A Rule of Reason Analysis of Territorial Restrictions in the Soft Drink Industry

• Author: Thomas W. Dunfee,Eugene F. Zelek,Louis W. Stern
• DOI: 10.1177/0003603X8202700207
• Published date: 01 June 1982
• Date: 01 June 1982
• Subject Matter: Article

The Antitrust Bulletin/Summer 1982 481

••

A rule

of

reason analysis

of

territorial

restrictions in the soft drink industry

BY LOUIS

W.

STERN, * EUGENE F. ZELEK,

JR.,

**

and THOMAS

W.

DUNFEE"*

The Supreme Court's 1977 decision in Continental T.

v.,

Inc. v.

GTE Sylvania Inc. Imarked the third time the Court had faced

the issue

of

the legality

of

non price vertical restraints' under the

A. Montgomery Ward Professor of Marketing, J. L. Kellogg

Graduate School of Management, Northwestern University, Evanston,

Illinois.

Member, Illinois Bar.

Joseph Kolodny Professor of Social Responsibility and Chair-

man of the Department of Legal Studies and Public Management, The

Wharton School, University

of

Pennsylvania, Philadelphia.

I433 U.S. 36 (1977).

2Nonprice vertical restraints are limitations on products, customers,

or territories imposed by agreement among firms or individuals at

successive stages of distribution, such as contracts between a manufac-

turer and a distributor or dealer. See generally United States v. Sealy,

Inc., 388 U.S. 350, 352-54 (1967). Such restraints are often designed to

reduce "intrabrand competition"

-competition

among distributors

of

the same

brand-and

may improve "interbrand competition"

-the

rivalry among sellers

of

different

brands-at

the same time. See Con-

tinental

T.V.,

Inc. v. GTE Sylvania, Inc., 433 U.S. at 52-57 (1977). For a

detailed discussion of this topic, see ABA Antitrust Section, Vertical

Restrictions Limiting Intrabrand Competition, Monograph

No.2,

1977

[hereinafter cited as ABA Monograph].

©1982by Federal Legal Publications, Inc.

482 The antitrust bulletin

Sherman

Act'

and

the

second

time

it

had

overruled itself

on

this

issue since 1967.4While generally praised for its

repudiation

of

the

unpopular

and

confusing Schwinn case, several

commenta-

tors

have

noted

the

absence

of

practical guidance by

the

Court

on

how

to apply

the

rule

of

reason which was reestablished in

Sylvania:' In an

effort

to ease

the

burden

of

counsel

and

judges

who

must

cope with alargely

undefined

rule, several decision

models have been proposed," including

one

formulated

by

the

authors."

3Section 1of the Sherman Act states: "Every contract, combination

. . or conspiracy, in restraint of trade or commerce among the several

states or with foreign nations, is declared to be illegal.

...

" 15

U.S.c.

§1

(1976).

4According to the Supreme Court: "There

are.

. . two complemen-

tary categories of antitrust analysis. In the first category are agreements

whose nature and necessary effect are so plainly anticompetitive that no

elaborate study of the industry is needed to establish their illegality-

they are 'illegal per se'

-in

the second category are agreements whose

competitive effect can only be evaluated by analyzing the facts peculiar

to the business, the history of the restraint, and the reasons why it was

imposed." National Soc'y of Professional Eng'rs. v. United States, 435

U.S. 679,692 (1978).

In

1963,

the Court stated that it knew "too little of the actual impact"

of customer and territorial restraints unaccompanied by price fixing to

declare them per se illegal. White Motor Co. v. United States, 372 U.S.

253,

261

(1963).

Less than five years later the Court reversed itself,

holding that such restrictions in the absence of a consignment relation-

ship are "unreasonable without more." United States v. Arnold, Sch-

winn &Co., 388 U.S. 365, 379, 382 (1967). Then in 1977, the Court

reversed itself again in Sylvania by announcing a "return to the rule of

reason that governed vertical restrictions prior to Schwinn." 433 U.S. at

59.

5See, e.g., ABA Monograph, supra note 2, at 54; Pitofsky, The

Sylvania

Case:

Antitrust Analysis

of

Nonprice

Vertical

Restraints, 78

COLUM.

L. REV. 1, 34 (1978); Posner, The Rule

of

Reason and the

Economic Approach: Reflections on the Sylvania Decision, 45 U.

CHI.

L.

REV. 1,

13-16

(1977).

6Bohling, A Simplified Rule

of

Reason

for

Vertical

Restraints:

Integrating Social Goals, Economic Analysis, and Sylvania, 64

IOWA

L.

Soft drink industry :483

This

article will

apply

our

model,

the

steps

of

which

are

outlined

below,

to

the

territorial

restrictions widely used in

the

soft

drink

industry.

The

restraints

employed

by

Coca-Cola

Com-

pany

and

PepsiCo

were

held

to be illegal by

the

Federal

Trade

Commission

less

than

a

year

after

Sylvania.' However,

Congress

has

passed

a law specifically

permitting

territorial

restrictions in

the

soft

drink

industry,

thereby

vitiating

the

FTC's

decision

and

erecting

barriers

to

future

litigation in

the

area."

The

social

value

of

such

particularistic legislation as well as

the

merits

of

the

FTC's

case

can

be

evaluated

in light

of

the

application

of

our

model.

More

importantly,

the

application

provides

an

illustration

of

the

process we believe

should

be followed in

determining

the

legality

of

vertical

restraints,

irrespective

of

the

specific

company

under

scrutiny.

REV.

461 (1979); Pitofsky, supra note 5; Strasser,

Vertical

Territorial

Restraints

After

Sylvania: A Policy Analysis and Proposed New Rule,

1977

DUKE

L. J. 775; Comment, A Proposed Rule

of

Reason Analysis

for

Restraints on Distribution, 47

FORDHAM

L.

REV.

527 (1979); Posner,

The Next Step in the Antitrust Treatment

of

Restricted Distribution: Per

Se Legality, 48

CHI.

L.

REV.

6 (1981).

7Zelek, Stern &Dunfee, A Rule

of

Reason Decision Model

After

Sylvania, 68

CAL.

L.

REV.

13 (1980).

8Coca-Cola Co., 91 ET.C. 517 (1978), appeal docketed, No. 78-1364

(D.C. Cir.

1978)

[hereinafter cited as Coca-Cola]; PepsiCo, Inc., 91

ET.C. 680 (1978), appeal docketed, Nos. 78-1544,

78-1545

(D.C. Cir.

1978) [hereinafter cited as PepsiCo]. The FTC found that the territorial

restrictions were more permissible for returnable bottles than for nonre-

turnables. 91 ET.C. at 609. However, we are less tolerant. See text

accompanying notes 71-72, 80 infra.

9"Soft Drink Interbrand Competition Act," 15 U.S.C. 3501, Public

Law 96-308 (S. 598), enacted July 9, 1980.

The law creates a special exemption from the antitrust laws for the

territorial restrictions used in the soft drink industry by subjecting them

to a looser standard than the rule of reason. Such restrictions would be

permissible for a soft drink product if it were in "substantial and

effective competition with other products

of

the same general class."

For

an analysis, see Abrams, Antitrust Law in the

Soft

Drink Industry,

26

ANTITRUST

BULL.

697 (1981).