# Petition — Continental TV, Inc. v. GTE Sylvania Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0242%3A01 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1977 - **Citation:** 433 U.S. 36 ## Text "" L 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 ae 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) . 13 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, 14 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“ . 15 “ ..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. 16 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 17 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 18 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. 19 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 20 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) ). 21 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. 22 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). 3 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 4 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. 6 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 7 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. 8 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 10 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- 11 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 12 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? xX 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? xX 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 13 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 14 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. 15 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). 16 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- 17 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). 18 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). 19 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). 20 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). 21 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 22 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. 23 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 24 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 25 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 26 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, 27 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). 28 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). 29 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. 30 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 31 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. 32 ‘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. 33 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 34 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, a “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). 35 398, 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 36 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 37 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 38 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- 39 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). 40 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 41 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.” 42 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). 43 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.” é 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, 44 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- 45 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). 46 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). 47 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. 48 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. 49 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. = : © Sas Ob major justification offered for such restrictions is that they enable a manufacturer to obtain access to markets that 50 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). 51 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 t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0242%3A01. Public record. Not legal advice.