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BEBR
FACULTY WORKING
PAPER NO, 89-1551
The Sad Legacy of GTE SYLVANIA
and its 'Rule of Reason': The
Dealer Termination Cases and the
Demise of § 1 of the Sherman Act
THE LIBRARY OF THE
MAY 5 1989
:„ ...... j.' ! Ot ILLINOIS
....
Mark E. Roszkowski
College of Commerce and Business Administration
Bureau of Economic and Business Research
University of Illinois Urbana-Champaign
BEBR
FACULTY WORKING PAPER NO. 89-1551
College of Commerce and Business Administration
University of Illinois at Urbana- Champaign
April 1989
The Sad Legacy of GTE SYLVANIA and its 'Rule of Reason' :
The dealer Termination Cases and the Demise of 1 of the Sherman Act
Mark E. Roszkowski, Assocate Professor
Department of Business Law
Digitized by the Internet Archive
in 2011 with funding from
University of Illinois Urbana-Champaign
http://www.archive.org/details/sadlegacyofgtesy1551rosz
THE SAD LEGACY OF GTE SYLVANIA AND ITS "RULE OF REASON" :
THE DEALER TERMINATION CASES AND THE DEMISE
OF § 1 OF THE SHERMAN ACT
ABSTRACT
Since the Supreme Court's decision in Continental T. V. , Inc. v.
GTE Sylvania, Incorporated (1977), a "rule of reason" standard has
been applied to judge the legality under § 1 of the Sherman Act of
nonprice vertical restraints, also known as vertical market division
(territorial, customer, or location restrictions imposed upon whole-
salers or retailers in the distribution of a manufacturer's product).
This approach differs from the rule of "per se" illegality that long
has governed vertical price restraints (vertical price fixing, or
resale price maintenance). This article examines GTE Sylvania , its
rationale, its application, and its effect upon antitrust enforcement
under § 1 of the Sherman Act, particularly cases involving termination
by a common supplier of a price-cutting retail or wholesale dealer at
the request of a competing dealer. The article concludes that GTE
Sylvania should be overruled to impose a rule of "per se" illegality
for all vertical restraints of trade, price and nonprice.
Contents
I. Introduction 1
II. The Legal Standard Governing Nonprice Vertical
Restraints 6
A. Evolution of the Current Judicial Approach .... 6
B. Purported Justifications for Nonprice
Vertical Restraints 16
1. Economies of Scale
2. Necessary Promotion, Facilities, Services —
Free Riders 17
3. Historical Success 20
4. The Specter of Vertical Integration 22
5. Dealer Goodwill 23
III. The Rule of Reason as Currently Applied to Vertical
Restraints 24
A. Introduction 24
B. GTE Sylvania 's Conflict with Prior Law 26
C. GTE Sylvania 's Rule of Reason as Incapable
of Judicial Application 29
IV. A Discriminating Application of the Rule of
Reason to Vertical Restraints 32
A. Harm to Competition 32
B. The Purpose of the Restraint 34
C. Less Restrictive Alternatives 37
D. Conclusion 39
V. The Sad Legacy of GTE Sylvanla — The Dealer
Termination Cases 40
A. Monsanto 41
1. The Error of Monsanto — Mischaracterization
of Horizontal as Vertical 45
2. The Error of Monsanto — Abrogation of the
Jury Function 49
B. Business Electronics 54
VI. The Sad Legacy of GTE Sylvania — The Demise of
§ 1 of the Sherman Act 63
VII. Conclusion 66
I. Introduction
Section 1 of the Sherman Act, the foundation of United States
antitrust law for almost a century, provides in relevant part that
"every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several
States, or with foreign nations, is declared to be illegal." As the
primary tool of antitrust enforcement, § l's basic proscription is
2
backed by a battery of criminal and civil sanctions including private
actions for treble damages available to "any person who shall be in-
jured in his business or property by reason of anything forbidden in
the antitrust laws."
Restraints of trade governed by the Sherman Act are traditionally
classified as horizontal or vertical. The term "horizontal" restraint
generally refers to loose knit agreements or combinations among com-
petitors (that is, persons at the same functional level) to achieve a
wide variety of anticompetitive results such as price fixing, division
of markets by territories or otherwise, and coercive elimination of
competitors by concerted conduct. The terra "vertical" restraint
refers to an agreement or combination among persons standing in a
buyer-seller or supplier-supplied relationship; that is, among persons
at different functional levels. Vertical restraints, unlike hori-
zontal restraints, often are imposed as part of express contract (such
as a franchise agreement) between the parties, and usually are char-
acterized as either "price" or "nonprice." The result of a vertical
price restraint (known also as "vertical price fixing," "resale price
maintenance," or "RPM") is to control or otherwise affect the price at
-2-
which the buyer (usually a wholesaler or retailer) resells the goods.
For example, a manufacturer of loudspeakers might sell its products to
a retailer only on condition that the retailer resell the speakers to
its customers only at prices set by the manufacturer. In contrast,
vertical nonprice restraints (known also as "vertical market division")
generally limit the territories within which a distributor or retailer
may resell the manufacturer's product (a "territorial" restriction),
the place or places of business from which the buyer may resell (a
"location" restriction), or the types of customers to whom the buyer
may resell (a "customer" restriction). All vertical restraints,
price or nonprice, are designed to restrict or eliminate intrabrand
competition; competition among dealers in a manufacturer's product for
the same customers.
In judging the legality of both horizontal and vertical restraints
under § 1, the basic standard is the "rule of reason" announced in
Standard Oil Company of New Jersey v. United States (1911). Under
the rule of reason standard, the Sherman Act does not condemn all
trade restraints, which would include those imposed by ordinary
contracts. Rather, § 1 condemns only those restraints that unreason-
ably restrain competition. In applying this rule of reason, the court
must undertake an often lengthy and detailed analysis of: (1) the harm
to competition resulting from the challenged restraint; (2) whether
the restraint achieves any countervailing legitimate and significant
procompetitive objectives; and (3) whether the legitimate objectives
of the restraint can be achieved by alternative methods less restric-
tive of competition.
-3-
Although reasonableness is the basic standard by which all § 1
violations are judged, courts use two approaches to determine reason-
ableness. In most cases, the court, in applying the three-part rule
of reason standard, permits the defendant to introduce evidence of
the reasonableness of the restraint to avoid a violation. The Supreme
Court has, however, declared that certain specific practices or busi-
ness relationships are so inherently destructive of competition that
they are unreasonable per se; that is, "conclusively presumed to be
unreasonable and therefore illegal without elaborate inquiry as to
the precise harm they have caused or the business excuse for their
use." The defendant is not permitted to justify conduct in the per
se category because the Court has already determined, through consider-
able experience with the practice or device, that it has no purpose
other than to destroy or stifle competition. Per se rules simplify
enforcement of the Act, and reduce the length of litigation because
the plaintiff is not required to refute the defendant's justification.
Per se rules also provide greater predictability and therefore greater
deterrence against conduct the law finds particularly offensive. Per
se illegality has been imposed, on a case by case basis, on a variety
Q
of horizontal conduct, such as price fixing. Similarly, vertical
price fixing (resale price maintenance) has been per se illegal under
§ 1 since the Supreme Court's classic 1911 decision, Dr. Miles Medical
Q
Company v. John D. Park & Sons Co. In contrast, since the Supreme
Court's decision in Continental T.V. , Inc. v. GTE Sylvania Incorporated
(1977) (hereinafter GTE Sylvania ), the legality under § 1 of nonprice
vertical restraints imposed upon dealers in the distribution of a
-4-
manufacturer's product is to be judged under a rule of reason rather
than "per se" analysis.
This paper examines GTE Sylvania , its rationale, its application,
and the effect the decision has had on antitrust enforcement under
§ 1, particularly the law governing termination by a common supplier
of a price cutting retail or wholesale dealer at the request of another
dealer. Though apparently unrelated to the issue addressed in GTE
Sylvania (whether a location restriction in a franchise agreement
should be governed by per se or rule of reason analysis), GTE Sylvania
is the basis of the two recent decisions outlining the current Supreme
Court approach to price related dealer terminations: Monsanto Company
v. Spray-Rite Service Corporation (1984) and Business Electronics
12
Corporation v. Sharp Electronics Corporation (1988).
Monsanto significantly increased the plaintiff's burden of proof
in price related dealer termination cases by holding that an illegal
price-fixing conspiracy may not be inferred merely from the existence
of competing dealers' complaints about price cutting or even from the
fact that plaintiff's termination came about in response to such
complaints. Rather, the plaintiff must adduce evidence "that tends to
exclude the possibility that the manufacturer and nonterminated
13
distributors were acting independently." In Business Electronics , a
case, like Monsanto , involving termination by a supplier of a price
cutting dealer at the request of another dealer, the court held that
an agreement between a manufacturer and a dealer to terminate a second
dealer is a per se § 1 Sherman Act violation only if the surviving
14
dealer expressly or impliedly agrees to set its prices at some level.
-5-
Collectively, these decisions and the lower court decisions apply-
ing them clearly indicate the bankruptcy of GTE Sylvania and its rule
of reason standard. GTE Sylvania is responsible for a dealer termina-
tion law that: is based upon a narrow and erroneous assumption re-
garding the basic purpose of antitrust law; glorifies but confuses the
essentially artificial distinction between price and nonprice vertical
restraints; and erroneously characterizes blatantly horizontal conduct
as vertical. GTE Sylvania has further created a business climate: in
which virtually any restraint of trade that arguably can be char-
acterized as "vertical," except the barest and most blatant forms of
resale price maintenance, is per se legal ; in which a group of inde-
pendent dealers in a manufacturer's product can with impunity conspire
to divide the markets and fix the prices for those products; and in
which dealers who refuse to go along with these effectively horizontal
intrabrand conspiracies may be terminated by the manufacturer, who may
act openly and with virtual immunity from antitrust scrutiny or
liability. In sum, current dealer termination law, grounded upon GTE
Sylvania ' s rule of reason, is a toothless legal standard, providing a
blank check for coercion and exclusionary behavior by powerful dealers
openly policed by manufacturers, which is structurally designed to
make it difficult if not impossible for injured private plaintiffs to
recover.
Part II of this paper analyzes the evolution of the legal standard
governing nonprice vertical restraints, and the purported procompeti-
tive justifications for such restraints. Parts III and IV indicate
how the rule of reason is applied under GTE Sylvania , and contrasts
-6-
its approach to the results dictated by a more traditional, and dis-
criminating, application of the rule of reason. Parts V and VI
analyze the debilitating effect that GTE Sylvania 's rule of reason has
had upon the law governing price related dealer terminations, and,
more generally, upon all antitrust enforcement under § 1 of the
Sherman Act. This paper concludes that the current judicial approach
to vertical nonprice restraints must be dramatically changed. Rather
than eliminating or further diluting the long-standing per se rule
against vertical price restraints, as some have suggested to comport
with GTE Sylvania , GTE Sylvania itself should be overruled to restore
a rule of "per se" illegality for all vertical restraints of trade,
price and nonprice. Further, the liberal evidentiary standards
regarding proof of conspiracy traditionally applicable to § 1 Sherman
Act violations also should be applied in dealer termination cases.
II. The Legal Standard Governing Nonprice
Vertical Restraints
A. Evolution of the Current Judicial Approach
The legal principles governing nonprice vertical restraints are
of fairly recent vintage, being primarily derived from three Supreme
1 £
Court cases: White Motor Company v. United States (1963), United
States v. Arnold, Schwinn &_ Co. (1967), and Continental T.V. , Inc.
1 o
v. GTE Sylvania, Incorporated (1977). Take careful note of the
judicial approach in Schwinn because rejecting the so-called "Schwinn
doctrine" is the basis of the court's holding in GTE Sylvania .
In White Motor , White Motor Company, a manufacturer of trucks and
parts, sold its products to distributors, dealers, and directly to
-7-
certain various large users. The government challenged White's
imposition of both territorial and customer restrictions on its
distributors and dealers alike. Under the territorial clause, the
buyer was granted the exclusive right to sell in a described terri-
tory. Each buyer also agreed to sell only to "individuals, firms, or
corporations having a place of business and/or purchasing headquarters
in said territory." Dealers and distributors also agreed not to sell
to the federal or any state government or departments or political
subdivisions thereof, because White planned to serve these lucrative
accounts itself. Thus, by vertical restriction White effected a
territorial division of markets among its wholesalers and dis-
tributors, who were effectively precluded from raiding each other's
territories by the customer location requirement. Clearly such an
arrangement would be "per se" illegal if the result of horizontal
19
combination between the distributors or dealers. Further, White
insulated itself from competition from its buyers for the fleet
accounts. The trial court declared the restrictions illegal "per se,"
refusing to hear evidence in justification, and granted summary
judgment for the government. The Supreme Court reversed and remanded
the case for trial, noting that "this is the first case involving a
territorial restriction in a vertical arrangement; and we know too
little of the actual impact of both that restriction and the one
respecting customers to reach a conclusion on the bare bones of the
20
documentary evidence before us." Thus, White Motor did not articu-
late the standard applicable to territorial and customer restrictions.
It did not declare them "per se" illegal nor did it say a rule of
-8-
reason standard governs. The court simply stated that it did not know
enough about the competitive impact of the restraints to assign them
to one rule or the other. It therefore remanded the case for trial.
Justice Clark, in a dissenting opinion joined by Chief Justice
Warren and Justice Black, strongly disagreed with the majority noting
that
I believe that these "bare bones" really lay bare
one of the most brazen violations of the Sherman
Act that I have experienced in a quarter of a
century .21
Justice Clark argued that White Motor justified its contracts as the
only feasible way to compete effectively with bigger and more powerful
competitors, a "business necessity" argument long rejected in anti-
trust cases. - Further, the agreements completely eliminated competi-
tion among White dealers and should not be permitted simply because
they are vertical:
White does not contend that its distribution
system has any less tendency to restrain compe-
tition among its distributors and dealers than
a horizontal agreement among such distributors
and dealers themselves. It seems to place some
halo around its agreements because they are
vertical. But the intended and actual effect
is the same as, if not even more destructive
than, a price-fixing agreement or any of its
per se counterparts. This is true because
price-fixing agreements, being more easily
breached, must be continually policed by those
forming the combination, while contracts for a
division of territory, being easily detected,
are practically self-enforcing. . . .
The Court says that perhaps the reason-
ableness or the effect of such arrangements
might be subject to inquiry. But the rule of
reason is inapplicable to agreements made
solely for the purpose of eliminating compe-
tition. . . . The same rule applies to the
contracts here. The offered justification
-9-
must fail because it involves a contention
contrary to the public policy of the Sherman
Act, which is that the suppression of competi-
tion is in and of itself a public injury. To
admit, as does the petitioner, that competi-
tion is eliminated under its contracts is,
under our cases, to admit a violation of the
Sherman Act. No justification, no matter how
beneficial, can save it from that interdiction. - J
The White Motor case subsequently was settled by consent decree
under which the manufacturer abandoned its distribution scheme.
Accordingly, the case left considerable doubt concerning the proper
standard to be applied to nonprice vertical distribution restraints.
This doubt was temporarily removed four years later in Schwinn . In
this case, the government attacked Schwinn' s complex and restrictive
bicycle distribution plan. The plan, adopted in 1952, was designed to
"promote sales, increase stability of its dealer and distributor
outlets, and augment profits." Although Schwinn' s share of the
bicycle market fell between 1951 and 1961 from 22.5% to 12.8%, its
dollar amount sales rose substantially. The particulars of the chal-
lenged system were as follows. Initially, Schwinn reduced the number
of retail outlets from 15,000 to 5,500, and instituted a practice of
franchising approved retail dealers. Schwinn distributors and re-
tailers were not required to handle only Schwinn bicycles. They
could and ordinarily did carry a variety of brands. Schwinn dis-
tributed its bicycles in three ways: (1) direct sales to wholesale
distributors, (2) sales to retailers through consignment or agency
arrangements with distributors, and (3) sales to retailers under the
so-called "Schwinn plan," involving direct shipment by Schwinn to the
retailer with Schwinn billing the dealer, extending credit, and paying
-10-
a commission to the distributor taking the order. Under this plan
the distributor acted essentially as a manufacturer's representative
or sales agent, forwarding retailer's orders to the factory. Under
this plan, the distributor never had title to or possession of the
bicycles. Approximately 75 percent of all Schwinn sales were made
under the "Schwinn plan."
In this context, Schwinn imposed a number of restrictions chal-
lenged by the government. The number of retail dealers was limited
and retailers were franchised only as to a designated location or
locations. Each dealer was authorized to purchase only from or
through the distributor authorized to serve that area. Further, re-
tailers were allowed to sell only to consumers, not to an unfranchised
dealer, such a discount department store. That is, dealers were not
allowed to act as wholesalers. To supply these retailers, Schwinn
assigned specific exclusive territories to each of its 22 dis-
tributors, who were authorized to sell only to franchised Schwinn
dealers in their respective territories. The myriad territorial,
customer, and location restraints in this case effectively insulated
both Schwinn distributors and dealers from intrabrand competition at
either functional level. That is, Schwinn, by vertical action, had
effected a territorial market division among both its wholesalers
and retailers. Clearly, a horizontal agreement accomplishing this
result would be "per se" illegal.
The court however refused to characterize the arrangement as a
dealer or wholesaler cartel, but instead viewed it as wholly vertical
-11-
and adopted the following standard, later designated the "Schwinn
doctrine," to test the legality of vertical nonprice restraints:
[T]he proper application of § 1 of the Sherman
Act to this problem requires differentiation be-
tween the situation where the manufacturer parts
with title, dominion, or risk with respect to the
article, and where he completely retains ownership
and risk of loss.
As the District Court held, where a manu-
facturer sells products to his distributor subject
to territorial restrictions upon resale, a per se
violation of the Sherman Act results. And, as we
have held, the same principle applies to restric-
tions of outlets with which the distributors may
deal and to restraints upon retailers to whom the
goods are sold. Under the Sherman Act, it is
unreasonable to seek to restrict and confine areas
or persons with whom an article may be traded after
the manufacturer has parted with dominion over
it. . . . Such restraints are so obviously destruc-
tive of competition that their mere existence is
enough. If the manufacturer parts with dominion
over his product or transfers risk of loss to another,
he may not reserve control over its destiny or the
conditions of its resale. ... On the other hand,
as indicated in White Motor , we are not prepared to
introduce the inflexibility which a per se rule might
bring if it were applied to prohibit all vertical
restrictions of territory and all franchising, in
the sense of designating specified distributors and
retailers as the chosen instruments through which
the manufacturer, retaining ownership of the goods,
will distribute them to the public. Such a rule
might severely hamper smaller enterprises resorting
to reasonable methods of meeting the competition of
giants and of merchandising through independent
dealers, and it might sharply accelerate the trend
towards vertical integration of the distribution pro-
cess. But to allow this freedom where the manufacturer
has parted with dominion over the goods — the usual
marketing situation — would violate the ancient rule
against restraints on alienation and open the door
to exclusivity of outlets and limitation of territory
further than prudence permits. ^
Thus, in Schwinn the court held that vertical nonprice restrictions
imposed in conjunction with the sale of goods were "per se" illegal
-12-
but that the same restrictions if used in an agency or consignment
arrangement (such as the "Schwinn plan") were governed by a rule of
reason approach. Applying this standard to the facts, the court
validated the restrictions on bicycles sold under the "Schwinn plan"
finding that the restrictions were reasonably necessary to meet the
competitive problems posed by mass merchandisers such as Sears,
Roebuck or Montgomery-Ward, thus satisfying the rule of reason. With
respect to the portion of Schwinn' s sales for which the distributors
acted as ordinary wholesalers, buying and reselling Schwinn bicycles,
the court held that the challenged territorial and customer restric-
tions were "per se" illegal.
The holding in Schwinn was harshly criticized for making the
legality of vertical nonprice restraints turn upon whether a sale or
nonsale transaction is involved, a distinction viewed by many as
artificial and forraalistic, bearing no relationship to competitive
25
effect. It also is arguably inconsistent with the court's previous
refusal in Simpson v. Union Oil (1964) to allow consignment as a
means to impose resale price maintenance (vertical price restric-
tions). Supporters of Schwinn , however, assert that it recognizes a
legitimate distinction: the degree of vertical integration. Assuming
a legitimate consignment arrangement involving significant integra-
tion, rather than the sham outlined in Simpson , a consigner assumes
risks not undertaken by an outright seller, such as risk of loss,
insurance, taxes, and credit. Thus, when the retailer or wholesaler
acts merely as an agent or representative of the manufacturer, it is
arguable that the seller should be able to exert more control over the
-13-
disposition of the goods than in cases when the wholesaler or retailer
27
purchases and assumes the attendant risks.
Whether the "Schwinn doctrine" recognizes a legitimate distinc-
tion, however, is now moot because Schwinn was explicitly overruled in
1977 in GTE Sylvania . In this case, Sylvania, a manufacturer of
television sets, sold directly to franchised retail dealers. The
franchise agreement contained a location clause, allowing the fran-
chisee to sell only from a designated location or locations. The
agreement did not grant territorial exclusivity to franchisees (that
is, Sylvania was free to license new dealers in competition with an
existing franchisee), but did not preclude them from selling competing
brands. The case arose when Sylvania franchised Young Brothers, an
established San Francisco television retailer, as an additional retail
outlet one mile from Continental T.V., one of Sylvania's most success-
ful franchised dealers. In displeasure over Sylvania's decision,
Continental cancelled a large order, and indicated an intent to begin
selling Sylvania televisions in Sacramento, in violation of the
location restriction. Upon termination of the franchise, Continental
sued Sylvania challenging the legality of Sylvania's location clause
under § 1 of the Sherman Act. The district court, relying upon
Schwinn , instructed the jury that by seeking to restrict the locations
from which Continental could sell Sylvania products, Sylvania had
committed a per se violation of § 1 of the Sherman Act. The jury
found that the location restriction violated § 1 and the Court of
28
Appeals reversed, ' distinguishing Schwinn and holding that because
Sylvania's location clause had less potential for competitive harm
-14-
than the restrictions proscribed in Schwinn , they should be judged
under a rule of reason rather than "per se" standard. The Supreme
Court granted certiorari to reexamine the legal standard applicable to
nonprice vertical restraints. Note that because title to the tele-
visions had passed to Continental, strict application of Schwinn would
have required a finding that the challenged restriction was "per se"
illegal.
After reviewing Schwinn , the Court noted that:
The market impact of vertical restrictions is com-
plex because of their potential for a simultaneous
reduction of intrabrand competition and stimulation
of interbrand competion. . . .
Vertical restrictions promote interbrand compe-
tition by allowing the manufacturer to achieve cer-
tain efficiencies in the distribution of his
products. Economists have identified a number of
ways in which manufacturers can use such restric-
tions to compete more effectively against other
manufacturers. . . . For example, new manufacturers
and manufacturers entering new markets can use the
restrictions in order to induce competent and ag-
gressive retailers to make the kind of investment
of capital and labor that is often required in the
distribution of products unknown to the consumer.
Established manufacturers can use them to induce
retailers to engage in promotional activities or to
provide service and repair facilities necessary to
the efficient marketing of their products. Service
and repair are vital for many products, such as
automobiles and major household appliances. The
availability and quality of such services affect a
manufacturer's goodwill and the competitiveness of
his product. Because of market imperfections such
as the so-called "free rider" effect, these services
might not be provided by retailers in a purely com-
petitive situation, despite the fact that each
retailer's benefit would be greater if all provided
the services than if none did. 29
-15-
The Court therefore concluded that:
[T]he distinction drawn in Schwinn between sale and
nonsale transactions is not sufficient to justify
the application of a per se rule in one situation
and a rule of reason in the other.
. . . [Vertical] restrictions, in varying forms,
are widely used in our free market economy. As
indicated above, there is substantial scholarly and
judicial authority supporting their economic utility.
There is relatively little authority to the contrary.
Certainly, there has been no showing in this case,
either generally or with respect to Sylvania's agree-
ments, that vertical restrictions have or are likely
to have a "pernicious effect on competition" or that
they "lack . . . any redeeming virtue." Accordingly,
we conclude that the per se rule stated in Schwinn
must be overruled. In so holding we do not foreclose
the possibility that particular application of vertical
restrictions might justify per se prohibition . . .
But we do make clear that departure from the rule-of-
reason standard must be based upon demonstrable eco-
nomic effect rather than — as in Schwinn — upon
formalistic line drawing.
In sura, we conclude that the appropriate decision
is to return to the rule of reason that governed
vertical restrictions prior to Schwinn . When anti-
competitive effects are shown to result from particular
vertical restrictions they can be adequately policed
under the rule of reason, the standard traditionally
applied for the majority of anticompetitive practices
challenged under § 1 of the Act. 30
In short, vertical nonprice restraints, unlike vertical price
restraints (resale price maintenance) are now governed by a rule of
reason rather than "per se" standard. Whether such preferred treat-
ment is justified is questionable. By definition, vertical re-
straints, price and nonprice, reduce or eliminate intrabrand competi-
tion. That is, all vertical restraints restrict in some manner the
ability of the buyers to compete among themselves for the trade in the
manufacturer's product. Any argument made in favor of nonprice
vertical restrictions also can be used to justify resale price main-
tenance, long a per se Sherman Act violation. Further, although
-16-
vertical nonprice restrictions do not fix resale prices, they always
eliminate or significantly reduce competition, including price
competition, among dealers governed by the restrictions. That is, by
insulating (territorially or by customers) dealers who might otherwise
compete in the sale of a product, vertical nonprice restrictions may
indirectly achieve resale price maintenance. In addition, because
vertical nonprice restraints obviously restrict intrabrand competi-
tion, sound antitrust policy requires that any argument against
treating territorial, customer, or location restrictions as per se
31
violations must be based on some offsetting benefit to competition.
As noted by the Court in GTE Sylvania , this offsetting benefit is
enhanced interbrand competition — the ability of manufacturers who use
the restrictions in distributing their products to compete more
effectively against other manufacturers. The following material
examines the purported interbrand benefits of nonprice vertical
restraints.
B. Purported Justifications for Nonprice Vertical Restraints
1 . Economies of Scale
One argument supporting manufacturer imposed territorial restraints
is that without them, some competing dealers would raid other dealers'
territories, depriving them of the minimum volume necessary to operate
efficiently. Commentators have identified at least three flaws in
this argument. First, its premise of an administered economy is
fundamentally at odds with the concept of competition envisaged by the
Sherman Act. That is, the economies of scale argument assumes the
-17-
manufacturer , rather than the numerous competing retailers, should
decide the character of competition at the retail level. As noted by
Professor Sullivan:
Competition calls not for peace and order, but for
vigor and danger to be the rule of trade. It en-
visages decisions about price, scale and other
important matters being made by numerous competing
traders, some of whom will judge right and some of
whom will judge wrong. It does not call for a mono-
lithic, untested judgment about the appropriate
scale for retail operations made by the manu-
facturer acting as a "manager" of all the units
in the economy handling his product, but for a
public judgment proved in the marketplace, where
the dealer bets his capital that he knows what he
is doing and the consumer votes with his purchasing
power to tell the dealer whether he is right or
wrong. 32
In addition, the economy of scale argument breaks down factually in
virtually every case. For example, in the most common case in which a
dealer carries products of a number of manufacturers, a dealer's
minimum efficient scale is not likely to be fixed by reference to the
33
scope of territorial protection offered by one manufacturer. In
addition,
[A] manufacturer making territorial assignments has yet
to present evidence that it studied retail operations
In order to determine the most efficient scale, or
even developed by intuition norms about scale which
it consistently applied. Thus the supposed theoret-
ical merits of the "economies of scale" argument as
a justification for territorial resale restrictions
never seem to be manifested in the marketplace. 34
2. Necessary Promotion, Facilities or Services — Free Riders
Proponents of vertical market division also assert that dealer
territorial protection is necessary to induce dealers to supply pre-
sale demonstration, promotion, or other informational services. As
-18-
explained in the U.S. Department of Justice Vertical Restraints Guide-
lines
[L]imiting the number of distribution outlets may be
the most efficient method of insuring the provision
of pre-sale demonstration and other informational
services that consumers want and that are necessary
to effective marketing of a technically complex
product. In those circumstances, in the absence
of vertical restraints a dealer may invest too
little in such services because other dealers that
do not provide the services may "free ride" on the
services that the dealer has provided. By reducing
the threat of free-riding, vertical restraints may
enable a dealer to capture a significant fraction
of the increase in total demand that is generated
by his investment in informational services and,
therefore, encourage dealers to expend the effort
required to provide those services. 35
This argument, like the economies of scale argument, assumes that the
manufacturer rather than the market, should determine the appropriate
mix of price and service available at the retail level:
The most comprehensive response to arguments
like this is that competition should be the device
which determines what the public really needs or
wants. Take the claim that display facilities are
needed. If the public prefers expensive shopping
amenities to lower prices, it will pay the higher
prices to have the greater amenities. If this is
really what the public wants, a dealer which bets
its capital that it can sell more by lowering prices
and skipping the frills will either find that it
makes less return on investment than it could by
providing display facilities, or will fail entirely.
Other dealers will continue providing showrooms only
if it pays them to do so. If sizable numbers of
customers use the display facilities of the high-
priced dealer to shop and then buy from the low-
priced dealer, the high-priced dealer will respond
by cutting its display services and its prices.
This is what should happen. If the public gen-
erally, or some significant segment of it, would in
fact prefer to skip the amenities and pay the lower
price, and if some dealer is ready to risk its capital
on a judgment that this is so, it would be a grave
•19-
distortion of the competitive process to allow the
manufacturer to impose on all concerned its narrower
conception of an orderly market. 3°
In addition, the mere existence of the free rider "problem" is open to
debate. As noted in the Vertical Restraints Guidelines promulgated by
the National Association of Attorneys General "the free ride phenomenon
is much disputed among economists, especially with regard to certain
37
products where servicing or product enhancement is highly unlikely."
The existence of the free rider problem also is disputed by industry
o o
sources. In addition, Professor Coraanor has noted that the free
rider theory does not apply if the product and services can be sold
separately. Nor does the theory apply to post sale services, such as
delivery, repair and instructions on proper use of the product, be-
cause consumers are unlikely to be able to buy the product from one
39
dealer and obtain these services from another.
In addition, to the extent a free rider problem exists, it can be
remedied by devices that are far more effective, and simultaneously
less restrictive to intrabrand competition than vertically imposed
airtight territorial insulation of dealers, "Draconian responses
which, in effect, could convert a major segment of the economy into a
mere pipeline." For example
[M]any point-of-sale activities sought by the manu-
facturer — for example, warranty service or other
product service — can be individually priced, rather
than tied to product sales. The free-rider is then
foreclosed by the pricing system. Others — for
example, point of sale promotion or advertising —
can be paid for in whole or part by the manufacturer
through "co-op" programs or the like. Others —
full line displays, for example — can be mandated
by the manufacturer as a condition for continued
dealing without imposing other vertical restraints
-20-
that may reduce price competition or product or
service variety competition in other respects. And
if some dealer separation is also needed, it need
not be airtight. Primary responsibility, promotion
payment pass over, or other such devices, reasonably
calculated to meet the specific problem can be
used. 41
3. Historical Success
Vertical restraints are often justified on the grounds that (1)
firms using them have succeeded in holding or increasing market share
in the face of competition from larger rivals, (2) consumer prices
have dropped in industries in which vertical market division is
used, or (3) firms which are adversely affected by vertical market
division, such as discount stores and catalog showrooms, have thrived
despite the use of vertical nonprice restraints. This "historical
success" argument in its various forms is among the flimsiest support-
ing vertical market division. First, it erroneously assumes a direct
44
correlation between size of market share and commercial success.
As Professor Sullivan notes:
The non sequitur is manifest; there is on the face
of the matter no basis for inferring that the firm
with 10, 15 or 20 percent of the market is earning
greater returns on invested capital than is the
firm with 6, 4 or 2 percent. Absent a claim that
aggregate volume at these lower levels is below the
most efficient scale, data about the percentage of
the market held is simply not relevant to the ques-
tion of whether profits are adequate. ^
Second, the success argument equates the manufacturer's interest with
the public interest.
[A]ctually, if a given manufacturer could prosper
only when there are anticompetitive props insul-
ating its dealers from intrabrand competition, it
-21-
may well be that the manufacturer's prosperity
indicates a less than optimum allocation of re-
sources .^6
Third, and perhaps most importantly, historical success is simply
irrelevant to the issue whether the vertical market division either
is pro-competitive or in fact caused the claimed success. For example,
an electronics industry representative recently asserted that "since
the GTE Sylvania decision, color TV prices have dropped more than 10
47
percent." This statement proves nothing. Color TV prices are
affected by a wide variety of variables, which may or may not include
the effects of restricted distribution policies adopted by some
manufacturers. In addition, the statement provides no basis for
asserting that GTE Sylvania benefits consumers. Without it, consumer
electronics prices might have dropped far more. Conversely, the dis-
count trade industry, which has admittedly flourished in the years
since GTE Sylvania was decided, might have expanded even faster. The
GTE Sylvania case itself also is instructive. In that case, Professor
Preston, Sylvania's expert witness, admitted that there was no neces-
sary connection between the use of a location clause and Sylvania' s
ability to maintain its market share, that there were many other
reasons (new management, increased product quality, promotion and
advertising) besides the location practice that could explain
Sylvania' s market share, and most importantly that it is impossible
to specify given the present state of economic analysis, the impact of
changes at the retail level on competition at the manufacturing
level. 48
-22-
4. The Specter of Vertical Integration
Perhaps the most specious argument supporting vertical restraints
is the prospect of substantial vertical integration by manufacturers
into retailing if such restraints are proscribed. Justice Scalia, in
Business Electronics , provided a classic formulation:
[T]he per se illegality of vertical restraints would
create a perverse incentive for manufacturers to
integrate vertically into distribution, an outcome
hardly conducive to fostering the creation and
maintenance of small businesses. ^
This argument ignores economic reality. As eloquently noted by Judge
Browning in his dissent in the Ninth Circuit's decision in GTE
Sylvania :
"Predictions of vertical integration" because of
antitrust condemnation of vertical restrictions "have
proved to be remarkably unreliable in the past." It
is unlikely that they would be more reliable in this
instance. Producers distribute through independent
dealers rather than through their own employees be-
cause it is economically advantageous to do so.
Vertical integration by a producer into retail dis-
tribution is particularly uneconomic. Distribution
is a relatively low profit activity. Both capital
and operating costs are high. The product "mix" re-
quired in most retail operations cannot be furnished
by a single producer: "Nobody is going to set up a
distribution system to sell toothpaste, no matter
what the antitrust laws say." . . . Moreover, inde-
pendent businessmen often bring to distribution
qualities such as a "sense of responsibility, indus-
triousness, attention to costs and desire to earn a
profit," which are not ordinarily found in salaried
employees. Finally, franchising offers significant
advantages in avoiding local labor problems, admin-
istrative burdens, and a variety of additional
taxes. These substantial economic advantages of
franchising will remain even if producers are pre-
vented from dictating the territory in which inde-
pendent dealers resell. The only reasonable predic-
tion, therefore, is that if the district court were
affirmed in this case, producers would continue to
distribute through independent dealers rather than
integrate forward. ^0
-23-
In addition, the "specter of vertical integration" argument assumes
erroneously that vertical integration is somehow bad in itself or that
vertical integration is less efficient than distribution through inde-
pendent franchised retailers. But as Judge Browning noted:
The majority's suggestion that elimination of
territorial restrictions might lead to the creation
of large franchisees with several outlets, and that
this result would be undesirable is nothing more
than an argument against competition. Chain stores
cannot be prohibited in the name of free competition.
If chain franchisees succeed in free competition
among independent businessmen making their own
decisions, and without predatory conduct, neither
the letter nor spirit of the Sherman Act will be
of fended. 51
5. Dealer Goodwill
Vertical market division is often justified as promoting dealer
goodwill and encouraging dealer selling effort, thereby promoting
interbrand competition. But, as Professor Sullivan notes:
We may assume, in general, that the more competition
a dealer faces, the more vigorous will that dealer
be obliged to be; and this holds true whether the
competition is interbrand or intrabrand. A dealer
worried about losing even those buyers with some
pre-coramitment to its brand will hustle more
earnestly than a dealer free of intrabrand competi-
tion and which must worry about losing only those
prospective customers who lack a clear preference
for the brand. "Effort" is encouraged not by
freeing a dealer from important competition pres-
sures, but by subjecting each dealer to whatever
competitive pressure the market generates. 52
Given the insubstantial nature of the arguments supporting vertical
market division, one might assume that few such arrangements survive
the rule of reason scrutiny mandated by GTE Sylvanla . In fact, how-
ever, because of the curious and unprecedented character of the "rule
-24-
of reason" analysis apparently sanctioned by GTE Sylvania , few nonprice
vertical restraints now violate the law. The current approach to rule
of reason analysis of vertical nonprice restraints is outlined below,
followed by a discussion indicating how the rule of reason ought
properly be applied in such cases.
III. The Rule of Reason as Currently
Applied to Vertical Restraints
A. Introduction
As previously noted, the "rule of reason" is the basic standard
used to judge violations of § 1 of the Sherman Act; that is, only
53
unreasonable restraints of trade are proscribed. In most cases,
therefore, the rule of reason requires an often elaborate judicial
inquiry to determine whether the challenged practice unreasonably
suppresses competition. The Supreme Court has, however, declared that
certain specific practices or business relationships are so inherently
destructive of competition that they are unreasonable "per se"; that
is, they are "conclusively presumed to be unreasonable and therefore
illegal without elaborate inquiry as to the precise harm they have
caused or the business excuse for their use." Per se illegality has
been imposed, on a case by case basis, on a variety of conduct
including horizontal price fixing, vertical price fixing (resale
price maintenance), group boycotts, certain tying arrangements,
59
and horizontal market division.
In applying the rule of reason, Professor Areeda has suggested
that virtually all courts apply a three-part analysis
-25-
(1) What harm to competition results or may
result from the collaborators' activities? (2)
What is the object they are trying to achieve and
is it a legitimate and significant one? That is,
what are the nature and magnitude of the "redeeming
virtues" of the challenged collaboration? (3) Are
there other and better ways by which the collab-
orators can achieve their legitimate objectives with
fewer harms to competition? That is, are there
"less restrictive alternatives" to the challenged
restraint? 60
Regarding whether different standards should apply under the "rule of
reason" to horizontal and vertical restraints, Professor Areeda notes
Although many vertical arrangements have char-
acteristics distinguishing them in important ways
from the bulk of horizontal arrangements, horizontal
and vertical restraints do not always threaten com-
petition in different ways, or call for different
analysis. The horizontal-vertical classification is
often helpful and convenient. But there is no need
to define watertight and mutually exclusive classes
of restraints. Whether horizontal or vertical, the
question is always one of competitive effects and
redeeming virtues. The horizontal-vertical distinc-
tion is relevant only insofar as it bears on the
assessment of competitive evils or justifications. °1
Professor Areeda explains the respective proof burdens of the parties
under the rule of reason as follows:
To avoid dismissal, the plaintiff must allege that
competition in a specified market has been restrained.
To avoid adverse summary judgment, he must show that
there are disputed material facts on that question.
If such a restraint is shown, the burden passes to
the defendant to offer evidence that a legitimate
objective is served by the challenged behavior.
That justification will be lost if the plaintiff
shows that it can be achieved by a substantially
less restrictive alternative. By this stage of the
controversy, most cases will be resolved. If not,
the harms and benefits must be balanced to reach a
net judgment whether the challenged behavior is, on
balance, reasonable. The plaintiff bears the burden
of persuading the tribunal that an unreasonable re-
straint exists. 62
-26-
As previously discussed, vertical market division schemes, under
GTE Sylvania , are now governed by the rule of reason. One might
assume, therefore, that the three-part harms-benefits-alternatives
test used in virtually every other antitrust context, would be used
to judge vertical market division. In fact, however, such an approach
is not used because of the curious balancing test apparently author-
ized by GTE Sylvania . The sole justification for the GTE Sylvania
holding is that the obvious reduction or elimination of intrabrand
competition inherent in vertical market division, may be offset by a
corresponding stimulation of interbrand competition. GTE Sylvania
therefore requires that courts, in judging legality, balance any
apparent harm to intrabrand competition against any claimed benefit
to interbrand competition. This approach, as developed below, has two
fatal flaws: (1) its basic premise has been categorically rejected in
every other antitrust context in which it has been raised; and (2) it
is incapable of discriminating judicial application and virtually
assures victory to the defendant.
B. GTE Sylvanla T s Conflict with Prior Law
The skewed "rule of reason" analysis adopted in GTE Sylvania
embodies a principle consistently rejected in other antitrust contexts:
that courts should (or indeed are able to) balance anticompetitive
effects of a restraint in one market against allegedly procompetitive
effects in another to determine legality. For example, in the land-
mark horizontal merger case, United States v. Philadelphia National
Bank (1963), the Justice Department sought to enjoin the merger of
-27-
the second and third largest commercial banks in the four-county
area including and surrounding Philadelphia. The defendants asserted,
inter alia, that the increased lending limit of the resulting bank
would enable it to compete with large out-of-state banks, particularly
New York banks, for very large loans. In rejecting this contention,
the Supreme Court stated:
We reject this application of the concept of "counter-
vailing power," . . . Kiefer-Stewart Co. v. Joseph E.
Seagram & Sons, 340 U.S. 211, 71 S.Ct. 259, 95 L.Ed.
219. If anticompetitive effects in one market could
be justified by procorapetitive consequences in
another, the logical upshot would be that every firm
in an industry could, without violating § 7, embark
on a series of mergers that would make it in the end
as large as the industry leader. °^
In addition, the notion that intrabrand competition may be sacrificed
to foster interbrand rivalry was explicitly rejected by the court in
its horizontal market division landmark, United States v. Topco
fi> s
Associates, Inc. (1972). In this case, the defendants, a group of
independent grocery store chains desired to sell a "house" or "private
label" brand to enable them better to compete with national and
regional supermarket chains. To this end they formed Topco to act as
purchasing agent for goods to bear the Topco brand, and to license
the individual members to sell those products. Of antitrust concern
were provisions in Topco' s bylaws granting member chains exclusive,
or in fact exclusive, territorial licenses. Topco argued that the
territorial division was necessary to meet larger chain competition.
In rejecting this argument, and declaring the territorial division
illegal, Justice Marshall noted:
-28-
[C]ourts are of limited utility in examining diffi-
cult economic problems. Our inability to weigh, in
any meaningful sense, destruction of competition in
one sector of the economy against promotion of compe-
tition in another sector is one important reason we
have formulated per se rules.
In applying these rigid rules, the Court has
consistently rejected the notion that naked re-
straints of trade are to be tolerated because they
are well intended or because they are allegedly
developed to increase competition. . . .
Antitrust laws in general, and the Sherman
Act in particular, are the Magna Carta of free enter-
prise. They are as important to the preservation of
economic freedom and our free-enterprise system as
the Bill of Rights is to the protection of our
fundamental personal freedoms. And the freedom
guaranteed each and every business, no matter how
small, is the freedom to compete — to assert with
vigor, imagination, devotion, and ingenuity whatever
economic muscle it can muster. Implicit in such
freedom is the notion that it cannot be foreclosed
with respect to one sector of the economy because
certain private citizens or groups believe that
such foreclosure might promote greater competition
in a more important sector of the economy. . . .
The District Court determined that by limiting
the freedom of its individual members to compete
with each other, Topco was doing a greater good by
fostering competition between members and other
large supermarket chains. But, the fallacy in this
is that Topco has no authority under the Sherman Act
to determine the respective values of competition
In various sectors of the economy. On the contrary,
the Sherman Act gives to each Topco member and to
each prospective member the right to ascertain for
itself whether or not competition with other super-
market chains is more desirable than competition in
the sale of Topco-brand products. Without terri-
torial restrictions, Topco members may indeed "[cut]
each other's throats." . . . But we have never found
this possibility sufficient to warrant condoning
horizontal restraints of trade.""
The court in GTE Sylvania would have been well advised to follow
Justice Marshall's reasoning and reject the interbrand-intrabrand
balancing test it adopted in G TE Sylvania . Subsequent experience with
CTE Sylvania has ably demonstrated the fact that, indeed, courts are
-29-
unable "to weigh, in. any meaningful sense , destruction of competition
in one sector of the economy against promotion of competition in
another sector.' In fact, most courts no longer even make the
effort; rather, by attaching no value to the elimination of intrabrand
competition, they have, as discussed below, effectively fashioned a
rule of per se legality for most vertical restraints.
C. GTE Sylvania's Rule of Reason as Incapable
of Judicial Application
Chicago School antitrust analysts assert that economic efficiency
is the sole goal of antitrust law. ' Others have asserted that
Congress condemned the trusts and monopolies to prevent the unfair
69
transfer of wealth from consumers to firms with market power.
Others have identified a broad range of social and political goals of
the law. With respect to vertical restraints, as Professor Cann
notes,
antitrust enforcement is increasingly reflecting the
values inherent in the efficiency approach and is
increasingly restricting Its concerns to economies
of scale, efficiency-enhancing functions, threats of
free riders, and interbrand competition. 71
Professor Cann also notes that in applying the rule of reason to
vertical restraints, "proponents of the efficiency approach tend to
view 'reason' as an inherent, and readily assumable, component of any
72
vertical restriction." Given this predisposition, which is now
shared by many in the judiciary, it is no surprise that the rule of
reason as applied to vertical restraints is a toothless legal standard,
73
Though some have attempted to breathe life into the standard, it is
apparent that the free floating cost-benefit analysis authorized by
-30-
GTE Sylvania , in which the obvious restraint on intrabrand competition
is somehow balanced against purported interbrand benefits, is utterly
incapable of principled judicial application. Indeed, this fact is
acknowledged by the Chicago School In support of its argument to
eliminate any judicial scrutiny of vertical restraints, price or non-
74
price. The GTE Sylvania approach suffers from the fundamental flaw
inherent in all cost-benefit analysis: (1) what are costs and what
are benefits depend solely upon one's point of view, and (2) even if
costs and benefits can be distinguished, the proportionate weight
attached to each is utterly arbitrary. The problem is well illus-
trated in the vertical restraint context. The Chicago School attaches
no importance to intrabrand competition " and probably views its
suppression as a "benefit" because of the alleged procorapetitive
impact of vertical restraints on interbrand competition. Others, who
are supported by a number of Supreme Court opinions, including GTE
Sylvania , assert that intrabrand competition is indeed important and
would view almost any intrabrand suppression as sufficient to condemn
the restraint. In other words, free floating cost-benefit analysis
prejudges the case depending almost solely upon the judge's opinion of
the value of intrabrand competition. Because the Chicago School and
many in the judiciary now assign virtually no weight to the suppres-
sion of intrabrand competition, the plaintiff automatically loses.
That is, "rule of reason" becomes equated with "per se legality" in
vertical restraint cases.
Another serious problem with the free floating cost-benefit
standard for vertical restraints is that "courts are ill-equipped to
-31-
resolve the complex economic problems involved in deciding in a given
case whether elimination of intrabrand competition among dealers
through territorial restrictions in fact produced compensating gains
in interbrand competition among producers." As previously noted,
economic analysis is unable to predict the effect that changes in
marketing practices at one level of a market will have at other
78
levels. As accurately observed by Judge Browning in his cogent
dissent to the Court of Appeals' opinion in GTE Sylvania :
If the courts were required to review such issues
under a "rule of reason," unpredictable ad hoc
determinations as to what is or is not illegal
under the Sherman Act would result. . . .
A judge or jury should not be expected to
determine whether Sylvania' s locations practice
contributed to Sylvania's success in interbrand
competition when Sylvania's expert witness was
unable to do so. Because the interbrand effects
of Sylvania's location practice cannot be mea-
sured, a decision as to whether the net effect
of the practice was procompetitive would be
sheer guesswork.'"
In addition to the problems of weighing complex and conflicting
economic evidence, the free floating cost-benefit analysis of GTE
Sylvania usurps to the courts a legislative function. As noted by
the Supreme Court in Topco :
If a decision is to be made to sacrifice compe-
tition in one portion of the economy for greater
competition in another portion, this too is a
decision that must be made by Congress and not
by private forces or by the courts. Private
forces are too keenly aware of their own inter-
ests in making such decisions and courts are
ill-equipped and ill-situated for such decision-
making. To analyze, interpret, and evaluate the
myriad of competing interests and the endless data
that would surely be brought to bear on such deci-
sions, and to make the delicate judgment on the
-32-
relative values to society of competitive areas
of the economy, the judgment of the elected repre-
sentatives of the people is required."*^
IV . A Discriminating Application of the Rule
of Reason to Vertical Restraints
In contrast to the current free floating nonstandard, a discrim-
inating application of the rule of reason under the traditional three
part harm-benefit-alternative standard will proscribe many if not most
vertical market division arrangements.
A. Harm to Competition
All vertical restraints, price or nonprice, intentionally and
inevitably always restrict or eliminate intrabrand competition, which
O 1
has long been protected by antitrust law. Vertical restraint pro-
ponents assume, however, that intrabrand rivalry is irrelevant, that
the manufacturer knows best what the appropriate product promotion,
service, and price mix should be at all levels of distribution.
Wholesalers and retailers are viewed as mere conduits who simply
effectuate the manufacturer's preordained vision, and add no value or
innovation of their own. In fact, of course, downstream firms do not
merely as a closed pipeline from manufacturer to consumer.
Retailers make investments and add value themselves.
They may vary in locational (and thus time) conven-
ience, in the range of merchandise they keep in
stock, in the kinds of information and personal
service they offer, and in atmosphere and style.
Because they add value in these ways, they use their
suppliers' products as an "input," much as, say, a
manufacturer of appliances uses machine parts as an
"input." Different retailers combine a particular
supplier's product with other elements to provide
different, and alternative outputs, just as differ-
ent appliance manufacturers differentiate their end
-33-
products, though many of the inputs are the same.
At the downstream as well as at the manufacturer
level, these differences increase the range of op-
tions open to consumers. . . . Moreover, innovation
can occur downstream as well as at the manufactur-
ing level. There have been numerous innovations in
marketing, just as in production: the department
store; the supermarket; the mail-order firm; the
discount store; the boutique; and others come to
mind. All have added to the variety and range of
choice open to consumers. Many have served to re-
duce the cost of getting merchandise to the con-
sumer. 82
In short, consumers benefit from intrabrand as well as interbrand
competition, both of which reduce price and promote cost-reducing
efficiencies. "Any vertical restraint, by reducing intrabrand compe-
tition, is likely to cause a price increase, and to reduce the range
83
of price-service-amenity options open to consumers."
In addition to restricting or eliminating intrabrand competition,
vertical restraints may: (1) facilitate collusion among suppliers or
84
dealers or both under certain market conditions; and (2) raise entry
barriers, erect new entry barriers, and force competitors to operate
85
inefficiently. Further, because of their tendency to facilitate
overt collusion and raise entry barriers, vertical restraints may
reinforce patterns of consciously parallel behavior in oligopolistic
markets.
The foregoing anticompetitive consequences are in many cases sup-
posedly outweighed by an enhancement of interbrand competition. Yet
this basic premise, the sole basis of the GTE Sylvanla holding, is
itself highly controversial. For example, a number of economists have
argued that because vertical market division enhances product differ-
87
entiation, interbrand as well as intrabrand competition is reduced.
-34-
In addition, the basic Chicago School assumption that vertical re-
straints enhance manufacturer profits only when consumers also receive
net benefits from increased services — that is, that manufacturer and
consumer interests fully correspond when vertical restraints are
RR 89
used — has been severely criticized. In sum, because vertical re-
straints always restrict or eliminate intrabrand competition, may have
other anticompetitive consequences in certain market structures, and
may not promote interbrand competition, it appears that on the "harm
to competition" prong of rule of reason analysis, the plaintiff should
prevail merely by proving the existence of the restraint.
B. The Purpose of the Restraint
The next element of traditional rule of reason analysis is to
determine why the manufacturer adopted the vertical restraint; that
is, which of the alleged procompetitive effects of vertical restraints
did the manufacturer seek to foster in this case. On this issue, it
would appear reasonable to require the defendant to provide some
explanation of the business conditions and market forces which led to
the adoption of the restraint and how the defendant believed it would
solve the perceived problem, rather than, as noted by one court, to
require the antitrust plaintiff "to conjure up every possible pro-
competitive rationale for a vertical restraint, and prove [its]
90
inapplicability to the restraint in question."
Of course, the Chicago School believes that the benefits of
vertical restraints are so manifest that the restraints should be
legal per se, requiring no justification. Yet despite this patent
-35-
obviousness, the Chicago School is utterly unable to answer the simple
question of why the restraints have been adopted. For example, the
Justice Department's roundly repudiated Vertical Restraints Guide-
91
lines presume that an inability to demonstrate efficiencies should
not condemn a restraint as anticompetitive because "efficiencies may
92
be present but the firms may be unable to demonstrate them."
Regarding whether a legal basis exists for the Guidelines' claim that
no adverse inference should be drawn from the defendant's inability
to articulate a legitimate justification for the restraint, Professor
Sullivan recently stated:
Not as a matter of law. Indeed, not even as a mat-
ter of Chicago School economics. The theoretical
assumption is that traders are doing things to maxi-
mize profits. If the sponsor of a trade restraint
cannot offer a plausible, innocent explanation the
normal inference might well be that there is a non-
innocent motive. "^
Nevertheless, Professor, now Judge, Easterbrook opines:
Most business practices have some explanation, else
they would not have survived. There is great dif-
ficulty in knowing what the explanation _is in a
particular case. Often the best anyone can do is
offer a menu of possibilities, some pro- and some
anti-competitive. When the anticompetitive explana-
tions have been eliminated, the procompetitive ex-
planations are left — although we still do not know
which explanations matter. . . .
It really does not matter which explanation is
"right." . . . For current purposes it does not
matter why restricted dealing is used, once we
have concluded that there is little likelihood of
anticompetitive effect. 94
Although the Chicago School is unable to find any anticompetitive
consequences of vertical restraints, both the case law and common
sense indicate that there are such consequences, most notably the
-36-
elimination of intrabrand competition — a form of competition which is
protected by antitrust law. In justifying such a restraint even the
most strident proponents of per se legality for restricted distribu-
tion are unable to offer more than a "menu of possibilities" among
which "we still do not know which explanations matter." In no other
area of the law is a defendant charged with illegal conduct permitted
to justify that conduct by producing a laundry list of arguably
exculpatory rationales, asking the court to choose one or more reasons
from that list to excuse the challenged conduct, while offering no
explanation of what particular benefit — such as reasonably specific
anticipated efficiency gains, resolving an actual free rider problem,
or actual provision of necessary sales expertise or service and repair
facilities — the restraints hope to achieve in the context of the case.
What is essential to a proper application of the rule of reason In a
nonprice vertical restraints case is that the defendant articulate
some reason justifying the use of the restraint that is capable of
being considered and applied, as it must, in the context of a liti-
gated case. By permitting all defendants using whatever variety or
combination of vertical restraints to parade the same Chicago School
laundry list of "coulds," mights," and "mays" in justification before
the trier of fact, and requiring the plaintiff to prove their inap-
plicability, the plaintiff is guaranteed defeat. Chicago School
"analysis" in effect concludes that because some forms of vertical
restraint may arguably benefit interbrand competition under some
indefinable set of circumstances, all vertical restraints therefore
should be legal under all circumstances.
-37-
C. Less Restrictive Alternatives
In applying the rule of reason, the court must determine whether
there are alternatives, less restrictive of competition, available to
achieve the asserted legitimate objectives of the restraint. For
example, some degree of territorial insulation can be provided by a
simple selective distribution system, under which the manufacturer
95
unilaterally franchises only a limited number of sales outlets.
Another alternative, which is designed to achieve many of the same
purposes alleged for vertical restraints (for example, to induce
buyers to carry a product line and promote it vigorously) , is the
exclusive franchise — such an arrangement (also known as an exclusive
selling, sole outlet, on exclusive dealership arrangement) involves a
promise by the seller not to sell to any dealer
other than the franchisee in a designated terri-
tory which the franchisee expects to serve, and a
further promise that the seller will not authorize
any other dealer which makes sales in the terri-
tory to hold itself out as the seller's authorized
representative there. These arrangements . . .
involve a territorial restriction only upon the
seller and are often used ... in conjunction with
primary responsibility clauses which obligate the
dealer to serve the territory effectively. 96
Although exclusive franchises do diminish intrabrand competition and
should therefore not be free of antitrust scrutiny, particularly when
97
used by a dominant firm, they have been upheld in a number of cases,
and are less restrictive to competition than airtight territorial
98
restraints. The manufacturer also may use a "profit passover"
arrangement, also subject to rule of reason analysis, under which a
dealer is required to compensate other dealers for sales made in their
-38-
territories (for example, to reimburse dealers for advertising,
promotional, and post-sale service).
The current crabbed "rule of reason" analysis of nonprice vertical
restraints takes no account of whether the defendant can achieve its
distribution objectives in ways that are less restrictive to competi-
tion than full blown territorial insulation. Indeed, under the
Chicago School approach, the manufacturer is not even required to
articulate the specific objectives sought to be achieved by the
restraints. This approach obviously makes it difficult for the trier
of fact to examine whether less restrictive alternatives exist to
achieve these objectives.
In sum, under the currently fashionable formulation of rule of
reason analysis applied to vertical restraints, the deck is stacked
against the plaintiff. The restraint on intrabrand competition is
ignored, or worse, its elimination is viewed as a benefit to competi-
tion. The defendants point to facially plausible, though question-
able, justifications for their conduct, but refuse or are unable to
elaborate (except with arcane economic analysis certainly unknown to
the manufacturer when it adopted the restraint) on which arguably
procorapetitive justification moved them to adopt the restraint in
question. They are, of course, unable to show that their purposes in
adopting the restraint could be achieved by less restrictive means
because they are unwilling or unable to explain to the plaintiff or
the court why they adopted the restraint in the first place. Based
upon this "analysis," which assumes away objections to the restraint,
and correspondingly assumes benefits, the Chicago School would fashion
-39-
a rule of per se legality. In fact, what the actual analysis shows is
a clearly anticompetitive practice which the defendant cannot justify
in the context of any specific case, except to opine what it "could,"
"might" or "may" do to promote interbrand competition.
D. Conclusion
As noted by Professor Areeda, the rule of reason often can be
applied summarily, without elaborate fact-finding and with no require-
ment that every question of competitive effect, justification, or
available alternatives be decided by the jury. That is, many cases
can be resolved on the basis of the parties' arguments or a summary
99
judgment record. Vertical market division cases would appear to be
a prime candidate for such an analysis especially given the assured
harm to intrabrand competition, the controversial nature of the argu-
ments supporting the restraints, and the defendant's inability or
unwillingness to justify its conduct. That is, a discriminating rule
of reason analysis would proscribe most restraints at the pleadings
stage. Indeed, a return to a rule of per se illegality for nonprice
vertical restraints (territory, customer, and location clauses) would
not unduly hamper a supplier's effort to develop a distribution
system and would greatly aid the adrainistratability of the Sherman
Act. As long ago noted by one commentator:
[H]undreds of manufacturers have for years been suc-
cessfully operating under antitrust decrees forbid-
ding precisely the same type of product control held
per se illegal in Arnold, Schwinn & Co. Injunctive
provisions of this type have long been standard in
Department of Justice consent and litigated decrees. ^^
-40-
V. The Sad Legacy of GTE Sylvania — The Dealer Termination Cases
If GTE Sylvania had been confined to its holding — that nonprice
vertical restraints are judged under rule of reason rather than per se
analysis — it would not be the pernicious decision it has become, be-
cause most such restraints cannot survive a rigorous rule of reason
analysis. The Chicago School, however, has latched onto it as por-
tending a major shift in antitrust doctrine, toward legalizing all
vertical restraints, price and nonprice. Perhaps more importantly,
GTE Sylvania and the Supreme Court's curious decisions in Monsanto
102
Company v. Spray-Rite Service Corporation (1984) , and Business
103
Electronics Corporation v. Sharp Electronics Corporation (1988)
have had a particularly debilitating effect upon antitrust enforcement
in a seemingly only tangentially related area — cases involving
termination of one dealer at the request of another. Professor
Sullivan eloquently explained the difference between the exclusive
franchise which may or may not survive antitrust scrutiny under the
rule of reason, and dealer induced terminations of competitors:
It does not follow from the fact that a manu-
facturer may, when franchising a dealer, commit it-
self not to franchise another in a territory defined
by the manufacturer, that it may, having earlier
franchised two or more dealers, agree at the re-
quest of one to terminate the others. It is not
merely that the latter promise liquidates palpable
interests of existing traders, while the former
does not (a difference which is real enough, and
which is charged with meaning for the procedural
and damage aspects of the law) ; it is also that
the competitive effect of the first promise is less
severe than that of the second. The first commit-
ment forecloses potential intrabrand competition
only; the second stamps out existing competition
at the behest of a firm which is suffering under
lt . 104
-41-
Despite this important difference, the Court in Monsanto and Business
Electronics has, through a reckless infusion of GTE Sylvania rhetoric,
created a monster, which has, as developed below, wreaked havoc on the
law governing dealer termination.
A. Monsanto
In Monsanto , Spray-Rite was a wholesale distributor of agricul-
tural chemicals, including herbicides manufactured by Monsanto.
Spray-Rite was described by the Court as a "discount operation, buy-
ing large quantities and selling at a low margin." After being
terminated, Spray-Rite sued under § 1 alleging that it had been
terminated pursuant to a conspiracy between Monsanto and some of its
other distributors to fix the resale prices of Monsanto herbicides.
The jury agreed. The Court of Appeals affirmed, noting that there
was sufficient evidence to satisfy Spray-Rite's burden of proving a
conspiracy to set resale prices noting that "proof of termination
following competitor complaints is sufficient to support an inference
of concerted action." In reviewing the evidence, the court found
evidence of numerous complaints from competing Monsanto distributors
about Spray-Rite's price cutting practices, and noted testimony of a
Monsanto official that Spray-Rite was terminated because of the price
complaints .
The Supreme Court granted certiorari and initially noted that two
important distinctions must be made In distributor termination cases.
First, there is the basic distinction between con-
certed and independent action. . . . Independent ac-
tion is not proscribed. A manufacturer of course
generally has a right to deal, or refuse to deal,
-42-
with whomever it likes, as long as it does so inde-
pendently. United States v. Colgate & Co. , 250 U.S.
300, 307, 39 S.Ct. 465, 468 (1919). . . . Under
Colgate , the manufacturer can announce its resale
prices in advance and refuse to deal with those who
fail to comply. And a distributor is free to
acquiesce in the manufacturer's demand in order to
avoid termination.
The second important distinction in distributor-
termination cases is that between concerted action to
set prices and concerted action on nonprice restric-
tions. The former have been per se illegal since
the early years of national antitrust enforcement.
See Dr. Miles Medical Co. v. John D. Park &_ Sons Co. ,
220 U.S. 373, 404-409, 31 S.Ct. 376, 383-385, 55
L.Ed. 502 (1911). The latter are judged under the
rule of reason, which requires a weighing of the
relevant circumstances of a case to decide whether
a restrictive practice constitutes an unreasonable
restraint on competition. See Continental T.V. ,
Inc. v. GTE Sylvania Inc. , 433 U.S. 36, 97 S.Ct.
2549, 53 L.Ed. 2d 568 (1977). 108
The Court then went on to conclude:
A manufacturer and its distributors have legitimate
reasons to exchange information about the prices and
the reception of their products in the market. More-
over, it is precisely in cases in which the manu-
facturer attempts to further a particular marketing
strategy by means of agreements on often costly
nonprice restrictions that it will have the most
interest in the distributors' resale prices. The
manufacturer often will want to ensure that its
distributors earn sufficient profit to pay for pro-
grams such as hiring and training additional sales-
men or demonstrating the technical features of the
product, and will want to see that "free-riders"
do not interfere. . . . Thus, the manufacturer's
strongly felt concern about resale prices does not
necessarily mean that it has done more than the
Colgate doctrine allows. . . .
Permitting an agreement to be inferred merely
from the existence of complaints, or even fro a
the fact that termination came about "in response
to" complaints, could deter or penalize perfectly
legitimate conduct. As Monsanto points out, com-
plaints about price cutters "are natural — and from
the manufacturer's perspective, unavoidable —
reactions by distributors to the activities of
-43-
their rivals." . . . Moreover, distributors are an
important source of information for manufacturers.
In order to assure an efficient distribution system,
manufacturers and distributors constantly must
coordinate their activities to assure that their
product will reach the consumer persuasively and
efficiently. To bar a manufacturer from acting
solely because the information upon which it acts
originated as a price complaint would create an
irrational dislocation in the market. ... In
sum, "[t]o permit the inference of concerted action
on the basis of receiving complaints alone and thus
to expose the defendant to treble damage liability
would both inhibit management's exercise of its
independent business judgment and emasculate the
terms of the statute." [ Edward J. Sweeney & Sons,
Inc. v. Texaco, Inc. , 637 F.2d 105, 111 n. 2 (3rd
Cir. 1980), cert, denied , 101 S.Ct. 1981 (1981).]
Thus, something more than evidence of com-
plaints is needed. There must be evidence that
tends to exclude the possibility that the manu-
facturer and nonterrainated distributors were act-
ing independently. As Judge Aldisert has written,
the antitrust plaintiff should present direct or
circumstantial evidence that reasonably tends to
prove that the manufacturer and others "had a
conscious commitment to a common scheme designed
to achieve an unlawful objective." Edward J.
Sweeney & Sons, supra , at 111.^"
Applying this standard to the facts, the Court found sufficient evi-
dence to support the jury finding of unlawful conspiracy.
Although the Court reached the right result in Monsanto , its
reasoning utterly obscures the basic issue in such cases and makes it
much more difficult for a plaintiff to recover. Monsanto , like most
cases following it, is an almost classic horizontal group boycott. A
group of competitors at one functional level (here, the complaining
Monsanto distributors) desire, for whatever reason (here, as in most
cases, discount pricing) to eliminate a competitor at their level
(here, Spray-Rite). To achieve their purpose the conspirators exert
pressure at a functional level above or below their own (here, at the
-44-
supplier level) to induce, usually coercively, a market participant at
that level to deprive the disfavored competitor of an essential trade
relationship it needs to compete with those conspiring. Note how
strikingly different this situation is from the issue addressed in
GTE Sylvania — whether a contractually imposed location clause should
be per se illegal or governed by the rule of reason under antitrust
law. It is one thing to contractually foreclose potential intrabrand
competition; it is quite another to stamp out existing competition
through a coercive combination consisting of a firm (or firms)
suffering from the competition and its (their) supplier.
Despite this basic distinction, the Court in Monsanto proceeded
as if the legality of Monsanto's distribution system was in issue,
speaking of: manufacturer attempts to further a "particular marketing
strategy" through "costly nonprice restrictions" designed to ensure
distributors a sufficient profit to pay for additional personnel or
product related services; efforts to eliminate the ubiquitous "free
rider"; and the requirement of coordinated activities between manu-
facturers and distributors in pursuit of an "efficient distribution
system." Of course, all of this GTE Sylvania rhetoric is irrelevant
to the issue presented in Monsanto — when is a jury permitted to infer
that a supplier's action in terminating a distributor is concerted
rather than independent? Nevertheless, to prevent a hypothetical manu-
facturer from being inhibited in the exercise of its independent
business judgment regarding a hypothetical distribution system not at
issue in the case, the Monsanto court thought it necessary to erect a
double barrelled burden of proof standard for plaintiffs in cases
-45-
involving termination of one dealer at the request of another. That
is, under Monsanto : "not only must a plaintiff seeking for each the
jury prove a conspiracy, but he also must disprove the existence of
any or all hypothetical explanations for the manufacturer's conduct
that 'might justify a dealer termination'," explanations invariably
drawn from the laundry list of arguably procompetitive consequences of
nonprice vertical restraints outlined in GTE Sylvania . The approach
sanctioned in Monsanto obscures the boycott nature of the dealer
termination cases, and erects unprecedented and virtually insurmount-
able evidentiary barrier to plaintiff recovery in such cases.
1. The Error of Monsanto — Mischaracterization of
Horizontal as Vertical
The most basic, fundamental, and pernicious error of Monsanto is
its failure to recognize that the restraint involved is a horizontal
price restraint not a vertical nonprice restraint. This point was
observed by Justice Stevens in the first paragraph of his dissent in
Business Electronics :
In its opinion the majority assumes, without
analysis, that the question presented by this case
concerns the legality of a "vertical nonprice re-
straint." As I shall demonstrate, the restraint
that results when one or more dealers threatens to
boycott a manufacturer unless it terminates its
relationship with a price-cutting retailer is more
properly viewed as a "horizontal restraint." More-
over, an agreement to terminate a dealer because of
its price cutting is most certainly not a "nonprice
restraint." The distinction between "vertical non-
price restraints" and "vertical price restraints,"
on which the majority focuses its attention, is
therefore quite irrelevant to the outcome of this
case. Of much greater importance is the distinc-
tion between "naked restraints" and "ancillary re-
straints" that has been a part of our law since the
-46-
landraark opinion written by Judge (later Chief
Justice) Taf t in United States v. Addyston P ipe &^
Steel Co. , 85 F. 271 (CA6 1898), aff'd. 175 U.S.
211, 20 S.Ct. 96, 44 L.Ed. 136 (1899). * 12
The Supreme Court recognized this distinction clearly in United
1 13
States v. General Motors Corporation (1966), a classic case decided
long before the debilitating influence of GTE Sylvania . In this case,
certain franchised Los Angeles area Chevrolet dealers sold some of
their cars through "referral outlets" or "discount houses," which sold
at prices lower than those charged by many franchised dealers. After
numerous dealer complaints, General Motors telephoned all area dealers,
both to identify those associated with the discounters and to induce
the offenders to stop dealing with the discounters. GM, through
coercion, quickly elicited from each dealer its promise to refrain
1 14
from dealing with the discounters. To police the agreement GM and
its dealer associations jointly financed "shopping" of the dis-
counters, which was successful in assuring that no Chevrolet dealer
continued to supply them with cars. This arrangement too relied upon
coercion of offenders.
At trial, General Motors argued that the dealers' involvement
with discounters violated a location clause in the franchise agreement
by establishing unauthorized additional sales outlets. GM further
argued that the clause was lawful and that General Motors, its dealers
and their associations, were merely seeking to vindicate a legitimate
interest in uniform compliance with the franchise agreement. The
Court rejected this argument noting:
-47-
We need not reach these questions concerning
the meaning, 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.
We have here a classic conspiracy in restraint of
trade: joint, collaborative action by dealers, the
appellee associations, and General Motors to elim-
inate a class of competitors by terminating busi-
ness dealings between them and a minority of
Chevrolet dealers and to deprive franchised dealers
of their freedom to deal through discounters if
they so choose. Against this fact of unlawful
combination, the "location clause" is of no avail.
Whatever General Motors might or might not lawfully
have done to enforce individual Dealer Selling
Agreements by action within the borders of those
agreements and the relationship which each defines,
is beside the point. . . .
Neither individual dealers nor the associa-
tions acted independently or separately. The
dealers collaborated, through the associations and
otherwise, among themselves and with General
Motors, both to enlist the aid of General Motors
and to enforce dealers' promises to forsake the
discounters. . . .
There can be no doubt that the effect of the
combination or conspiracy here was to restrain
trade and commerce within the meaning of the Sherman
Act. Elimination, by joint collaborative action,
of discounters from access to the market is a per
se_ violation of the Act.H6
After discussing the group boycott cases, some of which did not in-
volve price fixing, the Court further noted:
The principle of these cases is that where
businessmen concert their actions in order to de-
prive others of access to merchandise which the
latter wish to sell to the public, we need not
inquire into the economic motivation underlying
their conduct. . . . Exclusion of traders from
the market by means of combination or conspiracy
is so inconsistent with the free-market principles
embodied in the Sherman Act that it is not to be
-48-
saved by reference to the need for preserving the
collaborators' profit margins or their system for
distributing automobiles. ^°
Regarding the motive for the conspiracy, the Court observed:
[I]nherent in the success of the combination in
this case was a substantial restraint upon price
competition — a goal unlawful per se when sought
to be effected by combination or conspiracy. . . .
There is in the record ample evidence that one of
the purposes behind the concerted effort to elim-
inate sales of new Chevrolet cars by discounters
was to protect franchised dealers from real or
apparent price competition. The discounters ad-
vertised price savings. . . . Some purchasers
found and others believed that discount prices
were lower than those available through the fran-
chised dealers. . . . Certainly, complaints about
price competition were prominent in the letters
and telegrams with which the individual dealers
and salesmen bombarded General Motors. . . .
The protection of price competition from
conspiratorial restraint is an object of special
solicitude under the antitrust laws. We cannot
respect that solicitude by closing our eyes to
the effect upon price competition of the removal
from the market, by combination or conspiracy,
of a class of traders. Nor do we propose to
construe the Sherman Act to prohibit conspiracies
to fix prices at which competitors may sell, but
to allow conspiracies or combinations to put
competitors out of business entirely. ^^"
The same reasoning as that outlined above should have been used to
resolve Monsanto and the unfortunate collection of cases which follow
it. Monsanto , however, wrongfully characterizes the problem as
vertical rather than horizontal, rather than focusing upon the exis-
tence of, in the words of Justice Fortas in General Motors , "a classic
120
conspiracy in restraint of trade."
The Chicago School is fond of rejecting "formalistic distinc-
121
tions," requiring instead a showing of "demonstrable economic ef-
122
feet" " to justify departure from a rule of reason standard. What,
-49-
however, could be more formalistic than the Chicago School's current
approach to price related dealer terminations? They characterize
the restraint as vertical simply because the act implementing the re-
straint (the manufacturer terminating the price cutter) comes from
above. But, of course, this is exactly how the classic group boycott
works. A competitor or group of competitors, in order to eliminate a
competitor at their level, exert pressure on a functional level above
or below them to induce a supplier or customer of the boycott victim
123
not to deal with him. Further, as previously outlined, no pro-
competitive " demonstrable economic effect" can be shown or is even
attempted to justify such a "vertical" restraint. In contrast, there
are certain and easily provable adverse economic consequences, such as
fewer choices and higher prices for consumers, flowing from wholly
successful efforts by competitors to drive price cutting rivals out
of business.
2. The Error of Monsanto — Abrogation
of the Jury Function
Monsanto compounds its error by wrongfully focusing upon the pur-
ported benefits of vertical restraints and then using these alleged
benefits as a means of justifying a heightened burden of proof upon
the injured plaintiff in dealer termination cases. As developed
below, this burden usurps the function of the jury regarding con-
spiracy issues they are best qualified to resolved. More importantly,
the strange mix of GTE Sylvanla and Monsanto virtually insulates from
any judicial scrutiny the type of coercive horizontal combination
condemned in General Motors.
-50-
Before Monsanto , the courts of appeals were split regarding the
amount of evidence necessary to support a jury inference that a
dealer termination was the result of a conspiracy between the manu-
facturer and complaining distributors rather than the unilateral
action of the manufacturer. As explained in the House Report ac-
125
companying the "Freedom from Vertical Pricing Fixing Act of 1987":
Approaches varied widely, with some courts ap-
parently taking the view that evidence of termi-
nation following competitor complaints was suf-
ficient to create a jury issue of conspiracy, 126
and others apparently requiring evidence of
"something more." Those courts requiring "some-
thing more" most commonly phrased their require-
ments in terms of a "causal connection" between
the complaints and the termination. 127 Some
courts, however, intimated that even a showing
of causation might be insufficient to permit
the jury to infer the requisite vertical con-
spiracy between the seller and the complaining
distributors. 128 Others simply failed to make
clear what standard they were applying. 129
In Monsanto , the Court fashioned its own standard under which no
inference of conspiracy may be drawn by the jury either from evidence
that a price cutting dealer was terminated following complaints of
other dealers, or from evidence that the termination was "in response
130
to" such complaints. Rather, the court reasoned that applying
these standards without "something more" would undermine the Colgate
131
doctrine, which permits a manufacturer unilaterally to determine
132
with whom it will deal. The "something more" required by the
plaintiff is "evidence that tends to exclude the possibility that the
manufacturer and nonterrainated distributors were acting indepen-
133
dently." That is, "direct or circumstantial evidence that reason-
ably tends to prove that the manufacturer and others 'had a conscious
-51-
commitment to a common scheme designed to achieve an unlawful ob-
. , , T1 134
jective' .
In formulating this test, the Monsanto Court relied upon the Third
Circuit's majority opinion in Edward J. Sweeney &_ Sons , Inc. v.
135
Texaco, Inc. (1980) In Texaco , like Monsanto , a price cutting
distributor (Sweeney) was terminated after Sweeney's competitors
vigorously and frequently complained to Texaco about Sweeney's price
cutting activities. Sweeney attempted to prove that Texaco unlawfully
conspired with other fuel distributors and retailers to fix the price
of Texaco gasoline. The district court found that Sweeney had failed
to introduce evidence from which a jury could infer the existence of a
conspiracy and therefore directed a verdict in favor of Texaco. The
Court of Appeals affirmed, using the standard later adopted in
Monsanto . Judge Sloviter filed a dissent in Texaco , which ably
highlights the bankruptcy of the majority approach, and by derivation
the grievous error of Monsanto itself. Judge Sloviter 's disageeraent
focused on two issues: first, that the majority had adopted an unduly
restrictive interpretation concerning the quantum of evidence needed
to bring action within § 1 of the Sherman Act; and second, that the
majority abrogated to itself the jury's function of determining which
inferences can reasonably be drawn from the evidence before it.
On the first issue he argued that the majority "retreats from
prior decisions of this court, disregards the realities of market
behavior, and ignores the virtual impossibility of producing direct
1 of.
evidence of unlawful combinations." Initially Judge Sloviter noted
1 37
that the case law is "replete" with cases like General Motors or
-52-
Texaco in which a competitor or group of competitors, rather than meet
138
its competition in the marketplace, attempt to "thrust at the jugular"
of the discounter's price competition by complaining to their mutual
supplier in an effort to induce the supplier to control the discounter
139
or terminate its source of supply. He noted that most of these
cases had addressed the issue of whether the conduct involved was "per
se" illegal, and
until now, there has not been any serious question
in this circuit that the competitors' complaints
to the supplier about the discounter's market be-
havior and the supplier's action in response
thereto are sufficient to constitute the "combina-
tion" necessary to bring the matter within the
scope of section 1 of the Sherman Act.l^O
Judge Sloviter then noted that the majority's contrary holding was
unsupported by any authority and that other courts had taken a more
realistic view of the impact of complaints by competitors and the
141
reaction of the manufacturer. Judge Sloviter then continued
It is difficult to understand why the majority
seriously contends that if a manufacturer reacts to
complaints by its customers by cutting off the
offending discounter or otherwise hampering its
competition, this is not sufficient to establish a
conspiracy or combination. A long and unbroken
series of decisions has established that action
which on the surface appears to be unilateral be-
havior can be considered to be part of a combina-
tion when viewed in light of the surrounding cir-
cumstances . 1^2
On the second issue Judge Sloviter, after reviewing the evidence,
concluded that a jury could well find that Texaco had acted in
response to the numerous complaints it had received, but that the
majority had usurped the jury's legitimate fact finding function.
-53-
The majority concludes that there was no
credible evidence from which a jury could per-
missibly infer that Texaco 's actions were in re-
sponse to these complaints. In drawing this con-
clusion, the majority excerpts some of the testi-
mony on which plaintiffs rely and combs through
it to see what weight or credibility can be
attached to it. The pertinent issue, of course,
is not what the majority deems to be the reason-
able inferences that can be drawn from the testi-
mony but what the jury believes to be the reason-
able inferences that can be drawn from the testi-
mony ....
Although the majority purports to take
cognizance of the difficulty of proving an anti-
trust conspiracy by direct evidence, the effect
of its decision will be to require nothing less
than direct evidence of a causal connection be-
tween Sweeney's competitors' complaints and
Texaco 's actions. ... It cannot be so naive
as to expect that a sophisticated business con-
cern like Texaco will have maintained records
which make such a direct causal connection, or
that its officers, well trained in the tech-
nicalities of the antitrust laws, will testify
to that effect. The courts have recognized that
"in complex antitrust litigation where motive
and intent play leading roles, the proof is
largely in the hands of the alleged conspirators,
and hostile witnesses thicken the plot." Poller
v. Columbia Broadcasting System, Inc. , 368 U.S.
464, 473, 82 S.Ct. 486, 491 (1962). . . .
The need to show that defendants' actions
were part of a combination of conspiracy which
falls within § 1 of the Sherman Act must be ap-
proached realistically, with an understanding of
the various threads from which the fabric of
business decisions are woven. If we are unwilling
to allow the jury, which brings the community's
experience to the fact finding process, to exer-
cise its own judgment in making the reasonable
inferences from the evidence, we will have unduly,
and I think unwisely restricted its function in
antitrust cases. ^-^
144
By early 1986, Monsanto had been cited in over 60 reported
vertical restraint cases. As Judge Sloviter predicted, plaintiffs in
dealer termination cases have been unduly restricted in their ability
-54-
to recover, often banished from the court on summary judgment or
directed verdict motions. As noted in the House Report accompany-
ing the "Freedom from Vertical Price Fixing Act of 1987":
A striking feature of these cases is that a majority
have involved rulings for summary judgments or
directed verdicts in favor of defendant-manufacturers.
While many of the decisions briefly acknowledged the
accepted tenet that "summary proceedings should be
used sparingly in complex litigation where motive
and intent play leading role . . .,"147 many of the same
courts nevertheless granted, or affirmed the granting
of, summary judgment. The basis for using a summary
judgment disposition "sparingly" is rooted in two
basic sources: the right to a jury trial on con-
tested matters of fact, and the general philosophy of
the Federal Rules of Civil Procedure, which seeks to
filter out only those suits that are clearly frivolous,
or harassing or in which there Is no genuine issue for
trial. Surprisingly, these issues did not figure sig-
nificantly in the decisionmaking calculus of much of
the post -Monsanto litigation. 148
Another untoward consequence of the Monsanto standard is that it
provided no adequate evidentiary criteria for subsequent litigation.
It was not very difficult to predict that con-
fusion would abound in the federal circuits when the
Supreme Court intimated that "something more" would
be required in proving causation, even if such
termination was "in response to" a price complaint. 149
The courts of appeals have been left to decide for themselves the
appropriate dividing line between judge and jury functions in dealer
termination cases, resulting in a "confusing welter of lower court
semantic formulations." Indeed, the Supreme Court itself has had
difficulty characterizing the Monsanto test.
B. Business Electronics
The net effect of Monsanto and the lower court opinions applying
it, which give disproportionate deference to the formerly closely
-55-
circurascribed Colgate doctrine, is to render vertical price fixing
conspiracies virtually impossible to prove. Price related dealer
terminations or refusals to supply are now commonplace, as both the
152
number of post -Monsanto cases and industry sources indicate.
Nevertheless , in Business Electronics Corporation v. Sharp Electronics
153
Corporation (1988) the Supreme Court compounded the error it made
in GTE Sylvania and Monsanto by erecting yet another procedural
barrier to plaintiff recovery in dealer termination cases. In this
case, in 1968, respondent Sharp Electronics Corporation appointed
petitioner Business Electronics Corporation as the exclusive retailer
in Houston, Texas of Sharp's electronic calculators. In 1972, Sharp
appointed Gilbert Hartwell as a second retailer of its calculators in
Houston. Although Sharp published a list of suggested minimum retail
prices, the retailers were not required to adhere to the price list,
and Sharp imposed no nonprlce vertical restraints on its dealers.
Business Electronics usually sold Sharp calculators at prices lower
than Sharp's suggested minimum prices and lower than those charged by
Hartwell. In June 1973, after complaining to Sharp about Business
Electronic' s prices on several occasions, Hartwell notified Sharp that
he would terminate his dealership unless Sharp ended its relationship
with Business Electronics within 30 days. Sharp terminated the
Business Electronics dealership in July, 1973.
Business Electronics sued Sharp and Hartwell alleging that they
had conspired to terminate its dealership in violation of § 1 of the
Sherman Act. The trial court instructed the jury that an agreement to
terminate a dealer because of price cutting was a per se violation of
-56-
§ 1. The jury found for Business Electronics and awarded damages of
$600,000. On appeal, the Fifth Circuit Court of Appeals reversed,
holding that an agreement between a manufacturer and dealer to
terminate another dealer was a per se violation of § 1 of the Sherman
Act only if the agreement required the surviving dealer to set prices
at a particular level. In an opinion by Justice Scalia, the Supreme
Court affirmed reasoning
Our approach to the question presented in the
present case is guided by the premises of GTE
Sylvania and Monsanto : that there is a presumption
in favor of a rule-of-reason standard; that depar-
ture from that standard must be justified by demon-
strable economic effect, such as the facilitation
of cartelizing, rather than formalistic distinc-
tions; that interbrand competition is the primary
concern of the antitrust laws; and that rules in
this area should be formulated with a view towards
protecting the doctrine of GTE Sylvania . These
premises lead us to conclude that the line drawn by
the Fifth Circuit is the most appropriate one. . . .
The District Court's rule on the scope of per
se illegality for vertical restraints would threaten
to dismantle the doctrine of GTE Sylvania . Any
agreement between a manufacturer and a dealer to
terminate another dealer who happens to have charged
lower prices can be alleged to have been directed
against the terminated dealer's "price cutting."
In the vast majority of cases, it will be extremely
difficult for the manufacturer to convince a jury
that its motivation was to ensure adequate services,
since price cutting and some measure of service cut-
ting usually go hand In hand. Accordingly, a manu-
facturer that agrees to give one dealer an exclusive
territory and terminates another dealer pursuant to
that agreement, or even a manufacturer that agrees
with one dealer to terminate another for failure to
provide contractually-obligated services, exposes
itself to the highly plausible claim that its real
motivation was to terminate a price cutter. More-
over, even vertical restraints that do not result
in dealer termination, such as the initial granting
of an exclusive territory or the requirement that
certain services be provided, can be attacked as
-57-
designed to allow existing dealers to charge higher
prices. Manufacturers would be likely to forego
legitimate and competitively useful conduct rather
than risk treble damages and perhaps even criminal
penalties. . . .
Finally, we do not agree with petitioner's con-
tention that an agreement on the remaining dealer's
price or price levels will so often follow from
terminating another dealer "because of [its] price
cutting" that prophylaxis against resale price main-
tenance warrants the District Court's per se rule.
Petitioner has provided no support for the proposition
that vertical price agreements generally underlie
agreements to terminate a price cutter. That prop-
osition is simply incompatible with the conclusion
of GTE Sylvania and Monsanto that manufacturers are
often motivated by a legitimate desire to have
dealers provide services, combined with the reality
that price cutting is frequently made possible by
"free riding" on the services provided by other
dealers. The District Court's per se rule would
therefore discourage conduct recognized by GTE
Sylvania and Monsanto as beneficial to consumers.
• • •
In sum, economic analysis supports the view,
and no precedent opposes it, that a vertical re-
straint is not illegal per se unless it includes
some agreement on price or price levels. . . .^4
Once again, as in Monsanto , the Court uses GTE Sylvania- style
rhetoric to address an issue not presented by the case. Sharp imposed
no nonprice vertical restraints on its dealers; rather, a naked
horizontal price restraint was involved. As noted by Justice
Stevens in dissent
This therefore is not a case in which a manu-
facturer's right to grant exclusive territories,
or to change the identity of the dealer in an
established exclusive territory, is implicated.
The case is one in which one of two competing
dealers entered into an agreement with the manu-
facturer to terminate a particular competitor
without making any promise to provide better or
more efficient services and without receiving any
guarantee of exclusivity in the future. . . .
-58-
The termination was motivated by the ultimatum
that respondent received from Hartwell and that
ultimatum, in turn, was the culmination of Hart-
well's complaints about petitioner's competitive
price cutting. The termination was plainly the
product of coercion by the stronger of two dealers
rather than an attempt to maintain an orderly and
efficient system of distribution.
In sum, this case does not involve the
reasonableness of any vertical restraint imposed
on one or more dealers by a manufacturer in its
basic franchise agreement. What the jury found was
a simple and naked '"agreement between Sharp and
Hartwell to terminate Business Electronics because
of Business Electronics' price cutting.'" . . ,156
In addition to the mischaracterization problem, Business Electronics ,
like Monsanto and its progeny, usurps the jury's fact-finding func-
tion. At trial, after hearing several days of testimony, the jury
concluded that Sharp's defense that it had unilaterally terminated
Business Electronics because of its poor sales performance was
"pretextual ." Justice Stevens noted that neither the majority nor
the Court of Appeals questioned the accuracy of the jury's resolution
of the factual issues, but that
Nevertheless, the rule the majority fashions today
is based largely on its concern that In other cases
juries will be unable to tell the difference be-
tween truthful and pretextual defenses. Thus, it
opines that "even a manufacturer that agrees with
one dealer to terminate another for failure to pro-
vide contractually-obligated services, exposes it-
self to the highly plausible claim that its real
motivation was to terminate a price cutter." . . .
But such a "plausible" concern in a hypothetical
case that is so different from this one should not
be given greater weight than facts that can be
established by hard evidence. If a dealer has, in
fact, failed to provide contractually obligated
services, and if the manufacturer has, in fact,
terminated the dealer for that reason, both of
those objective facts should be provable by admis-
sible evidence. Both in its disposition of this
-59-
case and in Its attempt to justify a new approach
to agreements to eliminate price competition, the
majority exhibits little confidence in the judicial
process as a means of ascertaining the truth. ^8
In addition, also like Monsanto and its progeny, Business Electronics
fails to attach any weight to the value of intrabrand competition.
As noted by Justice Stevens, nothing in GTE Sylvania implied that
intrabrand competition could be eliminated without some evidence of a
159
purpose to improve interbrand competition. GTE Sylvania addressed
the legality of manufacturer attempts to provide some territorial
insulation to its dealers as part of an overall product distribution
system. These attempts the court found should be judged by the rule
of reason because of purported interbrand benefits of the restraints.
As noted by Justice Stevens, nowhere did GTE Sylvania
discuss the benefits of permitting dealers to struc-
ture intrabrand competition at the retail level by
coercing manufacturers into essentially anticompeti-
tive agreements. Thus, while Hartwell may indeed be
able to provide better services under the sales
franchise agreement with petitioner out of the way,
one would not have thought, until today, that the
mere possibility of such a result — at the expense of
the elimination of price competition and absent the
salutary overlay of a manufacturer's distribution
decision with the entire product line in mind — would
be sufficient to legitimate an otherwise purely anti-
competitive restraint. 1°"
In addition to the foregoing, Business Electronics suffers from an
even more fundamental flaw — its holding that an agreement between a
manufacturer and a dealer to terminate a second dealer is per se
illegal only if the surviving dealer expressly or impliedly agrees to
1 ft 1
set its prices at some level. Initially, as previously noted, such
proof will be virtually impossible for the plaintiff to adduce. More
-60-
importantly , the Supreme Court has never heretofore sanctioned such a
restrictive view of price fixing and indeed, one of the most funda-
mental premises of § 1 jurisprudence, articulated in a number of
landmark decisions, is that any conduct which has the purpose and
effect of restraining price movement and the free play of market
forces is per se illegal. For example, in the antitrust classic,
United States v. Socony-Vacuum Oil Co. (1940), " a case in which the
conspirators manipulated spot market oil prices by concertedly pur-
chasing excess supply, the Court stated:
any combination which tampers with price structure
is engaged in an unlawful activity. . . . [It is
not] important that the prices paid by the combina-
tion were not fixed in the sense that they were
uniform and inflexible. Price-fixing . . . has no
such limited meaning. An agreement to pay or
charge rigid, uniform prices would be an illegal
agreement under the Sherman Act. But so would
agreements to raise or lower prices whatever
machinery for price-fixing was used. . . . Under
the Sherman Act a combination formed for the pur-
pose and with the effect of raising, depressing,
fixing, pegging, or stabilizing the price of a
commodity in interstate or foreign commerce is
illegal per se.l"3
And, as more recently noted by Justice Stevens in National Society of
I /I A
Profess i ona l Engineers v. United States (1978):
"Price is the 'central nervous system of the
economy,' and an agreement that ' interfere [s]
with the setting of price by free market
forces' is illegal on its face. "165
T .t is barely arguable to assert that the coercive dealer terminations
involved in Monsanto , Business Electronics , and their ilk, do not in-
volve horizontal price fixing in the classic sense. The sole purpose
of the agreement is to eliminate the price competition of a competitor
-61-
of one of the conspirators, thereby enabling that conspirator to charge
a higher price. Clearly, this involves "tamper[ing] with price
structures" or "interfere[nce] with the setting of price by free
market forces." Yet the strange mix of GTE Sylvania , Monsanto , and
Business Electronics virtually insulates this type of conduct from
any judicial scrutiny under § 1 of the Sherman Act.
The Court's current characterization of the dealer termination
cases as vertical conspiracies to fix resale prices rather than
horizontal group boycotts would be unobjectionable if the Court had
adopted a broad common-sense definition of resale price maintenance.
In Business Electronics , however, the Court adopts an unprecedented
and unduly restrictive definition of resale price maintenance, thereby
clearly undermining Dr. Miles ' per se prohibition of vertical price
restraints. Contrast, for example, the Business Electronics approach,
with the following definitions of resale price maintenance:
[A] RPM violation will equally lie (1) where a con-
spiracy exists between a supplier or distributor to
eliminate or restrict a distributor's full latitude
to determine prices that he will charge; (2) where
a conspiracy exists between a supplier and a dis-
tributor to eliminate or restrict the freedom of a
second distributor to freely determine what price
he will charge; or (3) where a conspiracy exists
between a supplier and distributor to terminate
or cut off supply to a second distributor because
of the second distributor's pricing policies. . . .
Quite simply, if the p urpose or effect of concerted
activity is to affect or stifle price competition
in any manner, then vertical price fixing is at
issue; and the per se rule is the applicable test . *^6
A RPM agreement is reached when two or more inde-
pendent firms agree to fix, raise, lower, maintain
or stabilize the price at which goods or services
will be resold. 16 '
-62-
Note that under the broad definitions of resale price maintenance out-
lined above, agreement on specific resale prices is not required.
This result is supported by United States v. Parke , Davis and
1 to
Company , in which the court, quoting United States v. Socony-
Vacuum Oil Co. (1940), a case involving horizontal price fixing,
held that Parke Davis's coercion of retailers and wholesalers to
maintain resale prices created a price maintenance combination or
conspiracy in violation of the Sherman Act, and "a combination formed
for the purpose and with the effect of raising, depressing, fixing,
pegging, or stabilizing the price of a commodity in interstate or
foreign commerce is illegal per se."
The Supreme Court apparently retreats from this position in
Business Electronics . That is, in the dealer termination form of
resale price maintenance (the third type quoted in the House Report
above), the Court departs from its general approach to horizontal
price fixing that any agreement that "interf ere[s] with the setting
of price by free market forces is illegal on its face," requiring
172
instead "some agreement on price or price levels." The Business
Electronics Court, relying upon GTE Sylvanla , rejects the argument
that horizontal per se illegality and vertical per se illegality are
equivalent, requiring an agreement on price or price levels in the
latter, but not the former case. This result is utterly inconsistent
with the Court's long-standing and well-reasoned conclusion that
horizontal price fixing includes any "tamper[ing] with price struc-
tures" and "the machinery employed by a combination for price fixing
173
is immaterial."
-63-
Under Business Electronics , "downstream" agreements to maintain
specific prices are apparently per se illegal, whereas "upstream"
agreements involving efforts by full price retailers to attack their
discount competition through a common supplier, are governed by GTE
Sylvania 's toothless "rule of reason" (virtually, per se legal)
standard. As succinctly observed in the House Report accompanying the
"Freedom from Vertical Price Fixing Act of 1987," written before the
Supreme Court's decision in Business Electronics :
On balance, the renewed focus on the "nature" of the
alleged conspiracy (downstream vs. upstream) amounts
to little more than an attempt to reverse the per se
rule against RPM — which the Supreme Court plainly
refused to do when directly confronted with the
issue in Monsanto . '■'^
By adopting a requirement that illegality requires an agreement
on price or price levels in dealer termination cases, the Court adopts
another "forraalistic distinction" that ignores "economic reality,"
which, when coupled with its forraalistic mischaracterization of dealer
termination cases as vertical rather than horizontal, and with the
curious burden of proof standard authorized by Monsanto , virtually
assures a plaintiff's defeat.
VI. The Sad Legacy of GTE Sylvania — The Demise of
§ 1 of the Sherman Act
Another, and perhaps most serious, untoward consequence of GTE
Sylvania and its progeny is that they threaten to undermine virtually
the entire edifice of antitrust law developed under § 1 of the Sherman
Act in the last century. Initially, they have dregded up seemingly
long discredited cases such as U.S. v. Colgate & Co. (1919) relied
-64-
upon in Monsanto and by implication in Business Electronics and
U.S. v. General Electric Co. (1926). The renewed vitality of
Colgate casts doubt upon the continuing validity of the long line of
cases that previously had distinguished and qualified the "Colgate"
doctrine virtually out of existence, most notably United States v.
Parke Davis (I960) 179 and Albrecht v. Herald Co. (1968), 180 despite
181
the Business Electronics court's attempt to distinguish them.
Further, in Business Electronics , the Court resurrected United States
v. General Electric whose resale price maintenance scheme, effected
through a nominal consignment arrangement, was declared per se illegal
182
by a federal district court in 1973, in reliance on Simpson v.
Union Oil Co. (1964) 183 which held that
One who sends a rug or a painting or other work
of art to a merchant or a gallery for sale at a
minimum price can, of course, hold the consignee to
the bargain. . . . When, however, a "consignment"
device is used to cover a vast gasoline distribution
system, fixing prices through many retail outlets,
the antitrust laws prevent calling the "consignment"
an agency, for then the end result of United States
v. Socony- Vacuum Oil Co. , . . . would be avoided
merely by clever manipulation of words, not by dif-
ferences in substance. The present, coercive "con-
signment" device, if successful against challenge
under the antitrust laws, furnishes a wooden formula
for administering prices on a vast scale. *°^
In Business Electronics , Justice Scalia cited General Electric for
the proposition that " Dr. Miles does not apply to restrictions on
price to be charged by one who is in reality an agent of, not a buyer
185
from, the manufacturer." This casual reference to a case long
thought to have been overruled by Simpson , even by Justice Stewart in
-65-
1 86
dissent in that case, now raises doubt concerning the vitality of
Simpson .
In addition, Business Electronics lamely attempts to distinguish
1 87
General Motors , recognized by the Court in that case as a classic
horizontal group boycott. Accordingly, other classic boycott cases
may be of questionable current validity.
Further, as Justice Stevens dissent in Business Electronics
ably notes "what is most troubling about the majority's opinion is its
188
failure to attach any weight to the value of intrabrand competition."
This approach undermines the validity of other cases based on preser-
vation of intrabrand competition, most notably the classic cases in
the development of horizontal market division as a per se Sherman Act
i on
violation, United States v. Sealy, Inc. (1967), and United States
190
v. Topco Associates, Inc. (1972).
Finally, GTE Sylvania and its progeny have undermined even the most
basic Sherman Act premise: the per se illegality of horizontal price
fixing. As previously noted, the Court in Business Electronics adopted
a price fixing definition for dealer termination cases at odds with
that used in other price fixing cases. In addition, the dealer
services argument accepted in Business Electronics could be used to
justify any price fixing arrangement. As noted by Justice Stevens in
dissent in Business Electronics :
[G]iven the majority's total reliance on "economic
analysis," ... it is hard to understand why, if
such a purpose [to provide better services] were
sufficient to avoid the application of a per se
rule in this context, the same purpose should not
also be sufficient to trump the per se rule in all
other price-fixing cases that arguably permit car-
tel members to "provide better services. "191
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In sum, perhaps we have already reached the ideal "antitrust"
world envisioned by Mr. Bork in which the law "abandon[s] its concern
with such beneficial practices as . . . vertical price maintenance and
192
market division." Perhaps we have gone even farther, and have
abandoned the law's traditional and legitimate concern with naked
horizontal restraints. If so, GTE Sylvania and its progeny have led
us there, a result contrary to common sense, the purposes of the
Sherman Act, and almost a century of case law based upon real market-
place behavior.
VII. Conclusion
Criticism of Monsanto and Business Electronics has not been
confined to judges and legal commentators. Bills are pending in both
193
Houses of Congress to codify the rule of Dr. Miles to declare
unequivocally that all forms of resale price maintenance are per se
illegal, including conspiracies between a supplier and a distributor
to terminate or cut off supply to a second distributor because of the
second distributor's pricing policies (the General Motors , Monsanto ,
and Business Electronics fact patterns). The pending bills also would
overrule Monsanto by providing that an inference of concerted action
is raised upon proof that the manufacturer terminated or refused to
194
supply goods or services to the plaintiff-dealer "in response to"
195
or "because of," communications from a competing dealer or dealers
regarding price competition by the plaintiff. Under the bills a
termination or refusal to supply is "in response to" or "because of"
competition communications if such communications are a "major" or
-67-
197
"substantial" contributing cause of the termination or refusal to
supply.
Because the Supreme Court has, over the last 12 years, so thoroughly
divorced itself from traditional antitrust values in the vertical re-
straints area, a legislative response is required. The pending
statutes, though a step in the right direction, do not go far enough
because they do not address the root of the problem: the GTE Sylvania
1 98
holding. The gross injustice that now characterizes the law
governing dealer terminations is based upon an increasingly strained
and intentionally confused reading of the GTE Sylvania case. Until
GTE Sylvania is confined solely to determining the validity of nonprice
restraints in a supplier's distribution process, and a legitimate
standard is developed and applied to determine the validity of such
restraints, GTE Sylvania will continue to undermine antitrust enforce-
ment under § 1. As noted by Justice Stevens in his dissent in
Business Electronics , GTE Sylvania dealt solely with the legality of
restrictions imposed by a manufacturer as an integral part of struc-
turing its product distribution system, not with attempts by powerful
retailers to structure intrabrand retail competition by coercing
199
manufacturers into cutting off competing retailers.
It is unclear whether, at this point, the GTE Sylvania genie can
be put back into its bottle and a searching rule of reason standard
developed to judge the limited issue presented by that case. The more
important question is whether vertical market division schemes ought
to be judged by the rule of reason at all, given the fact that:
-68-
(1) nonprice vertical restraints like vertical price restraints,
raise prices and inhibit or eliminate intrabrand competition; ^00
(2) only plausible or arguable procompetitive justifications
support nonprice vertical restraints, which cannot be proven
or disproven in any given case;
(3) no discriminating rule of reason standard has been developed
in over 11 years of jurisprudence under GTE Sylvania to judge
the legality of nonprice vertical restraints;
(4) GTE Sylvania has undermined the long-standing prohibition against
resale price maintenance in all its forms, not only dealer
termination cases such as Monsanto and Business Electronics ;
(5) GTE Sylvania has, through Monsanto and its progeny, led to the
resurrection of the formerly closely circumscribed Colgate
doctrine and has created needless confusion regarding the
fundamental distinction between unilateral and concerted
activity, which is at the heart of § 1 enforcement;
(6) GTE Sylvania has unnecessarily confused the distinction between
horizontal and vertical restraints of trade and therefore
threatens further to undermine Sherman Act case law governing
horizontal restraints of trade;
(7) GTE Sylvania and its progeny virtually eliminate private enforce-
ment of the Sherman Act for any restraint the arguably can
be characterized as vertical, thus providing no protection
to retail dealers against coercion, collusion, or exclusionary
activities by their competitors and suppliers; and
(8) a rule of reason approach to nonprice vertical restraints is
not necessary to enable suppliers to develop efficient distri-
bution systems.
These consequences clearly indicate that the time has come to over-
rule GTE Sylvania to restore a rule of per se illegality for all
vertical restraints of trade, price and nonprice. Only then will the
Sherman Act be restored to its rightful place as the "Magna Carta of
free enterprise.
-69-
Footnotes
1. 15 U.S.C. § 1. The Sherman Act was enacted in 1890.
2. Id_. Violation of § 1 is a felony punishable by imprisonment of
up to three years and fines of up to $100,000 or both for indi-
viduals and fines of up to $1,000,000 for corporations.
3. Clayton Act § 4, 15 U.S.C. § 15. In addition to private treble
damage actions, civil equitable actions maintained either by the
government or private plaintiffs are a common tool of antitrust
enforcement. Section 4 of the Sherman Act (15 U.S.C. § 4) and
§ 15 of the Clayton Act (15 U.S.C. § 25) confer jurisdiction upon
the federal courts to "prevent and restrain" violations and
impose a duty upon the Attorney General to institute proceedings
in equity for that purpose. Similarly, § 16 of the Clayton Act
(15 U.S.C. § 26) authorizes private plaintiffs (such as an
injured competitor) to maintain actions to enjoin actual or
threatened injury resulting from violation of either the Sherman
Act or the Clayton Act.
4. Vertical nonprice restraints include generally some combination
of location, territory and customer restrictions. Under a
"location" restriction, the seller contractually requires the
buyer to resell only from a stated location, such as the buyer's
existing retail store. A "territorial" restriction requires a
buyer to confine its sales to a given geographic area, such as a
city or county or portion thereof. A "customer" restriction
-70-
requires , for example, a retailer to sell goods purchased only
to consumers and not to other retailers. These restrictions are
commonly found in the franchise agreement authorizing the
independent dealer to sell the manufacturer's products under the
manufacturer's trade name or mark. For example, in White Motor
Company v. United States , 372 U.S. 253, 83 S.Ct. 696 (1963),
White Motor Company, a manufacturer of trucks and parts, imposed
the following territorial and customer restrictions on its
franchisees :
Territorial Clause
"Distributor is hereby granted the exclusive
right, except as hereinafter provided, to sell dur-
ing the life of this agreement, in the territory
described below, White and Autocar trucks purchased
from Company hereunder.
"STATE OF CALIFORNIA: Territory to consist of
all of Sonoma County, south of a line starting at
the western boundary, or Pacific Coast, passing
through the City of Bodega, and extending due east
to the east boundary line of Sonoma County, with
the exception of the sale of fire truck chassis to
the State of California and all political subdivi-
sions thereof.
"Distributor agrees to develop the aforemen-
tioned territory to the satisfaction of Company,
and not to sell any trucks purchased hereunder ex-
cept in accordance with this agreement, and not to
sell such trucks except to individuals, firms, or
corporations having a place of business and/or pur-
chasing headquarters in said territory."
Customer Clause
"Distributor further agrees not to sell nor to
authorize his dealers to sell such trucks to any
Federal or State government or any department or
political subdivision thereof, unless the right to
do so is specifically granted by Company in writing."
-71-
In United States v. General Motors Corporation , 384 U.S. 127,
86 S.Ct. 1321 (1966), General Motors imposed a location clause
on Chevrolet dealers in its dealer selling agreement which pro-
hibited a franchised dealer from moving to or establishing "a
new or different location, branch sales office, branch service
station, or place of business . . . without the prior written
approval of Chevrolet."
5. 221 U.S. 1, 31 S.Ct. 502 (1911).
6. See infra notes 81-100 and accompanying text for a detailed
discussion of rule of reason analysis.
7. Northern Pacific Railway Compan y v. U nited States , 356 U.S. 1,
5, 78 S.Ct. 514, 518 (1958).
8. For a partial listing of cases establishing horizontal per se
violations, see infra notes 54, 55, 57, 59.
9. 220 U.S. 373, 31 S.Ct. 376 (1911).
10. 433 U.S. 36, 97 S.Ct. 2549 (1977).
11. 465 U.S. 752, 104 S.Ct. 1464 (1984).
12. U.S. , 108 S.Ct. 1515 (1988).
13. 465 U.S. at 764, 104 S.Ct. at 1471.
14. U.S. at , 108 S.Ct. at 1525.
-72-
15. See, for example , BORK, THE ANTITRUST PARADOX 288-298 (1978)
(hereinafter BORK); Posner, The Next Step in the Antitrust
Treatment of Restricted Distribution: Per Se Legality , 48
U. CHI. L. REV. 6 (1981) (hereinafter Posner); Easterbrook,
Vertical Arrangements and the Rule of Reason , 53 ANTITRUST L.J.
135 (1984) (hereinafter Easterbrook).
16. 372 U.S. 253, 83 S.Ct. 696 (1963).
17. 388 U.S. 365, 87 S.Ct. 1856 (1967).
18. 433 U.S. 36, 97 S.Ct. 2549 (1977).
19. The Supreme Court in United States v. Topco Associates, Inc. ,
405 U.S. 596, 92 S.Ct. 1126 (1972), stated:
It is only after considerable experience
with certain business relationships that courts
classify them as per se violations of the
Sherman Act. . . . One of the classic examples
of a per se violation of § 1 is an agreement
between competitors at the same level of the
market structure to allocate territories in
order to minimize competition. . . . This
Court has reiterated time and time again that
"[h]orizontal territorial limitations . . .
are naked restraints of trade with no purpose
except stifling of competition." White Motor
Co. v. United States, 372 U.S. 253, 263, 83
S.Ct. 696, 702, 9 L.Ed. 2d 738 (1963). Such
limitations are per se violations of the
Sherman Act. (405 U.S. at 607-608, 92 S.Ct.
at 1133-1134.)
The court went on to hold that horizontal market division is
per se illegal whether or not accompanied by other antitrust
violations (405 U.S. at 609 n. 9, 92 S.Ct., at 1134 n. 9).
-73-
Note that Topco , like White Motor and other vertical re-
straint cases discussed in this paper, involved intrabrand
market division. Topc o was recently cited with approval by the
Supreme Court in Business Electronics Corporation v. Sharp
Electronics Corporation , U.S. , , 108 S.Ct. 1515,
1524 (1988).
20. 372 U.S. at 261, 83 S.Ct. at 701. ( Emphasis in original.)
21. 372 U.S. at 276, 83 S.Ct. at 708 (Clark, J., dissenting).
22. 372 U.S. at 278, 83 S.Ct. at 709 (Clark, J., dissenting).
23. 372 U.S. at 279, 281, 83 S.Ct. at 710-711 (Clark, J., dissenting)
24. 388 U.S. at 378-380, 87 S.Ct. at 1865-1866.
25. For a sampler of criticism of Schwinn , see Justice Stewart's
dissent in Schwinn , 388 U.S. at 382-394, 87 S.Ct. at 1867-1873;
BORK, supra note 15 at 282-285 (1978); Handler, The Twentieth
Annual Antitrust Review — 1967 , 53 VA. L. REV. 1667, 1680-89;
Pollock, Alternative Distribution Methods After Schwinn , 63
NW. L. REV. 595 (1968); Sadd, Territorial and Customer Re-
strictions After Sealy and Schwinn , 38 U. CIN. L. REV. 249
(1969); The Supreme Court , 1966 Term , 81 HARV. L. REV. 69, 235-39
(1967); Note, Restrictive Distribution Agreements After the
Schwinn Case , 53 CORN. L. REV. 515 (1967). Note, Territorial
and Customer Restrictions : a_ Trend Toward a_ B roader Rule of
Reason?, 40 GEO. WASH. L. REV. 123 (1971). For a more inclusive
-74-
list of articles and comments, see GTE Sylvania, Incorporated
v. Continental T.V., Inc. , 537 F.2d 980, 988 n. 13 (1976).
26. 377 U.S. 13, 84 S.Ct. 1051 (1964).
27. See SULLIVAN, HANDBOOK OF THE LAW OF ANTITRUST 404-406 (1977),
28. 537 F.2d 980 (9th Cir. 1976).
29. 433 U.S. at 51-52, 54-55, 97 S.Ct. at 2558, 2560.
30. 433 U.S. at 57-59, 97 S.Ct. at 2561-2562.
31. As Professor Sullivan has noted:
In distribution, as in other aspects of the produc-
tive process, rivalry between traders tends to keep
prices down and to stimulate efforts to reduce costs
while Increasing quality, service and shopping con-
venience. Furthermore, since the ability of a trader
to offer (or approach) that mixture of high quality,
low price, efficient service and attractive, con-
venient facilities which the public regards as
optimal is what maximizes the trader's reward in
a competitive distribution market, competition in
distribution (as in production) stimulates a re-
sponse which the public values highly. The
Supreme Court has consistently pointed to these
goals as basic ones for antitrust policy.
But low prices and optimum allocation are not
the only public interests which competition
fosters; it also tends toward other important
social values: economic stability, fair and
rational income distribution, an economic climate
in which any person can aspire to Independence and
growth, dispersion of political and social as well
as economic power, and fair and objective deci-
sions dictated by market forces in economic rela-
tions between individuals. These values too are
relevant to the development of a sound antitrust
policy with respect to the distribution sector.
Sound public policy thus requires that the deci-
sion whether a particular retail trader is to
sell in a particular market should be a personal
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decision based upon a personal readiness to take
the risks and suffer the consequences; it should
not be an administered decision made for the
trader by the home office personnel of a national
manufacturer. Any argument against per se treat-
ment of territorial or customer resale restraints
must then be based on the existence of offsetting
advantages which, at least in some instances, may
be more beneficial than damaging to competition.
(SULLIVAN, supra note 27 at 411-412.)
32. Id. at 413.
33. Id.
34. Id. at 414.
35. U.S. DEPARTMENT OF JUSTICE, VERTICAL RESTRAINTS GUIDELINES
§ 3.1 (Jan. 23, 1985).
36. SULLIVAN, supra note 27 at 414.
37. THE NATIONAL ASSOCIATION OF ATTORNEYS GENERAL, VERTICAL RE-
STRAINTS GUIDELINES § 3.2 (Dec. 4, 1985). In the context of
fair trade, former President Ronald Reagan once noted:
[I]n an age when advertising has effectively pre-
sold so many brand names, is the retailer really
providing any extra useful service to the con-
sumer in exchange for that higher margin? It's
nice to know that he carries a broad selection,
but without fair trade, wouldn't an enterprising
merchant carry as broad a line of, say cosmetics
as his customers demand? (From a column written
by Mr. Reagan for Copley News Service, reprinted
at 121 Cong. Rec. 1268 (Jan. 23, 1975).)
38. For example, Stephen J. Jelin, president of Prange Way Stores,
speaking on behalf of the National Mass Retailing Institute re-
cently noted:
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Frora my perspective, I seriously doubt the
validity of the free-rider theory. The litera-
ture of which I am aware, and my own hands-on
experience, tell me that consumers rarely, if
ever, take advantage of the services of one out-
let and then purchase the product elsewhere; and
I know that to be true because my company oper-
ates full-service department stores that are
adjacent to, and in many cases, even share
premises with our discount stores, both carrying
the same identical merchandise. Customers
usually buy products, even sophisticated computer
products, at the stores where they received the
initial demonstration. Further, price competi-
tion and good service can, and do, go hand-in-hand
in most cases. For years discount retailers have
been selling complex products. Our stores, for
example, carry a substantial line of consumer
electronics, a limited selection of personal
computers, a fair choice of telephonic equipment,
a lot of diverse small appliances, an impressive
array of cameras and sight and sound equipment,
and a lot of other such merchandise that requires
technical knowledge on the part of the purchasing
consumer. We provide what technical data and in-
formation we can, within the constraints that a
no-frills, self-service, low-margin operation
imposes, primarily in the form of clearly pre-
sented manufacturer-supplied information; and we
back our commitment to our customer with a "satis-
faction guaranteed, no questions asked refund
policy." We are hardly "free-riders"; and we sell
a great deal of merchandise to a large number of
satisfied customers who want to shop for both
items and prices.
The whole "free-rider" concept is particularly
troublesome to me, with my personal background in
apparel retailing, when I find it being used as a
kind of intellectual stretcher-bar to extend the
notion of permissible price restraints to cover
apparel and health and beauty aids and candy, and
all sorts of categories to which it is patently not
a bit relevant... and equally patently anti-
competitive in its effect.
The consumer is the best judge of whether she
or he wishes to pay more for more technical con-
sultation and expertise with her product, or less
without it. And I assure you that the consumer's
choices resonate loudly and clearly in the free
marketplace. Most discounters have gone out of the
expensive personal computer business because most
-77-
customers for that commodity made it clear that
they would prefer to pay more elsewhere. However,
other sophisticated electronics businesses, like
television sets and microwave ovens, are appro-
priately carried by both discount and non-discount
outlets and an unproven and questionable theory
like "free-rider" should not be intruded into this
free market system by an executive agency. (Senate
Hearing, infra note 40 at 118-119.)
39. Comanor, Vertical Price Fixing, Vertical Market Restrictions,
and the New Antitrust Policy , 98 HARV. L.R. 983, 987-988 (1985).
40. Statement of Lawrence A. Sullivan, Statement Concerning the
Department of Justice Vertical Restraint Guidelines : Hearings
Before Senate Committee on the Judiciary , S. Hrg. 99-224 (July
16, 1985) at 72.
41. Id. at 72-73.
42. For example, in a recent letter to the editor of the National
Law Journal, Gary J. Shapiro, Staff Vice President of the Con-
sumer Electronics Group of the Electronic Industries Associa-
tion, in support of the Supreme Court's GTE Sylvania and
Business Electronics decisions stated:
The antitrust views of the Supreme Court
have furthered consumer welfare. Ironically,
both decisions involved sales of consumer
electronics products (televisions and cal-
culators, respectively). Since the GTE
Sylvania decision, color TV prices have
dropped more than 10 percent; other consumer
electronics products experienced similar
price drops. (National Law Journal,
October 24, 1988 at 12.)
43. Senator Strom Thurmond recently stated, in opposing a bill that
would overrule Monsanto and codify the per se prohibition against
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resale price maintenance, that the discount industry has
flourished even after Monsanto was decided. See , S. Rep.
100-230, 100th Cong., 2d Sess. 16-17 (1988) (minority views of
Senators Thurmond, Hatch, and Simpson).
44. For example in Sylvanla , the manufacturer increased its market
share after its vertical restraints were instituted without evi-
dence of profitability.
45. SULLIVAN, supra note 27 at 417.
46. Id.
47. See , supra note 42.
48. GTE Sylvania Incorporated v. Continenta l T.V. Inc. , 537 F.2d 980,
1026 n. 16 (9th Cir. 1976) (Browning, J., dissenting).
49 . Business Electronics Corporation v. Sharp Electronics Corpora-
tion , U.S. , , 108 S.Ct. 1515, 1520 (1988).
50. GTE Sylvania Incorporated v. Continental T.V. Inc. , 537 F.2d 980,
1028-1029 (9th Cir. 1976) (Browning, J., dissenting).
51. Id at. 1028.
52. SULLIVAN, supra note 27 at 419.
53. Standard Oil Co. v. United States , 221 U.S. 1, 31 S.Ct. 502,
515-516 (1911).
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54. Northern Pacific Railway Company v. United States , 356 U.S. 1,
5, 78 S.Ct. 514, 518 (1958).
55. United States v. Socony-Vacuum Oil Co., Inc. , 310 U.S. 150, 60
S.Ct. 811 (1940).
56. Dr. Miles Medical Co. v. John D. Park & Sons Co. , 220 U.S. 373,
31 S.Ct. 376 (1911).
57. Fashion Originators Guild v. FTC , 312 U.S. 457, 61 S.Ct. 703
(1941).
58. Northern Pacific Railway Company v. United States , 356 U.S. 1,
78 S.Ct. 514 (1958).
59. United States v. Topco Associates, Inc. , 405 U.S. 596, 92 S.Ct.
1126 (1972).
60. Areeda, The "Rule of Reason in Antitrust Analysis: General
Issues 2 (Federal Judicial Center (1981)); see also , 6 AREEDA,
ANTITRUST LAW 371 (1986).
61. Id. at 16-17.
62. 6 AREEDA, ANTITRUST LAW 371-372 (1986).
63. 374 U.S. 321, 83 S.Ct. 1715 (1963).
64. Id., 374 U.S. at 370, 83 S.Ct. at 1745.
65. 405 U.S. 596, 92 S.Ct. 1126 (1972).
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66. 405 U.S. at 609-611, 92 S.Ct. at 1134-1135.
67. 405 U.S. at 609-610, 92 S.Ct. at 1134 (emphasis added).
68. See BORK, supra note 15; Bork, Legislative Intent and the
Policy of the Sherman Act , 9 J. L. & ECON. 7 (1966); POSNER ,
ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 23 (1976); Posner, The
Chicago School of Antitrust Analysis , 127 U. PA. L. REV. 925
(1979). For a brief introduction to the views of the Chicago
School, see Cann, infra note 71, at 486-493.
69. Lande, An Anti-Antitrust Activist , NAT'L L.J., Sept. 7, 1987 at
28 (hereinafter "Lande II"); Lande, Wealth Transfers a nd the
Original a nd Primary Concern of Antitrust : The Efficiency
Interpretation Challenged , 34 HASTINGS L.J. 65, 68 (1982) (here-
inafter "Lande I").
70. As noted by Professor Sullivan:
Among the non-economic goals of antitrust, all
quite tenable as policy objectives, are a preference
for decentralization of economic power, reduction of
the range within which private discretion may be
exercised in matters materially affecting the welfare
of others, enhancement of the opportunity for more
people to exercise independently entrepreneurial
impulses, and, most blatantly, a social preference
for the small rather than the large. ( SULLIVAN ,
supra note 27 at 11.)
Professor Hovenkamp summarizes noneconomic "competing" values as
including
maximization of consumer wealth, protection of
small businesses from larger competitors, protec-
tion of easy entry Into business, concern about
large accumulations of economic or political power,
-81-
prevention of the impersonality or 'f acelessness '
of giant corporations, encouragement of morality
or 'fairness' in business practice, and perhaps
some others." HOVENKAMP , ECONOMICS AND FEDERAL
ANTITRUST LAW 41-42 (1985).
7 1 . Cann , Vertical Restraints and the "Efficiency" Influence — Does
Any Room Remain For More Traditional Antitrust Values and More
Innovative Antitrust Policies ?, 24 A. B.L.J. 483, 484 (1987).
72. Id_. ; see Posner, supra note 15.
73. Professor Cann advocates a more rigorous rule of reason analysis
than that espoused by the Chicago School in judging the legality
of vertical restraints:
Antitrust policy should balance the goals of
Congress, the needs of consumers, and the require-
ments of changing industries more appropriately than
does the currently fashionable Chicago efficiency
approach. Although the pursuit of efficiency is a
laudable goal, the elevation of efficiency to the
pinnacle of antitrust values has largely been the
consequence of the visions (or biases) of the care-
takers of antitrust enforcement. Contrary to the
beliefs of the Chicago economist, however, the
status that should be accorded efficiencies within
the broader pecking order of social values remains
an open question. The value of efficiencies should
be weighed against the values that can be derived
from product accessibility, consumer convenience,
promotional diversification, intrabrand dealer
selection, entrepreneurial innovation, entry and
exit capabilities, and the diffusion of economic
decision-making. (Cann, supra note 71 at 538.)
The National Association of Attorneys General, Vertical
Restraints Guidelines (Dec. 4, 1985) also advocate a searching
rule of reason analysis noting:
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In weighing the interbrand effects of a non-
price vertical restraint of trade, which may be
anticompetitive, or pro-competitive and counter-
balance or outweigh the anticompetitive intrabrand
effects, the following factors will be assessed:
1. The extent of product differentiation
(relative elasticity of demand, possibility of
intrabrand free-riding) or fungibility (highly
elastic demand, possibility of interbrand free-
riding and increased probably of collusion);
2. Whether restraints have resulted in multi-
brand exclusive distributors (reduced interbrand
competition and facilitation of collusion when con-
gruent and inefficiency when non-congruent);
3. The extent to which a restraint is adopted
as a result of dealer pressure;
4. whether a supplier requires that additional
services be performed by dealers subject to a re-
straint and monitors compliance and whether addi-
tional services have been rendered subsequent to
imposition of the restraint (evidence of pro-
competitive intent and effect);
5. The contractual longevity and rigidity of
a restraint (potentially maintaining an anticompeti-
tive restraint) and its natural longevity (demon-
strating its actual efficiency) ;
6. The effect the restraint has upon the real-
ization of scale economies;
7. Concentration and coverage of the markets
where the restraint is imposed (facilitation of
interbrand collusion and exclusion of rivals);
8. Whether the industry where the restraint
is imposed is oligopolistic in nature and whether
patterns of tacitly collusive or consciously
parallel behavior exist;
9. The output performance of individual firms
and the industry after the restraint was imposed
(output increase as a result of new demand is gen-
erally efficient), (output increase as a result of
"cannibalizing" existing demand is either inefficient
or ambiguous);
10. Whether the restraint eases entry (pro-
competitive) or raises entry barriers (anticompeti-
tive) and whether entry barriers unrelated to the
restraint are high or low (predicting how quickly an
anticompetitive restraint would result in new
entrants) ;
11. Whether the number of price/quality options
for consumers are increased (pro-competitive) or de-
creased (anti-competitive) by imposition of the
restraint; and
-83-
12. Miscellaneous factors such as the regulatory
climate, history of collusive practices and the actual
competitive intent of firms imposing a restraint.
(Id. at § 4.16.)
74. See , Easterbrook, supra note 15; Posner, supra note 15.
75. Id.
76. For a discussion of some of these cases, see Cann, supra note
71 at 505-509.
77. GTE Sylvania, Inc. v. Continental T.V., Inc. , 537 F.2d 980,
1024 (1976) (Browning, J., dissenting). And as noted by the
Supreme Court in United States v. Topco Associates , Inc. , 405
U.S. 596, 609-610, 92 S.Ct. 1126, 1134 (1972):
The fact is that courts are of limited utility in
examining difficult economic problems. Our
inability to weigh, in any meaningful sense,
destruction of competition in one sector of the
economy against promotion of competition in
another is one important reason we have formu-
lated per se rules.
78. See supra note 48 and accompanying text; see also , Preston,
Restrictive Distributio n Arrangements : Economic Analysis and
Public Policy Standards , 30 LAW & CONTEMP. PROB. 506, 508-509
(1965).
79. GTE Sylvania, Inc. v. Continental T.V., Inc. , 537 F.2d 980,
1024, 1026-1027 (1976) (Browning, J., dissenting).
80. United States v. Topco Associates, Inc. , 405 U.S. 596, 611-612,
92 S.Ct. 1126, 1135 (1972).
-84-
81. See , Cann, supra note 71 at 505-509. Professor Cann also
notes :
[V]ertlcal restraints inherently restrain intrabrand
competition. They tend to decrease the number of
available dealers, they tend to reduce product
accessibility, and they have the potential for
creating higher prices for infra-marginal purchasers.
They tend to frustrate retailer innovation and con-
centrate both economic and decision-making power in
the hands of fewer individuals. They tend to create
barriers to entry (whether categorized as natural or
artificial), they tend to delay the effects of cor-
rective market forces, they tend to reduce the range
of consumer options, and they appear to place primary
emphasis on stimulating demand (and the higher prices
that can result) rather than on increasing the capacity
for supply. (Id. at 535.)
82. Statement of Lawrence A. Sullivan, supra note 40 at 67.
83. Id. at 78.
84. When most or all of the competing suppliers in
a concentrated industry limit the number and geo-
graphical reach of their dealers, a dealer's cartel
will be shielded from competitive prices from out-
side the cartel's region. Similarly, direct col-
lusion among suppliers or collusion with dealers
acting as surrogates is facilitated. Furthermore,
the widespread use of such restraints facilitates
the policing of a conspiracy, by strictly control-
ling the number of outlets that must be monitored
for compliance. (NAAG Guidelines, supra note 37
at § 3.3B; see also , Justice Department Guidelines,
supra note 35 at § 3.21.)
85. When the dominant firms in a concentrated
market bind available dealers to exclusive dealing
arrangements, rivals of the dominant firms or poten-
tial entrants may have difficulty arranging for the
distribution of their products. Potential entrants
may be forced to enter the market at two levels
rather than one, making entry significantly more
costly. Existing competitors may be forced to
vertically integrate or find new independent dealers.
Either option may be more costly than distributing
through the now foreclosed dealers.
-85-
A firm may contract for the exclusive right to
purchase an important component in the manufacturing
or distribution process. If the exclusive arrange-
ment leaves insufficient quantities of the important
component for competitors, potential or existing,
entry barriers may be raised and costs of production
increased. This will occur if the competing firms
must integrate into the production of the component,
and this is more costly, or if they are forced to
substitute a less cost-effective or suitable com-
ponent. (NAAG Guidelines, supra note 37 at § 3.3C;
see also Justice Department Guidelines, supra note
35 at § 3.22.
86. NAAG Guidelines, supra note 37 at § 3. 3D.
87. Comanor, Vertical Territorial and Customer Restrictions: White
Motor and Its Aftermath , 81 HARV. L.R. 1419, 1437 (1968);
Zimmerman, Distribution Restrictions After Sealy and Schwinn ,
12 ANTITRUST BULL. 1181, 1183-1185 (1967); Schmitt, Antitrust
and Distribution Problems in Tight Oligopolies — A Case Study of
the Automobile Industry , 24 HASTINGS L.J. 849, 906 (1973).
88. Bork, The Rule of Reason and the Per Se Concept : Price Fixing
and Market Division , 75 YALE L.J. 373 (1966); 3ork, A Reply to
Professors Gould and Yamey , 76 YALE L.J. 731 (1967).
89. See Comanor, Vertical P rice Fixing, Vertical Market Restrictions,
and the New Antitrust Policy , 98 HARV. L.R. 983 (1985). For
example, Professor Comanor notes:
The conventional wisdom fails to acknowledge
the importance of differences among consumers re-
garding their preferences for dealer-provided
services. Where such differences exist, manu-
facturers' and consumers' interests do not neces-
sarily coincide. (Id. at 990.)
-86-
And as Professor Sullivan explained:
It is true that some same-brand restraints can in
some circumstances have some affirmative effects
on interbrand competition. For example, primary
responsibility clauses, location clauses, or
passover arrangements might be used by a new en-
trant or a weak brand to encourage point of sale
promotion or service. But even when a benefit of
that kind is present, there is also a cost. The
restraint is intended to reduce intrabrand compe-
tition, thus enabling the dealer to charge a
higher price. The notion is that interbrand
competition will preclude the dealer from pocket-
ing a monopoly return; he will be forced by
interbrand competition to spend the extra return
on promotion or service. The welfare of con-
sumers who would not otherwise have known about
the product, or who had need for the additional
service, will thus be increased. But the cost
is there too. All consumers pay the new, higher
price that the restraint supports, including
those that knew about the product even before
the restraint, and those who do not need the
additional service. . . .
[I]t is more important to recognize that
even when the restraint enhances the return to
the manufacturer, that does not mean that the
manufacturer is distributing the product in the
way that is "best" for consumers. Manufacturer
welfare is not a reliable surrogate for consumer
welfare. Some Chicago theorists, like Bowman,
have recognized this. Others, like Posner and
Bork, have not. . . . [A] vertical restraint
always hurts those consumers who do not need
(and would, if given the choice, not have paid
for) the additional information, additional
service or additional amenity supported by the
higher prices facilitated by the restraint.
The restraint is a benefit only to those con-
sumers who, if given the choice, would have
preferred to pay the higher price in order to
receive the additional service, information or
amenity. Indeed, the restraint benefits these
consumers only if, but for the restraint, no
dealer would have offered the higher price,
higher service, information, or amenity option.
If the market would have given a reasonable
range of such options even without the re-
straint, there are consumers whose welfare Is
impaired, but none whose welfare is improved.
-87-
In sura, the manufacturer may choose the method
of distribution best for him, but not best for
consumers. (Statement of Lawrence A. Sullivan,
s upra note 40 at 78-79.)
90. Graphic Prods. Distribs., Inc. v. Itek Corp. , 717 F.2d 1560,
1573 (11th Cir. 1983). This approach, which shifts the burden
of persuasion to the defendant to justify restraints crossing a
certain anticompetitive threshold has been advocated by Pro-
fessor Areeda ( see supra note 62 and accompanying text) and by
Professor Cann, who notes:
By requiring manufacturers to prove such countervail-
ing benefits in connection with restraints that cross
a given threshold, antitrust officials could ensure
that vertical activities that result in substantial
adverse intrabrand and social effects will be under-
taken with at least some worthwhile purpose in mind.
When a manufacturer is unable to demonstrate any
reasonable likelihood of counterbalancing benefits,
the argument that the purpose of the restraint is to
enhance the manufacturer's interbrand competitive
position (rather than merely to isolate retailers
from intrabrand competition) loses credibility.
Under such circumstances, little harm would result
from a decision prohibiting the restraint. . .
While no formal mechanisms have been estab-
lished for shifting the burden of proof in cases
involving restraints of substantial proportion,
there is support for the proposition that firms
imposing vertical restraints should be required
more clearly to justify their actions. In
Eiberger v. Sony Corp. of America, 622 F.2d 1068
(2d Cir. 1980), for example, the court indicated
that in those cases where no interbrand benefit
can be established, an adverse impact on intrabrand
competition may by itself support a finding of
antitrust violation. Id. at 1075, 1081. In
Graphic Prods. Distribs., Inc. v. Itek Corp., 717
F.2d 1560 (11th Cir. 1983), the court recognized
that an antitrust plaintiff must not be required
to disprove all conceivable procompetitive justi-
fications in order to demonstrate a violation of
the antitrust laws. Id_. at 1573. The NAAG
Guidelines, reflecting the position of the fifty
-88-
state attorneys general, specifically recognize
that the potential benefits of vertical restric-
tions should not be presumed. NAAG Guidelines,
. . . at § 3.2. Their likely benefits must be
demonstrated. Id_. The adoption of a threshold
beyond which procompetitive justifications or
counterbalancing benefits would have to be demon-
strated, would represent an explicit recognition
of the concerns expressed in the NAAG Guidelines
and by the courts in such cases as Eiberger and
Itek. (Cann, supra note 71 at 536.)
As noted above, proof of the existence of the restraint should
be the appropriate threshold which shifts the burden of per-
suasion.
91. The Justice Department's Vertical Restraints Guidelines, supra
note 35, prompted a hearing by the Senate Judiciary Committee,
S. Hrg. 99-224 (July 16, 1985), in which the guidelines were
roundly denounced. Further, Congress passed a joint resolution,
P.L. 99-180, 99 Stat. 1169, which was signed into law by President
Reagan on December 13, 1986, which states, inter alia , that the
Justice Department Vertical Restraint Guidelines "do not have
the force of law, do not accurately state current antitrust law,
and should not be considered by the courts of the United States
as binding or persuasive." Note that the NAAG Guidelines, supra
note 37, were written in response to and as a repudiation of
the Justice Department Guidelines.
92. Justice Department Guidelines, supra note 35 at § 4.226. See
also In re Beltone Electronics Corp. , 100 F.T.C. 68, 209 (1982).
93. Statement of Lawrence A. Sullivan, supra note 40 at 77.
-89-
94. Easterbrook, supra note 15 at 145, 151.
95. United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct. 465,
468 (1919); Monsanto Com pa ny v. Spray-Rite Service Corporation ,
465 U.S. 752, 760, 104 S.Ct. 1464, 1469 (1984).
96. SULLIVAN, supra note 27 at 423-424.
97. Professor Sullivan notes that
The arrangements have been upheld when [1] the manu-
facturer is introducing a new product and where sig-
nificant capital investment must be made or sub-
stantial expense incurred by the dealer, or [2] when
the seller is a small or weak firm in its market.
(Id. at 424.)
For the first proposition, he cites United States v. Bausch &_
Lomb Optical Co. , 321 U.S. 707, 64 S.Ct. 805 (1944); and for the
second, Schwing Motor Co. v. Hudson Sales Corp. , 138 F.Supp. 899
(D.Md.), aff r d , 239 F.2d 176 (4th Cir. 1956), cert, denied , 355
U.S. 823, 78 S.Ct. 30, 38 (1957); Packard Motor Car Co. v.
Webster Motor Car Co. , 100 U.S. App.D.C. 161, 243 F.2d 418
(D.C.Cir.), cert, denied, 355 U.S. 822, 78 S.Ct. 29 (1957);
Hevermon, Dealer Territorial Security and "Bootlegging" in the
Auto Industry , 1962 WIS. L. REV. 486; Kessler, Automobile Dealer
Franchises : Vertical Integration by Contract , 66 YALE L.J.
1135 (1957); PASHIGIAN, THE DISTRIBUTION OF AUOTMOBILES: AN
ECONOMIC ANALYSIS OF THE FRANCHISE SYSTEM (1961); Rif kind ,
" Division of Territories ," in HOW TO COMPLY WITH THE ANTITRUST
LAWS (Van Cise & Dunn, eds . 1954).
-90-
98. As noted by Professor Sullivan:
[Ejxclusive dealerships, unlike territorial or loca-
tion restrictions on dealers, cannot be used to stamp
out intrabrand competition entirely. If the author-
ized dealer sets prices too high, or provides inade-
quate service, promotes inefficiently or otherwise
creates market opportunities, a dealer authorized and
receiving shipments elsewhere can ship goods into the
exclusive area and sell them there. ... To allow the
manufacturer to use [an exclusive dealership] system
is, in effect, to concede to the manufacturer a
legitimate interest in how its goods are handled on
resale, while not allowing it to press that interest
to an extreme. The distinction between a seller's
promise and a buyer's is perhaps a practical, if
clumsy, place to draw the line. Moreover, the
seller's promise, being less restrictive than the
buyer's, can be defended as the less restrictive way
of achieving manufacturer objectives. In addition,
the exclusive franchise differs from the territorial
restriction on the buyer in that the latter is often
charged with a coercive energy which is likely to be
lacking where the only restriction is upon the seller.
(SULLIVAN, supra note 27 at 424, 426-427.)
The House report accompanying the "Freedom from Vertical Price
Fixing Act of 1987" addresses the less restrictive alternatives
issue in the context of resale price maintenance:
The Justice Department has . . . argued that re-
sale price maintenance is procorapetitive because it
is a useful tool for expanding a manufacturer's
dealer network or encouraging dealers to provide
additional promotion or services. To be sure, a
guaranteed higher minimum retail price can be an in-
centive to a retailer considering whether to handle a
product. But however useful to suppliers or some re-
tailers, a minimum resale price hurts consumers. And
manufacturers have other means to achieve these ends
that will not harm consumers.
A manufacturer may offer numerous enticements
to a potential new dealer, including attractive
prices, funds to subsidize dealer promotions, and
even an exclusive dealership. In addition, manu-
facturers who wish dealers to provide advertising
or services commonly contract separately with their
dealers to provide such services. The "free rider"
problem — that discounters may rely on full-price
-91-
dealers to provide advertising, information, and
warranty services — can be addressed most effectively
through such contractual commitments, without the
harm to consumers that ensues from such vertical
price fixing. Indeed, absent a contractual commit-
ment, resale price maintenance would, in any event,
not eliminate free riders since full price retailers
could still disregard dealer service and promotion
standards. (H.R. Rep. No. 100-421, 100th Cong.,
1st Sess. 13 (1987) (hereinafter "House Report").
It may be argued that a location clause is necessary to enforce
an exclusive distributorship; that is, the manufacturer could
not keep its promise to license only one dealer in a given area
if dealers licensed in other territories were free to open new
stores outside their geographic area. In fact, a location
clause is not necessary. If a dealer is both efficient enough to
adequately develop and serve its territory and has the capital
and ability to expand into another area, why not let it? The
possibility that a dealer initially licensed in one territory
might later expand to another or others should provide an in-
centive for all dealers to be efficient and over time lessens
the intrabrand insulation of the exclusive distributorship.
99. 6 AREEDA, ANTITRUST LAW 1 1508 (1986).
100. Williams , Distribution and the Sherman Act — The Effects of
General Motors, Schwinn and Sealy , 1967 DUKE L.J. 732, 735. See
also Zimmerman, supra note 87, at 1186-87 & n.8.
101. For example, Professor Easterbrook reads GTE Sylvania to provide
"a highly deferential standard of review" under which vertical
-92-
restraints "are lawful except in the rarest of cases."
Easterbrook, supra note 15 at 135.
102. 465 U.S. 752, 104 S.Ct. 1464 (1984).
103. U.S. , 108 S.Ct. 1515 (1988).
104. SULLIVAN, supra note 27 at 427.
105. 465 U.S. at 756, 104 S.Ct. at 1466-1467.
106. 684 F.2d 1226 (7th Cir. 1982).
107. Id. at 1238.
108. 465 U.S. at 761, 104 S.Ct. at 1469.
109. 465 U.S. at 762-764, 104 S.Ct. at 1470-1471.
110. SULLIVAN, supra note 27 at 427.
111. House Report, supra note 98 at 14.
112. Business Electronics Corporation v. Sharp Electronics Corpora-
tion , U.S. , , 108 S.Ct. 1515, 1526 (1988)
(Stevens, J., dissenting).
113. 384 U.S. 127, 86 S.Ct. 1321 (1966).
114. As noted by the Court:
There is evidence that unanimity was not ob-
tained without reference to the ultimate power of
General Motors. The testimony of dealer Wilbur
Newman was that regional manager Cash related a
-93-
story, the relevance of which was not lost upon
him, that in handling children, "I can tell them
to stop something. If they don't do it * * * I
can knock their teeth down their throats." 384
U.S. at 136, 86 S.Ct. at 1326.
115. 384 U.S. at 138, 86 S.Ct. at 1326-1327.
116. 384 U.S. at 139-140, 143, 145, 86 S.Ct. at 1327-1330.
117. The Court discussed Klor's Inc. v. Broadway-Hale Stores, Inc. ,
359 U.S. 207, 79 S.Ct. 705 (1959) and cited Fashion Originators '
Guild of America, Inc. v. Federal Trade Comm'n , 312 U.S. 457, 61
S.Ct. 703 (1941), and Eastern States Retail Lumber Dealers'
Assn. v. United States , 234 U.S. 600, 613-614, 34 S.Ct. 951,
954-955 (1914), neither of which involved price-fixing.
118. 384 U.S. at 146, 86 S.Ct. at 1331.
119. 384 U.S. at 147-148, 86 S.Ct. at 1331-1332.
120. 384 U.S. at 140, 86 S.Ct. at 1327. In commenting on the dealer
termination cases and specifically General Motors , Professor
Sullivan noted:
When the manufacturer sets up a dealership struc-
ture and binds itself not to add dealers in any
existing territory, we truly have a vertical re-
straint. But when an existing dealer enlists the
manufacturer to choke off one of the dealer's
competitors, although the "agreement" which en-
ables Section 1 to be invoked is vertical, the
restraint thereby achieved is horizontal in its
impact; it is an attack by one dealer against
another. ... In General Motors , where several
dealers concertedly induced the manufacturer to
hamper the aggressive selling efforts of a com-
petitor, the Court dismissed out of hand the sug-
-94-
gestion that it faced a vertical problem, one that
resonated with exclusive franchise arrangements.
The Court saw the matter for what it was, a
"classic conspiracy" to drive out competition.
(SULLIVAN, supra note 27 at 429.)
In Business Electronics , a case involving only one complaining
full price dealer, Justice Stevens agreed that the horizontal
boycott analysis used in General Motors should govern the case:
When a manufacturer responds to coercion from a
dealer, instead of making an independent deci-
sion to enforce a predetermined distribution
policy, the anticompetitive character of the
response is evident. As Professor Areeda has
correctly noted, the fact that the agreement is
between only one complaining dealer and the manu-
facturer does not prevent it from Imposing a
"horizontal" restraint. If two critical facts
are present — a naked purpose to eliminate price
competition as such and coercion of the manu-
facturer — the conflict with antitrust policy is
manifest.
Indeed, since the economic consequences of
Hartwell's ultimatum to respondent are identical
to those that would result from a comparable
ultimatum by two of three dealers in a market —
and since a two-party price-fixing agreement is
just as unlawful as a three-party price-fixing
agreement — it is appropriate to employ the term
"boycott" to characterize this agreement. In my
judgment the case is therefore controlled by
our decision in United States v. General Motors
Corp. , 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed. 2d
415 (1966). ( Business Electronics Corporation
v. Sharp Electronics Corporation , U.S. ,
- 108 S.Ct. 1515, 1530-1532 (1988)
(Stevens, J., dissenting).)
121. Business Electronics Corporation v. Sharp Electronics Corpora-
tion , U.S. , , 108 S.Ct. 1515, 1521 (1988).
122. Id., U.S. at , 108 S.Ct. at 1520. See also , Continental
T.V., Inc. v. GTE Sylvania, Incorporated , 433 U.S. 36, 58-59, 97
S.Ct. 2549, 2562 (1977).
-95-
123. See supra notes 90-94 and accompanying text.
124. A brief examination of the Chicago School's reaction to Monsanto
further illustrates the bankruptcy of the Chicago School
approach. Professor Easterbrook praises the Monsanto court for
"recognizing" the value of restricted dealing and asserts that
the Court's opinion calls the Dr. Miles rule of per se illegal-
ity for resale price maintenance into doubt, but expressed the
following reservation:
I do not want to leave the impression of unre-
served joy about this opinion. The Court affirmed
the judgment against Monsanto by pointing to some
evidence from which the jury could have inferred
actual RPM agreements among Monsanto and some
nonterminated dealers. The sort of evidence to
which the Court pointed is common in complex
systems of distribution. Monsanto had more than
100 dealers and many field personnel. It would
be surprising indeed if a search of Monsanto 's,
or any other manufacturer's, files did not turn
up some documents that could be read as express-
ing "agreement" on price. If one or two such
documents are enough to go to a jury, then the
manufacturer does not have the breathing space
the Court intended to provide for the discussions
of price and service that the justices recognized
as legitimate. The cost of trial, and the risk
of erratic judgments, will deter manufacturers
from using the practices the Court calls bene-
ficial. (Easterbrook, supra note 15 at 171-172.)
Contrary to Professor Easterbrook's assertion, the evidence of
conspiracy in Monsanto involved far more than "one or two"
ambiguous documents that "could be read as expressing 'agree-
ment' on price." In any event the trier of fact, who hears the
witnesses, and has seen the documentary evidence, should
certainly be capable of distinguishing legitimate business
-96-
coramunication from evidence of a conspiracy to drive a competi-
tor out of business. Professor Easterbrook further talks of
"breathing space" for manufacturers for legitimate discussions
of price and service, and laments that the dealer recovery in
Monsanto will "deter manufacturers from using the practices the
court calls beneficial." In the first place, the Court has
never said vertical restraints are beneficial. They are
restraints of trade governed by rule of reason rather than per
se analysis because the Court has accepted the controversial
proposition that they may benefit interbrand competition, even
though they obviously restrict intrabrand competition.
Secondly, the legality of Monsanto's distribution system was not
in issue here. In this case, as Professor Sullivan, the Court
in General Motors , and Justice Stevens in his Business Elec-
tronics dissent, have astutely observed, the issue is not
whether and to what extent a supplier can restrict prospective
intrabrand competition among retailers; the issue is whether the
law ought to permit a competitor or group of competitors to
enlist a supplier in a concerted effort to drive a price cutting
competitor out of business. In this context, bleatings regard-
ing protection of "legitimate" price and service discussions
concerning use of "beneficial" practices ring particularly
hollow.
Professor Easterbrook also criticized the remedy determina-
tion in Monsanto noting:
-97-
There is also a question of remedy. Why does
the existence of a RPM agreement between Monsanto
and Dealer #1 give Spray-Rite (Dealer #101) a right
to lost profit damages? The Court treated the case
as if every one of Monsanto T s dealers acquired
tenure when Monsanto struck an illegal agreement
with one dealer. The RPM agreement with Dealer #1
might hurt consumers of Monsanto' s products, but
what concern is this of Spray-Rite? Is it that
Spray-Rite has a right not to be fired for attempt-
ing to undermine the RPM agreement with Dealer #1?
Certainly the terminated dealer should be required
to have proof to that effect, but why is it enough?
It would be legitimate to fire a dealer for attempt-
ing to undermine the sort of tacit understanding
with Dealer #1 that Colgate supports, so why is
firing to protect RPM different? And why is Spray-
Rite's lost profit the proper measure of damages,
when antitrust is designed to protect competition
rather than competitors?
These questions of causation and damages lurk
in every dealership termination case. No one briefed
these issues in Monsanto , and the Court cannot be
faulted for passing them by. They await attention
by the lower courts, and they offer further oppor-
tunities to reduce the scope of the Dr. Miles rule
in the common law fashion. (Easterbrook, supra
note 15 at 172.)
The tone of Professor Easterbrook's criticism is instructive.
He fails to see why Monsanto 's agreement with its other dis-
tributors should be of any concern to Spray-Rite. Simply
stated, the conspiracy destroyed Spray-Rite's business. Under •
Professor Easterbrook's view, it is clear that Spray-Rite should
have no recovery on these facts. He once again mouths the words
that "antitrust is designed to protect competition rather than
competitors" (see infra note 145); but how does his view of the
case protect competition in any meaningful sense? Spray-Rite's
actual and potential customers will now have to pay more for
their herbicides. Spray-Rite, a vigorous price competitor, was
-98-
driven from the business through a wholly successful combination
explicitly designed to stifle price competition. The end result
is clear: fewer choices and higher prices for consumers.
Professor Easterbrook takes solace in the fact that the causa-
tion and damages questions in dealership termination cases will
provide courts with further opportunities to reduce the scope of
the Dr. Miles rule. This approach would apparently eliminate
any judicial scrutiny of any vertical restraint (price or
nonprice) or of any combination to enforce such a restraint, no
matter how coercive. Such an approach sanctions wholesale
boycott behavior by established competitors, all openly policed
by a common supplier, all under the rubric of "unilateral
action" and "vertical activity." Once again, it is time to
recognize this conduct for what it is, a classic horizontal
conspiracy to drive out competition, which should be subjected
to the harshest form of antitrust condemnation, "per se"
illegality.
125. House Report, supra note 98 at 15.
126. Citing , Spray-Rite Service Corporation v. Monsanto Company , 684
F.2d 1226, 1238-1239 (7th Cir. 1982); Girardi v. Gates Rubber
Company Sales Division, Inc. , 325 F.2d 196 (9th Cir. 1963).
127. Citing , Battle v. Lubrizol Corp. , 673 F.2d 984 (8th Cir. 1982),
vacated on rehearing en banc by an equally divided court , 712
F.2d 1238 (8th Cir. 1983); Filco v. Amana Ref igeration, Inc. ,
-99-
709 F.2d 1257 (9th Cir.), cert, dismissed , 104 S.Ct. 243 (1983);
Bostick Oil Co. v. Michelin Tire Corp. , 702 F.2d 1207 (4th Cir.),
cert, denied , 104 S.Ct. 243 (1983); Blankenship v. Herzteld ,
661 F.2d 840 (10th Cir. 1981); Edward J. Sweeney & Sons, Inc.
v. Texaco, Inc. , 637 F.2d 105 (3d Cir. 1980), cert, denied ,
451 U.S. 911 (1981).
128. Roesch, Inc. v. Star Cooler Corp. , 671 F.2d 1168 (8th Cir.
1982), aff'd on rehearing by an equally divided court , 712 F.2d
1235, 1237 (8th Cir. 1983), cert, denied , 104 S.Ct. 1707 (1984);
Bruce Drug Inc. v. Hollister, Inc. , 688 F.2d 853 (1st Cir.
1982).
129. Schwimmer v. Sony Corp. of America , 677 F.2d 946 (2d Cir.),
cert, denied , 459 U.S. 1007 (1982); H. L. Moore v. Eli Lilly &
Co. , 662 F.2d 935 (2d Cir. 1981).
130. Monsanto Company v. Spray-Rite Service Corporation , 465 U.S. 752,
763, 104 S.Ct. 1464, 1470 (1984).
131. United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct.
465, 468 (1919).
132. Monsanto Company v. Spray-Rite Service Corporation , 465 U.S.
752, 763-764, 104 S.Ct. 1464, 1470 (1984).
133. Id., 465 U.S. at 764, 104 S.Ct. at 1471.
134. Id.
-100-
135. 637 F.2d 105 (3d Cir. 1980).
136. ^d. at 123 (Sloviter, C. J., dissenting).
137. Id.
138. Id.
139. Id.
140. Id. at 124. Citing , Cernuto, Inc. v. United Cabinet Corp. , 595
F.2d 164 (3d Cir. 1979) (recognizing that when a manufacturer
takes action at the behest of a customer, such action can no
longer be considered unilateral and is therefore subject to the
prohibitions of the antitrust laws); Mannington Mills, Inc. v.
Congoleum Industries, Inc. , 610 F.2d 1059, 1069-70 (3d Cir.
1979) (holding that allegations that Congoleum terminated
plaintiff's foreign licenses "in response to" complaints by
Congoleum 1 s foreign licensees about plaintiff's excessive
competition and to the foreign licensees' threats to terminate
their own licenses stated a sufficient claim under the antitrust
laws) .
141. For example, on similar facts the court in Girardi v. Gates
Rubber Company Sales Division, Inc. , 325 F.2d 196, 200 (9th Cir.
1963), stated:
It seems to us to be clear that if the facts
here, as claimed by the appellant, are that
Oranges as a competitor of Girardi, the price
cutter, induced and participated in action which
resulted in Girardi being cut off from a supply
-101-
of this merchandise, then the case would be pre-
cisely within the rationale of United States v.
Socony-Vacuum Oil Co. , supra , for it is normally
the competitor who is being hurt by price cutting
who is likely to seek coercive action against the
competitor who is hurting or likely to hurt him.
We would think that a typical case of illegal
conspiracy to fix prices would arise from the
desire of one dealer to eliminate his price
cutting competitor through concerted action with
the manufacturer.
142. 637 F.2d at 125, citing , Eastern States Retail Lumber Dealers'
Association v. United States , 234 U.S. 600, 34 S.Ct. 951 (1914);
Interstate Circuit, Inc. v. United States , 306 U.S. 208, 59
S.Ct. 467 (1939); American Tobacco Co. v. United States , 328
U.S. 781, 66 S.Ct. 1125 (1946); United States v. Parke, Davis
& Co., 362 U.S. 29, 80 S.Ct. 503 (1960).
143. Id_. at 126-128, 131. Another untoward consequence of the narrow
Texaco/Monsanto focus on a "mechanistic search for direct
evidence of a combination" (Id_. at 130.) is that it diverts
attention from the more significant issue, which is: whether
antitrust law ought to permit one or a group of competitors to
squeeze out discounters by pressuring a mutual supplier to
control or cut the discounter out of the market, and escape
liability on the ground that the supplier's action was wholly
"vertical" or "unilateral." As noted by Judge Sloviter
Underlying the majority's out-of-hand rejection of
the possibility that there was a combination in
this case may be its belief that such conduct
does not or should not violate the antitrust laws.
However, that confuses two separate issues: whether
there was conduct that can fairly be considered to
-102-
have been joint or concerted, and the standard by
which such conduct should be evaluated for pur-
poses of antitrust liability. (Id.)
144. House Report, supra note 98 at 20, citing Flynn, Vertical
Restraints After Monsanto , 71 CORN. L. REV. 1095 (1986).
145. Chief Justice Earl Warren once stated in Brown Shoe Co. v.
United States , 370 U.S. 294, 82 S.Ct. 1502 (1962), that "it is
competition not competitors" (370 U.S. at 344, 82 S.Ct. at
1534) that the antitrust laws protect. This unfortunate
statement has acquired a life of its own, often used to support
broad statements that the fate of individual competitors, such
as small dealers or discount stores, are of no concern to
antitrust law. As Professor Easterbrook once noted:
Whatever role political values play in antitrust,
surely they do not call for courts to protect
these market participants at the expense of con-
sumers. Such protectionism turns antitrust on
its head. Antitrust protects competition, not
competitors. (Easterbrook, supra note 15
at 152.)
This assertion is simply wrong. Antitrust law exhibits a
substantial concern with protecting individual participants in a
variety of business settings against coercion, collusion, or
exclusionary activities by their competitors, suppliers, or
customers. For example, if antitrust had no concern for
individual market participants, it would not permit private
enforcement of the law, with its battery of remedies including
injunctive relief (Clayton Act § 16, 15 U.S.C. § 26) and treble
damage awards, which accrue to the benefit of " any person who
-103-
shall be injured in his business or property by reason of
anything forbidden in the antitrust laws." Clayton Act § 4, 15
U.S.C. § 15 (emphasis added). Indeed, Chief Justice Warren's
statement when placed in context indicates a healthy antitrust
concern for competitors:
The retail outlets of integrated companies, by elim-
inating wholesalers and by increasing the volume of
purchases from the manufacturing division of the
enterprise, can market their own brands at prices
below those of competing independent retailers. Of
course, some of the results of large integrated or
chain operations are beneficial to consumers. Their
expansion is not rendered unlawful by the mere fact
that small independent stores may be adversely af-
fected. It is competition, not competitors, which
the Act protects. But we cannot fail to recognize
Congress' desire to promote competition through the
protection of viable, small, locally owned businesses .
Congress appreciated that occasional higher costs and
prices might result from the maintenance of frag-
mented industries and markets. It resolved these
competing considerations in favor of decentraliza-
tion. We must give effect to that decision.
370 U.S. at 344, 82 S.Ct. at 1534 (emphasis added). And as
Professor Cann has noted:
a working definition of competition should reflect
some deference to legislative intent and the con-
cerns for entrepreneurial opportunity, business
initiative, decentralized decision-making, and
power diffusion.
Cann, supra note 71 at 526, citing Fox, The Modernization of
Antitrust : A New Equilibrium , 66 CORNELL L. REV. 1140, 1153-55,
1182-90 (distrust of power and entrepreneurial opportunity);
Panel Discussion: Merger Enforcement and Practice , 50 ANTITRUST
L.J. 233, 237-38 (1982) (comments of Steve Axinn) (competition
"refers to an entire process which has preserved a system of
-104-
entry and exit"); H.R. Rep. No. 99-162, 99th Cong., 1st Sess. 7
(1985) ("competitive decentralized social and economic system,"
"opportunities for business initiative," "opportunities for
small business").
And as Professor Sullivan has noted:
The antitrust laws do not deal solely with problems
of allocative efficiency. In passing the Sherman
and Clayton acts Congress was also concerned to
protect the freedom of individual traders to make
for themselves, free of compulsion or coercion,
decisions about the markets they would enter, the
prices they would charge and, in general, how they
would compete.
SULLIVAN, supra note 27 at 376, citing , Kiefer-Stewart Co. v.
Jos. E. Seagram & Sons, Inc. , 340 U.S. 211, 213, 71 S.Ct. 259,
260 (1951); United States v. A. Schrader's Son, Inc. , 252 U.S.
85, 100, 40 S.Ct. 251, 253 (1920).
And as the House Report accompanying the currently pending
"Freedom from Vertical Price Fixing Act of 1987" notes:
[W]ithout competitors, there would be no competi-
tion. To benefit consumers, competition should be
present at all levels of the manufacturing and dis-
tribution system. If retailers are inefficient or
engaged in anticompetitive activity, the gains to
consumers from competitive performance further up-
stream in the distribution system can be wiped out.
House Report, supra note 98 at 11-12.
And as Judge Browning noted in his classic dissent in the
Court of Appeals opinion in GTE Sylvania :
Legislative history and Supreme Court decisions
establish that a principal objective of the Sherman
Act was to protect the right of independent busi-
ness entities to make their own competitive deci-
sions, free of coercion, collusion, or exclusionary
practices.
-105-
Congress' general purpose in passing the Sherman
Act was to limit and restrain accumulated economic
power, represented by the trusts, and to restore and
preserve a system of free competitive enterprise.
The congressional debates reflect a concern not only
with the consumer interest in price, quality, and
quantity of goods and services, but also with
society's interest in the protection of the indepen-
dent businessman, for reasons of social and political
as well as economic policy.
The Supreme Court has implemented the statutory
policy of protecting the independence of individual
business units in a series of decisions banning resale
price maintenance agreements. . . .
The same theme of protecting the right of indepen-
dent business entities to compete runs through Supreme
Court decisions holding group boycotts illegal per
S6 • • • •
In many other contexts , the Supreme Court has
rested decisions upon the premise that protection of
the freedom to compete of separate business entities
is an important objective of the Sherman Act. . . .
From the holdings and rationale of these and
other Supreme Court decisions, "it seems clear that
the protection of individual traders from unnecessary
restrictions upon their freedom of action is a sig-
nificant independent objective of antitrust policy."
As a commentator recently put it, "The most important
of the social policy objectives found in the Court's
antitrust decisions are the concepts of business
independence and freedom of business opportunity."
In Judge Hand's well-known words, Congress was not
"actuated by economic motives alone. It is possible,
because of its indirect social or moral effect, to
prefer a system of small producers, each dependent
for his success upon his own skill and character, to
one in which the great mass of those engaged must
accept the directions of a few. These considerations,
which we have suggested as possible purposes of the
Act, we think the decisions prove to have been in
fact its purposes.
GTE Sylvania, Incorporated v. Continental T.V., Inc. , 537 F.2d
980, 1018-1021 (9th Cir. 1976) (Browning, J., dissenting).
And as forcefully reiterated by the Supreme Court in United
States v. Topco Associates , Inc. :
-106-
Antitrust laws in general, and the Sherman Act
in particular, are the Magna Carta of free enterprise.
They are as important to the preservation of economic
freedom and our free-enterprise system as the Bill of
Rights is to the protection of our fundamental personal
freedoms. And the freedom guaranteed each and every
business, no matter how small, is the freedom to com-
pete — to assert with vigor, imagination, devotion, and
ingenuity whatever economic muscle it can muster.
405 U.S. 596, 610, 92 S.Ct. 1126, 1135 (1972).
Defining competition by focusing upon the conduct of market
participants is not only supported by the language of the
antitrust laws and the cases, it is also the only definition
capable of judicial application in the context of a specific
case. Consider, for example, the definition of competition
posed by the Chicago School: any state of affairs or any
allocation of resources in which consumer welfare is maximized.
( See , for example, BORK, supra note 15, at 58-61, 137 and Judge
Posner's opinion in Roland Machine Company v. Dresser Industries ,
749 F.2d 380, 395 (7th Cir. 1984).) Even if we disregard the
Chicago School's "counterintuitive" definition of "consumer,"
which includes monopolists and cartels ( see discussion in Lande
I, supra note 69 at 28; see also HOVENKAMP supra note 70 at
45-49), and define the term in its ordinary legal sense to
include persons who purchase goods or services for personal,
family, or household use ( see , for example , the definition in
the Magnuson Moss Warranty Act at 15 U.S.C. §§ 2301(1), (3); see
also , Uniform Commercial Code § 9-109(1)), a consumer welfare
definition of competition provides no workable legal standard.
It focuses incorrectly on the recipients or beneficiaries of the
-107-
corapetitive process, rather than upon the conduct of the
participants in the process itself. Even if consumer welfare is
to be the guiding standard, isn't it likely that consumers will
be "better off" (in the sense of having a wider range of choice
regarding goods, services, and prices) if the market partici-
pants who provide those goods and services are acting without
collusion, coercion, or other activities which artificially
restrict the availability or inflate the price of goods or
services sold in the economy? In short, the focus of Sherman
Act § 1 violations, including vertical restraints of trade, must
be on the conduct of the market participants and the effect of
that conduct on other competitors.
Focusing antitrust analysis narrowly on the effect of a
given activity on the plaintiff should provide a strong infer-
ence of its effect on competition, which after all depends upon
the vitality of individual competitors in the market. It also
provides a standard which is capable of formulation as a legal
rule which can be applied in the context of a specific case.
Professor Lande recently has noted the extreme complexity of
antitrust law (Lande I, supra note 69 at 28), known only to
economists and a few antitrust lawyers, is one factor leading to
the widespread acceptance of the Chicago School's
"counterintuitive" definition of consumer welfare. This
complexity pervades Chicago School analysis and has had a
debilitating effect on antitrust enforcement virtually across
the board. Antitrust provides the conduct ground rules for
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business. It should inform business in fairly clear terms of
the parameters of acceptable conduct. Chicago School economic
"analysis" has muddied the waters to such an extent that
virtually any activity can be justified as "arguably" or
"plausibly" procorapetitive. Antitrust law means nothing to the
preservation of competition unless every person in business
knows what the rules are and can recognize violations.
146. House Report, supra note 98 at 20-21. On March 1, 1989 Professor
John J. Flynn of the University of Utah College of Law noted at
a District of Columbia Bar seminar that in recent years more
than 50% of antitrust cases have been dismissed on summary
judgment grounds and that there has been a 47% decline in
private antitrust suits. 56 ATRR 365 (Mar. 9, 1989).
147. Quoting , Poller v. Columbia Broadcasting System , 368 U.S. 464,
473, 82 S.Ct. 486, 491 (1962).
148. The House Report goes on to note:
It should be remembered that under the Rule 56 of
the Federal Rules of Civil Procedure, a summary
judgment will not lie if the dispute about a
material fact is "genuine" — that is, if the evi-
dence is such that a reasonable jury could return
a verdict for the nonmoving party. In Ad i ekes v.
S. H. Kress & Co. , 398 U.S. 144 (1970), the Supreme
Court emphasized that the availability of summary
judgment turned on whether a proper jury question
was presented. There, one of the issues involved
whether there was a conspiracy between private
persons and law enforcement officers. The dis-
trict court granted summary judgment for the de-
fendants, stating that there was no evidence from
which reasonably-minded jurors might draw an in-
ference of conspiracy. The Supreme Court reversed,
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pointing out that the moving party's submissions
had not foreclosed the possibility of the existence
of certain acts from which "it would be open to a
jury ... to infer from the circumstances" that
there had been a meeting of the minds. Id_. at
158-159.
From this and other decisions, the court in a
recent case, Anderson v. Liberty Lobby, Inc. , 106
S.Ct. 2505 (1986), summarized the test under Rule
56 as follows:
". . . it is clear enough from our recent cases
that at the summary judgment stage, the judge's
function is not himself to weigh the evidence and
determine the truth of the matter but to determine
whether there is a genuine issue for trial." Id .
at 2511.
In short, the inquiry of the court is confined
to determining whether a sufficient disagreement
exists to require submission to a jury, or whether
it is so one-sided that one party must prevail as a
matter of law. (House Report, supra note 98 at
21 n. 73.
It is clear that the Monsanto standard is inconsistent with
these basic principles, permitting or requiring judges to
"weigh the evidence and determine the truth of the matter" on
summary judgment evidence, thereby transforming summary judg-
ment in dealer termination cases "away from its traditional
focus on 'legal cognizability' to a kind of full-blown 'bench
trial on paper'" (Id. at 20).
149. House Report, supra note 98 at 23. See cases discussed at
23-25.
150. Id_. at 25. See cases discussed at 23-25.
151. In Matsushita Electric Industrial Co., Ltd. v. Zenith Radio
Corporation , U.S. , 106 S.Ct. 1348 (1986), Justice
Powell characterized Monsanto as holding
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"conduct as consistent with permissible competi-
tion as with illegal conspiracy does not, stand-
ing alone, support an inference of antitrust
conspiracy." (Id* at 1357.)
As noted in the House Report accompanying the "Freedom from
Vertical Price Fixing Act of 1987":
Such a reading of Monsanto appears to increase
the standard of proof for the conspiracy ele-
ment of the offense. To the extent that
Matsushita may be taken to imply that a defen-
dant's hypothetical explanations, however
plausible, may be used to determine whether the
evidence submitted by plaintiff "tends to prove
a conscious commitment to a common scheme," the
opinion appears to go further than the Monsanto
holding on the questions of what evidence is
legally sufficient to prove conspiracy and
whether the factual determination is one for
court or jury. (House Report, supra note 98
at 20 n. 69.)
152. See , for example , the statements of various representatives of
the discount retail industry at the Senate Judiciary Committee
hearings on the Justice Department's Vertical Restraints Guide-
lines (Senate Hearing, supra note 40 at 81-177). For
example, Monroe Milstein, Chairman of the Board of Burlington
Coat Factory Warehouse Corporation, testified
In my experience, my company has frequently
been deprived of highly valuable merchandise be-
cause a large full-price retailer has coerced the
manufacturer not to sell to Burlington in cer-
tain areas. In many of these areas, Burlington
was the only significant off-price retailer. The
net result of the cut-off of sales to Burlington
has been that in those areas, the only price
available to the consumer was the high price
charged by full-price stores. ( Id . at 82.)
153. U.S. , 108 S.Ct. 1515 (1988).
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154. U.S. at , 108 S.Ct. at 1520-1521, 1523, 1525.
155. See supra notes 112-124 and accompanying text.
156. Business Electronics Corporation v. Sharp Electronics Corpora-
tion , U.S. , , 108 S.Ct. 1515, 1528-1529 (1988)
(Stevens, J., dissenting).
157. Id_., U.S. at , 108 S.Ct. at 1533 (Stevens, J., dissent-
ing).
158. Id., U.S. at , 108 S.Ct. at 1533-1534 (Stevens, J.,
dissenting) .
159. Id., U.S. at , 108 S.Ct. at 1532 (Stevens, J., dissent-
ing).
160. Id., U.S. at , 108 S.Ct. at 1536 (Stevens, J., dissent-
ing).
161. See supra notes 125-151 and accompanying text.
162. 310 U.S. 150, 60 S.Ct. 811 (1940).
163. Id., 310 U.S. at 221-223, 60 S.Ct. at 843-844.
164. 435 U.S. 679, 98 S.Ct. 1355 (1978).
165. Id., 435 U.S. at 692, 98 S.Ct. at 1365.
166. House Report, supra note 98 at 38-39 (emphasis in original).
-112-
167. NAAG Guidelines, supra note 37 at § 2.1.
168. 362 U.S. 29, 80 S.Ct. 503 (1960).
169. 310 U.S. 150, 223, 60 S.Ct. 811, 844 (1940).
170. Id., 362 U.S. at 47, 80 S.Ct. at 513.
171. National Society of Professional Engineers v. United States ,
435 U.S. 679, 692, 98 S.Ct. 1355, 1365 (1978).
172. Business Electronics Corporation v. Sharp Electronics Corpora-
tion , U.S. , , 108 S.Ct. 1515, 1525 (1988).
173. Socony Vacuum , supra note 169, 310 U.S. at 221, 223, 60 S.Ct.
at 843, 844.
174. House Report, supra note 98 at 23.
175. 250 U.S. 300, 39 S.Ct. 465 (1919).
176. 465 U.S. at 761, 104 S.Ct. at 1469.
177. U.S. at , 108 S.Ct. at 1520.
178. 272 U.S. 476, 47 S.Ct. 192 (1926), cited with approval in
Business Electronics Corporation v. Sharp Electronics Corpora-
t ion , U.S. , , 108 S.Ct. 1515, 1524 (1988).
179. 362 U.S. 29, 80 S.Ct. 503 (1960). Note that in Monsanto the
court stated in a footnote that:
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The concept of "a meeting of the minds" or
"a common scheme" in a distributor-termination
case includes more than a showing that the dis-
tributor conformed to the suggested price. It
means as well that evidence must be presented
both that the distributor communicated its
acquiescence or agreement, and that this was
sought by the manufacturer. (465 U.S. at 764
n.9, 104 S.Ct. at 1471 n. 9.)
It has been suggested that this language casts some doubt on the
continuing precedential value of cases such as Parke Davis and
Albrecht , which involved combinations created by restraints
imposed on dealers and customers by coercive conduct. (See,
for example, Dimidowich v. Bell & Howell , 803 F.2d 1473, 1478
(9th Cir. 1986); Jack Walters & Sons Corp. v. Morton Building ,
Inc. , 737 F.2d 698, 707 (7th Cir.), cert, denied , 105 S.Ct.
432 (1984).
180. 390 U.S. 145, 88 S.Ct. 869 (1968).
181. U.S. at , 108 S.Ct. at 1525.
182. United States v. General Electric Co., 358 F.Supp. 731
(S.D.N.Y. 1973).
183. 377 U.S. 13, 84 S.Ct. 1051 (1964).
184. 377 U.S. at 18, 21-22, 84 S.Ct. 1055, 1057.
185. U.S. , 108 S.Ct. at 1524.
186. U.S. , 84 S.Ct. at 1061 (Stewart, J., dissenting).
187. U.S. at , 108 S.Ct. at 1525.
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188. U.S. at , 108 S.Ct. at 1532 (Stevens, J., dissenting).
189. 388 U.S. 350, 87 S.Ct. 1847 (1967).
190. 405 U.S. 596, 92 S.Ct. 1126 (1972).
191. U.S. at , 108 S.Ct. at 1536 (Stevens, J., dissenting).
192. BORK, s upra note 15 at 406.
193. See H.R. 585, "The Freedom from Vertical Price Fixing Act of
1987," accompanied by H.R. Rep. No. 100-421, 100th Cong., 1st
Sess. (1987); S. 430, "The Retail Competition Enforcement Act
of 1987," accompanied by S. Rep. No. 100-280, 100th Cong., 2d
Sess. (1987). A similar bill, the "Price Fixing Prevention
Act of 1989," (H.R. 1236), was introduced by House Judiciary
Committee Chairman Jack Brooks on March 2, 1989. See , 56
ATRR 363 (Mar. 9, 1989).
194. Language of H.R. 585.
195. Language of S. 430.
196. Id.
197. Language of H.R. 585.
198. Another weakness of the pending bills is the sponsors' apparent
willingness to limit the scope of per se illegality to con-
spiracies to fix minimum resale prices ( See , for example , 55
ATRR 4-5 (July 7, 1988)). The rationale for exempting maximum
-115-
resale price fixing is apparently that in newspaper distribu-
tion, independent distributors are granted exclusive territories
and maximum price fixing is necessary to prevent price gouging.
The bankriiptcy of this reasoning was, of course, long ago
exposed by Justice White in Albrecht v» The Herald Company , 390
U.S. 145, 154, 88 S.Ct. 869, 874 (1968):
The assertion that illegal price fixing is justi-
fied because it blunts the pernicious conse-
quences of another distribution practice is unper-
suasive. If . . . the economic impact of terri-
torial exclusivity was such that the public could
be protected only by otherwise illegal price fix-
ing itself injurious to the public, the entire
scheme must fall under § 1 of the Sherman Act.
199. In the words of Justice Stevens:
I have emphasized in this dissent the difference
between restrictions imposed in pursuit of a manu-
facturer's structuring of its product distribution,
and those imposed at the behest of retailers who
care less about the general efficiency of a
product's promotion than their own profit margins.
Sylvania stressed the importance of the former,
not the latter; we referred to the use that manu-
facturers can make of vertical nonprice restraints
. . . and nowhere did we discuss the benefits of
permitting dealers to structure intrabrand compe-
tition at the retail level by coercing manu-
facturers into essentially anticompetitive agree-
ments. ( U.S. at , 108 S.Ct. at 1536
(Stevens, J., dissenting).
200. In Business Electronics , the majority opinion Itself admits:
[A.]ll vertical restraints, including the exclusive
territory agreement held not to be per se illegal
in GTE Sylvania , have the potential to allow dealers
to Increase "prices" and can be characterized as
intended to achieve just that. In fact, vertical
nonprice restraints only accomplish the benefits
identified in GTE Sylvania because they reduce
-116-
intrabrand price competition to the point where
the dealer's profit margin permits provision of the
desired services. . . . ( U.S. at , 108
S.Ct. at 1521-1522).
201. United States v. Topco Associates, Inc. , 405 U.S. 596, 610,
92 S.Ct. 1126, 1135 (1972).
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