbins ice cream products. This contention is premised on two somewhat overlapping arguments. First, franchisees allege that BRICO and the area franchisors engaged in pricing discussions which resulted in the actual fixing of wholesale prices. Second, they allege that BRICO and its area franchisors engaged in continual exchanges of price information which facilitated the establishment of the maximum attainable wholesale prices. This latter practice, they contend, is a per se violation under United States v. Container Corp. of America, 393 U.S. 333, 89 S. Ct. 510, 21 L. Ed. 2d 526 (1969).
The District Court ruled that franchisees had failed to sustain their burden of proof on this issue. On appeal franchisees do little more than re-argue the facts found against them at trial, contending that the findings below are clearly erroneous. We disagree.
At trial, franchisees presented evidence of roughly a dozen isolated communications regarding prices over a seven-year period. Several of these communications involved persons with no direct pricing responsibilities. Many were found by the District Court to be no more than idle "shop talk" such as often occurs between persons in the same field of endeavor. To counter the charge of actual price fixing, Baskin-Robbins introduced evidence, set forth in the margin, indicating that the prices charged by area franchisors were at all times widely disparate. The District Court, after weighing the evidence, determined that the prices charged by the various area franchisors presented no pattern from which an unlawful price fixing conspiracy could be inferred. Because the record provides ample support for this ruling, we decline to disturb the holding of the District Court on this issue.
The District Court also found that franchisees had established only sporadic exchanges of price information, not involving all the area franchisors, and having no effect upon actual pricing decisions. This finding is amply supported by the record. Because the mere exchange of price information, without more, is not per se illegal, United States v. Citizens & Southern National Bank, 422 U.S. 86, 113, 95 S. Ct. 2099, 2115, 45 L. Ed. 2d 41 (1975); United States v. Container Corp. of America, 393 U.S. 333, 338, 89 S. Ct. 510, 513, 21 L. Ed. 2d 526 (Fortas concurring), we conclude that franchisees failed to prove any unlawful conspiracy to fix the wholesale prices of Baskin-Robbins ice cream products.
We conclude that franchisees failed to establish per se violations of the Sherman Act on the part of Baskin-Robbins. Because the parties stipulated that Baskin-Robbins should prevail absent proof of per se violation of the antitrust laws, the judgment below is affirmed.