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Full text of "The sad legacy of GTE Sylvania and its 'rule of reason' : the dealer termination cases and the demise of 1 of the Sherman Act"

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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 



-66- 

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 



-75- 



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: 



-76- 



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 



-78- 

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). 



-79- 

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). 



-80- 

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: 



-82- 



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). 



-111- 

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: 



-113- 

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. 



-114- 

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). 



D/504A 



HECKMAN 

BINDERY INC. 

JUN95 

I , -r di 9 N. MANCHESTER, 
I Bound -To -Plcas^ 1ND , AN A 46 962