Got his way!
Today is the 43rd anniversary of the Supreme Court's decision in Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977). The decision overruled United States v. Arnold Schwinn & Co., 388 U.S. 365 (1967). Sylvania also reflected a sea change in both the Supreme Court's normative account of the Sherman Act and the type of economic theory the Court would employ to implement that vision when determining whether challenged agreements were "in restraint of trade" within the meaning of the Sherman Act. While the decision dealt with a garden variety non-price vertical restraint, Sylvania's rationale had potentially major implications for various facets of antitrust law and policy. This post discusses what was at stake in Sylvania, the Court's resolution of the dispute as well as the potential implications of that resolution.
1. Readers will recall from a recent post that Schwinn had condemned as unlawful per se vertical exclusive territories and reservations of customers. The decision had announced an exception, however, in those cases in which such limitations appeared in a consignment agreement, pursuant to which the manufacturer retained title to the product until its distribution to a purchaser. The Court had also affirmed the district court's finding that Schwinn's consignment agreements including such restrictions were not unreasonable restrictions on competition. The Court concluded that Schwinn faced significant rivalry from other brands and that the firm had adopted such restrictions as part of a larger effort to fend off such interbrand rivalry. Unfortunately the Court did not explain how such restrictions could advance interbrand rivalry or why the legality of such restrictions should turn on the passage of title. Finally, the Court did not mention the foundational decision in Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958), which had articulated the standard governing when courts should condemn a given category of restraint. Northern Pacific Railway had held that per se condemnation was only appropriate if the category of restraint in question both produced a pernicious effect on competition and, in addition, lacked redeeming virtues.
2. Schwinn's per se rule was a manifestation of the so-called "inhospitality tradition" of antitrust. During this era, courts and the enforcement agencies were greatly suspicious of so-called "non-standard contracts," that is, agreements that constrained the discretion of purchasers after passage of title. As previously explained, neoclassical price theory had no efficiency-based explanation for such agreements. Thus, scholars, courts and agencies naturally concluded that such agreements, which undeniably restricted competitive rivalry, were efforts to obtain or exercise market power. Moreover, the Court also saw antitrust regulation as a tool for enhancing the "freedom" of traders from contractual limitations on their autonomy. In Albrecht v. Herald Co., 390 U.S. 145 (1968), for instance, the Court condemned as unlawful per se maximum vertical price fixing, which reduced consumer prices, because such agreements would "'cripple[] the freedom of traders and thereby restrain their ability to sell in accordance with their own judgment.''" Id. at 152 (quoting Kiefer-Stewart Co. v. Seagram & Sons, Inc., 340 U.S. 211, 213 (1951)). See also Alan J. Meese, Economic Theory, Trader Freedom and Consumer Welfare: State Oil v. Khan and the Continuing Incoherence of Antitrust Doctrine, 84 Cornell L. Rev. 763 (1999) Taken together, neoclassical price theory and a normative commitment to trader freedom combined to drive judicial expansion of various per se bans condemning conduct previously analyzed under a fact-intensive and forgiving rule of reason. See Alan J. Meese, Price Theory, Competition and the Rule of Reason, 2003 Illinois L. Rev. 77, 124-34.
3. The inhospitality approach was not confined to vertical cases In United States v. Topco, 405 U.S. 596 (1972), the Court condemned horizontal restrictions that were ancillary to the formation of a joint venture among independent grocery chains. The joint venture created numerous private label products which it distributed to member stores, which competed against large national chains who had created and advertised their own private label products. The agreement creating the venture assigned each member an exclusive territory within which only it could distribute the venture product. Relying on the work of Robert Bork, the defendants contended that such exclusivity could allow members to recapture the benefits of investments they made promoting the venture's product and thus enhanced interbrand competition vis a vis the giant chains. As a result, they said, such restrictions could produce redeeming virtues, thereby thwarting per se condemnation under the Northern Pacific Railway standard. The Supreme Court rejected this argument. however. Although the Court quoted the Northern Pacific Railway standard with approval, it opined that the Sherman Act was the "Magna Carta of Free Enterprise," and that the restrictions before it interfered with each member's "freedom to compete" however it saw fit. Thus, concern over the autonomy of traders precluded the Court from recognizing the promotion of interbrand competition as a redeeming virtue.
4. Before Schwinn, Sylvania, which at the time had a one percent share of the market, revamped its system of distribution in an effort to reverse flagging T.V. sales. Among other things the firm included so-called "location clauses" in its distribution agreements. These clauses specified the location(s) from which dealers could sell Sylvania products after title had passes and precluded such dealers from employing a different location without Sylvania's consent. Sylvania terminated Continental T.V. after the latter opened a new store in Sacramento over Sylvania's objection. Continental challenged this termination, claiming that the agreement limiting the locations from which it could sell was unlawful per se. The district court agreed, and instructed the jury to find for Continental if it found the existence of such an agreement governing products whose title had passed, without regard to whether the agreement was reasonable.
5. Sylvania appealed to the Ninth Circuit, which reversed in an en banc decision. See 537 F.2d 980 (9th Cir. 1976) (en banc). The court did not dispute that Schwinn condemned vertical exclusive territories or restrictions on the customers to whom dealers would sell. However, it sought to distinguish Schwinn on two grounds. First, the court emphasized that compared to Schwinn, Sylvania was a relatively small participant in the relevant market, with a market share that grew from one percent to five percent after it adopted the challenged restraints. Second, the court claimed that a location clause was less restrictive of competitive rivalry than the restrictions condemned in Schwinn, thereby suggesting a different application of the per se rule.
5. Sylvania appealed to the Ninth Circuit, which reversed in an en banc decision. See 537 F.2d 980 (9th Cir. 1976) (en banc). The court did not dispute that Schwinn condemned vertical exclusive territories or restrictions on the customers to whom dealers would sell. However, it sought to distinguish Schwinn on two grounds. First, the court emphasized that compared to Schwinn, Sylvania was a relatively small participant in the relevant market, with a market share that grew from one percent to five percent after it adopted the challenged restraints. Second, the court claimed that a location clause was less restrictive of competitive rivalry than the restrictions condemned in Schwinn, thereby suggesting a different application of the per se rule.
6. The Ninth Circuit's decision was not unanimous. Judge Browning, among others, dissented. Among other things, he contended that Schwinn rested upon concern for the autonomy of dealers, independent of the economic impact of the restraints. As a result, he said, the majority's effort to distinguish Schwinn was not successful, because location clauses limited dealer autonomy as well. To bolster this argument, he quoted Topco's assertion that the Sherman Act was the Magna Carta of Free Enterprise and thus protected the freedom of individual traders to ignore agreements limiting their economic autonomy. See 537 F.2d at 1015.
7. Continental T.V. sought review of the Ninth Circuit's decision in the Supreme Court. The Court almost said no. A grant of certiorari requires four votes. Justice Rehnquist was recused, leaving only eight available votes. Initially the Court balked, with only three justices (Brennan, Powell and Stevens) voting to grant review. However, Justice Powell (pictured above) asked that the case be relisted and then lobbied two colleagues --- Justices White and Stewart --- for the necessary fourth vote. He also threatened to issue a dissent if his colleagues voted to deny certiorari. Andrew Gavil's excellent historical work details this process, based upon a review of Justice Powell's papers. See Sylvania and the Process of Change in the Supreme Court, 17 Antitust 8 (Fall 2017). Among other things Professor Gavil concludes that it is unclear "why Powell became such an active, persistent and vocal advocate for using Sylvania to reconsider Schwinn."
8. The case featured a dispute between leading members of the Harvard School of Antitrust. For instance, Lawrence Sullivan co-authored Continental T.V.'s brief in the Supreme Court. Sullivan's credentials were impeccable. He received his J.D. from Harvard in 1951 and held a Chair at the University of California at Berkeley. His leading treatise on antitrust would appear that same year. See Lawrence Anthony Sullivan, Antitrust (1977). This work was a classic manifestation of the Harvard School approach to antitrust The book acknowledged Sullivan's intellectual debt to Joe Bain, Donald Turner and Philip Areeda, all faculty at Harvard and members of the Harvard School. Turner, of course, had authorized the case again Schwinn and had co-authored the government's brief in the Supreme Court. The book's four page survey of the "Literature of Antitrust" did not mention the work of Chicagoans Robert Bork, Harold Demsetz, Yale Brozen or Lester Telser. Instead, these pages invoked the work of Joe Bain, Donald Turner, Phillip Areeda and Carl Kaysen While Sullivan mentioned Richard Posner's 1974 casebook, he attributed its content to "an economic point of view and, indeed, a very particular one, representative of the 'Chicago School," a point of view which is narrower, especially in its approach to vertical issues, than either the law itself or most industrial organization economists would countenance." See id. at 14-15. Sullivan also cited work by scholars who advocated more interventionist antitrust policy than the Harvard School.
8. The case featured a dispute between leading members of the Harvard School of Antitrust. For instance, Lawrence Sullivan co-authored Continental T.V.'s brief in the Supreme Court. Sullivan's credentials were impeccable. He received his J.D. from Harvard in 1951 and held a Chair at the University of California at Berkeley. His leading treatise on antitrust would appear that same year. See Lawrence Anthony Sullivan, Antitrust (1977). This work was a classic manifestation of the Harvard School approach to antitrust The book acknowledged Sullivan's intellectual debt to Joe Bain, Donald Turner and Philip Areeda, all faculty at Harvard and members of the Harvard School. Turner, of course, had authorized the case again Schwinn and had co-authored the government's brief in the Supreme Court. The book's four page survey of the "Literature of Antitrust" did not mention the work of Chicagoans Robert Bork, Harold Demsetz, Yale Brozen or Lester Telser. Instead, these pages invoked the work of Joe Bain, Donald Turner, Phillip Areeda and Carl Kaysen While Sullivan mentioned Richard Posner's 1974 casebook, he attributed its content to "an economic point of view and, indeed, a very particular one, representative of the 'Chicago School," a point of view which is narrower, especially in its approach to vertical issues, than either the law itself or most industrial organization economists would countenance." See id. at 14-15. Sullivan also cited work by scholars who advocated more interventionist antitrust policy than the Harvard School.
9. Petitioner's brief sought reversal of the decision below, relying unapologetically on Scwhinn. In so doing, the brief emphasized the importance of the freedom of traders.
"Independent small businessmen who have made an investment of capital, energy and hope in their own enterprises, ought to be able to make their crucial decisions as to where to sell and what price to charge for their own merchandise, free of coercion, collusion or exclusionary practices. That is what the free enterprise system, which the Sherman Act protects, is all about."
See Brief for Petitioner in Continental T.V. v. G.T.E. Sylvania, 433 U.S. 36 (1977), No. 76-15 at 38-39.
The challenged restriction was not collusive or exclusionary, thereby suggesting that Sullivan and his co-authors believed the location clause was coercive. Indeed, the same brief asserted 20 pages later that rule of reason scrutiny of such restraints would countenance "administered judgement about the ideal development of outlets across the nation" and result in "paternalistic overreaching." (Id. at 58.)
10. Sullivan's was not the only voice of the Harvard School, however. Donald Turner also co-authored a brief, this time on behalf of the Motor Vehicle Manufacturer's Association as Amicus Curiae. The brief contended that Schwinn's per se rule was not justified and should be overruled. Among other things the brief recognized what the government and Court had ignored in Schwinn, namely, that such restraints could counteract the propensity of dealers to free ride on each others' promotional efforts and help ensure optimal promotion by a manufacturer's dealers.
11. In an opinion by Justice Powell, the Court chose Turner's version of the Harvard School over Sullivan's. The Court could have simply affirmed on the basis articulated by the Ninth Circuit. Indeed, Justice White's concurrence advocated just such an approach. See Sylvania, 433 U.S. at 59-71 (White, J. concurring). However, the Court, per Justice Powell, rejected the Ninth Circuit's logic. Among other things he agreed with Continental T.V. that there was no meaningful economic distinction between location clauses, on the one hand, and the restrictions invalidated in Schwinn, on the other. As a result, he said, the Court could only affirm the judgment below if it overruled Schwinn.
12. The Court also criticized the distinction Schwinn had drawn between vertical restraints that were part of consignment agreements and those that accompanied outright sales. Both restraints, the Court said, had identical effects on competitive rivalry, and there was no reason the Sherman Act should treat one restraint more favorably than the other merely because of the form of the transaction. Thus, the Court said, the Sherman Act should either condemn all such restraints outright or subject all to fact-intensive rule of reason scrutiny.
12. The Court also criticized the distinction Schwinn had drawn between vertical restraints that were part of consignment agreements and those that accompanied outright sales. Both restraints, the Court said, had identical effects on competitive rivalry, and there was no reason the Sherman Act should treat one restraint more favorably than the other merely because of the form of the transaction. Thus, the Court said, the Sherman Act should either condemn all such restraints outright or subject all to fact-intensive rule of reason scrutiny.
13. The Court then proceeded to determine which unified standard should apply. The Court chided Schwinn for its abupt and unexplained departure from United States v. White Motors, 372 U.S. 253 (1963), which had declined to condemn similar restraints because it know too little about their economic impact, including the propensity to produce redeeming virtues. The Court also chided Schwinn for failing to mention or apply the Northern Pacific Railway test for per se condemnation. Rule of reason was the default position, Justice Powell said, and the Court could only condemn a type of restraint as unlawful per se if the proponent of such treatment met the "demanding standards" of the Northern Pacific Railway test. The plaintiffs could not satisfy these standards, he said.
14. The Court recognized, of course, that location clauses and exclusive territories reduced intrabrand competition. During the inhospitality era, such realization would have sufficed to condemn a type of restraint. However, partly due to Turner's amicus brief, the Court rejected price theory's account of such restraints. See Gavil, Sylvania and the Process of Change, 17 Antitrust at 16-17 Instead, the Court turned to what modern scholars call Transaction Cost Economics. Invoking Robert Bork's 1966 article on horizontal and vertical ancillary restraints, the Court noted that manufacturers wished to maintain intrabrand competition as needed to distribute their products. See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L. J. 373 (1966). The Court also noted that, "because of market imperfections such as the 'free rider effect,'" a "purely competitive market" might not produce various services necessary to protect the manufacturer's goodwill and ensure proper distribution of its product. See Sylvania, 433 U.S. at 55. The Court also rejected the plaintiff's claim that expenditures on advertising were socially wasteful because they simply accentuated product differentiation and thus enhanced manufacturers' market power. See Sylvania, 433 U.S. at 57, n. 25 (rejecting contention that "a large part of the promotional efforts resulting from vertical restrictions does not socially valuable information about product availability, price, quality, and services"). Such restraints could overcome such market imperfections, ensure a more efficient level of promotional expenditures and thus enhance interbrand competition. This reasoning, of course, replicated the Chicago School's account of such restraints found in Bork's 1966 work, Richard Posner's 1976 monograph as well as a 1975 article by Posner. See Richard A. Posner, Antitrust: An Economic Perspective (1976); Richard A Posner, Antitrust Policy and the Supreme Court: An Analysis of the Restricted Distribution, Horizontal Merger and Potential Competition Decisions, 75 Columbia L. Rev. 282 (1975). (See also here) (describing how Sylvania Court embraced Bork's economic account of such restraints). The transaction cost account of such restraints also undermined the petitioner's claim that such restraints were necessarily coercive, given that non-standard agreements the overcome market failures are presumptively voluntary. See Alan J. Meese, The Market Power Model of Contract Formation: How Outmoded Economic Theory Still Distorts Antitrust Doctrine, 88 Notre Dame L. Rev. 1291 (2013).
15. At this point one might be tempted to conclude that changed economic theory alone accounted for the reversal of Schwinn. Certainly such a change was necessary. However, it was not sufficient. After all, Bork's work had been in the public domain for over a decade. As noted above, the Topco defendants had expressly contended that the challenged restraints were ancillary and might produce redeeming virtues because they could encourage members of the venture to invest sufficient resources in promotion, invoking Bork's 1966 article. But of course the Court had rejected that argument, reasoning that the autonomy of individual traders was of paramount concern, regardless of the potential favorable impact of such restraints on interbrand competition. As noted above, Judge Browning had invoked Topco to support his view that Schwinn rested upon a strong concern for the autonomy of traders.
The Sylvania Court expressly rejected Judge Browning's argument, however. According to the Court:
"Competitive economies have social, political as well as economic advantages, but an antitrust policy divorced from market considerations would lack any objective benchmarks. As Mr. Justice Brandeis reminded us: 'Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence.'"
Sylvania, 433 U.S. at 53, n. 21 (quoting Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918)).
16. Of course, the Sherman Act had remained unchanged since 1967, when the Court announced Schwinn. But the composition of the Court had changed considerably. Chief Justice Warren and Justices Douglas, Fortas, Clark and Black, who were members of Schwinn's 5-2 majority, had left the Court, as had Justice Harlan. Chief Justice Burger, and Justices Marshall, Rehnquist, Powell, Blackmun and Stevens had since joined the Court. All but Marshall had been appointed by Republican Presidents. All but Marshall and Rehnquist, the latter of whom had recused himself, joined the majority opinion overruling Schwinn. These five justices apparently embraced a different normative conception of the Sherman Act than those who had joined Schwinn, Topco and Albrecht, for instance.
17. Like all decisions, no matter how momentous, Sylvania left several questions open. Indeed, the Court qualified its holding in two important respects. For instance, the Court purported to distinguish the non-price restraints before it from horizontal restraints such as those condemned in Topco. The Court also distinguished non-price vertical restraints from minimum resale price maintenance, purporting at least to reaffirm the per se rule against the latter. According to Professor Gavil, Justice Powell had to grant such concessions to retain five votes for his majority opinion. Shortly after the decision, however, contemporary commentators wondered if these distinctions would survive future cases. For instance, if the propensity of a restraint to overcome a market failure and induce promotion qualified as a redeeming virtue in the vertical context, there was no apparent reason to reject a similar conclusion simply because a restraint is, like so many beneficial restraints, horizontal. See Martin Louis, Restraints Ancillary to Joint Ventures and Licensing Agreements: Do Seally and Topco Logically Survive Sylvania and Broadcast Music?. 66 Virginia L. Rev. 897 (1980). Only time would tell whether whether the Court would take Sylvania's rationale to its logical conclusions in other doctrinal contexts.
16. Of course, the Sherman Act had remained unchanged since 1967, when the Court announced Schwinn. But the composition of the Court had changed considerably. Chief Justice Warren and Justices Douglas, Fortas, Clark and Black, who were members of Schwinn's 5-2 majority, had left the Court, as had Justice Harlan. Chief Justice Burger, and Justices Marshall, Rehnquist, Powell, Blackmun and Stevens had since joined the Court. All but Marshall had been appointed by Republican Presidents. All but Marshall and Rehnquist, the latter of whom had recused himself, joined the majority opinion overruling Schwinn. These five justices apparently embraced a different normative conception of the Sherman Act than those who had joined Schwinn, Topco and Albrecht, for instance.
17. Like all decisions, no matter how momentous, Sylvania left several questions open. Indeed, the Court qualified its holding in two important respects. For instance, the Court purported to distinguish the non-price restraints before it from horizontal restraints such as those condemned in Topco. The Court also distinguished non-price vertical restraints from minimum resale price maintenance, purporting at least to reaffirm the per se rule against the latter. According to Professor Gavil, Justice Powell had to grant such concessions to retain five votes for his majority opinion. Shortly after the decision, however, contemporary commentators wondered if these distinctions would survive future cases. For instance, if the propensity of a restraint to overcome a market failure and induce promotion qualified as a redeeming virtue in the vertical context, there was no apparent reason to reject a similar conclusion simply because a restraint is, like so many beneficial restraints, horizontal. See Martin Louis, Restraints Ancillary to Joint Ventures and Licensing Agreements: Do Seally and Topco Logically Survive Sylvania and Broadcast Music?. 66 Virginia L. Rev. 897 (1980). Only time would tell whether whether the Court would take Sylvania's rationale to its logical conclusions in other doctrinal contexts.