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ABA ANTITRUST SECTION, DISTRIBUTION & FRANCHISE COMMITTEE

A THUMBNAIL GUIDE TO KEY DISTRIBUTION AND FRANCHISE CASES

I. SHERMAN ACT, § 1

A. Horizontal Agreements

1. Price

United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940): Established the rule that any agreement between competitors formed for the purpose and with the effect of raising, depressing or stabilizing the price of a commodity is per se illegal. Horizontal agreements with respect to other terms of trade are also covered by the per se rule. See, e.g., Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643 (1980) (finding illegal agreements standardizing credit terms); Plymouth Dealers' Asso. v. United States, 279 F.2d 128 (9th Cir. 1960) (auto dealers’ agreement establishing a standard trade-in allowance).

American Tobacco Co. v. United States, 328 U.S. 781 (1946): Established the rule that a horizontal agreement in restraint of trade may be proven through circumstantial evidence; but see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986) (holding that, in order to prove a antitrust conspiracy, circumstantial evidence must “tend[] to exclude the possibility that the alleged conspirators acted independently”).

Toys “R” Us, Inc. v. F.T.C., 221 F.3d 928 (7th Cir. 2000): A retailer that entered into vertical agreements with several manufacturers to prevent them from supplying competing discount retailers. Each manufacturer agreed to the restriction on the condition that the other competing manufacturers also agree to it. The court held that the defendant-retailer’s role was effectively to coordinate a horizontal conspiracy, in violation of § 1 of the Sherman Act.

Weit v. Continental Illinois Nat'l Bank & Trust Co., 641 F.2d 457 (7th Cir. 1981), cert. denied, 455 U.S. 988 (1982): One of the first cases to enunciate the now established principle that mere conscious parallelism with respect to prices does not provide the threshold of proof necessary to satisfy § 1 of the Sherman Act. See also Petruzzi's IGA Supermarkets v. Darling-Delaware Co., 998 F.2d 1224 (3d Cir. 1993) (holding that a

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pattern of leader-follower behavior cannot support an inference of conspiracy).

Miles Distribs. v. Specialty Constr. Brands, Inc., 476 F.3d 442 (7th Cir. 2007): Competing tile products distributors complained to their supplier about the another distributor’s prices. The distributor about whom the complaints were made was subsequently terminated by the supplier. The court found that the complaints were natural and unavoidable reactions by distributors to the activities of their rivals and held that the distributor’s termination following complaints from other distributors did not give rise to an inference of concerted action among competing distributors such that a jury could find a horizontal conspiracy.

2. Territory and Customer Allocation

United States v. General Motors Corp., 384 U.S. 127 (1966): General Motors dealers and dealer associations in Los Angeles complained strongly about dealers who were supplying cars to discounters and threatened a boycott if General Motors did not take action. In response, General Motors threatened dealers that supplied cars to discounters with termination. The Court found that it was a “classic conspiracy in restraint of trade” by virtue of the horizontal nature of the collaboration among the dealers.

Miles Distribs. v. Specialty Constr. Brands, Inc., 476 F.3d 442 (7th Cir. 2007): Competing tile products distributors complained to their supplier about the another distributor’s prices. The distributor about whom the complaints were made was subsequently terminated by the supplier. In addition to finding that was no evidence of a horizontal agreement, supra, the court also held that termination of the distributor following price complaints from other distributors did not establish a per se illegal vertical conspiracy aimed at stabilizing prices. While there was no question that the supplier and its other distributors acted in concert regarding non-price issues like retaining customer accounts and promoting the supplier's product, the court would not permit an inference of concerted action to fix prices from the fact that the supplier and its other distributors acted in concert in other respects.

Rossi v. Standard Roofing, Inc., 156 F.3d 452 (3d Cir. 1998): A distributor brought suit against its competitors and manufacturers, claiming that they engaged in a group boycott in retaliation for price discounting. The court held that a supplier was a co-conspirator in a horizontal conspiracy, notwithstanding its vertical relation to the plaintiff-distributor.

American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230 (3d Cir. 1975): At trial, the defendant franchisor was found to have violated § 1 of

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the Sherman Act by its horizontal allocation of territories and by prohibiting franchisees from operating any other type of motel franchise. On appeal, the Third Circuit found that defendant’s actions in allowing other franchisees to effectively veto a new franchise was an illegal restraint on territories and markets. However, because the trial court failed to define the market, the appeals court declined to hold that the exclusivity agreement, precluding each franchisee from operating facilities under a competitor’s franchise, was per se illegal.

B. Vertical Agreements

1. Resale Price Maintenance

Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911): Established the rule that vertical agreements to set minimum resale prices are per se illegal. Because the “sole purpose” of such agreements was to fix prices to the detriment of consumers, they were impermissible under the Sherman Act. Overruled by Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. ___ (2007), infra.

United States v. Colgate & Co., 250 U.S. 300 (1919): The Court held that, absent monopoly power, a manufacturer is free to refuse to deal with retailers who deviate from a resale price set unilaterally by the manufacturer. Whereas an agreement regarding resale prices between a manufacturer and its distributors was illegal under Dr. Miles, an independent decision on the part of a manufacturer not to deal with a retailer is not within the scope of § 1 because it does not involve an agreement regarding price. Acquiescence of resellers on fear of termination does not constitute an agreement.

United States v. Parke, Davis & Co., 362 U.S. 29 (1960): A manufacturer implemented a program of refusing to deal with wholesalers in order to elicit their agreement to deny products to retailers who sold below the manufacturer’s suggested retail price. The manufacturer also brokered an agreement among its retailers not to advertise prices below the suggested retail price. Because the manufacturer had gone beyond the type of unilateral action permitted under Colgate, the Court found a retail price maintenance conspiracy.

Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984): Establishes that a court cannot infer a vertical agreement as to price merely because a manufacturer and its distributors discussed prices or because a manufacturer responded to complaints from its distributors regarding the resale prices charged by one dealer. Rather, to show a vertical agreement, a plaintiff must put forward evidence that tends to exclude the possibility that a manufacturer and its distributors acted independently.

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Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988): The Court reiterated that vertical restraints that includes “some agreement on price or price levels” are per se illegal.

State Oil Co. v. Khan, 522 U.S. 3 (1997): The Court overruled its decision in Albrecht v. Herald Co., 390 U.S. 145 (1968), and held that vertical agreements regarding maximum retail price should be judged under the rule of reason rather than the per se illegality standard.

Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. ___ (2007): The Court overruled its long-standing precedent in Dr. Miles Medical Co. v. John D. Park & Sons Co., supra, to hold that vertical minimum resale price maintenance arrangements are to be evaluated under the rule of reason, rather than condemned as per se illegal.

2. Territorial Restrictions

White Motor Co. v. United States, 372 U.S. 253 (1963): A manufacturer established a distribution system that gave dealers exclusive rights to sell in assigned territories. The manufacturer agreed in the distributor agreements not to open another dealer a given territory, while the dealers agreed that they would not sell outside of their assigned territories. The Court refrained from applying a per se illegality rule to the arrangement and, instead, remanded the case for further inquiry into the potentially redeeming value of such restrictions.

United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967): Casting aside the cautious approach it had taken in White Motor, the Court held that it was “unreasonable without more for a manufacturer to seek to restrict and confine areas or persons with whom an article may be traded after the manufacturer has parted with dominion over it.” Although the Court did not impose a per se rule for all vertically imposed territorial restraints, restrictions extending after the sale of a product were held per se illegal.

Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977): The facts presented in this case were indistinguishable from those in Schwinn (i.e., a manufacturer imposed territorial sales restraints after it sold the product). However, the Court determined that the ruled it established in Schwinn must be overruled. Vertical restraints on territory would be governed by the rule of reason, regardless of whether the restriction is imposed in a sale or nonsale transaction.

Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988): The Court further established that vertical nonprice restraints, such as territorial restraints, are judgment under the rule of reason. Only vertical

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restrictions that involve “some agreement on price or price levels” are per se illegal.

3. Tying Arrangements

Times-Picayune Publ’g Co. v. United States, 345 U.S. 594 (1953): The Court noted that, because “tying agreements serve hardly any purpose beyond the suppression of competition,” such agreements “fare harshly” under the antitrust laws. However, to violate § 1 of the Sherman Act, a plaintiff must prove that the seller both enjoyed a monopolistic position in the market and that a substantial volume of commerce in the tied product was restrained. (Either of these conditions satisfy § 3 of the Clayton Act.)

N. Pac. Ry. v. United States, 356 U.S. 1 (1958): Defines a tying arrangement as “an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from another supplier.” Such arrangements are per se illegal where a party has sufficient economic power with respect to the tying product to pressure buyers into taking the tied item.

Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984): Five members of the Court ruled that tie-ins were per se illegal where four requirements were met: (1) there are two separate products; (2) the sale of the tying product is condition on the purchase of the tied product; (3) the sell possesses sufficient market power to appreciably restrain competition in the tied-product market; and (4) the transaction involves a not insubstantial amount of commerce. Because these conditions were not met in this case, the Court held that the rule of reason applied.

Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992): Eighteen independent service organizations that serviced Kodak copying and micrographic equipment brought an antitrust action against Kodak for its policies that sought to limit the availability of Kodak parts to ISO’s. The Court clarified the standards for a § 1 tying violation. First, it defined the “distinct products” requirement as products for which there is a separate demand and found that Kodak had tied products. Second, it described “appreciable market power” in terms of the ability “to force a purchaser to do something that he would not do in a competitive market” or to “raise price and restrict output.” The Court affirmed the denial of summary judgment on this issue because there was a question of fact.

United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001): As part of the government’s suit against Microsoft for monopolization, it alleged a § 1 per se tying violation. The court determined that the rule of reason standard applied instead because the per se illegality rule would stunt innovation in the platform software market, where a certain level of tying

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was beneficial to consumers. A “wooden application” of the per se rule under these circumstances would restrict the development of new software specifically designed to be integrated with a computer’s operating system.

II. SHERMAN ACT, § 2

A. Refusals to Deal

United States v. Colgate & Co., 250 U.S. 300 (1919): The Court held that, absent monopoly power, a manufacturer is free to refuse to deal with retailers.

Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359 (1927): Kodak had monopoly power over the wholesale market for photographic supplies. As part of an attempt to vertically integrate, it began acquiring retail distributors. Kodak terminated one distributor that refused Kodak’s purchase offer on the basis that the termination was part of an attempt to monopolize. The Court held that such conduct does not fall within the scope of protections under Colgate.

Paschall v. Kansas City Start Co., 695 F.2d 322 (8th Cir. 1982): The publisher of the only newspaper in a city sought to terminate independent distributors of the paper in order to substitute its own distribution system. Sitting en banc, the Eighth Circuit Court of Appeals held that there was no § 2 violation barring proof of a specific intent to monopolize or of anticompetitive effects from the conduct. The plaintiffs failed to prove that the anticompetitive harm outweighed the potential efficiencies from vertical integration, and therefore could not show a § 2 violation.

United States v. Dentsply Int'l, Inc., 399 F.3d 181 (3d Cir. 2005): The government alleged that a monopolist artificial tooth manufacturer’s “dealer criterion,” which prevented its dealers from selling competitors’ products, violated, inter alia, § 2 of the Sherman Act. The court found a § 2 violation where there was evidence that the criterion was designed to (and did successfully) block competitive distribution points and stifle customer choice.

III. ROBINSON-PATMAN ACT

A. Prima Facie Case

A plaintiff must establish all of the following conditions to make out a prima facie case of price discrimination under § 2(a) of the Robinson-Patman Act:

1. A seller makes two or more sales at different prices. See Texaco, Inc. v. Hasbrouck, 496 U.S. 543 (1990) (holding that functional discounts given to wholesalers in competition with retailers, but not to the retailers

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themselves, are not exempt from the Robinson-Patman Act’s proscription against price discrimination).

2. At least one sale crosses a state line. See Moore v. Mead's Fine Bread Co., 348 U.S. 115 (1954).

3. The sales are of commodities. See First Comics, Inc. v. World Color Press, Inc., 884 F.2d 1033 (7th Cir. 1989), cert. denied, 493 U.S. 1075 (1990) (holding that printing services did not qualify as a commodity under the Act).

4. The commodities are of like grade and quality. FTC v. Borden Co., 383 U.S. 637 (1936).

5. The commodities are for use, consumption or resale in the United States.

6. The sales are made to two or more different purchasers.

7. The sales are within a relevant time period.

8. The difference in the price has an adverse effect on competition. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).

In Brooke Group, a primary-line case, the plaintiff argued that defendant’s volume rebates to wholesalers threatened primary-line competitive injury by furthering a predatory pricing scheme designed to purge competition from the generic segment of the cigarette market. The Supreme Court held that the plaintiff had failed to demonstrate competitive injury as a matter of law, in that the evidence did not prove that the defendant had a reasonable prospect of recovering its losses from its alleged below-cost pricing scheme. See also A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396 (7th Cir. 1989).

In order for a disfavored customer (rather than a competitor) to make out a secondary-line price discrimination case, it must prove that a competitor of the customer received a more favorable price and that the discrimination would tend to substantially limit competition. See FTC v. Morton Salt Co., 334 U.S. 37 (1948). In Morton Salt, the Supreme Court held that competitive injury may be inferred from evidence demonstrating injury to an individual competitor. 334 U.S. at 46-47. Specifically, Morton Salt permits an inference of injury to competition from evidence of a substantial price difference over time, because such a price difference may harm the competitive opportunities of purchasers, and thus create a “reasonable possibility” that competition itself may be harmed.

In Volvo Trucks North America Inc. v. Reeder-Simco GMC Inc., 546 U.S. 164 (2006), the Supreme Court held that a heavy-duty truck manufacturer’s unequal price concessions to its dealers bidding for special order jobs do not violate the RPA unless they discriminate between dealers competing for the same retail

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customer. The Court further held that “[e]ven if the Act’s text could be construed in the manner urged by Reeder and embraced by the Court of Appeals, we would resist interpretation geared more to the protection of existing competitors than to the stimulation of competition.”

9. The victim of the discrimination suffered an “antitrust” injury. See J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557 (1981). In Payne, the Court held that the Robinson-Patman Act was violated merely upon a showing that the effect of discrimination could be to substantially lessen competition. The statute does not require that the price discrimination in fact harms competition.

B. Defenses

1. Functional Discounts. A wholesaler may generally be charged a different price for good than a retailer where the wholesaler is not in direct competition with the retailer. See, e.g., FTC v. Fred Meyer, Inc., 390 U.S. 341 (1968).

2. Meeting Competition. A defendant can rebut a prima facie case of price discrimination by showing that the discriminatory price at which goods were sold was set in good faith to meet the equally low price of a competitor. Standard Oil Co. v. FTC, 340 U.S. 231 (1951). See also Falls City Indus. v. Vanco Beverage, 460 U.S. 428 (1983). In Falls City the Supreme Court held that the meeting competition defense may be available even if the discrimination results from area-wide price increases—as compared with a customer-by-customer approach—where the prices were established in response to competitive market conditions.

3. Cost Justification. A seller may reduce a price to a customer if it can show that its price reduction is only passing on actual dollar savings that the seller enjoyed when selling to that customer. See United States v. Borden Co., 370 U.S. 460 (1962); Bruce's Juices, Inc. v. American Can Co., 87 F. Supp. 985 (S.D. Fla. 1949), aff’d, 187 F.2d 919 (5th Cir.), modified, 190 F.2d 73 (5th Cir.), cert. dismissed, 342 U.S. 875 (1951).

4. Exempt Transactions. The Robinson-Patman Act does not apply to the purchase of supplies by churches, schools, hospitals, libraries and certain other non-profit institutions, 15 U.S.C. § 13(c), nor does it apply to purchases by the federal government. But see Jefferson County Pharm. Ass'n v. Abbott Labs., 460 U.S. 150 (1983) (holding that purchases of drugs by state and local hospitals for resale to the public are not exempt from the Robinson-Patman Act).

5. Changing Conditions. The Robinson-Patman Act does not apply where a seller can show that a change in the market for a commodity, or a change in the commodity itself, has affected the marketability of the goods

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concerned. 15 U.S.C. § 13(a). See also Comcoa, Inc. v. NEC Tel., Inc., 931 F.2d 655 (10th Cir. 1991). In Comcoa, a manufacturer of telephone systems sold these systems at a discount because they had become obsolete. In rejecting the price discrimination claim brought by distributors of the telephone systems, the court held that “price differences as a result of technological obsolescence or the introduction of a new product model are circumstances sufficiently similar to the examples named in the statute that they fall within the general scope of the statute.” Id. at 661.

6. Availability. If a lower price is practically available to all competing purchasers—either from the defendant or from another seller—then there is no violation of the Robinson-Patman Act. However, in order for a price to be considered “available,” the customer must be advised of the lower price and objective standards must exist to guide regular customers in qualifying for it. Mueller Co. v. FTC, 323 F.2d 44 (7th Cir. 1963), cert. denied, 377 U.S. 923 (1964).