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

Annotate this Case

U.S. Supreme Court

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

United States v. Arnold, Schwinn & Co.

No. 25

Argued April 20, 1967

Decided June 12, 1967

388 U.S. 365

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

Syllabus

This is a civil antitrust suit under § 1 of the Sherman Act in which appellees were charged by the Government with a continuing conspiracy, with others, to fix prices, to allocate exclusive territories to wholesalers and jobbers, and to confine merchandise to franchised dealers. Appellees are Arnold, Schwinn & Co. (Schwinn), a leading bicycle manufacturer, and an association of distributors handling Schwinn products. In 1951, Schwinn had the largest share, 22.%, of the U.S. bicycle market. By 1961, its share had fallen to 12.8%, although dollar and unit sales had risen. The market leader, with 22.8% in 1961, which had increased its share from 11.6% in 1951, sells mainly to mass merchandisers. Schwinn sells to (1) distributors, (2) retailers by means of consignment or agency arrangements with distributors, and (3) retailers under the Schwinn Plan, which involves direct shipment to retailers with Schwinn invoicing the dealers, extending credit, and paying a commission to the distributor taking the order. Schwinn assigned specific territories to each of its wholesale distributors who were instructed to sell only to franchised dealers in their respective territories. The District Court rejected the charge of price-fixing, held that the Schwinn franchising system was fair and reasonable, but that the territorial limitation was unlawful per se as respects products sold by Schwinn to its distributors. The United States did not appeal from the rejection of the price-fixing charge, and appellees did not appeal from the order invalidating restraints on resale by distributors who purchase products from Schwinn. The Government requests that the limitations on distribution where the distributor acts as agent or consignee of Schwinn or on the Schwinn Plan be considered under the "rule of reason," and that they be held to constitute an unreasonable restraint of trade.

Held:

1. The promotion of Schwinn's self-interest alone does not invoke the rule of reason to immunize otherwise illegal conduct.

"It is only if the conduct is not unlawful in its impact in the marketplace or if the self-interest coincides with the statutory concern with

Page 388 U. S. 366

the preservation and promotion of competition that protection is achieved."

P. 388 U. S. 375.

2. It is

"illogical and inconsistent to forbid territorial limitations on resales by distributors where the distributor owns the goods . . . and, at the same time, to exonerate arrangements which require distributors to confine resales of the goods they have bought to 'franchised' retailers."

Pp. 388 U. S. 377-378.

(a) The decree should be revised on remand to

"enjoin any limitation upon the freedom of distributors to dispose of the Schwinn products, which they have bought from Schwinn, where and to whomever they choose."

P. 388 U. S. 378.

(b) Since this principle is equally applicable to sales to retailers,

"the decree should similarly enjoin the making of any sales to retailers upon any condition, agreement or understanding limiting the retailer's freedom as to where and to whom it will resell the products."

P. 388 U. S. 378.

3.

"Where the manufacturer retains title, dominion, and risk with respect to the product and the position and function of the dealer in question are, in fact, indistinguishable from that of an agent or salesman of the manufacturer, it is only if the impact of the confinement is 'unreasonably' restrictive of competition that a violation of § 1"

of the Sherman Act results from such confinement, absent culpable price-fixing. Pp. 388 U. S. 380-381.

(a) While a manufacturer's adoption "of an agency or consignment pattern and the Schwinn type of restrictive distribution system" would not be

"justified in any and all circumstances by the presence of the competition of mass merchandisers and by the demonstrated need of the franchise system to meet that competition,"

in the absence of price-fixing and with an adequate source of alternative products to meet the needs of the unfranchised, the vertically imposed distribution restraints may not be held to be per se violations of the Sherman Act. P. 388 U. S. 381.

(b) As long as Schwinn retains all indicia of ownership and the dealers' activities are indistinguishable from those of agents or salesmen, Schwinn's franchising of retailers and confinement of retail sales to them do not constitute an "unreasonable" restraint of trade. P. 388 U. S. 381.

237 F.Supp. 323, reversed and remanded.

Page 388 U. S. 367

MR. JUSTICE FORTAS delivered the opinion of the Court.

The United States brought this appeal to review the judgment of the District Court in a civil antitrust case alleging violations of § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1. Direct appeal is authorized by 2 of the Expediting Act, 32 Stat. 823, as amended, 15 U.S.C. § 29. The complaint charged a continuing conspiracy since 1952 between defendants and other alleged coconspirators involving price-fixing, allocation of exclusive territories to wholesalers and jobbers, and confinement of merchandise to franchised dealers. Named as defendants were Arnold, Schwinn & Company ("Schwinn"), the Schwinn Cycle Distributors Association ("SCDA"), and B. F. Goodrich Company ("B. F. Goodrich"). [Footnote 1]

At trial, the United States asserted that not only the price-fixing, but also Schwinn's methods of distribution were illegal per se under § 1 of the Sherman Act. The trial lasted 70 days. The evidence, largely offered by appellees, elaborately sets forth information as to the total market interaction and interbrand competition, as well as the distribution program and practices.

The District Court rejected the charge of price-fixing. With respect to the charges of illegal distribution practices, the court held that the territorial limitation was

Page 388 U. S. 368

unlawful per se as respects products sold by Schwinn to its distributors, but that the limitation was not unlawful insofar as it was incident to sales by Schwinn itself to franchised retailers where the wholesaler or jobber (hereinafter referred to as the distributor) functioned as agent or consignee, including distribution pursuant to the "Schwinn Plan" described below.

The United States did not appeal from the District Court's rejection of its price-fixing charge. The appellees did not appeal from the findings and order invalidating restraints on resale by distributors who purchase products from Schwinn.

In this Court, the United States has abandoned its contention that the distribution limitations are illegal per se. Instead, we are asked to consider these limitations in light of the "rule of reason," and, on the basis of the voluminous record below, to conclude that the limitations are the product of "agreement" between Schwinn and its wholesale and retail distributors and that they constitute an unreasonable restraint of trade.

Appellee Schwinn is a family-owned business which for many years has been engaged in the manufacture and sale of bicycles and some limited bicycle parts and accessories. [Footnote 2] Appellee SCDA is an association of distributors handling Schwinn bicycles and other products. The challenged marketing program was instituted in 1952. In 1951, Schwinn had the largest single share of the United States bicycle market -- 22.5%. In 1961, Schwinn's share of market had fallen to 12.8% although its dollar and unit sales had risen substantially. In the same period, a competitor, Murray Ohio Manufacturing Company, which is now the leading United States bicycle

Page 388 U. S. 369

producer, increased its market share from 11.6% in 1951 to 22.8% in 1961. Murray sells primarily to Sears, Roebuck & Company and other mass merchandisers. By 1962 there were nine bicycle producers in the Nation, operating 11 plants. Imports of bicycles amounted to 29.7% of sales in 1961.

Forty percent of all bicycles are distributed by national concerns which operate their own stores and franchise others. Another 20% are sold by giant chains and mass merchandisers like Sears and Montgomery Ward & Company. Sears and Ward together account for 20% of all bicycle sales. Most of these bicycles are sold under private label. About 30% of all bicycles are distributed by cycle jobbers which specialize in the trade, and the remaining 10% by hardware and general stores.

Schwinn sells its products primarily to or through 22 wholesale distributors, with sales to the public being made by a large number of retailers. In addition, it sells about 11% of its total to B. F. Goodrich for resale in B. F. Goodrich retail or franchised stores. There are about 5,000 to 6,000 retail dealers in the United States which are bicycle specialty shops, generally also providing servicing. About 84% of Schwinn's sales are through such specialized dealers. Schwinn sells only under the Schwinn label, never under private label, while about 64% of all bicycles are sold under private label. Distributors and retailers handling Schwinn bicycles are not restricted to the handling of that brand. They may and ordinarily do sell a variety of brands.

The United States does not contend that there is in this case any restraint on interbrand competition, nor does it attempt to sustain its charge by reference to the market for bicycles as a whole. Instead, it invites us to confine our attention to the intrabrand effect of the contested restrictions. It urges us to declare that the

Page 388 U. S. 370

method of distribution of a single brand of bicycles, amounting to less than one-seventh of the market, constitutes an unreasonable restraint of trade or commerce among the several States.

Schwinn's principal methods of selling its bicycles are as follows: (1) sales to distributors, primarily cycle distributors, B. F. Goodrich and hardware jobbers; (2) sales to retailers by means of consignment or agency arrangements with distributors, and (3) sales to retailers under the so-called Schwinn Plan, which involves direct shipment by Schwinn to the retailer with Schwinn invoicing the dealers, extending credit, and paying a commission to the distributor taking the order. Schwinn fair-traded certain of its models at retail in States permitting this, and suggested retail prices for all of its bicycles in all States. During the 1952-1962 period, as the District Court found,

"well over half of the bicycles sold by Schwinn have been sold direct to the retail dealer (not to a cycle distributor) by means of Schwinn Plan sales and consignment and agency sales."

Less than half were sold to distributors. [Footnote 3]

After World War II, Schwinn had begun studying and revamping its distribution pattern. As of 1951-1952, it had reduced its mailing list from about 15,000 retail outlets to about 5,500. It instituted the practice of franchising approved retail outlets. The franchise did not prevent the retailer from handling other brands, but it did require the retailer to promote Schwinn bicycles and to give them at least equal prominence with competing brands. The number of franchised dealers in any area was limited, and a retailer was franchised only as to a designated location or locations. Each franchised dealer

Page 388 U. S. 371

was to purchase only from or through the distributor authorized to serve that particular area. He was authorized to sell only to consumers, and not to unfranchised retailers. The District Court found that, while each Schwinn franchised retailer

"knows that he is an unrestricted retail dealer, free to sell at his own price to any person who wants to buy on a retail basis. . . , [he] knows also that he is not a wholesaler, and that he cannot sell as a wholesaler or act as an agent for some other unfranchised dealer, such as a discount house retailer. . . . When he acts as such an agent, he subjects his franchise to cancellation at will by Schwinn."

Schwinn assigned specific territories to each of its 22 wholesale cycle distributors. These distributors were instructed to sell only to franchised Schwinn accounts and only in their respective territories, which were specifically described and allocated on an exclusive basis. The District Court found

"that certain cycle distributors have, in fact, not competed with each other . . . , and that, in so doing, they have conspired with Schwinn to unreasonably restrain competition contrary to the provisions of Section 1 of the Sherman Act."

The court, however, restricted this finding and its consequent order to transactions in which the distributor purchased the bicycles from Schwinn for resale, as distinguished from sales by the distributor as agent or consignee of Schwinn or on the Schwinn Plan. The United States urges that this Court should require revision of the decree in this respect to forbid territorial exclusivity regardless of the technical form by which the products are transferred from Schwinn to the retailer or consumer. [Footnote 4]

Page 388 U. S. 372

The District Court rejected the Government's contention that Schwinn had, in fact, canceled the franchises of some retailers because of sales to discount houses or other unfranchised dealers, nor did it find that distributors have been cut off because of sales to unfranchised retailers or violation of territorial limitations. The United States urges that this is "clearly erroneous." In any event, it is clear and entirely consistent with the District Court's findings that Schwinn has been "firm and resolute" in insisting upon observance of territorial and customer limitations by its bicycle distributors and upon confining sales by franchised retailers to consumers, and that Schwinn's "firmness" in these respects was grounded upon the communicated danger of termination. Our analysis will embrace this conclusion, rather than the finding which is urged by the Government and which was refused by the trial court that Schwinn actually terminated retail franchises or cut off distributors for the suggested reasons.

We come, then, to the legal issues in this case. We are here confronted with challenged vertical restrictions as to territory and dealers. The source of the restrictions is the manufacturer. These are not horizontal restraints, in which the actors are distributors with or without the manufacturer's participation. We have held in such a case, where the purpose was to prevent the distribution of automobiles to or by "discounters," that a "classic conspiracy in restraint of trade" results.

Page 388 U. S. 373

United States v. General Motors Corp.,384 U. S. 127 (1966); see also Klor's, Inc. v. Broadway-Hale Stores, Inc.,359 U. S. 207 (1959); Timken Roller Bearing Co. v. United States,341 U. S. 593 (1951). Nor is this a case of territorial or dealer restrictions accompanied by price-fixing, for here the issue of unlawful price-fixing was tendered, litigated, decided against the appellant, and appellant has not appealed. If it were otherwise -- if there were here a finding that the restrictions were part of a scheme involving unlawful price-fixing, the result would be a per se violation of the Sherman Act. United States v. Sealy, Inc., ante, p. 388 U. S. 350; United States v. Bausch & Lomb Co.,321 U. S. 707, 321 U. S. 724 (1944). Because of the posture of the case and the failure of the Government to urge the point, we do not here pause to consider whether a case might be presented, short of unlawful price-fixing, in which the activities of the manufacturer to affect resale prices -- whether styled price "maintenance" or "stabilization" or otherwise -- would fatally infect vertical customer restrictions so as to require a conclusion of per se violation. The Government does not contend that a per se violation of the Sherman Act is presented by the practices which are involved in this appeal (that is, without reference to the practice which the lower court enjoined, and which is not before us). Accordingly, we are remitted to an appraisal of the market impact of these practices.

In White Motor Co. v. United States,372 U. S. 253 (1963), this Court refused to affirm summary judgment against the manufacturer even though there were not only vertical restrictions as to territory and customer selection, but also unlawful price-fixing. The Court held that there was no showing that the price-fixing was "an integral part of the whole distribution system," and accordingly it declined to outlaw the system because of the possibility that a trial laying bare "the economic

Page 388 U. S. 374

and business stuff out of which these arrangements emerge" might demonstrate their reasonableness. Id. at 372 U. S. 263. So here we must look to the specifies of the challenged practices and their impact upon the marketplace in order to make a judgment as to whether the restraint is or is not "reasonable" in the special sense in which § 1 of the Sherman Act must be read for purposes of this type of inquiry. Chicago Board of Trade v. United States,246 U. S. 231, 246 U. S. 238 (1918); Standard Oil Co. v. United States,221 U. S. 1, 221 U. S. 51 (1911); Apex Hosiery v. Leader,310 U. S. 469, 310 U. S. 498 (1940). [Footnote 5]

We first observe that the facts of this case do not come within the specific illustrations which the Court in White Motor articulated as possible factors relevant to a showing that the challenged vertical restraint is sheltered by the rule of reason because it is not anticompetitive. Schwinn was not a newcomer, seeking to break into or stay in the bicycle business. It was not a "failing company." On the contrary, at the initiation of these practices, it was the leading bicycle producer in the Nation. Schwinn contends, however, and the trial court found, that the reasons which induced it to adopt the challenged distribution program were to enable it and the small, independent merchants that made up its chain of distribution to compete more effectively in the marketplace. Schwinn

Page 388 U. S. 375

sought a better way of distributing its product: a method which would promote sales, increase stability of its distributor and dealer outlets, and augment profits. But this argument, appealing as it is, is not enough to avoid the Sherman Act proscription, because, in a sense, every restrictive practice is designed to augment the profit and competitive position of its participants. Price fixing does so, for example, and so may a well calculated division of territories. See United States v. Socony-Vacuum Oil Co.,310 U. S. 150 (1940). The antitrust outcome does not turn merely on the presence of sound business reason or motive. Here, for example, if the test of reasonableness were merely whether Schwinn's restrictive distribution program and practices were adopted "for good business reasons," and not merely to injure competitors, or if the answer turned upon whether it was indeed "good business practice," we should not quarrel with Schwinn's eloquent submission or the finding of the trial court. But our inquiry cannot stop at that point. Our inquiry is whether, assuming nonpredatory motives and business purposes and the incentive of profit and volume considerations, the effect upon competition in the marketplace is substantially adverse. The promotion of self-interest alone does not invoke the rule of reason to immunize otherwise illegal conduct. It is only if the conduct is not unlawful in its impact in the marketplace or if the self-interest coincides with the statutory concern with the preservation and promotion of competition that protection is achieved. Chicago Board of Trade, supra, at 246 U. S. 238.

On this basis, restraints as to territory or customers, vertical or horizontal, are unlawful if they are "ancillary to the price-fixing" (White Motor Co. v. United States, supra, at 372 U. S. 260) or if the price-fixing is "an integral part of the whole distribution system." (Bausch & Lomb, supra, at 321 U. S. 720.) In those situations, it is needless to inquire further

Page 388 U. S. 376

into competitive effect because it is established doctrine that, unless permitted by statute, the fixing of prices at which others may sell is anticompetitive, and the unlawfulness of the price-fixing infects the distribution restrictions. Cf. Sealy, supra, and Bausch & Lomb, supra. At the other extreme, a manufacturer of a product other and equivalent brands of which are readily available in the market may select his customers, and, for this purpose, he may "franchise" certain dealers to whom, alone, he will sell his goods. Cf. United States v. Colgate & Co.,250 U. S. 300 (1919). If the restraint stops at that point -- if nothing more is involved than vertical "confinement" of the manufacturer's own sales of the merchandise to selected dealers, and if competitive products are readily available to others, the restriction, on these facts alone, would not violate the Sherman Act. It is within these boundary lines that we must analyze the present case.

The District Court here enjoined appellees from limiting the territory within which any wholesaler or jobber may sell any Schwinn product which it has purchased. It held that these are agreements to divide territory, and, as such, are per se violations of § 1 of the Sherman Act. The court made clear that it confined its order to transactions in which the distributor purchases from Schwinn. As to consignment, agency and Schwinn Plan transactions, the court held that, in these instances, "Schwinn has a right to allocate its agents or salesmen to a particular territory." The court also held that the franchising of retailers was reasonable in view of the competitive problem presented by "giant" bicycle retailers such as Sears and Ward and by other mass merchandisers, and it declined to enjoin appellees' practices with respect to confinement of sale by distributors or Schwinn to franchised retailers, or to forbid Schwinn and its distributors from continuing to prohibit franchised retailers

Page 388 U. S. 377

from selling to discount houses or other unfranchised retailers for resale to the public.

As noted above, appellees have not appealed from the District Court's order, and, accordingly, we have before us only the Government's pleas: (1) that the decree should not be confined to sale transactions between Schwinn and wholesalers, but should reach territorial restrictions upon distributors whether they are incident to sale and resale transactions or to consignment, agency or Schwinn-Plan relationship between Schwinn and the distributors; (2) that agreements requiring distributors to limit their distribution to only such retailers as are franchised should be enjoined, and (3) that arrangements preventing franchised retailers from supplying non-franchised retailers, including discount stores, should also be forbidden.

As to point (2), the Government argues that it is illogical and inconsistent to forbid territorial limitations on resales by distributors where the distributor owns the goods, having bought them from Schwinn, and, at the same time, to exonerate arrangements which require distributors to confine resales of the goods they have bought to "franchised" retailers. It argues that requiring distributors, once they have purchased the product, to confine sales to franchised retailers is indistinguishable in law and principle from the division of territory which the decree condemns. Both, the Government argues, are in the nature of restraints upon alienation which are beyond the power of the manufacturer to impose upon its vendees and which, since the nature of the transaction includes an agreement, combination or understanding, are violations of § 1 of the Sherman Act. Cf. Dr. Miles Medical Co. v. Park & Sons Co.,220 U. S. 373 (1911); United States v. Bausch & Lomb Co., supra; Klor's, Inc. v. Broadway-Hale Stores, Inc., supra; 312 U. S. S. 378

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