The United States brought this injunction action charging a
violation of § 1 of the Sherman Act by appellee, Topco, a
cooperative association of about 25 small and medium-sized
independent regional supermarket chains operating in 33 States. As
its members' purchasing agent, appellee procures more than 1,000
different items, most of which have brand names owned by Topco. The
members' combined retail sales in 1967 were 2.3 billion, exceeded
by only three national grocery chains. A member's average market
share in its area is about 6%, and its competitive position is
frequently as strong as that of any other chain. The members own
equal amounts of Topco's common stock (the voting stock), choose
its directors, and completely control the association's operations.
Topco's bylaws establish an "exclusive" category of territorial
licenses, under which most members' licenses are issued, and the
two other membership categories have proved to be
de facto
exclusive. Since no member under this system may sell Topco brand
products outside the territory in which it is licensed, expansion
into another member's territory is, in practice, permitted only
with the other member's consent, and, since a member, in effect,
has a veto power over admission of a new member, members can
control actual or potential competition in the territorial areas in
which they are concerned. Topco members are prohibited from selling
any products supplied by the association at wholesale, whether
trademarked or not, without securing special permission, which is
not granted without the consent of other interested licensees
(usually retailers), and then the member must agree to restrict
Topco product sales to a specific area, and under certain
conditions. The Government charged that Topco's scheme of dividing
markets violates the Sherman Act because it operates to prohibit
competition in Topco brand products among retail grocery chains,
and also challenged Topco's restrictions on wholesaling. Topco
contended that it needs territorial divisions to maintain its
private label program and to enable it to compete with the larger
chains; that the association could not exist if the territorial
divisions were not exclusive; and that the restrictions on
competition in Topco brand sales enable members to meet larger
chain competition.
Page 405 U. S. 597
The District Court, agreeing with Topco, upheld the restrictive
practices a reasonable and pro-competitive.
Held: The Topco scheme of allocating territories to
minimize competition at the retail level is a horizontal restraint
constituting a
per se violation of § 1 of the Sherman Act,
and the District Court erred in applying a rule of reason to the
restrictive practices here involved.
United States v. Sealy,
Inc., 388 U. S. 350.
Topco's limitations upon reselling at wholesale are for the same
reason
per se invalid under § 1. Pp. 606-612.
319 F.
Supp. 1031, reversed and remanded.
MARSHALL, J., delivered the opinion of the Court, in which
DOUGLAS, BRENNAN STEWART, and WHITE, JJ., joined. BLACKMUN, J.,
filed an opinion concurring in the result,
post, p.
405 U. S. 612.
BURGER, C.J., filed a dissenting opinion,
post, p.
405 U. S. 613.
POWELL and REHNQUIST, JJ., took no part in the consideration or
decision of the case.
MR. JUSTICE MARSHALL delivered the opinion of the Court.
The United States brought this action for injunctive relief
against alleged violation by Topco Associates, Inc. (Topco) of § 1
of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1.
Jurisdiction was grounded in § 4 of the Act, 15 U.S.C. § 4.
Following a trial on the merits, the United States District Court
for the Northern District of Illinois entered judgment for Topco,
319 F.
Supp. 1031, and the United States appealed directly to this
Court pursuant to § 2 of the Expediting Act, 32 Stat. 823, as
amended, 15 U.S.C. § 29. We noted probable jurisdiction, 402 U.S.
905 (1971), and we now reverse the judgment of the District
Court.
Page 405 U. S. 598
I
Topco is a cooperative association of approximately 25 small and
medium-sized regional supermarket chains that operate stores in
some 33 States. [
Footnote 1]
Each of the member chains operates independently; there is no
pooling of earnings, profits, capital, management, or advertising
resources. No grocery business is conducted under the Topco name.
Its basic function is to serve as a purchasing agent for its
members. [
Footnote 2] In this
capacity, it procures and distributes to the members more than
1,000 different food and related nonfood items, most of which are
distributed under brand names owned by Topco. The association does
not itself own any manufacturing, processing, or warehousing
facilities, and the items that it procures for members are usually
shipped directly from the packer or manufacturer to the members.
Payment is made either to Topco or directly to the manufacturer at
a cost that is virtually the same for the members as for Topco
itself.
All of the stock in Topco is owned by the members, with the
common stock, the only stock having voting rights, being equally
distributed. The board of directors, which controls the operation
of the association, is drawn from the members, and is normally
composed of high-ranking executive officers of member chains. It is
the board that elects the association's officers and appoints
Page 405 U. S. 599
committee members, and it is from the board that the principal
executive officers of Topco must be drawn. Restrictions on the
alienation of stock and the procedure for selecting all important
officials of the association from within the ranks of its members
give the members complete and unfettered control over the
operations of the association.
Topco was founded in the 1940's by a group of small, local
grocery chains, independently owned and operated, that desired to
cooperate to obtain high quality merchandise under private labels
in order to compete more effectively with larger national and
regional chains. [
Footnote 3]
With a line of canned, dairy, and other products, the
Page 405 U. S. 600
association began. It added frozen foods in 1950, fresh produce
in 1958, more general merchandise equipment and supplies in 1960,
and a branded bacon and carcass beef selection program in 1966. By
1964, Topco's members had combined retail sales of more than $2
billion; by 1967, their sales totaled more than $2.3 billion, a
figure exceeded by only three national grocery chains. [
Footnote 4]
Members of the association vary in the degree of market share
that they possess in their respective areas. The range is from 1.5%
to 16%, with the average being approximately 6%. While it is
difficult to compare these figures with the market shares of larger
regional and national chains because of the absence in the record
of accurate statistics for these chains, there is much evidence in
the record that Topco members are frequently in as strong a
competitive position in their respective areas as any other chain.
The strength of this competitive position is due, in some measure,
to the success of Topco brand products. Although only 10% of the
total goods sold by Topco members bear the association's brand
names, the profit on thee goods is substantial, and their very
existence has improved the competitive potential of Topco members
with respect to other large and powerful chains.
It is apparent that, from meager beginnings approximately a
quarter of a century ago, Topco has developed into a purchasing
association wholly owned and operated by member chains, which
possess much economic muscle, individually as well as
cooperatively.
II
Section 1 of the Sherman Act provides, in relevant part:
"Every contract, combination in the form of trust or otherwise,
or conspiracy, in restraint of
Page 405 U. S. 601
trade or commerce among the several States, or with foreign
nations, is declared to be illegal. . . ."
The United States charged that, beginning at least as early as
1960 and continuing up to the time that the complaint was filed,
Topco had combined and conspired with its members to violate § 1
[
Footnote 5] in two respects.
First, the Government alleged that there existed:
"a continuing agreement, understanding and concert of action
among the coconspirator member firms acting through Topco, the
substantial terms of which have been and are that each
coconspirator member firm will sell Topco controlled brands only
within the marketing territory allocated to it, and will refrain
from selling Topco controlled brands outside such marketing
territory."
The division of marketing territories to which the complaint
refers consists of a number of practices by the association.
Article IX, § 2, of the Topco bylaws establishes three
categories of territorial licenses that members may secure from the
association:
"(a)
Exclusive -- An exclusive territory is one in
which the member is licensed to sell all products bearing specified
trademarks of the Association, to the exclusion of all other
persons."
"(b)
Non-exclusive -- A non-exclusive territory is one
in which a member is licensed to sell all products bearing
specified trademarks of the Association, but not to the exclusion
of others who may also be licensed to sell products bearing the
same trademarks of the Association in the same territory."
"(c)
Coextensive -- A coextensive territory is one
Page 405 U. S. 602
in which two (2) or more members are licensed to sell all
products bearing specified trademarks of the Association to the
exclusion of all other persons. . . ."
When applying for membership, a chain must designate the type of
license that it desires. Membership must first be approved by the
board of directors, and thereafter by an affirmative vote of 75% of
the association's members. If, however, the member whose operations
are closest to those of the applicant, or any member whose
operations are located within 100 miles of the applicant, votes
against approval, an affirmative vote of 85% of the members is
required for approval. Bylaws, Art. I, § 5. Because, as indicated
by the record, members cooperate in accommodating each other's
wishes, the procedure for approval provides, in essence, that
members have a veto of sorts over actual or potential competition
in the territorial areas in which they are concerned.
Following approval, each new member signs an agreement with
Topco designating the territory in which that member may sell Topco
brand products. No member may sell these products outside the
territory in which it is licensed. Most licenses are exclusive, and
even those denominated "coextensive" or "non-exclusive" prove to be
de facto exclusive. Exclusive territorial areas are often
allocated to members who do no actual business in those areas on
the theory that they may with to expand at some indefinite future
time and that expansion would likely be in the direction of the
allocated territory. When combined with each member's veto power
over new members, provisions for exclusivity work effectively to
insulate members from competition in Topco brand goods. Should a
member violate its license agreement and sell in areas other than
those in which it is licensed, its membership can be terminated
under Art. IV, §§ 2(a) and 2(b) of the
Page 405 U. S. 603
bylaws. Once a territory is classified as exclusive, either
formally or
de facto, it is extremely unlikely that the
classification will ever be changed.
See Bylaws, Art.
IX.
The Government maintains that this scheme of dividing markets
violates the Sherman Act because it operates to prohibit
competition in Topco brand products among grocery chains engaged in
retail operations. The Government also makes a subsidiary challenge
to Topco's practices regarding licensing members to sell at
wholesale. Under the bylaws, members are not permitted to sell any
products supplied by the association at wholesale, whether
trademarked or not, without first applying for and receiving
special permission from the association to do so. [
Footnote 6] Before permission is granted,
other licensees (usually retailers) whose interests may potentially
be affected by wholesale operations are consulted as to their
wishes in the matter. If permission is obtained, the member must
agree to restrict
Page 405 U. S. 604
the sale of Topco products to a specific geographic area, and to
sell under any conditions imposed by the association. Permission to
wholesale has often been sought by members, only to be denied by
the association. The Government contends that this amounts not only
to a territorial restriction violative of the Sherman Act, but also
to a restriction on customers that, in itself, is violative of the
Act. [
Footnote 7]
From the inception of this lawsuit, Topco accepted as true most
of the Government's allegations regarding territorial divisions and
restrictions on wholesaling, although it differed greatly with the
Government on the conclusions, both factual and legal, to be drawn
from these facts.
Topco's answer to the complaint is illustrative of its posture
in the District Court and before this Court:
"Private label merchandising is a way of economic life in the
food retailing industry, and exclusivity is the essence of a
private label program; without exclusivity, a private label would
not be private. Each national and large regional chain has its own
exclusive private label products in addition to the nationally
advertised brands which all chains sell. Each such chain relies
upon the exclusivity of its own private label line to differentiate
its private
Page 405 U. S. 605
label products from those of its competitors and to attract and
retain the repeat business and loyalty of consumers. Smaller retail
grocery stores and chains are unable to compete effectively with
the national and large regional chains without also offering their
own exclusive private label products."
"
* * * *"
"The only feasible method by which Topco can procure private
label products and assure the exclusivity thereof is through
trademark licenses specifying the territory in which each member
may sell such trademarked products."
Answer, App. 11. Topco essentially maintains that it needs
territorial divisions to compete with larger chains; that the
association could not exist if the territorial divisions were
anything but exclusive; and that, by restricting competition in the
sale of Topco brand goods, the association actually increases
competition by enabling its members to compete successfully with
larger regional and national chains.
The District Court, considering all these things relevant to its
decision, agreed with Topco. It recognized that the panoply of
restraints that Topco imposed on its members worked to prevent
competition in Topco brand products, [
Footnote 8] but concluded that
"[w]hatever anti-competitive effect these practices may have on
competition in the sale of Topco private
Page 405 U. S. 606
label brands is far outweighed by the increased ability of Topco
members to compete both with the national chains and other
supermarkets operating in their respective territories."
319 F.
Supp. 1031, 1043 (1970). The court held that Topco's practices
were procompetitive, and therefore consistent with the purposes of
the antitrust laws. But we conclude that the District Court used an
improper analysis in reaching its result.
III
On its face, § 1 of the Sherman Act appears to bar any
combination of entrepreneurs so long as it is "in restraint of
trade." Theoretically, all manufacturers, distributors, merchants,
sellers, and buyers could be considered as potential competitors of
each other. Were § 1 to be read in the narrowest possible way, any
commercial contract could be deemed to violate it.
Chicago
Board of Trade v. United States, 246 U.
S. 231,
246 U. S. 238
(1918) (Brandeis, J.). The history underlying the formulation of
the antitrust laws led this Court to conclude, however, that
Congress did not intend to prohibit all contracts, nor even all
contracts that might in some insignificant degree or attenuated
sense restrain trade or competition. In lieu of the narrowest
possible reading of § 1, the Court adopted a "rule of reason"
analysis for determining
Page 405 U. S. 607
whether most business combinations or contracts violate the
prohibitions of the Sherman Act.
Standard Oil Co. v. United
States, 221 U. S. 1 (1911).
An analysis of the reasonableness of particular restraints includes
consideration of the facts peculiar to the business in which the
restraint is applied, the nature of the restraint and its effects,
and the history of the restraint and the reasons for its adoption.
Chicago Board of Trade v. United States, supra, at
246 U. S.
238.
While the Court has utilized the "rule of reason" in evaluating
the legality of most restraints alleged to be violative of the
Sherman Act, it has also developed the doctrine that certain
business relationships are
per se violations of the Act
without regard to a consideration of their reasonableness. In
Northern Pacific R. Co. v. United States, 356 U. S.
1,
356 U. S. 5
(1958), Mr. Justice Black explained the appropriateness of, and the
need for,
per se rules:
"[T]here are certain agreements or practices which, because of
their pernicious effect on competition and lack of any redeeming
virtue, 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. This principle of
per se unreasonableness not only makes the type of
restraints which are proscribed by the Sherman Act more certain to
the benefit of everyone concerned, but it also avoids the necessity
for an incredibly complicated and prolonged economic investigation
into the entire history of the industry involved, as well as
related industries, in an effort to determine at large whether a
particular restraint has been unreasonable -- an inquiry so often
wholly fruitless when undertaken."
It is only after considerable experience with certain business
relationships that courts classify them as
per se
Page 405 U. S. 608
violations of the Sherman Act.
See generally Van Cise,
The Future of
Per Se in Antitrust Law, 50 Va.L.Rev. 1165
(1964). 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. Such concerted action is usually termed a "horizontal"
restraint, in contradistinction to combinations of persons at
different levels of the market structure,
e.g.,
manufacturers and distributors, which are termed "vertical"
restraints. This Court has reiterated time and time again that
"[h]orizontal territorial limitation . . . are naked restraints of
trade, with no purpose except stifling of competition."
White
Motor Co. v. United States, 372 U. S. 253,
372 U. S. 263
(1963). Such limitations are
per se violations of the
Sherman Act.
See Addyston Pipe & Steel Co. v. United
States, 175 U. S. 211
(1899),
aff'g 85 F. 271 (CA6 1898) (Taft, J.);
United
States v. National Lead Co., 332 U. S. 319
(1947);
Timken Roller Bearing Co. v. United States,
341 U. S. 593
(1951);
Northern Pacific R. Co. v. United States, supra;
Citizen Publishing Co. v. United States, 394 U.
S. 131 (1969);
United States v. Sealy, Inc.,
388 U. S. 350
(1967);
United States v. Arnold, Schwinn & Co.,
388 U. S. 365,
388 U. S. 390
(1967) (STEWART, J., concurring in part and dissenting in part);
Serta Associates, Inc. v. United States, 393 U.
S. 534 (1969),
aff'g 296
F. Supp. 1121,
1128
(ND Ill.1968).
We think that it is clear that the restraint in this case is a
horizontal one, and, therefore, a
per se violation of § 1.
The District Court failed to make any determination as to whether
there were
per se horizontal territorial restraints in
this case, and simply applied a rule of reason in reaching its
conclusions that the restraints were not illegal.
See,
e.g., Comment, Horizontal Territorial Restraints and the
Per Se Rule, 28 Wash. & Lee L.Rev. 457, 469 (1971). In
so doing, the District Court erred.
Page 405 U. S. 609
United States v. Sealy, Inc., supra, is, in fact, on
all fours with this case. Sealy licensed manufacturers of
mattresses and bedding to make and sell products using the Sealy
trademark. Like Topco, Sealy was a corporation owned almost
entirely by its licensees, who elected the Board of Directors and
controlled the business. Just as in this case, Sealy agreed with
the licensees not to license other manufacturers or sellers to sell
Sealy brand products in a designated territory in exchange for the
promise of the licensee who sold in that territory not to expand
its sales beyond the area demarcated by Sealy. The Court held that
this was a horizontal territorial restraint, which was
per
se violative of the Sherman Act. [
Footnote 9]
Whether or not we would decide this case the same way under the
rule of reason used by the District Court is irrelevant to the
issue before us. The fact is that courts are of limited utility in
examining difficult economic problems. [
Footnote 10] Our inability to weigh, in any
meaningful
Page 405 U. S. 610
sense, destruction of competition in one sector of the economy
against promotion of competition 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 restraints of trade are to be
tolerated because they are well intended or because they are
allegedly developed to increase competition.
E.g., United
States v. General Motors Corp., 384 U.
S. 127,
384 U. S.
146-147 (1966);
United States v. Masonite
Corp., 316 U. S. 265
(1942);
Fashion Originators' Guild v. FTC, 312 U.
S. 457 (1941).
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 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.
Cf. United States v.
Philadelphia National Bank, 374 U. S. 321,
374 U. S. 371
(1963).
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
Page 405 U. S. 611
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 supermarket chains is
more desirable than competition in the sale of Topco brand
products. Without territorial restrictions, Topco members may
indeed " [cut] each other's throats."
Cf. White Motor Co.,
supra, at
372 U. S. 278
(Clark, J., dissenting). But we have never found this possibility
sufficient to warrant condoning horizontal restraints of trade.
The Court has previously noted with respect to price-fixing,
another
per se violation of the Sherman Act, that:
"The reasonable price fixed today may, through economic and
business changes, become the unreasonable price of tomorrow. Once
established, it may be maintained unchanged because of the absence
of competition secured by the agreement for a price reasonable when
fixed."
United States v. Trenton Potteries Co., 273 U.
S. 392,
273 U. S. 397
(1927). A similar observation can be made with regard to
territorial limitations.
White Motor Co., supra, at
372 U. S. 265
n. 2 (BRENNAN, J., concurring).
There have been tremendous departures from the notion of a free
enterprise system as it was originally conceived in this country.
These departures have been the product of congressional action and
the will of the people. If a decision is to be made to sacrifice
competition 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 interests in making such
decisions, and courts are ill-equipped and ill-situated for such
decisionmaking. To analyze, interpret, and evaluate the myriad of
competing interests and the endless data that would surely be
brought to
Page 405 U. S. 612
bear on such decisions, and to make the delicate judgment on the
relative values to society of competitive areas of the economy, the
judgment of the elected representatives of the people is
required.
Just as the territorial restrictions on retailing Topco brand
products must fall, so must the territorial restrictions on
wholesaling. The considerations are the same, and the Sherman Act
requires identical results.
We also strike down Topco's other restrictions on the right of
its members to wholesale goods. These restrictions amount to
regulation of the customers to whom members of Topco may sell Topco
brand goods. Like territorial restrictions, limitations on
customers are intended to limit intra-brand competition and to
promote inter-brand competition. For the reasons previously
discussed, the arena in which Topco members compete must be left to
their unfettered choice absent a contrary congressional
determination.
United States v. General Motors Corp., supra;
cf. United States v. Arnold, Schwinn & Co., supra; United
States v. Masonite Corp., supra; United States v. Trenton
Potteries, supra. See also White Motor Co., supra, at
372 U. S.
281-283 (Clark, J., dissenting).
We reverse the judgment of the District Court and remand the
case for entry of an appropriate decree.
It is so ordered.
MR. JUSTICE POWELL and MR. JUSTICE REHNQUIST took no part in the
consideration or decision of this case.
[
Footnote 1]
Topco, which is referred to at times in this opinion as the
"association," is actually composed of 23 chains of supermarket
retailers and two retailer-owned cooperative wholesalers.
[
Footnote 2]
In addition to purchasing various items for its members, Topco
performs other related functions:
e.g., it insures that
there is adequate quality control on the products that it
purchases; it assists members in developing specifications on
certain types of products (
e.g., equipment and supplies);
and it also aids the members in purchasing goods through other
sources.
[
Footnote 3]
The founding members of Topco were having difficulty competing
with larger chains. This difficulty was attributable in some degree
to the fact that the larger chains were capable of developing their
own private label programs.
Private-label products differ from other brand-name products in
that they are sold at a limited number of easily ascertainable
stores. A&P, for example, was a pioneer in developing a series
of products that were sold under an A&P label and that were
only available in A&P stores. It is obvious that, by using
private label products, a chain can achieve significant cost
economics in purchasing, transportation, warehousing, promotion,
and advertising. These economics may afford the chain opportunities
for offering private label products at lower prices than other
brand-name products. This, in turn, provides many advantages of
which some of the more important are: a store can offer
national-brand products at the same price as other stores, while
simultaneously offering a desirable, lower priced alternative; or,
if the profit margin is sufficiently high on private-brand goods,
national-brand products may be sold at reduced price. Other
advantages include: enabling a chain to bargain more favorably with
national-brand manufacturers by creating a broader supply base of
manufacturers, thereby decreasing dependence on a few, large
national-brand manufacturers; enabling a chain to create a
"price-mix" whereby prices on special items can be lowered to
attract customers while profits are maintained on other items; and
creation of general goodwill by offering lower priced, higher
quality goods.
[
Footnote 4]
The three largest chain are A&P, Safeway, and Kroger.
[
Footnote 5]
Topco was named in the complaint as the sole defendant, but the
complaint clearly charged that its members, while not defendants,
were coconspirators in Topco's violation of the Sherman Act.
[
Footnote 6]
Article IX, § 8, of the bylaws provides, in relevant part:
"Unless a member's membership and licensing agreement provides
that such member may sell at wholesale, a member may not wholesale
products supplied by the Association. If a membership and licensing
agreement permits a member to sell at wholesale, such member shall
control the resale of products bearing trademarks of the
Association so that such sales are confined to the territories
granted to the member, and the method of selling shall conform in
all respects with the Association's policies."
Shortly before trial, Topco amended this bylaw with an addition
that permitted any member to wholesale in the exclusive territories
in which it retailed. But the restriction remained the same in all
other cases.
It is apparent that this bylaw, on its face, applies whether or
not the products sold are trademarked by Topco. Despite the fact
that Topco's general manager testified at trial that, in practice,
the restriction is confined to Topco-branded products, the District
Court found that the bylaw is applied as written. We find nothing
clearly erroneous in this finding. Assuming,
arguendo,
however, that the restriction is confined to products trademarked
by Topco, the result in this case would not change.
[
Footnote 7]
When the Government first raised this point in the District
Court, Topco objected on the ground that it was at variance with
the charge in the complaint. The District Court apparently agreed
with Topco that the complaint did not cover customer limitations,
but permitted the Government to pursue this line on the basis that,
if the limitations were proved, the complaint could later be
amended. App. 141. Topco acquiesced in this procedure, and both
sides dealt with customer limitations in examining witnesses. The
District Court made specific findings and conclusions with respect
to the totality of the restraints on wholesaling. In light of these
facts, the additional fact that the complaint was never formally
amended should not bar our consideration of the issue.
[
Footnote 8]
The District Court recognized that
"[t]he government has introduced evidence indicating that some
applications by Topco members to expand into territories assigned
to other members have been denied,"
319 F.
Supp. 1031, 1042, but concluded that these decisions by Topco
did not have an appreciable influence on the decision of members as
to whether or not to expand. Topco expands on this conclusion in
its brief by asserting that "the evidence is uncontradicted that a
member has never failed to build a new store because it was unable
to obtain a license." Brief for Appellee 18 n. 18. The problem with
the conclusion of the District Court and the assertion by Topco is
that they are wholly inconsistent with the notion that territorial
divisions are crucial to the existence of Topco, as urged by the
association and found by the District Court. From the filing of its
answer to the argument before this Court, Topco has maintained
that, without a guarantee of an exclusive territory, prospective
licensees would not join Topco and present licensees would leave
the association. It is difficult to understand how Topco can make
this argument and simultaneously urge that territorial restrictions
are an unimportant factor in the decision of a member on whether to
expand its business.
[
Footnote 9]
It is true that, in
Sealy, the Court dealt with
price-fixing as well as territorial restrictions. To the extent
that
Sealy casts doubt on whether horizontal territorial
limitations, unaccompanied by price-fixing, are
per se
violations of the Sherman Act, we remove that doubt today.
[
Footnote 10]
There has been much recent commentary on the wisdom of
per
se rules.
See, e.g., Comment, Horizontal Territorial
Restraints and the
Per Se Rule, 28 Wash. & Lee L.Rev.
457 (1971); Averill,
Sealy, Schwinn and Sherman One: An
Analysis and Prognosis, 15 N.Y.L.F. 39 (1969); Note, Selected
Antitrust Problems of the Franchisor: Exclusive Arrangements,
Territorial Restrictions, and Franchise Termination, 22 U.
Fla.L.Rev. 260, 286 (1969); Sadd, Antitrust Symposium: Territorial
and Customer Restrictions After
Sealy and
Schwinn, 38 U.Cin.L.Rev. 249, 252-253 (1969); Bork, The
Rule of Reason and the
Per Se Concept, pt. 1, Price Fixing
and Market Division, 74 Yale L.J. 775 (1965).
Without the
per se rules, businessmen would be left
with little to aid them in predicting in any particular case what
courts will find to be legal and illegal under the Sherman Act.
Should Congress ultimately determine that predictability is
unimportant in this area of the law, it can, of course, make
per se rules inapplicable in some or all cases, and leave
courts free to ramble through the wilds of economic theory in order
to maintain a flexible approach.
MR. JUSTICE BLACKMUN, concurring in the result.
The conclusion the Court reaches has its anomalous aspects, for
surely, as the District Court's findings make clear, today's
decision in the Government's favor will tend to stultify Topco
members' competition with the great and larger chains. The bigs,
therefore, should find it easier to get bigger and, as a
consequence, reality
Page 405 U. S. 613
seems at odds with the public interest. The
per se
rule, however, now appears to be so firmly established by the Court
that, at this late date, I could not oppose it. Relief, if any is
to be forthcoming, apparently must be by way of legislation.
MR. CHIEF JUSTICE BURGER, dissenting.
This case does not involve restraints on inter-brand competition
or an allocation of markets by an association with monopoly or
near-monopoly control of the sources of supply of one or more
varieties of staple goods. Rather, we have here an agreement among
several small grocery chains to join in a cooperative endeavor
that, in my view, has an unquestionably lawful principal purpose;
in pursuit of that purpose, they have mutually agreed to certain
minimal ancillary restraints that are fully reasonable in view of
the principal purpose, and that have never before today been held
by this Court to be
per se violations of the Sherman
Act.
In joining in this cooperative endeavor, these small chains did
not agree to the restraints here at issue in order to make it
possible for them to exploit an already established line of
products through noncompetitive pricing. There was no such thing as
a Topco line of products until this cooperative was formed. The
restraints to which the cooperative's members have agreed deal only
with the marketing of the products in the Topco line, and the only
function of those restraints is to permit each member chain to
establish, within its own geographical area and through its own
local advertising and marketing efforts, a local consumer awareness
of the trademarked family of products as that member's "private
label" line. The goal sought was the enhancement of the individual
members' abilities to compete, albeit to a modest degree, with the
large national chains which had been successfully marketing private
label lines for
Page 405 U. S. 614
several years. The sole reason for a cooperative endeavor was to
make economically feasible such things as quality control, large
quantity purchases at bulk prices, the development of attractively
printed labels, and the ability to offer a number of different
lines of trademarked products. All these things, of course, are
feasible for the large national chains operating individually, but
they are beyond the reach of the small operators proceeding alone.
[
Footnote 2/1]
After a careful review of the economic considerations bearing
upon this case, the District Court determined that "the relief
which the government here seeks would not increase competition in
Topco private label brands"; on the contrary, such relief "would
substantially diminish competition in the supermarket field."
319 F.
Supp. 1031, 1043. This Court has not today determined, on the
basis of an examination of the underlying economic realities, that
the District Court's conclusions are incorrect. Rather, the
majority holds that the District Court had no business examining
Topco's practices under the "rule of reason"; it should not have
sought to determine whether Topco's practices did, in fact,
restrain trade or commerce within the meaning of § 1 of the Sherman
Act; it should have found no more than that those practices involve
a "horizontal division of markets," and are, by that very fact,
per se violations of the Act.
I do not believe that our prior decisions justify the result
reached by the majority. Nor do I believe that a new
per
se rule should be established in disposing of this case, for
the judicial convenience and ready predictability
Page 405 U. S. 615
that are made possible by
per se rules are not such
overriding considerations in antitrust law as to justify their
promulgation without careful prior consideration of the relevant
economic realities in the light of the basic policy and goals of
the Sherman Act.
I
I deal first with the cases upon which the majority relies in
stating that
"[t]his 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,
372 U. S.
263 (1963)."
White Motor, of course, laid down no
per se
rule, nor were any horizontal territorial limitations involved in
that case. Indeed, it was in
White Motor that this Court
reversed the District Court's holding that vertically imposed
territorial limitations were
per se violations, explaining
that
"[w]e need to know more than we do about the actual impact of
these arrangements on competition to decide whether they . . .
should be classified as
per se violations of the Sherman
Act."
372 U.S. at
372 U. S. 263.
The statement from the
White Motor opinion quoted by the
majority today was made without citation of authority, and was
apparently intended primarily to make clear that the facts then
before the Court were not to be confused with horizontally imposed
territorial limitations. To treat dictum in that case as
controlling here would, of course, be unjustified.
Having quoted this dictum from
White Motor, the Court
then cites eight cases for the proposition that horizontal
territorial limitations are
per se violations of the
Sherman Act. One of these cases,
Northern Pacific R. Co. v.
United States, 356 U. S. 1 (1958),
dealt exclusively with a prohibited tying arrangement, and is
improperly cited as a case concerned with a division of
Page 405 U. S. 616
markets. [
Footnote 2/2] Of the
remaining seven cases, four involved an aggregation of trade
restraints that included price-fixing agreements.
Timken Roller
Bearing Co. v. United States, 341 U.
S. 593 (1951);
United States v. Sealy, Inc.,
388 U. S. 350
(1967); [
Footnote 2/3]
Serta
Associates, Inc. v. United States, 393 U.
S. 534 (1969),
aff'g 296 F.
Supp. 1121 (ND Ill.1968). Price-fixing is, of course, not a
factor in the instant case.
Another of the cases relied upon by the Court,
United States
v. National Lead Co., 332 U. S. 319
(1947), involved a world-wide arrangement [
Footnote 2/4] for dividing territories,
Page 405 U. S. 617
pooling patents, and exchanging technological information. The
arrangement was found illegal by the District Court without any
reliance on a
per se rule; [
Footnote 2/5] this Court, in affirming, was concerned
almost exclusively with the remedies ordered by the District Court,
and made no attempt to declare a
per se rule to govern the
merits of the case.
In still another case on which the majority relies,
United
States v. Arnold, Schwinn & Co., 388 U.
S. 365 (1967), the District Court had, indeed, held that
the agreements between the manufacturer and certain of its
distributors, providing the latter with exclusive territories, were
horizontal in nature and that they were, as such,
per se
violations of the Act.
237 F.
Supp. 323, 342-343. Since no appeal was taken from this part of
the District Court's order, [
Footnote
2/6] that issue was not before this Court in its review of the
case. Indeed, in dealing with the issues that were before it, this
Court followed an approach markedly different from that of the
District Court. First, in reviewing the case here, the Court made
it clear that it was proceeding under the "rule of
Page 405 U. S. 618
reason," and not by
per se rule; [
Footnote 2/7] second, the Court saw the issues presented
as involving vertical, not horizontal, restraints. [
Footnote 2/8] It can hardly be contended,
therefore, that this Court's decision in
Schwinn is
controlling precedent for the application in the instant case of a
per se rule that prohibits horizontal restraints without
regard to their market effects.
Finally, there remains the eighth of the cases relied upon by
the Court -- actually, the first in its list of "authorities" for
the purported
per se rule. Circuit Judge (later Chief
Justice) Taft's opinion for the court in
United States v.
Addyston Pipe & Steel Co., 85 F. 271 (CA6 1898),
aff'd, 175 U. S. 211
(1899), has generally been recognized -- and properly so -- as a
fully authoritative exposition of antitrust law. But neither he,
nor this Court in affirming, made any pretense of establishing a
per se rule against all agreements involving horizontal
territorial limitations. The defendants in that case were
manufacturers and vendors of cast-iron pipe who had "entered into a
combination to raise the prices for pipe" throughout a number of
States "constituting considerably more than three-quarters of the
territory of the United States, and significantly called . . .
pay territory.'" 85 F. at 291. The associated defendants
in
Page 405 U. S.
619
combination controlled two-thirds of the manufactured output
of such pipe in this "pay territory"; certain cities ("reserved"
cities) within the territory were assigned to particular individual
defendants who sold pipe in those cities at prices fixed by the
association, the other defendants submitting fictitious bids and
the selling defendants paying a fixed "bonus" to the association
for each sale. Outside the "reserved" cities, all sales by the
defendants to customers in the "pay territory" were, again, at
prices determined by the association and were allocated to the
association member who offered, in a secret auction, to pay the
largest "bonus" to the association itself. The effect was, of
course, that the buying public lost all benefit of competitive
pricing. Although the case has frequently -- and quite properly --
been cited as a horizontal "allocation of markets" case, the sole
purpose of the secret customer allocations was to enable the
members of the association to fix prices charged to the public at
noncompetitive levels. Judge Taft rejected the defendants' argument
that the prices actually charged were "reasonable"; he held that it
was sufficient for a finding of a Sherman Act violation that the
combination and agreement of the defendants gave them such monopoly
power that they, rather than market forces, fixed the prices of all
cast-iron pipe in three-fourths of the Nation's territory. The case
unquestionably laid important groundwork for the subsequent
establishment of the per se rule against price-fixing. It
did not, however, establish that a horizontal division of markets
is, without more, a per se violation of the Sherman
Act.
II
The foregoing analysis of the cases relied upon by the majority
indicates to me that the Court is not merely following prior
holdings; on the contrary, it is establishing
Page 405 U. S. 620
a new
per se rule. In the face of the District Court's
well supported findings that the effects of such a rule in this
case will be adverse to the public welfare, [
Footnote 2/9] the Court lays down that rule without
regard to the impact that the condemned practices may have on
competition. In doing so, the Court virtually invites Congress to
undertake to determine that impact.
Ante at
405 U. S.
611-612. I question whether the Court is fulfilling the
role assigned to it under the statute when it declines to make this
determination; in any event, if the Court is unwilling on this
record to assess the economic impact, it surely should not proceed
to make a new rule to govern the economic activity.
White Motor
Co. v. United States, 372 U.S. at
372 U. S.
263.
When one of his versions of the proposed Act was before the
Senate for consideration in 1890, Senator Sherman, in a lengthy,
and obviously carefully prepared, address to that body, said that
the bill sought
"only to prevent and control combinations made with a view to
prevent competition, or for the restraint of trade, or to increase
the profits of the producer at the cost of the consumer. It is the
unlawful combination, tested by the rules of common law and human
experience, that is aimed at
Page 405 U. S. 621
by this bill, and not the lawful and useful combination."
"
* * * *"
"I admit that it is difficult to define in legal language the
precise line between lawful and unlawful combinations. This must be
left for the courts to determine in each particular case. All that
we, as lawmakers, can do is to declare general principles, and we
can be assured that the courts will apply them so as to carry out
the meaning of the law. . . ."
21 Cong.Rec. 2457, 2460.
In "carry[ing] out the meaning of the law" by making its
"determin[ations] in each particular case," this Court early
concluded that it was Congress' intent that a "rule of reason" be
applied in making such case-by-case determination.
Standard Oil
Co. v. United States, 221 U. S. 1,
221 U. S. 60
(1911). And that rule of reason was to be applied in light of the
Act's policy to protect the "public interests."
United States
v. American Tobacco Co., 221 U. S. 106,
221 U. S. 179
(1911). The
per se rules that have been developed are
similarly directed to the protection of the public welfare; they
are complementary to, and in no way inconsistent with, the rule of
reason. The principal advantages that flow from their use are,
first, that enforcement and predictability are enhanced and,
second, that unnecessary judicial investigation is avoided in those
cases where practices falling within the scope of such rules are
found. As the Court explained in
Northern Pacific R. Co. v.
United States, supra, at
356 U. S. 5,
"[T]here are certain agreements or practices which, because of
their pernicious effect on competition and lack of any redeeming
virtue, 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. "
Page 405 U. S. 622
In formulating a new
per se rule today, the Court does
not tell us what "pernicious effect on competition" the practices
here outlawed are perceived to have; nor does it attempt to show
that those practices "lack . . . any redeeming virtue." Rather, it
emphasizes only the importance of predictability, asserting that
"courts are of limited utility in examining difficult economic
problems," and have not yet been left free by Congress to "ramble
through the wilds of economic theory in order to maintain a
flexible approach." [
Footnote
2/10]
With all respect, I believe that there are two basic fallacies
in the Court's approach here. First, while I would not characterize
our role under the Sherman Act as one of "rambl[ing] through the
wilds," it is indeed one that requires our "examin[ation of]
difficult economic problems." We can undoubtedly ease our task, but
we should not abdicate that role by formulation of
per se
rules with no justification other than the enhancement of
predictability and the reduction of judicial investigation. Second,
from the general proposition that
per se rules play a
necessary role in antitrust law, it does not follow that the
particular
per se rule promulgated today is an appropriate
one. Although it might well be desirable in a proper case for this
Court to formulate a
per se rule dealing with horizontal
territorial limitations, it would not necessarily be appropriate
for such a rule to amount to a blanket prohibition against all such
limitations. More specifically, it is far from clear to me why such
a rule should cover those "division of market" agreements that
involve no price-fixing and which are concerned
Page 405 U. S. 623
only with trademarked products that are not in a monopoly or
near-monopoly position with respect to competing brands. The
instant case presents such an agreement; I would not decide it upon
the basis of a
per se rule. [
Footnote 2/11]
The District Court specifically found that the horizontal
restraints involved here tend positively to promote competition in
the supermarket field and to produce lower costs for the consumer.
The Court seems implicitly to accept this determination, but says
that the Sherman Act does not give Topco the authority to determine
for itself "whether or not competition with other supermarket
chains is more desirable than competition in the sale of Topco
brand products."
Ante at
405 U. S. 611.
But the majority overlooks a further specific determination of the
District Court, namely, that the invalidation of the restraints
here at issue "would not increase competition in Topco private
label brands."
319 F.
Supp. at 1043. Indeed, the District Court seemed to believe
that it would, on the contrary, lead to the likely demise of those
brands in time. And the evidence before the District Court would
appear to justify that conclusion.
Page 405 U. S. 624
There is no national demand for Topco brands, nor has there ever
been any national advertising of those brands. It would be
impracticable for Topco, with its limited financial resources, to
convert itself into a national brand distributor in competition
with distributors of existing national brands. Furthermore, without
the right to grant exclusive licenses, it could not attract and
hold new members as replacements for those of its present members
who, following the pattern of the past, eventually grow
sufficiently in size to be able to leave the cooperative
organization and develop their own individual private label brands.
Moreover, Topco's present members, once today's decision has had
its full impact over the course of time, will have no more reason
to promote Topco products through local advertising and
merchandising efforts than they will have such reason to promote
any other generally available brands.
The issues presented by the antitrust cases reaching this Court
are rarely simple to resolve under the rule of reason; they do
indeed frequently require us to make difficult economic
determinations. We should not, for that reason alone, however, be
overly zealous in formulating new
per se rules, for an
excess of zeal in that regard is both contrary to the policy of the
Sherman Act and detrimental to the welfare of consumers generally.
Indeed, the economic effect of the new rule laid down by the Court
today seems clear: unless Congress intervenes, grocery staples
marketed under private label brands, with their lower consumer
prices, will soon be available only to those who patronize the
large national chains.
[
Footnote 2/1]
The District Court's findings of fact include the following:
"33. A competitively effective private label program to be
independently undertaken by a single retailer or chain would
require an annual sales volume of $250 million or more, and, in
order to achieve optimum efficiency, the volume required would
probably have to be twice that amount."
319 F.
Supp. 1031, 1036.
[
Footnote 2/2]
There is dictum in the case to the effect that
United States
v. Addyston Pipe & Steel Co., 85 F. 271 (CA6 1898),
aff'd, 175 U. S. 211
(1899), established a "division of markets" as unlawful in and of
itself. 356 U.S. at
356 U. S. 5. As I
will show, however,
Addyston Pipe established no such
thing; it was primarily a price-fixing case.
[
Footnote 2/3]
I cannot agree with the Court's description of
Sealy as
being "on all fours with this case."
Ante at
405 U. S. 609.
Sealy does support the proposition that the restraints on
the Topco licensees are horizontally imposed. Beyond that, however,
Sealy is hardly controlling here. The territorial
restrictions in
Sealy were found by this Court to be so
intimately a part of an unlawful price-fixing and policing scheme
that the two arrangements fell together:
"[T]his unlawful resale price-fixing activity refutes appellee's
claim that the territorial restraints were mere incidents of a
lawful program of trademark licensing.
Cf. 341 U. S. v.
United States, [
341 U.S.
593 (1951)]. The territorial restraints were a part of the
unlawful price-fixing and policing."
388 U.S. at
388 U. S.
356.
[
Footnote 2/4]
In summarizing its findings, the District Court made the
following statements:
"When the story is seen as a whole, there is no blinking the
fact that there is no free commerce in titanium. Every pound of it
is trammeled by privately imposed regulation. The channels of this
commerce have not been formed by the winds and currents of
competition. They are, in large measure, artificial canals
privately constructed. . . ."
"
* * * *"
". . . No titanium pigments enter the United States except with
the consent of NL [defendant National Lead]. No foreign titanium
pigments move in interstate commerce except with like approval. No
titanium pigment produced by NL may leave the ports of the United
States for points outside the Western Hemisphere."
63 F. Supp.
513, 521-522.
[
Footnote 2/5]
The District Court clearly decided the case under the "rule of
reason." It found that there was
"a combination and conspiracy in restraint of trade; and the
restraint is
unreasonable. As such, it is outlawed by
Section 1 of the Sherman Act."
63 F. Supp. at 523 (emphasis added). The court rejected the
argument made by the defense that the basic agreement on which the
arrangement was founded was permissible under
"the doctrine which validates covenants in restraint of trade
when reasonably ancillary to a lawful principal purpose. . . .
[T]he world-wide territorial allocation was
unreasonable in
scope when measured against the business actualities."
Id. at 524 (emphasis added).
[
Footnote 2/6]
"The appellees did not appeal from the findings and order
invalidating [territorial] restraints on resale by distributors. .
. ." 388 U.S. at
388 U. S.
368.
[
Footnote 2/7]
"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. . . . Accordingly, we are remitted to
an appraisal of the market impact of these practices."
". . . [W]e 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."
388 U.S. at
388 U. S.
373-374.
[
Footnote 2/8]
"We are here confronted with challenged vertical restrictions as
to territory and dealers. . . . These are not horizontal
restraints, in which the actors are distributors with or without
the manufacturer's participation."
388 U.S. at
388 U. S.
372.
[
Footnote 2/9]
Among the facts found by the District Court are the following:
private label brand merchandising, which is beyond the reach of the
small chains acting independently and which, by definition, depends
upon local exclusivity, permits the merchandiser to offer the
public "lower consumer prices on products of high quality" and "to
bargain more favorably with national brand manufacturers"; such
merchandising fosters
"the establishment of a broader supply base of manufacturers,
thereby decreasing dependence upon a relatively few, large national
brand manufacturers;"
it also enables
"[s]maller manufacturers, the most common source of private
label products, who are generally unable to develop national brand
name recognition for their products, [to] benefit . . . by the
assurance of a substantial market for their products. . . ."
319 F. Supp. at 1035.
[
Footnote 2/10]
It seems ironical to me that, in another antitrust case decided
today,
Ford Motor Co. v. United States, ante, p.
405 U. S. 562, the
Court, in contrast to its handling of the instant case, goes out of
its way to commend another District Court for its treatment of a
problem involving "predictions and assumptions concerning future
economic and business events."
Id. at
405 U. S.
578.
[
Footnote 2/11]
The national chains market their own private label products, and
these products are available nowhere else than in the stores of
those chains. The stores of any one chain, of course, do not engage
in price competition with each other with respect to their chain's
private label brands, and no serious suggestion could be made that
the Sherman Act requires otherwise. I fail to see any difference
whatsoever in the economic effect of the Topco arrangement for the
marketing of Topco brand products and the methods used by the
national chains in marketing their private label brands. True, the
Topco arrangement involves a "combination," while each of the
national chains is a single integrated corporation. The controlling
consideration, however, should be that in neither case is the
policy of the Sherman Act offended, for the practices in both cases
work to the benefit, and not to the detriment, of the consuming
public.