Petition — Continental TV, Inc. v. GTE Sylvania Inc.

Supreme Court brief1977

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Text

8 1976 |

MICHAEL RODAK, JR., CLERK i

Iu the Supreme Court

OF THE

Anited States ‘

ee ee

Ocroser TERM, 1976

No. 76-15

CONTINENTAL T.V,, [8c., A & G Sais, SYLPAC,

Inc. and S.A.M. LNpusrrtes, [Nc., Petitioners,

vs.

GTE Syivaxia ENCoRPORATED, Respondent.

— —_——— nn OO

$$$

PETITION FOR A WRIT OF CERTIORARI

to the United States Court of Appeals

for the Ninth Circuit

—_— —

—————

)

Jesse CHOPER,

Boalt Hall

Berkeley California 94720

LAWRENCE A. SULLIVAN,

Boalt Hall

Berkeley. California 94720

GiLENN E. MILLer,

711 First National Bank Building

San Jose California 95113

Attorneys for Petitioner,

— Ls SS

PERNAU - WALSH PRINTING CO. - 562 MISSION STREET - GAN FRANCISCO, CA 94108

tt ct Cat we ee erent

Subject index

Page

Gaiety BNE. o.00s ctnadldinois teats cb abnees Geek éacesses 1

Da oo be ish hb eS how obb aie seek eT cee stsee 2

GD sg ccc cede cesncecvacscenepetncaseeesess 2

Constitutional and statutory provisions involved ........... 3

Gee CE. TO GD ax 6s ieercndourcctatedracctcestian 3

Proceedings in the District Court .............00ee008- 3

Proceedings in the Court of Appeals .............0.05. 3

Reasons for gramting the Wit .....cccccccccccccccccccecs ll

I. The decision below is a transparent evasion of con-

trolling decisions by this Court ................005. 11

If. The decision below is blatantly out of harmony with

recent decisions by other courts of appeal and creates

confusion in an area where every firm engaged in

distributing merchandise needs to know the law ..... 20

GEE. 0.4.5 06. cn oh nad ce-centeas aah wih 00404 6s eawneoes 23

Table of Authorities Cited

Cases Pages

Adolph Coors Company v. FTC, 497 F.2d 178 (10ch Cir.

1974), cert. denied 419 U.S. 1105 (1975) .............. 21

Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ... 13

Carter-Wallace Inc. v. United States, 449 F.2d 1374 (Ct.

CE, SEE é cdinc sos ccnbansdeteedi an Fedde s 0s decks tbe 21

Copper Liquor, Ine. v. Adolph Coors Co., 506 F.2d 934

ey GR eS nnndcdvcsusbuumieedetskceéaedadce bance 21

Dr. Miles Medical Co. v. John D. Park & Sons Co., 220

te Re ee ee ee ees ae 12,13

Hobart Brothers Co. v. Malcolm T. Gilliland, Ine., 471 F.2d

GBS Ga GE FRGED . vbcacceneviccubnctivcueded codecs 21

Interphoto Corp. v. Minolta Corp., 417 F.2d 621 (2d Cir.

FRED. ccc cccnivectcereowieevenesedibandandterdih 21

ii TABLE oF AuTHorItIEs CITED

Pages

Janel Sales Corp. v. Lanvin Parfums, Ine., 396 F.2d 398

(2d Cir.), cert. denied 393 U.S. 938 (1968)............ 21

Joseph E. Seagram and Sons, Inc. v. Hawaiian Oke and

Liquors, Ltd., 416 F.2d 71 (9th Cir. 1969), cert. denied

§F & See ere ee 17

Northern Pacific Railroad Co. v. United States, 356 U.S. 1

tt PCa e Us deus ¢46ub besten 0600 0% oe 12, 13, 14

Reed Brothers, Inc. v. Monsanto Company, 525 F.2d 486

(8th Cir. 1975), cert. denied 46 L.Ed.2d 645 (U.S. Sup.

Sl PED o Pauiun cd MAMA eNUEG be keh Cabin cee enswecodeee 21

Saleo Corp. v. General Motors Corp., 517 F.2d 567 (10th

8 BR Pe agen Se eee Frey eer 16

Simpson v. Union Oil Co., 377 U.S. 13 (1964) .......... 13

Tripoli Company Ine. v. Wella Corporation, 425 F.2d 932

(3rd Cir.), cert. denied 400 U.S. 831 (1970) .......... 21

United States v. Arnold, Schwinn & Co., 388 U.S. 365

EE inch chia ded banal db akheeasknessséenens ianees passim

United States v. A. Schrader’s Sons, Inec., 252 U.S. 85

SS. xetcenehst din pauksdendieawieas Ciden aes dndecouk 13

United States v. Topco Associates, Inc., 405 U.S. 596

EE dike nkacecheae budesonide Be Undone ss 2, 3, 14, 15, 19, 20

White Motor Co. v. United States, 372 U.S. 253 (1963)... .11, 19

Statutes

28 U.S.C., Section 1254(1) ............ Hid uacnaianied weak 2

House Reports

Sh. CD one4bs6nd ue Gams ENCES i 10hb64oocs caheccucl 15

Texts

Bohling, Franchise Terminations Under the Sherman Act:

Populism and Relational Power, 53° Texas L. Rev., pp.

Le CUED. $4 eb GnAds 60066056 ada cons) <c ak 13, 14

Bowman, The Prerequisites and Effects of Resale Price

Maintenance, 22 Univ. Chi. L. Rev. 825 (1955) ........ 13

ae me ae Ve

a ee ee

SP ee SR ee ee ele me —

a. er Sere or

Iu the Supreme Court

OF THE

Rnited Staten

OcroBER TERM, 1976

No.

CONTINENTAL T.V., Inc., A & G SALES, SYLPAC,

Inc. and 8.A.M. Inpustrigs, INc., Petitioners,

vs.

GTE Sy.vania INcozPoraTED, Respondent.

PETITION FOR A WRIT OF CERTIORARI

to the United States Court of Appeals

for the Ninth Circuit

Petitioners, Continental T.V., Inc., A & G Sales,

Sylpac, Inc. and 8. A. M. Industries, Inc. pray that

a writ of certiorari issue to review the judgment of

the United States Court of Appeals for the Ninth

Circuit entered in this case on April 9, 1976.

OPINIONS BELOW

The opinion of the Court of Appeals (Appendix

A) is not yet reported. The District Court wrote no

opinion. It entered Findings of Fact and Conclusions

of Law (Appendix B, pp. 115-29) which are not re-

ported.

JURISDICTION

The Court of Appeals entered judgment on April

9, 1976. The jurisdiction of this Court is invoked

under 28 U.S.C. See. 1254(1).

QUESTIONS PRESENTED

If a TV manufacturer selling direct to retail dealers

restricted intrabrand competition by assigning to

each dealer a territory in which alone it could resell,

the arrangement would blatantly violate the per se

rule of United States v. Arnold, Schwinn & Co., 388

U.S. 365 (1967). The questions presented here are:

1) Can such a manufacturer evade the Schwinn

rule by assigning to each dew »r not a territory but

a store location from which at: © it can resell, when

the manufacturer’s stated purpuse is to eliminate

intrabrand competition and the etfect is to exclude

one dealer from competing in the territory served by

another ?

2) Even though United States v. Topco Associates,

Inc., 405 U.S. 596 (1972) and United States v.

Arnold, Schwinn & Co., supra, establish that claimed

benefits to interbrand competition cannot excuse

horizontal or vertical territorial restrictions which

foreclose intrabrand competition, must a trial judge

or jury attempt under the rule of reason to weigh as-

serted benefits to interbrand competition against fore-

closure of intrabrand competition merely because the

manufacturer has changed the form by which intra-

brand competition is eliminated from a restraint on the

territory within which dealers can resell to a restraint

upon the store locations from which dealers can resell ?

3) Even if it were assumed, contrary to the teach-

ing of Topco and Schwinn, that a judge or jury could

properly decide to sacrifice intrabrand competition

upon eredible economie evidence that increases in

interbrand competition would be attained thereby,

should they be compelled to speculate about a possible

benefit to interbrand competition and its relative

weight when the only economic evidence shows that in

the present state of economic knowledge it is impos-

sible to tell whether a restraint upon intrabrand

competition has resulted in any benefit to interbrand

competition ?

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The applicable constitutional and statutory mate-

rials are set out in Appendix C, pp. 130-33.

STATEMENT OF THE CASE

Proceedings in the District Court

When GTE Sylvania Incorporated (“Sylvania”)

sued petitioners, corporations in substantially common

ownership operating a chain of retail TV stores in

California (“Continental”), for money due for TV

sets sold and delivered, Continental counterclaimed

seeking treble damages and injunctive relief under

the antitrust laws. The case on the counterclaim was

tried to a jury before Mr. Justice Tom C. Clark sitting

by designation in the district court. The jury found

for Continental in the form of answers to special

interrogatories and Mr. Justice Clark made findings of

fact favorable to Continental and granted injunctive

relief. The trial court’s findings and the evidence

supporting the jury’s verdict show the following

facts:

In 1962 Sylvania abandoned its earlier practice of

selling ''V sets manufactured by it to wholesalers who

resold without restriction. It initiated instead what it

called its “elbow room” plan. (App. A pp. 3-6)

Under this plan Sylvania sold only to selected re-

tailers. These retailers undertook to resell only at

designated store locations approved in advance by

Sylvania. (App. A pp. 5-6) There was abundant

evidence that Sylvania’s purpose was precisely the

same purpose which motivated the territorial re-

straints in Schwinn. Thus, Sylvania’s sales manual

said the restraints would create “‘elbow room’ in a

sensible territory ....” and that “ ‘same brand’ com-

petition is eliminated.” (App. A p. 66)? At the

time it initiated these restraints Sylvania held between

1Sylvania’s sales manual which was introduced into evidence in

the district court also stated that the elbow room plan “gives

every Sylvania dealer a geographic area in which to sell . . . ,” and

that Sylvania “franchise|s} dealers by territory ....” (See Find-

ings of Fact, 7, App. B pp. 119-20)

etree tte a a AEN OES NS ey OA

one and two percent of the TV market nationally.

(App. A p. 3) Though Sylvania introduced not

a shred of evidence that its pre-1963 TV operations

were not profitable, the evidence is clear that Sylvania,

like Schwinn, wanted a bigger market share. It intro-

duced the “elbow room” restrictions (along with

product, advertising and managerial changes) in the

hope of increasing its share. (App. A pp. 2-3, foot-

note 2)

Continental, a family business with eight retail

stores in northern California, was one of Sylvania’s

largest customers. From the inception of its relation-

ship with Sylvania until 1965, it complied with the

elbow room restraints. (App. A pp. 6-9) In 1965

Continental, which had stores in Oakland, San Fran-

cisco, and San Jose, decided to open a store in Sac-

ramento, California. (App. A p. 9) Although before

1963 Sylvania had sold to several retailers in

Sacramento, under the “elbow room” program there

was only one retailer in Sacramento which handled

Sylvania merchandise in volume; that retailer, Handy

Andy, was the only firm in Sacramento making retail

sales of Sylvania color TV sets and also accounted

for 80% of the sales of black and white sets. When

Continental took steps to enter the Sacramento

market, Handy Andy complained to Sylvania.

(App. A pp. 54-55, footnote 1) Sylvania thereupon

denied permission to Continental to ship any of Con-

tinental’s Sylvania-brand merchandise to the new

Sacramento store or to sell Sylvania-brand merchan-

dise there. Indeed, Sylvania threatened dire conse-

quences if Continental displayed or sold Sylvania

products in Sacramento, (App. A pp. 54-55, footnote 1)

(Findings of Fact {1 11-13, App. B pp. 122-23)

Despite Sylvania’s threats, Continental, after con-

sultation with counsel, moved Sylvania-brand T'V sets

owned by Continental, from its San Jose warehouse

to its Sacramento store for resale. Sylvania took re-

taliatory steps which injured Continental’s credit, de-

prived it of souvces of merchandise, drove it out of

Sacramento and, ultimately, out of several other mar-

kets as well. (App. A pp. 54-55, 56-57) (Findings of

Fact 114, App. B pp. 123-24)

As Sylvania has insisted throughout, given the form

of Sylvania’s elbow room restriction, Continental the-

oretically could make resales to Sacramento buyers

without technically violating the restriction by mak-

ing such sales from its San Francisco or Oakland

stores. But witnesses for both parties all testified that

a TV retailer cannot as a practical matter make sales

to customers more than 25 to 50 miles away from its

store: and Continental’s nearest stores were well

beyond this range in the entirely different San Fran-

AktA

cisco and retail markets. (App. A pp.

67-68) Thus, the unquestioned thrust of Svlvania’s

action was exclusion of Continental from competing

with Handy Andy in Sacramento. (Finding of Fact,

{1 8, 16, App. B pp. 120, 126)

The case was presented to the jury by Continental

on the theory that in purpose and effect Sylvania im-

posed a territorial restriction in violation of the per

se rule of United States v. Arnold, Schwinn & Co.,

De te ee I iar He

supra. (App. A p. 60, footnote 1b) Sylvania asserted

the factual defense that it did not retaliate against

Continental for entering Sacramento but took the

steps it did for credit reasons, (Finding of Fact

115, App. B pp. 124-25) It also contended that the true

character of its elbow room program was merely

to franchise by location and that it did not control

dealer resale territories. (App. A pp. 60-61, footnote

lc) Mr. Justice Clark left these f ] issyes to the

jury. He instructed them that pa emer that

the elbow room restrictions constituted a contract

combination or conspiracy “the purpose and effect

of which was to establish and enforce-a distribution

policy restricting the locations from which and ter-

ritories in which Sylvania dealers could resell... .”

He then accurately paraphrased the language and

holding of U.S. v. Arnold, Schwinn & Co., supra,

saying:

“...[w]here a manufacturer . . . restricts the ter-

ritcries with which a dealer may resell merchan-

dise purchased from the manufacturer, such a re-

striction is unlawful regardless of whether or not

the restriction is good business practice from the

manufacturer’s point of view and is likely to as-

sure adequate volume or profits. Any agreement,

combination or conspiracy by which a manfac-

turer interferes with the ordinary, and usual

forces of co itio rl itori

within Mig a ne Hara Se

ufacturer or te keep one dealer from competing

for customers or sales in a territory or area

served by another dealer also constitutes a viola-

tion of the antitrust laws, whether or not the

Meth

territories resulting seem reasonable or unreason-

able.

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 do-

minion 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 pur-

chased from Sylvania to be a violation of Section

1 of the Sherman Act, regardless of the reason-

ableness of the location restrictions.” (App. A

p. 59, footnote la)

He then went on to instruct the jury in the terms

requested by Sylvania that a manufacturer does have

the right to franchise by location and to refuse to

franchise at additional locations, and does have the

right to select its own customers and to grant exclu-

sive dealerships. In short, it was only a contract,

combination or conspiracy which in purpose and effect

restricted where or to whom a dealer might resell

which the court told the jury would constitute a vio-

lation.

The jury in answers to special interrogatories found

that Sylvania’s resale restrictions constituted a con-

tract, combination, or conspiracy in restraint of trade

in violation of the antitrust laws and that Continental

sustained damage to its business or property as a

proximate result. (App. A pp. 11-12, footnote 6)

Mr. Justice Clark then made findings of fact to the

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same effect as a predicate to injunctive relief. These

findings, Appendix B pp. 116-26, like the jury ver-

dict, rejected Sylvania’s factual claim that it acted

against Continental not because Continental sold TV

sets in Sacramento but because of doubts about Con-

tinental’s credit; the trial judge found that Sylvania

acted, in purpose and effect, to keep Continental from

competing in Sacramento. (Findings of Fact 11 14,

15, 16, App. B pp. 123-26)

Proceedings in the Court of Appeals

The judgment entered for Continental in the dis-

trict court was affirmed, two to one, by a tluree-judge

panel in the court of appeals. Rehearing en bane was

granted and the panel opinion withdrawn. A sharply

divided court of appeals ultimately reversed the dis-

trict court by a seven to four vote. The majority, in

a lengthy opinion by Judge Ely (App. A pp. 1-54),

held that “the legality of the locations clauses

here involved should be judged under what is com-

monly referred to as the ‘rule of reason’, rather than

a rule of per se illegality.” (App. A p. 17) The

majority distinguished Schwinn on the ground that

“Schwinn’s territorial restrictions . . . prevented a

dealer from competing for customers outside his terri-

tory,” whereas “Sylvania’s dealers could sell to custom-

ers from any area, could advertise in any area, and

were limited only as to the location of the franchisee’s

place of business.” (App. A pp. 20-21) The majority

found in some lower court cases a basis for doubting

whether this Court was, in Schwinn, “establishing a

per se rule against all vertical territorial restraints”

(App. A p. 33). It criticized the trial judge be-

cause he “chose to apply, literally, the . . . sweeping

language” of Schwinn (App. A pp, 17-18). Perceiv-

ing a distinction between the restraints in Schwinn

which restricted resale territories and those used by

Sylvania which restricted the store location where

resaies could be made, the majority held that it was

wrong to instruct in terms of Schwinn despite the

abundant evidence of a purpose and effect to exclude

Continental from Handy Andy’s protected Sacra-

mento territory. The majority limited Schwinn’s ap-

plication to territorial restraints which “absolutely pro-

hibited a dealer from selling to purchasers outside of

a certain area.” (App. A p. 24) Even on facts like

those here, the Schwinn rule, it held, must be kept

secret from the jury. The court beiow thus entered

its order reversing and remanding the case for

further proceedings not inconsisieut with the majority

opinion. (App. A pp. 53-54) ©

Judges Kilkenny, Browning, Duniway and Wright

dissented from that disposition and opinion. Judge

Kilkenny’s opinion (App. A pp. 54-86), concurred

in by Judges Browning and Wright and in this

part by Judge Duniway called the factual distine-

tions from Schwinn “insignificant” and stated that

the district court “simply took the holding of Schwinn

at face value and applied it to a set of facts which it

logically encompasses.” (App. A p. 65) It labelled

the majoritys’ views as “impossible to reconcile with

the jury verdict and the district court’s findings of

fact, which establish that the location clause operated

‘ — — ee”

as a territorial restraint”. (App. A p. 66) It read

Schwinn to “outlaw any and all territorial re-

strictions on resale to others” and thus as rendering

illegal “all devices, the inevitable practival effect of

which is to restrict a retailer’s territory.” (App, A

p. 68) Judge Browning also wrote a lengthy opin-

ion showing that major purposes of the Sherman Act

would be frustrated by the majority position. (App. A

pp. 87-113) Judge Duniway wrote a brief opinion

putting his dissent solely on the ground that Schwinn

controls this case. (App. A p. 114) Chief Judge

Chambers wrote a brief opinion concurring in the

judgment of the majority but dissenting from the

number of words used to reach it and criticizing the

majority for relying on law review comments about

this very case. (App. A pp. 86-87)

REASONS FOR GRANTING THE WRIT

I. THE DECISION BELOW IS A TRANSPARENT EVASION OF

CONTROLLING DECISIONS BY THIS COURT

Resolving earlier doubt expressed in White Motor

Co. v. United States, 372 U.S. 253 (1963), and over

pointed dissent, this Court in United States v. Arnold,

Schwinn & Co., 388 U.S. 365 (1967) deliberately

adopted a rule of per se illegality to govern vertical

restraints imposed by a manufacturer limiting the

persons to whom or places at which a wholesaler or

retailer may resell:

“Under the Sherman Act, it is unreasonable with-

out more for a manufacturer to seek to restrict

and confine areas or persons with whom an arti-

cle may be traded after the manufacturer has

parted with dominion over it... . Such restraints

are so obviously destructive of competition that

their mere existence is enough.” (388 U.S. at

379)

The important policies which underlie this rule all

require that the Schwinn holding be applied to all fact

situations which in reason it governs and _ that

Schwinn not be reduced to a technicality which can

be evaded by trivial changes in the form of a resale

restraint. In whatever guise they appear, vertical

resale restraints which effectively segregate resellers

into separate geographic markets (as do both the

Schwixn and the Sylvania restraints) deprive con-

sumers of the benefits of same-brand competition. The

maverick dealer whose actual or potential entry would

otherwise put a protected dealer on his mettle is ef-

fectively thwarted. A protected dealer like Handy

Andy is freed from intrabrand price competition just

as effectively as if the manufacturer had fixed resale

prices; in addition, he is freed from such competition

as an entering dealer like Continental might offer in

the way of attractive facilities and services. Moreover,

when restraints like these are used, decisions about the

deployment of distribution resources are made at the

“macro” level by the manufacturer. See Northern Pa-

cific Railroad Co. v. United States, 356 U.S. 1, 4

(1958). Often (as in this instance, where Sylvania’s

protected Sacramento dealer complained to Sylvania)

the manufacturer will be acting merely as the surro-

gate for dealers or distributors who welcome the ben-

efits of what constitutes, in effect, a cartel. Of. Dr.

CT Ee ee es ee Oe ee Te ee ee ee ee ee ee ee ee

a >.

Miles Medical Co. v. John D. Park & Sons Co., 220

U.S. 373 (1911); Bowman, The Prerequisite and Ef-

fects of Resale Price Maintenance, 22 Univ. Cut. L.

Rev. 825 (1955). But even if the initiative comes

entirely from the manufacturer, consumers are de-

prived of the more flexible judgments about resource

allocation which could be expected if decisions were

made on a “micro” basis by numerous individual deal-

ers and distributors, each intent on his own best in-

terest. Dr. Miles Medical Co. v. John D. Park & Sons

Co., supra at 409. None of these harmful effects turn

on whether the restraint is in the precise form of the

Schwinn restraint or in a somewhat different form,

like the Sylvania restraint. They turn solely on the

effect of the restraint—that one dealer is kept from

selling in the same general area and to the same

customers as the other.

Nor are economic interests the only ones at stake.

The Sylvania restraints, just as surely as the Schwinn

restraints, offend a vital social goal of the Sherman

Act. Both deprive independent retailers of power to

act for themselves, free of coercion, collusion and ex-

clusionary impediments, in making the most crucial

and important decisions any independent trader can

make. This Court has often stressed the Sherman Act

goal of commercial freedom. United States v. A.

Schrader’s Sons, Inc., 252 U.S. 85, 100 (1920) ; North-

ern Pacific Railway Co. v. United States, 356 U.S. 1,

4-5 (1958); Brown Shoe Co. v. United States, 370

U.S. 294, 344 (1962); Simpson v. Union Oil Co., 377

U.S. 13, 19 (1964). Recent scholarship reconfirms that

Congress, too, regarded it as important. Bohling,

Franchise Terminations Under the Sherman Act:

Populism and Relational Power, 53 Texas L. Rev.

1180, 1189 (1975). Judge Browning’s dissent below

presses this point forcefully, (App. A pp. 88-90)

Finally, to apply the rule of reason in a case where

resellers, by any device, are precluded from competing

with each other in the same resale market would be to

run roughshod over this Court’s settled view about the

alternative roles of the judiciary and the legislature

in anti-trust administration. The interests which the

Court has had in mind when it has addreszed these

matters of legal process are related to the purpose

and effect of a restraint, not to its mere form. A per

se rule “. . . avoids the necessity for an incredibly

complicated and prolonged economic investigation .. .

—an inquiry so often wholly fruitless when under-

taken.” Northern Pacific Railway v. United States,

supra at 5. That difficult inquiry cannot be avoided

when, absent such an inquiry, it is not possible to tell

whether or not competition has been injured at all.

But as this Court recently held in United States v.

Topco Associates, Inc., 405 U.S. 596 (1972), where, as

here, a restraint has been imposed on intrabrand com-

petition, the Court should not set sail on a sea of

speculation in a prophetic effort to tell whether the

resulting injury is offset by asserted benefits to inter-

brand competition:

“Our inability to weigh, in any meaningful sense,

destruction of competition in one sector of the

economy against promotion of competition in an-

other sector is one important reason we have for-

mulated per se rules...” (405 U.S. at 609-610)

6“

“ ..If a decision is to be made to sacrifice com-

petition in one portion of the economy for greater

competition in another portion, this... is a deci-

sion that must be made by Congress and not by

private forces or by the courts.” (405 U.S. at

611).?

While the view expressed in Topco is not aimed

primarily at the problem of court congestion, it is ob-

viously relevant also to that problem. Tried under the

per se rule, this case was numerous months at the

discovery and motion stage, many weeks at trial, and

five years in the court of appeals. Under a rule of

reason standard vastly more private and judicial re-

sources would have to be expended on a case such as

this. The per se rule also has another collateral ad-

vantage. By pointing the jury to the explicit and

manageable question whether resale restrictions were

imposed, it reduces the jury’s range of untrammeled

discretion. The inevitable risks of ethnic, social, re-

gional, racial, anti-corporate or other invidious dis-

eriminations are markedly reduced.

Despite this Court’s holdings in Schwinn and Topco,

and with apparent disdain for the policies underlying

them, the majority below held that Schwinn has no

2Tt was recently reported that the House Commerce Committee

approved a bill (H.R. 6684) which provides that trademark licens-

ing agreements limiting the geographical territory in which a

franchise holder can process and sell certain private-label food

products and soft drinks shall not be deemed per se violations of

the antitrust laws. See 766 Antitrust & Trade Reg. Rep. A-14

(June 1, 1976). Whatever the fate of this particular legislation,

which would leave Schwinn applicable in full foree to the TV

industry, it is obvious that Congress can deal with the issues left

to it by Topco selectively on an industry by industry basis in a

way which, as Topco makes clear, is not feasible for the Court.

application to Sylvania’s resale restraint because,

given the form of Sylvania’s restraint, Continental

retained a right to resell in Sacramento from its retail

TV store in San Francisco or Oakland—a right which

was wholly theoretical, and of no more practical con-

sequence than Continental’s equally theoretical and

wholly useless right to sell, say, in New York City,

by advertising in the New York Times in the hope of

attracting phone or mail orders to be filled by deliver-

ies from San Francisco. In short, the majority below

embraced a factual basis for distinguishing Schwinn

which is a transparent farce. If allowed to stand, that

decision will belie any claim that antitrust jurispru-

dence is rooted in principles of general application. If

the decision below is sound, then the rule of Schwinn

has bev: successfully laid to rest by an intermediate

appellate court, except in so far as the Schwinn rule

may remain a hazard for the naive trader who does

not avail himself of the simple measures which, ac-

cording to the Ninth Circuit majority, may be used to

evade Schwinn.

The reasons given by the majority below for its

scornful treatment of Schwinn compound the incon-

gruity. For one thing, the majority relies on cases

which plainly lack relevance. Salco Corp. v. General

Motors Corp., 517 F.2d 567 (10th Cir. 1975), for

example, holds only that it is lawful for a manu-

facturer to specify the location covered by a franchise

given to a dealer. Of course it is. A manufacturer

need not permit a dealer to hold itself out as the man-

ufacturer’s authorized representative at locations

where the manufacturer does not wish to do so. At

Sylvania’s request Mr. Justice Clark instructed the

jury below precisely to that effect. This case does not

involve any assertion by Continental that it may hold

itself out as a franchised, or authorized dealer of

Sylvania at any location where Sylvania has not

conferred on Continental the right to profit from Syl-

vania’s name and good wil!. This case turns on a very

different question—namely, whether a manufacturer

can by agreement foreclose a retailer from shipping its

own merchandise from a franchised location to a

non-franchised location for resale, an issue not in-

volved in Salco, but to which Schwinn clearly speaks.

For another, the majority below relies on cases like

Joseph E. Seagram and Sons, Inc. v. Hawaiian Oke

and Liquors, Ltd., 416 F.2d 71 (9th Cir. 1969), cert.

denied, 396 U.S. 1062 (1970) which hoid that a manu-

facturer may agree that i will sell only to one dealer

in a territory; obviously cases involving such exclusive

dealerships, restraints solely on the manufacturer’s

own sales, cannot after Schwinn be read as implying

that a manufacturer can also agree to stamp out ef-

forts by competing dealers to ship goods purchased

elsewhere into a competitor’s territory for resale.

Schwinn says that to be lawful the exclusive dealer-

ship must stop at “ ‘confinement’ of the manufacturer’s

own sales,” an arrangement at “the other extreme”

from resale restrictions on the dealer. (388 U.S. at

376)

The majority opinion by Judge Ely below also sig-

nals its attitude about Schwinn by its use of secondary

authority. Probably no antitrust decision of recent

memory has had such ardent champions or vehement

detractors as Schwinn.’ From among this vast litera-

ture the pieces chosen for special comment and appar-

ent approval by the majority below were an article and

several student comments discussing the withdrawn

panel opinion in this very case.‘ All of these, though

serving as briefs for the position taken by the ma-

jority below, are either overt or thinly disguised at-

tacks on Schwinn itself. Not one of them assumes the

need to find a principe on the basis of which this ease

can be distinguished fiom Schwinn. The reasons they

offer for upholding the Sylvania restraint would, if

accepted, require that the Schwinn restraint be up-

held too. \

Nor is it only its reliance upon dubious authorities

which impeaches the majority opinion\ below; that

opinion puts forth an analysis which displays the ma-

jority’s lack of regard for Schwinn. Tracking Mr. Jus-

tice Stewart’s dissenting opinion in Sdhwinn. the

majority below asserts that the rule of Schwinn should

not “be stretched to encompass [a] practice which can

produce pro-competitive effects” by aiding {nterbrand

competition. (App. A, p. 24) For a lower court to

assert such a basis for putting Schirinn aside is start-

ling. As Judge Browning insists (App. A, pp. 99-101

79-80) Schwinn expressly recognizes the claim that

territorial restraints may sometimes benefit interbrand

structure; on this basis Schwinn both states that the

rule of reason should be used to govern these restraints

3See, e.g., the materials cited at A

, s pp. A, p. 2, fn. 1; pp.

ins 12 and 13 .P. 20, fn. 15: p. 25, fn. 17, p. 33, Ey,= 35

» Pp. 6/, In. 2; p. 99, fn. 8; pp. 100-101, fn. 10; p. 103,

‘See App. A, p. 2, fn. 1; pp. 17, 18, fns. 12 and 13.

when products are consigned rather than sold (388 U.S.

at 380-81) and implies that a “new comer” or “failing

company” defenses may be available to justify these

restrictions even in cases where the manufacturer sells

the goods. (383 U.S. at 374) In the second place, the

Topco decision which involved horizontal territorial

and related restraints, flatly rejects possible benefit to

interbrand competition as a basis for sanctioning dam-

age to intrabrand competition—and it does so on the

basis of a principle which applies with equal force to

vertical restraints of a similar kind. (405 U.S. at 610-

11). Both Schwinn and Topco plainly establish the ap-

plicability of the per se rule. If this Court itself is con-

strained by stare decisis to apply the per se rule, cer-

tainly “at this late date” a lower federal court ought

“not oppose” that rule on the basis of its own diver-

gent policy views. See United States v. Topco As-

sociates, Inc., supra at 613. (concurring opinion).

There is yet another circumstance which marks

as wholly specious any claim that despite Schwinn

and Topco benefits to intrabrand competition can in

this case justify damage to intrabrand competition.

In support of its rule of reason defense Sylvania

offered and (over Continental’s objection) the trial

court and jury heard the testimony of an economist

who has written extensively on resale restraints. Thus,

the district court here, unlike the trial court or this

Court in White Motors, had before it the manufac-

turer’s full “rule of reason” defense when it ruled that

the jury should not be allowed to speculate whether

claimed interbrand benefits outweighed conceded in-

trabrand injury. That economic testimony, far from

undercutting the rationale of Schwinn and Topco,

strongly confirmed it. It established that economic

analysis cannot aid a court or jury to weigh as-

serted interbrand gains against. established intrabrand

losses.*

II. THE DECISION BELOW IS BLATANTLY OUT OF HARMONY

WITH RECENT DECISIONS BY OTHER COURTS OF APPEAL

AND CREATES CONFUSION IN AN AREA WHERE EVERY

FIRM ENGAGED IN DISTRIBUTING MERCHANDISE NEEDS

TO KNOW THE LAW

Every firm manufacturing or selling merchandise

must set up or participate in a distribution system.

Thus, when Schwinn was decided it appeared to settle

the law on a major question which confronts virtually

every manufacturer and distributor and vast num-

bers of retailers throughout the country. Given the

decision below confusion again reigns.

As shown above, the court of appeals majority holds

Schwinn inapplicable to a restraint in a different

form from that in Schwinn even though its con-

On direct examination, the most the economist, Lee Preston,

could bring himself to say was that “Sylvania is in there. They

are at the bottom, but in there. Now if we squeeze out the bottom

firms—we would see a decline in competition among brands in all

the major markets in the country. Therefore, if this distribution

policy or any particular distribution has the effect of strengthening

Sylvania or any other smaller firm as a competitive foree—then I

think we have to look carefully at that poliey as . . . a procom-

petitive policy . . .” App. A, p. 48, footnote 36) (emphasis

added) Then, on ecross-examination Preston’s testimony frankly

discloses thai he was not asserting that Sylvania was in danger of

falling out of the market if it could not use its restrictive distribu-

tion policy and that the current state of economic theory provides

no way to tell whether this or any restrictive distribution policy

vields offsetting advantage to competition at the manufacturer

level. (App. A, pp. 104-106 (especially footnotes 15 and 16) ).

ceded purpose and its effect are substantially iden-

tical with those used in Schwinn. So doing, the ma-

jority below collided head on with two other courts of

appeal. The Eighth Cireuit has held that Schwinn ap-

plies to any resale restraint “[w]hatever their appel-

lation or garb” which “have the effect of being unlaw-

ful territorial and customer restraints.” Reed Broth-

ers, Inc. v. Monsanto Company, 525 F.2d 486, 500 (8th

Cir. 1975), cert. denied, 46 L.Ed.2d 645 (U.S. Sup.

Ct., 1976). The Fifth Cireuit decision in Hobart

Brothers Co. v. Malcolm T. Gilliland, Inc., 471 F.2d

894, 899-901 (5th Cir. 1973) is to the same effect.

Both those cases explicitly hold that Schwinn gov-

erns any vertical restraint having the purpose and

effect of confining the persons to whom or places at

which customers may resell, Identity in form to the

Schwinn restraint need not be shown in order to invoke

the Schwinn rule.®

5 i nflict noted in the text the only source of confusion.

The Sona of haga for the Third Circuit, though not going so

far as does the majority below, held in Tripoli Company Ince. v.

Wella Corporation, 425 F.2d 932 (3rd Cir.), cert. denied, 400 U.S.

831 (1970) that Schwinn is inapplicable where the manufacturer

has a business reason other than concern about resale competition

for imposing a vertieal resale restraint. On similar facts the Court

of Appeals for the Tenth Cireuit followed Schwinn, but with

expressed reluctance (Adolph Coors Company v. FTC, 497 F.2d

178 (10th Cir. 1974), cert. denied, 419 U.S. 1105 (1975) ) but the

Court of Appeals for the Fifth Cireuit insisted that Schwinn

could not—and even if it could, should not—be distinguished.

Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d 934 (5th Cir.

1975). Adding peripherally to the confusion are cases from the

Seeond Cireuit, some of which warmly embrace Schwinn (e.g.

Interphoto Corp. v. Minolta Corp., 417 F.2d 621, 622 (2d Cir.

1969) ), others of which seem to make the applicability of Schwinn

turn not upon the imposition of the territorial restraint, but upon

firm and resolute enforcement (e.g. Janel Sales Corp. v. Lanvin

Parfums, Inc., 396 F.2d 398, 406 (2d Cir.), cert. dented, 393 USS.

938 (1968), and cases like Carter-Wallace Inc. v. United States,

449 F.2d 1374, 1380 (Ct. Cl. 1971) which trivializes Schwinn.

The majority opinion below, by adding its weight to

the anti-Schwinn side of what had been largely an

academic debate—and by doing so on a fact situation

devoid of any alternative issue, such as price fixing,

or any principled basis for distinguishing Schwinn—

has granted itself the prerogative of rewriting the law

announced by this Court, and has done so in rhetoric

which lacks either balance or candor. In consequence,

confusion and doubt will now plague the marketplace.

No trader will know the extent to which manufacturers

may dictate to dealers and distributors about where

they may resell. No lawyer with clients whose busi-

ness traverses two judicial circuits will be able to ad-

vise whether restraints differing only in form from

Schwinn will be governed by a per se rule or be sub-

ject to the rule of reason.

If Schwinn is to be overruled, it should be over-

ruled by this Court, and overruled candidly; it should

not be dispatched by the court below in a specious ma-

jority opinion. If Schwinn is to be modified, it should

be modified by this Court, with deliberation, not left

to unravel as other courts and commentators, encour-

aged by the decision below, begin to pick at it. If

Schwinn is to remain the law, this Court must

elearly teach that the majority below is wrong and

does not have the power to reduce Schwinn to a legal

exercise devoid of force or principle.

CONCLUSION

For the foregoing reasons this Court should grant

a writ of certiorari to review the decision below.

Dated, June 28, 1976.

Respectfully submitted,

JESSE CHOPER,

LAWRENCE A, SULLIVAN,

GLENN E. MILLER,

Attorneys for Petitioners.

(Appendices Follow) |

APPENDICES

Appendix A

United States Court of Appeals

for the Ninth Circuit

No. 71-1705

GTE Sylvania Incorporated, !

Appellant,

vs.

Continental T.V., Inec., a corporation;

A & G Sales, a corporation; Sylpac, Inc.,

a corporation; and S.A.M. Industries,

Ine., a corporation,

—~

Appellees. j

[April 9, 1976]

Appeal from the United States District Court

for the Northern District of California

OPINION

Before: CHAMBERS, Brownina, Duntway, ELy, Hur-

STEDLER, WRIGHT, KILKENNY, CHoy, Goop-

win, WALLACE, and SNEED, Circuit Judges.*

*Judges Koelsch and Trask recused themselves and did not

participate in any aspect of this appeal. Senior Judge Kilkenny

exercised his statutory prerogative to participate, pursuant to the

provision of the last sentence of 28 U.S.C. § 46(c). Judge Kennedy

did not participate because he did not assume his judicial position

until after the full court heard the oral arguments of counsel and

thereafter conducted its private deliberations.

Ezy: Cireuit Judge:

Pursuant to a jury verdict in a private antitrust

action, a judgment and an equitable decree were en-

tered in favor of the appellees (hereinafter, collee-

tively, “Continental”) and against the appellant

(hereinafter “Sylvania”). On this appeal by Syl-

vania, the critical issue is whether the district judge

erred in concluding and instructing the jury accord-

ingly, that, under the supposed rationale of United

States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967),

Sylvania’s practice of fixing by agreement the loca-

tions from which Continental was authorized to sell

Sylvania’s products was illegal per se under Section 1

of the Sherman Act. For the many reasons set forth

below, we reverse.’

I. Factual Background

Sylvania, a corporate subsidiary of General Tele-

phone and Electric, manufactures and sells radios

and television sets through its Home Entertainment

Products Division. Though Sylvania emerged from

World War II as one of the major manufacturers

in the television industry, its share of the market

1The majority and dissenting opinions of the panel first con-

eerned with the appeal, unofficially reported in 1974-1 Trade Cas.

75,072 (9th Cir. May 9, 1974), was withdrawn by the full court’s

Order of December 19, 1974. The original majority opinion has

been the subject of a number of law review commentaries. Sce

Robinson, Recent Antitrust Developments—1974, 75 Colum. L.

Rey. 243 (1975), and the ease notes at 88 Harv. L. Rev. 636 (1975) :

26 Mercer L. Rev. 629 (1975); 53 N.C.L.Rev. 775 (1975); 49

N.Y.U.L.Rev. 957 (1975) ; 53 Tex. L. Rev. 127 (1975) ; 10 Colum.

J.L. & Social Prob. 497 (1974).

never became large. In the post-war era, when only

black and white television was the industry’s major

product line, a single competitor, RCA, enjoyed sixty

to seventy percent of the market, and the remainder

was divided among Sylvania and 130 other manufac-

turers. During the so-called black and white era,

most television manufacturers engaged in a relatively

unselective ‘‘saturation” method of distribution. Es-

sentially, this system involved the sale of television

sets both to independent and manufacturer-owned

distributorships, without any limit on the number

of dealers in a given locale. The goal of such a sys-

tem was to generate as much volume as possible;

therefore, manufacturers sought to sell as many deal-

ers as possible.

By 1962 Sylvania’s sales volume had decreased to

a relatively tiny portion of the television market,

between one and two percent, approximately. Prior

to 1962 Sylvania’s practice was to sell its products

primarily to distributors, some of which it owned.

These distributors sold, in turn, to retailers. At about

this time Sylvania determined that its attempt to

utilize the saturation type of distribution in com-

petition, especially with RCA and Zenith, could not

be successful. Hoping to revive itself as an effective

interbrand competitor, and to avoid the virtually

certain possibility that it would be compelled to sur-

render the business of manufacturing and selling

television sets,? Sylvania decided to abandon its for-

2Certain testimony indicated that Sylvania instituted its elbow

room policy in order to avoid being driven out of the television

market. Ray J. Steiner, at the time of trial the Vice President of

mer method of saturation distribution and begin a

program of selective distribution.’ Sylvania’s man-

agement apparently believed that it could become a

more effective competitor in the then rapidly ex-

Sony Corporation of America, and prior to April, 1969, the Na-

tional Sales Manager of Sylvania, testified as follows:

“ . . basically elbow room was as a result of the fact that as a

company we were in trouble. By that I mean that we needed

something, a sales pitch that the sales company could use in

order for us to get a foot hold in the market.

Basically we were competing with RCA, Zenith, Magnavox,

Motorola, private brands, and very frankly we were not doing

a good job.

So the elbow room is basically a selective or limited distribu-

tion approach that has been used by other companies in the

business, for example, Magnavox, Frigidaire, and we decided

that we could no longer have a me too approach to the dealers.

Because if we were in a me too approach or the same type

of approach as RCA or Zenith, basically there was no reason

for the dealers to handle our line because they could handle

other lines.

J oe

We knew that if the advent of this program, if it didn’t

work and we didn’t keep our plant running in Batavia, there

was the alternative that we would probably go out of the

television business.” (Record at 2543-44) (Emphasis added).

... the result was that it [the elbow room policy] was success-

ful. We did get a foothold in the market place and we were

able to compete with the big boys in the business and it got

the onus off our back that we were going out of business.”

__ (Reeord at 2554) (Emphasis added).

William E. Boss, Jr., the Viee President of Marketing for Sylvania,

testified that the purpose of the elbow room policy was:

“... really to enable us and our retailers to survive profitably,

to effectively compete in a marketplace. Limited distribution

merely means that there are less dealers in a given area. We

have, for example, perhaps one-sixth of the dealers of our

competition, but by having a limited distribution policy we

feel that we can develop a more mutually profitable business

with the retailer.

If we were to go out and compete with the majors we would

not be successful.” (Emphasis added).

‘Selective distribution was pioneered in the late 1950’s by

another company, Magnavox, which held only a small share of the

television market. By utilizing this method of distribution, as above

noted, Sylvania was able to inerease its share of the market to

approximately five percent, thereby becoming an effective inter-

brand competitor.

panding market for color television if it could develop

a prestige image and a network of dealers with suffi-

cient loyalty to Sylvania to market Sylvania prod-

ucts aggressively.

In 1962, as part of a reorganization of its Home

Entertainment Products Division, Sylvania imple-

mented its new selective distribution system by phas-

ing out both its wholesale distributors and its own

factory distributorships. These were replaced by a

“straight line distribution” system (SLD), under

which sales were made from the factory directly to

franchised dealers, who in turn sold to consumers.

This program, which Sylvania called its “elbow room

policy”, involved the use of franchises to limit the

number of Sylvania retail dealers. Sylvania hoped to

attract dealers willing to identify themselves as au-

thorized Sylvania outlets in exchange for the oppo

tunity to earn fair profits.

An essential element of Sylvania’s “elbow room pol-

iev” was the practice of franchising by location.

Under this policy Sylvania sold its products only to

selected retailers, who were identified as authorized

Sylvania dealers, and who were authorized to sell

Sylvania products only at designated locations. There

were agreements* between Sylvania and its dealers

4At trial Sylvania denied that its elbow room policy involved any

express or implied agreement with its franchised dealers con-

cerning the movement of television sets. Sylvania insisted that its

elbow room policy was implemented unilaterally by an announce-

ment. However, for purposes of this appeal Sylvania has deferred

to the implied findings of the jury and has argued its appeal

upon the assumption that an implied agreement existed between

Sylvania and its dealers prohibiting the shipment of inventory to

unauthorized locations.

that the dealer would not move Sylvania brand mer-

chandise to a new unapproved location for resale

without the prior approval of Sylvania.

Sylvania made specific efforts to avoid anticom-

petitive practices. No dealer was given an exclusive

dealership for a particular area. In Northern Cali-

fornia, for example, Sylvania had at least two or

more authorized dealers serving every major metro-

politan market larger than the City of Selinas. No

dealer had the power to veto Sylvania’s decision to

approve an additional franchise location in a given

market area. There were no agreements that in any

way restricted the freedom of authorized Sylvania

dealers to sell to anyone who came to their franchise

location, regardless of the customer’s place of resi-

dence.

The record contains evidence suggesting that this

“elbow room policy” was moderately successful in

improving Sylvania’s competitive position. Sylvania

asserts that due to its selective distribution policy

and its practice of franchising by location, it became

able to attract effective, aggressive dealers. With the

growth of the color television market, Sylvania in-

ereased its market share from about one or two per-

cent in 1962 to about five percent by 1965. By the

mid-1960’s Svlvania had emerged as a vigorous com-

petitor, ranking as the nation’s eighth largest manu-

facturer and seller of color television sets.

The appellees, Continental, are a group of affiliated

corporations with common ownership. The principal

operating officer of Continental, together with his

wife, owned substantially all of the stock of the cor-

porations. Continental began business in 1960 as a

retail dealer of radios and television sets in San Jose,

California. Its primary sales territory included most

of Santa Clara County, and its inventory consisted

principally of television sets manufactured by Muntz

T.V., Inc. Continental prospered, and in 1964 it re-

placed its downtown San Jose store with a larger

suburban facility in a region known as the Stevens

Creek area. In the 1960-64 period Continental had no

eredit arrangements for floor financing of its inven-

tory with either Muntz, or any bank or credit insti-

tution. It handled its customer credits large’ through

a local bank in San Jose.

In May, 1964, Sylvania attracted Continental to

beeome an authorized Sylvania dealer and granted

franchises to Continental for several locations. In

July, 1964, Continental began financing its purchases

of Sylvania merchandise with the “Maguire plan”,

under which Continental executed a promissory note

for the price of inventory purchased from Sylvania,

with payment secured by a trust receipt in favor of

John P. Maguire & Co., Inec., a national finance com-

pany. Continental was obligated to repay Maguire

Continental’s cost for each television set immediately

after the set was sold (or six months after Continen-

tal’s receipt of unsold merchandise). Sylvania main-

tained some contre] over the amount of credit to be

extended to Continental, because in the event of Con-

tinental’s default, Maguire had full recourse against

Sylvania.

Continental expanded rapidly. By May, 1965, it had

become one of the largest Sylvania dealers in the

country,° operating Sylvania franchises at eight loca-

tions in the California counties of San Francisco,

Santa Clara, San Mateo, and Alameda. In the spring

of 1965 Continental learned that Sylvania was plan-

ning to franchise another dealer, Young Brothers, at

a location on Geary Street in San Francisco, about

one mile from ene of Continental’s outlets. Continen-

tal allegedly believed that the franchising of this

loeation would violate the spacing concept underlying

the “elbow room policy”. it therefore strenuously ob-

jected and threatened to reappraise its need for Syl-

vania merchandise in its San Francisco store. In

June, 1965, Sylvania franchised the Young Brothers

store. Continental thereupon canceled a very large

Sylvania order, placed a half-million dollar order with

a Sylvania competitor called Phileo, and advised Sy}-

vania that Continental would reduce its further pur-

chases from Sylvania.

In March, 1965, Continental had notified Sylvania

that it wished to enter the Sacramento, California,

market. In compliance with Sylvania’s policy, Con-

tinental had initially agreed not to sell Sylvania’s

merchandise from a Sacramento location without Sy1-

vania’s prior approval. As he had previously done

when Continental opened a store at a new location.

Continental’s principal operating officer organized a

new corporate affiliate (S.A.M. Industries, Ine.) and,

5In 1965. Continental opened five new stores. Its sales volume

exceeded $1,000,000, and it had a $300,000 line of credit with

Sylvania.

through that affiliate, leased a Sacramento location

about one mile from another Sylvania dealer, Handy

Andy. In early September, 1965, Continental advised

Sylvania of the location of *xe new Continental store

in Sacramento and requested approval for a fran-

chise to sell Sylvania products there. Sylvania re-

plied that approval would be denied. Thereafter,

Continental moved Sylvania merchandise into the

Sacramento store. According to some of the testi-

mony, Sylvania refused Continental’s request for a

Sacramento franchise because Sylvania’s management

believed that Sylvania’s distribution in the area was

already sufficient and that additional Sylvania retail

outlets would be undesirable. On September 7, 1965,

Continental decided that it would violate locations

agreement that it had made with Sylvania and pro-

ceed to sell Sylvania merchandise in Sacramento

without Sylvania’s approval. One of Sylvania’s con-

tentions is that Continental’s move into the Sacra-

mento area was made in retaliation for Sylvania’s

decision to franchise Young Brothers in San Fran-

cisco and represented an attempt by Continental to

pressure Sylvania into revoking the Young Brothers

franchise.

While all these events were occurring in Sacra-

mento, credit personnel at Syvlvania’s headquarters

had become deeply concerned over Continental’s abil-

itv to meet its obligations under its financing ar-

rangements. Sylvania had _ received information

sometime prior to June, 1965, that Continental’s

principal shareholder and chief operating officer had

a criminal record. Sylvania ordered and received a

Dun and Bradstreet report which confirmed that the

chief officer had a military conviction while in the

Marine Corps for misappropriation of government

funds and issuing worthless checks. A second alleged

eause for the concern of Sylvania’s credit personnel

was the fact that Continental had substantially in-

creased its obligations to Phileo by a capital loan

and a $500,000 order for Phileo products. This was

in addition to Continental’s existing high credit limit,

$300,000 with Sylvania. Additionally, Continental had

failed to pay past due obligations for its purchase

of Sylvania products. These obligations were held

by Maguire for Sylvania and were passing into ma-

turity and then delinquency stages. Finally, on Sep-

tember 24, 1965, Continental informed Sylvania that

pending resolution of the dispute over Continental’s

new Sacramento store, all of its future obligations

would be paid as they matured by the deposit of

checks with its, Continental’s own attorneys.

Because of its concern, Sylvania’s credit depart-

ment placed a credit hold on Continental’s orders and

on September 16, 1965, reduced Continental’s credit

line from $300,000 to $50,000. In reaction to the

eredit reduction, Continental withheld all payments

due to Maguire. This refusal to make payment con-

tinned for over three weeks until Continental owed

$62,000 to Sylvania, unsecured by any merchandise.

At that time Macuire instituted suit against Conti-

nental for the amount duc, repossessed the Svlvania

merchandise in Continental’s possession, levied at-

tachments on Continental’s places of business and

bank account, and caused Continental’s San Jose

stores and central warehouse to be closed. A bank

with which Continental had done business terminated

Continental’s consumer financing program and called

for the payment of a commercial loan. Finally, Syl-

vania notified Continental that Continental’s fran-

chise as a Sylvania dealer was terminated.

Continental sought damages from both Sylvania and

Maguire, alleging violations of the antitrust laws and

tortious injury to its business and property, a pend-

ent claim under California law. Continental alleged

that Sylvania’s credit actions were not based upon

a genuine concern about Continental’s solvency, but

rather were undertaken to enforce the location re-

striction and to prevent Continental from selling Syl-

vania merchandise from the unauthorized Sacramento

location. Continental further asserted that Sylvania’s

“elbow room policy” was a policy in restraint of trade,

constituting a per se violation of Section 1 of the

Sherman Act. Damages were alleged to have resulted

from Sylvania’s termination of its relationship with

Continental and Continental’s resulting inability to

procure substitute products during a period of prod-

uct shortage. Continental also sought an injunction

prohibiting Sylvania from enforcing its locations re-

strictions. Continental’s antitrust and tort claims were

submitted to the jury. The jury returned a verdict in

favor of Continental® and found that Continental

6The jury’s verdict was returned in the form of answers to

special interrogatories. The verdict in respect to the antitrust

had been damaged in the amount of $591,505. The

jury decided that John P. Maguire & Co., the only

other defendant, had not engaged in a combination,

contract, or conspiracy in restraint of trade in viola-

tion of the antitrust laws. Finally, the jury exonerated

both Sylvania and Maguire on Continental's pendent

tort claim under California law. Trebling the dam-

ages pursuant to 15 U.S.C. § 15, the district judge

entered judgment against Sylvania in the amount of

$1,774,515. In addition, the court awarded Continental

attorney’s fees in the sum of $275,000.

claim is as follows:

A. Antitrust Claim

1. Did Sylvania Electric Products, Inc. engage in a con-

tract, combination, or conspiracy in restraint of trade in

violation of the antitrust laws with respect to location

restrictions and price fixing as an integral part of a single

distribution policy?

Yes No

2. Did Sylvania Electrie Products, Inc. engage in a con-

tract, combination, or conspiracy in restraint of trade in

violation of the antitrust laws with respect to locations

restrictions alone?

Yes No

3. Did John P. Maguire & Co., Ine. engage with Syl-

vania in a contract, combination or conspiracy :

a. As deseribed in Question 1 above?

b. As deseribed in Question 2 above?

Yes No

4. If the answer to Question 1, 2, or 3 is “yes”, did

Continental T.V., Ine. sustain damage to its business or

property as a proximate result of such violation of the

antitrust laws?

a an

Yes No

5. If the answer to Question 4 is “yes”, what is the

amount of such damage? $591,505

On Continental’s prayer for equitable relief, the

district judge entered findings of fact and conclusions

of law. The non-jury court found that Sylvania had

requested Maguire to sue Continental on its outstand-

ing notes as a part of Sylvania’s attempt to prevent

Continental from selling Sylvania products in Sacra-

mento.’ Further, the court found that Sylvania’s

credit concerns were not the true reason for Syl-

vania’s actions. The court entered a limited injune-

tion,” prohibiting Sylvania from enforcing its location

clause.°

*The trial judge’s finding on this point appears to be in conflict

with the finding of the jury that Maguire and Sylvania were not

involved in any contract, combination, or conspiracy to enforce the

location restriction. When issues common to both legal and equi-

table claims are to be tried together, the legal issues are to be tried

first, and the findings of the jury are binding on the trier of the

equitable claims. Beacon Theatres v. Westover, 359 U.S. 500 (1959).

We therefore rely upon the findings of the jury if they appear to

be inconsistent with findings of the trial judge.

*Since the ineidental injunctive relief granted below was predi-

cated upon the application of an erroneous legal standard (See

the District Court’s conclusion of law No. 5, quoted infra note 9),

the equitable Decree, in addition to the legal Judgment, must be

vacated. Sce United States v. Parke Davis & Co., 362 U.S. 29, 44

(1960) ; Beverage Distributors, Inc. v. Olympia Brewing Co., 440

F.2d 21 (9th Cir.), cert. denied, 403 U.S. 906 (1971).

The district judge entered findings of fact and conclusions of

law pertaining to the equitable Decree The most significant

conclusions are as follows:

“3. Sylvania, during the time involved herein, and in

violation of Seetion 1 of the Sherman Act, did engage in a

contract, combination or conspiracy with its retail dealers,

including Handy Andy and Continental, pursuant to which it

restricted and enforeed its location distribution policy and

imposed a system of location restraints upon its retail dealers

limiting for all practical purposes the areas in which they

could display and sell Sylvania brand products which the

dealers had purchased from Sylvania and which were owned

by them.

4. As a proximate result of Sylvania’s conduct as above

deseribed, Continental sustained damage to its business and

property as found by the jury. Moreover, equitable relief

Sylvania’s principal contention here is that the dis-

trict judge erred in basing both the jury instructions

and the grant of equitable relief on the theory that

by seeking to restrict the locations from which Con-

tinental could sell Sylvania products, Sylvania had

committed a per se violation of Section 1 of the Sher-

man Act. Over Sylvania’s objection, the trial judge

instructed the jury as follows:

“Therefore, if you find by a preponderance of

the evidence that Sylvania entered into a con-

tract, combination or conspiracy, with one or more

of its dealers pursuant to which Sylvania exer-

cised dominion and 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, re-

gardless of the reasonableness of the location re-

strictions.’”””

having been granted in the Judgment heretofore entered on

the 11th day of December, 1970, the Court deems it necessary

to enter in support thereof, Findings of Fact and Conclusions

of Law contained herein.

-5. The foregoing restraints are per se violations of Section

1 of the Sherman Act, inasmuch as Sylvania made sales to

its retailers upon ‘condition, agreement or understanding

limiting the retailers freedom as to where and to whom it will

resell the products’, these sales having been made ‘subject to

territorial restrictions upon resale.’ United States v. Arnold

[,] Schwinn & Co., 388 U.S. 378-379 (1967).”

10The trial judge in this case was the distinguished Associate

Justice Tom C. Clark (Ret.), sitting by designation in the District

Court. In formulating his jury instructions, Justice Clark ap-

parently adopted some of his own dissenting comments in White

Motor Co. v. United States, 372 U.S. 253, 275 (1963). There, the

majority of the Court, against the will of Mr. Justice Clark, de-

clined to establish a broad per se rule regarding all vertical ter-

ritorial restraints.

In deciding that the per se rule of United States v.

Arnold, Schwinn & Co., 388 U.S. 365 (1967), was

applicable to Sylvania’s location restrictions, the court

rejected instructions requested by Sylvania under

which the jury would have been told that Sylvania’s

locations practice was illegal only if it unreasonably

restrained competition in the market for television

sales."

Once the instruction incorporating the theory of

per se illegality was submitted, a verdict against Syl-

vania was virtually assured. Sylvania never denied the

existence of its locations practice, which by definition

admittedly “restrict[ed] outlets or store locations from

which its dealers resold the merchandise which they

had purchased from Sylvania. .. .” It is not entirely

clear from the jury instructions and the findings of

11The court also rejected a jury instruction proposed by Sylvania

which propounded the theory that even if the Schwinn per se rule

were applicable to locations restrictions, Sylvania would be exon-

erated if it could prove a “failing company” defense. The rejected

instruction reads as follows:

“If you find such a contract, combination or conspiracy to

restrain movement or sale of merchandise, such a practice

would be presumptively unlawful. However, before you can

find it to be a violation of the antitrust laws, you must consider

whether it was justified. In this ease, such a restriction would

be justified if Sylvania had proved by a preponderance of the

evidence that the adoption of such a restriction was reasonably

necessary to enable Sylvania to remain in the television busi-

ness or to enable it to increase the strength and effectiveness

of its competitive efforts in the television industry. If you

find that such justification has been shown, you should find

that Sylvania and Maguire have not violated the antitrust

laws. If you find that Sylvania has not proved such a justifi-

cation by a preponderance of the evidence, and if you find the

existence of a contract, combination or conspiracy to restrict

movement or sale of merchandise, as I have defined it above,

then you should find that Sylvania has violated the antitrust

laws.” (Emphasis added).

fact and conclusions of law entered on the equitable

claim whether Sylvania was found to have committed

an illegal per se violation merely because it entered

the agreement restricting Continental to specific loca-

tions, or because of the subsequent enforcement of

that agreement. We think it irrelevant as to whether

both, or only one, of these considerations were applied,

since we hold that under either, the court’s application

of the law was clearly erroneous.

Il. Analysis.

We confront an important and intriguing question,

i.e., whether the rule of per se illegality established

by the Supreme Court in United States v. Arnold,

Schwinn & Co., 388 U.S. 365 (1967), should be ex-

tended to embrace the ‘‘locations practice” utilized by

Sylvania and others as a method of modern product

distribution systems. The trial judge, applying a bit

of the literal language of Schwinn without reference

to its context or the specific facts of that case, deter-

mined to extend that language to encompass locations

clauses. Accordingly, Sylvania’s proffered “rule of

reason” jury instruction was rejected. Our study has

convinced us, beyond doubt, that the challenged eon-

clusion reflects a misinterpretation of Schwinn, is in-

consistent with the existing law permitting exclusive

dealerships, and, most importantly, would seriously

undermine, rather than implement, the major purpose

of the Sherman Act. That purpose is to insure the

“unrestrained interaction of competitive forces” that

“will yield the best allocation of our economic re-

sources, the lowest prices, the highest quality and the

greatest material progress, while at the same time

providing an environment conducive to the preserva-

tion of our democratic political and social institu-

tions.” Northern Pacific Ry. v. United States, 356 U.S.

1, 4 (1958). We therefore hold that the legality of the

locations clauses here involved should be judged under

what is commonly referred to as the “rule of reason”,

rather than a rule of per se illegality. We are con-

vinced that a contrary holding would constitute an

unwarranted ‘‘hody blow” to legitimate business enter-

prise and would place our free capitalistic system

under stifling restraints, never contemplated or in-

tended by the Congress. The “rule of reason” should

have been applied, permitting inquiry into the com-

petitive effect and reasonableness of the locations

agreement in question.'?

A. The Schwinn Precedent in Context

In ruling that Sylvania’s locations practice was il-

legal per se, the trial judge chose to apply, literally,

the following sweeping language from the opinion of

12We think it noteworthy that all of the law review commen-

tators who have undertaken a detailed analysis of the decision of

our court’s original panel have reached the conclusion that the

District Court’s application of a per se rule of illegality was

wholly inappropriate and that, in light of the purposes of the

Sherman Act, the “rule of reason” should have been applied.

Robinson, Recent Antitrust Developments—1974, 75 Colum. L.

Rev. 243, at 278-79 (1975); 88 Harv. L. Rev. 636, 641-42, 648

(1975); 26 Mereer L. Rev. 629, 637 (1975); 53 N.C.L. Rev. 775,

724-85 (1975); 49 N.Y.ULL. Rev. 957, 969 (1975); 53 Texas L.

Rev. 127, 134-37 (1974).

Mr. Justice Fortas for the Court in United States v.

Arnold, Schwinn & Co., 388 U.S. 365 (1967) :"

“Once the manufacturer has parted with title and

risk, he has parted with dominion over the prod-

uct, and his effort thereafter to restrict territory

or persons to whom the product may be trans-

ferred—whether by explicit agreement or by silent

13Tf we thought the opinion of Mr. Justice Fortas in Schwinn

to control our present decision, our duty would compel us to

apply Schwinn. And this we would do, despite the fact that the

opinion of Mr. Justice Fortas has frequently been criticized for

the breadth of a small portion of its language and its primary

reliance upon the “ancient rule against restraints on alienation,”

388 U.S. at 380, a rule deseribed in Mr. Justice Stewart’s dissent

as a “wooden and irrelevant formula.” Jd. at 394. See generally

Comegys, Moderator, Restraints in Distribution: General Motors,

Sealy and Schwinn, a Symposium on Ancillary Restrictions, 36

ABA Antitrust L.J. 84 (1967); Handler, Twenty-Fifth Annual

Antitrust Review, 73 Colum. L. Rev. 415, 458-59 (1973); Handler,

The Twentieth Annual Antitrust Review—1967, 53 Va. L. Rev.

1667, 1680-86 (1967); Keek, The Schwinn Case, 23 Bus. Lawver

669 (1968); MeLar.n, Marketing Limitations on Independent

Distributors and Deaiers—Prices, Territories, Customers, and

Handling of Competitive Products, 13 Antitrust Bull. 161, 168

(1968); Orrick, Marketing Restrictions Imposed to Protect the

Integrity of ‘Franchise’ distribution Systems, 36 ABA Antitrust

L.J. 63, 69-72 (1967); Pollack, Antitrust Problems in Franchising,

15 N.Y.L.F. 106, 110-13 (1969); Pollack, Alternative Distribution

Methods After Schwinn, 63 Nw. L. Rev. 595 (1968); Sadd,

Territorial and Customer Restrictions After Sealy and Schwinn,

38 U. Cin. L. Rev. 249 (1969); Williams, Distribution and the

Sherman Act—The Effects of General Motors, Schwinn and Scaly,

1967 Duke L.J. 732, 740 (1967); Note, Restrictive Distribution

Arrangements after the Schwinn Case, 53 Cornell L. Rey. 515

(1967); The Supreme Court, 1966 Term, 81 Harv. L. Rev. 69,

235-38 (1967); Note, Territorial Restrictions and Per Se Rules—

A Re-evaluation of the Schwinn and Sealy Doctrines, 70 Mich,

L. Rev. 616 (1972); Comment, Vertical Territorial Restraints and

the Per Se Concept, 18 Buffaio L. Rev. 153, 161 (1969): Com-

ment, The Impact of the Schwinn Case on Territorial Restric-

tions, 46 Texas L. Rev. 497, 511 (1968).

combination or understanding with his vendee—is

a per se violation of §1 of the Sherman Act.”

388 U.S, at 382.

We reiterate our view that this language, in isolation,

was applied too literally, without sufficient reference

to the textual context in which it appears or the facts

from which Schwinn arose. Furthermore, a funda-

mental antitrust principle, which our own court

stressed in Joseph E. Seagram ad Sons, Inc. v. Ha-

waitan Oke & Liquors, Ltd., 416 F.2d 71 (9th Cir.

1969), cert denied, 396 U.S. 1062 (1970), was appar-

ently overlooked. Quoting from Maple Flooring Manu-

facturers Association v. United States, 268 U.S. 563,

579 (1925), we emphasized in Hawatian Oke the Su-

preme Court’s admonition that :

“ ~ . each case 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.”

416 F.2d at 79.

14The District Court may also have relied, to some extent, and

with some justification, upon certain additional isolated language

from Schwinn.

“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 manu-

facturer has parted with dominion over it. White Motor,

supra; Doctor Miles, supra. Such restraints are so obviously

destructive of competition that their mere existence is

enough.” 388 U.S. at 379 (Emphasis added).

In Schwinn the Supreme Court held illegal per se

a system of vertical restraints affecting both wholesale

and retail distribution. Arnold, Schwinn & Company

had created exclusive geographical sales territories

for each of its 22 wholesale bicycle distributors and

had made each distributor the sole Schwinn outlet

for the distributor’s designated area. Each distributor

was prohibited from selling to any retailers located

outside its territory. Moreover, the restrictions in

Schwinn limited the classes of customers to whom

Schwinn’s wholesale distributors and franchised re-

tailers could sell, by prohibiting them from selling

Schwinn products to unfranchised retailers. Conse-

quently. Schwinn’s systemn completely barred sales to

some potential purchasers of Schwinn products, re-

gardless of where these customers were located. The

Schwinn restrictions on classes of persons or partic-

ular persons to whom a distributor may not sell have

been termed ‘‘customer” restrictions, while the re-

strictions against selling to customers outside a cer-

tain area are classified as “territorial” restrictions."

In our present case Sylvania imposed neither of

the restrictions that Schwinn appropriately con-

demned. Schwinn’s territorial restrictions requiring

dealers to confine their sales to exclusive territories

prescribed by Schwinn prevented a dealer from com-

15Pollack, Alternative Distribution Methods after Schwinn, 63

Nw. U.L. Rev. 595 (1968); Williams, Distribution and the Sher-

man Act—The Effects of General Motors, Schwinn and Sealy,

1967 Duke L.J. 732; Note, Vertical Customer and Territorial

Restrictions and the Sherman Act, 63 Nw. U.L. Rev. 262 (1968).

Note, Restrictive Distribution Arrangements after the Schwinn

Case, 53 Cornell L. Rev. 514 (1968).

peting for customers outside his territory. In contrast,

Sylvania’s dealers could sell tu customers from any

area, could advertise in any area, and were limited

only as to the location of the franchisee’s place of

business. Sechwinn’s restrictions guaranteed each,

wholesale distributor that it would be absolutely iso-

lated from all competition from other Schwinn whole-

salers. Sylvania, on the other hand, franchised com-

peting dealerships at will and in the major metropoli-

tan markets in Northern California such competing

dealers were located within the 25 to 30 mile radius

of volume selling. Schwinn’s territorial restrictions

were tied to customer restrictions, but a Sylvania

dealer could sell to anyone, just so long as the dealer’s

store remained in the approved location.

Thus a critical and very obvious distinction between

the restrictions in Schwinn and those of Sylvania is

that Schwinn involved a restriction on the locations

and types of permissible vendees, while Sylvania only

imposed restrictions on the permissible locations of

vendors. When Schwinn’s proscription of restrictions

on “territory or persons to whom the product may be

transferred”, 388 U.S. at 382, and on “areas or per-

sons with whom an article may be traded”, 388 U.S.

at 379, are interpreted in Schwinn’s factual context,

it is clear to us that “territory” and “areas” refer to

the location of vendees, rather than vendors. More-

over, there are very clear and substantial differences

between the effect of the restrictions in Schwinn and

the effect of those of Sylvania. In Schwinn a whole-

sale distributor was foreclosed from selling Schwinn

products to any purchaser located outside his exelu-

sive territory; thus, intrabrand competition (i.e., com-

petition between sellers of the same brand) was wholly

destroyed. A potential purchaser of Schwinn products

at the wholesale level could look to only one source

of the product—the authorized dealer for his terri-

tory. No other wholesaler could compete by offering

a lower price or better service to the same purchaser.

In marked contrast, Sylvania franchised at least two

dealers in the major markets and each Sylvania dealer

was free to sell to any buyer he chose—preserving

intrabrand competition and allowing to every potential

purchaser of Sylvania products a reasonable choice

between several competing dealers.

Concurring in White Motor Co. v. United States,

372 U.S. 253 (1963),"° Mr. Justice Brennan noted that

while there are no possible procompetitive benefits to

be derived from vendee, or customer, restrictions,

some territorial restrictions on vendors may have pro-

competitive effects. The Justice wrote

“There are other situations, not presented di-

rectly by this case, in which the possibility of jus-

tification cautions against a too hasty conelusion

that territorial limitations are invariably unlaw-

ful. Arguments have been suggested against that

conclusion, for exampie, in the case of a mannu-

facturer starting out in business or marketing a

new and risky product; the suggestion is that

16White Motor Co. v. United States, 372 U.S. 253 (1963), in-

volved customer restrictions that precluded distributors and deal-

ers from selling trucks to any federal or state government or

subdivision thereof and to other large customers without the

permission of the manufacturer.

such a manufacturer may find it essential, simply

in order to acquire and retain outlets, to guaran-

tee his distributors some degree of territorial in-

sulation as well as exclusive franchises. It has

also been suggested that it may reasonably appear

necessary for a manufacturer to subdivide his

sales territory in order to ensure that his product

will be adequately advertised, promoted, and

serviced.”

372 U.S. at 269.

“T turn next to the customer restrictions. These

present a problem quite distinct from that of the

territorial limitations. The customer restraints

would seem inherently the more dangerous of the

two, for they serve to suppress all competition

between manufacturer and distributors for the

custom of the most desirable accounts. At the

same time they seem to lack any of the counter-

‘ailing tendencies to foster competition between

brands which may accompany the territorial lim-

itations. In short, there is far more difficulty in

supposing that such customer restrictions can be

justified.”

372 U.S. at 272.

The observations of Mr. Justice Brennan also spot-

light another significant distinction between our case

and Schwinn. Schwinn had an extremely large share

of the bicycle market. Sylvania’s market share, how-

ever, was so small when it adopted its locations prac-

tice that it was threatened with expulsion from the

television market. In Schwinn a manufacturer with a

dominant market share imposed restraints which de-

stroyed any possibility of intrabrand competition in

the same territory. Here, a manufacturer with a pre-

carious market share entered agreements which en-

abled it to achieve a viable 5% market share while

preserving significant intrabrand competition in each

metropolitan area. When viewed in their respective

factual contexts, we cannot possibly perceive the situ-

ation presented in the two cases as being analogous or

similar, even remotely.

The facts in Schwinn make it clear that the terri-

torial restraint which the Court condemned was a

restraint that absolutely prohibited a dealer from sell-

ing to purchasers outside a certain area. That, of

course, is not our case. The Schwinn holding that

restrictions forbidding dealers from selling to per-

sons located outside specifically designated exclusive

territories and to certain classes of customers are

per se violations of the Sherman Act should, we

think, be stretched to encompass Sylvania’s practice

which can produce pro-competitive effects, desirable

effects wholly different from those produced hy the

restrictions that the Court, in Schwinn, sought to

prohibit.

Our interpretation of Schwinn is reinforced by the

fact that the decree on remand in Schwinn expressly

sanctions locations clauses. After paraphrasing the

general language of the Supreme Court’s Schwinn

decision dealing with restrictions on ‘‘areas or per-

sons”, the District Court’s decree on remand adds:

“Notwithstanding the foregoing provisions, nothing

in this Final Judgment shall prevent Schwinn .. .

from designating in its retailer franchise agreements

the location of the place or places of business for

which the franchise is issued.” United States v,

Arnold, Schwinn & Co., 291 F. Supp. 564, 565-66

(N.D. Til. 1968) (Emphasis added). Surely, if a man-

ufacturer has the right to choose a particular dealer

to franchise, as the Supreme Court recognized in

Schwinn, 388 U.S. at 376,"" and the right to designate

the location where the franchise is valid, as reeog-

nized in the Schwinn decree on remaiid, then the man-

ufacturer must have the power to enforce these rights

if a franchisee violates his location clause agreement.

When we move beyond Schwinn to a consideration

of other relevant precedent,'* our conclusion is fur-

170ne exceptionally distinguished commentator, very recently

the Assistant Attorney General heading the Antitrust Division of

the Department of Justice and now a United States District

Judge, has interpreted Schwinn as clearly exempting locations

clauses from the rule of per se illegality because a locations clause

is implicit in this right of a manufacturer to select his dealers:

“Justice Fortas’ opinion does clearly exempt two types of

arrangements. First, it upholds the right of a manufacturer

to select—or ‘franchise’—the dealers ‘to whom, alone, he will

sell his goods’—citing United States v. Colgate & Co., 250

U.S. 300 (1919)—-where competitive products are readily

available. A necessary element of the right to ‘franchise’—

which I suggest is really a word of art covering the Category

2 arrangement deseribed earlier—is the right to have a

‘location clause.’ That is, a manufacturer must be free to

appoint another to be his dealer at a given place and to

agree not to appoint another dealer within a certain distance.

If this were not so, a manufacturer would exhaust his right

of dealer selection—which Justice Fortas says he has—once

he appointed a single dealer. Moreover, the autodealer loca-

tion clause—allowed to stand in the General Motors Discount

House case—would be outlawed sub silentio.”

"MeLaren, Territorial and Customer Restrictions, Consignments,

Suggested Retail Prices and Refusals to Deal, 37 Antitrust L.J.

137, 144-45 (1968) (footnote omitted).

18The eoneclusion we reach is not inconsistent with the recent

decision of the United States Court of Appeals for the Fifth

Cireuit in Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d

ther strengthened. We have discovered no reported

eases wherein a location clause has been struck down

for illegality. In fact, and to the contrary, it has been

934 (5th Cir. 1975). Two fundamental distinctions between —

and the present case make the reasoning of Coors inapplicable

to our situation: (1) Coors involved overt price fixing, a clear

per se violation of section one of the Sherman Act. As Judge Gee

pointed out in his concurring opinion (506 F.2d at 955), any

consideration of Schwinn was unnecessary to the decision im

Coors. (2) The restrictions involved in Coors were, like those in

Schwinn, designed to foreclose all intrabrand competition, while

Sylvania’s “elbow room policy” undeniably retained and fostered

substantial intraband competition.

In Coors, the plaintiff alleged that Coors combined or conspired

with its distributors to fix the retail price of its beer and caused

its distributors, servicing the plaintiff’s liquor store, to discon-

tinue the supply of Coors beer to the plaintiff when he sold

below the suggested retail price and declined to give assurances

that he would not continue to do so in the future. 506 F.2) at

936. Vertical price fixing, of course, has long been recognized

as a per se violation of the Sherman Act. United States v. Bausch

& Lomb Optical Co., 321 U.S. 707 (1944). There heine evidence

that Coors had conspired to fix prices, we agree wii Judge Gee

that it was unnecessary for the court to rely upon Schwtnn so as

to hold that Coors’ practices were a per se antitrust violation.

But of more significance is the fact that the Coors opinion ex-

plicitly recites that the evidence of price fixing was the founda-

tion for the determination that Coors’ restrictions ran afoul of

the Schwinn holding: ae

q“We do not say that vertically imposed territorial restric-

tions may never comport with the Sherman Act; Schwinn

itself conceded they might be proper in the case of new

entrants in a highly competitive field or ‘failing companies’,

And there may be other exceptions. We say only that this

record does not, as a matter of law, provide justification for

excepting Coors from the effect of Schwinn, in light of the

price fixing evidence.” 506 F.2d at 945 (Emphasis in

original). asi

Later in the Coors opinion the court abandoned an inquiry into

various exceptions which the Tenth Circuit has engrafted onto

the Schwinn rule, saying:

“But we need pursue the question no further here. Coor’s

restraints were ancillary to an illegal price fixing scheme.”

506 F.2d at 947-48.

We therefore believe that there is no significant similarity be-

tween our situation and that presented in Coors. In Coors terri-

torial restraints were utilized to effect vertical price fixing—a

clear per se violation by whatever means it is achieved. Here,

widely assumed that location restrictions were reason-

able restraints of trade, and therefore lawful,’® ever

since Boro Hall Corp. v. General Motors Corp., 124

F.2d 822 (2d Cir. 1942), cert. denied, 317 U.S. 695

(1943). In Boro Hall, Judge Augustus Hand, writing

there was absolutely no evidence that Sylvania engaged in price

fixing or that there was any other unlawful purpose cuiiving

the location clause agreements.

The second major distinction between Coors and the present

ease inheres in the competitive effects of the challenged territorial

agreements. In addition to his claim of price fixing, the plaintiff

in Coors contended that “Coors conspired or combined with its

distributors to create and enforce exclusive territories within

which each distributor was to conduct his business, making it

impossible for the plaintiff to obtain a supply of Coors beer from

another distributor once his original supply had been cut off.”

506 F.2d at 936 (Emphasis added). Me Coors himself stated

that “unless the distributor could be assured that. he would not

be confronted with competition from another Coors distributor

within his territory—assured there would be no intrabrand com-

petition—the distributor would be unwilling to make the neces-

sary capital expenditure, and lending institutions would be un-

widedt to extend credit to him.” F.2d at 938 (Emphasis

In contrast to the Coors restrictions which “assured that there

would be no intraband competition” because the distributor

promised to ‘‘conduct his wholesale disribution exclusively within

the preseribed territory” (506 F.2d at 938), Sylvania permitted

intraband competition. No Sylvania retailer was forbidden to sell

to persons residing outside any prescribed territory, and Sylvania

franchised more than one dealer in every major metropolitan

area in Northern California. It was not impossible for a buyer

to purchase from more than one seller, as it was for the plaintiff

* in Coors. Thus, the restriction in Coors, like the restriction in

Schwinn and unlike Sylvania’s location clauses, “assured that

there would be no intraband competition.”

Similar considerations apply to the Tenth Circuit’s decision in

Adolph Coors Company v. FTC, 497 F.2d 1178 (10th Cir. 1974),

cert. denied, 419 U.S. 1105 (1975). We need not speculate as to

how that decision might relate to locations clauses, since the

Tenth Circuit expressly considered the legality of locations clauses

in the later case of Saleco Corp. v. General Motors Corp., (dis-

cussed at p. 18, infra) and resolved the issue as we resolve it

now.

19See Robinson, Recent Antitrust Developments—1974, 75

Colum. L. Rev. 243, 276 n.207 (1975).

for the Court of Appeals for the Second Circuit,

specifically held that a dealer contract clause that

would ‘fix a location for the sale of used cars at a

place that did not unduly affect other dealers” did not

constitute an unreasonable restraint of trade. 124

F.2d at 823. In United States v. General Motors

Corp., 384 U.S. 127 (1966), the Supreme Court was

presented with a location clause which prohibited

Chevrolet dealers from moving to, or establishing, a

new location for the sale of Chevrolet vehicles with-

out the prior approval of Chevrolet. The Government

urged the Supreme Court to declare the claise egal,

but only insofar as it was employed to prohibit deal-

ers from selling to discounters for resale. The Su-

preme Court expressly declined to do this,” although

it held the conduct of General Motors and its dealers

unlawful solely on the basis of a horizontal conspir-

acy among dealers to prevent sales to discounters.

In concurring Mr. Justice Harlan wrote, “In my

opinion, . . . General Motors is not precluded from

enforcing the Jocation clause by unilateral action, and

I find nothing in the Court’s opinion to the contrary.”

Id. at 149. In our own Circuit, the District Court on

remand expressly provided that ‘‘[nJeither the in-

junctive provisions of this Final Judgment nor any

provision thereof shall be construed to enjoin General

20°We need not reach these questions concerning the mean-

ing, effect, or validity of the ‘location clause’ or of any other

provision in the Dealer Selling Agreement, and we do not.

We do not decide whether the ‘location clause’ may be

construed to prohibit a dealer, party to it, from selling

through discounters, or whether General Motors could _by

unilateral action enforce the clause, so construed.” United

States v. General Motors Corp., 384 U.S. 127, 139-40 (.966).

Motors from acting unilaterally under any Chevrolet

dealer franchise agreement or from unilaterally en-

forcing any such agreement [including the location

clause],” except as provided in a six months probibi-

tion relating to sales to discounters." Unite? States v.

*1Another case, United States v. Topco Associates, Inc., 405

U.S. 596 (1972), dealt similarly with locations clauses. Although

Topco involved horizontal rather than vertical limitations, the

District Court, on remand, expressly allowed the defendant to fix

the locations of his licensees, except where doing so would give an

exclusive territory to another licensee. The District Court’s J udg-

ment provided:

“. .. nothing in this Final Judgment shall prevent defend-

ant ... (2) from designating the location of the place or

places of business for which a trademark license is issued,

provided that the defendant shall not refuse to grant a

trademark license to any member or withdraw a license from

any member, except any withdrawal incidental to the bona

fide termination of any member firm’s membership in Topco,

if such action would achieve or maintain territorial exclu.

sivity in any member firm.” United States v. Topco Associ-

ates, Inc., 1973 Trade Cas. 74,391 (N.D. Ill 1973).

An appeal was taken from the judgment entered by the Dis-

trict Court, after remand, and this judgment was summarily

7 with only Mr. Justice Douglas dissenting, 414 U.S. 801

(1973).

The dissenting opinions written by my brothers Browning and

Kilkenny rely heavily upon language from the Supreme Court’s

opinion in Topco for the sweeping and unqualified conclusion

that, in Judge Kilkenny’s words, “restricted intraband competi-

tion cannot be justified by alleged interbrand competitive gain.”

The majority believes that such a broad interpretation of Topco

is plainly wrong. In Topco the Court held that the District Court

had erred by applying a rule of reason to a horizontal restraint,

which, the Court noted, is “[o]ne of the classic examples of a per

se violation of §1.” 405 U.S. at 608.

Thus, Topco stands only for the accepted proposition that a

rule of reason may not be applied in cireumstances wherein a

per se violation has ween clearly established. A vertical device,

like the locations clause employed in the present case, is by no

means a “elassic example” of a per se violation. When, as here,

the issue of per se liability has not been previously determined,

Topco in no way precludes consideration of whatever gains in

interbrand competition have resulted from intrabrand restrictions.

General Motors Corporation, Civil No. 62-1208-CC

(S.D. Cal. Aug. 17, 1966).”

Two other Courts of Appeals have considered the

legality of location clauses in the post-Schwinn era,

22Continental attempts to circumvent the precedent established

by the Schwinn, Topco, and General Motors (United States v.

General Motors Corp., 384 U.S. 127 (1966)) orders on remand

yy arguing that the manufacturer’s acknowledged right to “fran-

chise by location” means only that a franchisor may authorize a

dealer to hold himself out as the “authorized agent” of the

franchisor only at certain locations. Thus, the argument con-

tinues, the right to “franchise by location” does not give the

franchisor any right to prevent the franchisee from opening as

many additional outlets as he wishes at unauthorized locations,

and the franchisor must provide additional quantities of product

and related services to the dealer at these locations. The “right

to franchise by location” is construed to mean oniy that the

franchisor may deny his franchisee the right to “hold himself out

as the authorized agent” of the manufacturer at these additional

locations.

We find the foregoing argument to be highly artificial and even

spurious. The very fact that the television sets sold from the un-

authorized location bear the Sylvania brand name implies to the

public that the store is an “authorized Sylvania dealer”, even if

the store cannot expressly identify itself as such. The franchised

Sylvania dealer has the advantage of company arranged credit,

guaranteed company shipments. Sylvania’s national advertising of

the product, and his recognized name as a Sylvania dealer at his

authorized locations. Any inherent advantages of being a Sylvania

franchisee go with the dealer to the new location, regardless of

whether he holds himself out at the new location as a franchised

Sylvania dealer or not. The decree on remand in Schwinn ex-

pressly provided that nothing therein should prevent Schwinn

“from designating in its franchise agreements the location of the

place or places of business for wiich the franchise is issued,”

291 F. Supp. 564, 566 (N.D. Ill. 1968). Continental would define

“franchise”, as applied to the facts here, to mean the right of a

store at an unauthorized location to refer to itself in its advertise-

ments or signs on the premises as an “authorized Sylvania

dealer.” It is obvious to us that the word, “franchise”, should

more logically be interpreted to mean the right to purchase

television sets from Sylvania for resale, in conjunction with the

above mentioned benefits; in essence, the right to act as a Syl-

vania dealer. Both the Schwinn and Sylvania franchises were

ents which authorized the dealer to sell the manufactur-

er’s products from a specific location. The primary purpose of

and both have concluded that such clauses are valid.

In Salco Corporation v. General Motors Corporation,

Buick Motor Division, 517 F.2d 567 (10th Cir. 1975),

a franchisee, relying upon Schwinn, contended that the

location clause within the standard Buick Automobile

dealer franchise agreement* was illegal per sé, asa

restraint of trade. The Tenth Circuit rejected this

argument, noting with approval the Second Circuit’s

conclusion in Boro Hall, supra, that the right to

franchise necessarily validated the type of location

clause typically included in automobile franchise

agreements. The court therefore concluded that a loca-

tion clause is valid as a matter of law.

the franchises in both cases was to authorize the sale and displa:

of the manufacturer’s product, as system f

distribution p ' part of an overall of

erefore, we read the above quoted ianguage from

Schwinn decree on remand explicitly to authorize the a

followed by Sylvania, designating the location or locations from

which a particular retailer was authorized to operate as the

manufacturer’s dealer. The term “franchise” in tne Schwinn

order on remand has been similarly interpreted by law review

commentators. See, e.g., Pollack, Alternative Distribution Methods

After Schwinn, 63 Nw. U. L. Rev. 595, 603-04 (1968) :

“Nor does the Schwinn doctrine outlaw the use of the so

ealled ‘location clause’, which designates the location of the

place of business for which a franchise is issued and which

requires the franchisor’s consent to operate the business at

another location. . . . Indeed, without some such agreement,

it is difficult to see how a franchise relationship could op-

erate... . wot yp ong A . his final decree in the Schwinn

case on remand from the Supreme Court, Ju Pe

cifically authorized Schwinn’s use of By thteoy A

franchise agreements.”

28The location clause involved in Salco provided:

“Onee dealer is established in facilities and at a location . . .

mutually satisfactory to Dealer and Buick, Dealer will not

move to or establish a new or different location . . . without

prior written approval of Buick.”

517 F.2d at 575 n.7.

‘There is nothing in the complaint, nor for that

matter in the facts subsequently developed by

Denver Buick in opposition to the General

Motors’ summary judgment motion on the First

Claim for Relief, indicating that General Motors

did anything other than simply assert its rights

under the terms of the clause by insisting on the

right to approve a new location for Denver

Buick. There is no allegation that General Motors

assigned territories outside of which dealers could

not sell, and in fact the appellant admits other-

wise (Br. 57). Accordingly, the Section 1 allega-

tions were properly dismissed, since the location

clause is valid as a matter of law, and there are

no allegations that would amount to an unlawful

use of the clause.”

517 F.2d at 576.

In the present case, like Salco and unlike Schwinn,

Sylvania did not assign discrete selling territories

outside of which the dealers were not permitted to

sell. The dealer could sell to anyone who came to his

approved location. Indeed, in terms of the wording of

the location clause involved and its potential competi-

tive effect, we find Salco to be virtually indistinguish-

able from the case before us.

In Kaiser v. General Motors Corp., ... F.2d...

(3d Cir. Feb. 10, 1976), aff’g 396 F. Supp. 33 (ED.

Pa. 1975), the Third Cireuit affirmed a_ District

Court’s order granting summary judgment in favor

of a manufacturer against a challenge that a location

clause in its franchise agreement was illegal under the

Sherman Act. The District Court expressly found

nothing in Schwinn that makes location clauses illegal.

Looking beyond the cases dealing with location

clauses, we find numerous decisions that, while apply-

ing Schwinn, have*not interpreted Schwinn as estab-

lishing a per se rule against all vertical territorial

restraints.** A variety of vertical territorial and cus-

tomer restraints have been upheld under the rule of

reason test,” and some of these restraints were far

*4The tendency of the courts to construe the Schwi ding

narrowly has been the subject of law review mee aay See

Note, Territorial and Customer Restrictions: A Trend Toward

a Broader Rule of Reason?, 40 Geo. Wash. L. Rev. 123 (1971);

Note, Vertical Territorial and Customer Restrictions Under the

: Decisions Since United St . |

& Co., 22 J. Pub. L. 483 (1973). oe

25While a locations clause is a common tool utilized

facturers in their distributorship or franchise pearing

by no means the only vertical restraint that has been employed

to subject a distributor or retailer of products bearing a recog-

nized trade name to certain controls over his business operations.

These other controls on dealer territorial expansion include such

practices as exclusive dealerships, area of primary responsibility

covenants, and profit pass-over requirements. Each of these ver-

tical restraints might limit intraband competition, and all are

susceptible, linguistieally, to inclusion within the literal language

of Schwinn; nevertheless all have been upheld against claims

that they fall within Schwinn’s per se rule of prohibition. See

Colorado Pump & Supply Co. v. Febco Inc., 472 F.2d 637 (10th

Cir.), cert. denied, 411 U.S. 987 (1973) (primary responsibility

clause); Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke &

Iaquors, Ltd., 416 F.2d 71, 76 (9th Cir. 1969), cert denied, 396

U.S. 1062 (1970) (exclusive dealership) ; Superior Bedding Co. v.

Serta Associates, Inc., 353 F. Supp. 1143 (N.D. Ill. 1972) (pri-

mary responsibility and profit pass-over clauses); Plastic Pack-

aging Materials, Inc. v. Dow mical Co., 327 F. Supp. 213

(E.D. Pa. 1971) (primary responsibility clause); but cf. Reed

Brothers, Inc. v. Monsanto Company, ........ + (8th Cir.

May 22, 1975) (recognizing that courts have approved designa-

tion of areas of primary responsibility “without more”, but hold-

ing that there was “more” in Monsanto’s additional policies that

effectively curtailed the ability of its distributors to sell Mon-

santo Herbicides, after purchase, to whomever they wished).

A primary responsibility clause is basically an agreement obli-

gating a distributor to concentrate his soie efforts in a ified

geographical area for which he is primarily responsibie. The use

of these clauses was endorsed in White Motor Co. v. United

more burdensome than the location clause which is

here at issue. See Anderson v. American Automobile

Association, 454 F.2d 1240, 1246 (9th Cir. 1972);

Tripoli Company, Inc. v. Wella Corp., 425 F.2d 932,

936 (3d Cir.), cert. denied, 400 U.S. 831 ( 1970) ;7°

Janel Sales Corp. v. Lanvin Parfums, Inc., 396 F.2d

States, 372 U.S. 253 (1963), by Mr. Justice Brennan, who noted

in his coneurring opinion that the lawfulness of area of primary

responsibility covenants has been recognized in many consent

decrees. (372 U.S. at 271 n. 12).

A profit pass-over arrangement requires a dealer who makes

sales within the territory of another dealer to turn over part

of his profits from those sales to that other dealer, to compensate

the other dealer for the latter’s promotional efforts in the terri-

tory wherein the sale occurred. Mr. Justice Brennan also dis-

eussed this type of restriction in White Motor Co., supra, noting

“fi}f, for example, such a cross-sale incurs only an obligation to

share (or ‘pass-over’) the profit with the dealer whose territory

juas been invaded-—as is most often, and apparently here, the

case—then the practical effect upon competition of a territorial

limitation may no more harmful than that of the typical ex-

clusive franchise—the lawfulness of which the Government does

not dispute here.” 372 U.S. 253, 270-71 (Brennan, J., concurring).

26The Third Circuit, sitting en banc, held in Tripoli that a

cosmetic manufacturer’s restriction on its distributor's resale of

products, intended for professional use, to non-professionals was

not a per se violation of the Sherman Act, although the chal-

lenged practice fell within the Schwinn language pertaining to

restrictions on resale after title to the product passes to the

distributor. The court applied the rule of reason and held the

restrictions reasonable as a means of protecting the publie from

potential harm. The court chose to restrict Schwinn to its facts,

“That case [Schwinn] does not, as plaintiff proposes, estab-

lish as @ per se violation every attempt by a manufacturer

to restrict the persons to whom a wholesaler may resell any

product whatsoever, title to which has left the manufacturer.

Rather, Schwinn must be read, as must all antitrust cases,

in its factual context.” 425 F.2d at 936 (3rd Cir. 1970).

More recently, the Third Cireuit has suggested that the principle

established in Tripoli may not be limited to health and safety

justifications, but may extend to encompass the broader proposi-

tion that “. . . where a manufacturer’s restriction is related to a

legitimate business purpose, Sehwinn may be inapplicable.”

Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840, 847 n.13

(3rd Cir. 1974).

398, 406 (2d Cir.), cert. denied, 393 U.S. 938 (1968) ;

Carter-Wallace, Inc. v. United States, 449 F.2d 1374,

1380 (Ct. Cl. 1971) ; National Dairy Products Corp. v.

Milk Drivers & Dairy Employees Union Local 680,

308 F.Supp. 982 (S.D.N.Y. 1970); La Fortune v.

Ebie, 1972 Trade Cas. 174,090 (Calif. Ot. App.). See

also Good Investment Promotions, Inc. v. Corning

Glass Works, 493 F.2d 891 (6th Cir. 1974).

In the light of the cases upholding the legality of

location clauses and the fact that the decree on re-

mand in Schwinn expressly permitted manufacturers

to designate the location for which a franchise is is-

sued, it is hardly surprising that Schwinn has been

interpreted by learned commentators as leaving un-

disturbed the basie legality of location clauses.2” More-

over, years after Schwinn, the Department of Justice

refused to characterize location clauses as illegal per

se, treating them instead as restrictions to be governed

by the rule of reason.**. And only last year, a spokes-

man for the Antitrust Division stated that locations

clauses “are not illegal standing by themselves” since

“[t}hey reflect the manufacturer’s legitimate interest

in having his goods distributed efficiently throughout

27See Jentes, Permissible Vertical Restraints in M "

Distributor Relations, 8 A.B.A. Antitrust ew Notes 1 10a

(Summer 1972), in which the author advises that a location

clause is not only legal, but a preferred type of manufacturer

restraint under Schwinn. See also 1968 Antitrust Law Sym-

posium of the New York State Bar Association, 62-64; Pollack,

Alternative Distribution Methods After Schwinn, 63 Nw. U.L.

Rev. 595, —~ Pe we Ry gy -- Fr singe, Bar Association Sym-

posium on Marketing a ranchising: Antitrust Pr 1

the 70’s, 39 Antitrust L.J. 502, 516 (1970). ws

28See Robinson, Recent Antitrust Developments—197

Colum. L. Rev. 243, 276 n.207 (1975). sl te

a particular area.” Address by K. Clearwaters before

the International Franchising Association, Franchis-

ing and the Antitrust Laws, May 16, 1974. The Fed-

eral Trade Commission has also recognized that

Schwinn did not establish a per se rule against ver-

tical territorial restrictions. In its Report of the

Ad Hoe Committee on Franchising, the Commission

reached the conclusion that:

“ .. in Schwinn, the Court left enough leeway in

its initial threshold test of the overall reasonable-

ness of vertical arrangements to enable a manu-

facturer to justify such an arrangement by

establishing that it could not have entered the

market or expanded its market share... .”

FTC, Report of the Ad Hoe Committee on Franchis-

ing 30 (June 2, 1969). See, Coca Cola Co., 3 CCH

Trade Reg. Rep. 121,010 (Oct. 8, 1975) (Sustaining

a soft drink manufacturer’s imposition of exclusive

territories upon licensed bottlers).

In summary, when Schwinn is analyzed in its fac-

tual context it is readily distinguishable from the case

before us, in terms of both the kind of restrictions

involved and their operative competitive effect. This

conclusion is reinforced by reference to the Schwinn

decree on remand, Boro Hall, Salco, and Kaiser, all

of which uphold location clauses like the one before

us now. Finally, in both the cases decided after

Schwinn, involving other types of vertically imposed

customer and territorial restraints, and the post-

Schwinn pronouncements of the Federal Trade Com-

mission and Antitrust Division of the Department

of Justice, we see a clear trend against interpreting

Schwinn as establishing a per se rule of illegality, in-

discriminately invalidating all vertical territorial re-

straints without any consideration of their reasonable-

ness in terms of their overall competitive effect.

B. The Exclusive Dealership Precedents

The validity of the trial judge’s decision to apply

a rule of per se illegality to Sylvania’s locations prac-

tice is further undermined by the many authorities

upholding a manufacturer’s right to grant “exclusive

dealerships”, a practice much more restrictive of com-

petition than Sylvania’s location clauses. In an ex-

clusive dealership arrangement a manufacturer agrees

with a dealer not to authorize any competing dealers

to sell the manufacturer’s products anywhere within

the exclusive territory of the first dealer. There is a

veritable avalanche of precedent to the effect that,

absent sufficient evidence of monopolization, a manu-

facturer may legally grant such an exclusive fran-

chise, even if this effects the elimination of another

distributor. See Joseph E, Seagram & Sons, Inc. v.

Hawatian Oke & Liquors, Ltd., 416 F.2d 71 (9th Cir.

1969), cert. denied, 396 U.S. 1062 (1970); Elder-

Beerman Stores Corp. v. Federated Department

Stores, Inc., 459 F.2d 138 (6th Cir. 1972); Scanlan v.

Anheuser Busch, Inc., 388 F.2d 918 (9th Cir. 1968),

cert. denied, 391 U.S. 916 (1968) ; Walker Distributing

Co. v. Lucky Lager Brewing Co., 323 F.2d1,7 (9th Cir.

1963), cert. denied, 385 U.S. 976 (1966); Ace Beer

Distributors, Ine. v. Kohn, Ine., 318 F.2d 283 (6th

Cir.), cert. denied, 375 U.S. 922 (1963); Packard Mo-

tor Car Co. v. Webster Motor Car Co., 243 F.2d 418

(D.C, Cir.), cert. denied, 355 U.S. 822 (1957); In-

terborough News Co. v. Curtis Publishing Company,

225 F.2d 289 (2d Cir. 1955); Natfeh v. Ronson Art

Metal Works, 218 F.2d 202 (10th Cir. 1954); Bas-

com Launder Corp. v. Telecoin Corp., 204 F.2d 331

(2d Cir.), cert. denied, 345 U.S. 994 (1953); Fargo

Glass & Paint Co. v. Globe American Corp., 201 F.2d

534 (7th Cir.), cert. denied, 345 U.S. 942 (1953);

Potter’s Photographic Applications Co. v. Ealing

Corp., 292 F.Supp. 92 (E.D.N.Y. 1968); L.S. Good &

Co. v. H, Daroff & Sons, Inc., 279 F.Supp. 925 (N.D.

W.Va. 1968); Peerless Dental Supply Co. v. Weber

Dental Manufacturing Co., 283 F. Supp. 288 (E.D.

Pa. 1968) ; Top-All Varieties, Inc. v. Hallmark Cards,

Ine., 1969 Trade Cas. 172,850 (S.D.N.Y.). See gen-

erally Note, Restricted Channels of Distribution Un-

der the Sherman Act, 75 Harv. L. Rev. 795 (1962).

The clearly established legality of exclusive dealer-

ships logically compels the conclusion that location

clauses cannot be per se illegal. If it is legal for a

manufacturer to promise one dealer that he will have

the exclusive right to sell the manufacturer’s prod-

ucts within a designated territory, then obviously it

is legal for that manufacturer to keep his promise

of exclusivity by denying other dealers like Continen-

tal the power to sell from retail outlets at unauthorized

locations within the first dealer’s exclusive territory.

The accepted principle that a manufacturer may le

gally grant an exciusive dealership is rendered mean-

ingless if he cannot legally use a location clause to

prevent his other dealers from opening their own

retail outlets in the same area. If a manufacturer

cannot include a location restriction in a franchise

agreement, he cannot do what the exclusive dealer-

ship cases hold is legal, i.e., promise that “I will not

franchise another dealer in your area.” If a location

restriction cannot legally be enforced, and, for exam-

ple, a franchise is established in San Francisco, Cali-

fornia, who then opens a store in Los Angeles,

California, the manufacturer cannot fulfill his prom-

ise to his original Los Angeles franchisee that he will

not recognize another dealer in Los Angeles. There-

fore, we conelude that the rule of per se illegality

applied below is logically inconsistent and irreconcila-

ble with our decision in Hawaiian Oke and the many

other cases upholding the right of manufacturers to

establish exclusive dealerships.

If the rule adopted by the trial judge in this case

were the law, it would have grievous implications for

the common and established practices of franchising”®

and the granting of exclusive dealerships, Under the

district judge’s approach a manufacturer legally pre-

vented from imposing or enforcing a location restric-

tion could not lawfully prevent its franchisee from

creating new outlets at any unauthorized locations the

franchisee might choose and distributing the fran-

chisor’s merchandise therefrom. In other words, un-

29According to the Department of Commerce, there were

445,281 franchised businesses in the United States in 1972. U.S.

Dept't. of Commerce, Franchising in the Economy 1972-1974

(1974).

der the rule of per se illegality, if a dealer is franchised

anywhere he is franchised everywhere. Once the man-

ufacturer has granted a franchise for any location,

he would be legally obligated to enable the franchisee

to sell the manufacturer’s product from all other

locations into which the franchisee might wish to ex-

pand, regardless of the prejudicial effect that this

would have on existing distribution in those areas.*°

3°Tt has been argued that if, under Schwinn, Sylvania could

not legally prevent Continental from selling to another unfran-

chised retailer, who thereupon resells from an unauthorized loca-

tion, then there is no reason why Continental could not sell to

itself (by shipping television sets to unauthorized locations for

resale there). It may be true that any attempt by Sylvania to

restrict sales by its franchises to unfranchised dealers would con-

stitute a violation of the antitrust laws. Howev-r, Sylvania was

careful to avoid this problem by allowing i: dealers to sell to

anyone. Allowing a franchised dealer to sell {> a non-franchised

retailer has a far different effect upon the franchiser than aillow-

ing a franchisee, in violation of a contract, to open a store at any

location he chooses. The unfranchised retailer would ordinarily,

in the first instance, pay a higher price for the Sylvania product

because the unfranchised dealer would be buying through a mid-

dleman, the franchised dealer, rather than directly from Sylvania.

On the other hand, as we have previously emphasized, the fran-

chised dealer has the benefit of company arranged credit, guar-

anteed company shipments, and a recognized name as a Sylvania

franchisee, as well as the advantage of buying directly from the

manufacturer at a lower price. And all advantages of the status

of a Sylvania franchisee attend the dealer’s move to the new loca-

tion, regardless of whether he holds himself out at the new loea-

tion as a franchised Sylvania dealer. The franchised dealer who

violates the company’s elbow room policy still will retain all the

benefits of his franchise, while eliminating the benefits to the

company of having a reliable market, and spaced distribution.

The ultimate economic result of the approach below would likely

spell the doom of all Sylvania franchised dealers. No longer could

Sylvania offer to its dealers the primary advantage of a promise

not to franchise more dealers than a particular market could

reasonably support. This promise on Sylvania’s part was not

nearly as restrictive as an exclusive dealership, which our court

and many others have upheld, but it did tend to prevent the

kind of “cut-throat” competition between franchisees that could

ultimately result in the destruction of Sylvania as an interbrand

The adoption of the rule of per se illegality in a

ease such as this would undoubtedly hasten the dis-

appearence from the American marketplace of the

small independent merchant, now often a franchisee,

and already an endangered entrepreneur. The Supreme

Court has recognized the concern that Congress has

expressed over the disappearance of the small inde-

pendent merchant due to competition with much

larger, vertically integrated firms. In the words of

Mr. Justice Stewart,

“. . franchising promises to provide the inde-

pendent merchant with the means to become an

eompetitor. The elbow room policy was never used by Sylvania

severely to restrict intrabrand competition or to divide markets.

No dealer had a veto power over the entry of other dealers into

his area, and locations were authorized by Sylvania solely on the

basis of market expandability.

Taking another approach, Continental also argues that “Con-

tinental sold in Sacramento not ‘to itself’, but to an ‘unfrau-

chised dealer’, namely, to S.A.M. Industries, Inc.” In fact, «he

record thoroughly belies this contention and conclusively demon-

strates that Continental was indeed shipping to itself in Sacra-

mento because S.A.M. Industries, Inc., was not a separate, inde-

pendent dealer. ;

In the original Answer and Counterclaim, Continental (includ-

ing S.A.M.) alleges that it, as a group of affiliates, did business

in California under the firm name and style of “Continental

T.V.” Throughout its Answer S.A.M. and the other affiliated

corporations referred to themselves, collectively, as “Continental.”

In his statements to the jury, Continental’s attorney made it

clear that S.A.M. was a part of Continental, and that the Sac-

ramento store operated by S.A.M. was doomed to be a link in

the Continental chain. The testimony of George Shahood, the

President and General Manager of Continental T.V. also shows

that the Sacramento store was part of Continental T.V.’s whole

enterprise. Finally, and as the irrefutable answer to Continental’s

alternate approach, the district judge found as a fact that “Cross

claimants are a group of affiliated corporations in substantially

common ownership which did business under the name ‘Conti-

nental T.V.’ George Shahood and his wife were the principal

owners of all the corporations and Mr. Shahood was the principal

operating officer.”

efficient and effective competitor of large inte-

grated firms. Through various forms of franchis-

ing, the manufacturer is assured qualified and

effective outlets for his products, and the fran-

ehisee enjoys backing in the form of know-how

and financial assistance. These franchise arrange-

ments also make significant social and economic

contributions of importance to the whole society,

as at least one federal court has noted:

‘The franchise method of operation has the

advantage, from the standpoint of our Amer-

ican system of competitive economy, of enabling

numerous groups of individuals with small

capital to become entrepreneurs .... If our

economy had not developed that system of op-

eration these individuals would have turned out

to have been merely employees. The franchise

system creates a class of independent business-

men; it provides the public with an opportu-

nity to get a uniform product at numerous

points of sale from small independent contrac-

tors, rather than from employees of a vast

chain.”

i Indiscriminate invalidation of franchising ar-

rangements would eliminate their creative con-

tributions to competition and force ‘suppliers to

abandon franchising and integrate forward to the

detriment of small business. In other words, we

may inadvertently compel concentration by mis-

guided zealousness. As a result, ‘[t]here [would

31Quoting Susser v. Carvel Corp., 206 F. Supp. 636, 640 (S.D.

N.Y. 1962), aff'd, 332 F.2d 505 (2d Cir. 1964) cert. granted, 379

U.S. 885, cert. dismissed, 381 U.S. 125 (1965).

be] less and less place for the independent.’

Standard Oil Co. v. United States, 337 U.S. 293,

315 (separate opinion of MR. JUSTICE DOUG-

LAS). ‘The small, independent businessman

[would] be supplanted by clerks.’ Id., at 321.”

United States v. Arnold, Schwinn & Co., 388 US.

at 386-87 (Stewart, J., coneurring and dissenting)

(footnotes omitted).

If we were to adopt the approach of per se illegal-

ity, the ultimate result might be to undermine fran-

chising as a tool to enable the small, independent

businessman to compete with the large vertically in-

tegrated giants of many industries. One danger would

be that a single franchisee, allowed to expand into

a chain of stores and sell everywhere over the manu-

facturer’s objection and in violation of the contract,

might make it impossible for other small single-outlet

franchisees of the same manufacturer to compete ef-

fectively. Thus the loyal network of small indepen-

dent bus‘nessmen that the manufacturer desired for

his franchisees might be supplanted by several “giant”

franchisees, each having numerous outlets. Another

risk would be that a small manufacturer who could

not afford to integrate vertically, if prohibited from

offering any degree of territorial protection from in-

trabrand competition or “elbow room”, might not be

able to attract dealers and thus might be unable to

establish an effective system of distribution for its

product. We cannot believe that Congress intended

to implement a rigid per se rule of illegality that por-

tends such serious risk to franchising arrangements,

methods that have made significantly worthy contri-

butions to our Nation’s economy.”

C. The Policy of the Sherman Act

A final reason for our conclusion, and perhaps the

most compelling one, is our belief that location agree-

ments like the ones adopted by Sylvania may in some

instances promote, rather than impede, competition.

Consequently, we think that there must be a case by

case inquiry under the “rule of reason” to determine

the competitive effect of such restraints if the policy

of the Sherman Act is to be effectuated. The true

anticompetitive evil of the restraints which Schwinn

declared to be illegal per se was their total proscrip-

tion of all competition between Schwinn dealers for

the same customers or within the same geographical

areas. Here, Sylvania’s practice involved no such total

destruction of intrabrand competition.” Implicit in

the application of a per se rule in antitrust analysis

is the conclusion that the challenged practice neces-

sarily and always involves an unreasonable restraint

upon competition,** and thus can be conclusively pre-

82See generally H. Brown, Franchising—Realities and Reme-

dies (1973); Small Business Administration for Senate Select

Committee on Small Business, 92 Cong., 1st Sess., Report on the

Economie Effects of Franchising (Comm. Print 1971): E. Lewis

& R. Hancock, The Franchise System of Distribution (1963) ;

Zeidman, The Growth and Importance of Franchising—Its Im-

pact on Small Business, 12 Antitrust Bull. 1191 (1967).

83See text accompanying notes 14 to 18 supra.

84“Specifically, the per se rule of prohibition has been applied

to price fixing agreements, group boycotts, tying arrangements,

and horizontal division of markets. As to each of these practices,

experience and analysis have established the utter lack of justi-

fication to excuse its inherent ‘threat to competition. To gauge the

appropriateness of a per se test for the forms of restraint in-

sumed to be illegal without any inquiry into the

nature and history of the industry involved and a

determination of the precise manner in which a par-

ticular restraint has affected competition. Harsh and

inflexible per se rules should be applied when, and

only when, a court has made a threshold examination

of the economic effects of the chalienged practice and

has determined that it is clear that the practice to be

declared illegal per se has had a “pernicious effect on

competition” and a “lack of any redeeming virtue.”

See Northern Pacific Railway Co. v. United States,

396 U.S. 1, 5 (1958).

On the record before us Continental has not proved

that the enforcement by Sylvania of its location clause

has worked a net anticompetitive effect, or that the

facts presented in this one case warrant the conclu-

sion that further inquiry into the economic impact of

Sylvania’s location clauses upon competition would

be irrelevant. We recognize, of course, that in estab-

lishing a locations practice, Sylvania did check intra-

brand competition to some extent. This was an in-

evitable incident to Sylvania’s attempt to promote

and maintain interbrand competition. However, to

ignore Sylvania’s ultimate purpose, to remain in the

market as a viable competitor; thereby fostering in-

terbrand competition, and to consider only the fact

velved in this case, then, we must determine whether experience

warrants, at this stage, a conclusion that inquiry into effect upon

competition and economic justification would be similarly irrele-

vant.” White Motor Co. v. United States, 372 U.S. 253, 265-66

(1963) (Brennan, J., concurring) (footnotes omitted). See gen-

erally von Kalinowski, The Per Se Doctrine—An Emerging

Philosophy of Antitrust Law, 11 U.C.L.A.L.Rev. 569 (1964).

that its practice slightly limited intrabrand competi-

tion, is to overlook the forest while watching the

trees.“° The free market policy of the antitrust laws

would not be served by fashioning rules which foster

. intrabrand competition to the point of extinguishing

interbrand competition. This would lead to the more

insidious evil of total monopolization. In this connec-

tion, it is important to emphasize the following con-

siderations: that in a market dominated by a single

company (RCA), Sylvania possessed only a minor

fraction of the total market, that many other brands

were available to the consumer, that Sylvania dealers

possessed no veto power against the franchising of

additional dealers in any given area, that Sylvania

dealers could and did carry competing brands, and

that the location restriction on Sylvania dealers had

no demonstrable effect on prices, volume of products

available, quality, or consumer choice. Additionally,

in no market did Sylvania’s practice foreclose any

consumer from substantial choice among several Syl-

vania dealers, and any Sylvania dealer who might

have been inclined to set his prices too high or to pro-

$5As one economist has explained the principal point in the

course of an analysis of the economic effects of restrictive distri-

bution arrangements:

“Restrictive marketing arrangements of any sort thus limit

competition in some respect. However . . . limitations on com-

petitive activity in one direction may strengthen competitive

forces in another . . . The question for analysis .. . is

whether this departure from competitive structure within

one marketing organization is counterbalanced by an increase

in the number of marketing organizations and products

available in particular markets or in the vig r of competitive

behavior.” Preston, Restrictive Distribution Arrangements:

Economic Analysis and Public Policy Standards, 30 Law. &

Contemp. Prob. 506, 508 (1965).

vide inadequate service would run headlong into both

strong interbrand competition from other manufac-

turers and intrabrand competition from one or more

other Sylvania dealers.

Where, as here, it cannot be said with certainty

that a challenged practice is inherently anticompeti-

tive and unreasonable, the standard commonly re-

ferred to as the “rule of reason” is, and should be

applied. That rule, read into the Sherman Act in

Standard Oil Co. v. United States, 221 U.S. 1, 62

(1911), was stated in its classic form by Mr. Justice

Brandeis in Chicago Board of Trade v. United States,

246 U.S. 231 (1918).

; “Every agreement concerning trade, every regu-

lation of trade, restrains. To bind, to restrain, is

of their very essence. The true test of legality

is whether the restraint imposed is such as merely

regulates and perhaps thereby promotes compe-

tition or whether it is such as may suppress or

even destroy competition. To determine that ques-

tion the court must ordinarily consider the facts

peculiar to the business to which the restraint

is applied; its condition hefore and after the re-

straint 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 adoptir = 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.”

Id., at 238.

In holding that an instruction incorporating the

“rule of reason” should have been given to the jury,

we note that Sylvania presented substantial evidence

from which the jury might have reasonably concluded

that Sylvania’s location practice, rather than unrea-

sonably restricting competitive market forces, actually

had a procompetitive effect** in that it enabled a

marginal producer to achieve the status of a viable

competitor in an industry threatened by oligopolistic

%¢Lee Egan Preston, Jr., a professor at the School of Manage-

ment at the State University of New York in Buffalo, testified as

to his conclusions after a study of the television market:

“A. Now, since Sylvania occupies a relatively small position

in the television market and it is therefore a competitive ele-

ment in that market, I think the television market would be

less competitive if Sylvania would be out of it, because the

number of brands, after all, are 10 to 12.

Sylvania is in there. They are at the bottom, but in there.

Now, if we squeeze out the bottom firms from that market,

then I think we would see a decline in competition among

brands in all the major markets in the country. Therefore,

if this distribution policy or any particular distribution

policy has the effect of strengthening Sylvania or any other

smaller firm as a competitive force among the other firms

in that market, many of which are much larger, then I think

we have to look carefully at that policy as an element in

competition, indeed as a procompetitive policy among the

brands and the manufacturers as a whole.

Q: In the opinion which you have just described for us, sir,

did you ascertain whether the type of distribution policy

that you have assumed to be employed was in any way bene-

ficial to competition in the sense beyond the one you have

just given?

A: I think I just responded to that by saying that *

think that anything that maintains a range of competition

alternatives throughout the market strengthens competitive

forces there.”

*e2¢

“Q: Assuming a distribution practice of the type that you

are asked to assume, is there any anticompetitive characteris-

ties that you can identify?

A: I don’t see any, because I feel that competition in the

market has resulted from the large number of brands and

dealers available throughout the system.” Compare Preston,

supra note 35 at 506.

tendencies. It may be true, as Sylvania claimed, that

the 1] «ation restrictions employed by Sylvania at-

tracted dealers to carry and promote Sylvania’s prod-

ucts, and ultimately fortified its market position in

competition with other brands. Perhaps some limit on

ruinous intrabrand competition was necessary to in-

duce a sufficient number of otherwise reluctant deal-

ers to sell the Sylvania product. It is undisputed that,

as we have previously noted, Sylvania’s share of the

market increased from jess than 2% in 1962 to 5%

by 1965. Any reduction of intrabrand competition that

may have resulted from the locations practice ap-

parently did not eventuate in the evils that are nor-

mally associated with an unreasonable restraint of

trade, since the television industry as a whole expe-

rienced both an increase in volume and a decrease in

price during this period.°“ Whether some dim-

inution in intrabrand competition is justified when

it averts the loss of one competitor in an industry

that is already oligopolistic should ultimately be a

question for the finder of the facts. Our choice

of a rule of reason test over a per se rule of illegality

means only that the critical policy question will at

least be asked and answered.*’ In our view, the Sher-

man Act demands no less,

36°See Note, 53 Texas L. Rev. 127, 136 (1974).

874A number of justifications have been offered for vertically-

imposed territorial restraints, a few of which can be briefly sum-

marized. We express no view as to the validity of these justifica-

tions, either as a matter of abstract economic theory or in the

context of the specific facts of this case. As previously indicated,

under the rule of reason the ultimate question must be answered

ier of fact. = :

that they enable a manufacturer to obtain access to markets that

Chief Justice Hughes once wrote, in discussing the

Sherman Act: “The restrictions the Act imposes are

are otherwise closed to him. It is altogether probable that dis-

tributors will be unwilling to handle a manufacturer’s product

unless they are afforded some protection against ruinous intra-

brand competition. Dealers could justifiably believe that in the

absence of vertical restrictions, “cutthroat” intrabrand competi-

tion from other dealers would drive down prices and render

their operation unprofitable, and endanger their capital invest-

ment.

A second argument in favor of vertical restrictions is the so-

called “free ride” theory. Vertical restrictions are said to be nee-

essary to prevent dealers from invading the territories of other

dealers by choosing to rely on the promotional efforts of those

other dealers rather than undertaking costly selling activities

themselves. It is argued, with significant logic, that in the absence

of vertical territorial restrictions, dealers will not provide ad-

vertising or repair facilities as extensively as they would if they

could be assured that invading dealers will not pirate the benefits

of these promotional activities.

A third asserted justification for vertical restrictions is that

they encourage total sales effort on a dealer’s part by facilitating

more concentrated and intense coverage of each geographic mar-

ket, thus leading to increased sales of the manufacturer’s prod-

ucts. Sales to large customers located close to the dealer usually

require lower distribution costs than sales to smaller more dis-

tant customers. Accordingly, the manufacturer benefits if all cus-

tomers are charged an identical price and the dealer’s savings

from sales to the choice customers offset the higher costs in-

curred in sales to others. Vertical territorial restrictions are thus

often designed to motivate dealers to increase their depth of cov-

erage in narrowly defined areas rather than “skimming” choice

customers over a wider area.

A fourth major justification for the legality of vertical re-

straints is that they are necessary incentives to motivate dealers

to provide a high quality and character of dealer services, such

as consumer credit, prompt and efficient repairs, and other post-

sale services. The theory is that dealers can be persuaded, and

are willing, to provide these better services in exchange for some

insulation from ruinous intrabrand competition.

For a more detailed discussion of these justifications and oth-

ers, see Bork, The Rule of Reason and the Per Se Concept:

Price Fixing and Market Division, 75 Yale L.J. 373, 430-453

(1966); Comanor, Vertical Territorial and Customer Restric-

tions: White Motor and its Aftermath, 81 Harv. L. Rev. 1419,

1426-33 (1968); Preston, Restrictive Distribution Arrangements:

Economic Analysis and Public Policy Standards, 30 Law. & Con-

temp. Prob. 506, 511-12 (1965).

not mechanical or artificial. Its general phrases, inter-

preted to attain its fundamental objects, set up the

essential standard of reasonableness.” Appalachian

Coals, Inc. v. United States, 288 U.S. 344, 360 (1933).**

In holding that the just result in the present contro-

versy is not absolutely foreordained by Schwinn, and

that a rule of reason analysis should have been ap-

plied we believe and hope that we further the Sher-

man Act’s goal of protecting the consumer from the

dangers that result when free competition is sup-

pressed. Since the legislative intent underlying the

Sherman Act had as its goal the promotion of con-

sumer welfare,*® we decline blindly to condemn a busi-

38In the words of the present Solicitor General of the United

States, “. . . the inescapable fact is that an agreement which

eliminates competition is basic to almost every productive unit

consisting of more than a single person. The agreement may be

spelled out or, more often, may be tacit, but, to the degree that

coordination of the productive activities of persons is achieved,

actual or ntial competition must be eliminated.” Bork, supra

n.37 at 377 (1966). For a classie discussion cautioning against

an overly literal construction of the Sherman Act, see the dis-

senting opinion of Mr. Justice Holmes in Northern Securities

Co. v. United States, 193 U.S. 197, 400411 (1904).

389A study of the legislative history of the Sherman Act “estab-

lish [es] 7 that the legislative intent underlying the

Sherman Act was that courts should be guided exclusively by

consumer welfare and the economic criteria which that value

premise implies.” Bork, Legislative Intent and the Policy of the

Sherman Act, 9 J. Law & Econ. 7, 11 (1966). The current

Solicitor General also noted that: ; ,

{It is difficult to resist the conclusion that the most faithful

judicial reflection of Senator Sherman’s and his coll e’s

policy intentions was the rule of reason enunciated by Chief

Justice White in the 1911 Standard Oil and American To-

bacco opinions. There was in White’s opinions as in Sher-

man’s speeches the idea that the statute was concerned

exclusively with consumer welfare and that this meant the

law must discourage restriction of output without hampering

efficiency. White appears also to have incorporated into his

rule of reason those major rules of law which Sherman en-

ness practice as illegal per se because it imposes a

partial, though perhaps reasonable, limitation on in-

trabrand competition, when there is a significant pos-

sibility that its overall effect is to promote competition

between brands. If the application of the rule of per

se illegality in this case were permitted to stand,

Sylvania would inevitably be stripped of a tool which

it claims enabled it to compete effectively with the

few “giants” of the industry. Its market share might

well shrink to the precarious level that existed prior

to institution of its “elbow room” policy. It is alto-

gether possible that foreclosing the competitive bene-

fits of vertical agreements like the one here involved

by means of a per se rule, without any inquiry into

the possibility of an overall procompetitive effect in

the relevant industry, might well signal the death of

similarly situated manufacturers with small market

Shares in other industries.*° If a per se rule of ille-

gality is permitted to replace a genuine inquiry into

the reasonableness and economic effect of business ar-

rangements which, in reality, strengthen competition

as implied by a consumer-welfare policy. The rules

implied by the policy are alterable as economic analysis

progresses, however. White clearly foresaw this and incor-

porated that principle of change into the rule of reason.”

Id. at 47.

49We acknowledge that, as a matter of economic theory, there

is a sharp divergence of opinion as to the alleged procompetitive

effects of vertical territorial restrictions. Perhaps the classic expo-

sition of the competing arguments appear in two discussions,

one written by Solicitor General Bork, and the other by William

Comanor. Compare Bork, supra n.37, with Comanor, supra n.37.

We do not further summarize the major aspects of the competing

views, inasmuch as our reasoning in the present case endorses

neither of the views. We simply believe that the fact that a dis-

agreement exists, and the corresponding possibility that the loca-

tions clauses involved here may have had a procompetitive effect,

and promote the Nation’s economic welfare, the pur-

pose of the Sherman Act is undermined, This would

promote monopoly, hamstring free enterprise, and

victimize our country’s consumers. Hopefully, our

conclusion in this case bars such subversion of the

national welfare.

The judgment of the District Court is reversed, and

the cause is remanded for further proceedings not

inconsistent with the views herein expressed.*?

renders wholly inappropriate the application of a per se rule of

illegality. The ultimate consideration of the procompetitive merits

of Sylvania’s practice must be conducted under the rule of reason.

41Sylvania vigorously contends that even if its locations prac-

tice could be held to be illegal per se under Schwinn, then it

should have had the benefit of an instruction on the “failing

company” defense. We have hitherto quoted its proffered jury

instruction in this 7aee See note 11 supra. Sylvania argues

that at the time its “el room” policy was instituted, Sylvania

would have been compelled to abandon its television manufac-

turing business if it did not increase its share of the market in

the manner that it did. The failing company defense has Fane

erally been applied to mergers or acquisitions which would .

wise violate the antitrust laws. United States v. Greater Buffalo

Press, 402 U.S. 549 (1971); Citizen Publishing Co. v. United

States, 394 U.S. 131 (1969) ; International Shoe Co. v. FTC, 280

U.S. 291 (1930); Hale and Hale, Failing Firms and the Merger

Provisions of the Antitrust Laws, 52 Ky. L.J. 597 (1964) ; Con-

nor, Section 7 of the Clayton Act: The Failing Company Myth,

49 Geo. L.J. 84 (1960). However, United States v. Arnold,

Schwinn & Co., 388 U.S. 365 (1967) indicates that the defense

is also available in cases wherein a vertical restraint is being

challenged. The Court in Schwinn clearly indicated its intent

that the failing company defense, once shown, would then subject

the case to the rule of reason and the per se rule would noi be

“We first rve that the facts of this case do not come

within the ific illustrations which the Court in White

Motor articulated as possible factors relevant to a showing

that the challenged vertical restraint is sheltered by the rule

of reason, because it is not anticompetitive. Schwinn was not

a newcomer, seeking to break into or stay in the bicycle

business. It was not a ‘failing company’.” ,

388 U.S. at 374. However, because we have determined that the

trial court erred in applying the Schwinn rule of per se illegality

Reversed and Remanded.*”

KILKENNY, with whom Brownina, Dunrway and

WricuHr concur in whole or in part.

With the majority factual statement so fraught with

irrelevancies and weighted with factual issues decided

adversely to appellant by the jury,' it is our firm

to Sylvania’s locations clauses and that a new trial is therefore

required, we find it unnecessary now to decide whether there

was sufficient evidence to warrant instructing the jury on the

failing company defense. For future guidance to the District

Court, however, we think it presently appropriate to emphasize

that even if a manufacturer is prosperous in its whole operation,

the failing company defense is applicable if the company is fail-

ing .n the manufacture and distribution of one of its significant

products. In Schwinn, Mr. Justice Fortas wrote of the “product

market.” 388 U.S. at 382.

Similarly, our determination that the rule of per se illegality

established in Schwinn is inapplicable to the Sylvania location

practice challenged here also makes it unnecessary for us to

consider the merits of Sylvania’s argument that it had no rea-

sonable basis for believing its practices violated the antitrust

laws because the conduct in question occurred before the Schwinn

decision.

42While the disposition of the present case was under consid-

eration by the full court, a panel issued its opinion in Noble v.

McClatchy Newspaper, —.. F.2d ....... (9th Cir. Nev. 14, 1975).

The majority here has no quarrel with the result reached by

the Noble court; however, any language in the Noble opinion

that may be inconsistent with any of the majority’s language in

the present case is hereby disapproved.

1In passing on whether or not to grant an injunction on the

appellant’s practices, the district court entered elaborate findings

of fact which are in direct contradiction of many of the state-

ments in the majority opinion. For example, footnote 30 of the

majority opinion states that “[t]he elbow room policy was never

used by Sylvania severely to restrict intrabrand competition or

to divide markets. No dealer had a veto power over the entry of

other dealers into his area, and locations were authorized by

Sylvania solely on the basis of market expandability.” However,

in its 16th finding of fact the district court concluded that “the

action of Sylvania [reducing Continental’s credit line, cancelling

Continental’s orders, and cutting off all communication with

Continental, among other things] was taken pursuant to the

belief that a separate statement would be helpful to

a full understanding of the principal issue presented.

We offer this at the risk of some repetition.

FACTS

By 1962, Sylvania’s share of the television market

had declined to approximately one or two percent.

It then changed its methods in an effort to obtain a

larger share of the market. Under its new policy,

Sylvania abandoned distribution through wholesalers

and decided to sell only to selected retailers who

would premote the Sylvania brand, It is undisputed

that title to the television sets passed to these re-

tailers. This plan, by limiting the number of fran-

chises in a given area, would reduce intrabrand com-

petition among retailers and serve as an incentive

to carry and promote its product. Sylvania called this

the “elbow room policy” and believed that these meth-

ods would allow it to improve its competitive position.

In fact, under this new policy, it increased its mar-

ket share to 5% in 1965, and, so it claims, this in-

crease permitted it to remain in the market. Sylvania

neither restricted franchised retailers from carrying

contract, combination or conspiracy alleged by Continental and

was part and thereof and at the instance of Sylvania’s

co-conspirator Handy Andy; and as a result thereof Continental

was prevented from selling its Sylvania brand products in its

store in Sacramento.” The district court also found that on Sep-

tember 7, 1965, Sylvania’s area sales manager advised Continen-

tal’s principal operating officer “that due to prior ‘commitments’

which Sylvania had with Handy An , it was impossible for

Sylvania to franchise Continental in ento.” Needless to

say, the findings of the district court are implicit in and grow

out of the jury’s general verdict and its affirmative response to

the previously maintained special interrogatory.

other brands, nor did it rcyuire retailers to sell only

to customers who lived within a particular territory.

However, it did enforce location restrictions on its

retailers and prohibited them from reselling its tele-

vision sets from unauthorized locations.

Continental, one of Sylvania’s largest retailers, is

composed of a chain of retail stores. In 1965, it opened

a new store in Sacramento, shipped sets from an-

other store, and offered them for sale in that city in

September, 1965. Sylvania concedes that it had an

agreement with Continental under which it was pro-

hibited from moving Sylvania brand merchandise to

an unapproved location for resale, without Sylvania’s

prior approval. Sylvania refused to franchise the new

store and, beyond question, hampered Continental’s

resale efforts in Sacramento. In this case, it is clear

that Sylvania’s purpose was to prevent more retail

intrabrand competition in Sacramento, where most of

its sales were by one important retailer.

as an outgrowth of this dispute, Sylvania set in

motion a series of maneuvers which seriously affeeted

Continental’s ability to resell Sylvania’s television

sets. To that time, Continental’s credit limitation with

Sylvania had been $300,000.00. On September 16th,

the credit limit was reduced to $50,000.00, at which

time Sylvania cancelled pending orders and severed

other friendly ties with Continental. About the same

time, Sylvania demanded payment of accounts reesiv-

able, which had not been its practice in the past. The

following October 13th, it cancelled Continental’s

franchise, On the same day, the company through

which Sylvania previously extended credit to Con-

tinental sued the latter to collect accounts which were

allegedly due. Sylvania then accelerated the collection

of the remaining indebtedness, repossessed all of Con-

tinental’s Sylvania sets, attached its bank accounts

and caused its main store and warehouse to be locked

and closed. At about the same time, Sylvania notified

Philco, another major supplier of Continental, of

what it was doing.

Sylvania claims it acted for reasons unrelated to

its locations policy and not in retaliation. However,

it is manifest that some or all of these actions had

something to do with the enforcement of the agree-

ment to restrict locations. This follows since the jury

was instructed:

“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 prvducts, you must find any effort there-

after to restrict outlets or store locations from

which its dealers resold the merchandise which

they had purchased from Sylvania to be a viola-

tion of Section 1 of the Sherman Act, regardless

of the reasonableness of the location restrictions.”

{Emphasis supplied. ]

On the basis of the evidence and the quoted instruc-

tion, the jury answered the following special inter-

rogatory in the affirmative.

“Did Sylvania Electric Products, Inc., engage in

a contract combination or conspiracy in restraint

of trade in violation of the antitrust laws with

respect to location restrictions alone?”

There is no way of pinpointing the percentage of

Sylvania’s subsequent behavior that the jury attrib-

uted to enforcement efforts. However, it is obvious

the jury concluded that Sylvania attempted to and

did restrict Continental’s business location pursuant

to a contract, combination, or conspiracy in violation

of the Sherman Act and to the damage of Conti-

nental.

Despite what is said on page one of the majority

opinion, the district judge did not instruct the jury

that Sylvania’s practice of fixing by agreement the

locations from which Continental was authorized to

sell Sylvania products was illegal per se under § 1 of

the Sherman Act. To the contrary, it is clear that the

district judge presented to the jury the issue of

whether Sylvania entered into a contract, combina-

tion or conspiracy with one or more of its dealers

pursuant to which it exercised dominion and control

over the product sold to the dealer after having

parted with title and risk to the products, to restrict

the territories in which the dealers may resell the

merchandise.

The paragraph from the instructions quoted above

is relied upon by the majority as a statement to the

jury that location clauses are per se illegal. This is

one of several interrelated paragraphs in the instrue-

tions dealing with the subject of territorial or cus-

tomer restrictions. Standing alone, this paragraph

requires proof hoth of a contract, combination, or

conspiracy, and of an exercise of control by Sylvania

after title and risk had passed to the dealers. This

and related paragraphs read together also clearly

informed the jury that Sylvania would be liable only

if it exercised its control to restrict the territories in

which the dealers resold.”

1*The pertinent instructions read: peste '

“So too, concerted action in the form of dividing territo-

ries in which a dealer may resell merchandise purchased

from the manufacturer without resale price maintenance

constitutes a viclation of the antitrust laws. That is to say,

where a manufacturer, by means of a contract, combination

or conspiracy, restricts the territories within which a dealer

may resell merchandise purchased from the manufacturer,

such a restriction is unlawful regardless of whether or not

that restriction is good business practice from the manu-

facturer’s point of view and is —, to assure adequate

volume of profits. Any agreement, combination or conspiracy

by which a manufacturer interferes with the ordinary and

usual forces of competition to restrict the territories within

which dealers may resell merchandise which they have pur-

chased from the manufacturer or to keep one dealer from

yompeting for customers or sales in a territory or area served

by another dealer also constitutes a violation of the antitrust

laws, whether or not the territories resulting seem reasonable

unreasonab

or le.

“Theref if you find by a preponderance of the evidence

that Sylvania emared into a contract, combination or con-

spiracy with one or more of its dealers pursuant to which

Srlvania exercised dominion or control over the products

gold to the dealer, after having partcd with title and risk

to the products, you must find any effort thereafter to re-

strict 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

reasonableness e ion 1 wr

of the measother hand, on this question of territorial or cus

tomer restrictions, you are instructed that a manufacturer,

such as Sylvania, has a right, acting alone and are mgm

for its own business interests, to select its customers, an

for this purpose, the mannfacturer may grant an exclusive

‘franchise’ to certain dealers to whom, alone, he will sell

his products. Also, it is lawful for the manufacturer to

designate the location or locations of the place or places of

business for which said dealer or dealers are franchised.

It is also lawful for the manufacturer to decline or refuse

to grant s dealer's request for e franchise ot diftsrent or

additional locations.” [Tr. 3446 48]

Counsel for both Sylvania and Continental so under-

stood the instructions. In closing arguments Conti-

nental’s counsel told the jury that Sylvania had com-

mitted a per se violation of the Sherman Act if

Sylvania by conspiracy had imposed territorial or

price maintenance restrictions on the resale of prod-

ucts purchased from Sylvania.” Sylvania’s counsel

agreed, telling the jury that it was only required to

decide whether Sylvania had fixed prices or controlled

territories, which would be unlawful, or had fran-

chised by location, which would be lawful."

THE CONSPIRACY

It is sufficient if the arrangement or combination is

put together through the coercive tactics of the man-

ufacturer alone. Hobart Bros. Co. v. Malcolm T.

1*Continental’s counsel said:

“Ladies and Gentlemen, there are also types of antitrust

cases, which this is, which are so pernicious, the policies are

so pernicious to competition, so anti-competitive in their

impact on our economy that the law states there is no pos-

sible way to justify them. And, ladies and gentlemen, the

two restrictions involved in this case are such marketing,

distribution restrictions: Territorial restrictions and price

maintenance restrictions are whet lawyers and courts call

per se violations of the act if they are enforced by contract,

combination or conspiracy.

“So despite what Mr. Popofsky told you in his opening

argument, despite what Prof. Preston testified to on the

stand, the facts are that it is only necessary im this case to

find, number one, that Sylvania had a poliey by which it

restricted the territory in which and/or custemers to which

Continental could sell Sylvania products after it had pur-

chased them from Sylvania. :

“As a part of that distribution policy, Sylvania maintained

minimum prices

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